Leggett & Platt Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2022

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Leggett and Platt Second Quarter 2022 Webcast and Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Susie McCoy, Vice President of Investor Relations for Leggett and Platt, please go ahead.

Speaker 1

Good morning and thank you for taking part in Leggett and Platt's Q2 Conference Call. On the call today are Mitch Dollop, President and CEO Jeff Tate, Executive Vice President And CFO, Steve Henderson, Executive Vice President and President of the Specialized Products And Furniture, Flooring and Textile Products segments Tyson Hagel, Senior Vice President and President of the Bedding Products segment And Cassie Branscum, Senior Director of Investor Relations. 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. Jeff will cover financial details and address our outlook for 2022 and the group will answer any questions you have.

Speaker 1

This conference call is being recorded for Leggett and Platt and is copyrighted material. This call may not be transcribed, recorded or broadcast without our express permission. A replay is available from the IR portion of Wegut's 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.

Speaker 1

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 For a summary of the risk factors and additional information, please refer to yesterday's press release And the sections in our most recent 10 ks and subsequent 10 Q entitled Risk Factors and Forward Looking Statements. I'll now turn the call over to Mitch.

Speaker 2

Thanks, Susan. Good morning, and thanks, everybody, for participating in our Q2 call. Our employees continued to drive strong results in the quarter despite ongoing macroeconomic, geopolitical and various end market challenges. Sales from continuing operations were a quarterly record of $1,330,000,000 EBIT was $143,000,000 Earnings per share was $0.70 Sales in the quarter were up 5% versus Q2 2021, reflecting our successful pass significant inflation over the past several quarters, partially offset by lower volume and currency impact. EBIT decreased 17% versus Q2 2021 and was down slightly versus Q2 2021 adjusted EBIT.

Speaker 2

Last year's Q2 EBIT included a $28,000,000 gain from the sale of real estate associated with our exited fashion bed business. EBIT decreased slightly versus last year's adjusted EBIT, primarily from volume declines and lower overhead absorption as And the next question comes from the line of the line of the line of the line of the line of the line of EPS was $0.70 a 15% decrease versus Q2 2021 and a 6% increase versus last year's adjusted EPS. We are lowering our full year guidance to reflect macroeconomic uncertainties, including impacts of inflation, tightening monetary policy and softening consumer demand continuing through the back half of the year. We expect solid demand in our industrial and automotive end markets to partially offset Now I'll move on to the segments. Sales in our bedding product Segment were up 1% versus Q2 of 2021.

Speaker 2

Raw material related selling price increases, strong trade demand in steel rod and drawn wire And the addition of our K Foam acquisition made in the Q2 of last year were largely offset by volume declines from soft demand in U. S. And European bedding markets. Market demand was negatively impacted by higher energy cost and general inflation early in the quarter, but then remained relatively consistent. Mattress consumption has been on the leading edge of consumer spending activity and began to slow in the Q4 of last year, making year over year comparisons difficult.

Speaker 2

Sequentially, demand was down only slightly from the Q1. Commodity costs seem to have stabilized, although at historically high levels. Other manufacturing inputs, including energy, continued to increase during the quarter. We are carefully managing these costs and the impact to our business and our customers. Within our bedding businesses, the supply chain remains stable and we are well protected against future disruptions.

Speaker 2

We began to adjust production, manufacturing cost and inventory in the Q4 of last year. Inventory levels have turned it down since that And we will continue to monitor them closely while maintaining our ability to service customer requirements. We are well positioned to address further demand changes, whether up or down, and will respond quickly and responsibly. Provided no major changes in the macroeconomic backdrop, We expect demand in the segment for the back half of the year to remain consistent with levels seen in the first half of the year. EBITDA margins in the segment were lower versus Q2 2021 adjusted EBITDA margins, primarily from lower volume And lower overhead absorption as production and inventory levels were adjusted to meet reduced demand, mostly offset by expanded metal margin in our steel rod business.

Speaker 2

Sales in our Specialized Products segment increased 8% versus Q2 2021 from strong volume growth in all three businesses. These volume gains were partially offset by currency impact. The industry forecast for global automotive production has stabilized since April. The current forecast anticipates just under 5% growth in the major markets this year. Consumer demand remains strong and vehicle inventory remains As supply chains continue to stabilize, the industry should see improving production for the next several years.

