Leggett & Platt Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Leggett and Platt First Quarter 2023 Earnings Call and Webcast. 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's now my pleasure to introduce your host, Susan McCoy, Senior Vice President of Investor Relations for Leggett and Platt.

Operator

Thank you. You may begin.

Speaker 1

Good morning, and thank you for taking part in Leggett and Platt's First Quarter Conference Call. On the call today are Mitch Dollock, President and CEO Jeff Tate, Executive Vice President and CFO Steve Henderson, Executive Vice President and President of Specialized Products and Furniture, Flooring and Textile Products segments Tyson Hagel, Executive Vice President and President of the Bedding Products segment Cassie Branscum, Senior Director of IR And joining us for the first time today is Colina Talbert, Manager of Investor Relations, who will be working directly with Cassie and me. Colina joined Leggett in 2014 and has served in various roles, most recently working with the Bedding segment's Strategy and Business Intelligence We are excited to have Collina as the newest member of Iheart. 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.

Speaker 1

Jeff will cover financial details and address our outlook for 2023 and the group will answer any questions you have. 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 expressed permission. A replay is available from the IR portion of Leggett'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.

Speaker 1

Those documents supplement the information we discuss on this call, including non GAAP reconciliation. 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 sections in our most recent 10 ks entitled Risk Factors and Forward Looking Statements. I'll now turn the call over to Mitch.

Speaker 2

Good morning, and thank you for participating in our Q1 call. As expected, the current global macroeconomic environment and its impact on the consumer negatively impacted our Q1 results. Sales were $1,210,000,000 EBIT was $89,000,000 and earnings per share was $0.39 These results were better than anticipated, but declined versus record Q1 results last year. Sales in the quarter were down 8% versus 1st quarter 2022 from lower volume, raw material related price decreases and currency impact. Acquisitions added 3% to sales.

Speaker 2

The volume decline was driven by continued demand softness in residential end markets, partially offset by growth in automotive, aerospace and hydraulic cylinders. EBIT decreased 35% versus prior year, primarily from lower volume and lower metal margin in our steel rod business. As a result of these impacts, EBIT margin was 7.4%, down from 10.4% in the Q1 of 2022. Earnings per share decreased 41% versus Q1 2022. 1st quarter earnings were better than anticipated.

Speaker 2

While operating results were largely in line with our expectations, Several expenses were lower due to other factors totaling approximately $20,000,000 Those included lower incentive compensation, Favorable medical claims and other insurance trends, lower bad debt expense, a reduction to a contingent purchase price liability associated with the prior year acquisition and pandemic related cost reimbursements. Cash flow from operations was $97,000,000 Up $58,000,000 versus Q1 2022. Our full year guidance range remains unchanged as we balance better than expected 1st quarter results with continuing macroeconomic uncertainty. Our diverse portfolio of businesses, solid financial position and the ingenuity and agility of our employees continue to help us navigate challenging markets. Moving on to segment results and outlook.

Speaker 2

Sales in our betting products segment were down 17% versus Q1 of 2022. Demand in the U. S. Betting market appears to have stabilized at low levels consistent those experienced in the second half of twenty twenty two. We expect demand to remain at current levels through at least the first half of the year with the potential for modest increases in the 2nd half of the year.

Speaker 2

Volume in U. S. Spring was down 13% in the Q1, which we believe is comparable to the domestic mattress market. Although relatively consistent demand is assumed in 2023, we expect to increase production in our U. S.

Speaker 2

Spring business after limiting output last to align inventory with lower demand levels. Similar to 2022, steel rod production is expected to remain approximately 20% below However, we believe it should be relatively consistent across quarters. We expect higher internal consumption to offset lower trade demand. As expected, metal margin has begun to narrow moderately as scrap costs increased and steel prices softened. While it is difficult to predict changes in the steel market, We anticipate metal margin to be down mid teens versus 2022.

Speaker 2

However, we also expect rod pricing and metal margin to remain at historically elevated levels due to higher conversion costs. The actions we have taken to reduce inventory across the segment have brought levels back in line with those needed to support current demand. With the capacity we have in place, we are prepared to respond quickly to changing demand, and we remain focused on servicing customer requirements. Improving the performance of Specialty Foam remains a top priority. About 2 thirds of the earnings challenge is a result of low demand driven by the general bedding market decline, the outsized impact on digitally native brands from changes in consumer privacy laws and cash constraints and share loss from a small number of customers with some of those sales shifting from finished goods to components.

