Q2 2021 Leggett & Platt Inc Earnings Call

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Okay.

Greetings and welcome each of the Leggett <unk> Platt second quarter 2021 webcast an earnings conference call. At this time, all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

For any 1 should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

Now my pleasure to introduce your host Susan Mccoy Senior Vice President of Investor Relations. Thank you you may begin.

Thank you Daryl and good morning, and thank you for taking part and I guess, what second quarter Conference call. We are conducting this call from different locations again this quarter. Please bear with US if you experience minor delays or mixed audio quality on the call today are of Karl Glassman, Chairman and CEO.

Mitch Dolloff, President and C of O, Jeff Tate Executive Vice President and CFO, Steve Henderson, the EVP and president of the specialized products and furniture flooring and textile products segments, Cassie Branscum senior director of IR and chair of Sherwood.

Director of IR.

The agenda for our call. This morning is as follows Karl will start with the summary of the main points. We made in yesterday's press release, Mitch will discuss operating results and demand trends and Jeff will cover financial details and the address our updated outlook for 2021.

This conference call is being recorded for Leggett <unk> Platt and this copyrighted material. This call may not be transcribed recorded or broadcast without our expressed permission a replay is available from the IR portion of luggage website.

We posted to the Investor relations portion of the website yesterday's press release and a set of Powerpoint slides that contain summary financial information along with segment details for those.

Documents supplement the information we discuss on this call, including non-GAAP reconciliations.

I need to remind you that remarks today concerning future expectations events objectives strategies trends or results constitute forward looking statements actual reserve adults or events may differ materially due to a number of risks and uncertainties and the company undertakes no.

Geisha to update or revise these statements.

For a summary of these risk factors and additional information. Please refer to yesterday's press release and the section in our most recent 10-K and subsequent 10-Q entitled risk factors and forward looking statements I'll now turn the call over to Karl.

Good morning, and thank you for participating in our second quarter call.

Yesterday, we reported all time record quarterly sales from continuing operations and record second quarter, adjusted EBIT and EBITDA.

These outstanding results are a testament to the dedication and hard work of our employees around the globe.

Second quarter sales were 1 point to $7 billion EBIT was $172 million and earnings per share were <unk> 82 cents.

All significantly higher than the second quarter of 2020 X.

Excluding the real estate gain noted in Yesterdays press release, adjusted EBIT was $144 million and adjusted EPS was <unk> 66 cents.

Strong year over year results reflect recovery in most of our businesses from the significant impacts related to the COVID-19 pandemic.

When comparing to the pre pandemic results of second quarter 2019 trade sales grew 5% of.

Adjusted EBITDA was up 9% and adjusted EBITDA margin improved 60 basis points and adjusted EPS increased 12%.

During the quarter, we made 2 strategic acquisitions expanding our capabilities.

And product offerings, and our work furniture and international bedding businesses.

At the end of May we acquired a small manufacturer of bent metal tubing used in office and residential furniture located in Poland that has been an important supplier to our local work furniture operation.

On June 4th we acquired a leading provider of specialty foam and finished mattresses, primarily serving customers in the U K and Ireland. The company K foam is located near Dublin and has 2 manufacturing facilities with the with combined annual.

Sales of approximately $80 million.

Hey film expands the capabilities of our European bedding business and establishes a platform and foam technology and finished mattress production.

Similar to our U S betting business. This acquisition allows us to support our European bedding customers anywhere in the value chain from inner spring and foam components to finished products, including private label mattresses toppers pillows and other bedding accessories.

We increased our full year sales guidance as a result of continued material cost inflation and sales related to the acquisitions just mentioned.

Increased EPS guidance is largely due to metal margin expansion in our steel rod business.

Jeff will provide more detail on updated guidance later in the call.

With that I'll turn the call over to Mitch.

Thank you Karl and good morning, everyone first I would like to thank our employees for driving record second quarter results. Your commitment resolve and ingenuity of allowed us to navigate raw material constraints labor shortages and freight challenges the service our customers in a very strong demand environment your efforts and accomplishments.

<unk> are greatly appreciated.

We had strong operating performance in the second quarter as sales have recovered to near or above pre pandemic levels in most of our businesses.

