Leggett & Platt Q3 2021 Earnings Call Transcript

Presentation

[Operator]

Greetings, and welcome to the Leggett and Platt Third Quarter 2021 Webcast and Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Susan McCoy, Senior Vice President of Investor Relations. Thank you, Ms. McCoy. You may begin.

[Susan R. McCoy, Senior Vice President, Investor Relations at Leggett & Platt]

Good morning, and thank you for taking part in Leggett & Platt's third quarter conference call. On the call today are Karl Glassman, Chairman and CEO; Mr. Dolloff, President and COO; Jeff Tate, Executive Vice President and CFO; Steve Henderson, EVP and President of the Specialized Products and Furniture Flooring and Textile Product segments; and Cassie Branscum, Senior Director of IR.

The agenda for our call this morning is as follows. Karl will start with a summary of the main points we made in yesterday's press release, Mitch will discuss operating results and demand trends, and Jeff will cover financial details and address our updated outlook for 2021. This conference call is being recorded for Leggett and Platt in its 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 set a PowerPoint slides that contain summary of financial information along with segment details. Those documents supplement the information we discuss on this call, including non-GAAP reconciliations. I need to remind you that remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties and the company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our most recent 10-K and subsequent 10-Qs entitled Risk Factors and Forward-Looking Statements.

I'll now turn the call over to Karl.

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Good morning, and thank you for participating in our third quarter call. Yesterday, we reported record quarterly sales from continuing operations of $1.32 billion, EBIT of $144 million and earnings per share of $0.71. Sales in the quarter were up 9% versus third quarter 2020 and reflect a pass-through of significant inflation in 2021, partially offset by lower volume in several of our businesses. When comparing to the pre-pandemic results of the third quarter of 2019, trade sales grew 6%, Adjusted EBITDA increased 1%, and adjusted EPS was flat.

Like many other companies, we continue to navigate a myriad of macro market challenges, including supply chain issues related to semiconductor shortages, foam, chemicals shortages, labor availability and freight challenges, as well as higher costs associated with each of these issues. Given this very challenging operating environment, we are extremely pleased that our teams were able to deliver third quarter earnings in line with a pre-pandemic and relatively strong third quarter 2019. We narrowed our full year guidance range for both sales and EPS, primarily reflecting lower expected volume in our automotive business due to declines in global production forecast. Jeff will provide more detail on the updated guidance later in the call.

Leggett remains well positioned both competitively and financially to capitalize on long-term opportunities in our various end markets. Our enduring long-term fundamentals give us confidence in our ability to continue creating long-term value for our shareholders.

With that, I'll turn the call over to Mitch.

[J. Mitchell Dolloff, President and Chief Operating Officer at Leggett & Platt]

Thank you, Karl, and good morning, everyone. First, I would like to thank our employees for leading us through another challenging quarter with great success. Your determination and agility helped us to navigate the material, labor and transportation issues that Karl mentioned, allowing us to better serve our valued customers. I greatly appreciate your commitment, ingenuity and forward-looking viewpoint. I'm proud to be a part of your team and have all that we've accomplished together.

Sales in our Bedding Products segment were up 13% versus the third quarter of 2020 and up 10% versus the third quarter of 2019, primarily from raw material related selling price increases from inflation in steel, chemicals and non-woven fabrics. Volume was down in both the one-year and two-year periods primarily due to chemical shortages, labor availability and transportation issues which continue to constrain U.S. mattress production, negatively impacting component demand in our finished goods production.

Availability of chemicals used in our specialty foam operation is slowly improving but remains challenging and dynamic. We import chemicals to supplement domestic supply, but port delays and logistics issues are limiting access to those products. We now see chemical challenges continuing into 2022. Our European bedding business softened during the third quarter as consumer demand return to more normalcy on our levels. In third quarter last year, market demand was very strong as OEMs and retailers built inventory and COVID restrictions began to ease. We anticipate long-term growth opportunities in Europe from the Kayfoam acquisition we completed in June. Similar to the trends we've seen in the U.S. bedding market over the past several years, European consumers are purchasing more mattresses online and in compressed form, increasing demand for specialty foam and hybrid mattresses. We are well positioned to support our branded mattress customers as a supply chain partner for components and private label finished mattress needs.