Speaker 2

The remaining challenges relate primarily to material inefficiency from practices that emerged during the pandemic as we prioritize servicing customers amid chemical shortages and surging demand. While it will take some time to see significant improvements in Specialty Foam, especially with the continuing weak demand environment, We're confident in our recovery plan and are making progress. Our team has a strong pipeline of opportunities supported by our specialty foam technologies. We also are focused on driving improvement in material margins through both process and equipment changes. We remain confident that our Specialty Foam business drive long term profitable growth for the segment and are placing our highest level of attention on improvements in sales and material management.

Speaker 2

Sales in our Specialized Products segment increased 21% versus Q1 of 2022, in part from the Hydraulic Cylinders Acquisition completed in August of last year. The April forecast for global automotive production shows approximately 4% growth in the major markets in 2023, consistent with industry forecast last quarter. While improving year over year, we expect automotive industry production to remain dynamic Supply chain, macroeconomic and geopolitical impacts bring continued volatility across different regions. Cost recovery is continuing in our automotive business, and we expect to make further progress as we move through 2023. In our Aerospace business, we expect continued strong demand throughout 2023.

Speaker 2

Demand for fabricated duct assemblies remained strong Recovery of welded and seamless tube products accelerated in the quarter. Market production is expected to recover to pre pandemic levels by the end of 2024. End market demand in hydraulic cylinders is strong and order backlogs in both the Material Handling and Heavy Construction Equipment market segments remain at elevated levels. Supply chain and labor issues have moderated, but still impact our customers' ability to expand production. Demand is expected to remain strong throughout 2023.

Speaker 2

Sales in our Furniture, Flooring and Textile Product Segment were down 13% versus Q1 2022. Home furniture demand remained slow during the quarter, with the high end modestly outperforming low and middle price points. This demand softness also impacted volume in fabric converting. While improving, inventory levels across the market remain high. We expect lower market volume through at least the first as contract demand slowed and demand for products with residential exposure continued to soften.

Speaker 2

We expect demand to remain at these levels for the remainder of 2023. In Flooring Products, residential demand remains soft due to a slowing housing market and lower home improvement activity. Hospitality demand has improved, but remains below pre pandemic levels. While the Q1 is seasonally soft for geocomponents, demand remains solid, particularly in the civil construction market. Infrastructure spending is expected to help support demand over the next few years.

Speaker 2

We are focused on improving the things that we can control and are continuing to mitigate the macroeconomic impacts on our businesses. We are working with our customers on new product opportunities, continuing our focus on improving operating efficiency and driving strong cash management. Our financial discipline allows us to withstand periods of economic uncertainty and enables us to manage our company for long term success. Before I turn the call over to Jeff, I would like to update you on some of our ESG activities. Last year, we conducted our first materiality assessment identify opportunities that will drive the most value for our company.

Speaker 2

In mid April of this year, we issued our 3rd sustainability report. As we move through this year and into 2024, our key ESG activities include obtaining third party limited assurance of our greenhouse gas submissions data and publicly reporting our data developing and communicating our ESG goals, including climate related targets Establishing a road map of actions that will support us in meeting our ESG goals and targets continuing to advance our inclusion, diversity and equity efforts Upgrading our management systems to improve data collection and contribute to broader company wide sustainability advancements and continuing to enhance our supplier assessment process, including a heightened emphasis on labor and social standards and cybersecurity controls. We're proud of the progress we have made in modernizing our businesses, building critical infrastructure and advancing our culture. Thanks to the skills and dedicated efforts of our teams, we are making significant progress in bringing these capabilities to life, while navigating a challenging macroeconomic environment. I'll now turn the call over to Jeff.

Speaker 3

Thank you, Mitch, and good morning, everyone. In Q1, we generated cash from operations of $97,000,000 $58,000,000 higher than the $39,000,000 we generated in Q1 of 2022. This increase Reflects a much smaller use of cash for working capital, partially offset by lower earnings. We continue to closely manage all elements of working capital in Current lower demand environment. We ended the quarter with adjusted working capital as a percentage of annualized sales of 15.8%.

