Q2 2023 Leggett & Platt Incorporated Earnings Call
Greetings and welcome to the Ellie Chi Chi cute. Thank you 23 with cost and earnings conference call.
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It is now my pleasure to introduce your host Susan Mccoy SVP Investor Relations. Thank you you may begin.
Good morning, and thank you for taking part and like at what second quarter Conference call on the call today are Mitch Dolloff, President and CEO Burton Burns Executive Vice President and CFO .
Steve Henderson Executive Vice President and President of the specialized products and furniture flooring and textile products segments, probably shouldn't Heiko executive Vice President and President of the bedding product segment, Cassie Branscum senior director of IR and pulling that.
Manager of IR.
The agenda for our call. This morning is as follows Mitch will start with a summary of the main points. We made in yesterday's press release and discuss operating results and demand trends than we will cover financial details and address our outlook for 2023, and the great or answer any questions you have.
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Replay is available from the IR portion of I guess 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.
These statements for a summary of these risk factors and additional information. Please refer to yesterday's press release and the section in our most recent 10-K and subsequent 10-Q entitled risk factors and forward looking statements I'll now turn the call over to Mitch.
Good morning, and thank you for participating in our second quarter call.
First I would like to welcome been burnt stepped into the CFO role effective June 21st.
Ben it's been with the company for 20 years and previously led our internal audit Department served as our Treasurer and most recently led our business support services functions, including procurement logistics and risk.
Then brings a deep knowledge of our business strong financial capabilities and an ability to drive change that has benefited and will continue to benefit leggett and Platt.
Now turning to second quarter results sales in the quarter were down 8% versus second quarter 2022 from lower volume and raw material related price decreases.
Acquisitions added 3% to sales.
The volume decline was driven by continued demand softness in residential end markets, partially offset by growth in automotive aerospace and hydraulic cylinders.
Second quarter earnings per share were 46.
This included $4 million or <unk> <unk> per share of gain from insurance proceeds from April tornado damage at a shared home furniture and bedding manufacturing facility.
Excluding this item adjusted earnings per share were 38 cents.
Earnings decreased primarily from lower volume and residential end markets and lower metal margin in our steel rod business.
Cash flow from operations was $111 million up $21 million versus second quarter of 2022.
We are lowering our full year guidance to reflect continued volatility and macroeconomic environment and low visibility at several of our end markets are.
Our previous guidance anticipated a modest improvement in residential end markets in the second half of the year.
We are encouraged by the continued recovery in our industrial businesses, but have yet to see an upward trajectory in the residential markets.
Moving onto our business segment results and outlook.
Sales in our bedding products segment were down 18% versus second quarter of 2022.
We previously expected 2023 market volume to be flat with modest improvement in the back half of the year, although the market improves sequentially in May and June from seasonal lows in April the second quarter was weaker than expected. In addition signals from the broad market and customers are less less optimistic than earlier in the year.
We now expect demand to remain at or slightly below current levels. This suggests volume in the back half of the year will be down mid single digits and full year mattress consumption will be down high single digits versus 2022.
This estimate results in consumption down 25% to 30% from the 2021 peak and at levels comparable to 2016.
In the quarter, our volume generally track the overall market, but there is some variability within specific product categories.
Trade Rod and wire volume declined year over year as industrial demand was strong until the third quarter of last year steel Rod production through the first half of the year was consistent with initial plans. However, full year production is now expected to be approximately 25% below historical levels to align with current demand versus our previous expectations of <unk>.
20% below historical levels.
Yeah.
Volume in U S spring was down 13% in the second quarter.
Comfort core unit volumes declined versus last year, but attract near a positive to the overall market.
Lower priced open coil inner springs, and wire foundations declined more which we believe is indicative of broader market trends.
Volume in specialty foam was up 8% successful efforts to diversify our customer base led to growth in finished mattress units and accessories, such as mattress toppers.
As expected federal margin narrowed in the first half of the year and we still anticipate metal margin to be down mid teens versus 2022.
Market volume continues to be the greatest headwind and impact to earnings and margin. However, our teams continue to work to improve internal capabilities and bring value to our customers. Despite the challenging environment.
In recent years, we strategically shifted our focus in the bedding market by expanding product capabilities and growing content at attractive price points. Our inner spring components business has moved more towards mid to higher end price points and greater content within each unit.
