Leggett & Platt, Incorporated (LEG) Q3 2023 Earnings Call Transcript

Oct. 31, 2023 10:34 AM ETLeggett & Platt, Incorporated (LEG)

Q3: 2023-10-30 Earnings Summary

EPS of $0.36 misses by $0.04 | Revenue of $1.18B (-9.19% Y/Y) misses by $64.81M

Leggett & Platt, Incorporated (NYSE:LEG) Q3 2023 Earnings Call Transcript October 31, 2023 8:30 AM ET

Company Participants

Cassie Branscum – Senior Director, Investor Relations

Mitch Dolloff – President and Chief Executive Officer

Ben Burns – Executive Vice President and Chief Financial Officer

Tyson Hagale – Executive Vice President and President-Bedding Products

Mitch Dolloff

Good morning, and thank you for participating in our third quarter call. I would like to start the call by thanking our employees for their tremendous efforts in what was another challenging quarter. Ongoing weak demand impacted our bedding products and furniture, flooring and textile product segments, but was partially offset by continued demand strength in our specialized product segment. Sales in the quarter were down 9% versus third quarter 2022 from lower volume and raw material related price decreases. Acquisitions added 2% to sales.

Third quarter earnings per share were $0.39. This includes $5 million or $0.03 per share of gain from the sale of real estate. Excluding this item, adjusted earnings per share were $0.36. Earnings decreased year-over-year, primarily from lower metal margin in our steel rod business and lower volume in our residential end markets. These decreases were partially offset by lower incentive compensation and bad debt expense.

Cash flow from operations was $144 million, up $78 million versus third quarter of 2022. We are lowering our full-year guidance to reflect continued volatility in the macroeconomic environment, continued low consumer demand in residential end markets, and the modest impact we’ve experienced so far from the UAW strike on our automotive business. We are focused on anticipating and adapting to market changes, improving operating efficiency, driving strong cash management, and engaging with our customers on new product opportunities. We are evaluating opportunities across our businesses, including further integration of our specialty foam and interspring operations that are expected to support improved profitability, a strong balance sheet, and continued shareholder returns.

Now moving on to segment results and demand trends. Sales in our betting product segment were down 17% versus third quarter of 2022. Demand in the US betting market remains soft, but relatively stable sequentially. We continue to anticipate full-year mattress consumption to be down high single digits. In the quarter, we saw modest sequential improvement in innerspring and mattress units, but we expect a deceleration in units sequentially in the fourth quarter due to normal seasonality. Metal margin expanded to its highest point in mid-2022 and narrowed as expected. We still anticipate metal margin to be down mid-teens versus 2022.

While our commercial teams continue to evaluate customer opportunities and commercialize new products, soft demand remains the largest headwind to profits. In the near term, we continue to drive operational efficiencies, especially in our specialty foam business to help offset soft volume. Additionally, we believe meaningful opportunities to increase profitability exist and are evaluating a number of possibilities, including the further integration of our specialty foam and innerspring operations I mentioned a moment ago, which should drive manufacturing savings and product development gains, optimizing our production and distribution capacity to service our customers effectively and efficiently, and enhancing our value proposition to our customers through expanded product capabilities and growing content at attractive price points.

Sales in our furniture, flooring, and textile product segment were down 11% versus third quarter 2022, driven by soft demand across the segment. Sales in home furniture, fabric converting, and flooring were down year-over-year, but roughly in line with second quarter levels. Work furniture demand has softened modestly with slower activity in European markets. In geo components, demand continued to soften in home improvement retail and civil construction end markets. We expect demand across the segment to decelerate sequentially in the fourth quarter due to normal seasonality.

Susan Maklari

Good morning. I want to start on the specialized segment. Perhaps a couple of things in there as we think about auto, especially. I guess first, can you talk about your ability to return to volumes as the strike eventually hits full resolution and those OEMs start getting back to work in there. How should we think about that potentially coming through the business? And then I also noticed in the release you mentioned that you had consolidated some facilities in there. Any thoughts on, one, the impact to the margin perhaps this quarter, but two, just how we should think about the cost structure of that business and any further improvements or things that you can do there?