Adjusted EBITDA margins in the segment improved over third quarter 2019, primarily from expanded metal margins and our Steel Rod business and fixed cost actions taken last year. Margins were lower versus third quarter of 2020, primarily from lower volume, production inefficiencies -- production inefficiencies driven by supply chain constraints and higher freight costs. Sales in our specialized product segment were down 3% from third quarter 2020 and down 12% from third quarter 2019 due to lower volumes in automotive and aerospace, partially offset by growth in Hydraulic Cylinders.

In our automotive business, volumes were down -- volume was down over the one-year and two-year period. The semiconductor issues that have impacted many industries remain the major challenge for the automotive industry with global production forecast for the balance of 2021 declining dramatically this past quarter and again in October. Industry production was impacted to a much larger degree than expected with many OEMs reducing or completely shutting down production of some models for extended periods. Consumer demand remains strong and vehicle inventory remains at record low levels. Once supply chain stabilize, the industry should see improving production. Industry forecast indicate recovery starting in the back half of next year and continuing through 2023.

In our Aerospace business, demand for fabricated duct assemblies is near third quarter 2019 levels, but demand for welded and seamless tube products is still well below pre-pandemic levels. With the lingering impact from pandemic related disruption in air travel and resulting buildup of aircraft and supply chain inventories, the industry is not anticipated to return to 2019 demand levels until 2024. End market demand in Hydraulic Cylinders is very strong and order backlogs continue to grow. However, global supply chain constraints and labor availability has hampered the ability of our OEM customers to ramp up production. We expect our sales to increase as OEM production increases, but supply chain constraints in this business could persist into 2022. EBITDA margins in the segment declined over the one-year and two-year period, primarily from lower volume, partially offset by fixed cost actions taken last year.

Sales in our Furniture Flooring and Textiles product segment were up 12% versus third quarter 2020 and up 13% versus third quarter 2019, primarily from raw material related selling price increases and demand strength in home furniture. We expect strong demand in our home furniture business for the remainder of the year and into 2022. While demand remains below 2019 levels, Work Furniture sales continued sequential improvement for the fifth consecutive quarter, with strong demand from products sold to residential use and improving demand in the contract market.

Volume was down in our Geo components business as retail activity returned to more normalized levels after a surge in demand last year from the consumers focus on home improvements. Volume was also down in Fabric Converting due to the non-recurrence of the surge in medical and filtration sales last year. In Flooring products, residential end market demand is above pre-pandemic levels, Whereas hospitality demand remains well below 2019 levels. Volume was down in the quarter due to limited chemical supply, labor availability and transportation disruptions.

Adjusted EBITDA margins in the segment improved over the third quarter of 2019, primarily from improvements in our home furniture business and fixed cost actions taken last year. Margins were lower versus third quarter 2020 primarily from lower volume. Overall, the fixed cost actions we took last year reduced our third quarter costs by approximately $20 million versus the third quarter of 2019. Across all of our businesses, we remain focused on controlling our costs by only adding fixed cost as necessary to support higher volumes and future growth opportunities. With fluctuating demand and limited labor availability, we are making short-term investments to attract and retrain -- retain our labor force.

We have rebuilt inventory in our Steel Rod, Drawn Wire in US Spring business following severe depletion in 2020 and our holding slightly higher levels of inventory -- in inventory in order to meet anticipated customer demand as foam and labor availability improves across the industry. We will take our rod mill out of operation for approximately three weeks near the end of this year to replace the reheat furnace and are holding additional safety stock as a precautionary measure. As a result, higher levels of inventory in these businesses are expected through the remainder of the year and will likely alter our normal seasonal cash flow cycle to some degree.

I'll now turn the call over to Jeff.

[Jeffrey L. Tate, Chief Financial Officer at Leggett & Platt]

Thank you, Mitch, and good morning, everyone. In the third quarter, cash from operations was $50 million, down from last year's third quarter record of $261 million, primarily due to planned working capital investments to build and maintain the higher inventory levels that Mitch discussed earlier, as well as inflation and the cost of those inventories. With the expectation of carrying higher inventory through the end of the year and lower forecasted earnings, we have reduced our full year operating cash estimate. We now anticipate cash flow from operations to approximate $350 million in 2021.