Our specialty foam business allows us to produce specialty foam components and finished products for our branded partners.
Consumer interest in adjustable beds continues to grow providing us with an additional opportunity to increase content.
This strategic approach enables us to innovate high quality differentiated products for our customers and improve comfort for the end consumer.
We intend to grow our market share and increase profitability by focus on focusing on three key areas.
First we will continue to pursue opportunities to enhance our value proposition by offering product differentiation and reducing total mattress production costs for OEM customers. For example, our new combination pocket combines perimeter edge inner springs, especially phone to create a fabric in case inner spring and phone color that minimize this.
Motion disturbance from a sleeping partner and improves airflow.
Eco basis, another new product that allows our customers to streamline their manufacturing process lower costs and reduce environmental impact by replacing commodity based phone with a lighter polyester nonwoven material under our comfort core unit.
Our second area of focus is improving specialty films performance and continuing to improve costs.
Continued integration of our foam and inner spring operations will drive opportunities for manufacturing savings and product development gains.
And our third area of focus is maintaining our production flexibility and ensuring appropriate levels of inventory.
Our competitive position is unique from our vertical integration of steel rod and wire specialty polyol, and additives and efficient and flexible machine technology to innovative products and service our customers anywhere in the value chain, our bedding business is well positioned to bring value to our customers and end consumers.
Sales in our specialized products segment increased 23% versus second quarter of 2022, driven by the hydraulic cylinders acquisition completed in August of last year and continued recovery in all three businesses.
The July forecast for global automotive production shows six 5% growth in the major markets in 2023 as the industry has seen stronger production recovery and inventory restocking than anticipated earlier in the year.
While improving automotive industry production remains dynamic supply chain macroeconomic and geopolitical impacts spring volatility across different regions.
Cost recoveries, continuing in our automotive business and we expect to make further progress as we move through the second half of the year.
Strong end market demand in hydraulic cylinders is expected through the remainder of the year.
Order backlogs in the material handling and heavy construction equipment market segments remain at elevated levels, but it has started to moderate as our customer supply chain and labor issues have improved allowing them to increase production levels.
In our aerospace business, we expect strong demand in the second half of the year as the industry recovery continues.
OEM backlogs remained strong however, build rates fluctuate based on supply chain availability.
Sales in our furniture flooring and textile products segment were down 14% versus second quarter of 2022.
Home furniture demand remained slow during the quarter with high end price point softening.
The lower demand also impacted volume in fabric converting.
Well inventory levels across the market continued to improve.
Demand to remain soft through the third quarter with the potential for some improvement in the fourth quarter.
Work furniture demand for both contract and residential end use products remained at low levels consistent with previous quarters. We expect demand to continue at these levels for the rest of the year.
In flooring products residential demand improved sequentially, but remained slow in what is typically a seasonally stronger quarter largely due to softer remodeling activity.
Hospitality demand continues to improve but remains below pre pandemic levels.
And G O components, we expect slower demand in the back half of the year as home improvement retailer suffered and civil construction is slower than anticipated.
We are maintaining our emphasis on improving areas within our control and proactively addressing the effects of the macroeconomic impacts on our businesses. Our employees have done an excellent job in driving these efforts which include engaging with our customers on new product opportunities some of which we mentioned earlier in our bedding segment commentary.
Improving operating efficiency as we have done in the North American automotive facility as progress continues and specialty foam and.
And driving strong cash management as demonstrated by our working capital improvements and year to date operating cash flow of $207 million.
Our focused execution and enduring fundamentals position leggett and Platt for long term success.
Now I'll turn the call over to Ben Thank.
Thank you Mitch and good morning, everyone and second quarter, we generated cash from operations of $111 million 21 million higher than the 90 million. We generated in second quarter of 2022. This increase reflects working capital improvements, partially offset by lower earnings. We continue to closely control all elements of working capital we.
We ended the quarter with adjusted working capital as a percentage of annualized sales of 15, 2% cash from operations is still expected to be $450 million to $500 million in 2023.
We ended second quarter with total debt of $2 billion, including $224 million of commercial paper outstanding and no significant maturities until November 2024.
Net debt to trailing 12 month adjusted EBITDA was three one times at quarter end. The ratio has increased as EBITDA has declined in recent quarters, but we expect to continue to comfortably meet our debt covenant requirements and maintain sufficient liquidity we.
