Leggett & Platt Q2 2024 Earnings Call Transcript

Morning, Susan.

Morning.

Thank you. I think it's good to be back but it's good to speak to you, anyway.

Thank you.

Yes. It's really to be incredibly transparent with you, the investment community, and with our employees that we're in a tough environment. And transparency. Is always important, but probably never more important than it is now. It's also to have just kind of quick wins to continue to do the blocking and tackling that's required to improve our profitability. And at the same time, just empowering our people to make decisions, to know that they're supported and, you know, that we're all in this together.

At the same time, we're establishing, really, a sense of accountability and urgency that maybe was lacking. That's really important. We're also, you know, I can't be more pleased with where the restructuring plan is. Staying focused on the restructuring plan is really important. Tyson and his team have done a terrific job with what really is a heavy lift, to get through the first phase of that in US Spring as quickly as they have is truly remarkable when you think about the size and scope of those activities.

So, staying involved in that analysis and kind of talking through phase II. At the same time, always, always prioritizing customer relationships and product innovation. The stickiness of our relationship with our customers is really important to us. And the responsibility that they kind of share with us for innovation going forward. So, we spend a lot of time on that.

We're also spending a lot of time kind of dealing with what does Leggett look like five years from now? What's our positioning? It's really a portfolio management review in terms of what businesses should we be in, and then at the same time, trying to accelerate profitable growth in the businesses that we remain in and balancing that. So there's more to come. There's been a lot of work, really good work done there, but I couldn't be more pleased with how the team is interacting and kind of rising to the occasion. It's typical Leggett style. But thanks for the question, Susan. I'm sorry it's so long winded but there's a lot going on.

Well, you are a master at asking a complex question. So, therefore I'm a master at handing it off. So ask Tyson to answer that question. But, Susan, before I do, you know, when many of the listeners know that I've been around the Bedding industry literally all my life and the changes that the industry is going through right now are remarkable. They're unprecedented. I will tell you in retrospect, 2008 through 2010 was easy to manage through compared to what the team's managing through right now in terms of the rate of change.

So, with all of that said, Tyson, please try to unravel that giant ball.

Sure thing, Karl. Good morning, Susan. I appreciate the question. Let me go through a few things with you. I'll start by saying our development teams are extremely busy right now working with several of our critical customers on innovation projects. And it's really true across the segment, but really, most specifically with our spring group. And a high percentage of our resources are spending time working on projects that are committed to launch and their high-volume and long-term opportunities, so they're really critical for both us and our partners.

And really this is, like Karl said, this is a really critical service and function in how we work together with our customers. We depend on one another. And so, this is a really encouraging thing. Despite the current challenges like Karl just outlined, this is a really encouraging sign for us and getting through these projects is really critical.

And it is a really tough market. The second thing would be it's always competitive. Right now it's extremely competitive and we're not ignoring any opportunities that we have even in the short-term to work with customers on opportunities that make sense for us and for them. And we've talked a little bit in some of the past calls about some of our innovation that helps us in this category, our Eco-Base, Automated Foam and Case ComfortCore unit production. And these are both really labor and manufacturing efficient projects. And so, these are some tools that we have that we can work with our customers even in a really tough environment to help them and gives us a chance to regain some market share. So those are really, really important things for us in the short-term as well.

And then, also ECS, you mentioned that and you can see in the second quarter we did have an earlier-than-expected loss of a customer. But without that, we did have some volume improvement year-over-year. And we've seen this for the last several quarters and it's the result of a lot of hard work from our commercial teams at ECS. And diversifying the customer base, selling accessories, components and finished mattress projects, specifically with some private label customers. So, we have been seeing the benefits grow through a lot of that effort and we'll see some more of that in the back half of the year. We have some more things in the pipeline.

With that said, we have a lot of work to do there and there will be some ups and downs when we're in the middle of restructuring that also impacts Specialty Foam. So, there will be some things that come and go, but we're working hard on it and feel good about the progress we're making.