Speaker 3

Cash from operations is still expected to be $450,000,000 to $500,000,000 in 2023. Our long term priorities for use of cash remain unchanged. They include in order of priority, funding organic growth, paying dividends, funding strategic acquisitions and share repurchases with available cash. In February, our Board of Directors declared a 1st quarter dividend of $0.44 per share, dollars 0.02 or 5% higher than last year's Q1 dividend. At an annual indicated dividend of $1.76 the yield is 5.4% based upon Friday's closing price, One of the highest yields among the dividend kings.

Speaker 3

We ended the 1st quarter with total debt of $2,100,000,000 including $317,000,000 of commercial paper outstanding and no significant maturities until November 2024. Net debt to trailing 12 month adjusted EBITDA was 2.88 times atquarterend. Total liquidity was $870,000,000 at March 31, comprised of $345,000,000 cash on hand and $525,000,000 in capacity remaining under our revolving credit facility. Our strong financial base 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.

Speaker 3

Now moving to the 2023 full year guidance. As Mitch stated earlier, our 2023 guidance range remains unchanged. 2023 sales are expected to $5,200,000,000 or down 7% to up 1% versus 2022, reflecting continued macro uncertainty across our markets. Volume at the midpoint of our guidance is expected to be down low single digits. With bedding products down low single digits, specialized products up high single digits and furniture flooring and textile products down low single digits.

Speaker 3

The 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% to sales growth in 2023. Volume growth is expected to continue in automotive, aerospace, hydraulic cylinders and geo components, With declines expected in work furniture, home furniture, adjustable bed and trade sales of steel rod and drawn wire. We expect generally stable demand in our other betting businesses, reflecting continued low volume levels. 20.23 earnings per share are expected to be in the range of $1.50 to $1.90 The midpoint primarily reflects Lower metal margins in our steel rod business, lower volume in some of our businesses and moderate pricing pressure from deflation. Based upon this guidance framework, our 2023 full year EBIT margin range is expected to be 7.5% to 8%.

Speaker 3

Earnings per share guidance assumes a full year effective tax rate of 24%, depreciation and amortization of approximately $200,000,000 Net interest expense of approximately $85,000,000 and fully diluted shares of 137,000,000 For the full year 2023, we expect capital expenditures of approximately $100,000,000 to $130,000,000 Versus prior guidance of approximately $100,000,000 Dividends of approximately $240,000,000 and minimal spending for acquisitions and share repurchases. In closing, while the macroeconomic environment is still challenging, We remain disciplined and agile in our approach. The Leggett team around the world continues to focus on our customers, Our operating efficiency as well as our working capital discipline. As we progress, Leggett is well positioned to navigate through market uncertainty With a keen focus on strong cash generation and our enduring fundamentals give us confidence in our ability to continue creating long term value for our shareholders. With those comments, I'll turn the call back over to Susan.

Speaker 1

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

Speaker 4

Good morning, everyone.

Speaker 2

Good morning.

Speaker 4

My first question, Mitch, is on the specialized segment in there. You saw a nice Lift in the volumes across all three of those businesses. Can you talk a bit about how you're thinking of further gains as some of those end markets Continue to recover from here and perhaps what that will mean for that segment margin as we go through the balance of this year and maybe even into next?

Speaker 2

Yes, great question, Susan. Thank you so much. Yes, we had seen significant gains across all three This is with volume up in automotive about 7%, 30% in aerospace and 22% in hydraulic cylinders. So great to see that Recovery coming to life. Like we've seen post pandemic, nothing just comes back to 100% 120 percent of the normal production quickly, but we're starting to really see that impact take place, particularly in aerospace.

Speaker 2

And we're seeing improved output from OEMs in the hydraulic cylinders area. And of course, automotive remains a bit dynamic, but continuing to improve. The outlook for automotive production volumes in major markets is up about 4% or a little more. We continue to see some Across different regions, but I think overall, we've been holding in that 3.5% to 4% range, and we expect that to continue For the next few years, as we I think we talked about last time, production the outlook is still below where it was in 2019. We really won't get there until 2026, but in my view, that provides some tailwinds over the next several years for production to increase.

Speaker 2

Similarly, in Aerospace, I think we see us getting back to sort of pre pandemic levels or see the industry getting back to pre pandemic levels In about 2024 and it was just said that the backlog in hydraulic cylinders for both material handling and heavy Structured equipment is really long. So that will benefit the segment significantly. Absolutely that Increased volume will have an impact on our margins going forward. We've talked about some operational issues, particularly in the U. S.

