Q2 2019 Earnings Call

July 30, 2019

Thanks, and welcome to the Leggett <unk> Platt second quarter 2019 earnings conference call. At this time, all participants are not listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Wendy Watson director of Investor Relations. Thank you Ms. Watson you may begin.

Wendy Watson: You may begin.

Good morning, and thank you for taking part in Leggett <unk> Platt second quarter Conference call.

Susan McCoy: Good morning, and thank you for taking part in Leggett & Platt's Q2 conference call. With me today are Karl Glassman, President and CEO, Matt Flanigan, Executive Vice President and Chief Financial Officer, Mitch Dolloff, EVP, Chief Operating Officer, and President of the Furniture Products and Specialized Products segments, Perry Davis, EVP, and President of the Residential Products and Industrial Products segments, Susan McCoy, Senior Vice President of Investor Relations, and Cassie Branscum, Manager of IR. The agenda for our call this morning is as follows: Karl will start with a summary of the main points we made in yesterday's press release. Matt will discuss financial details and address our outlook for 2019. Finally, the group will answer any questions that you may have. This conference call is being recorded for Leggett & Platt and is copyrighted material.

Wendy Watson: Good morning, and thank you for taking part in Leggett & Platt's Q2 conference call. With me today are Karl Glassman, President and CEO, Matt Flanigan, Executive Vice President and Chief Financial Officer, Mitch Dolloff, EVP, Chief Operating Officer, and President of the Furniture Products and Specialized Products segments, Perry Davis, EVP, and President of the Residential Products and Industrial Products segments, Susan McCoy, Senior Vice President of Investor Relations, and Cassie Branscum, Manager of IR. The agenda for our call this morning is as follows: Karl will start with a summary of the main points we made in yesterday's press release. Matt will discuss financial details and address our outlook for 2019. Finally, the group will answer any questions that you may have. This conference call is being recorded for Leggett & Platt and is copyrighted material.

With me today are Karl Glassman, President and CEO , Matt Flanigan, Executive Vice President and Chief Financial Officer.

Lets dollar EGP, Chief operating officer, and president of the furniture products and specialized products segment.

Harry gave it he VP and president of the residential products and industrial products segment.

Susan Mccoy senior Vice President of Investor Relations, and khaki Branscom manager of IR.

The agenda for our call. This morning is a solid Karl will start with a summary of the main point, we made in yesterday's press release.

Matt will discuss financial details and address our outlook for 2019.

Finally, the group will answer any questions that you may have.

This conference call is being recorded for Leggett <unk> Platt and is copyrighted material. This call may not be transcribed recorded or rebroadcast without our express permission. A replay is available from the IR portion of like its website.

Susan McCoy: This call may not be transcribed, recorded, or broadcast without our express permission. A replay is available from the IR portion of Leggett & Platt's 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. 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 these risk factors and additional information, please refer to yesterday's press release and the section in our 10-K and 10-Qs entitled Forward-Looking Statements. I'll now turn the call over to Karl.

Wendy Watson: This call may not be transcribed, recorded, or broadcast without our express permission. A replay is available from the IR portion of Leggett & Platt's 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. 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 these risk factors and additional information, please refer to yesterday's press release and the section in our 10-K and 10-Qs entitled forward-looking statements. I'll now turn the call over to Karl.

We posted to the Investor relations portion of the website Yesterdays 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 a number of risks and uncertainties and the company undertakes no obligation 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 10-K and 10 kids entitled forward Looking statements I'll now turn the call over to Carl.

Karl Glassman: Good morning. Thank you for participating in our Q2 call. First, I want to thank Perry Davis for his nearly four decades of dedicated service to Leggett & Platt, congratulate him on his announced retirement early next year. Perry is a leader within Leggett and the global bedding industry, with contributions too numerous to detail today. Perry is a good friend. He will be missed both personally and professionally. Yesterday, we reported Q2 sales increased 10% to $1.21 billion. Growth from ECS and other smaller acquisitions was 16% in the quarter. Sales also increased from continuing market share and content gains in US Spring, where sales were up 4%. This was more than offset by lower volume from business exited in our Furniture Products segment, weak trade demand in the Industrial Products segment, and softer demand in automotive.

Karl Glassman: Good morning. Thank you for participating in our Q2 call. First, I want to thank Perry Davis for his nearly four decades of dedicated service to Leggett & Platt and congratulate him on his announced retirement early next year. Perry is a leader within Leggett and the global bedding industry, with contributions too numerous to detail today. Perry is a good friend. He will be missed both personally and professionally. Yesterday, we reported Q2 sales increased 10% to $1.21 billion. Growth from ECS and other smaller acquisitions was 16% in the quarter. Sales also increased from continuing market share and content gains in US Spring, where sales were up four percent. This was more than offset by lower volume from business exited in our Furniture Products segment, weak trade demand in the Industrial Products segment, and softer demand in automotive.

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

First I want to thank Barry Davis for his nearly four decades of dedicated service to Leggett <unk> Platt and congratulate him on his announced retirement early next year.

Very is a leader within leggett and the global bedding industry with contributions to numerous the detail today.

Korea is a good friend he will be missed both personally and professionally.

Yesterday, we reported second quarter sales increased 10% to $1.21 billion.

Growth from you see us and other smaller acquisitions was 16% in the quarter.

Sales also increased from continuing market share and content gains in U.S. spring, where sales were up 4%. This was more than offset by lower volume from business exited in our furniture products segment, we trade demand in the industrial product segment and softer demand in automotive.

Organic sales declined 6% with volume down 6%.

Karl Glassman: Organic sales declined 6%, with volume down 6%. The exited business accounted for 3% of the decline. Negative currency impact offset raw material-related selling price increases implemented in 2018. Q2 EBIT increased $15 million or 12% over the Q2 last year to $136 million, primarily from lower raw material costs, including a LIFO benefit and the ECS acquisition, even after $12 million of amortization expense. These increases were partially offset by the impact from lower volume in several businesses and other smaller items. Q2 EBIT margin increased 20 basis points to 11.2%. Q2 EBITDA increased $31 million over the Q2 of 2018 to $186 million, and EBITDA margin increased 130 basis points to 15.3%.

Karl Glassman: Organic sales declined six percent with volume down six percent. The exited business accounted for three percent of the decline. Negative currency impact offset raw material-related selling price increases implemented in 2018. Q2 EBIT increased $15 million or 12% over the Q2 last year to $136 million, primarily from lower raw material costs, including a LIFO benefit and the ECS acquisition, even after $12 million of amortization expense. These increases were partially offset by the impact from lower volume in several businesses and other smaller items. Q2 EBIT margin increased 20 basis points to 11.2%. Q2 EBITDA increased $31 million over the Q2 of 2018 to $186 million, and EBITDA margin increased 130 basis points to 15.3%.

The exited business accounted for 3% of the decline negative currency impact offset raw material related selling price increases implemented in 2018.

Second quarter, EBIT increased $15 million or 12% over the second quarter last year to $136 million, primarily from lower raw material costs, including a LIFO benefit and the easy yes acquisition, even after $12 million of amortization expense.

These increases were partially offset by the impact from lower volume in several businesses and other smaller items.

Second quarter, EBIT margin increased 20 basis points to 11.2% second quarter EBITDA increased $31 million over the second quarter of 2000 $18 million to $186 million and EBITDA margin increased 130 basis points to 15.3%.

Second quarter earnings per share were 64 cents up one cents from the second quarter last year impacted by the items mentioned as well as higher interest expense and a higher effective tax rate.

Karl Glassman: Q2 earnings per share were $0.64, up $0.01 from the Q2 last year, impacted by the items mentioned, as well as higher interest expense and a higher effective tax rate. We reduced our full-year sales guidance due to lower than previously expected sales at ECS and lower organic sales. The ECS reduction is a combination of lower volume, primarily from programs that were delayed or did not develop, weakness in some of our non-bedding markets, and raw material-related selling price decreases. We also have shifted some production to our US Spring operations. The reduction in full-year organic sales guidance is primarily from lower than previously expected production in the automotive market and lower trade demand for steel rod and wire. In addition, we expect currency and steel-related selling price decreases to be a headwind in the back half of the year.

