Leggett & Platt, Incorporated (LEG) Q2 2023 Earnings Call Transcript

Aug. 01, 2023 11:49 AM ETLeggett & Platt, Incorporated (LEG)

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Q2: 2023-07-31 Earnings Summary

EPS of $0.38 misses by $0.01 | Revenue of $1.22B (-8.47% Y/Y) misses by $22.00M

Leggett & Platt, Incorporated (NYSE:LEG) Q2 2023 Earnings Conference Call August 1, 2023 8:30 AM ET

Company Participants

Susan McCoy – Senior Vice President-Investor Relations

Mitch Dolloff – President and Chief Executive Officer

Ben Burns – Executive Vice President and Chief Financial Officer

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

Tyson Hagale – Executive Vice President and President–Bedding Products

Mitch Dolloff

Good morning and thank you for participating in our second quarter call. First, I would like to welcome Ben Burns, who stepped into the CFO role effective June 21. Ben has been with the company for 20 years and previously led our internal audit department served as our Treasurer and most recently led our business support services functions, including procurement, logistics and risk. Ben brings a deep knowledge of our business, strong financial capabilities and an ability to drive change that has benefited and will continue to benefit Leggett & Platt.

Now turning to second quarter results. Sales in the quarter were down 8% versus second quarter 2022 from lower volume and raw material-related price decreases. 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.

Second quarter earnings per share were $0.40. This included $4 million or $0.02 per share of gain from the net insurance proceeds from April tornado damage at a shared Home Furniture and Bedding manufacturing facility. Excluding this item, adjusted earnings per share were $0.38. Earnings decreased primarily from lower volume in residential end markets and lower metal margin in our steel rod business.

Cash flow from operations was $111 million, up $21 million versus second quarter of 2022. We are lowering our full year guidance to reflect continued volatility in macroeconomic environment and low visibility in several of our end markets. Our previous guidance anticipated a modest improvement in residential end markets in the second half of the year. We are encouraged by the continued recovery in our industrial businesses, but have yet to see an upward trajectory in the residential markets.

Moving on to our business segment results and outlook. Sales in our Bedding Products segment were down 18% versus second quarter of 2022. We previously expected 2023 market volume to be flat with modest improvement in the back half of the year. Although the market improved sequentially in May and June from seasonal lows in April, the second quarter was weaker than expected. In addition, signals from the broad market and customers are less optimistic than earlier in the year.

We now expect demand to remain at or slightly below current levels. This suggests volume in the back half of the year will be down mid-single digits, and full year mattress consumption will be down high single digits versus 2022. This estimate results in consumption down 25% to 30% from the 2021 peak and at levels comparable to 2016.

In the quarter, our volume generally tracked the overall market, but there is some variability within specific product categories. Trade rod and wire volume declined year-over-year as industrial demand was strong until the third quarter of last year. Steel rod production through the first half of the year was consistent with initial plans. However, full year production is now expected to be approximately 25% below historical levels to align with current demand versus our previous expectations of 20% below historical levels.

Volume in U.S. Spring was down 13% in the second quarter. ComfortCore unit volumes declined versus last year, but tracked near or positive to the overall market. Lower priced open coil innersprings and wire foundations declined more, which we believe is indicative of broader market trends.

Volume in specialty foam was up 8%. Successful efforts to diversify our customer base led to growth in finished mattress units and accessories such as mattress toppers. As expected, metal margin narrowed in the first half of the year, and we still anticipate metal margin to be down mid-teens versus 2022.

Market volume continues to be the greatest headwind and impact to earnings and margin. However, our teams continue to work to improve internal capabilities and bring value to our customers despite the challenging environment. In recent years, we’ve strategically shifted our focus in the Bedding market by expanding product capabilities and growing content at attractive price points.

Our innerspring components business has moved more towards mid to higher end price points and greater content within each unit. Our specialty foam business allows us to produce specialty foam components and finished products for our branded partners. Consumer interest in adjustable beds continues to grow, providing us with an additional opportunity to increase content. This strategic approach enables us to innovate high quality differentiated products for our customers and improve comfort for the end consumer.