We are focused on maintaining investment grade debt ratings and expect this ratio to improve as earnings increase over time, and we used excess cash to pay down debt.
Total liquidity was $632 million at June 30 is comprised of $272 million of cash on hand, and $360 million in capacity remaining under our revolving credit facility.
In May our board of directors increased for the quarter, the second quarter dividend of 46 per share to censor four 5% higher than last year's second quarter dividend at an annual indicated dividend of $1 80 for the yield of six 2% based upon Fridays closing price one of the highest yields among the dividend kings.
This year marks our 52nd consecutive year of annual increases.
We continue to deploy our cash in a balanced and disciplined manner for the full year 2023, we expect capital expenditures of approximately $100 million to $130 million dividends of approximately $240 million and minimal spending for acquisitions and share repurchases as we prioritize debt reduction in the near term.
Our long term priorities for uses of cash remain unchanged. They include in order of priority funding organic growth paying dividends funding strategic acquisitions and repurchasing shares with available cash.
As announced yesterday, we are lowering our full year sales and earnings guidance 2023 sales are now expected to be $4 75 billion to $4 95 billion were down 4% to 8% versus 2022.
Our guidance reflects volumes at the mid point down mid single digits with bedding products down mid to high single digits specialized products up high single digits, and furniture flooring and textile products down mid to high single digits.
Our guidance also assumes the impact of deflation and currency combined is expected to reduce sales mid single digits and acquisitions completed in 2022 should add approximately 3% of sales in 2023.
What are your 23 earnings per share are now expected to be in the range of $1 50 to $1 70, including approximately five cents per share of gain from net insurance proceeds we expect to recognize for the year.
Full year adjusted earnings per share are now expected to be $1 45 to $1 65, with the decrease versus prior guidance, primarily reflecting lower expected volume and residential end markets.
EPS guidance assumes a full year effective tax rate of 24% depreciation and amortization of approximately $200 million net interest expense of approximately $85 million and fully diluted shares of $137 million.
Based upon this guidance framework, our full year adjusted EBIT margin range is expected to be seven 3% to 7.7% EBIT.
EBIT margins continue to be pressured by several factors with the largest being lower volume primarily in our residential end markets operational inefficiencies and specialty foam and the inflationary impact on margin percentages as we raised selling prices to recover higher input costs.
Important drivers of margin improvement going forward will be a stronger volume continued efficiency and cost improvements and pricing discipline as raw material costs fluctuate.
Longer term, we expect innovation to drive our margins higher as we work closely with our customers to develop differentiated products.
We are committed to maintaining our long held financial strength. This discipline, along with the tenacity and dedication of our employees allows us to navigate uncertain times and capture long term opportunities with those comments I'll turn the call back over to Susan.
That concludes our prepared remarks, we thank you for your attention.
To answer your questions operator, we're ready to begin the Q&A session.
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The first question is from Susan Mcclary of Goldman Sachs. Please go ahead.
Thank you good morning, everyone.
Good morning, Susan.
The first question is on the bedding business, it's encouraging to hear you talk about some of the new products and some of the innovation that is coming out.
Do you think about the recovery in that business.
Can you think can you talk a bit about the role that those new products might play in and how what stage of their life cycles. There was a rent and how we should be thinking about the potential ramp there.
Yeah very good question, thanks for asking that Tyson I'll, let you take that one sure thing.
Good morning, Susan.
And thanks for the question those are products that Mitch covered in his opening comments that we've been working on for a while I think we've talked about this in some of our past conference calls that during the pandemic. There was a heavy heavy focus on supply and then as the supply chain started to get more stable, we had more interest from some of our customers on.
Working on new products and so those are still both early lifecycle lifecycle products they've been in our pipeline for a while but they are now being commercialized we are selling them into the market. It will so they're still early stage. It will take time for them to grow but there's good strong customer interest in those products.
But we're also very mindful of as we ramp those up we want to support our customers really well and as we roll them out.
So I'd say, a gradual improvement, but they are good examples of the types of innovation that we've worked on for a long time, if you think back historically its a continuation of where we've been with the growth of comfort core and then perimeter edge comfort core and then now products that combination pocket and eco base.
Where we're adding content not just to add it but it adds.
Differentiation or more comfort for end consumers, but also value for our OEM customers, where we can help them either reduce labor cost or additional content to make products more easy to manufacture.