Karl Glassman: Q2 earnings per share were $0.64, up $0.01 from the Q2 last year, impacted by the items mentioned, as well as higher interest expense and a higher effective tax rate. We reduced our full-year sales guidance due to lower than previously expected sales at ECS and lower organic sales. The ECS reduction is a combination of lower volume, primarily from programs that were delayed or did not develop, weakness in some of our non-bedding markets, and raw material-related selling price decreases. We also have shifted some production to our US spring operations. The reduction in full-year organic sales guidance is primarily from lower than previously expected production in the automotive market and lower trade demand for steel rod and wire. In addition, we expect currency and steel-related selling price decreases to be a headwind in the back half of the year.

We reduced our full year sales guidance due to lower than previously expected sales at you see us and lower organic sales.

The easiest reduction is a combination of lower volume primarily from programs that were delayed or did not develop.

Weakness in some of our non bedding markets and raw material related selling price decreases.

We also have shifted some production to our U.S. free operations.

The reduction in full year organic sales guidance is primarily from lower than previously expected production in the automotive market and lower trade demand for steel rod and wire.

In addition, we expect currency and steel related selling price decreases to be a headwind in the back half of the year.

Karl Glassman: Even with these changes, we continue to expect full-year sales growth in automotive, U.S. Spring, aerospace, hydraulic cylinders, and work furniture. Matt will discuss full-year guidance details, as well as our near-record operating cash in the quarter later in the call, but I wanted to update you on several operational items first. We received positive news in the quarter related to the mattress industry's antidumping matter on imported Chinese mattresses. The Department of Commerce made a preliminary determination that mattresses were being sold at prices that violate the United States trade laws and imposed preliminary dumping duties that range from 69% to 1,732%. This should allow domestic mattress producers to compete on a more level playing field. We anticipate a final determination in the antidumping matter by the end of the year.

Karl Glassman: Even with these changes, we continue to expect full-year sales growth in automotive, U.S. spring, aerospace, hydraulic cylinders, and work furniture. Matt will discuss full-year guidance details, as well as our near-record operating cash in the quarter later in the call, but I wanted to update you on several operational items first. We received positive news in the quarter related to the mattress industry's antidumping matter on imported Chinese mattresses. The Department of Commerce made a preliminary determination that mattresses were being sold at prices that violate the United States trade laws and imposed preliminary dumping duties that range from 69% to 1,732%. This should allow domestic mattress producers to compete on a more level playing field. We anticipate a final determination in the antidumping matter by the end of the year.

Even with these changes we continue to expect full year sales growth in automotive you a spring aerospace hydraulic cylinders and work furniture.

Matt will discuss full year guidance details as well as our near record operating cash in the quarter later in the call, but I wanted to update you on several operational items first.

We received positive news in the quarter related to the mattress industries anti dumping matter on imported Chinese mattresses. The department of Commerce made a preliminary determination that mattresses were being sold at prices that violate the United States trade laws and impose preliminary dumping duties that range from 69% to 1732%.

This should allow domestic matters producers to compete on a more level playing field, we anticipate a final determination in the anti dumping matter by the end of the year.

We continue to be excited about the combined strength of vcs and our traditional bedding business and the opportunities it presents for us going forward.

Karl Glassman: We continue to be excited about the combined strength of ECS and our traditional bedding business and the opportunities it presents for us going forward. In our home furniture and Fashion Bed businesses, the restructuring activities are going very well. The most significant elements of both plans are behind us. We expect to be substantially complete by the end of Q3. We already are seeing a positive impact from the restructuring, with EBIT and EBIT margin up in Q2 from lower fixed costs attributable to the restructuring, as well as improved pricing and lower raw material costs. We continue to expect full-year restructuring-related charges of $17 million, with $11 million of which is non-cash. We also wanted to update you on the automotive market.

Karl Glassman: We continue to be excited about the combined strength of ECS and our traditional bedding business and the opportunities it presents for us going forward. In our home furniture and Fashion Bed businesses, the restructuring activities are going very well. The most significant elements of both plans are behind us and we expect to be substantially complete by the end of Q3. We already are seeing a positive impact from the restructuring, with EBIT and EBIT margin up in Q2 from lower fixed costs attributable to the restructuring, as well as improved pricing and lower raw material costs. We continue to expect full-year restructuring-related charges of $17 million, with $11 million of which is non-cash. We also wanted to update you on the automotive market.

In our home furniture and fashion bed businesses. The restructuring activities are going very well. The most significant elements of both plans are behind us and we expect to be substantially complete by the end of the third quarter.

We already are seeing a positive impact from the restructuring with EBIT and EBIT margin up in the second quarter from lower fixed cost attributable to the restructuring as well as improved pricing and lower raw material costs. We continue to expect full year restructuring related charges of $17 million with $11 million of which is non cash.

We also wanted to update you on the automotive market.

Karl Glassman: Year-to-date production in the major global markets, which are North America, Europe, China, Japan, and South Korea, is down 6% and is now expected to be down 3% for the full year. Based on the latest forecast, vehicle production in the second half of the year is expected to be flat, with both 2018 and the first half of 2019. While global production will be significantly lower than originally forecast and will temper our sales growth, we expect our automotive business to continue to significantly outperform the market. I will now turn the call over to Matt.

Karl Glassman: Year-to-date production in the major global markets, which are North America, Europe, China, Japan, and South Korea, is down six percent and is now expected to be down three percent for the full year. Based on the latest forecast, vehicle production in the second half of the year is expected to be flat, with both 2018 and the first half of 2019. While global production will be significantly lower than originally forecast and will temper our sales growth, we expect our automotive business to continue to significantly outperform the market. I will now turn the call over to Matt.

Year to date production in the major global markets, which are North America, Europe , China, Japan, and South Korea is down 6% and is now expected to be down 3% for the full year.

Based on the latest forecast vehicle production in the second half of the year is expected to be flat with both 2018 in the first half of 2019.

While global production will be significantly lower than originally forecast and will temper our sales growth. We expect our automotive business to continue to significantly outperform the market I will now turn the call over to Matt Thanks, Carl and good morning, everyone.

Matt Flanigan: Thanks, Karl. Good morning, everyone. Operating cash flow was $172 million in Q2, an increase of $92 million versus Q2 last year. Within $2 million of our all-time record for a Q2 operating cash flow performance. A keen focus upon working capital levels was reflected by our quarter-end adjusted working capital as a percentage of sales at 12.4%, which improved from both last year's Q2 and sequentially from this year's Q1. We continue to expect our full year operating cash flow to approximate $550 million. We are decreasing our full year CapEx expectations to $180 million from our prior estimate of $195 million. Dividends should require $205 million of cash.

Operating cash flow was $172 million in the second quarter.

An increase of 92 million versus the second quarter last year.

And within $2 million of our all time record for a two Q operating cash flow performance.

A keen focus upon working capital levels was reflected by our by our quarter and adjusted working capital as a percentage of sales at 12.4%.

Which improved from both last years second quarter and sequentially from this years first quarter.

We continue to expect our full year operating cash flow to approximate $550 million.

We are decreasing our full year capital expenditure expectations to $180 million.

From our prior estimate of $195 million.

Dividends should require $205 million of cash.

We ended the quarter with debt at 3.45 times, our trailing 12 month pro forma adjusted EBITDA.

Matt Flanigan: We ended the quarter with debt at 3.45 times our trailing twelve-month pro forma adjusted EBITDA, which is right in line with our deleveraging plans. We have so far brought back $60 million of offshore cash in 2019, and expect to return an additional $110 million before year-end. As we announced yesterday, we are lowering our sales and EPS guidance for 2019. Full year sales are expected to be $4.7 to 4.85 billion, or up 10% to 14% over last year. Acquisitions should add 15%. We expect organic sales to be down 1% to 5%, including a 3% reduction from exited business.

