禮恩派 (LEG) 2016 Q2 法說會逐字稿

Greetings and welcome to the Leggett & Platt second-quarter 2016 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David DeSonier, Senior Vice President Strategy and Investor Relations for Leggett & Platt. Thank you. You may begin.

Good morning and thank you for taking part in Leggett & Platt's second-quarter conference call. With me this morning are the following; Karl Glassman, who is President and CEO; Matt Flanigan, our Executive VP and CFO; and Susan McCoy, our VP of Investor Relations. Perry Davis, who is Senior Vice President of the Company and also President of the Residential Furnishings segment, is also joining us this morning to participate in Q&A.

The agenda for our call this one is as follows. Karl Glassman will start with a summary of the major statements we made in yesterday's press release and provide segment highlights, Matt Flanigan will discuss financial details and address our outlook for the remainder of 2016, and finally the group will answer any questions that you have.

This conference is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded or broadcast without our express permission. A replay is available from the IR portion of Leggett's website.

We posted to the IR portion of the website a set of PowerPoint slides that contain summary financial information along with segment details. Those slides supplement the information we discuss on this call, including Non-GAAP reconciliations.

I need to remind you that our remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties, and the Company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the section in our 10-K entitled forward-looking statements.

I will now turn the call over to Karl Glassman.

Good morning and thank you for participating in our second-quarter call. Yesterday we reported another quarter of strong earnings despite softer than forecasted volume. For the full year we continue to expect record earnings per share from continuing operations, strong EBIT margins and a significant improvement in operating cash flow.

Second-quarter earnings per share from continuing operations were $0.72 and included a net $0.06 per share benefit from unusual items. Excluding this benefit, earnings per share from continuing operations were $0.66 up 25% versus the $0.53 that we earned in the prior year. This increase reflects several factors, including higher unit volume, favorable product mix, operational improvements, a lower effective tax rate, and reduced share count.

Second-quarter sales decreased 4% to $959 million from divestitures and a 1% decline in same-location sales. Unit volume grew 2% but was more than offset by raw material related place decreases and currency impact which combined to reduce sales by 3%. Adjusted EBIT grew 9% in the quarter and adjusted EBIT margin increased 170 basis points to 13.8%.

During the quarter we settled as plaintiff a long-standing antitrust claim and received cash proceeds of $38 million. Since this claim was primarily related to the Prime Foam business that we divested in 2007, the majority of the benefit was recognized in discontinued operations. The remaining $0.03 per share benefit related to our Carpet Cushion business and was recognized in continuing operations.

Late in the quarter we completed two small divestitures. The first was a wire products operation with annual sales of approximately $50 million. This divestiture was completed in early June and was part of the industrial materials segment.

The second was a CVP operation with annual sales of approximately $30 million. This divestiture occurred in late June and was part of the specialized product segment. The $0.05 per share divestiture gained that we recognized in the second quarter related to this CVP transaction. The $0.02 per share goodwill impairment charge that we recognized in the quarter also related to the CVP business but was associated with the operation that remains.

During the quarter we purchased the minority interest in our automotive joint venture in China. This is a strong performing business that we have controlled and operated for several years and we are pleased to now have full ownership.

Now on to the segments. In residential furnishings second-quarter same-location sales were down 6%, unit volume decreased 2%, and raw material related price deflation and currency reduced sales by 4%. Sales trends for the major businesses and product categories, excluding deflation and currency, were as follows. US spring component dollar sales were flat. Innerspring units decreased 4% and boxspring unit volumes were down 6%. The favorable mix shift in innersprings continued with comfort Core units up 9% during the quarter.

International spring sales grew 6%. Furniture component sales were down 6% with sales in the seating and sofa sleeper business up 2%, and motion hardware unit volume down 18%. Volume also increased in Geo components.

The segment's reported EBIT included a $7 million benefit from the portion of the litigation settlement that was related to Carpet Cushion. Excluding this gain, segment EBIT and EBIT margin increased in the quarter, with the impact from lower unit volume more than offset by pricing discipline, the favorable product mix within US and European bedding, and the non-recurrence of last year's Foam litigation expense.

In the commercial product segment, second-quarter same-location sales decreased 4%. Growth in work furniture was more than offset by lower sales in adjustable bed, with those units being down 5% during the quarter. Adjustable bed sales also reflect a decrease in industrywide AUSP as more product introductions are occurring at lower retail price points. Segment EBIT was flat and EBIT margin increased slightly with operational improvements offsetting the impact from lower sales.