Supply chain disruptions continued throughout the quarter, most notably in chemicals semiconductors, labor and transportation constraining volume growth.

Well, we're seeing the incremental improvements in many of these areas. They continue to create volatility in both supply and the costs.

Given the significant pandemic related impact of last year's second quarter results. My comments will compare our segment of business unit results to second quarter, 2019, which provides a more meaningful insight to our quarterly operating performance.

Sales in our bedding products segment were up 7% versus the second quarter of 2019, primarily from raw material related selling price increases from inflation in steel chemicals and non woven fabrics.

Volume was down in part due to the exited business in fashion bed in drawn wire for.

All of them was also lower due to the phone shortages of labor of those availability, which continue to constrain the U S mattress.

Strained U S mattress production negatively impacting component demand and our finished good production.

Availability of chemicals used in our specialty film operation improved during the second quarter, but at a slower pace than anticipated due to supplier production disruptions in logistics challenges lots.

While the supply improved chemical allocations could persist to some degree throughout the remainder of the year.

Okay.

In U S. Spring are playing comfort core capacity expansion is largely in place and we have built inventory of comfort core inner springs to fulfill customer requirements as phone becomes more readily available.

Demand in our European bedding business was strong throughout the second quarter, but recently, we are seeing some signs of seasonal softening over the summer months.

The long term, we anticipate more growth opportunities in Europe with the K foam acquisition similar to the trends we've seen in the U S betting market over the past several years European consumers are purchasing more of mattresses online and you can compress for increasing demand for specialty foam in hybrid mattresses.

Adjusted EBITDA margins in the in the segment improved over the 2 year period, primarily from pricing discipline expanded metal margins in our steel rod business from fixed cost actions taken last year.

Sales in our specialized products segment were down 9% for second quarter of 2019 due to lower volume across the segment.

In our automotive business volume was down over the 2 year period, primarily from recent semiconductor shortages industry production was heavily impacted in April and may with many Oems, reducing or completely shutting down production of some models.

<unk> is expected to slowly improve but we anticipate the shortages to continue through at least the first half of 2022.

And our aerospace business demand for fabricated duct assemblies as near second quarter, 2019 levels, but demand for welded and seamless tube products, it's still well below pre pandemic levels.

With the lingering impact from pandemic related disruption in the air travel and resulting buildup of aircraft and supply chain inventories. The industry is not anticipated to return to 2019 demand levels until 2024.

In the market demand in hydraulic cylinders is very strong with the surge in lift truck orders, however, global supply chain constraints and labor availability have hampered the Oems the ability to ramp up production.

We expect our sales to increase as OEM production increases, but supply chain constraints in this business could persist into early 2022.

EBITDA margins in the segment declined over the 2 year period, primarily from lower volume, partially offset by fixed cost actions taken last year.

Yes.

Yeah.

Sales in our furniture flooring and textile products segment were up 11% versus the second quarter of 2019, driven by demand strength in home furniture and Geo components.

We expect strong market demand in our home furniture products business for the remainder of the D of the year and into 2022.

And our Geo components business private construction and retail market demand is strong.

Demand in our fabric converting business softened due to the foam constraints that are impacting bedding and furniture manufacturers as from the availability improves we anticipate sales to rebound.

In flooring products residential end market demand is above pre pandemic levels, whereas hospitality demand remains well below 2019 levels.

And while recovery work furniture lags the other businesses in the segment over the 2 year comparison period, we continue to see strong demand for products sold for residential use and are beginning to see some improved demand in the contract market.

Adjusted EBITDA margin in the segment increased over the 2 year period, primarily from improvement in our home furniture business and fixed cost actions taken last year.

Overall, the fixed cost actions, we took last year reduced our second quarter costs by approximately $20 million versus the second quarter of 2019 across all of our businesses. We are focused on controlling cost by keeping our variable cost structure aligned with demand levels, and only adding fixed costs as necessary to support higher volume.

And future growth opportunities.

We are planning to increase production in our steel rod drawn wire in U S spring businesses through the second and third quarter to allow U S spring to build the inventory inventory in order to meet anticipated customer demand as foam and labor availability improves across the industry.