Speaker 2

Here And on automotive, we're making progress there. I think we have opportunities, frankly, in all three of those businesses to improve our operating efficiency. So Yes. We really like to get our margins back up into this closer to historical levels, and I think we'll be able to make that trip. Steve, anything you would add there that I missed?

Speaker 5

Well, you did a pretty good job there, Mitch. I would like to say if We go back to Aerospace. Certainly, the backlogs are there for long term growth. They have actually been pretty stable. So For the long term, we should see that growth.

Speaker 5

And Aero has seen year on year growth for the last five quarters. I certainly expect that to And then shifting back to hydraulics, material handling, there's still significant backlog There, which should last us through this year and possibly into early next year. And then on the construction side of hydraulics, The infrastructure spending is something that's just really starting to hit, so we expect that to be a tailwind As well, and as Mitch said, as we're going through this, doing all the things and to improve margins along the way. So Fairly optimistic about these

Speaker 4

businesses. Okay. That's very helpful. And then My second question is, you guided to 7.5% to 8% margin operating margin for this year, which is what you've given us, I guess, 2 months ago or so. But Mitch, can you help us kind of bridge the range that you expect to end this year at relative to that longer term guide that you've put out there of To that longer term guide that you've put out there of 11.5% to 12.5%, what Do you need to see the comeback in the businesses to get there?

Speaker 4

And what are the roles that the different segments will play in getting to those targets?

Speaker 2

Yes, another great Question, Susan. I would say the biggest impact is volume by far. And so of course, it's in bedding both in terms of mattress units, innerspring volume and even rod, trade rod volume there 2. But it also we see it across Furniture, Flooring and Textiles as well with home furniture down, work furniture down, Flooring not down quite as much and of course geo improving there. And then we see fortunately as we just talked about Stronger volumes in specialized, but still below probably pre pandemic norms in some of in at least inflation has been a drag on our margins from a percentage standpoint, right?

Speaker 2

The teams have done a just terrific job of passing along commodity cost increases, but it has As with a drag on our margin percentages. I think continuing to drive operating Efficiency will also help get us back to those targeted levels. We've talked about the work we have to do in our specialty phone business and a little bit in automotive. But I think continuing to optimize our capacity provides opportunities for us, improving our output and reducing costs Through things like automation, I think those are always on the table for us. Maintaining our pricing discipline, I think I would add that to the I think the teams have done a terrific job as we've gone through this inflationary time, but continuing to hold on to the lessons that we've learned as we've gone through that will be important.

Speaker 2

And then we always look at our fixed cost and make sure that we're limiting maybe things that provided more value historically, but Right. Less value today, continuing to evolve our capabilities. I think that will drive it. And then ultimately, in the long term, it's innovation, right? Our ability to deliver Differentiating new products to our customer bases has typically come with a little bit higher margins, and it provides us with new opportunities with our customers.

Speaker 2

So I think from my perspective, those are really the big drivers that are all doable for us, right? We can't control the macroeconomic Mark, that we can make progress on those other things while we're looking for volumes to improve more broadly, but also look for the opportunities that we have with our customers.

Speaker 4

Okay. That's very helpful color, Mitch. Thank you. I'm going to squeeze one more in here, which is, With the events in the last month or so in the banking industry, there's just been more focus on cash flows and liquidity. Can you talk a bit about how you're thinking of the cash generation capabilities, even if things maybe end up a bit weaker than what's Currently being reflected in the business?

Speaker 4

And also how you're thinking about the key priorities for the uses of cash? With the leverage coming up a A bit more recently, any target there? And just how you're thinking about those priorities for capital allocation?

Speaker 2

Okay. Yes. Thanks, Susan. Another Question. Well, I think we're very confident in our ability to deliver strong cash flow.

Speaker 2

We're coming into the year with our inventories in a much better place and continue to do a great job Managing working capital. In short, I think our priorities for use of cash has really have not They've been stable for many, many years. But Jeff, let me turn it over to you, and I'll let you answer the full question here.

Speaker 3

Yes. Thanks, Mitch, and good morning, Susan. Yes, I think what Mitch started off there, Susan, is exactly where I think is an important element here. The working capital management that the team has continued to demonstrate even going back to the latter half of last year, especially on the inventory side has positioned us well Going into 2023, so the sharp focus on working capital gives us a lot of confidence in our ability to generate the cash flow range that we've articulated here $450,000,000 to $500,000,000 If you recall, our cash flow has Seated our dividends as well as our CapEx investment in 33 of the past 34 years. And we are very confident in our ability to be able to do that again in 2023.