Speaker 2

Industry forecasts now indicate recovery continuing through 2024. In our Aerospace business, Demand for fabricated duct assemblies remains at pre pandemic levels, and we continue to see modest demand recovery for welded and seamless tube products. We expect continued recovery in 2022, and the industry is anticipated to return to 2019 demand levels in 2024. End market demand in hydraulic cylinders is strong and order backlogs in the industry are at record levels. However, labor availability and global supply chain have hampered the ability of our OEM customers to ramp up production.

Speaker 2

We're seeing some improvement in these areas, It could be late 2022 or longer before industry backlogs normalize. We expect our sales in this business to continue to grow as OEM production increases. EBITDA margins in the segment declined primarily from higher raw material and transportation costs, labor inefficiencies and currency impact, partially offset by higher volume. Sales in our Furniture, Flooring and Textile Products segment were up 10% versus Q2 2021 primarily from raw material related selling price increases and volume recovery in work furniture, partially offset by lower volume in Home Furniture, Textiles and Flooring. In Home Furniture, mid and upper level price And macroeconomic uncertainties.

Speaker 2

Demand at lower price points has continued to soften, negatively impacting our business in China. The Chinese market was also impacted by COVID related lockdowns during the Q2. We expect work furniture sales to continue to grow from improving demand in contract market as companies redesign their footprints and invest in office space. However, demand for products sold for residential use is softening. In textiles, we expect geo components to grow in 2022 as demand remains strong across both the civil construction and retail markets.

Speaker 2

In flooring products, residential demand has softened with lower home improvement activity and hospitality demand remains well below pre pandemic levels. EBITDA margins in the segment improved versus Q2 2021, primarily from pricing discipline, partially offset by lower volume. Before I turn the call over to Jeff, I'd like to thank our employees for once again delivering strong quarterly results. Your collective ingenuity, commitment

Speaker 3

Thank you, Mitch, and good morning, everyone. In the 2nd quarter, we generated cash from operations of $90,000,000 up $49,000,000 as Working capital increased significantly last year due to restocking efforts following inventory depletion in 2020, but increased to a lesser extent this year as we continue to return to inventory levels more reflective of current demand. We expect cash from operations of $550,000,000 to $600,000,000 in 2022, As last year significant inflationary impact stabilized and we continue to balance inventory levels. We ended the Q2 with adjusted working capital as a percentage of annualized sales of 15.7%. Our priorities for use of cash are unchanged.

Speaker 3

They include an order priority, funding organic growth, paying dividends, Funding strategic acquisitions and share repurchases with available cash. Capital expenditures in the second quarter were $22,000,000 In May, our Board of Directors increased the quarterly dividend to $0.44 per share, dollars 0.02 or 5% higher than last year's At an annual indicated dividend of $1.76 the yield is 4.4% based upon Friday's closing price, One of the highest among the dividend kings. With deleveraging we accomplished over the past few years, share repurchases have returned as one of our The level of repurchases will vary depending on various considerations, including alternative uses of cash and the opportunities to repurchase shares at an attractive price. We took advantage of the lower share price during the 2nd quarter And repurchased 1,000,000 shares at an average price of $35.01 per share. Total repurchases for the quarter were $35,000,000 This brings year to date repurchases to 1,600,000 shares or $57,000,000 We ended the 2nd quarter with net debt to trailing 12 month adjusted EBITDA of 2.39 times.

Speaker 3

Our strong financial base gives us flexibility when making capital and investment decisions. We remain focused on cash generation While maintaining our balance sheet strength and deploying capital in a balanced and disciplined manner that positions us to capture near and long term growth opportunities, both organically and through strategic acquisitions. Now moving to guidance. As Mitch stated earlier, we are lowering our full year guidance for Sales and earnings per share. 2022 sales are now expected to be $5,200,000,000 to $5,400,000,000 or up 2% to 6% over 2021.

Speaker 3

Guidance reflects volume down lowtomidsigledigits With the bedding product segment down low double digits, specialized product segment up low double digits and furniture flooring and textile products roughly flat. The guidance also reflects continued inflationary impact primarily from raw material related price increases, including those implemented as we move through 2021. The guidance assumes negative currency impact and acquisitions in 2021 Should add 1% to sales growth, but will be mostly offset by small divestitures. 2022 earnings per share are now expected It's partially offset by continuing strength in industrial and automotive markets as well as metal margin expansion in our steel rod business. Based upon this guidance framework, our 2022 full year EBIT margin range should be 10.5% to 10.7%.