In the industrial materials segment, second-quarter same-location sales were down 13% from steel-related price decreases and lower unit volume in drawn wire. Total sales also decreased versus the prior year from two divestitures. The first was the steel tubing business that we sold in late 2015, and the second was the small wire products operation that I mentioned earlier.

The segment's EBIT increased in the second quarter primarily from operational improvements partially offset by lower unit volume. EBIT margins in the segment have improved significantly this year and were up 350 basis points to 11.1% in the second quarter. The segment's margins have structurally improved as a result of the divestitures.

In the specialized product segment, second-quarter same-location sales increased 9% with a 10% volume improvement, partially offset by currency impact. Excluding currency changes automotive sales grew 13%, machinery sales grew 4%, and commercial vehicle product same-location sales were up 29%. The aerospace same-location sales decreased 11% in the quarter.

The segment's reported EBIT included an $11 million divestiture gain and a $4 million goodwill impairment charge, both related to CVP. Excluding these items, EBIT grew and EBIT margins improved 360 basis points, primarily from higher volume, currency benefits and cost reductions.

I will now turn the call over to Matt.

Thanks, Karl, and good morning, everyone. Cash from operations was a very strong $151 million in the second quarter. Operating cash flow increased $56 million versus our second quarter last year, in part due to the collection of our $38 million of proceeds from the litigation settlement that Karl discussed.

Operating cash flow also benefited from continued working capital management. We ended the quarter with adjusted working capital as a percentage of annualized sales at 10.4%.

In May, we increase the quarterly dividend by $0.02 to $0.34 per share. This was our largest quarterly increase since 2007 and marked a $0.03 per share or 9.7% increase versus the second quarter of 2015.

Our target range for dividend payout is 50% to 60% of net earnings. Actual payout had been higher until last year but with earnings growth we are now within our targeted payout range. At yesterday's closing price of $54.53 the current yield is 2.5%, which is one of the higher yields among the 50 companies that comprise the S&P 500 dividend aristocrats.

During the second quarter we repurchased 1.2 million shares of our stock at an average price of $49.39 and issued 300,000 shares through employee benefit plans and option exercises. Our financial base remains very strong and this gives us considerable flexibility when making capital and investment decisions.

During the quarter we renewed our bank facility, which supports our commercial paper program, and increased the capacity to $750 million, up from $600 million previously. We also extended the maturity by two years to May 2021. At June 30 we had $467 million available under this program.

We ended the second quarter with net debt to net capital of 37%, well within our long-standing targeted range of 30% to 40%. We also monitored debt to EBITDA. At the end of June our debt was 1.6 times our trailing 12-month adjusted EBITDA.

We assess our overall performance by comparing a total shareholder return to that of peer companies on a rolling three-year basis. Our target is to achieve TSR in the top one-third of the S&P 500 over the long term, which we believe will require an average TSR of 12% to 15% per year.

For the three-year period that will end on December 31, 2016, we have so far generated compound annual TSR of 27% per year. That performance places us within the top 6% of the S&P 500.

As we announced yesterday, we are narrowing our 2016 EPS guidance and now expect record full-year earnings from continuing operations of $2.45 to $2.60 per share. This revised range includes the $0.06 per share of unusual items that we recognized in the second quarter, $0.03 of which was in our prior EPS range of $2.40 to $2.60.

Full-year guidance now anticipates our 2016 sales to be roughly flat with 2015 at $3.9 billion. This assumes unit volume growth in the mid single digits, offset by a 3% reduction from divestitures, net of small acquisitions, and a 2% decrease from commodity deflation in currency impacts.

We expect another year of strong margin performance. Based upon our guidance range our full-year adjusted EBIT margin should be between 12.6 % and 13.1%. Margins in the back half of the year are forecasted to be lower than our first-half margins, primarily due to the expected pricing lag associated with passing through recent inflation in commodities.

The three main assumptions that have changed from our prior guidance are the level of unit volume growth, the divestiture impact on sales, and the tax rate. Unit volume growth is now expected to be at the lower end of our prior range which was mid to high single-digit growth. First-half unit volume was roughly flat versus strong prior-year comps. We expect unit volume to grow in the back half of the year.

We also have more sales impact from divestitures following the two transactions that were completed in the second quarter. The $100 million decrease from the midpoint of our prior sales guidance is evenly split between lower unit volume growth and divestitures.

EPS guidance is also impacted by the lower unit volume growth assumption but this is offset by an expected lower effective tax rate. This tax rate change is driven primarily by the new accounting treatment for stock-based compensation.