Speaker 3

Our revolver gives us a lot of flexibility and our next debt maturity of $300,000,000 is not due until November of 2024. So we're in a really good position from a liquidity perspective and we have traditionally been able to demonstrate strong cash flow generation And economic downturns. In terms of our capital allocation, again, as Mitch mentioned, is still very consistent. Our ability to be able to fund the dividend is something that we have very good confidence in. We're going to be very minimal and conservative in terms of share repurchases As well as acquisitions during the course of the year.

Speaker 3

2nd part of your question around the leverage target, we've Still been very consistent here in terms of on a net debt basis, we have not communicated externally yet a leverage target At this point, but if you recall, when we were on a total debt basis, we said that 2.5 times would be an appropriate target to consider. So you can expect on a net debt basis for us to be somewhere below 2.5 times on a long term from a long term standpoint.

Speaker 4

Okay, that's very helpful color, Jeff. Thank you.

Speaker 2

Thank you, Susan.

Operator

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

Speaker 6

Thank you. A couple of questions. In the furniture business, Right. Home Furniture, you would refer to channel inventory. Could you just talk a little more on what products you think are most heavily inventoried?

Speaker 6

And That would assume you need to be running below demand for a while to bring down your components. Is that correct?

Speaker 2

Yes. I think that's right. I mean, we're talking about inventory in the market. Steve, I'll let you jump in here. But it's after the surge post pandemic, there was such a backlog and then those started to get eliminated and then resulted in High inventories throughout the channel.

Speaker 2

They're coming down. They're coming down at retail. I think they're probably at the lower to midpoints Of the market higher, so it's just sort of having a weight on demand. I think the outlook is that it will continue to improve from inventory environment and we'll see The production volumes start to increase a bit as we go into the back half of the year, but it's been pretty steady Low levels like we talked about in bedding. But Steve, any other details you'd like to fill in?

Speaker 5

Yes, not too much more. I think the retail levels have Drop down to something more in the normal range, I would say. And then wholesale and manufacturer Inventories are remaining high in certain areas there. April Sales were a little lower than March, kind of as an indicator there. So we are cautiously optimistic for a rebound a little bit later in But those inventories are going to have to be worked through

Speaker 7

essentially.

Speaker 6

Okay. Let me shift over to bedding. I know not a lot of inventory in that channel, but are you producing ad demand? Are you having to bring your inventory levels down

Speaker 2

That's a great question and one I know Tyson will love to answer.

Speaker 8

Good morning, Keith. Last year that was the Situation we were in just after building, it wasn't excessive levels of inventory in the last part of 2021, but Making sure we're in a good place to support our customers, we did have higher inventories than we needed as demand started to Shift down pretty quickly. So last year, through the course of the year, we did constrain our production even below the low demand levels. But really as we got towards the end of the year, we ended up in a pretty good place and even back through the full value chain at Sterling where we took days out to make sure we didn't have steel inventory as well. We ended the year in a good place and actually as we've moved through the Q1 even though demand has maintained pretty consistent level, we've actually had to produce more to Shipment levels and in certain cases above that just to get our inventories and specific product categories to a place we feel comfortable.

Speaker 8

So at this point, we feel like we have good flexibility for For producing just whatever demand needs to be. Okay.

Speaker 6

And just one final question on bedding. The units were down in the U. S. Spring, it was 13%. They were down about that much Q1 of last year.

Speaker 6

Given the flattening in the market, I would have thought that would have come Closer to 0, can you talk about what's happening there?

Speaker 8

Sure. Really if we think about the Q1 of last year, we are still on the downward Trend. And so really the Q1 last year was the highest level that we had for the full year both for internal as we look at our business, but also for the market. Really from the Q2 through the end of the year and even the Q1 this year, demand has been pretty stable. So So really after we saw that downshift in the Q1 last year, it's been a pretty consistent picture.

Speaker 7

Okay. Thank you.

Speaker 2

Yes. So the tough comp Got us at this time. That's right.

Speaker 7

All right. Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Bobby Griffin With Raymond James, please proceed with your question.

Speaker 9

Good morning, buddy. Thanks for taking my questions.