Speaker 3

Earnings per share guidance assumes a full year effective tax rate of 23%, depreciation and amortization to approximate $200,000,000 Net interest expense of approximately $80,000,000 and fully diluted shares of 137,000,000. For the full year 2022, we expect capital expenditures of approximately $130,000,000 and dividends should approximate $230,000,000 In closing, Leggett remains well positioned both competitively and financially to capitalize on long term growth opportunities in our various end markets. Our enduring fundamentals give us confidence in our ability to continue creating Long term value for our shareholders. With those comments, I'll now turn the call back over to Susan.

Speaker 1

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

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Bobby Griffin with Raymond James. Please proceed with your question.

Speaker 4

It's really a 2 part question. I mean, 1, we saw you guys tick up the volumes pretty notably and for the full year. So maybe just unpack what areas of that business are coming in Stronger than expected and kind of what's a little bit more detail on what's going on in those end markets. And then secondly, just what's the pathway back For margins to return to kind of the mid teens in that segment that we're used to seeing, is there a path back there or structurally Something changed within the businesses that it's going to need to be a

Speaker 5

little bit lower margin business going forward.

Speaker 2

Yes. Good morning, Bobby, and thanks for I think it's really just more confidence in the actual improvement of production across all three of those businesses. We've seen Significant improvement in aerospace and hydraulic cylinders, although that's still somewhat impacted by the OEMs ability To navigate labor and chip issues, but we have seen increased production over the last several months. And then similar in Automotive as well, where while they're not getting all of the chips that are needed to enhance production there, it has become more stable. And so that production schedules are way less dynamic than they were probably last year.

Speaker 2

So we continue to see some improvement there. I think in automotive, the projection for the major markets is 2nd Half production up about 11% versus the first half. So all of those things kind of holding up are what really gave us the Confidence to increase our guidance around the volume there. And then your questions around the margins is also a good So I do think that we have a path forward to those mid teens kind of margins again. I think a few things dynamics are in play there.

Speaker 2

First, All three of those businesses were the most impacted at different times, but as the pandemic hit and in 2020, we saw the volumes there just Fine. Very, very significantly and this is, I think, old news, right? Everybody knows that it's been a really struggle for those industries to regain their traction. But as I just said, they're starting to now. So we certainly have the impacts from lower volume, which is Lower overhead recovery.

Speaker 2

And then just some of the inefficiencies as the production schedules, as I said, are so dynamic. The other element that is critical and we talked about this on the call last quarter that it started more significantly to impact us in automotive It's the impact of commodity inflation. It's less of a commodity business than if you think about the steel products in bedding or home furniture or things like that. So it's normally not much of an issue. Over time, over the course of this dynamic last year or 2, there have been inflationary impacts that Built up, whether it's around resins or steel impacts or just other raw materials transportation that We had built up and we talked about it last quarter to become relatively significant for the business.

Speaker 2

And Yes. We've made really material progress, I would say, in the cost recovery starting in the second quarter. And I would expect to continue sequentially as we go through the year. One thing to note is that pricing in automotive is very, very different than any other of our businesses, Maybe similar to aerospace, but that the industry generally works on fixed pricing with cost downs over the life of a program. So Prices typically don't go up and down throughout the life of a program unless there is some really significant event Like we've seen over the last couple of years, really the last year.

Speaker 2

And so it takes time for enough pressure to build through the Supply chain that the OEMs are then sort of forced to concede price changes. So it's tough to predict exactly the timing. It's not as simple as industries were built to Have these kind of pricing fluctuations. So we have seen that momentum build and start to see tangible benefits of that in the second quarter. Again, tough to predict exactly in the timing, but we do expect to continue to make significant progress over the second half of the year.

Speaker 2

And that recovery can take the form of a number of items. It could be actual price changes. It could be delaying cost downs. It could be some Engineering changes or even one off payment, but we do feel confident that the ball is rolling now. We're starting to see the results and that will continue.

Speaker 2

The second area that we talked about probably just one more thing real quick. Last time, we talked about operational issues that we're having in one of our facilities in the U. S. We've also made substantial progress there In that plant, inventory positions are improved, the premium resulting premium freight is going down and our excess labor costs Not done, still work to do, but making progress.

Speaker 4

Very good. I appreciate that details. It was very helpful. Thank you, Mitch. And then I guess Secondly, just as a follow-up maybe on the commodity or steel side of the business.