At the end of the quarter, adjusted working capital as a percentage of annualized sales was 14.3%. Through September, we brought back $232 million of offshore cash and currently expect to return over $240 million of cash for the full year. In August, we increased the quarterly dividend by $0.02 to $0.42 per share. At an annual indicated dividend of $1.68, the yield is 3.6% based upon Friday's closing price of $46.85, one of the higher yields among the S&P 500 dividend aristocrats. This year marks our 50th consecutive year of annual increases. We're proud of our dividend record and we plan to extend it.

During the third quarter, we used our commercial paper program to repay the remaining $280 million of the term loan A issued when we acquired ECS. we also amended the terms of our $1.2 billion revolving credit facility and extended the maturity to September of 2026. Our strong financial base along with our deleveraging efforts over the last two years give us flexibility when making capital and investment decisions. We ended the quarter with net debt to trailing 12-month EBITDA of 2.41 times and $965 million of total liquidity. Our long-term priorities for use of cash are unchanged. They include in order priority, funding organic growth, paying dividends, funding strategic acquisitions and share repurchases with available cash. For the full year 2021, we expect capital expenditures of approximately $120 million, dividends should approximate $220 million and acquisition spending of approximately $150 million.

We do not expect any significant share repurchases as we continue to focus on deleveraging. As announced yesterday, we are narrowing our sales and earnings per share guidance ranges. 2021 sales are now expected to be $5 billion to $5.1 billion or up 17% to 19% over 2020. Guidance reflects mid single-digit volume growth, raw material related price increases, currency benefit and approximately 1% growth from acquisitions, net of divestitures. The change versus prior guidance of $4.9 billion to $5.1 billion primarily reflects higher raw material related price increases and lower expected volume in automotive resulting from semiconductor shortages impacting industry production. 2021 earnings per share are now expected to be in the range of $2.86 to $2.96, including $0.16 per share from the real estate gain recognized in the second quarter.

Full year adjusted earnings per share is now expected to be $2.70 to $2.80, with the change versus prior guidance of $2.70 to to.$2.90 primarily due to lower automotive volume. This guidance also assumes fixed cost savings as a result of actions taken in 2020 to now be approximately $75 million. Based upon this guidance framework, our 2021 full year adjusted EBIT margin range should be 11.1% to 11.2%. Earnings per share guidance assumes a full year effective tax rate of 23%, depreciation and amortization to approximate $190 million, net interest expense of approximately $75 million, and fully diluted shares of $137 million. In closing, we remain focused on cash generation, while reducing debt 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.

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

[Susan R. McCoy, Senior Vice President, Investor Relations at Leggett & Platt]

Thank you, Jeff. That concludes our prepared remarks. We thank you for your attention and we'll be glad to answer your questions. Karl will direct our Q&A session as the group answers questions. Daryl, we're ready to begin.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first questions comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your questions.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Thank you. Good morning, everyone.

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Good morning, Susan.

[Susan Maklari, Analyst at The Goldman Sachs Group]

My question is around -- maybe could we get some more color on what you're hearing from some of your customers in terms of auto production, understanding that the chip headwinds are obviously pretty tough out there, but just any kind of incremental commentary around what some of the OEMs are telling you and any regional differences as you think about the different parts of the world that you're seeing in terms of production levels and availability?

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Good morning, Susan. Mitch will answer the question and we'll kind of marry that with some IHS data, which helps us from a directional perspective. But Mitch wants to go ahead and start it if you don't mind.

[J. Mitchell Dolloff, President and Chief Operating Officer at Leggett & Platt]

Yeah, sure. Thanks, Karl, and good morning, Susan. Yeah, let me take a shot at that. It's -- it's kind of mixed signals still from the OEMs, right, and they're challenged with an understanding what their production schedules are going to be is that chip situation remains very dynamic. But if we step back to the July IHS production forecast for the major markets, so that would be North America, Europe and the sort of developed Asian countries, which is most impactful to us. As we -- that July forecast showed year-over-year production being up just under 8% and so then it has declined and had been declining sort of month-to-month in small increments, and then all of a sudden in September took a big drop down, which I think became sort of more realistic to what's actually happening out there in -- with the chip availability and then took another step down in October.