In the fourth quarter, we will also take our Rod mill out of operation for 3 weeks to replace the reheat furnace as a result higher levels of inventory of these businesses are expected through the remainder of the year the inventory build and sales will likely alter our normal seasonal cash flow cycle to some degree.

I'll now turn the call over to Jeff.

Thank you Mitch and good morning, everyone.

In the second quarter cash from operations was $41 million.

Higher earnings were partially offset by planned working capital investments to build and maintain the higher inventory levels that Mitch just discussed as well as inflation in the cost of those inventories.

With the expectation of carrying higher levels of inventory through the end of the year, we have lowered our full year operating cash estimate.

We now anticipate cash flow from operations to approximate $450 million and 2021.

At the end of the quarter adjusted working capital as a percentage of annualized sales was 12, 8%.

During the first half of the year, we brought back $187 million of offshore cash and currently expect to return at least $200 million of cash for the full year.

In May we increased the quarterly dividend by 2 cents to <unk> 42 per share.

At an annual indicated dividend of $1.68, the yield of 3.5% based upon Fridays closing price of $48 and <unk> 1.

1 of the higher yields among the S&P 500 dividend aristocrat.

This year marks our fifth consecutive year of annual increases.

We're proud of our dividend record and we plan to extend it.

Our strong financial base, along with our deleveraging efforts over the last 2 years give us flexibility when making capital and investment decisions.

We ended the quarter with net debt to trailing 12 month EBITDA of $2.3 2 times.

And $1.3 billion of total liquidity.

Our long term priorities for use of cash are unchanged.

They include in order of priority funding organic growth.

Paying dividends funding strategic acquisitions and share repurchases with available cash.

For the full year of 2021 we expect capital expenditures of approximately of $140 million.

Dividends should approximate $215 million.

And the acquisition spending of approximately of hydrogen and $50 million.

We do not expect any significant share repurchases as we continue to focus on deleveraging.

As announced yesterday, we are again, increasing our 2021 sales and earnings per share of guidance.

2021 sales are now expected to be $4.9 billion to $5.1 billion or up 14% to 19% over 2020.

The resulting from mid to high single digit volume growth raw material related price increases currency benefit and approximately 1% growth from acquisitions net of divestitures.

The increase versus prior guidance of $4.8 billion to $5 billion reflect the.

A combination of higher raw material related price increases and acquisition sales.

We expect continued strong consumer demand for home related products and global automotive.

Along with some improvements in supply chain constraints as we move through the remainder of this year.

2021 earnings per share are now expected to be in the range of $2.86 to $2.2 of $3.06.

Including 16 cents per share from the real estate gain recognized in the second quarter.

Full year adjusted earnings per share is now expected to be $2.70 to $2.90.

With increased versus prior guidance of $2.55 to $2.75, primarily due to higher metal margin.

This guidance also assumes fixed cost savings as a result of actions taken in 2020 to be approximately $70 million.

Based upon the guidance framework, our 2021 full year adjusted EBIT margin range should be 11, 4% to 11, 6%.

Earnings per share guidance assumes the full year effective tax rate of 23%.

Depreciation and amortization to approximate $195 million.

Net interest expense of approximately $75 million and fully diluted shares of $137 million.

In closing, we remain focused on cash generation, while reducing debt and deploying capital in a balanced and disciplined manner that positions us to capture the near and long term growth opportunities, both organically and through strategic acquisitions with those comments I'll turn the call back over to Susan.

That concludes our prepared remarks, we thank you for your attention and I will be glad to answering the questions Karl will direct our Q&A session and the great Oh, well the answer your questions.

Carol we're ready to start Q&A.

Thank you we will now be conducting the question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad a.

The confirmation of talking about educate your line is in the question queue.

You May press star 2 if he would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, 1 moment. Please while we poll for your questions.

Okay.

Our first questions come from the line of Bobby Griffin with Raymond James. Please proceed with your questions.

Good morning, everybody. Thanks for taking my questions and I hope everyone's doing well.