The implied full-year adjusted margin of approximately 13% is consistent with the margin derived from prior guidance at the mid-single-digit unit volume growth level. Full-year cash from operations is now expected to exceed $500 million. Dividends should require about $175 million of cash, and capital expenditures should approximate $130 million for the year.

As has been our practice, after funding capital expenditures and dividends remaining cash flow will be prioritized toward competitively advantaged acquisitions. Potential acquisitions must meet stringent strategic and financial criteria.

Should no acquisitions come to fruition, and if excess cash flow is available, we have a standing authorization from the Board to repurchase up to 10 million shares each year. No specific repurchase commitment or timetable has been established. However, we currently expect to repurchase 4 million to 5 million shares in 2016 and issue approximately 2 million shares, primarily for employee benefit plans.

With those comments, I will now turn the call back over to Dave.

That concludes our prepared remarks. We thank you for your attention and we will be glad to answer your questions. In order to everyone an opportunity to participate we request that you ask only one question and then yield to the next participate. If you have additional questions please reenter the queue and we will we answer those questions, as well.

Melissa, we are ready to begin the Q&A.

(Operator Instructions)

Budd Bugatch, Raymond James

This is Bobby filling in for Budd. Thank you for taking my questions. Karl, just real quickly, on the reduction and the unit volume expectations, can you give us a little bit of color on maybe which segments you're seeing that at more versus some other areas of the business?

Bobby, good morning. It's pretty broad-based. There's some softness in residential that continues. Feels a little bit more like home furniture than bedding at this point. The strength continues to be automotive but it's more of a step function change down from a macro perspective that we perceive to be impacting us.

From a forecast standpoint, there's some softness in our European forecast that has yet to be seen as to what the Brexit impact will have. Maybe we're a little pessimistic, I don't know. So, that's a change from the previous forecast. But I certainly can't isolate it to any one business unit.

Okay, I appreciate that color. And then, just real quickly, on the raw material and the pricing outlook, has much changed since the last time we spoke going into the back half of the year?

A little bit in that if we look at second-quarter to first-quarter scrap, it was up in excess of $50 a ton, which is about 30%. So, as the quarter continued we continue to see scrap inflation that will manifest itself into, on the flat products side. US steel cost inflation in the third quarter the forecast is about a 30% level.

And we are now passing through pricing on the long products, the rod and wire. That impact we told you about last quarter, that we had launched some of those increases. We continue to implement increases.

There's not real good visibility as to how scrap is going to move in the back half of the year. It traded down slightly in July. We think August may be flat to a slightly up bias. We will see.

Really, what's happened, the way to think about it, Bobby, is that commodities deflation was a tailwind and now inflation has turned into a bit of a headwind. Remembering that we have about a 90-day lag of pass-through time.

Okay. Then following the 90-day lag, you should start to see some of the actual reported revenue start to reflect some of the higher prices and everything going there?

That's correct.

Margin headwinds but on a higher revenue number, would be the way to think about it in our model, right?

Absolutely.

All right. I appreciate the detail and best of luck moving forward.

Daniel Moore, CJS Securities.

I wanted to hone in a little bit on the adjustable beds. Obviously you mentioned some introduction of lower price points, I think. Is it simply tough comps or is there a change in consumer buying patterns out there?

Dan, I think it's more of a tough comp issue in that our adjustables in 2Q 2015 were up 70%. And the fallback actually in this quarter was very much early quarter weighted. April was tough and then we saw a recovery as the quarter progressed.

We expect units to be positive in the back half of the year, in part because of the significant rollout of a new retail program. And, frankly, the fourth-quarter comps are very, very easy. I don't think it's a step function change at all. Consumer demand is real. I think it's just a byproduct of a tough comp.

And maybe one more -- specialized products, obviously auto remains really strong. Commercial vehicle products in particular were strong. Maybe just talk about the sustainability of those growth rates as we look out in the back half of the year.

The forecast now -- by the way, the CVP business is just one single location after the series of divestitures that we've gone through. That is an Atlanta-based facility. It was actually the largest of the CVP businesses, at least in recent years. Their volume had really been good. They had a very good first quarter, as well.

So we see some pickup in demand but I'm not willing to claim victory yet. That business is inherently choppy. Our current forecasts show a little bit softer demand in the back half, which is typical that we will see some choppiness in that business. But everything said, it is performing much better than it had in the past.

Thank you again for the color.

Mark Rupe, Longbow Research.