We intend to grow our market share and increase profitability by focusing on three key areas. First, we will continue to pursue opportunities to enhance our value proposition by offering product differentiation and reducing total mattress production costs for our OEM customers. For example, our new combination pocket combines perimeter edge innerspring and specialty foam to create a fabric-encased innerspring and foam column that minimizes motion disturbance from a sleeping partner and improves airflow.

Eco-Base is another new product that allows our customers to streamline their manufacturing process, lower cost, and reduce environmental impact by replacing commodity based foam with a lighter polyester non-woven material under a ComfortCore unit.

Our second area of focus is improving specialty foam’s performance and continuing to improve costs. Continued integration of our foam and innerspring operations will drive opportunities for manufacturing savings and product development gains. And our third area of focus is maintaining our production flexibility and ensuring appropriate levels of inventory.

Our competitive position is unique. From our vertical integration of steel rod and wire, specialty polyols and additives and efficient and flexible machine technology to innovative products that service our customers anywhere in the value chain. Our Bedding business is well positioned to bring value to our customers and end consumers.

Susan Maklari

My first question is on the Bedding business. It’s encouraging to hear you talk about some of the new products and some of the innovation that is coming out. As you think about the recovery in that business, can you talk a bit about the role that those new products might play? And how – what stage of their life cycles those are in? And how we should be thinking about the potential ramp there?

Mitch Dolloff

Yes. Very good question. Thanks for asking that. Tyson, I’ll let you take that one.

Tyson Hagale

Sure. Thanks. Good morning, Susan, and thanks for the question. Those are products that Mitch covered in his opening comments that we’ve been working on for a while. I think we’ve talked about this in some of our past conference calls that during the pandemic, there was a heavy, heavy focus on supply. And then as the supply chain started to get more stable, we had more interest from some of our customers on working on new products. And so those are still both early life cycle products. They’ve been in our pipeline for a while, but they are now being commercialized. We are selling them into the market. It will – so they’re still early stage. It will take time for them to grow, but there’s good strong customer interest in those products.

But we’re also very mindful of as we ramp those up that we want to support our customers really well, as we roll them out. So, I’d say a gradual improvement, but they’re good examples of the types of innovation that we’ve worked on for a long time. If you think back historically, it’s a continuation of where we’ve been with the growth of ComfortCore and then perimeter edge, ComfortCore and then now products like combination pocket and eco-based, where we’re adding content, not just to add it, but it adds differentiation or more comfort for end consumers, but also value for our OEM customers, where we can help them either reduce labor cost or additional content to make products more easy to manufacture.

So, I think it’s a continuation of where we’ve been hedging for a long time, and we continue to add those types of products into our pipeline. Another area that Mitch didn’t mention, but I think I’d like to add is innovation from our specialty foam business as well. We have some good products in the pipeline there that both help with the weight of specialty foam products and then also sustainability. So those are also products that we can add into either component form or finished products through specialty foam. And all of these are pretty technical and goes well with our integration all the way back to our machine business because they are pretty complicated in things that we have to apply machine technology all the way through our manufacturing to provide a good product for our customers.

Bobby Griffin

Okay. I appreciate that. And maybe my second question, I think Tyson is probably might stay with you, too because it is on ECS. But is the volume growth actually surprised me was pretty nice this quarter at 8%. Was there – is the operational inefficiencies is really more on cost? Or was there some uniqueness this quarter from a volume standpoint that might not be – valuable for us to kind of read that 8% as a true number?