So now we've gone from being up 8% year-over-year for 2022 to down over 2% is the forecasted. And I think there is still risk there, but I think again this is chip production on OEM production that trails back to us. From our standpoint, we do use some chips, but they're pretty generic and we've so far been able to navigate the availability there. So this is an industry impact on us. As we look into the third quarter here, we would see production for the major markets was down almost 23% year-over-year and the outlook for Q4 is down just about 20%. So I think it continues to be challenging through the remainder of the year. And then as for the forecast looking out into 2020, I think, you see year-over-year they maybe down a bit in the first quarter and maybe a little bit of improvement in the second quarter and then a more optimistic look for the back half of 2022. I think that we'll have to continue to watch that. I think the chip situation continues to be very dynamic. But hopefully we'll start seeing some improvement in the back half of '22 and the current forecast shows would have been back at 2019 production levels by the end of 2023.

You asked a second part of that question around regional differences, which I think is really a good question. It feels like that the North American OEMs were impacted the most quickly as they ramped up production most quickly and feel like that -- feels like that is may be getting a little bit better. I don't see any massive surge. But I think maybe is sort of starting to level out and recover slightly and now we're starting to see more impact spread to Europe and a little bit of Asia. So I think it is a little bit dynamic regionally, but I think it's -- we're probably seeing the -- continued to see hopefully sort of the worst impact in Q3, but we've said that before. But I think we don't see the kind of very optimistic surge coming in the next quarter or two that the industry was forecasting previous to that. Let me pause there and see if that's helpful to you.

[Susan Maklari, Analyst at The Goldman Sachs Group]

No, that's very helpful. Thank you for all that color. That was -- that was great, Mitch. And my follow-up question is you've obviously proven the ability to get price even this quarter across bedding and furniture and flooring, I mean you're seeing that kind of mid-high teens pricing. Where are you just kind of across the business as you think about price cost? And how should we be thinking about that as we look to 2022? Are you positive, are you fairly caught up, is there more to come? Just any color there.

[J. Mitchell Dolloff, President and Chief Operating Officer at Leggett & Platt]

Yeah, sure. Yeah, I think we're in a really good spot. I mean, I think that we have been -- made some changes, some of the restructure we did in home furniture to walk away from sort of lower margin business, commodity business has allowed us to be more impactful in passing along inflation and I think inflation levels are high enough that we are having to pass it along, our customers are having to pass it along and it's just a different dynamic than historically. So I feel like we're pretty well caught up. Sometimes we have a bit of a lag. But, say for example, there was a chemical increase that came through sort of in the mid of the third quarter, it took us a little bit longer that had to pass that through, but now that's through as well. So I don't see that dynamic changing. think where -- where it's most challenging of course is in the automotive side where we have long-term contracts, but we don't have the same kind of inflationary impacts that we have say across steel and chemicals and nonwovens. So we're able to offset those either through discussions with our suppliers or through delaying or eliminating that sort of annual price downs that are traditional in that industry or through other VA-VE activities. So, I feel like the teams have done it incredibly good job of passing through the inflation that we've seen so far and I think we're well positioned to do that should it continue.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Yeah, okay.

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

And the follow-on to that Susan that, as Mitch said, I think we're fully caught up now with the foam increase that went into place early October. That issue that's out there is, it looks like there'll be some steel inflation, the scrap forecaster up in November when scrap settles here next week. So I think that we'll probably see some continued inflation in the steel market that will recover as we always do with the historic lag, but we're not done from a industry perspective as it relates to steel. So some people have asked about metal margin. I expect that the metal margin is sustainable for the forecastable future and may even expand because of really strong demand signals augmented by commodity inflation and basic scrap.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Okay, that's very helpful. I'm just going to squeeze one more in, which is kind of continuing on this conversation of price versus volume. When we look at the update to the margin guidance that you gave and that incremental move down, my assumption is that's really reflecting all the pricing that's coming through while the volumes have come off. As we think about next year, if we assume that that volume recovery starts to come back in and production levels rise kind of across bedding, autos, all these segments, is it fair to assume that you should see incremental margin expansion along with that?