So I think it's a continuation of worried but hate them for a long time and we would consider.
<unk> to add those types of products into our pipeline and another area that Mitch didn't mention but I think I'd like to like to add is innovation from our specialty foam business as well and we have some good products in the pipeline there that both help with the the weight of specialty film products and then also sustainability. So those are also.
<unk> that we can add into either component form or finished products through through specialty film and all of these are are pretty technical and goes.
It goes well with our integration all the way back to our machine business, because they are pretty complicated and things that we have to apply machine technology, all the way through our manufacturing to.
Provide a good product for our customers.
That's great color. Thank you Tyson and then maybe switching gears a bit and thinking about the specialized segment you did see a nice recovery there. It sounds like auto production is is slowly but surely coming back as you think about the different geographies and different stages of the global macros or perhaps in as it relates to.
Auto how are you thinking about the further trajectory of that and are there any areas that are perhaps leading versus logging where you can continue to see a nice lift as things sort of move along.
Yeah.
Susan It has been a little bit dynamic across different regions for for a while now I'd say that probably the case that North America and Europe are the most stable right now and we see continued improvement and it's really been in China, and Asia, where it's been a little bit more volatile and you've seen some of the shift to evs, especially in.
China that has created a little bit of disruption, but you know the outlook is still it's still very strong.
The.
Year over year production change for this year is now up to about six 5% based on the IHS data and that's up from 4% back in April when we were there. So I think that also indicate some of the dynamics that we've seen right and that does create some inefficiencies occasionally and there's still some supply chain issues, but as you said.
It is getting better I think the longer term our outlook over the next four years or so is a CAGR of just under 3% and so I think there is continued growth out there and will be continued stable stability and frankly Africa opportunities for us to increase operational efficiencies there too so.
So in 2019 total production was about 75 million vehicles in the major markets and you have the latest forecast indicates we'd get there in 2026, so we still have some room to improve.
Okay.
That's perfect and then I'm going to sneak one more in which is welcome Ben and congrats on your new role.
Perhaps you can tell us as you take on the role of CFO , what will be different what will stay the same and perhaps anything that you're more focused on as you come into this new position.
Yeah, Thanks, Susan and good morning, and thanks for the comments.
Yeah, I'd say, just very excited to step into this role and I appreciate it appreciate it.
To have the opportunity to serve as our CFO .
You know some things that I think will stay the same clearly our high level of integrity transparency and access for the investment community.
Really I I'm very aligned with like its values or my personal values. So those are really important to me also youll see our commitment to our disciplined uses of cash that will not change. So that that will be very consistent also have a strong focus on driving shareholder value driving strong cash flow and really.
<unk> been focused on margin improvements.
As I come into this role and think about how I can and dry.
Drive some some value I think about developing very close connection with our businesses I'm really a partnership and driving a result, I have some strong relationships with our business leaders that I've developed over the years and some prior roles and really look forward to just partnering with those leaders and collaborating with them and just thinking.
About how I can best help help serve them in their businesses.
All of this will be focused on working with our teams and thinking about how we modernize our finance function and really looking to drive efficiencies and then over time thinking about how do we add technology and make better use of that so that we can spend more time thinking about value creation, and how we drive that and just off.
<unk> those routine processes. So we don't spend quite as much time on them. So really excited to jump in and get to work and I. Appreciate the question yeah. Okay. Thank you for that color and I'll requeue.
Thank you Susan.
And the next question is from Bobby Griffin of Raymond James. Please go ahead.
Good morning, Bobby Thanks for taking my questions.
I guess I bought the first time first off for me I wanted to maybe go back to the bedding product segment and kind of just understand a little bit more of the margin drivers. There I know, there's kind of basically two aspects going on we have a little bit lower year over year metal margins as well as some pretty significant volume declines. So when you. When you look at the compression on EBIT margins in that business in the quarter can you can you maybe.
Help just provide some color on the biggest driver was it was two thirds volume and one third the the metal margins or is it even more volume related just trying to get some context around the impact from really the volume declines.
Sure Hey, Bobby this is Tyson.
So year over year, it's more heavily weighted towards metal margin, probably the inverse of what you bought you throughout so middle margin. The majority probably approaching two thirds of the remaining one third being volume.