Matt Flanigan: We ended the quarter with debt at 3.45 times our trailing twelve-month pro forma adjusted EBITDA, which is right in line with our deleveraging plans. We have so far brought back $60 million of offshore cash in 2019, and expect to return an additional $110 million before year-end. As we announced yesterday, we are lowering our sales and EPS guidance for 2019. Full year sales are expected to be $4.7 to 4.85 billion, or up 10% to 14% over last year. Acquisitions should add 15%. We expect organic sales to be down one to five percent including a three percent reduction from exited business.

Which is right in line with our de leveraging plans.

We have so far brought back $60 million of offshore cash in 2019 and expect to return an additional 110 million before year end.

As we announced yesterday, we are lowering our sales and EPS guidance for 2000 or 19.

Full year sales are expected to be 4.7 to 4.85 billion or up 10% to 14% over last year.

Acquisitions should add 15%.

We expect organic sales to be down, 1% to 5%, including a 3% reduction from exited business.

Our full year earnings per share guidance range has been reduced by a nickel and is now $2 and 30 to $2.50 per share.

Matt Flanigan: Our full year earnings per share guidance range has been reduced by a nickel and is now $2.30 to $2.50 per share, including approximately $0.10 per share of restructuring-related costs, and therefore adjusted EPS is expected to be $2.40 to $2.60. This decrease is due to the lower than expected sales, partially offset by decreasing steel costs. Based upon this guidance framework, our full year adjusted EBIT margin should be 11.1% to 11.4%. This EPS guidance also assumes a full year effective tax rate of 24%, full year depreciation and amortization of $200 million, net interest of approximately $90 million, and fully diluted shares of 136 million. With those comments, I'll turn the call back over to Wendy.

Including approximately 10 cents per share of restructuring related cost.

And therefore, adjusted EPS is expected to be $2 and $42.60.

This decrease is due to the lower than expected sales, partially offset by decreasing steel costs.

Based upon this guidance framework, our full year adjusted EBIT margin should be 11.1% to 11.4%.

This EPS guidance also assumes a full year effective tax rate of 24%.

Full year, depreciation and amortization and $200 million.

Net interest of approximately $90 million.

And fully diluted shares of $136 million.

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

Susan McCoy: That concludes our prepared remarks. We thank you for your attention, and we will be glad to answer your questions. In order to allow everyone an opportunity to participate, we request that you ask only 1 question and then yield to the next participant. If you have additional questions, you are welcome to reenter the queue, and we will answer those questions as well. Dana, we're ready to begin the Q&A session.

Wendy Watson: That concludes our prepared remarks. We thank you for your attention, and we will be glad to answer your questions. In order to allow everyone an opportunity to participate, we request that you ask only one question and then yield to the next participant. If you have additional questions, you are welcome to reenter the queue, and we will answer those questions as well. Dana, we're ready to begin the Q&A session.

That concludes our prepared remarks, we thank you for your attention and we will be glad to answer your question.

In order to allow everyone an opportunity to participate we request that you ask only one question and then yield to the next participant.

If you have additional questions you're welcome to reenter the queue and we'll answer those questions as well.

Dana we're ready to begin the Q any.

Thank you we will now be conducting a question and answer session.

Operator: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Operator: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to move your questions on the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Good morning, Thanks for taking the questions.

Daniel Moore: Good morning. Thanks for taking the questions. Extend the congratulations to Perry. Look forward to meeting with you shortly. Wanted to focus on the 2 things. One, looking at the top-line guidance revision, you gave us, you know, a number of kind of key elements. Is it possible to bucket or maybe rank order the biggest deltas relative to your initial guide? You know, be it FX, lower raws, industrial, auto, maybe just kind of rank order those to give us a sense of the magnitude.

Daniel Moore: Good morning. Thanks for taking the questions. Extend the congratulations to Perry. Look forward to meeting with you shortly. Wanted to focus on the two things. One, looking at the top-line guidance revision, you gave us, you know, a number of kind of key elements. Is it possible to bucket or maybe rank order the biggest deltas relative to your initial guide? You know, be it FX, lower raws, industrial, auto, maybe just kind of rank order those to give us a sense of the magnitude.

And.

Extend congratulations to to Perry look forward to meeting with you shortly.

Wanted to focus on the.

Two things one you're looking at the topline guidance revision. The you gave us a number of kind of key elements is it possible that bucket or maybe rank order the biggest delta relative to your initial guide.

Be it FX, a lower raws industrial auto.

Maybe just kind of rank order those give us a sense of the magnitude.

Dan I would start by saying that we've got decline and all of those businesses into named we've got.

Susan McCoy: Dan, I would start by saying that we've got declines in all of those businesses that you named. We've got autos down lower than we originally expected. We have more inflation or I'm sorry, deflation impact on our sales than we originally expected, and currency continues to be a headwind. The other businesses that we named, well, steel. Steel and the steel rod and the wire business are also, I think, demand in that market is softening as well. Then, I don't know, Perry or Carl, if you want to add anything else?

Audits down lower than we originally expected.

We have more.

Inflation.

Deflation impact on our sales than we originally expected.

And currency continues to be a headwind.

The other businesses that we named well steel steel and steel Rod and wire business are also I think.

Demand in that market is softening as well.

And then.

And carrier.

Thank you and obviously you see us expectation is softer than originally thought.

Matt Flanigan: Yeah, obviously, ECS expectation is softer than originally thought.

Perry Davis: Yeah, obviously, ECS expectation is softer than originally thought.

Susan McCoy: Yeah. Yeah.

Yes.

Perry Davis: Right. Although in ECS, it appears that the deflation impacts have stabilized at this point. Going forward, second half of the year, barring any unforeseen circumstances, we expect that to be relatively stable.

Right, although we're in a in a CS it appears that the deflation impacts have stabilized at this point so.

Going.

Forward second half of the year barring any unforeseen circumstances, we expect that to be relatively stable.

Thats helpful and I'm going to sneak one other in if I can see shifting gears the anti dumping rules.

Daniel Moore: It's helpful. I'm gonna sneak one other in, if I can. Shifting gears, the antidumping rules, can you help us frame it? What type of impact do you expect that those to have on the supply of Chinese imports as we think about 2020? Is it possible to translate in that to potential for incremental growth for your overall bedding business?

To help us frame at what type of impact do you expect that those to have on supply of Chinese imports as we think about 2020 and is it possible to translate and that that potential for incremental growth for your overall bedding business.

Dan It's it's tough math because we're so early.

Matt Flanigan: Dan, it's tough math because we're so early in the process. We do know that Chinese imports in May, which is the last published data, were down by 55% in units. There has been some upshift in places like Vietnam that admittedly don't have near the manufacturing capacity that China had.

Karl Glassman: Dan, it's tough math because we're so early in the process. We do know that Chinese imports in May, which is the last published data were down by 55% in units. There has been some upshift in places like Vietnam that admittedly don't have near the manufacturing capacity that China had.

In the process, we do know that Chinese imports in May which is the last published data were down by 55% in units.

There has been some upshift in places like Vietnam that admittedly don't have near the manufacturing capacity that China had.

Karl Glassman: ... to actually frame it, that the Chinese units last year averaged 475,000 mattresses a month. Much has been written about the Vietnam surge, which was 109,000 pieces in May, as they start to build some capacity. What we do know, the facts are that our US innerspring sales were positive in June and are positive in the first three weeks of July. We think some of that is coming from anti-dumping. We know ECS mattress unit sales are up in the 13% to 14% range year to date. We think some of that is a benefit of anti-dumping. We have an expectation that their growth will be greater than that in the back half as the inventory of Chinese mattresses is worked out. It's really kind of anecdotal.

To actually frame it that the Chinese units last year averaged 475000 mattresses, a mom and much has been written about the Vietnam surge, which was 109000 pieces and in may as they start to build some capacity.

What we do know the facts are that our U.S. innerspring sales were positive in June and are positive in the first three weeks of July we think some of that is coming from anti dumping. We know SCS mattress unit sales are up and the 13% to 14% range year to date, we think some of that is the benefit of anti dumping.