Speaker 4

We have started to recently see some of the steel commodities roll over. Has that has the spread or the metal margins changed at all with the recent kind of reduction in some of the steel indexes? And it's been a very long time since we've kind of seen steel deflation. The last couple of years have been inflation. How do you think the business will respond To potential deflation of steel products similar to the history we're used to seeing with Leggett when they see deflation?

Speaker 2

Yes, great question, Bobby. I'll take the easy part and then hand it over to Tyson. But on the steel side, think about the separation between where we're using flat products In Home Furniture, we have seen some reduction there. Teams are managing that very, very well, managing our inventory and also managing Our pricing, a little bit different on the rod side with increased other input costs there. So, Tyson, I'll hand it over to you On that one?

Speaker 2

Sure.

Speaker 6

Yes, and it is a little bit of a complicated story. But you're right, Bobby, even recently we have started to see some softening in rod pricing, But to a lesser extent, we've even seen some changes in scrap. Mitch started to hint at it, but I think some of that is just general industrial And has remained relatively strong for steel products and then also some of the conversion costs that have increased pretty substantially that I don't think get quite as much notice. But energy, Just general utility usage, consumables that go into it have also I think helped support some of the higher pricing. But we have seen it start to stabilize and also Start to come down a bit.

Speaker 6

We've been monitoring that closely on the way up and also do the same as things decrease. We have also large part of our steel base It's contractual, so we'll obviously see those things pass through as necessary.

Speaker 4

Thank you. I appreciate the details. Best of luck here in the second half.

Speaker 2

Thank you, Bobby.

Operator

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

Speaker 7

Thank you. Good morning, everyone. My first question is, you're talking a little bit about the consumer perhaps. You mentioned in your comments, Mitch, that you have seen bedding demand stabilize in the quarter, you expect it to hold flat. Can you talk in general just about the state of the consumer, the health of the consumer that you're hearing from your customers?

Speaker 7

And perhaps with that, any commentary on the Just the demand that you're seeing in bedding, especially as you're continuing to put price in to offset those inflationary pressures?

Speaker 2

Yes, sure. I'll take a shot at that and good morning, Susan. Thanks for the good question. I think it's tough to predict, but I think the fact that we've seen demand Being pretty stable is probably a good thing, right? It's tough in this type of inflationary environment with monetary policy tightening and all of the other macroeconomic disorders that are out there.

Speaker 2

So I think that led to the step down. But I think that if we can see that inflation is starting to stabilize and then starting to gently come down, I really don't see it just Dropping off very swiftly, but if it starts to stabilize, I think that we will see the consumer hold in there for us at least at decent levels. And then depending upon what happens going forward, if we are able to avoid or save for your recessionary cycle, I think that we should be in pretty good shape. But we've certainly been planning in all of our businesses for this kind of uncertainty and really starting last year To make sure we're managing inventory closely that we're managing our variable costs and our production levels so that we're really ready To move either way, if it gets a little bit softer, to be able to take a step back and control our costs or to be able to respond very quickly if we're able to see pickup. So think that's the really big question that's out there for the world, right, is what's going to happen with consumer demand and inflation out there.

Speaker 2

But I'm relatively optimistic with the trends that we're seeing. But Tyson, any what are you hearing?

Speaker 6

Very similar, Mitch. We've shared that We felt some of the slowdown earlier than a lot of others when it started happening in the Q4 of last year. Both I think From the lower end price points slowing first, but then also as it moved into some mid and even to a lesser extent some higher price point As we move through the early part of this year and also not just from the impact of inflation, other things, but Consumer shifting to spending on services, travel and some other areas like that. Like Mitch said, what gives us confidence even as we watch consumer sentiment be at low levels We've seen some step downs over the course of the last 9 months or so, but it's been really consistent, especially as we move through the Q2. One thing I think we'll be watching closely as we've watched some of the retail activity is just especially consumers on the lower end and how they react to the Inflation or even prices staying at high levels, but overall, I think we feel pretty confident just in some consistency as we get to the back half of the year.

Speaker 2

And Tessa, maybe I'll add In the longer term, right, in this betting side, really historically don't see multi year downward trends. That's something That would be outside of the norm of what we see. And even if we think about the housing market Softening a little bit even in places like our home furniture business, for example, maybe less impact in consumer sentiment and People even if with all of the home traffic that has happened over the last couple of years, probably some return to that repurchasing cycle there. I will say that we've been more seen more negative impact on the home furniture side, particularly at the low end recently.