Mitch Dolloff

Yes. Sure, Susan. I’ll try and get to all those. Remind me if I miss them.

Susan Maklari

I know it’s a lot.

Mitch Dolloff

That’s good. On the UAW impact, let’s start there. I mean, of course, things appear to be moving in a better direction now with tentative agreements reached among the big three U.S. auto producers. Still have to be approved by the union members themselves, so still some uncertainty out there, but definitely appear to be moving towards a better spot than could have been possible. And so, a little tricky there for us on the guidance because of the way the strike progressed against all three OEMs in a different facility. So really each of those steps had a different impact.

You saw for us that the impact was pretty minimal in the third quarter. And so far, as we’ve gone through the fourth quarter, through October, basically, not too significant as well. I think that’s due mainly for three reasons. One, as I said, it’s very facility-specific at the OEMs. And so it’s a different impact to everybody. I also would say that I think that as you go through the tears in the supply chain, I think people, all of us, including us, have tried to learn from the difficulties that we had during the pandemic. And so, while the orders decreased some and sales decreased some, people were trying to be very cautious through the supply chain and not put ourselves in a position where we couldn’t respond with the strike ended.

And so that gets to your question. So I think that as now the labor is coming back and those facilities are getting back up and running, I don’t think it’ll just have to go back to normal overnight, as we know. But I think if we continue to move forward as we are, there’ll be a little bit of a slowdown, but it shouldn’t be too significant. Hard to tell. We’ve baked in, of course, in our outlook what we’ve seen through our order book so far. So maybe it gets a little bit worse, but if things return in a decent way, I think that will continue to move forward pretty much as we are. So we’ll stay posted there. I don’t think that it is likely to be a significant change to us, but if it is, then we’ll think about whether we need to report on that or not.

Then in the consolidation there, yes, I think that’s a good example of us continuing to look for ways to improve our operating efficiency and cost structure and really optimizing our footprint there in the automotive business. So facilities in Asia that had a relatively small one and a large one that made the same type of products. And after doing some work, realized that we could pull those together. So it did have some cost impact for us in the third quarter. It should drive some good gains for us going forward. It wasn’t a huge consolidation, but I think it’s a good example of taking advantage of the opportunities that we have. And we’ll continue to look for more of those across the full business.

I think the outlook for automotive continues to be strong. We still have low inventories. We have an aging vehicle fleet. There’s certainly some dynamics that have been showing up in the market and the forecast, I would say, especially with the UAW strike, but kind of ups and downs in China as well. But I think the long-term outlook is encouraging there for us. Finally, I think we’ve making — the team is doing a good job of making progress in solving some of the production issues that we had here in the U.S. that we talked about at one of our facilities earlier in the year. So, we still have some work to do, but have made significant progress there. And we’ll continue to drive margin improvement across the business, continue to make progress in our inflation recovery there, probably up to about 85% recovery, and with some of the commodity costs deflating now, probably about the end of us talking about that online. But feel good about our outlook there, and we’ll continue to drive larger improvements.

Bobby Griffin

Good morning, everybody. Thanks for taking my questions. I guess, first I want to talk about — first I want to hit on the bedding product segment. It’s more just of a longer term question. A lot’s changed in that segment over the last, call it, 18 months, especially with the spread coming down. So if we’re in a world where the spread on rod is kind of stays where it is today or is under a little bit further pressure, would volumes come back in a recovery scenario? What is the margin profile of that business in that type of setup? We used to think of that business as a 10-ish, 9-ish to probably 11-ish EBIT margin business? What could it be if the spread doesn’t ever go back to those all-time high levels?