We have an expectation that their growth will be greater than that in the back half as the inventory of Chinese mattresses worked out.

But so it's really kind of anecdotal things are moving in the right direction.

Karl Glassman: Things are moving in the right direction, but to try to quantify it going forward is a bit of a challenge.

But to try to quantify it going forward is a bit of a challenge.

Understood. That's good color appreciate it.

Daniel Moore: Understood. That's good color. Appreciate it. As I sneak out, if you have organic volume growth on ECS for the quarter, that would be helpful. Thank you.

And as I sneak out if you have organic volume growth on EPS for the quarter that would be helpful. Thank you.

Susan McCoy: We don't have that detail, Dan.

We don't have that detail Dan.

Wendy Watson: Our next question comes from the line of Budd Bugatch with Raymond James. Please proceed with your question.

Our next question comes from the line of Budd.

Oh gosh with Raymond James. Please proceed with your question.

Budd Bugatch: Good morning. It's Bud, substituting for Bobby, who's in Vegas, for the market.

Good morning, its Bud subs students were Bobby Who's in Vegas.

Budd Bugatch: Good morning. It's Bud, substituting for Bobby who's in Vegas for the market.

For the for the market Oh, God I never thought I would heard that here that Budd bugatch substituting for Bobby Griffin My goodness things James Good morning Budd.

Karl Glassman: Budd, I never thought I would hear that. Budd Bugatch substituting for Bobby Griffin. My goodness, things change. Good morning, Budd.

Budd Bugatch: Things improve, Karl. Things improve. Perry, congratulations and best wishes to you. I think I resemble your remark.

Things things improved Carl things.

Budd Bugatch: Things improve, Karl. Things improve. Perry, congratulations and best wishes to you. I think I resemble your remark.

[laughter] [laughter] and Barry Congratulations and best wishes to you I think I resemble your remark.

Karl Glassman: Thanks, Bud.

Perry Davis: Thanks, Bud.

[laughter], Oh, I guess I want to go back to that guidance changes too I was hoping to get maybe a little bit more detail and numerical changes that went into it I know it was $50 million of sales decrease in the guidance too easy, yes, and we only have a five cents a decrease but am I thinking deflation is greater than expected can we kind of pinpoint some of those numbers. Susan I heard you give kind of a higher level of that but I know you've got the numbers. So maybe you can give us either some numerical ranges on the detail of that and secondly, and I'll I'll just ask this as well what does all of this say about the health of the consumer and the health of the economy, how much of that factors into to these to these Chuck guidance changes.

Budd Bugatch: I guess I want to go back to the guidance changes, too. I was hoping to get maybe a little bit more detail and the numerical changes that went into it. I know it's $50 million of sales decrease in the guidance to ECS, and we only have a $0.05 decrease, but I think deflation is greater than expected. Can we kind of pinpoint some of those numbers? Susan, I heard you give kind of a higher level of that, but I know you've got the numbers, so maybe you can give us either some numerical ranges on the detail of that. Secondly, and I'll just ask this as well, what does all of this say about the health of the consumer and the health of the economy?

Budd Bugatch: How much of that factors into to these check guidance changes?

But as far as numbers go relative to our organic guidance, what I'd say is at minus one to minus five the midpoint minus three and that is our exited volumes.

Susan McCoy: Budd, as far as numbers go, relative to our organic guidance, what I'd say is at -1 to -5, the midpoint's -3, and that is our exited volume out of the FBG, Fashion Bed, and Home Furniture businesses. That leaves a range of +2 to -2 around that organic expectation, and those are the factors that we talked about before, largely, if not exclusively, volume. We would expect that currency and the inflation/deflation effect from raw materials will probably be largely offset for the full year, if not slightly negative, but not the two combined, not hugely negative. Remember, in Q1, we were...

Susan McCoy: Budd, as far as numbers go, relative to our organic guidance, what I'd say is at minus one to minus three, the midpoint's minus three and that is our exited volume out of the FBG, Fashion Bed, and Home Furniture businesses. That leaves a range of plus two to minus two around that organic expectation, and those are the factors that we talked about before, largely, if not exclusively, volume. We would expect that currency and the inflation/deflation effect from raw materials will probably be largely offset for the full year, if not slightly negative, but not the two combined, not hugely negative. Remember, in Q1, we were...

Out of the FTT fashion bed and home furniture businesses that leaves a range of plus two to minus two.

Around that organic expectation and those are the factors that we talked about before largely if not exclusively volume, we would expect that currency and the.

Inflation last deflation effect from raw materials will probably be largely offset for the full year, if not slightly negative, but not the twod combine not hugely negative remember in the first quarter and we were the net of those two factors were up 2% and we went flat in the second quarter and probably be negative in the third and fourth quarters, if not not by a lot, but slightly driven by the fact that last year, we were still implementing selling price increases. This year, that's beginning to turn to decreases in as we anniversary last year's increases then.

Susan McCoy: The net of those two factors were up 2%, then we went flat in Q2 and probably be negative in Q3 and Q4, if not by a lot, but slightly. Driven by the fact that last year we were still implementing selling price increases. This year, that's beginning to turn to decreases, and as we anniversary last year's increases, then that's gonna allow those two to net to something lower than they've been so far this year. That's the amount of numeric reference or detail that we're really in a position to comfortably say.

Susan McCoy: The net of those two factors were up two percent, then we went flat in Q2 and probably be negative in Q3 and Q4, if not by a lot, but slightly. Driven by the fact that last year we were still implementing selling price increases. This year, that's beginning to turn to decreases, and as we anniversary last year's increases, then that's gonna allow those two to net to something lower than they've been so far this year. That's the amount of numeric reference or detail that we're really in a position to comfortably say.

That's going to allow those two to nap to something lower than they have been so far this year.

That that's the amount of numeric.

Reference or detail that we're really in a position to comfortably say in from the health of the us consumer, but it's a we think that the U.S. consumers reasonably healthy the surprise to us.

Karl Glassman: From the health of the US consumer, Budd, we think that the US consumer is reasonably healthy. The surprise to us really is the downshift in demand in Industrial Products on the wire and rod, but that's industrial demand. That's, there's too much steel capacity in this country chasing too few opportunities. We have no interest. That's trade commentary. We have no interest in selling tons of steel at less than reasonable returns. We don't need to. That's not why the steel business exists. That's a pull-off of demand, which has hurt our sales, but again, it isn't commentary on the US consumer. We think the US consumer is reasonably healthy, the healthiest consumer in the world, for sure. We're seeing some, you know, some greater softness, certainly in the European market and Asian markets.

Really is the down shift in demand in industrial products on the wire and rod, but thats industrial demand that there's too much steel capacity in this country chasing too few opportunities we have no interest and Thats trade commentary. So we have no interest in selling tons of steel at less than reasonable returns, we don't need to that's not why the steel business exists. So that say hey pull off of demand, which has hurt our sales, but again isn't comp isn't commentary on the US consumer we think the U.S. consumer is reasonably healthy probably the healthiest consumer.

In the World for sure we're seeing some.

Some some greater softness certainly in the European market in Asian markets.

And just if I could ask you to just expand a little bit on the automotive situation, where that where those markets have turned week, maybe Mitch can give us kind of a read on what to expect in automotive going forward, that's such a profitable and growing business for you.

Budd Bugatch: Just if I could ask you to just expand a little bit on the automotive situation, where that, where those markets have turned weak. Maybe Mitch can give us kind of a read on what to expect in automotive going forward. That's such a profitable and growing business for you. Big disappointment to see those headwinds develop.

Big disappointment to see that from that peak that hedge those headwinds developed.

Sure Budd this is Mitch thanks for asking.

Mitch Dolloff: Sure, Budd. This is Mitch. Thanks for asking. Yeah, and that's another element. I mean, the production forecast has continued to decline month-over-month and took another big step downward in July, which certainly impacts our outlook. I think now it feels like we're at a less optimistic and more realistic place with the forecast. And I'm talking about the IHS production forecast, not our own. Now, as Karl mentioned, we're at a place where the production forecast, the market forecast for Q3 and Q4, is now basically flat with Q1 and Q2 2019, as well as Q3 and Q4 2018. When you look at the comps, it's quite impactful, right?