Speaker 7

Okay. That's all very helpful color. And following up, obviously, the macro environment has shifted in the quarter. There's a lot of debate about For a shift in the macro landscape, what is the playbook that you'll go to if we do see things Deteriorate more than where we currently are at? And what are you watching in order to determine what needs to happen to the business to protect it in a weaker macro?

Speaker 2

Great question, Susan. Thank you. And I guess, we've kind of been through a similar type of circumstance before when we were In 2020 with the downturn after the onset of the pandemic. So I think that we've learned some new skills that we certainly haven't forgotten then. But First off, though, I would say, expect that we'll benefit from our portfolio diversity, right?

Speaker 2

We're seeing stronger demand hold up in our Industrial and Automotive businesses compared to our more consumer facing businesses. So I do think that that will continue to hold up. But We'll also regardless be able to continue aligning our variable costs and our inventories to demand. I think the good news there is, I mentioned on the call, that we've been doing this Since we first started to see demand slowing a little bit in the Q4 of last year in Bay as well as across our other businesses, it's something Frankly, that we talk about on a regular basis across all of our businesses. In this environment, since we're well positioned, we're already we're not Grambling to catch up with what's happening in the macroeconomic circumstances, we continue to drive strong free cash flow.

Speaker 2

We have really strong liquidity. So we'll be able to benefit from those things as well. In 2020, we cut about $90,000,000 of cost, mainly overhead costs. I never thought about that as something that was temporary that we would take those costs out and we would bring them back. But I did think about it as that we would make investments for our future.

Speaker 2

And we have been doing that. And I think that our portfolio diversity and our strong cash flow and liquidity Will allow us to continue to make those investments. So we'll have more capacity to implement those activities if demand is slower And we'll benefit from the improved efficiencies, the capabilities and be ready to take advantage of stronger demand when those conditions improve. If it's worse than that, then we'll take those actions and we'll go back to more radical cost cutting. But I really think that we're well positioned to be able to invest in our future and really benefit from the recovery as we come out of the cycle.

Speaker 7

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

Operator

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

Speaker 5

Thank you. First question, on one of the earlier comments, you talked about metal margins. I think they were particularly Ticking down a little bit. I want to make sure I heard that right. And kind of what have you assumed in the guidance for the second half of the year on those margins?

Speaker 2

Tyson, do you want to take that one?

Speaker 6

Sure. And Keith, just to clear that up, what I was suggesting was that we're seeing some softening in rod pricing. But overall, I think we've And actually maybe take a quick step back. In the Q2, metal margins actually expanded a bit beyond our expectations and some of the drivers there that That kind of caught us a little bit by surprise, but the invasion of Ukraine had an impact on scrap pricing As an input, people were trying to scramble around and find scrap, which drove up the demand for scrap supply. We also saw a sharp increase And energy costs and then just general steel demand all put to some higher metal margin expansion in the 2nd quarter.

Speaker 6

In the 3rd quarter, we've seen rod Start to soften a bit, scrap as well as some of those things have backed off. But generally, we would still see overall metal margins being relatively consistent in the 3rd quarter. And right now, we're expecting some modest compression as we get into the Q4 just with overall supply and demand. But at this point, it's still tough But we would then think for the full year, we'd still be up year over year.

Speaker 5

Okay. And in the prepared comments, you talked about textiles and Loren, kind of seems like you're moving in different directions right now. Just relative size, you kind of lump those together in the 10 ks, can you just talk about how what those two represent as a percentage of the FFT segment?

Speaker 2

Let me see here. I hope if I could think about it. Yes. Okay. And Steve, chime in if you have that Andy, I think that textiles is about 35% or so of the business Of the segment?

Speaker 2

Is that about right, Steve?

Speaker 8

Yes. Texel is about 35%, Flooring, probably about 25 percent?

Speaker 2

Yes, about 20%.

Speaker 8

Yes, 20%.

Speaker 5

Okay. And then I guess Final question. We had the compression in Specialized as you discussed earlier on the call and the kind of lag on pricing there. Would we continue to see similar types of margin compression based on your revenue guidance in the next couple of quarters? Will that start

Speaker 2

Yes, great question and Steve chime in here. But I think that we expect to see Sequential improvement in the margins in Specialized as we move through the back half of the year. We as I said, we've made progress on Passing through some of the inflationary impacts in automotive and the increase in volume will help us there. We have had a bit of a hit from exchange rates impacting margins, but we do expect to see meaningful improvement in the back half.

