Q2 2022 Leggett & Platt Inc Earnings Call

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As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Susie Mclain, Vice President of Investor Relations for Leggett and Platt. Please go ahead.

Good morning, and thank you for taking part in like a flat second quarter conference call on the call today are Mitch <unk>, President and CEO , Jeff Tate Executive Vice President and CFO , Steve Henderson Executive Vice President and President of the specialized products and.

Furniture flooring and textile products segments, I shouldn't Hegel, senior Vice President and President of the bedding product segment.

And Chelsea branch them senior director of Investor Relations.

The agenda for our call. This morning is as follows Mitch will start with the summary of the main points. We made in yesterday's press release and discuss operating results and demand trends, Jeff will cover financial details and address our outlook for 2022 and the group will answer any questions you have.

This conference call is being recorded for Leggett <unk> Platt and is copyrighted material. This call may not be transcribed recorded or broadcast without our expressed permission.

A replay is available from the IR portion of why its website.

We posted to the IR portion of the website yesterday's press release and a set of Powerpoint slides that contain summary financial information along.

With segment details 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 results or events may differ materially due to a number of risks and uncertainties and the company undertakes no obligation to update or revise these statements.

For a summary of the 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 Mitch.

Thanks, Susan good morning, and thanks, everybody for participating in our second quarter call.

Our employees continued to drive strong results in the quarter, despite ongoing macroeconomic geopolitical and various end market challenges sale.

Sales from continuing operations were a quarterly record at $1.33 billion EBIT was $143 million and earnings per share was <unk> 76.

Sales in the quarter were up 5% versus second quarter 2021, reflecting our successful pass through of significant inflation over the past several quarters, partially offset by lower volume and currency impact.

Yeah.

EBIT decreased 17% versus second quarter, 2021, and was down slightly versus second quarter 2021 adjusted EBIT.

Last year's second quarter EBIT included a $28 million gain from the sale of real estate associated with our exited fashion bed business.

EBIT decreased slightly versus last year's adjusted EBIT, primarily from volume declines and lower overhead absorption as production and inventory levels were adjusted to meet reduced demand mostly in Betty.

These decreases were largely offset by expanded metal margins in our steel rod business and pricing discipline in our furniture flooring and textile products segment.

Yeah.

EPS was <unk> 70 cents, a 15% decrease versus second quarter, 2021, and a 6% increase versus last year's adjusted EPS.

We are lowering our full year guidance to reflect the macroeconomic uncertainties, including the impacts of inflation tightening monetary policy and softening consumer demand continuing through the back half of the year.

We expect solid demand in our industrial and automotive end markets, partially offset softer consumer market.

Now I'll move on to the segments.

Sales in our bedding products segment were up 1% versus second quarter 2021.

Raw material related selling price increases strong trade demand in steel rod in drawn wire and the addition of our Cape Ohm acquisition made in the second quarter of last year were largely offset by volume declines for soft demand in the U S and European Betty market.

Market demand was negatively impacted by higher energy costs and general inflation early in the quarter, but then remained relatively consistent.

Mattress consumption has been on the leading edge of consumer spending activity and began to slow in the fourth quarter of last year, making year over year comparisons difficult.

Sequentially demand was down only slightly from the first quarter.

Commodity costs seem to have stabilized although at historically high levels.

Other manufacturing inputs, including energy continued to increase during the quarter.

We are carefully managing these costs and the impact to our business and our customers.

Within our bedding businesses the supply chain remains stable and we are well protected against future disruption.

We began to adjust production manufacturing cost and inventory in the fourth quarter of last year.

Inventory levels have trended down since that time, and we will continue to monitor them closely while maintaining our ability to service customer requirements.

We are well positioned to address further demand changes, whether up or down and we will respond quickly and responsibly.

Provided no major changes in the macroeconomic backdrop, we expect demand in this segment for the back half of the year to remain consistent with levels seen in the first half of the year.

