Leggett & Platt, Incorporated (LEG) Q1 2023 Earnings Call Transcript

May 02, 2023 11:24 AM ETLeggett & Platt, Incorporated (LEG)

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Q1: 2023-05-01 Earnings Summary

EPS of $0.39 beats by $0.13 | Revenue of $1.21B (-8.22% Y/Y) beats by $24.82M

Leggett & Platt, Incorporated (NYSE:LEG) Q1 2023 Earnings Conference Call May 2, 2023 8:30 AM ET

Company Participants

Susan McCoy – Senior Vice President-Investor Relations

Mitch Dolloff – President and Chief Executive Officer

Jeff Tate – Executive Vice President and Chief Financial Officer

Steve Henderson – Executive Vice President and President-Specialized Products and Furniture, Flooring and Textile Products segments

Tyson Hagale – Executive Vice President and President-Beddings Products Segment

Mitch Dolloff

Good morning and thank you for participating in our first quarter call. As expected, the current global macroeconomic environment and its impact on the consumer negatively impacted our first quarter results. Sales were $1.21 billion, EBIT was $89 million and earnings per share was $0.39. These results were better than anticipated, but declined versus record first quarter results last year. Sales in the quarter were down 8% versus first quarter 2022 from lower volume, raw material-related price decreases and currency impact. Acquisitions added 3% to sales. The volume decline was driven by continued demand softness in residential end markets, partially offset by growth in automotive, aerospace and hydraulic cylinders. 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 first quarter of 2022.

Earnings per share decreased 41% versus first quarter 2022. First quarter earnings were better than anticipated. While operating results were largely in line with our expectations, several expenses were lower due to other factors, totaling approximately $20 million. 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 million, up $58 million versus first quarter 2022. Our full year guidance range remains unchanged as we balance better than expected first 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. Sales in our Bedding Products segment were down 17% versus first quarter of 2022. Demand in the U.S. bedding market appears to have stabilized at low levels consistent with those experienced in the second half of 2022. 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 second half of the year. Volume in U.S. Spring was down 13% in the first quarter, 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. spring business after limiting output last year to align inventory with lower demand levels.

Improving the performance of specialty foam remains a top priority. About two 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. The remaining challenges relate primarily to material inefficiency from practices that emerged during the pandemic as we prioritize servicing customers amid chemical shortages and surge in 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 will drive long-term profitable growth for the segment and are placing our highest level of attention on improvements in sales and material management.

Keith Hughes

Thank you. A couple of questions. In the Furniture business, home furniture you would refer to channel inventory. Could you just talk a little more on what products you think are most heavily inventoried and that would assume you’d be running below demand for a while to bring down your components. Is that correct?

Mitch Dolloff

Yes, I think that’s right. I mean we were talking about inventory in the market. And Steve, I’ll let you jump in here. But it’s – after the surge post pandemic, there is such a backlog and then those started to get eliminated and then resulted in high inventories throughout the channel. They’re coming down. They’re coming down at retail; I think they’re probably at the lower to midpoint 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 a 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 at low levels, like we talked about in Bedding.

But Steve, any other details you’d like to fill in?

Steve Henderson

Yes, not too much more. I think the retail levels have dropped 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 the year, but those inventories are going to have to be worked through. That’s essentially…

Keith Hughes

Okay. Let me shift over to Bedding and not a lot of inventory in that channel. But are you producing at demand? Or are you having to bring your inventory levels down in the Bedding market?

Mitch Dolloff

That’s a great question. I want to know if Tyson will love to answer.

Tyson Hagale

Good morning. 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 were 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, when 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 first quarter, even though demand has maintained a 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. So at this point, we feel like we have good flexibility for producing just whatever demand needs to be.

Keith Hughes

Okay. And just one final question on Bedding. The units were down in the U.S. Spring and it was 13%. They were down about that much first quarter of last year. Given the flattening of the market, I would have thought that would have come down closer to zero. Can you talk about what’s happening there?

Tyson Hagale

Sure. Really, if we think about the first quarter of last year, we are still on the downward trend. And so really, the first quarter 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 second quarter through the end of the year and even in the first quarter of this year demand has been pretty stable. So really, after we saw that downshift in the first quarter last year, it’s been a pretty consistent picture.

Susan Maklari

Okay. That’s helpful. And then just one last question, which is that you talked a bit about Bedding softening in late March and not holding into April. Do you think some of that and maybe not just in Bedding, 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 cloud or issues out on the horizon that they’re watching in terms of consumer confidence or their willingness or ability to go out and spend on some of these items?

Mitch Dolloff

That is a great question, but I wish I knew the precise answer to, Susan. But I think that – I don’t know, Tyson, let you jump in as well, but I think it’s been pretty consistent. And I think we’ve seen the hiring product hold up a little better across many of our residential markets, with which 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 Bedding as well.

Tyson Hagale

Yes. I think so, Mitch. And it’s a great question. The one we think about all the time and 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 had in our lines and we’ve talked about has been just are there additional shocks within the economy that would have a greater impact than – 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. I don’t have the answer, but we’re continuing to watch it. But overall, I still feel pretty good about just now we’ve had four quarters of relatively stable probably the low levels of where business has been.

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