Tyson Hagale

Hey, Bobby. This is Tyson. I’ll jump in and try to answer it for you. I think we — obviously, there have been a lot of changes over the last 18 months, a lot of craziness, supply chain and demand related. I think over the longer term, we still think the fundamental margin profile exists. We have some work to do. The top drag, of course, we’ve said it quite a few times is volume and so a big part of this will be what the recovery looks like and exactly where it comes from and what type of products.

We’ve mentioned our work that we need to do to not only integrate but improve the operating efficiencies in our specialty foam business. That’s a big driver for us as well. On top of that, just continuing to try to think how we can most effectively serve our customer base from our manufacturing operations and distribution. And then also continuing to work in our product development and commercializing our new products, and especially with content games. So I think all of the market is changing a lot and continues to. We have a lot of different things that we push on that we think gets us kind of to that same type level in terms of margin.

Bobby Griffin

Okay. And then I think this is the second time you guys have called out about the potential of facilities, rationalizations, or just some work you’re doing inside the ECS business and looking at some different options. Is there a time frame to kind of complete that initial dive through where we could think about maybe the potential impact from some of these changes, or are we still in the early innings of looking at all the different options?

Mitch Dolloff

Bobby, I think we’re still in the early innings. It’s a great question. And also about the changes in the bedding market. I think that’s really fueling us to go back and say, hey, how do we need to adjust our outlook and take actions to make sure we’re driving profitability and strong cash flow and shareholder returns. And so, that’s what we’re doing. We still have work to do. I think the consolidation that we mentioned in automotive is a good small example of that. So we’ll look across other businesses, but certainly a lot in bedding that we’ve mentioned before.

But Tyson, anything you would add there? I know there’s not a lot more that we can say at this point.

Tyson Hagale

Sure. No, I mean, we’re working on a couple of things in specialty foam. I can’t remember if we’ve mentioned them in the past, but just trying to optimize our footprint. We have some on the west coast where we’re just trying to reduce some of the complexity and also in the southeast part of the United States where we’re already working on some there as well. But I think it probably also goes, Bobby, to what we’ve talked about where we had to pause, the integration of specialty foam into L&P. And even beyond that, when Leggett acquired the ETF business, it was four companies that were also being brought together. So on top of that, as Mitch said, it’s early innings because we still have a lot of that work that needs to be completed.

Keith Hughes

Okay. And in the bedding, your specialty foam business compared to US Spring has done better, really for every quarter this year. Could you talk about, do you think that’s share wins, is that just the market as a whole? What’s going on with the dynamic between those two? And I’m speaking to unit performance.

Tyson Hagale

Sure, Keith. This is Tyson. We talked about this, I think, going back to last year where we had a pretty heavy emphasis in our specialty foam business with our digitally native customers and, even more so than the broad bedding market in the U.S., that segment of the market was really disrupted. And so we talked about the need that we had even in the early part of the recovery, as the market recovers, that we needed to diversify our customer base. And so, our commercial team has been working really hard, even in a tough market, trying to uncover those opportunities and they’ve been making some progress there. And so, I think it’s more of — more that the nature of the improvement there is just as we’ve been able to pick up some wins, even in the [sole] (ph) market, diversifying the customer base and that’s helping us even as the market’s recovering.

Keith Hughes

And that’s in foam you’re referring to, correct?

Tyson Hagale

I’m referring to foam, yes.

Keith Hughes

Yes, okay. And I guess final thing on this, if you look at the customer list in specialty foam, are — at one time I think [ECSI] (ph) was very concentrated with a couple. Can you give us an idea of the largest customers, how much they represent of foam sales?

Mitch Dolloff

It’s kind of a tough question to answer, Keith, but going back into history, it was more concentrated, like with the digitally native customer list. Don’t want to get into how many that represented, but we still have some key customers, but we are growing that as we try to diversify the customer base.

Ben Burns

Yes, so Tyson, is it right to say, I mean, at the time of acquisition, as you said, focused in the D&Bs, still a decent list of them. It wasn’t just one or two. And as that part — that segment of the market has struggled a little bit, the team has done a good job of diversifying our customer base.

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