EBITDA margins in the segment were lower versus second quarter 2021, adjusted EBITDA margins, primarily from lower volume and lower overhead absorption as production and inventory levels were adjusted to meet reduced demand, mostly offset by expanded metal margins in our steel rod business.

Sales in our specialized products segment increased 8% versus second quarter 2021 from strong volume growth in all three businesses. These volume gains were partially offset by currency impact.

The industry forecast for global automotive production has stabilized since April the current forecast anticipates, just under 5% growth in the major markets. This year.

Sumer demand remained strong and vehicle inventory remains at record low levels.

Our supply chain continue to stabilize the industry should see improving protection for the next several years.

Industry forecast now indicate recovery continuing through 2024.

And our aerospace business demand for fabricated duct assemblies remains at pre pandemic levels and we continue to see modest demand recovery for what it seamless to products.

We expect continued recovery in 2022 and the industry is anticipated to return to 2019 demand levels in 2024.

End market demand in hydraulic cylinders is strong and order backlogs in the industry are at record levels, However, labor availability and global supply chain constraints have hampered the ability of our OEM customers to ramp up production.

We're seeing some improvement in these areas, but it could be late 2022 or longer before industry backlogs normalize.

We expect our sales in this business to continue to grow as OEM production increases.

EBITDA margins in the segment declined primarily from higher raw material and transportation costs labor inefficiencies and currency impact, partially offset by higher volume.

Sales in our furniture flooring and textile products segment were up 10% versus second quarter 2021, primarily from raw material related selling price increases and volume recovery in work furniture, partially offset by lower volume in home furniture, textiles and flooring.

And home furniture, mid and upper level price points should remain relatively strong through the third quarter due to customer backlogs. However, backlogs are coming down due to consumer demand shifts and macroeconomic uncertainties.

Demand at lower price points has continued to soften negatively impacting our business in China. The Chinese market was also impacted by Covid related lockdowns during the second quarter.

We expect work furniture sales to continue to girlfriend, improving demand in the contract market as companies redesigned their footprints and invest in office space.

Demand for products sold for residential use is Saudi.

In textiles, we expect Geo components to grow in 2022 as demand remained strong across both the civil construction and retail markets.

In flooring products residential demand has softened with lower home improvement activity in hospitality demand remains well below pre pandemic levels.

EBITDA margins in this segment improved versus second quarter 2021, primarily from pricing discipline, partially offset by lower volume.

Before I turn the call over to Jeff I'd like to thank our employees for once again delivering strong quarterly results. Your collective ingenuity commitment and effort allows us to effectively navigate this dynamic operating environment.

Jeff I'll hand, it over to you.

Thank you Mitch and good morning, everyone and second quarter, we generated cash from operations of $90 million up $49 million as compared to $41 million in second quarter 2021, reflecting a much smaller use of cash for working capital.

Working capital increased significantly last year due to restocking effort following inventory depletion in 2020, but increased to a lesser extent. This year as we continued to return to inventory levels more reflective of current demand.

We expect cash from operations of $550 million to $600 million in 2020 two.

Last year, a significant inflationary impact stabilize and we continue to balance inventory levels.

We ended the second quarter with adjusted working capital as a percentage of annualized sales of 15, 7%.

Our priorities for use of cash are unchanged. They include in order priority funding organic growth paying dividends funding strategic acquisitions and share repurchases with available cash.

Capital expenditures in the second quarter was $22 million.

In May our board of directors increased the quarterly dividend of 44 cents per share.

<unk> or 5% higher than last year's second quarter dividend.

At an annual indicated dividend of $1 76, then the yield is 4.4% based upon Fridays closing price one of the highest among the dividend King.

With deleveraging we have accomplished over the past few years share repurchases have returned as one of our priorities for use of cash.

The level of repurchases will vary depending on various considerations, including alternative uses of cash and the opportunities to repurchase shares at an attractive price.

We took advantage of the lower share price during the second quarter and repurchased 1 million shares at an average price of $35.01 per share.