Speaker 3

I guess, Mitch, I first wanted to just talk

Speaker 9

a little bit about kind of your view of the environment today versus when we So, last, you guys delivered some upside this quarter through some of the cost things that came in favor, but left the year the same. Should we read into that that the environment is tougher today than maybe when we spoke a few months ago? Or is it just kind of baking in an extra level of conservatism in the guidance?

Speaker 2

Yes. Good morning, Bobby. Great question. I think it is relatively consistent. Certainly, everybody has concerns about is there going to be a banking crisis or something that pushes us into more of a Substantial recessionary environment, but it's just unknown, right?

Speaker 2

And so I think about it as being pretty consistent with when we talked After the in our last earnings call, that there's uncertainty out there. But as we keep saying In bedding and furniture, demand is relatively stable, but at lower levels and has maintained that and we see the improvements that we've talked about in Specialized. So I think that as we've mentioned, those sort of non operating costs that benefited us in Q1 Really helped us with our outperformance in the Q1. Everything else from an operating perspective was pretty much online. We still feel like that.

Speaker 2

We'll probably Give up a little bit of those costs that came in, they varied quarter to quarter. But it's really just a view of, hey, we have a Fairly broad range of our guidance just because of the economic uncertainty that's out there and the impact on the consumer, but I don't really think our view has changed Since we initially issued that guidance.

Speaker 9

Okay. And then maybe secondly, can you talk a little bit about just the midpoint of CapEx Ticked up a little bit, just what you're seeing there and versus, I guess, how we started the year out from a capital spending standpoint?

Speaker 2

Yes, great question. And it really just hasn't changed our how we allocate cash. But Really, it's not a big change. It's just that we've seen the supply chain constraints have eased a bit That we've been able to make some more progress on some of these projects and able to get them moving through. So I I think we have a pretty consistent list of items that would be on our CapEx list.

Speaker 2

We're just I think we made more progress in the Q1 in In getting those moving than we have over the last several quarters. And so we thought it was appropriate to give ourselves a little range On the guidance making it from $100,000,000 to $130,000,000 somewhere in between there. So we'll see. It'll still play out over the rest

Speaker 9

Okay. And then I guess lastly for me, Jeff or Susan, is Just when we look at the guide for the year and think about teaming up the models on a quarterly basis, do we still expect 1Q to be The low watermark for the year within the EBIT guidance or is there another quarter we should keep in mind?

Speaker 1

Margins, I'm sorry, Jackie.

Speaker 9

I was asking a little bit from a margin standpoint, I'm sorry.

Speaker 1

Yes. So we do First quarter came in stronger than we expected. That's what we said. We would expect second quarter to be similar The Q1 and then a little bit of improvement in the back half of the year. So that's the I think the quarterly Sequential cadence that you should be thinking about, in relative to sales, a bit of normal seasonality as we move 1st quarter into second and then third quarter and fourth quarter, and margins will follow The comment I just made relative to the earnings sequential Development, so second quarter similar to first quarter with improvement into the back half of the year.

Speaker 9

Okay. Thank you for the details. Best of luck here going forward.

Speaker 2

Thank you, Bobby.

Operator

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

Speaker 7

Hey, thank you. Good morning, everyone. Thanks for taking the questions. So I know the commentary on the residential End markets that you've I think you've characterized as stable over the last couple of months. But I guess I want to narrow down even to just the last 2 months and I apologize for the short term nature of the Question, but there does seem to be a lot of industry discussion and chatter around kind of a weakening of demand in the last 2 months.

Speaker 7

I'm curious if you're seeing that or if you're seeing things are stable, it's been kind of hanging in there since the beginning of the year.

Speaker 2

I think we're staying pretty stable. Tycho, I'll let you dig into a little more detail on that and Steve too on Home Furniture.

Speaker 8

Hi, Peter. Sure. For the Q1 in total, it's been pretty much in line with where we saw things. There's been some ups and downs over the months, but what we saw from the Q2 of last year through the end of the year. Towards the end of March, we did see things soften a bit.

Speaker 8

Nothing too significant, wasn't falling off a cliff Anything like that, but just a bit of softening towards the end of March. April saw a continuation of that trend where it Was a bit softer than it had been, but still within a reasonable range of kind of where it's been over the last year or so. And really as we've looked at it, We've said this for a little while, but really do feel like we're getting back to some of the more normal patterns of seasonality and April is always a tough month in the year anyway. And looking back at kind of where we've been at least the last few weeks and comparing it with October November of last year, which are also weak months, it's Kind of in that same range. So, we'll see where it goes.