Okay, and then when we take when we think about that I mean, the metal margin is still pretty elevated versus historical standards. So I guess the next question off of that because you know my guess of two thirds. One third was backwards I mean, how do we protect margins. If if we are moving our way back towards maybe a little bit more of a historical standards that is a pretty magnet a sizable impact.
Sure.
And you know at this point, we've talked about this in the past as well we have seen better margins start to decline versus last year, it's down somewhere mid teens, which is pretty close to our expectation that we shared at the beginning of the year you know at this point.
Our thought is that we'll probably see those the remainder of the year be at pretty steady levels. When we see a change in rod pricing, it's pretty well mirrored by scrap and part of that is being driven just by some of the industry dynamics around increased conversion costs, just inflation in utilities labor and other consumables.
And then just the general supply and demand environment around around steel products in the U S. So we still think through the last half of the year, we see some consistency there but longer term you know really hard to hard to predict but we have a lot of things that we're working on around improving profits and margins are the number one Ben Ben hit it and I know we've talked about this for a while but it's by far.
Our volume that's the that's the biggest driver in that we have around profitability margins.
Additionally, we've covered this before too but the operational improvements that ECS also another big area for some work.
We've taken a lot of action so far even as the market has been soft and our U S. Spring business has been busy reducing both fixed and semi variable costs them a lot of those we think will stick even as volume improves.
We started making some progress around our material costs in our specialty foam business and also diversifying some of our customer base. So those those are things that even in the short run we feel like we're going to start getting some benefit from them and we have had some salaried head count reductions as well as some small facility consolidations are nothing that would impair our ability to support our customers.
Help us manage and reduce costs.
We still have a lot of opportunities through operational improvements at ECS, they're working hard on and our teams are really working through root causes and just finding different ways to reduce some of our costs and then additional synergies in both development and cost savings through U S spring and ECS. So we have a lot of things that we're working on to help us with those thing.
And.
[noise] confident we'll get back to the profitability levels, we've had in the past.
Okay I appreciate that and maybe my second question I had a whole pricing is probably my stay stay with you too because it is an ECS, but is the volume growth actually surprised me it was pretty nice in school at 8%. It was there you know it is the operational efficiencies is really more on cost or was there. Some uniqueness this quarter from a volume standpoint that are you know might not be.
Where it might not be valuable for us to kind of read that 8%.
True as a true number.
Now we are seeing volume improvements as.
As we've talked about the diversification of our customer business is important.
As we saw the market softened across betting it was even more severe for ECS, just where we're aligned with our customers more on the digitally native customers that had.
An even greater decline overall in the market than the rest and.
So a lot of our efforts in trying to partner with some new customers even as the market slow has allowed us to grow our business and though it's going to take a while for things to really recover just given the softness we are seeing volume improvements.
Where we have been and we are making some improvements most specific raw material costs, but.
But we also have some offsets to that we're obviously looking at the long run. So we are taking on some one time costs as we start up some new equipment and programs and go through some facility changes. There also are impacting us in the short run, but we think will pay off in the long run.
Okay perfect.
On the volume side right, we still have a ways to go to make up that dnb volume, that's declining but the new programs as you've talked about that as an opportunity and I suppose it finished mattresses as well as accessories right that's right.
Thank you and I guess lastly for me is just on the balance sheet.
Mr. Botner for prepared remarks leverage ticked up a tiny bit with a corresponding EBITDA, but you know we have youre kind of guiding for some cash flow here for the back half of the year is do you have any type of near term target is is it possible to see the net leverage get back under three times by the end of the year or any type of commentary you want to add there.
Yeah, Ben I'll, let you take that one and no to that that's our covenant calculation on the leverage is a little bit different too right yeah.
Great question. So yeah, we'd say, we're near the peak of our leverage we think in a potential to go up maybe modestly in the third quarter, but really in the similar range and then we would expect that ratio to begin to improve by the end of the year and continue to improve into 2024 and as Mitch just mentioned our debt covenant calculation is.
Is a bit different than what we report publicly and I'm, just a little bit more favorable for us. So there's a little bit more headroom there than the $3 one times measure would indicate so.
But we don't have a specific target right now, but we are committed to being a strong investment grade company, which in our view from a long term perspective means having a net debt to EBITDA in the $2 five and under range.
Okay I appreciate the details and all the transparency you best of luck here in the third quarter.