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Yes, it's, yeah I think your suspicion is correct, its volume-dependent, Susan. We need productive activity and we need some supply chain stability so we get past the manufacturing inefficiency that's caused by the supply chain disruption. So units and predictable supply chain would go a long way in adding the incremental margin.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Yeah, okay, all right, thank you. I will pass it along.

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Thanks, Susan.

[Operator]

Thank you. Our next questions comes from the line of Bobby Griffin with Raymond James. Please proceed with your questions.

[Bobby Griffin, Analyst at Raymond James]

Good morning, everybody. Thank you for taking my question. Hope everybody is doing well.

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Good morning, Bobby.

[Bobby Griffin, Analyst at Raymond James]

I guess, first I want to cross as we brought up in Susan's questions, just touch back on steel real quick. There has been over the last couple days some talk about changes in the EU, U.S. aluminum and steel tariffs. I don't quite know exactly what's changing or if it's been settled completely yet, but do you see any impact to Leggett from those changes and anything there that could change the dynamics happening right now with the steel and Rod spread?

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Bobby, it's a really good question. And we -- we factually don't know what those negotiations are at this point. We do not believe that that will have an impact from the standpoint that the steel business is truly local and the U.S. rod and wire producers have been assisted by anti-dumping actions that are in place, will continue to be in place that are separate and apart from any tariffs. So we do not think that it will be disruptive in any way. It-- somewhat dependent on a strong EU economy and the steel market in the EU itself is pretty tight too. So while it's early, we don't expect any real impact at this point.

[Bobby Griffin, Analyst at Raymond James]

Okay, that's helpful. And then, I just want to maybe also touch on automotive. Clearly a very dynamic supply chain environment and I was just curious from your perspective is there's things you guys can do where you're prepared when the chip availability at least comes back and maybe talk a little bit about the ability of the Automotive segment to ramp up quickly in production, because I have a feeling once chips open back up, there's going to be a flood of orders from the OEM to try to get these cars back on the lots and stuff?

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Mitch wants to [Speech Overlap]

[J. Mitchell Dolloff, President and Chief Operating Officer at Leggett & Platt]

Yeah, sure, thanks Karl. Tat's a great question, Bobby. I think, one --I think that there had been this optimism of hey these are going to -- this is going to get resolved one day and it's going to come pouring back and I don't think that's what it looks like. As we talked about, I think we see some modest improvement through the first half of next year. But I do think we have really important point to this is that the consumer demand for vehicles is very, very strong and inventories are very, very low. And so at some point you are right. When this constraint resolves itself, there's going to be a very strong tailwind for us and for the industry in general, but only to get vehicles on the lots and service demand, but then to build back up inventory levels.

Fortunately for us, this -- a lot of that the automotive production is more automated than some of our other production and so I think that there is not -- I think it's that balance of making sure that we are maintaining appropriate levels of labor, as I had mentioned like investing in our labor force in these times are difficult to bring people on. And as we see things start to improve, we will make sure, I think that will have visibility and time to continue to ramp up, but I don't think it's equipment ads or things like that.

[Bobby Griffin, Analyst at Raymond James]

Okay. That's helpful. And then lastly from me and I'll turn it over. Just crawl inside the Bedding segment, clearly hard to kind of see what the industry does on a quarter-by-quarter basis. But maybe can we unpack the U.S. Spring volumes and the foam volumes versus what your expectations are or what you kind of heard how the industry, the U.S. industry performed in 3Q? And is there any way to maybe parse out what some of the labor and availability challenges costs from a volume standpoint?

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Well, that is a complex question, Bobby. And we're going to actually take it back. Mitch and I've been talking about this a lot, so he's going to answer it. But we're going to kind of take you back in history a little bit to give you kind of a status update of where we think the industry where it's come from. So, Mitch, if you don't mind will you unravel all that?