Total repurchases for the quarter were $35 million.

This brings year to date repurchases to one 6 million shares or $57 million.

We ended the second quarter with net debt to trailing 12 month adjusted EBITDA of 2.39 times.

Our strong financial base gives us flexibility, when making capital and investment decisions.

We remain focused on cash generation, while maintaining our balance sheet strength and deploying capital in a balanced and disciplined manner that positions us to capture near and long term growth opportunities, both organically and through strategic acquisition.

Now moving to guidance.

Mitch stated earlier, we are lowering our full year guidance for both sales and earnings per share.

2022 sales are now expected to be $5 2 billion to $5 $4 billion or up 2% to 6% over 2021.

Guidance reflects volume down low to mid single digits with the bedding product segment down low double digits specialized products segment up low double digits and furniture flooring and textile products roughly flat.

The guidance also reflects continued inflationary impact primarily from raw material related price increases, including those implemented as we move through 2020 one.

The guidance assumes negative currency impact and acquisitions in 2020, one should at 1% of sales growth, but will be mostly offset by small divestitures.

2022 earnings per share are now expected to be in the range of $2 65 to $2.80.

The decrease versus prior guidance, primarily reflects lower expected volume and consumer end markets, partially offset by continuing strength in industrial and automotive market as well as metal margin expansion in our steel rod business.

Based upon this guidance framework, our 2022 well your EBIT margin range should be 10, 5% to 10, 7%.

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

Depreciation and amortization to approximate $200 million.

Interest expense of approximately $80 million and fully diluted shares of $137 million.

For the full year 2022, we expect capital expenditures of approximately $130 million and dividends should approximate $230 million.

In closing leg it remains well positioned both competitively and financially to capitalize on long term growth opportunities in our various end markets.

Our enduring fundamentals give us confidence in our ability to continue creating long term value for our shareholders.

With those comments I'll now turn the call back over to Susan.

Thanks, Jeff.

That concludes our prepared remarks, we thank you for your attention and I'll be glad to answer your questions. Operator, we're ready to begin the Q&A session.

Thank you.

We will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing.

Darcie.

Our first question comes from the line of Bobby Griffin with Raymond James. Please proceed with your question.

Good morning, everybody. Thank you for taking my questions. So some first which I want to first start off on the specialized products segment.

Really a two part question I mean, one we saw you guys pick up the volumes pretty notably and for the full year. So maybe just unpack what areas of that business or are coming in stronger than expected and kind of what's a little bit more detail on what's going on in those end markets.

Then secondly, just what's the what's the pathway back for for margins to return to kind of the mid teens in that segment that we're used to seeing is there is there a path back there or is structurally something changed within the business is that it's it's going to need to be a little bit lower margin business going forward.

Yeah, Good morning, Bobby and thanks for participating today I appreciate the good question.

So I think a couple of things here I'll take your questions in order first the volume up you know from the prior guidance why I think it's really just more confidence and the actual improvement of production across all three of those business as we've seen significant improvement in aerospace and hydraulic cylinders, although that's still somewhat impacted by.

The oem's ability to to navigate labor and chip issues, but we have seen increased production over the last several several months and then similar in automotive as well, where while they're not getting them all of the chips that are needed to enhance production. There. It has become more stable and so that the production schedule.

Those are wavelengths.

Dynamic than they were.

Probably last year and so we continue to see some improvement there I think in automotive the that projection for the major markets is a.

Second half production up about 11% versus the first half so all of those things kind of holding up or what really gave us the confidence to to increase our guidance around the volume there.

And then your questions around the margins is also a good one so do you think that we have a path forward to those mid teens kind of margins again I think a few things dynamics are in play there first all three of those businesses were the most impacted at different times, but as the as the pandemic hit and then 'twenty two.

We saw the volumes there just decline very very significantly and this is I think old news right everybody noticed that it's been a really struggle for those industries to two to regain their traction, but as I just said that they're starting to now so we certainly have the impacts from lower volume, which is significant lower overhead Rick.