And I'd also add, as part of Specialty Foam, our Peterson chemical team has been really, really busy with some development projects as well, and they have a couple of products that they've been sharing with -- at some of the recent trade shows that they're excited about, our customers are excited about. So, that's some good progress as well.

So, I guess, to tie all of that together, I know that's a long answer, not all of this will benefit us overnight but I think it's really exciting and encouraging that even in a challenging market that our customers are working with us on some new development and things that will pay some long-term dividends for us and them.

Yes, Sam, why don't you appreciate, really the accolades. Sam and his team are doing a great job. Those businesses are really well managed. But, Sam, if you would, why don't you respond?

Sure, Karl. Thanks for the question, Susan. Really appreciate it. So, first off, let me just say that we've got some great teams and some great leaders across these businesses. They've always been good, but over the last four years with the, you know, the wild spikes and the drops that we've seen in volume, commodity costs, freight rates, manufacturing costs, all these things have taught us really to be even better leaders.

Yes, for example, we've learned how to very quickly analyze where we are from a cost and margin perspective. We learned to really anticipate where we believe volumes are going to go and where costs are going to go. In the near-term, we've learned how to make some really hard decision to mitigate some of the cost increases, like the restructuring efforts that we're working through right now in Flooring and that we've essentially finished in Home Furniture. And we've learned how to have some really difficult conversations with ourselves, with our customers and with our vendors.

And as we've done all these hard things, I think our teams really gained a lot of confidence in themselves and in their abilities to kind of control what they could control and to really deliver on what they need to deliver on. So, I think these abilities and our growing confidence are really what's allowed us to deliver on this bright, great pricing discipline that you see in a really tough environment.

So, bottom line, I think we're becoming more agile, more focused and really better overall business leaders. So, when volumes do start getting better, I think we're going to be able to use these skills and our confidence that we've learned to positively grow on the upside. I think it's too early to really speculate what that looks like from a magnitude perspective, but we're in a lot better position to handle the upside appropriately because handling the downside made us a lot better.

Thanks, Susan.

Yes. Same goes both ways. Thanks, Bobby.

You're welcome.

Yes, Bobby. Thanks for the question. Like many of our markets, global automotive is a bit of a challenge. As you said, the EV adoption is very different depending on what region we operate in and as you know, that's a very global business.

Overall, it probably is good for us, but not so good from a total industry demand perspective in that the current IHS forecast shows global build in the major markets, down 2%. We think that it will probably be shifted down as a release again. There's probably more of a hockey stick in 4Q than is appropriate. We've readjusted our thinking and that's embedded in our current guidance.

Our teams are dealing with elongated programs on ICE vehicles in certain markets and acceleration of EV adoption in others. And I do want to make it clear that we do have content on the Chinese -- BYD is the biggest, but there's a number of them that we certainly have content there.

When we take our sales forecast down, it's because the dollars of sales per each unit are less than originally anticipated in an EV model but we take profitability down at a lesser rate because our profit margins on those legacy models, which are very heavy weighted to mechanical lumbars, where we have a very, very strong market position. So, lesser selling price, higher profitability, really in absolute dollars in many of those programs. So it's complicated.

As regards to inventories in the US. Inventories are starting to grow. What's normal? I don't think post-COVID anyone really knows. The consumer has been trained to wait even longer for a vehicle. But at the same time, autos are -- I think the average auto life in North America is 12.6 years. So that's at a historic high. So how that all sorts out.

You know, really, at the end of the day, there's an affordability problem. Buying a new vehicle is hellaciously expensive. That's what's happening in Europe with the trade down to electrification, but with some of the -- Chinese upstarts is probably too strong, but it's really an affordability issue. I think that plays into our hands as well, as I said earlier, but we'll see how the whole thing unravels.

Yes, Tyson, can clean me up. I think it's just a normalization. There's no change in import protection at all. It's just the shrinking of that spread is probably more driven by demand or lack of demand domestically across all markets, not -- obviously, not just Bedding and Furniture, but it's just a normalization.