[J. Mitchell Dolloff, President and Chief Operating Officer at Leggett & Platt]

Yeah, let me take a shot at it, Karl. So Bobby, let's focus on the U.S. Spring side here first, right. So on the component cycle here. And we've been in a little bit of a different cycle dynamic than the industry. So if we step back and we think about Q2 of last year when the pandemic hit, everything slowed down, we had the surge in need for medical products. And so all of a sudden at the end of the second quarter demand started to creep back up. We all thought that was a great thing and then really became very strong in the third quarter of last year. And for us, we had nonwoven shortages, we had labor shortages. So we were sort of the first negatively impacted by all of these supply chain constraints that are so common in our dialog today. So in the third quarter of last year we were just literally decreasing our inventory and making all we could, but we couldn't keep up. And you probably remember those challenging times for us but. So from a comfort core perspective, for example, that was a -- Q3 of last year was even higher than of 2019. So it was a bit of a peak for us. And again, just depleting our inventory. And then as we went into Q4, our volumes dropped significantly not because there wasn't demand, but because we just couldn't get the labor and the nonwovens material that we needed to keep up.

We also at that time walked away from a decent volume, a low margin open coil business. So that has been a bit of a drag, but from a sales standpoint, but not really from a profitability standpoint. Since that time in -- all it Q4 of last year, we've been sequentially improving our production in our sales and so I guess as we went through that time where we were unable to fully support our customers, they not surprisingly seldom turned to some imported product, which finally started to come towards the end of last year, more of it sort of hit at the beginning of this year just as the OEMs then started facing their foam shortages and then later some of their labor constraints. So there is a bit of the excess inventory that's been worked through. Now we have the data with hindsight that shows like those imports of component innersprings are coming down and our volumes are sequentially improving and have every quarter since the fourth quarter of last year. So we're just on a little bit of a different dynamic cycle. And so as we said here, we are here with strong inventory position, keeping labor in place to be able to support our customers as their production improves as they work through their backlogs, work through their foam shortages and their labor constraints and move into next year. Let me pause there. Does that help.

[Bobby Griffin, Analyst at Raymond James]

Yes, that's helpful. Mitch. I appreciate the detail starting on a complex one, but I do appreciate you taking the time to walk through it.

[J. Mitchell Dolloff, President and Chief Operating Officer at Leggett & Platt]

Okay, all right, great, Bobby. And then I think if we say from a phone standpoint for us, Q3 was also very strong from an ECS standpoint just because of the business we were winning and then more in line with the overall industry. We hit the chemical constraints that have been continuing to impact us, but are hopefully getting a little bit better in Q4.

[Bobby Griffin, Analyst at Raymond James]

Okay, helpful. Best of luck here in 4Q and then heading into 2022.

[J. Mitchell Dolloff, President and Chief Operating Officer at Leggett & Platt]

Thank you, Bobby.

[Operator]

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

[Peter Keith, Analyst at Piper Sandler Companies]

Hi, thanks. Good morning, everyone. Thanks for taking the questions. Maybe I'll just follow up on that last comment from Mitch, just around the foam business and feeling pretty good about it. I'm having a hard time reconciling the negative 17% drop in volume year-on-year. I know there's the chemical constraints. But we thought at this point you'll be having some benefit from anti-dumping and it does seem like the demand backdrop through Q3 has been pretty good. So can you just help me understand what's going on with the drop in volume?

[J. Mitchell Dolloff, President and Chief Operating Officer at Leggett & Platt]

Sure, Peter. I'll take a shot at. I think maybe you misunderstood my comment. So what I was saying was that our volume was really strong in the third quarter of last year at ECS as we were winning new business, and then our impact has been more like the overall OEM industry impact as we continued to face supply chain constraints due to chemical shortages throughout the year, including during the third quarter. I think the outlook for us for chemicals in the fourth quarter is improving some -- to some degree, hopefully would allow us to be more in line to service the full demand that we have, But that is really the constraint for us is the chemical availability and it remains a very challenging and dynamic situation, but I think it's improving.