Coverage and then just some of the inefficiencies as the production schedule as I said as I said are so dynamic.

The other element that is is critical and we've talked about this on the call last quarter that it started more significantly to impact us in automotive is the impact of commodity inflation, it's less of a commodity business and if you think about the steel products embedded in our home furniture or things like that so it's normally not much of an issue but over and over.

Our time over the course of the dynamic last year or two there has been inflationary impacts that had built up whether it's around resins or steel impacts or just other other raw materials transportation that have had built up that we talked about it last quarter to become relatively.

Significant for the business and we've.

We've made really material progress I would say in the cost recovery starting in the second quarter.

And I would expect that to continue sequentially as we go through the year. One thing to note is that you had pricing in the automotive is very very different than any other of our businesses, maybe similar to aerospace, but that the industry generally works on fixed pricing with cost downs over the life of a program so prices typically.

Don't go up and down throughout the life of the program unless there is some really significant events like we've seen over the last couple of years really the last year and so it takes time for enough pressure to build through the supply chain that the Oems are there sort of forced to concede price changes so it's tough to predict exactly the timing.

It's not as simple as you know the industries were built to have these kind of pricing fluctuations fluctuations.

Hmm.

We have seen that momentum build and start to see actual tangible benefits of that in the second quarter again tough to predict exactly the timing, but we do expect to continue to make significant progress over the second half of the year and that recovery could take the form of a of a number of items it could be actual price changes it could be delayed.

<unk> cost and it could be some engineering changes or even one off payments, but we do feel confident that the ball is rolling now we're starting to see the results and that will continue.

The second area that we talked about.

Okay.

Probably just one more thing real quick last time, we talked about some operational issues that we're having in one of our facilities in and in the U S. We've also made substantial progress there.

And that plant inventory positions are improved.

Premium, resulting premium faith trade is going down and our excess labor cost should go down not done still work to do but making progress.

Very good I appreciate that detail. It was a very helpful. Thank you Mitch and then I guess secondly, just as a follow up maybe on the on the commodity or steel side of the business. We have started to recently see some of the steel commodities rollover has that is that is the spread or the metal margins changed at all with the recent kind of reduction in some of the steel index.

Suzanne and it's been a very long time since we've kind of seen steel deflation in the last couple of years have been inflation. How do you think the business you know, we'll respond to potential deflation in steel products are you know.

Similar to the history, we're used to seeing with legged when they when they see deflation.

Yeah, Great question, Bobby I'll take the easy part and then hand, it over to Tyson, but on the on.

On the steel side think about the separation between wherever using you know flat products and in home furniture, and we have seen some reduction there teams are managing that very very well managing our inventory and also managing our pricing.

It'll be different on the on the Rod side with increased other input costs. There. So types I'll hand, it over to you on that one sure yeah. It is.

It is a little bit of a complicated story, but but you're right. Bobby even recently, we have started to see some softening in rod pricing them, but to a lesser extent than we've even seen some changes in scrap mix started to hint at it but I think some of that is just general industrial demand is relatively strong for steel products and then also some of the convert.

Costs that have increased pretty substantially I don't think it quite as much notice but.

But energy.

General utility usage consumables that go into it have also I think helped support some of the higher pricing, but we have seen.

Have seen it start to stabilize and start to come down a bit and we've been monitoring that closely on the way up and also will do the same as as things decreasing. We have also have you know a large part of our steel based business. It's contractual so we will obviously see those things pass throughs as necessary.

Thank you I appreciate the detail best of luck in the second half.

Thank you Bobby.

Thank you. Our next question comes from the line of Susan Mcclary with Goldman Sachs. Please proceed with your question.

Thank you good morning, everyone.

Well My first question is you're talking a little bit about the consumer perhaps you mentioned in your comments niche that you have seen bedding demand stabilize and look what are you expecting to hold flat can you talk in general just about the state of the consumer the health of the consumer that you're hearing from your customers and perhaps with that any commentary.