Nice execution. As it relates to the innerspring demand, I think, Karl, you had mentioned through maybe the first part or first three weeks of April demand from a unit perspective was flat. That implies May and June being a little bit tougher than that. I just want to confirm that. And how does that relate versus the adjustable comment that you made that April was tough but May and June was little bit better?

Mark, this is Perry. Although we don't really provide color now on a period-by-period basis because it's so confusing with the different period ends amongst our customers and some of the information that's out there from an industry standpoint, but we did find it pretty choppy throughout the quarter. We had demand that was well below where we had earlier thought we would be.

However, if you look at the quarter overall, in 2015 in innerspring volume we were up 17% last year, year on year. So, this year being down about 4%, if you took the two years and put them together it would be a 13% rise over 2014. If somebody had told me that two years ago I would've been tickled.

Okay. And just real quickly, on furniture hardware, I had asked on the last quarter when it was down, I believe, high singles, maybe in the first quarter, the commentary was the first half was tough comps with the port issues last year. I assume it's the same answer, that tough comps. But I think, given that it's minus 18%, I at least want to ask whether or not there's anything else going on from a furniture hardware component standpoint.

Mark, we did have some small benefit last year in the second quarter still pertaining to the port situation. But there have been some shifts within the market. We are seeing right now raw material, primarily steel, a delta in US versus China pricing at the highest level I have seen. It's north of 40%, in some cases, on the flat steel we're using in mechanisms we produce both here in the US and in China obviously.

But what that has caused is a shift of product being sourced out of China over the last three or four months. We've seen a significant shift. Along with that, we've seen some down specking by some of the manufacturers and retailers, that they will take a product that may not be quite as high of quality as they had before but it's still acceptable to them, with that big delta in steel pricing. And we consistently are seeing business volumes that are generating below last year's numbers and it's been that way pretty much for the full year.

Okay, perfect. Thank you and good luck.

Dillard Watt, Stifel.

I just wanted to maybe confirm on the change in the EBIT margin guidance. Is that solely related to the slightly lower unit volume assumption? I know, Matt, you made that comment but I just want to make sure there's nothing else going on there.

No, Dillard, it's very much in line with what our prior guidance would've suggested, if we would've then been guiding for volume growth to have been mid single digits instead of mid to high single digits.

Okay, great. That does it for me.

Keith Hughes, SunTrust Robinson Humphrey.

This may be a repeat. I've gotten disconnected a couple of times here on the call. On LIFO, any sense in the second half of the year what that is going to look like given the inflation? Is it going to turn into a negative in the future quarters?

Keith, we booked a little over $7 million of LIFO expense in the second quarter, which was basically a first-half catch-up given where quantities have moved during the course of the second quarter. Our current best view of the LIFO scenario would put us at a little over $14 million for the full year. But as you well know, that has a tendency to move around and we'll continue to revisit that estimate each quarter.

Okay. But does the bias on that turn to the negative given the inflation that's going on?

Keith, this is Matt. It's basically reflecting inflation that has occurred from the beginning of the year to where we find ourselves now. It gets a little confusing when you think about last year and all the deflation that was happening.

LIFO is a calendar quarter phenomenon. And, so, sure enough, just like Susan said, it was $7 million recorded in the second quarter. Full-year expectation as we sit here today is $14 million. So that means that in the next two quarters that that turns out to be exactly right. You'd see another $3.5 million of LIFO expense in 3Q and then in 4Q, as well.

I know this is tough for you to gauge, it can move around a lot from quarter to quarter just based on the various ups and downs of what's going on in steel prices, correct?

Correct.

Thank you.

Herbert Hardt, Monness, Crespi & Hardt.

I have two questions. One is on the pension side. With interest rates where they are, what are the thoughts in terms of the next year or two as the rollover of older bonds from higher rates come through?

Herb, this is Dave. We're not forecasting any change in our mix. In the frozen plans, we're roughly 60% bond, 40% stock, and we feel pretty good about that. If you could tell me when interest rates were going to move, we would be able to forecast better what we should do with pension. But we feel pretty good with the mix we've got and we're pretty well-balanced obligations versus asset mix.

What is your assumption on discount rate?

I will have to get that, Herb. I don't recall off-hand.

The next question is on the part of the Chinese venture that you purchased. Did you give out any of the numbers on that in terms of multiple EBITDA or sales or whatever you would pay for it?

No. You can see a line item in our cash flow statement that actually isn't in investing activities. Because it was a JV before, it lands down in the financing section. I want to say $35 million or something, in that ballpark, for what we spent.