[Peter Keith, Analyst at Piper Sandler Companies]

Okay, all right, that's helpful. And so maybe this is related to it. But if we're just looking at the sales guidance for the fourth quarter, it looks like you're calling for again high single-digit year-on-year growth, but it's against a tougher comparison in Q3, so the two-year growth needs to accelerate quite a bit. Can you just help us get comfortable with what part of the business should be accelerating on a two-year basis?

[Susan R. McCoy, Senior Vice President, Investor Relations at Leggett & Platt]

Peter, this is Susan. And a big part of that increase that you're looking at will be on a two-year basis, will -- actually will be -- will be inflation. I think volume for the into your markets was slightly down.

[Peter Keith, Analyst at Piper Sandler Companies]

Okay, so is more price increases coming through for the full quarter?

[Susan R. McCoy, Senior Vice President, Investor Relations at Leggett & Platt]

Yeah, and if you remember. Well, I have to hook this up myself, so you may not remember. But we were in a deflationary setting in the back half of 2019 thinking that the two-year and actually last year we were -- we just had -- had just begun to inflate selling prices in the fourth quarter. So we were flat in third quarter, deflationary first half, flat in third quarter and finally had a little bit of inflation in the fourth quarter. So yeah, we've had with all the inflation we brought in this year most of that year-over-year change no matter which -- which quarter you're looking at versus which prior one year or two year to look back. The big part of all of that is pricing.

[Peter Keith, Analyst at Piper Sandler Companies]

Okay, very helpful. And then I had one last question just on labor availability. You've mentioned this now for the both mattresses and flooring, I believe. So what actions are you taking to address the labor availability that seems to be prevalent everywhere?. So it doesn't seem like a an issue that's going to be going away?

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Yeah, I think there's two different issues, Peter. And when we spoke to labor availability on the bedding side, it was primarily a customer issue. So what our customers are telling us is as foam is becoming more available to them, that they're having a more difficult time ramping their productive capacity because of the availability and or ability to retain labor. So that is more of an external issue. We have had pockets of labor availability issues from time-to-time, it's very, very local. In our comment on the flooring side is in the third quarter we had some lack of available labor in two geographies that has been partially mitigated, augmented by the challenges that we face from a trucking and transportation labor that our flooring business is all delivered to stores, primarily retail outlets and that availability of trucking and delivery labor has been a challenge. So it's not a comp issue at all. It's a matter of just live bodies willing to work and come to work on a repetitive basis.

[Peter Keith, Analyst at Piper Sandler Companies]

Okay. Thanks for clearing that up for me. I appreciate it and good luck.

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Your welcome.

[Operator]

[Operator Instructions] Our next question comes from the line of Judy Merrick with Truist. Please proceed with your questions.

[Judy Merrick, Analyst at Truist Financial]

Thanks. This is Judy on for Keith Hughes. Is just to clarify one -- on your answer, Karl, on industry for Bobby's question. So you're springs inventories are in good shape even though the foam was not expected to be resolved in 2022, but where your inventory is now on the springs?

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

Yes, inventory is in really good shape. The foam situation is improving slowly, but is incredibly volatile and we don't think that there'll be full availability of chemicals into '22 -- into 2022. So Judy you have it right.

[Judy Merrick, Analyst at Truist Financial]

Okay, great. Thank you.

[Karl G. Glassman, Chairman and Chief Executive Officer at Leggett & Platt]

You're welcome.

[Operator]

Thank you. There are no further questions at this time. I would like to turn the floor back over to Susan McCoy for any closing comments.

[Susan R. McCoy, Senior Vice President, Investor Relations at Leggett & Platt]

Thanks, Daryl. All I have to say is just thank you for joining us today and we look forward to talking to you again next quarter. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Susan R. McCoy, Senior Vice President, Investor Relations
• Karl G. Glassman, Chairman and Chief Executive Officer
• J. Mitchell Dolloff, President and Chief Operating Officer
• Jeffrey L. Tate, Chief Financial Officer

Analysts

• Susan Maklari, The Goldman Sachs Group, Inc.
• Bobby Griffin, Raymond James
• Peter Keith, Piper Sandler Companies
• Judy Merrick, Truist Financial Co.