On the elasticity of demand that you're seeing in betting, especially as you're continuing to put pricing to offset those inflationary pressures.

Yeah sure I'll take a shot at that and good morning, Susan Thanks for the good.

Question, I think it's tough to predict but I think the fact that we've seen demand being pretty stable is is probably a good thing right. It's tough in this type of inflationary.

Environment with monetary policy tightening and all of the other macro economic disorders that are out there. So I think that led to the step down but you know I think that if we can see that inflation is starting to stabilize and then starting to generally come down I really don't see it you know just just dropping off very swiftly.

But if it starts to stabilize I think that we will see that consumer hold in there for at least a decent levels and then depending upon what happens going forward.

You know if we are able to avoid or save for your recessionary cycle I think that we should be in pretty good shape, but we've certainly been planning and all of our businesses for this kind of uncertainty really starting last year to make sure we're managing inventory.

Closely that we're managing our variable costs in our production levels. So that we're really ready to move either way if it gets a little bit softer to be able to take a step back and control our costs or to be able to respond very quickly. If we're able to see see pick up. So I think that's a really big question. That's out there for for the world's right is let's go.

To happen with consumer demand and inflation out there, but I'm relatively optimistic with the trends that we're seeing but types of any what are you hearing.

Very similar mix you know we've shared that.

We felt some of the slowdown earlier than a lot of others. When it started happening in the fourth quarter of last year.

You know both I think from the lower end price points slowing first but then also as it moved in just a minute and even to a lesser extent some of the higher price point and as move through the early part of this year and also you know not just from the impacts of inflation and other things, but consumers shifting to spending on services travel and such.

Other areas like that but like Mitch said, what gives us confidence even as we watch consumer sentiment would be at low levels as we've seen some step downs over the course of the last nine months or so, but it's been really consistent, especially as we move through the second quarter and one thing I think we'll be watching closely as we've watched them to retail activity is just especially consumers on the lower end and and how they re.

To the continued inflation or even prices staying at high levels, but overall I think we feel pretty confident just in and some consistency as we get into the back half of the year testing maybe I'll add.

In the longer term right in and there's betting side really historically don't see multi year downward trend is that something that would be outside of the norm of what we see and even if we think about you.

The.

As the housing market is softening a little bit even in places like like our home furniture business. For example, maybe less impacted consumer sentiment and people, even if that with all of the home traffic that has happened over the last couple of years probably some.

Return to that repurchasing cycle, there I will say that we've been more seen more negative impact on the whole furniture side, particularly at the low end recently.

That's all very helpful color.

And you know following up obviously, the macro environment has shifted in the quarter. There's a lot of debate about where are we sort of are you know from a broader perspective, there, but as you speak about the business. Matt how are you preparing for a shift in shift in the macro landscape. You know what is the playbook that she'll go too.

If we do see things.

Deteriorate more than you know where we currently are at and you know what are you watching in order to determine what needs to happen to the business to protect it in a weaker macro.

Yeah, Great question season, Thank you and I guess, you know we've kind of been through a similar type of circumstance before you know when we were in.

In 2020 with the downturn after the onset of the pandemic. So I think that we've learned some new skills that we certainly haven't forgotten man, but first off though I would say I expect that will benefit from our portfolio diversity right, we're seeing stronger.

Stronger demand hold up in our.

Industrial and automotive.

Businesses compared to our more consumer facing businesses. So I do think that that will continue to hold up but you.

Well also regardless be able to continue aligning our variable costs in our inventories to demand I think the good news there as I mentioned on the calls that we've been doing this since we first started to see demand slowing a little bit in the fourth quarter of last year and Betty as well as across our other businesses. It's something frankly that we talk about on a regular basis across all of our.

Businesses.