Good morning, Bobby I guess for first I wanted to touch on the International Betty says no. It's been actually a very bright spot of good growth for you guys over the last couple of years. So now with the acquisition Karl or Michigan can you maybe frame up for US your international bedding business and kind of the go to market strategy, where you participate in there.

That might be a little different in the U S. And then importantly with case volume what is the.

That acquisition give you in terms of capabilities that a springboard of launch and the more phone business in continental Europe or kind of how do we think about the 2 to 3 year opportunity now with this addition to our your capabilities over there.

Yeah. Thanks for the question Bobby.

Rich do you want to unravel that yes.

Yes sure.

Good morning, Bobby.

And you're right the international bedding group for US, particularly in Europe has been really really strong over the last couple of years and including this year coming out of the the pandemic. So really I mean, we see that it's a different market than the U S. It's more segmented across different regions with different product types, but we do see that.

As a meaningful growth opportunity for us and the Cape of acquisition really sets us up similarly to take advantage of the trends that were happening here in the U S and we see them taking place in the UK and other parts of Europe. So first off.

K for them is a is a provider of specialty foam and finished mattresses.

We're interested in in the bedding business not so much in commodity foam and this fills that mark for us they've been collaborating with Peterson chemical technologies for over a decade and really utilizing that specialty film expertise. So it gives us not only that the capability of specialty foam.

But also the scale and production of finished mattresses.

Similar to what we got through ECS and really just like in the in the U S.

The betting value chain it allows us to support our customers really anywhere along the value chain from components.

Of.

Of inner springs to specialty foam all the way to the private label finished mattresses or other accessories. So we.

We feel like it sets us up really.

Really well to continue to grow our business in Europe. This is primarily focused in the U K and Ireland, but we will explore the possibilities of of similar opportunities as we look through broader European market.

Okay. I appreciate that that's helpful. And then I guess the last thing for me before I jump back in the queue just on the auto supply chain understand the chip shortages and what's going on there is is the is the catch up going to start in <unk> and for Q of this year or is this really when we think about it in our model of the 'twenty 'twenty 2 type catch up where things will be impacted pretty much for the rest of the year.

And then there'll be a big catch up in 2022 from all of getting getting our inventories back in normal levels.

Yeah, Bobby that's a really good question that we're trying to work through those answers ourselves.

But Steve why don't you you know based on the the most contemporary information we have tried to answer that question.

Alright, good morning, Bobby.

Yeah good morning.

The the way that we see it right now and then again with the caveat that it's it is pretty opaque.

<unk>.

To us and a number of other players in the value chain.

What we think we are going to see is the Q2 was really the peak of the of the issue. So.

So we lost 1 of 1.4 million units in Q1 of about $2.6 million units were lost in Q to.

Q3, right now is sitting at about 1 million lost units, but probably looking more like of the first quarter and then we would see Q4 being somewhat lower impact in Q3, but the recovery continuing into Q1 and probably into Q2.

At that point really being able to start to build up from the.

The inventories in the arm.

And then of the inventories right now are sitting in the new in the in the U S. We're sitting at 23 days, which is the.

Of the lowest since August of 2000.

And down $1.2 million units year on year, and probably somewhere between 1.5% of 1.8 million from where they they really should be so it will take probably 6 to 12 months to rebuild all of that inventory once we get to parity again.

Thank you that's very helpful. I'll jump back in the queue, but best of luck here in the second half.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Keith Hughes with true of Securities. Please proceed with your questions.

Oh, thank you.

I guess my question is on the metal margins, what's your kind of outlook and this guidance for that coming in the third of the fourth quarter.

Yeah, Keith the metal margin story is certainly has been a good 1 over the last few years and really metal margins defined.

As the difference between the input cost or in our case scrap and then the sales price, which in our cases, either rob or wire and there's kind of 2 different dynamics in the scraps inflated pretty dramatically. This year with you know ups and downs each month, but aggregate up.

The $145 a ton.

The sell price of Rod and wire has increased at a faster rate that's because of the lack of capacity in the U S versus the demand that exists. So over the last few years, there was a lot of capacity taken offline.

Heck, we shut 1 of our wire mills down and post Covid. There has been really strong demand and many mills like us need to take some downtime in the back half of the year for just for routine maintenance. So kind of the outlook is an expectation the scrap.