Yes, I totally agree, Karl, normalization. And Bobby, you probably remember we talked about it, there was, at least compared to history, an excessive difference between the US steel market and Europe. And we saw some of that and adjusted prices accordingly in our businesses late last year. So, we had already started to see a lot of the price normalization kind of downstream through our businesses. But yes, totally agree with Karl, just normalization of kind of coming off COVID and the pandemic impacts.

Yes, Bobby, good question. We remember how to do it. There was Ryan Kleiboeker, who run Strategy was certainly involved at that time frame and helping through all of that. So we're -- what we're trying to do is forecast these businesses -- yes, we look at them today, but trying to forecast them five years out. And from a profitability perspective, from a growth potential and from a fit to Leggett perspective. A lot of good work is done. I think that you should expect a smaller, more focused company in the future. By our history, we don't divulge any potential divestitures until we're under an LOI. So there's more to come but there's a lot of activity.

Yes. Thank you, Bobby.

I would think probably early next year. It just takes a long time to get through some of these processes. Some of our businesses are very complex geographically, multiproduct. So, yes, I would say first half of next year.

Everything is being evaluated. In the prepared comments, you know, we continue to tell you the businesses that we're going to lean into; Bedding, Automotive, Geo and I would say all textiles, there's some alternative markets and some of our other textiles businesses that have significant growth. Those businesses are well managed. There are some other businesses that are core to the company that are really well managed that are good performers, great cash generators. We need those businesses to be healthy going forward. So, there's a balance of all of that. Really, the screen is fit, growth potential and our ability to execute in whatever those markets are.

Well, it's an interesting question, Keith, because pricing is all over the board. But generally, what's happening is prices are falling with commodity cost reductions, general comment across most of the portfolio. But I do need to call out a couple of businesses, aerospace and automotive. They had a hard time passing through cost inflation post-pandemic and trying to deliver to the customer.

So it's difficult in that time frame when they were having a hard time, kind of meeting demand, for them to pass through materials. Now that they have both of those businesses, have done a better job of being able to keep up with customer demand, they've gone back kind of retrospectively and increase some prices. So we've enhanced margins in both of those two businesses. But across the company, it's generally highly correlated to commodities being softer.

Yes. It's a little bit of Bedding year-on-year.

A little bit of Textiles, we're seeing.

Yes. That's an interesting question because I haven't really been away, you know, staying involved certainly with relationships. But I think it's continuing to be transparent and having a sense of urgency and an ability to make decisions. I think those are kind of the key areas of focus.

And it's a tough environment, you know, not laying blame on anybody. I mean, it's a tough, tough environment that our teams are operating in. Sometimes it's tough to be able to just kind of stand back and, you know, see the force from the trees. And I think that's it as much as anything, Peter.

Our people have been working in a tough environment that there's no question in my mind that the Bedding industry is probably no longer in recession but is in depression. That's been unprecedented. The last three years have been a challenge with the whipsaw effect of post-pandemic demand and then the fall off right after that. So, the whipsaw effect has been tough. So, you know, I think it's just dealing with the issues at hand and then trying to guide from a future perspective.

You know, I think sequentially, first quarter, second quarter was kind of more of the same. What's changed from our last call is we would have had a -- probably a more aggressive positive tone on units in the back half of this year. I think the industry has come to the realization that there -- it's tough, and it's going to continue to be tough. So, you know, nothing's really changed.

We tease each other about this phrase that the industry uses about bouncing along the bottom and it kind of feels that way. You know, based on history, election years are not very favorable to the Bedding industry. Advertising, the cost of advertising, availability of advertising is really difficult and trying to get, keep the consumer's attention at a time when there are some affordability issues.

So, yes, that's why we've kind of changed our update to the back half to say that we expect full year to be soft down mid-single-digits, acknowledging that the comps get a little bit easier in the back half.