Mitch Dolloff: Sure, Budd. This is Mitch. Thanks for asking. Yeah, and that's another element. I mean, the production forecast has continued to decline month-over-month and took another big step downward in July, which certainly impacts our outlook. I think now it feels like we're at a less optimistic and more realistic place with the forecast. And I'm talking about the IHS production forecast, not our own. Now, as Karl mentioned, we're at a place where the production forecast, the market forecast for the second half of the year, is now basically flat with first half of 2019, as well as second half of 2018. so when you look at the comps, it's quite impactful, right?

Yes, and Thats another element that production forecast has continued to decline month over month and took another big step downward in July , which certainly impacts our outlook I think now it feels like we're at a less optimistic a more realistic placed with the forecast.

Dan I'm talking about the ITATS production forecast on our own.

So now as Carl mentioned, we're at a place where the production forecast the market forecast for the second half of the year is now basically flat with the first half is not of 19 as well as the second half of eight so when you look at the comps it's quite impactful right there.

Mitch Dolloff: The second half of 2018 was down about 9% from the first half, so we're now facing, you know, less difficult comps. I think for our business, we're still very pleased with it. It continues to perform very well, and our long-term outlook hasn't changed. I think with the disruption in the market that we see this year, we're not likely to get to our full 1,000 basis points over the market target, but I think we'll be able to get to something closer to 600 to 700. We do see the back half as being stronger for us, on two factors. One, as we said, you know, the comps are simply easier, and two, we see the back half up a bit for us, not huge.

Second half of 18 was down about 9% from the first half so we're now facing less difficult comps.

But I think for our business. We are still very pleased with it continues to perform very well and our long term outlook hasn't changed.

I think with the disruption in the market that we see this year, we're not likely to get to our 4000 basis points over the market target, but I think we'll be able to get to something closer to 600 to 700.

So we do see the back half as being stronger for us on two factors. One is we said the comps are simply easier and two we see the back half up a bit for us not huge.

Mitch Dolloff: I don't think anything overly optimistic at this point, more based on the traditional program, new program launches that take place in the back half of the year. I would also say that the profitability of this business, even in this difficult environment, continues to be incredibly strong, and the team has done a really good job of reallocating or taking costs out of the business, as we've seen some of the growth slow in this market. I anticipate that we'll offset a very good chunk of the impact from the volume declines that we've seen from an EBIT standpoint. Continue to have a very positive outlook on it. Hope that helps.

I don't think anything overly optimistic at this point, but.

But more based on.

The traditional program new program launches that take place in the back half of the year.

I would also say that the profitability of this business even in this difficult environment continues to be incredibly strong and the team has done a really good job of that.

Reallocating or taking costs out of the business as we've seen some other growth slow in this market.

And I anticipate that will offset a very very good chunk of the impact from the volume declines that we've seen from an EBIT standpoint. So can you have a very positive outlook I hope that helps.

Budd Bugatch: The one thing you didn't talk about were project wins. You normally talk a little bit about that. Have they decreased this year?

We do one thing you didn't talk about were project wins, you normally talk a little bit about that had they decreased this year.

Budd Bugatch: The one thing you didn't talk about were project wins. You normally talk a little bit about that. Have they decreased this year?

Mitch Dolloff: No, but it's hard. The project, the program awards are typically heavy weighted for the back half of the year. There's not really a meaningful comparison for the, on a year-over-year basis, they're very lumpy. As we've said before, yeah, we won over $370 billion in new awards last year that'll launch over the next couple of years and last about six years. You know, we have really good visibility for the long term, and we don't expect that to change.

No, but its hard to put the project. The program awards are typically heavy weighted for the back half of the year Theres not really a meaningful comparison for for the year on a year over year basis, they're very lumpy, but as we've said before year. We run over 370 billion in New awards last year that will launch over the next couple of years and last about six years. So we have really good visibility for the long term and we don't expect that to change 2018 was a record when the year for our team.

Wendy Watson: The 2018 was a record win year for our team.

Karl Glassman: The 2018 was a record win year for our team.

Mitch Dolloff: Well, we've had consecutive record win years...

Karl Glassman: Well, we've had consecutive record win years...

Well, we've had consecutive record years or quite a lot to keep on inner and outer though.

Wendy Watson: Yeah, sure.

Mitch Dolloff: for quite a while.

Mitch Dolloff: Yeah, sure.

Mitch Dolloff: for quite a while.

Wendy Watson: They keep stacking up.

Mitch Dolloff: They keep stacking up.

Mitch Dolloff: So.

Thank you.

Budd Bugatch: Thank you.

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

Operator: Our next question comes from the line of Keith Hughes with SunTrust. Please proceed with your question.

Keith Hughes: Thank you. A couple questions. First, I'm still a little confused in automotive. In the second half of 2019, in your guidance, are you assuming you're up a little bit year-over-year? Is that what you're saying?

Yes. Thank you a couple of a couple of questions first I'm still a little confused and automotive so.

In the second half of 19 in your guidance.

Are you, assuming you're up a little bit year over year is that what you're saying.

Yes, Keith were up some somewhat in the second half year over year.

Mitch Dolloff: Yes, Keith, we're up somewhat in the second half, year-over-year.

Okay. So.

Keith Hughes: Okay. I guess the bigger picture-

I guess the bigger all year.

Mitch Dolloff: For the full year, we end up being slightly up with the market, slightly down.

For the full year, we end up being slightly up with the market slightly down.

Mitch Dolloff: For the full year, we end up being slightly up with the market, slightly down.

Okay. So you were down about 3% to 4% in the first half.

Keith Hughes: Okay, you were down about 3% to 4% in the first half. Seems like you would be down a little bit for the year. How does that work out?

Keith Hughes: Okay, you were down about three percent to four percent in the first half. Seems like you would be down a little bit for the year. How does that work out?

How are you getting.

It seems like you would be down a little bit for the year, how does that work out.

You're you're right that we are down about three in the first half we expect to be up.

Mitch Dolloff: You're right that we're down about three in the first half. We expect to be up more than that and be up about three for the full year.

More than that and be up about three for the full year.

So that would mean you'd have to be up mid to high single digits in the second half of the year correct.

Keith Hughes: That would mean you'd have to be up mid to high single digits in the second half of the year, correct?

Mitch Dolloff: That's correct.

That's correct.

Keith Hughes: Okay.

Okay, and remember that awful lot yeah, remember that yeah remember the car comes into play as well. So it is thats the factor that up.

Wendy Watson: Remember the comp-

Keith Hughes: All right, that's what I...

Wendy Watson: Yeah, remember...

Mitch Dolloff: Yeah, remember the comp comes into play as well. It is, that's the factor that I didn't explain very well, but you have both the easier comp, but we are up more in the second half than in the first half.

Didn't explained very well, but you have both the easier comp, but we are up.

More in the second half than than in the first half.

Keith Hughes: That gets you back to...

So if you back to this.

Wendy Watson: I'm sorry.

Keith Hughes: That gets you back to 600, 700 basis points above global build rate.

I guess back to 600 or 700 basis points above global build rate is I've got them out yet so I guess whats you that really for the first half of Knights assuming for 719, it really back into 18 your spread responsibility come way down what happened during that period of time.

Mitch Dolloff: Exactly.

Keith Hughes: Is that the math?

Mitch Dolloff: Yeah.

Keith Hughes: Okay.

Mitch Dolloff: Yep, that's right.

Keith Hughes: I guess, what's, you know, really for the first half of 2019, and really back into 2018, your spread versus global build had come way down. What happened during that period of time? You know, what's causing it to re-accelerate in the second half of 2019?

And what's causing it to re accelerate in the second half of the 19th.

I think that it's kind of tough to put a finger on it but you had a lot of things going on that really caused disruption in different parts of the market right that you add Brexit impact in.