GAAP will probably trade down slightly in August it will settle the here sometime next week, but the forecast is down $20. There is some expectation that rod and wire pricing will despite the scrap reduction inflate again, because there are.

It's just really hard to buy.

Rod and wire in this country Theres, just no availability, but in any of the the spreads long winded answer to tell you the spreads in good shape and we will continue to be for the forecastable future.

Okay, usually when prices.

Prices are coming down do you actually make some extra margin.

It sounds like it's part.

1 of the way up now I guess could you get the double double positive the price of oil eventually fall.

Could you see really nice margin for that.

The downturn environment as well all of the scrap officers.

That's the near term expectation Keith Yeah, Okay.

And I guess final question.

And the AR and the excuse me more of your mattress the supply business, particularly so.

Is there.

When do you anticipate the industry will be caught up if you will in terms of getting what the the producers need to meet them some pretty strong demand of mattresses.

It makes you want to grab that 1 I answer the easy question.

Okay.

The next car rental margins the metal of artist easy Karl.

[laughter].

Good morning, Keith Yeah, I'll take a shot of data.

It's certainly been very very dynamic right and every time that we think we have thought over the last several quarters that the chemical constraints that translate into the foam are getting resolved something else needs to happen. So I don't want to jinx us here, but they have improved somewhat over the second quarter, we expect that to continue to.

Incrementally as we look in the third quarter and fourth quarter. The the shorter answer is the short answer is we really don't know, but we're planning for and we expect that debt.

Capacity will continue to expand as we move through the third and fourth quarter and we want to be ready frankly in case, the there's a search right. It for if something happens in and the foam and labor constraints are resolved very quickly we want to be able to respond which is in part why we're.

Building inventory as we go through this time frame, but yeah. They will hopefully see it be resolved as we go through the the ended the year may be carryover of little bit into the next year, but that's all going to depend on primarily on the chemical availability.

Okay, and with your demand and tried to build a little bit of inventory of D C, especially the sold out right now.

I'm, sorry, what was that.

Given the demand level and the fact, it sounds like you're going to try to build some inventory in the off season as you see us sold out for the foreseeable future yeah at ECA. So it's still kind of of secondary impact for us on our spring components right. We have the capacity plenty of capacity and can.

Immediately respond in our in our <unk>.

The phone production in our finished mattress production through ECS. There are we are constrained by the from there. So we're basically making and selling everything we can at this point okay. Thank you very much.

Thank you.

Thank you. Our next question is coming from the line of Susan of Macquarie with Goldman Sachs. Please proceed with your questions.

Good morning, everyone.

Good morning, Susan.

First question is around the betting capacity side of things can you talk us through where you are in terms of adding some of that incremental capacity that you are working on this year and then I guess with that too you mentioned Karl or I think it was the car and your comments about increasing production at the Rod Mill can you.

Talk through how much you're increasing there how to think about that coming online and how that sizes to this capacity that's coming with it.

Yeah, Mitch why don't you take the first part as regards comfort core capacity yeah.

Yeah, Okay sure. So good morning, Susan Yes, we as we talked about over the last several quarters, adding machine capacity Israel of staffing capacity and we're largely through that as we said, we've got a little bit more machinery coming online.

Most of the operations that we plan to bring up to 4 shifts they are they're not fully staffed frankly, because we don't need all of that capacity of today, but weird of very very good place from our comfort core planned capacity expansion.

Largely through it as I said and then.

Karl do you want me to talk about the reheat furnace or do you want to say Oh, yes.

Yes. Please do go ahead.

And then maybe a slight clarification there. So the reheat furnace is really not of capacity expansion and it's really a replacement do.

Do the 2 the dynamics of that production is essentially really.

It really takes a toll on the reheat furnace overtime and you essentially just need to replace it and now is the time for us to do that so it will put it put us in a in a stable place and with the brand new reheat furnace in Wil.

Allow us to make sure we don't have outages going forward, but it is not a capacity expansion for us and so we'll build some inventory ahead of taking that taking the rod mill down. So that you will have plenty of.

Inventory on hand, as it comes back up.