Speaker 8

We've been tracking a lot of that same type of industry information of how things start to soften, It's not been too significant and we think it's more of a seasonal nature, but we'll continue to watch it.

Speaker 7

Okay. That's helpful. The other thing I wanted to ask about was the emerging price deflation or some of just the raw material declines. I guess it's particularly focused on the bedding segment. But maybe within bedding, could you help us understand where the declines Are most significant and perhaps where they're least significant?

Speaker 8

Sure, Peter. I think I'd point you to The slides that are part of the deck, the presentation deck that include the organic and volume changes, I think you can see it there. And there's a couple of areas That really stand out as part of the price changes. The first would be in specialty foam. And if you think back over the last couple of years, really the peak chemical cost period was Late in 2021, the early part of last year.

Speaker 8

Since then, we've seen the cost moderate, But it hasn't been a steep moderation. They've been coming down, but overall, we'd still see chemical costs being at pretty historic high levels. And I think we've talked publicly about this before, but inventory chemicals move through our system pretty quickly in specialty foam and it makes The customers in both going up and going down in a pretty quick manner. So that's where we've seen the biggest change and that's the reason why that's come through first. The 2nd biggest area would be in steel rod.

Speaker 8

And if you think about this time last year or in the Q1 of last year, There was a pretty robust trade demand environment for rod and so we had a pretty tough comparison just for what we were selling and There was a pretty big need in the market for it. It was softer in the Q1 of this year and we have seen some softening in the prices for the products that we sell to the trade. And so just from a total dollar standpoint, that would be the 2nd most significant area of deflation within the betting group. There's a mixture in the other product categories, but far less significant than those 2 in terms of the total price change.

Speaker 2

So if we look at from the steel rod standpoint, we see we do see the rod prices down a bit, but not to the levels that are sort of indicated here. Some of that is Because of higher billet sales, right, and basically the mix impact shows up.

Speaker 8

Yes. That's a great point, Mitch, because it does get a little confusing when you look at just the steel rod We do sell different products within that category. I think we talked about it a couple of quarters ago. Sort of the last option or our least preferred option Within the rod businesses, we'll sell semi finished products called billets. And there was an offset as we sold fewer trade And abroad that we have picked up some sales of a lower value billet product and that there was a pretty big pickup of that in the Q1 of this year.

Speaker 7

Okay. Helpful. And maybe Tyson, just looking at the specialty foam in the document, if I'm reading it It looks like I guess the demand or the volumes were flat year on year. It just shows a line in the deck. And then the sales were down 15.

Speaker 7

So does that imply prices were down 15% in foam?

Speaker 8

Roughly to that level, but there is the volumes are flat, but there is The mix of what we were selling in specialty foam, it's kind of like going back to Rod, it is different than what we sold last year. It's fewer The mattress market remains challenging and especially the segment where we're most focused within digitally native customers. But we did make up a lot of difference with some lower value products, bedding accessories like toppers, pillows and things like that. So the teams are doing a good job selling what they But it is a lower value product than what we normally would sell and that was making up some of the difference in volume.

Speaker 7

Makes sense. Okay. And then one last question I want to ask And it was related to Susan's question earlier around the banking crisis and some of the tighter lending standards. Certainly no concern with Leggett's liquidity, but more concerned around some of your customers' liquidity And particularly your smaller customers, who we are hearing about tightening lending standards with small companies and they're having to draw down inventory. Are you seeing any risk of that where maybe reduced orders as some of your small clients get a little more cautious?

Speaker 2

Yes, great question. I'll talk about the credit side a little bit and Tyson, you can chime in if we see any impact on the volumes. But Yes. We've been really, really attentive to managing our credit as best we can from, gosh, March of 2020 when the pandemic kicked in and it's become just part of what we do every day, right? And so we feel good about Where we are in for managing that and we do have to sometimes limit I think sales to some Make sure that they can pay for what we're delivering to them, but we've developed a good process to manage that and maintain our flexibility.

Speaker 2

So Tyson, what

Speaker 8

do you think about that and any impacts on volume? It hasn't been too significant, but it is something that we've had to watch closely, I said, Mitch, for a couple of years now. And I do think it's been a kind of a cooperative process with customers where we do see some that are getting tight or falling behind, we work We have some plans to make sure that we can do it in the right way. But it probably is something that we'll be seeing more of in the near term, just having to watch that more closely, Especially the longer the demand environment stays like it is, it's probably just more of a reality of what we'll have to deal with. Yes.