In this environment since we're well positioned we're already we're not scrambling to catch up with what's happening in the in the macroeconomic circumstances. We continue to drive strong free cash flow, we have really strong liquidity. So we will be able to benefit from from those things as well you know in 2020, we cut about $90 million of cash.

Cost, mainly overhead costs and I never thought about that as something that was temporary that we would take those cost out and we would bring them back but I did think about it as that we would make investments for our future and we have been doing that.

And I think that our portfolio diversity, and our strong cash flow and liquidity will allow us to continue to make those investments. So we will have more capacity to implement those activities if demand is slower.

We'll benefit from the improved efficiencies of the capabilities and be ready to take advantage of strong demand when those conditions improve you know if it's worse than that then we'll take those actions. It will go back to a more radical cost cutting but I really think that we're well positioned to be able to invest in our future and really benefit from the recovery as we come out of this.

Cycle.

That's great. Thank you for the color I'll I'll re queue and turn it over to someone else.

Alright. Thanks.

Yeah.

Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad.

Our next question comes from the line of Keith Hughes Whichever Securities. Please proceed with your question.

Thank you first question Oh, My mother earlier comments, you talked about margins I think I think they were particularly ticking down a little bit it wouldn't make sure I heard that right and kind of what have you assumed in the guidance for the second half of the year on those mortgage.

[noise] testing you want to take that one sure.

And Keith just to take care of that that's what I was suggesting was that we're seeing some softening in rod pricing, but overall I think we've seen and actually maybe take a quick step back in the second quarter, our metal margins actually expanded a bit beyond our expectations and some of the drivers there that are there.

That kind of caught us a little bit by surprise, but the invasion of Ukraine had an impact on scrap pricing as.

It is an input people were trying to scramble around and find scrap which drove up the demand for scrap supply and we have to.

A sharp increase in energy costs, and then just general steel demand all put to some higher.

Margin expansion in the second quarter and the third theory see rod start to soften a bit scrap as well as some of those things have backed off.

But generally we would still see overall metal margins being relatively consistent in the third quarter and right now we're expecting some modest compression as we get into the fourth quarter, just with the overall supply and demand but.

But at this point, it's still tough to predict but we think for the full year, we'd still be up year over year.

Okay.

And then she talks about textiles and flooring.

Somebody can move in different directions, right now just relative size.

You kind of lump those together and in the 10-K can you can you just talk about how what goes to represent as a percentage of the two segments.

Let me see here.

Thank you Matt.

Exactly.

Yeah, Okay, and Steve chime in if you have that handy I think that that.

Textiles is about 35% or so.

Of the business.

Right.

Instead of outright.

Yes, that's what it was about 35%, Florida, and probably about 25% yeah about 120 days.

That's why I talked about.

Okay.

And then I guess.

Austin.

The compression in specialized you discussed earlier on the call.

Kind of lag pricing there.

We continue to see similar types of margin compression.

And you're a regular guy who's next couple of quarters, well that started to more rotation.

Some more probes.

Yeah, Great Great question, and Steve chime in here, but I think that we expect to see sequential improvement in the margins in specialized as we move through the back half of the year. We you know as I said, we've made progress on passing through some of the inflationary impacts in automotive.

Automotive and the increase in volume will help us there.

We've had a bit of a hit from the exchange rates impacting margins, but we do expect to see.

Meaningful improvement in the back half.

Okay. Thank you.

Yeah. Thank you.

Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Hi, Thanks, Good morning, everyone I did want to focus this morning on the bedding business and I guess I'm just looking at the the volume trends with the steady declines in my calculation. The betting volumes are down about 22% on a three year basis and.

And so I know, we're waiting for macro headwinds.

Headwinds to abate.

It's really anyone's guess to when that happens. So I wanted to ask what is it sort of the strategic initiatives to really get the betting volumes going in and put yourself in a position to be taking market share.

Yeah. Good morning, Peter Great question pass it I'll, let you see that one sure thing I, Peter So I'll put it into some short medium and long term buckets for you.