Got you. Okay. That's helpful. I'm, sorry for that I thought that you were increasing the production there but that was my mistake.

And my other question is you know you did these 2 acquisitions. This quarter can you talk through what Youre seeing in terms of the M&A pipeline the <unk>.

Cancel for maybe some more of these smaller deals over the next couple of quarters, So what's going on there.

Susan we continue to look you know, we're we're always trying to <unk>.

<unk> strong true strategic fits and capabilities the kind of fill gaps so to speak.

Or to continue to build out existing platform. So.

Everything that we're looking at and would consider near term would be considered small bolt on don't expect anything large deleveraging and the focus on deleveraging continues to be important to us while our teams have done a great job of deleveraging, we continue to want to work pulled.

Net lever.

Got you okay. Thanks, Karl good luck.

Yeah. Thank you Susan.

Yeah.

Thank you as a reminder, if you would like to ask a question. Please press star 1 on your telephone keypad.

Our next questions come from the line of Peter Keith with Piper Sandler. Please proceed with your questions.

Hi, Thank you good morning, everyone. Thanks for taking the questions.

You had mentioned some capacity constraints across your various segments due to labor shortages.

But I was just curious what you're seeing at your own factories. However.

Are you seeing any wage inflation are there any pockets, where you are having trouble getting.

Fully staff, just just given the labor backdrop right now.

Yeah, Mitch do you want to grab that 1.

Yes sure.

<unk>.

Just like for Us and I think probably everybody in the world Labor is a bit of a challenge but.

But we're not really seen any place where at this point, where we're so severely impacted we are probably struggling a little bit in a couple of our ECS operations that are marginally constraining our output, but we will get those tackle but it's just a it's a it's a I think in the ongoing challenge as the work force is just smaller coming out of.

The pandemic, we are seeing a bit of of wage inflation.

I think that's that's not unique to us either.

Okay. Thanks.

Pivoting over now to to betting of I've gotten a couple of the investor questions on this and it really goes to the the volume growth on a 2 year basis.

My math would say sort of back of the envelope. It looks like the volumes are down somewhat.

Somewhere about 8% to 10% on a on a 2 year basis from 2019.

And I was wondering if you could address that you specifically called out you've exited fashion bed in drawn wire, maybe quantify what the the volume impact was from those or if you think theres been some headwind from just your general customer mix.

Okay.

Well the biggest issue.

Peter for sure is the constraint from the.

The the.

Foam impacts but.

Susan we've never quantified the.

The exit of those businesses.

Is that correct.

Not at the segment level, we have with quantified just the company wide level because that Peter I haven't done that 19 to 21 now year over year end of 'twenty that we were looking at the Basel III per start redact.

The reduction companywide, which would mean I don't know just couple of that roughly for the relative size of the of the.

Betting segment, maybe that's closer to 6.7% or so but that's very rough math. We can we can follow up with you after the call for you Mike.

Okay.

Thanks for that sounds good.

And then.

Nice job with the the.

The beat and raise and I guess, particularly to the the sales guidance raise.

Certainly passing through Q2, but then it looks like you've got the acquisitions and.

The raw material price increases.

Look at the EPS raise here.

The arguably theres much of the Q2 flow through as well are there is there anything on the margin front, however that youre adjusting and you're in your back half of your outlook that that allows for the the EPS bump up.

Yeah, Youre right about what the cause for that increase the is it's largely a matter of margin and no theres not anything that we're adjusting for in the back half so.

We would anticipate as we knew the rail.

The second half of the year, so third quarter fourth quarter to see sequential.

The improvement of quarterly improvement in sales.

And EBIT margin and in the P. S.

Flowing through.

With the expectations that we've talked about already relative to supply chain constraints in and our ability to recover from material costs and so forth, but no no no special adjustments.

Okay. Thanks.

Thanks for the overview and good luck.

Thank you.

Thank you there are no further questions at this time I would like to turn the floor back over to Susan Mccoy for any closing comments.

We well we appreciate you joining us today and we look forward to talking to you in the next quarter. Thank you.

Thank you that does conclude this mornings teleconference. Thank you for your participation you may disconnect your lines at this time.