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Urethane Comments from L&P Investors Call

Leggett & Platt, Inc. (LEG) CEO Karl Glassman on Q4 2020 Results – Earnings Call Transcript

Company Participants

Susan McCoy – SVP, IR

Karl Glassman – Chairman & CEO

Mitchell Dolloff – President, COO, President, Bedding Products Segment & Director

Jeffrey Tate – EVP & CFO

Steven Henderson – EVP & President, Specialized Products Segment, Furniture, Flooring & Textile Products Segment

Karl Glassman

Good morning, and thank you for joining us today. First, thank you to our employees for your dedication, ingenuity and tenacity in what was a very challenging year as a result of the COVID-19 pandemic. In 2020, our employees came together across our corporate functions and businesses to develop highly effective protocols to manage the crisis, committed to not only keeping each other safe and healthy while serving our customers. But also found many ways to give back and help their communities, redesigned the way that they work while maintaining and even increasing productivity.

Amended the financial covenant in our revolving credit facility to provide additional liquidity, all while having a sharp focus on managing working capital and reducing capital expenditure investments, continuing our deleveraging efforts and delivering our 49th consecutive annual dividend increase.

I am extremely proud of all that the team has accomplished. We finished 2020 as a stronger company as a result of their extraordinary efforts.

As we reported yesterday, fourth quarter sales were $1.182 billion, up 3% versus the fourth quarter of 2019. Continued strong demand in residential end markets and growth in automotive was partially offset by continued weakness in Aerospace and Work Furniture. Fourth quarter EBIT was $150 million, EBIT increased $15 million in the quarter versus fourth quarter of 2019, primarily due to lower fixed cost and the nonrecurrence of 2019’s restructuring-related charges partially offset by a change in LIFO impact.

EBIT margin increased 90 basis points to 12.7% and increased 50 basis points versus adjusted fourth quarter 2019 EBIT margin of 12.2%. Fourth quarter EBITDA margin was 16.8% compared to 2019’s fourth quarter adjusted EBITDA margin of 16.4%. Earnings per share were a fourth quarter record $0.76. Fourth quarter 2019 EPS was $0.64 and included $0.04 per share of restructuring-related charges. Excluding those charges, fourth quarter EPS increased $0.08 or 12% versus fourth quarter 2019 adjusted EPS of $0.68.

For the full year, 2020 sales decreased 10% to $4.28 billion, primarily from COVID-related demand declines across most of our businesses. EBIT decreased $113 million and adjusted EBIT decreased $83 million to $446 million. Primarily from the impacts of lower sales and the change in LIFO, partially offset by fixed cost reductions. Full year EPS was $1.82 and adjusted EPS was $2.13, a 17% decrease from 2019 adjusted EPS of $2.57.

In addition, we generated operating cash flow of $603 million. During 2020, we divested 2 businesses in our Bedding segment. A small specialty wire operation in our drawn wire business with annual sales of $30 million and a small operation in our former Fashion Bed business with annual sales of $15 million.

We also reported yesterday that our Board of Directors declared a $0.40 per share first quarter dividend. At Friday’s closing price of $43.02, the current yield is 3.7%, which is one of the higher yields among the S&P 500 Dividend Aristocrats. We remain committed to our position as a dividend aristocrat.

Our enduring fundamentals gives us confidence in our ability to create long-term value for our shareholders. We are leaders in most of our markets, focused on innovation and working closely with our customers to provide more of what they need to be successful. We continue to invest in businesses with sustainable competitive advantages in large addressable markets with opportunities to grow and add value over time.

Consistent with that objective, on January 30, 2021, we acquired an Aerospace business located in the U.K. that specializes in metallic ducting systems, flexible joints and components for space, military and commercial applications for $27 million, annual sales of approximately $17 million this acquisition expands our Aerospace product offering to include key components such as flexible hoses and bellows that are frequently used in fluid conveyance systems.

Mitchell Dolloff

Thank you, Karl, and good morning, everyone. I’d like to echo Karl’s comments and thank our employees for your tremendous efforts this past year. Your flexibility, ingenuity, commitment and endurance made all the difference as we navigate in 2020. We are well positioned to tackle 2021 and the years ahead, and I’m honored and proud to be on your team.

We’re making progress with many of the challenges we faced this past year, and we ended the year with fourth quarter sales growth and margin improvement in all 3 segments. Sales in our Bedding Products segment increased 3% in the fourth quarter. Strength in the global Bedding market drove sales growth in ECS, European Spring and U.S. Spring. This growth was partially offset by lower volume in Adjustable Bed and exited volume in Fashion Bed and drawn wire.

Mattress consumption in the fourth quarter was well above historic levels, driven by the continued focus on home-related products by consumers. However, supply remained constrained across the market by shortages of fabrics, chemicals and labor, with each of these factors having varying degrees of impact throughout the quarter.

In addition, COVID-related restrictions constrained some retail channels and drove continued strong growth of online sales. These factors impacted our primary market channels in very different ways. We estimate that mattress sales in the U.S. bedding market increased by roughly 1 million units or 13% in the fourth quarter.

Imported mattresses increased by about 350,000 units and domestically produced mattresses increased by about 650,000 units. Of the domestically produced mattresses, we estimate that foam and other non-spring based mattresses increased by roughly 600,000 units and spring mattresses increased by about 50,000 units or 1%.

Our fourth quarter sales growth mirrored these trends, with U.S. Spring sales up 2% year-over-year and ECS sales up 8% year-over-year. We believe that our overall share of the domestic bedding market is fairly consistent year-over-year, perhaps down slightly considering the growth of mattress imports this year.

The volatility in demand, market share shifts and supply chain constraints that the overall industry experienced in 2020 likely created some minor ups and downs quarter-by-quarter, but we believe our share is fairly steady overall.

As the quarter progressed, we secured nonwoven fabrics from alternative suppliers around the globe, improving our production efficiency and fabric inventory position. Supply of the primary chemicals used in our specialty foam operations, TDI, MDI and polyol were restricted through the quarter as producers declared force majeure and implemented customer allocations due to reported production disruptions.

We expect chemical constraints to persist through at least mid-2021. We continue to add labor in our U.S. spring facilities but also must manage inefficiencies as we train new employees and experienced some absenteeism related to COVID 19. As we move through 2021, we plan to continue to add staffing on our Comfort Core lines and we’ll add additional machine capacity to accommodate demand for these products. The combination of labor and machinery additions should add about 25% to our current capacity for Comfort Core once fully in place later this year.

Mitchell Dolloff

No. I think you covered it, Karl. I think on the chemicals, it’s really dynamic. The pricing started surging in the fourth quarter, we see continued increases in Q1. And as you said, I think we’ll have some disruption there, both from availability and from pricing through the first half of the year. But you’re right, we are able to, I think, so far, pass that on pretty quickly.