Mitch Dolloff: I think that it's kind of tough to put a finger on it, but you had a lot of things going on that really caused disruption in different parts of the market, right? You had Brexit impact and WLTP emission standards impact in the, in Europe, which impacts particular disproportionate impact on certain programs, so it's not a overall market phenomenon. You had, you know, China trade dispute impact and the significant decline there. You had this recent acceleration of emission standards there that has really slowed sales. You had then the, tariff impact and just the concerns in North America. We're inherently, you know, we take this metric as sort of a long-term, big picture guidepost.

Mitch Dolloff: I think that it's kind of tough to put a finger on it, but you had a lot of things going on that really caused disruption in different parts of the market, right? You had Brexit impact and WLTP emission standards impact in the, in Europe which impacts particular disproportionate impact on certain programs, so it's not a overall market phenomenon. You had, you know, China trade dispute impact and the significant decline there. You had this recent acceleration of emission standards there that has really slowed sales. You had then the, tariff impact and just the concerns in North America. We're inherently, you know, we take this metric as sort of a long-term, big picture guidepost.

In and W. LTP emission standards impact in that in Europe , which impasse particular disproportionate impact on certain programs. So it's not an overall market phenomenon and you had.

China trade dispute impact and the significant decline there you had this recent acceleration of admission standards. There that has really slowed sales.

You had then that.

Tariff impact and just the concerns in North America. So were inherently we picked this metric as sort of a long term Big picture Guide post and take compare it in as sort of detailed way on a quarter to quarter basis, just doesn't work very well we were inherently comparing.

Mitch Dolloff: To compare it, you know, in a sort of detailed way on a quarter-to-quarter basis, just doesn't work very well. I mean, we're inherently comparing market unit production of vehicles to our sales dollars, not our unit dollars, or not our units. There's a time lag in the supply chain. It's inherently an imperfect comparison, but it really is just meant to say, hey, when we look at where we are in the market, the size of the market and where we participate, and the growth rates and our win rates, that this is sort of an expectation about the long-term growth that we have for the business.

Market unit production of vehicles to our sales dollars not our unit dollars.

Or not our units.

And there's a time lag in the supply chain. So it's inherently an imperfect comparison, but it really is just meant to say hey, we look at where we are in the market the size of the market and.

And where we participate in the growth rates in our win rates that this is sort of an expectation about the long term growth that we have for the business.

Keith Hughes: Okay. You, the 1,000 basis points you already, you've used, you really haven't been that in a while, is 675, you know, pick your something like that, basis points above. Is that kind of the new normal, or is there something that would cause it to reaccelerate back to 1,000?

Okay, and you the thousand basis points, you or your views that we really havent been that in a while is six seven volume figures from something like that basis points above is that is that kind of the new normal or is there something that would cause it to reaccelerate, Dr. Phil I'd like to see a new normal in the market right. It's been hard to know what the market's doing when you know every every month, it's been getting a little bit worse. So I think I'd say, we're still stand behind our thousand basis points target, but we'll be realistic about it so to get into in a period of stability and if we need to adjust it will be the first ones to come back to you, but for now we stand by.

Mitch Dolloff: I'd like to see a new normal in the market, right? It's been hard to know what the market's doing when, you know, every month it's been getting a little bit worse. I think I'd say we still stand behind our 1,000 basis points target, but we'll be realistic about it. Let it get in a period of stability, and if we need to adjust it, we'll be the first ones to come back to you. For now, we stand by it.

Okay, and then finally switching to adjustables adjustable matches were up a couple of points in the quarter. There were some industry numbers that rollout weaker is can you give me sort of a feel of what you think is going on the adjustables market.

Keith Hughes: Okay. Finally switching to adjustables. Adjustable mattresses were up a couple points in the quarter. There were some industry numbers that were a lot weaker. Can you give me sort of a feel of what you think is going on in the adjustables market?

Yeah, that's a good question Keith.

Mitch Dolloff: Yeah, that's a good question, Keith. I think we think that based on a calendar basis, remember that industry numbers, the numbers are lagged, but on a calendar basis.

I think we think that based on a calendar basis and wherever the industry numbers. The us the numbers our lag, but on a calendar basis take that first quarter was down about 12% year over year.

Keith Hughes: Right

Mitch Dolloff: ... we think Q1 was down about 12% year-over-year. We think that the industry was down about 1% in Q2. I know that's a lot less than the industry numbers. I think there's a couple of things that are going on to impact that. We think that if we look back at the industry numbers for Q2 2018, I think they were at something like 1 million units, which seems really, really high for that period of time. I think that's probably throwing off the year-over-year comparison to a large degree. I don't mean to be critical. I think this isn't an easy task.

Mitch Dolloff: ... we think Q1 was down about 12% year-over-year. We think that the industry was down about one percent into Q2. I know that's a lot less than the industry numbers. I think there's a couple of things that are going on to impact that. We think that if we look back at the industry numbers for Q2 2018, I think they were at something like 1 million units, which seems really, really high for that period of time. I think that's probably throwing off the year-over-year comparison to a large degree. I don't mean to be critical. I think this isn't an easy task.

And we think that the industry was down about 1% in Q2, I know thats a lot less than the industry numbers and I think theres a couple of things that are going on to impact that.

We think that if we look back at the industry numbers for the second quarter of 2018, I think they were at something like a million units, which seems really really high.

For that period of time, so I think thats, probably throwing off to the year over year comparison to a large degree and.

I mean to be critical I say this isn't an easy path tracked tracking the import data is difficult. There is multiple HTS codes. They get shifted around so I. We don't believe we certainly haven't seen negative impact anything like the industry is reporting.

Keith Hughes: Right.

Mitch Dolloff: tracking the import data is difficult. There's multiple HTS codes, they get shifted around.

Keith Hughes: Right.

Mitch Dolloff: We don't believe. We certainly haven't seen negative impact, anything like the industry is reporting. We just, we think there's a data problem there.

So we just we think theres that data problem there.

Okay all right. Thank you.

Keith Hughes: Okay. All right. Thank you.

Thanks, Steve.

Perry Davis: Thanks, Keith.

Our next question comes from the line of John styles with Stifel. Please proceed with your question.

Operator: Our next question comes from the line of John Baugh with Stifel. Please proceed with your question.

Good morning.

John Baugh: Good morning. Perry, congrats on the retirement, and Susan, good to hear your voice.

And Perry Congrats on the retirement, Susan good to hear your voice.

Susan McCoy: Thank you.

Perry Davis: Thanks.

Yes. Thanks.

John Baugh: I was wondering, you know, you walked through all of these revenue, shortfall, items, and particularly on the deflation, the question is simple: Which of those really affected the earnings? In other words, some of the deflating items, I don't know what the timing might be in terms of impacting, your cost of goods sold, but I'm thinking it's more neutral. I'm curious as to obviously, auto being soft, and I guess ECS being soft would impact earnings, but if you could parse that out, that'd be great.

I was wondering you walked through all these revenue.

Shortfall items and.

Particularly on the deflation the question is simple.

Which of those really affected the earnings in other words, some with deflating items.

Oh, I don't know what the timing might be in terms of impacting.

Your cost of goods sold.

I think it's more neutral so I'm curious as to obviously auto being soft and I guess he has been soft would impact earnings, but if you could parse that out there would be great.

Yeah deflation not so much we there is a lag both directions with their raw materials typically when prices go higher costs going up our pricing typically lags in more often continent, and squeeze there and coming down.

Susan McCoy: Yeah, deflation, not so much. There's a lag both directions with our raw materials, typically. With prices going or costs going up, our pricing typically lags, and we're often caught in a bit of a squeeze there. Coming down, it can work the opposite direction. You would have seen a big uptick in our LIFO benefit this quarter versus where we would have been earlier, obviously, in the Q1. It's the first time we took a swing at actually recognizing our full year estimate. That helped our earnings and is built into the full year forecast now, too. LIFO is not a unique creature that's standing out there on its own. It's gonna have offsetting dynamics happening within the operations. The...

It can work the opposite direction.