Thank you Bobby.
The next question is from Keith Hughes of <unk> Securities. Please go ahead.
Thank you my questions embedded products as well.
In terms of pricing for the second half of the year, we're gonna be seat similar declines.
What we saw in the first half I guess my question is how are you.
Expected steel to play out.
Good morning, Keith This is Tyson.
Yeah, So just like we covered them with Bobby.
Probably still some continuation of where we've been in terms of metal margin.
You know as we see some deflation and rod cost pass through to inner Springs, we've seen mirrored coston in scrap so we see more of a continuation of our trend around metal margin.
You can see in the supplemental slides the deflation that we've seen in chemical costs low teens overall versus last year at this point, we see that being pretty stable, how many reps are downs.
It tends to be pass through pricing there as well.
Pricing impacts from steel you know there we have a large portion of the majority of our business covered by contracts where indexes.
Manage our pricing and for those that arent will be fair going going down with what cautious as we were going up.
You haven't anniversaried the decline I guess I'm, just trying to figure out when this is going to trend down towards zero.
I think we still have a long way I mean, I would say both on rod pricing chemical pricing are still way way above I think pre pandemic kind of levels is that right that's right and for sure on better margin. If you think back to this time last year, we were still seeing inquiry.
<unk> mm rod pricing and just overall steel cost in the market Didnt really start to see the declines happen until late third quarter and the fourth quarter, Yeah, and I think I guess I would say if we have to guess at it seems like we're seeing some modest deflation, but not radical moves for the most part we see some things going up and down a good example would be hot rolled.
If you use a lot of in our home furniture business. For example in the first quarter. It went up quite a bit and then you know in the second quarter, it's coming back down not quite as much. So I think we'd see especially chemicals tend to be a little bit volatile, but I'd say that things have normalized a little bit they continue to move probably a little bit or down.
Hum, but.
But not.
Really radical ways.
Okay. One other question if I look at your commentary for the year are embedding products versus furniture flooring and textiles.
It does look like in the second half that are furniture flooring and textiles is trending towards a flatter.
This decline number we're betting space some pretty weak.
Seems unusual those two categories are moving in different directions. So number one is that correct directionally and what do you think the difference between them is.
Yes, Steve I'll, let you jump in here as well.
It gets a little bit more to do with our portfolio.
We have are you know pretty pretty diverse portfolio in a.
S. S. T. So home furniture, I think is moving pretty close to that betting markets very much residential end market, where furniture is a little bit different as some residential but some also.
Office space products, and so you know it's.
It's down it's probably.
Coming back to life last year, it fell down and it was pretty low, but then flooring and our textiles businesses are quite a bit different and so flooring I think a little bit stronger we're not seeing the same kind of increase that we would normally see seasonally.
But you know its but its holding up we see you know.
On the other.
Other areas are doing better textiles for a big portion of that is the geo components that is more almost industrial facing so civil construction private construction things like that so I think that's probably what drives most of the change okay alright. Thank you.
The next question is from Peter Keith of Piper Sandler. Please go ahead.
Hi, Thank you good morning, everyone just looking at.
Maybe it's the weakness in our in the furniture and bedding segments.
Resulting in the guide down.
It looks like that the volume trends came in pretty similar to Q1, but I'm curious what the trends look like through the quarter or did it did to kind of hold at a pretty consistent level or was there any any improvement as the quarter progressed.
Touching him Archie and Kim and good morning, Peter Yeah, I'll jump in on the bedding betting part of that first I think what we saw is probably what's been reported more broadly in the market.
Actually even on our last conference call, we talked about April which was our expectation being seasonally down.
And it was but then we did see sequential improvement as we went through the quarter. So April April was down more towards the levels that we saw in October November of last year, and then May and June improved from that point more to the levels that we've seen both back in the first quarter and probably third quarter of last year. So it didn't it didn't peak out at levels of it.
Offset the softness in April , but just back more to sort of the steady state that we've been in for a while.
And I think the end consumer demand would be very similar in furniture and bedding, but that's just where the market.
Changes might be a little bit different Steve anything you'd like to add their own home furniture.
Yeah, I would just say no.
<unk> started.
The low end of Med X Ben Locke for months, but the high end was hanging in there.
Over the over the course of the quarter, we saw that start to decline as well through the quarter I would say and then just recently starting to feel like we're probably at the bottom bouncing around and saying a little bit up.