In the short term you know its been a chaotic two and a half years that we've been dealing with with customers supply chain of high and low levels of demand, but our teams are working really hard on evaluating near term near term opportunities with our customers and what can we go do what makes sense and there are things out there even in a slow environment that tab, where we think we can provide some guy talking.

We are carefully balancing the economics of those opportunities also kind of as we look at the the risk and economics of those but we do expect to start to see some of the benefits you know even now and through the back half of the year. So we do see some some opportunities for improvement there even in the short run.

Hum.

In the medium term.

It's a it's a tough time to do this but we do have customers that are interested in new product development. Both from a V. A P E standpoint, and just differentiation and we have some new things that we're working on with customers right now, but those will take some time to gain steam and actually gain gain a foothold in the market. So that would be more of a medium term initiative.

Over the longer term you know we've been pretty public about our investments in getting and you can kind of see where we've been heading with our investments that E. C. S. K foam also within our adjustable bed business, we've been investing in areas, where we feel like we can increase our addressable market size and although were pretty specific about our position as a supply chain partner also get.

There's still opportunities in segments of the market to increase our content as well. We've also continued to invest in our ability to supply our customers in our core components business and we're in a good place there as well so we've been investing even as we've gone through the downturn and positioning ourselves for the long run of being in a better place to grow again.

Okay.

Okay. Thanks for the summary, and then.

We talk about the weak economy, but wasn't the area that does seem to be getting a week or for the foreseeable future is housing and I guess I wanted to understand your your views on housing and its impact on your guidance as home sales are slowing quite a bit here.

Seems like it could have a further negative impact on bedding and furniture flooring. Some various segments. So is that something that you're contemplating as you look out over the next six to 12 months.

Yeah, I think so I think it's tough to predict exactly Peter but I mean, it is yeah. As we said that's really the the take on our guidance was understanding that there are is this macroeconomic uncertainty out there, including the housing market and likely to have some impact we think that you know.

Consumer sentiment and other factors have a bigger impact than that.

That there's even with them you know housing movement helps us and laughs over some period of time, but I think that I think that we've factored in at least what we anticipate is the impact there.

Okay very good thanks, so much.

Thank you.

Thank you. Our next question is a follow up from the line of Susan Mcclary with Goldman Sachs. Please proceed with your question.

Thank you Hello again.

My first question is you know we've talked a lot about the supply chains and production as it relates to auto within specialized but can you talk a little bit about the improvement or how youre thinking about the improvements coming through in Aero as well as in hydraulic cylinders I mean, obviously in aerospace one of the big OEM.

He's just got approval to start shipping one of their products and are you seeing that there is some increase there are some improvements that are coming through and how are you thinking about that flowing in and contributing to that margin improvement in the back half and into 'twenty three.

Yeah, Great question, Susan Thanks, Steve I'll, let you take that one but I think it's a positive outlook for us.

Yeah sure good morning, Susan.

Aerospace demand.

And it's tracking pretty much as we expected as the industry continues to recover and as much said that well yeah 2019 levels in about 2024 aircrafts. The backlogs are near their peak levels at this point so the demand is there.

And we saw year on year sequential volume growth in Q.

Two we expect that to continue going going forward.

As my job. It's also mentioned Assembly Assembly business has recovered quite quickly and now we're starting to see that happen for the tubing side of the of the business and as that demand returns the industry starting to see.

Some of the same things we saw in our automotive you know orders being pulled forward expedited delivery short lead times to come in in the arms.

We're also starting to see some extended lead times for our raw materials.

But we're taking that into consideration so our team's doing a really good job of dealing with that Pat situations that goes our work.

Hydraulics end market for forklifts remained strong, particularly in North America that that market is sitting at about 22 months of backlog, but we're also seeing that reflected in our orders, which we think positions us well for the second half of the year.

Now the Oems got backtrack on there.

And our capabilities.

Yeah.

Okay. That's it.