You would have seen a big uptick in our LIFO benefit this quarter versus where we would have been earlier, obviously the first quarters first time, we took us that's playing it actually recognizing our full year estimate so that helped our our earnings and is built into the full year forecast now to you now my phone is not unique creature that standard out there on its own it's gonna have offsetting dynamics happening within the operations.

But so deflation has been a net positive for us the first part of this year and.

Susan McCoy: Deflation has been a net positive for us so far this year, and for the volume obviously has not.

And for that the volume obviously is not.

Perry Davis: Right. Restructuring impact has been positive as well. The team has done a really good job on the restructuring and walking away from unacceptable priced, low-margin business, working on our cost structure. That's a kind of a thankless task, but for that team to see the bottom line positively impacted and the forecast being so from a future perspective, is a really good thing. It's a much healthier business. Home furniture is a much healthier business going forward than it has been in the recent past.

Alright restructuring impact has been positive as well that the team has done a really good job on the restructuring and walking away from.

Unacceptable price low margin business.

Working on our cost structure.

And it's that's a kind of a thankless task, but for that team to see the bottom line positively impacted and the forecast being so from a future perspective is really good thing. It's a much healthier business home furniture is a much healthier business going forward than it has been in the recent past.

Good.

John Baugh: Good. I apologize, I joined a couple of minutes late, so if you addressed this. On ECS, you referenced in the slide, there was, you know, some volume shortfall relative to your expectation. Could you walk through? I assume that's not deflation. There was something about program delays or something. Could you be a little more specific on what you see there and the dynamics of that business short term?

And then I apologize I joined a couple of minutes late so if you just addressed this but on the sea US reference the slides there was some volume shortfall relative to your expectation could you walk through I assume that's not deflation. There's there was something about program delays or something to to be a little more specific on what you see there is the dynamics of the business short term John so so.

Perry Davis: Yeah, John. Definitely top-line deflation effects that we've seen more heavily weighted in Q2. We'll see those kind of going forward. In a reset of our forecast going forward, we have experienced a couple of programs that have either been delayed or canceled altogether. As you know, there's a lot of puts and takes and shifts of business around in the marketplace. Some of those impact us. We don't talk specifically about customers, but there's been some of that also. One of the things that was a little bit unforeseen that we have experienced is some weakness in the non-bedding part of ECS's business, and that's primarily related to furniture, some automotive, but furniture, where we've not seen the growth that we earlier would have expected in the marketplace....

Definitely topline deflation affects that we've seen.

More heavily weighted in Q2, we'll see those.

Kind of going forward in a reset of our forecast going forward. We also have we have experienced.

A couple of programs that have either been delayed or canceled altogether as you know there's.

A lot of puts and takes some shifts of business around in the marketplace and some of those impact us we don't talk specifically about customers, but but there's been some of that also and then.

One of the things that was a little bit unforeseen that we have experienced is some weakness in the non bedding part of SCS business, and that's primarily related to furniture, some automotive but.

Furniture were where we've not seen the growth that we earlier would have expected in the marketplace.

Perry Davis: Then also there's a portion of that business that we're quite busy making compressed finished mattresses. The growth has been plus double digits, and we expect that to be the case in the back half of the year. We've actually moved some of that production capacity over to the U.S. Spring side, where we have a facility where we can make hybrids. We're seeing continued strength in demand going into the back half, in expected demand in both foam and hybrid mattresses.

And then also there's a portion of that business that were were quite busy.

Making compressed finished mattresses.

The.

Growth.

Is.

Has been.

Plus double digits.

And we expect that to be the case in the back half of the year, we've actually moved some of that production capacity over.

To us spring side, where we have a facility where we can make highbridge and were seeing continued strength in demand going into the back half in expected demand in both foam and hybrid.

Mattresses.

Perry if you were just a follow up.

John Baugh: Perry, if you were, just to follow up, on some of those programs that were either delayed or, particularly, the ones that were canceled or maybe business you didn't get that you expected to get, is there some common, you know, the customer found a lower price, they want to diversify their supply? Was there some common theme?

On some of those programs that were either delayed or on particularly the ones that were canceled or maybe business you didn't get that you expected. The kid is there some common the customers down to lower price.

They want to diversify their supply or was there some common seed.

All right I guess, what I'd say, John is that where there is a.

Perry Davis: I guess what I'd say, John, is that where there's a lowered expectation on the ECS side, we feel like that there'll be a balancing pickup on the component side. We really look at it as a shift. It, obviously, the finished product primarily comes through ECS. We pick up some on the spring side, if it shifts elsewhere. On balance, though, it's a quite healthy situation. Like I said, I think in the back half, that cadence of finished mattress business will continue to get quicker.

Where there is a lowered expectation.

On the EPS side, we feel like that there will be a.

A balancing pickup on the components side.

So we really look at it as a shift.

It.

Obviously the finished product primarily comes through Lcs, we pick up some on the spring side.

If it shifts elsewhere and so on balance, though it's it's.

Quite healthy situation and like I said I think in the back half.

That that cadence of finish mattress business will continue to get quicker.

Thanks, Good luck.

John Baugh: Thanks. Good luck.

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

Operator: Our next question comes from the line of Peter Keith with Piper Jaffray. Please proceed with your question.

Hey, good morning, everyone, it's actually Bobby senior on for Peter.

Bobby Friedner: Hey, good morning, everyone. It's actually Bobby Friedner on for Peter. I just wanted to follow up on steel deflation, LIFO benefit. I thought that was a nice benefit in Q2 for the first time in a few quarters. Can you talk us what to guidance now from a LIFO benefit standpoint for Q3 and Q4? Thanks.

I just wanted to follow up on a steel deflation LIFO benefit.

I thought that was a nice benefit in Q2 for the first time, a few quarters Youve talked what's baked into guidance now from a LIFO benefit standpoint for Q3 and Q4. Thanks.

Susan McCoy: Yeah, Peter, we have half of our full year estimate booked now at 10.4, so double that, about 20.8, $21 million is our full year estimate. We'll continue to look at that as the year progresses, and it will likely change. Could go up, could go down, and you can assume whatever amount we haven't yet booked, we would expect to book in equal portions in the remaining quarters.

Yes, Peter we have a half of our full year estimate book now at at 10.4, So double that about 20 20.8 to 21 million as our full year estimate.

We'll continue to look at that as the year progresses, and it will likely change could go up it goes down and you can assume whatever amount we haven't yet we would that we would expect a buck and equal portions in the remaining quarters.

Perry Davis: Bobby, it's important to remember that, as Susan said earlier, that LIFO is not a discrete accounting activity. There is a related FIFO impact in the operations. It's not like LIFO is a gift from heaven because there's a FIFO offset over time. It's not perfectly correlated in each quarter, but over time, matches up on the FIFO side. Year-on-year comparisons get to be a challenge because in 2017 and 2018, we were in an increasing steel environment. Now we flip to a decreasing steel environment, so it has the opposite impact on the LIFO and then related impact, opposite impact on FIFO, if that makes any sense. They true up over time.

Bobby it's important to remember that as Susan said earlier that.

LIFO is not a discrete accounting activity. So there is a related FIFO impact in the operations. So it's not like LIFO as a gift from heaven, because there is a FIFO offset over time, it's not perfectly correlated in each quarter, but overtime matches up on the FIFO side. So it gets to be year on year comparisons get to be a challenge because.

In 2017, and 2018, we were in an increasing steel environment now we flipped to a decreasing in steel environment. So it has the opposite impact on the LIFO and then related impact.

Opposite impact on FIFO, if that makes any sense, but they true up overtime.

Got it thanks for the color and just one more if I can on a.

Bobby Friedner: Got it. Thanks for the color. Just one more, if I can, on the impact of exited business. I noticed the furniture margin swung nicely from down in Q1 to up in Q2. How should we be thinking about the overall impact from your exited businesses on both sales and EBIT for the back half of the year?

The impact of.

Exited business I know, it's furniture margins along nicely from going to the winds up in Q2.

How should we be thinking about the overall impact from your exited businesses on both sales and EBIT for the back half the year.

Bobby This is Mitch.