The increase in the lower end of the market. So kind of started out a little stronger a little weaker than it had in into the third quarter getting a little stronger in terms of demand and we think thats, primarily due to the inventory that was in the channel. That's now now being depleted.
Yeah, I think Steve maybe another thing I would add too is we had the benefit of backlogs, particularly at the higher end for quite a while and then yeah.
Now I think warren worn out pretty much it so that what is sales to us deliveries to our customers.
I think that that tailwind evaporated.
Okay.
Yeah, I was going to ask about the home furniture to clients I think you've addressed that so maybe I'll I'll pivot to the to.
So the betting in spring declines.
I guess it down.
The newest bringing the volume down 13%.
Pretty similar to Q1 on a volume basis. It does seem like the industry has gotten better in Q2, and maybe even continues to get better here with Q3.
Your volumes are kind of holding steady is there a customer mix issue within springs is there some share loss can you just help us frame up why the the volume trends arent turning towards less negative.
Sure I'll jump back in here Peter.
So the way we look at is things are pretty consistent.
You know.
Looking across the market overall, I think we would see things pretty similar broadly in the market with kind of where we've been trending talked.
Talked about the April weakness.
The signals that we've been getting from our customers is less optimistic for the back half of the year I think entering the year. There was optimism that we will start seeing some modest improvement from kind of where we were at least the last part of last year and the early part of this year, but.
Especially with the modest Memorial day, and fourth of July that seem to dampen the expectations for a lot of improvement the back half but.
But within our business no I don't think Theres, a customer mix change just within our products Mitch covered in his opening comments, but open coil and grids from a volume standpoint are more adversely impacted than comfort core.
I think that's both some consumer and consumer preference and also just pressure on the lowest end of the market. So.
So I think the mix within our product categories is probably more of an issue than any type of customer mix.
Okay.
And.
The last question I had was just on the.
The inventory levels that you have and just thinking about maybe some of the cash flow opportunities do you have a potential inventory reduction are ahead, and I know you've kind of on a low sales base right now, but your inventory turns are.
Our below pre pandemic levels.
Wondering what you think about the status of inventory and bringing that down.
Good question, Peter I think that's something that's always very focused on our mind as we focus on cash management, but then I'll, let you share your thoughts it yeah I think thanks, Peter Yeah.
Yeah, I think for us from an inventory perspective, you know the past few years have been very dynamic as we've had volatility in demand levels supply chain challenges our inventory balances have gone up over the last couple of years and then as we saw demand start to.
To taper down a little bit in the back half of last year and continued into this year. We've we've had.
Some great work by our teams to work those inventory levels down while still maintaining that ability to serve our customers in a good way. So we have worked it down sequentially for a number of quarters now.
But we also believe that there is a little bit more opportunity.
Left there. So we'll continue to focus on it we think we can drive some cash through that and we also pay attention to all the elements of working capital. So I think our <unk> in really good shape right now our teams have done a good job of keeping that current accounts payable are down a little bit just mainly due to the lower volumes, but it's something we'll continue to focus on and.
And and really look at that as a way to drive cash and then use that cash to the <unk>.
Stay disciplined with our our uses of cash so organic growth funding the dividends and then what you'll see is minimal spend on acquisitions and share repurchases in the near term, but we'll use that excess cash to prioritize paying down debt and that really supports our commitment to being a strong investment grade company.
Okay very good thanks, so much.
Thank you.
Thank you we have a follow up question from Susan Mcclary of Goldman Sachs. Please go ahead.
Thank you.
I just wanted to go back to the specialized segment. When you think about the improvement in the margin that you did see this quarter back to that low double digit range and you look out and you think about some of the changes that have come through in that segment, specifically with some of the acquisitions you've done more recently and things that are sort of changing the profile of that.
Business, how do you think about the.
Where are those margins will go overtime and what is the role of the changing profile of that within the eventual sort of target relative to perhaps where we've been in the past.
Hum.
Thanks, Suzanne and Steve have laid chime in here too.
Youre right that the difference is the portfolio within specialized does have some impact certainly those acquisitions add some more of depreciation and amortization, so EBIT and EBITDA look different.
But particularly in this downturn time aerospace had been a really big drag while the volume was so low we saw troubles you know in automotive and then some of the inefficiencies that we talked about that you see the margins improving we think it may not be perfectly sequential that every quarter it gets better but.