We were already consolidating all of it, sales and EBIT, under the accounting rules for treating the positions in businesses where we had the majority ownership already. So, all that's really changing from our financials relative to the earnings profile is that the next to last line on our income statement that used to back out the noncontrolling interest is no longer going to exist. That's really the extent of the disclosures that we'll make around this. Pretty small, but it has been a really important part of that profile for the business unit and one we're happy to have full ownership of.

Okay, thank you very much.

(Operator Instructions)

Daniel Moore, CJS Securities.

Just turning to capital allocation, curious if the expansion of the credit facility, does it indicate any incremental likelihood of M&A activity in the next several quarters, or are you simply maintaining drive power and flexibility?

Dan, this is Matt. Thanks for the question. A combination of things, really. First of all, the market is quite receptive, as you well know. And we decided it was a good time to go ahead and extend our facility, the additional two years out to May of 2021.

We have done so much divesture work, as everyone is well aware of, over the last several years. And, so, we do believe that we're basically largely done with that effort, so there's an opportunity to continue. And this has always been the case, to be mindful of any attractive growth opportunities that are coming through the M&A pipeline. Certainly Karl can comment how he views the pipeline looking right now.

We just wanted to take advantage of the market as it currently resides to make sure we have plenty of flexibility. And that really is the number one driver behind that. And, sure enough, we do anticipate that we will have perhaps a bit more opportunity to look at some growth prospects.

Not that we haven't been looking at them all along, but since so much of the divesture work has now been done, it's a natural opportunity, it appears, for the next 12 to 24 months. And of course that credit goes out five years. So it's a nice position to be in.

Always best time to take in capital is when you don't need it. I appreciate the color. Again, congrats on a solid quarter.

Mark Rupe, Longbow Research.

Just a quick follow-up, and I don't believe it's been addressed. The aerospace business was down in this quarter. And I don't remember it being down in a while. I assume it's probably some timing with some of the projects but I just wanted to see if you had any comment there.

Mark, you are right, it has not been done in the past. It actually was up greater than double digits into 2Q 2015, so that's what the comp was out there.

The newly acquired or more recently acquired businesses are performing very well. Those are the more value-added businesses. I will say the French operation continues to exceed all expectations. Our people in France are doing a great job.

The softness that we experienced was just some demand choppiness. And it's back at the original Western Pneumatic investment that we made in the first quarter of 2012. You remember, that's just a straight tube business. It's just aerospace demand is inherently choppy.

Okay. And then just one last real quick one -- the wire products divesture, the rationale on that? That surprised me. Was there some rationale on that one being divested?

Yes. There were a lot of sales and not much EBIT. The return profile wasn't acceptable. We were pleased with that divestiture that we received a long-term supply agreement with the acquirer of that business. So it was originally purchased many years ago to be a wire play. So from a future standpoint, will still have those wire tons to run through our operation, we just won't have the low-margin sales associated with the value-added product.

Perfect, thank you.

Budd Bugatch, Raymond James

It's Bobby. Susan, can you give us just some detail on the line items, the segments I mean, for revenue and operating margins, as we typically get?

This is steeped in basically the current guidance, I would say, midpoint, but we've got an approximate revenue guidance down 3.9%. At this point we would assume full-year residential sales volume that would be down probably low single digit. We will have some volume growth, we think, in the segment but we also have some first-half deflation. Not sure that that deflation is going to be completely overcome with price increases in the back half of the year.

Commercial would be looking at up high single digits, a combination of acquisition and some volume growth. Industrial is still looking to be down quite notably, and, in fact, mid 20%s is where it would be. But keep in mind that they are taking the largest hit from divestitures. So, simple math would say 15%, 16% off just because of the divestitures and maybe 8% to 10% down organic, which is also a major reflection of steel deflation. And then specialized up high single digits with continued good growth across most of that segment.

The margin profiles, interestingly enough, and it's similar to what we said before, those don't really look very different from what we said last time. In fact, residential is still 10% to 11% range, up slightly from where they were last year. Commercial up 50 to 100 basis points from last year, which would put them in the 7% to 8% range.

Industrial 10% to 11% or so, which is up a lot from last year. We mentioned structurally a lot of improvement because of the divestitures. And then specialized up 100 basis points from where they were last year, which puts them in the high teens, as well. So, when you blend all that together you're still closing in on about somewhere close to a 13% blended margin for overall.

Very helpful. I appreciate the further detail.

Mr. DeSonier, there are no further questions at this time. I will turn the floor back to you for any final remarks.

We'll just say thank you for your participation. We do appreciate your time and we will talk to you next quarter.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.