Speaker 5

Okay. Thank you.

Speaker 2

Yes. Thank you, Keith.

Operator

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

Speaker 9

Hi, thanks. Good morning, everyone. I did want to focus this morning on the bedding business. And I guess I'm just looking at the volume trends with the steady declines. My calculation that betting volumes are down about 22% on a 3 year basis.

Speaker 9

And so I know we're waiting for macro headwinds to abate, and It's really anyone's guess to when that happens. So I wanted to ask, what are sort of the strategic initiatives to really get the betting volumes going and To put yourself in a position to be taking market share?

Speaker 2

Yes. Good morning, Peter. Great question. Tyson, I'll let you see that one.

Speaker 6

Sure thing. Hi, Peter. So I'll put it into some short, medium and long term buckets for you. In the short term, it's been a chaotic two and a half years that we've been dealing The customer supply chain, high and low levels of demand, but our teams are working really hard on evaluating near term opportunities with our customers. What We go do what makes sense.

Speaker 6

And there are things out there even in a slow environment that where we think we can provide some value to our customers. We are carefully balancing the economics of those opportunities and also kind of as we look at the risk and economics of those. But we do expect to start to see some of the benefits even now and through the back half of the year. So we do see some opportunities for improvement there even in the short run. In the medium term, it's a tough time to do this, but we do have customers that are interested New product developments, both from a VAVE standpoint and just differentiation, and we have some new things that we're working on with customers right now.

Speaker 6

But those will take some time to gain steam and actually gain a foothold in the market. So that would be more of a medium term initiative. And over the longer term, we've been pretty public about our investments in bedding and you kind of see where we've been heading with our investments at ECS, K Foam, also within our adjustable bed business, we've been investing in areas where we feel like we can increase our addressable market size. And although we're pretty specific about our position as a supply chain partner, also gives us still opportunities in segments of the market to increase our content as well. We've also continued to invest in our ability to supply our customers in our core components business.

Speaker 6

We're in a good place there as well. So we've been investing even as we've gone through the downturn and Ourselves for the long run of being in a better place to grow again.

Speaker 9

Okay. Great. Thanks for the summary. And then we talked about the weak economy, but one area that does seem to be getting weaker for the foreseeable future is housing. And I guess I want to understand your views on housing and its impact on your guidance as home sales are slowing quite a bit here.

Speaker 9

Seems like it could have further negative impact on bedding and furniture floorings and various segments. So is that something that you're contemplating as you look out over the 6 to 12 months?

Speaker 2

Yes, I think so. I think it's tough to predict exactly, Peter. But I mean, Yes. As we said, that's really the take on our guidance was understanding that there is this macroeconomic uncertainty Out there, including the housing market and likely to have some impact, we think that consumer sentiment and other factors have a bigger impact and That there's even with housing movement helps us and lasts over some period of time. But I think that we factored in at least what we anticipate as the impact there.

Speaker 9

Okay. Very good. Thanks so much.

Speaker 2

Thank you.

Operator

Thank you. Our next question is a follow-up from the line of Susan Maklari with Goldman Sachs.

Speaker 7

My first question is, we've talked a lot about The supply chain is in production as it relates to auto within specialized. But can you talk a little bit about the improvements or how you're thinking about the improvements Coming through in aero as well as in hydraulic cylinders. I mean, obviously, in aerospace, one of the big OEMs just Got approval to start shipping one of their products. Are you seeing that there is some increase there, some

Speaker 2

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

Speaker 7

Yes, for sure.

Speaker 8

Good morning, Susan. Yes, aerospace demand growth is tracking pretty much as we As the industry continues to recover and as Mitch said, that will hit 2019 levels in about 2024. Aircraft backlogs are near their peak levels at this point, so the demand is there. We saw year on year Sequential volume growth in Q2. We expect that to continue going forward.

Speaker 8

As Mitch also mentioned, assembly the assembly business has recovered quite quickly, and now we're starting to see that happen for the choosing side of the business. And as that demand returns, the industry is starting to see some of the same things we saw in our automotive, Orders being pulled forward, expedited delivery, short lead times becoming the norms, also starting to see some extended lead times for raw materials, And we're taking that into consideration. So our team is doing a really good job of dealing with that situation as it goes forward. In Hydraulics, the end market for forklift remains strong, particularly in North America. That market is sitting at about 22 Months of backlog, we're also seeing that reflected in our orders, which we think positions the business well for the second half of the year.