We do believe that we will continue to improve over the long term.
I don't know that we'll get back to the peaks that we had when the automotive was.
That's huge huge growth pattern in the law.
Largest part of the segment by far is still the largest part but not the same share it had before but I think that will continue to see movement up hopefully somewhere into the into the teens at least but youre not making.
Any prediction at this point, but I think that we do have opportunities. Both for continued growth in all three businesses over the long term well positioned strategically and also opportunities to get back get to improve operational efficiency.
As we continue to grow those businesses, Steve anything you would add there.
So just I think theres also opportunities for us to continue to improve margins.
Volumes increase theres still some.
Bob lack of consistency in order patterns and other things that are driving costs.
To our to.
Our operations in there so.
By now we should expect to see those the cost associated with those go away to some margin expansion there as well as some some new product developments, particularly in the hydraulics over the over the longer term.
Yeah.
Okay. Okay. That's helpful. And then you know we've touched on this one a lot of ways. In this call that may be thinking about just the the differences that you're seeing across consumer or residential end markets relative to the industrial pieces of the business.
Well one of the interesting dynamics is that within betting, especially.
The way these promotions are still fairly low and we've seen that normalize and some of the other categories that we cover them that are consumer related and how that sort of promotional element to them any.
Thoughts on what you're hearing from your customers as it relates to sort of the broader state of the consumer and perhaps anything that that they're looking to do to to help entice them or to help drive that traffic a bit and then I guess anything that you're also seeing broadly as you think about the recovery potential in consumer.
And that longer term track for industrial do you think they'll continue to sort of both move forward or are there any puts and takes that you would highlight.
Yes, thanks, Susan So Tyson I'll comment a little bit on some of the broader issues and let you come back to some of the promotional activity there, but so I think that the.
It's a great question because it highlights the diversification of our portfolio. So while we see this.
Lower lower activity in our more consumer durables facing markets. The industrial businesses have done really well and are improving and I think hopefully we get back into growth mode and not just recovery book before too long. So they can when I emphasize that that is a key element of our portfolio management.
And then secondly, I think it's an interesting question. If you think about the health of the consumer I think it's fairly strong at this point as we've seen inflation easing and job market remaining strong and wages improving but the focus is on consumer spending and this is really remains on services on consumables it other than durable goods.
That's really the drag that we're seeing on our furniture flooring.
And Betty more residential end markets I'd say, the possibility of achieving a soft landing and avoiding a broader recession, it's still out there in the narrative, maybe even becoming more more likely and if that's the case hopefully consumer spending comes back into residential end markets before too long, but it's really difficult to predict.
To highlight at this point.
I think that I would agree that we have seen promotions lower and I'm not I think that it just hasn't been very effective I think is my take on it what do you think yeah I agree with everything you just said Mitch I mean going back to that.
That's sort of the consumer sentiment and where consumers want to spend their dollars as sort of a huge question for our industry and you know we went through a period of time, where promotions weren't necessary at all when everybody was that was spending on the home and focused on on buying home related goods and then it shifted quickly.
It does feel like we're back to at least the promote seasonal promotional periods, but theres, probably still some more room to go to get back to more of the typical types of promotions.
Yeah, it's some things that I guess I've already talked a little bit about what's caused us to remove the optimism for the back half of the year, but some things that give us a little more confidence Mitch talked about the maybe potential for a soft landing improving consumer sentiment, even though it is still at relatively low levels.
Some stability in the housing market I mean, those are typically things that act as a tailwind for the bedding market, but I think both us and our customers are waiting to see some real pickup and shift back from spending on services travel things like that back into spending on the home.
And getting more of a tailwind because if anything at this point I do feel like we are creating pent up demand any type of pull forward, it's probably been extinguished and at this point, its probably more creating pent up demand rather than even neutralizing neutralizing. It now you are at the point yeah.
Okay. Thanks for the color and good luck with everything.
Thank you Susan.
There are no further questions at this time I would like to turn the floor back over to Susan Mccoy for closing comments. Please go ahead ma'am.
Thank you for joining US today, we will talk to you again next quarter. If you have questions. Please contact us using the information in yesterday's press release.
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Okay.
That concludes today's conference. Thank you for joining US you may now disconnect your lines.
Okay.
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