Speaker 7

Okay. Thank you very much. Appreciate all the feedback today.

Speaker 2

All right. Thanks, Peter.

Operator

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

Speaker 4

Thank you. I wanted to ironically follow-up on one of Peter's questions now, Which is going back to the price cost situation, you mentioned some of those deflationary pressures that you're starting to see in bedding. But as you think about, 1, in Specializ, the ability to continue to get price, which you are getting a little bit more of in the Q1. It seems like that's working. Just any updates there on that initiative?

Speaker 4

And then 2, as we do think about costs flattening out and maybe coming down a bit, the ability to hold Some of this price over time and how you think that will flow through in the different businesses and segments?

Speaker 2

Yes, great question. So you're right, we are continuing to make progress on the automotive cost recovery. I think we've it's a little bit of a moving target, right, as Thanks, James. But we've gone from, I think, about 60% recovered to about 70% now. And so we still have a ways to go, but are making progress.

Speaker 2

And just remind That comes through multiple ways. It could be in price increases. It could be in reducing cost reductions in the future. So but feel good about our Progress there. The teams have done a great job of managing through this inflationary environment.

Speaker 2

And as we've talked about today, some of it, those inflationary Trends have been coming back down a little bit, but not radically. And so it's been in a way that we've effectively managed our inventory. And of course, We need to be fair with our customers and pass along those price reductions, which we do. There's probably if we Think about embedding, there's such a large portion, particularly in U. S.

Speaker 2

Spring, of the business that is contract based. And so there's really less Leverage there, right? It's more around just passing through those commodity products. But we've I think do that in a very fair way and history will show whether up or That's been a very good process for us. And as deflation comes down a little bit, we'll reduce some of the drag on our margins.

Speaker 2

I I think specialized pricing is a little bit more fixed, tends to be. And as I think we see that The input costs there are probably at the higher level. So that maybe will provide a little bit of benefit as well. Hard to see. It's been still a little bit dynamic there.

Speaker 2

And then more particularly around some of our Furniture, Flooring and Textiles Those are a little bit more near term basis pricing and some of those things and you've done a good job holding on to our pricing So I'm not really concerned about a big fall, a downturn, which would have been on my mind when we earlier in the inflationary time. Now it seems like it's moderating and some things go up and some things go down. But I think we can continue to manage through it.

Speaker 4

Okay. That's helpful. And then just one last question, which is that you talked a bit about betting softening in late March and not Holding into April, do you think that some of that and maybe not just in betting, but in your other consumer businesses as well was influenced By what was going on in the banking sector and as we move further out from there, are you hearing from your customers that the consumer is Starting to come back. And any other sort of clouds or issues out on the horizon that they're In terms of consumer confidence or their willingness or ability to go out and spend on some of these items?

Speaker 2

That is a great question that I wish I knew the precise answer to, Susan. But I think that, I don't know, Tyce, I'll let you jump It is well. But yes, I think it's been pretty consistent. And I think we've seen the higher end products hold up a little better across many of our residential markets, It totally makes sense. And I think we saw some a bit of optimism that the home furniture market, for example, would come back A little bit more in the back half of the year, and I think probably a little bit in betting as well.

Speaker 8

Yes, I think so, Mitch. And yes, Susan, it's a great question, the one We think about it all the time. I know our customers are thinking about it all the time, just the health of the consumer and where they want to spend their dollars. One thing that we've It had in our minds and we've talked about has been just are there additional shocks within the economy that would have a greater impact and The banking situation or something else that pops up, but also just how sticky inflation continues to be and especially on Really essential goods that consumers have to buy every day, can they continue to push out long term durable purchases? It's a big question.

Speaker 8

Don't have the answer, but we're continuing to watch it. But Overall, we still feel pretty good about just now we've had 4 quarters of relatively stable despite the low levels of where business has

Speaker 2

Yes. I think the last thing I would add is just that, yes, I think that is the big question. We don't see anything really negative at this point, but that's why we Have our broader than normal guidance out there because there's some unknowables. Okay.

Speaker 4

Well, thank you for all the color and good luck with everything.

Speaker 2

Okay. Thank you

Operator

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

Speaker 1

Thank you for joining us today. We'll talk to you again next quarter. If you have questions, please contact us

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Leggett & Platt Q1 2023
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