Speaker 8

The OEMs don't backtrack on their production capabilities.

Speaker 2

Okay. Steve, would you say in both those businesses, we You're likely to see a little bit of hiccups as the production ramps up, but are really much more confident in that production ramp up Taking place and improving as we go in the back half.

Speaker 8

Yes, certainly.

Speaker 7

Okay. That's very helpful. The other thing that I want to go back to is the inflation question. We talked a lot about The metal margins, but can you talk to what you're seeing in terms of the inflationary pressures on perhaps ECS, things that go back more to those oil sort of Supply chains in there, 1, what is the availability of a lot of those key inputs? And 2, what are you seeing in terms of the input cost side?

Speaker 2

Yes. That's a great question. Tyson, you want to take that? Sure.

Speaker 6

Yes, Susan. So from a supply standpoint at this point, Things are good. We've gotten hesitant to say all clear, never a problem, but we've really been in a stable place in terms of the supply chain there And feel good about it and we've taken some actions even beyond just our typical market supply that gives us some options to give us backup and insurance with some storage tanks Thanks that would allow us to stay covered even if there was a short term supply constraint. In terms of pricing, you're right, energy costs We've had an impact, but we feel like where prices have been or our costs, they've been relatively stable. And so I think as demand overall in the chemical market has softened, the energy cost Probably kept some of the pricing more stable, but it's similar to some other things we've seen.

Speaker 6

We haven't seen an increasing trend overall with chemical pricing that have been more stable.

Speaker 7

Okay. Good. That's helpful. I'm going to squeeze one more in here and maybe this one's more for Jeff. I'd be remiss if I didn't Mentioned the $35,000,000 of buybacks that you did this quarter.

Speaker 7

Can you talk a little bit about what drove that decision? And how you're thinking about the willingness to continue to buy back the stock going forward? And perhaps with that, anything that you'd like to share with us in terms Of a target for leverage or just the overall sort of capital structure of the business?

Speaker 3

Great. Good morning, Susan, and thank you for noticing the $35,000,000 of repurchases there. I think it's important to start with the tremendous progress that the team has made around our deleveraging efforts Over the past few years since the ECS acquisition, because I think that really has positioned us well as we think about our overall capital allocation Strategy, our priorities still remain funding organic growth, maintaining the flexibility around our strategic growth opportunities around M and A and Supporting our dividend, but as we've made that deleveraging progress, we well positioned ourselves now to be more active from a share repurchase perspective. And we were Much more aggressive in the Q2 because of where we saw our share price during the period. But if you look year to date, We've repurchased 1,600,000 shares and allocated about $57,000,000 in that regard.

Speaker 3

As we look towards the future, Susan, We're going to continue to evaluate our share repurchases in the context of our other investment opportunities, while at the same time monitoring Our cash flow from operations, so it's one of those things we'll evaluate each and every quarter and compare it to our other opportunities that we have as we think about investments. And in terms of your second question around our leverage target, I think it's important there To think about the view that we have around an ideal target range for net debt to EBITDA, which for us is to maintain a capital structure That we feel that allows us to do a couple of things. 1 is to pursue strategic growth opportunities. Another is around returning cash to our shareholders. And then thirdly, ensuring that we can A solid investment grade profile.

Speaker 3

If you rewind back to 2019 at the time of the ECS acquisition, that was the last time we stated publicly A target from a leverage standpoint of 2.5 times on a total debt basis to EBITDA. Fast forward to May of 2020, We amended our covenant and our revolving credit facility to go from a total debt to a net debt metric. And then in September of 2021, we successfully amended our facility again and retain the net debt covenant as well from a metric standpoint with a maximum leverage of 3.5 times. Now we haven't formally updated what we feel is a leverage target moving forward, but it's safe to assume Susan that it will be something below well below a net debt of 2.5 times basis.

Speaker 7

Okay, great. I appreciate all the color today and good luck with the second half.

Speaker 2

Thank you. Thank you very much, Susan.

Operator

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Ms. McCoy for any final comments.

Speaker 1

Thank you for joining us today. We'll speak to you again on November 1st As always, if you have questions, please contact us using the information in yesterday's press release. Hope everybody has a good day. Thanks.

Operator

Thank you. This concludes

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Earnings Conference Call
Leggett & Platt Q2 2022
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