Yeah, sorry, so is that just kind of say C would you say both of those businesses, where you're likely to see a little bit of hiccups as we as the production ramps up but I really am much more confident in that production ramp up taking place and improving as we go into the back half.

Yes, certainly.

Okay, that's very helpful.

Got it.

Go back to is the inflation question, we talked a lot about the metal margins, but can you talk to what you're seeing in terms of the inflationary pressures on them, perhaps ECS things that go back more to those oil sort of supply chains in there one what is the availability of a lot of those key and put them into what are you seeing.

In terms of the input cost side.

Yeah. That's a great question Tyson you want to take that or Susan so.

Supply standpoint at this point things things are good we've gotten hesitant to say all clear never a problem, but we've really been in a stable place in terms of the supply chain there for a while now and feel good about it and we've taken some actions even beyond just our typical market supply that gives us some options to give us back up and in insurance with storage.

Tanks, and things that would allow us to stay covered even if there was a short term supply constraint in terms of pricing Youre right energy costs and it had an impact, but we feel like that world prices have been to our cost base.

<unk> been relatively stable and so I think as demand overall in the chemical market has softened the energy costs have probably kept some of the pricing more stable.

But it's similar to some other things we've seen we haven't seen an increasing trend overall with chemical prices had been more stable.

Okay. Okay. That's helpful. And then just squeeze one more in here and maybe just one more for a job and I'd be remiss, if I Didnt mentioned, the $35 million of buyback that you did this quarter and can you talk a little bit about what drove that decision. How you are thinking about their willingness to continue to buyback the stock going forward.

And perhaps with that anything that you'd like to share with us in terms of like of a target for leverage or just the overall sort of capital structure of the business.

Great. Good morning, Susan and thank you for noticing the $35 million of repurchases. There I think it's important to start with the tremendous progress that the team has made around our deleveraging efforts over the past few years since the ECS acquisition, because I think that really have positioned us well as we think about our overall capital allocation.

Strategy, you know our priority still remains funding organic growth maintain the flexibility around our strategic growth opportunities around M&A and supporting our dividend, but if we made that deleveraging progress we've well positioned ourselves now to be more active from a share repurchase perspective, and we were much more aggressive in the <unk>.

Quarter, because you know where we saw our share price during the period, but if you look year to date, we have repurchased one 6 million shares and an allocated about $57 million in that regard as we look towards the future. Susan you know, we're going to continue to evaluate share repurchases in the context of our other investment opportunities while at the same.

Monitoring our cash flow from operations. So it's one of those things, we will evaluate each and every quarter and compare it to our other opportunities that we have as we think about investments.

And in terms of your second question around our leverage target I think it's important there to think about the view that we have around an ideal target range for net debt to EBITDA, which for US is to maintain a capital structure that we feel that allows us to do a couple of things one is to pursue strategic growth opportunities. Another is around return.

<unk> cash to our shareholders and then thirdly, ensuring that we can maintain our solid investment grade profile. If you rewind back to 2019 at the time of the ECS acquisition that was the last time, we stated publicly a target from a leverage standpoint of 2.5 times on a total debt basis to EBITDA.

Fast forward to May of 'twenty 'twenty, we amended our covenant in our revolving credit facility to go from a total debt to a net debt metric and then in September of 'twenty. One we successfully amended our facility again and retain but net debt covenant as well from a metric standpoint with a maximum leverage of three five times.

Now we haven't formally updated what we feel is a leverage target moving forward, but it's safe to assume Susan that it will be something below well below our net debt of about 2.5 times basis.

Okay, Great I appreciate all the college football and good luck with the second half.

Thank you very much Susan.

Yeah.

Thank you ladies and gentlemen, this concludes.

A question answer session I'll turn the floor back.

Quite for any final comments.

Thank you for joining us today, well sneaking a bolt on Oklahoma first when we report third quarter results as always if you have questions. Please contact us using information in yesterday's press release February he has a good day. Thanks.

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