Tyson Hagale

No. We are seeing volume improvements. As we’ve talked about, the diversification of our customer business is important. As we saw the market softened across bedding, it was even more severe for ECS, just where we’re aligned with our customers, more on the digitally native customers that had an even greater decline overall in the market than the rest. So a lot of our efforts in trying to partner with some new customers, even as the market slow has allowed us to grow our business. And though it’s going to take a while for things to really recover just given the softness, we are seeing volume improvements from where we have been. And we are making some improvements, most specifically on material costs, but we also have some offsets to that. We’re obviously looking at the long run, so we are taking on some onetime costs as we start up some new equipment and programs and go through some facility changes. They’re also impacting us in the short run, but we think will pay off in the long run.

Mitch Dolloff

On the volume side, right, we still have a ways to go to make up that D&B volume that’s declining, but the new programs, as you talked about, that’s an opportunity. It’s both in finished mattresses as well as accessories, right?

Tyson Hagale

That’s right.

Peter Keith

Hi, thank you. Good morning everyone. Just looking at maybe the weakness in the Furniture and Bedding segments that’s resulting in the guide down, it looks like the volume trends came in pretty similar to Q1, but curious what the trends looked like through the quarter? Did it kind of hold at a pretty consistent level? Or was there any improvement as the quarter progressed?

Mitch Dolloff

Tyson, why don’t you take that?

Tyson Hagale

Sure. Thank you. Good morning, Peter, I’ll jump in on the bedding part of that first. I think what we saw is probably what’s been reported more broadly in the market. Actually, even on our last conference call, we talked about April, which was our expectation being seasonally down, and it was. But then we did see sequential improvement as we went through the quarter. So April was down more towards the levels that we saw in October, November of last year. And then May and June improved from that point more to the levels that we’ve seen, both back in the first quarter and probably third quarter of last year. So it didn’t peak out at levels that offset the softness in April, but just back more to the sort of the steady state that we’ve been in for a while.

Mitch Dolloff

And I think the end consumer demand would be very similar in furniture and bedding, but some of the market changes might be a little bit different. Steve, anything you’d like to add there on home furniture?

Steve Henderson

Yes. I would just say when quarter started, the low end to mid-end had been low for months, but the high end was hanging [ph] in there. And probably over the course of the quarter, we saw that start to decline as well through the quarter, I would say. And then just recently starting to feel like, we’re probably at the bottom bouncing around and seeing a little bit of increase in the lower end of the market. So started out a little stronger. I got a little weak and then it to end into the third quarter getting a little stronger in terms of demand. But we think that’s primarily due to the inventory that was in the channel that’s now being depleted.

Mitch Dolloff

Yes. I think, Steve, the other thing I would add too is we had the benefit of backlogs particularly at the higher end for quite a while. And as those – are now I think worn out pretty much. And so what is sales to us, deliveries to our customers that – I think that tailwind evaporated.

Peter Keith

Okay. Yes, I was going to ask about the home furniture decline. So I think you’ve addressed that. So maybe I’ll pivot to the bedding and the spring declines. I guess down the U.S. Spring volume down 13%, pretty similar to Q1 on a volume basis. It does seem like the industry has gotten better in Q2 and maybe even continue to get better here with Q3. Your volumes are kind of holding steady. Is there a customer mix issue within springs? Is there some share loss? Can you just help us frame up why the volume trends aren’t trending towards less negative?

Tyson Hagale

Sure. I’ll jump back in here, Peter. So the way we look at it is things are pretty consistent. Looking across the market overall, I think we would see things pretty similar broadly in the market with kind of where we’ve been trending, talked about the April weakness. The signals that we’ve been getting from our customers is less optimistic for the back half of the year. I think entering the year, there was optimism that we would start seeing some modest improvement from kind of where we were at least the last part of last year and the early part of this year.

But especially with the modest Memorial Day in 4th of July that seemed to dampen the expectations for a lot of improvement in the back half. But within our business, no, I don’t think there’s a customer mix change just within our products. Mitch covered in his opening comments, but open coil and grids from a volume standpoint are more adversely impacted than ComfortCore. I think that’s both some consumer and consumer preference and also just pressure on the lowest end of the market. So I think the mix within our product categories is probably more of an issue than any type of customer mix.

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