Compared to 2019, certainly, yes, I would say it's higher than 2019. And as regards metal margin compression imputed in the guidance, it's not that significant. But no, we don't decompartmentalize to that degree.

I agree that they're probably not transitory and it really does go back to car affordability, auto affordability issues. It's interesting, this is a North American statistic, and remember that our automotive business is very much a global business. But small car sold at a faster rate so far this year than any time in recent history. And I think that's not a consumer preference change, that's purely an affordability or lack of affordability issue. So it is more of a pressure on top line and bottom line for sure.

Our automotive teams continue to do a terrific job of executing. And as I said earlier, we're really well placed on some of those. We're well placed across the whole value chain but because of the maturity of the smaller vehicles and the kind of lack of, I guess, the top line as I said it more fluently, the first time I said it. The top line is going to be less, but the bottom line is on a percentage basis, absolutely in an absolute dollar basis, probably better just because of the maturity of those programs and our competitive market position with those programs.

You're welcome.

I'm trying to get Ben in this conversation.

Good. Good. Thank you. He's anxious.

It's a concern. You know, the news of yesterday on job formations isn't positive. Some of the, you know I'm certainly not an economist, but some believing that we're heading into recession. The health of the consumer is weak, as you know, certainly on the premium side of Bedding a lot of those purchases are financed. You know, economists speak of the K-shaped recovery and the top leg of the K seems to be softening. The ultra-premium seems to, for the first time post-pandemic, feeling a little bit of softness that we can see as a read- through some of our customers.

So, said differently, until the Fed makes a rate adjustment, I don't think that anything really changes that -- you know what drives Bedding, and that's household formation, household changes and consumer confidence. And none of that happens until the Fed moves.

Absolutely. Volume is always a good thing. You know, that's really what's happening now into Sam's very appropriate comments a little bit ago that you put some volume through these assets now -- you know, what Tyson and the team has done in Bedding. I'll tell you what, we all know what volume does through the spring plants. It gets really good, really, really quick. And many of our businesses have the same characteristics. So, volume would be welcomed and is needed at this point.

All right. I appreciate it.

Yes. Sure, Susan. I think most of the benefit really comes from bringing our inventories down. We've been doing that nicely for a while now. Our teams are really focused on that and doing a good job, and it has provided some improvement. I think as we go through the back half of the year, we don't expect a whole lot more. We've done a good job. But I would think working capital benefits is slightly -- our earnings will drive the majority of the cash flow. And we really, as we've talked about, we'll use that to help start reducing debt.

You know, one thing I'd also -- I'd point out that we did reduce debt $73 million in the second quarter, which was nice. And we haven't seen the free up of the cash yet from the debt, I'm sorry, the dividend reduction, that really will start to make an impact in the third quarter, even though we declared the dividend lower in the second quarter. We paid the first quarter dividend in second quarter. So, from a cash perspective, that was still a little bit higher burden, obviously.

And then, the last thing I'd mention is our teams have done a really great job of monetizing some of these real estate properties. So, in the first half of the year, we generated $18 million of proceeds from real estate properties that were not related to the real estate, or I'm sorry, the restructuring project. But in the back half of the year, we're seeing where we can accelerate some of the restructuring-related real estate properties and generate $15 million to $25 million in proceeds there. So we feel good about our cash generation and these real estate sales as we start to make progress now in the back half on that debt reduction.

Yes. I think there's a couple of things there and we talked about them here -- just here recently. The ability for our business is to really start seeing the benefit of the restructuring, you know, being able to efficiently move volume through the business, I think, will be a big thing. And then, we have a really big focus on working capital. Like I said, we've had a good focus on that, but we'll continue to do that and we'll continue to challenge ourselves to utilize that to drive cash as well.

Thank you, Susan.

Thank you, Susan.

Thank you for joining us today and your interest in Leggett & Platt. We'll talk to you next quarter. Have a great weekend.