Mitch Dolloff: Bobby, this is Mitch. I think we see pretty similar impact in the back half of the year from a sales perspective, and I think probably pretty similar, maybe a little bit of improvement from a margin perspective. As Karl Glassman mentioned, the team has done a great job of both planning and executing that plan and taking out overhead costs and moving through the big parts. The riskiest elements are behind us. It's a little tricky as we wind down Fashion Bed, that, you know, we've moved through a very good portion of the inventory we have there, so we'll see significantly lower sales in the back half of the year. I expect that we'll see a bit less decline from home furniture, on the home furniture side as we compare that, first half and the second half.

I think we see pretty similar impact in the back half of the year from a sales perspective, and I think probably pretty similar maybe a little bit of improvement from a margin perspective as Karl mentioned the team has done a great job.

Both planning and executing that plan and taking out overhead cost and moving through the big part so the riskiest elements are behind us.

It's a little tricky as we wind down of down fashion bed that we've moved through a very good portion of the inventory we have there. So we'll see significant lead lower sales in the back half of the year, but I expect that we'll see a bit less decline from home furniture.

Home furniture side as we compare that.

First half in the second half so I think probably pretty similar to what we've seen in the first half.

Mitch Dolloff: I think probably pretty similar to what we've seen in the first half.

All right. Thanks, a lot guys and good luck.

Bobby Friedner: All right. Thanks a lot, guys, and good luck.

Our next question comes from the line of Herbert Parker with Monness Crespi Hardt. Please proceed with your question.

Operator: Our next question comes from the line of Herbert Hardt with Monness, Crespi, Hardt. Please proceed with your question.

Good morning.

John Baugh: Good morning.

Herbert Hardt: Good morning.

Mitch Dolloff: Good morning, Herb.

Well actually I have two questions. One is given what we know shoe aerospace was up 10% this quarter, but given all the problems with Boeing as having are you involved with any of those programs.

John Baugh: I actually have two questions. One is, I noticed your aerospace was up 10% this quarter, but given all the problems that Boeing is having, are you involved with any of those programs?

Herbert Hardt: I actually have two questions. One is, I noticed your aerospace was up 10% this quarter, but given all the problems that Boeing is having, are you involved with any of those programs?

Good morning, Herve this is Mitch.

Mitch Dolloff: Good morning, Herb. This is Mitch. We do have involvement there, but it does not have huge impact on us. As you mentioned, Boeing's reduced the production rate from about 52 per month to 42, so down about 20%. The supply chain was struggling to keep up with production anyway, so we haven't really seen the impact of that rate reduction yet. If this continues to drag on longer than people expect, right now, you know, the expectation is deliveries will resume in early 2020 or late 2019, but who knows at this point, right? It continues to stretch a bit. We sell about $1 million per month on that platform, so the 20% reduction would be about $3 million or so to us annually.

We do have involvement there, but it does not have huge impact on us on.

As you mentioned volumes reduced the production rate from about 52 per month to 42, so down about 20% on the supply chain was struggling to keep up with production anyway. So we haven't really seen.

The impact of that that rate reduction yet.

If this continues to drag along longer than people expect right now the expectations deliveries will resume in early 2020 or late 2019, but who knows at this point ready to continue to stretch a bit but we so about a million dollars per month on that platform. So the 20% reduction would be about 3 million or so to us annually, so not a huge impact.

Mitch Dolloff: Not a huge impact, and we have good content on the Airbus alternative. That is the part of what is driving the good performance there.

And we have good content on the Airbus and alternatives. So that's part of what's driving the good performance there.

Herbert Hardt: Okay, thank you. My other question is, as we go into next year, let's assume that retail doesn't hold up as well as you've been expecting, and industrial tends to drift. How much room do you have for margins? You've always been really good at kind of squeezing costs out. Is there a lot left over the next, say, 18 months if the world continues to drift?

Okay. Thank you my other question is.

As we go into next year.

Let's assume that to.

Retail doesn't hold up as well as you can expect is industrial tends to drift.

How much room do you have.

Margin erosion really good kind of squeezing costs now youre a lot less.

Over the next 18 months.

We will.

Okay Mr. Driscoll.

Yes herb.

Karl Glassman: Yeah, Herb, I appreciate the compliment. That actually is the answer. Our teams are really good in a downshift environment. Unfortunately, we learned a lot in 2008, 2009. All along the restructuring that's taking place in parts of our business, the real difference between now and 2008 and 2009, is our portfolio is a lot healthier today than it was then. We can absolutely take costs out. We won't, from a long-term perspective, compromise product development, CapEx for efficiency reasons. It's one of the wonderful things about Leggett, is we manage from a very long-term perspective. Yes, there's an opportunity to take additional cost out. The other thing that happens in a downshift is, historically, there has been a significant improvement in cash generation.

Appreciate the compliment.

And that actually is the answer our teams are really good in a downshift environment. Unfortunately, we learned a lot in 2018.

Yeah.

All law, the the restructuring thats, taking place in parts of our business. The real difference between now and 2008 in 2009 is our portfolio is a lot healthier today than it was then so we can absolutely take cost out we wont from a long term perspective compromise product development.

Capex for efficiency.

Reasons. So that's one of the wonderful things about leg. It is we manage from a very long term perspective, but yes. There is an opportunity to take additional cost out the other thing that happens in a downshift is historically there has been a significant improvement in cash generation.

Karl Glassman: You know, cash doesn't become compromised. Actually, it helps. Dividend in a downshift is absolutely solid. It's very important to us going forward. Yeah, we don't want to learn those skills, relearn those skills, but we know how to. Automotive, Mitch, I think that's a good point that you make.

So cash doesn't become compromise actually it it helps so dividend in a downshift is absolutely solid it's.

It's.

Very important to us going forward. So we don't want to learn those skills re learn those skills, but we know how to automotive Mitch I think thats a good point, yeah, well, we at that impacted 2007, 2008 has never left our minds and so as weve as weve grown that business, particularly adding that capacity and new plants in Asia, we've done that with the downturn in mind and so weve purposely size tend to be smaller to be close to our customers to have not a lot of overhead support them from some regional centers, where we can so if we need to take action. There, we'll we'll do that.

Mitch Dolloff: Yeah. Well, we, the impact of 2007, 2008 has never left our minds. As we've, you know, as we've grown that business, particularly adding the capacity and new plants in Asia, you know, we've done that with the downturn in mind. We've purposely sized them to be smaller, to be close to our customers, to have not a lot of overhead, to support them from some regional centers where we can. If we need to take action there, we'll do that.

Karl Glassman: Yeah. Well, we, the impact of 2007, 2008 has never left our minds. As we've, you know, as we've grown that business, particularly adding the capacity and new plants in Asia, you know, we've done that with the downturn in mind. We've purposely sized them to be smaller, to be close to our customers, to have not a lot of overhead, to support them from some regional centers where we can. If we need to take action there, we'll do that.

Matt Flanigan: Herb, this is Matt. I just add to amplify what Karl said. You may have heard us mention in the prepared remarks that our two core, Q2 operating cash flow performance we just had was $2 million within the best we've ever experienced. The best Q2 performance we ever had was in 2009, and it's because of that unwind phenomenon and our ability to bring home cash when things get soft. We would absolutely do that again in a notable way.

And Herve this is Matt I'd, just add to amplify what Carl said.

You mentioned you may have heard us mentioned in the prepared remarks that are to shore Twoq you operating cash flow performance. We just had was $2 million.

Within the best we've ever experienced the best Twoq performance, we ever had was in 2009, and it's because of that unwind phenomenon and our ability to bring home cash when things get soft and we would absolutely do that again in a notable way.

Okay. Thank you very much.

Herbert Hardt: Okay, thank you very much.

Karl Glassman: Thanks, Herb.

Thanks or.

There are no further questions at this time I would like to turn the floor back over to Wendy Watson for closing comments.

Operator: There are no further questions at this time. I would like to turn the floor back over to Wendy Watson for closing comments.

Thank you everybody and we'll talk to you again next quarter.

Wendy Watson: Thank you, everybody, and we'll talk to you again next quarter.

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