禮恩派 (LEG) 2016 Q3 法說會逐字稿

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

The agenda for our call 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 expressed 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 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 third-quarter call. Yesterday, we reported another quarter of strong earnings despite lower-than-anticipated sales. 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. Third-quarter sales decreased 6% to $949 million with 4% of the reduction due to four small divestitures completed in the past 12 months. Same-location sales were down 2% from slightly lower unit volume, raw material-related price decreases and currency impact.

Our third-quarter EBIT decreased versus third quarter last year primarily reflecting a lower year-over-year benefit from commodity deflation and lower unit volume. Third-quarter EBIT margin decreased by 30 basis points compared to the prior year, but was stronger than expected at 13.7%. Third-quarter earnings per share from continuing operations were $0.67, or flat with the same quarter last year. The EBIT decrease was offset in the quarter by a lower effective tax rate related to the new accounting standard for stock-based compensation and a reduced share count, both of which were in line with forecast. Given our third-quarter results and lower current commodity costs, we have increased our full-year EPS guidance on a lower sales outlook. Matt will discuss our 2016 guidance in a few minutes.

Last month at an Investor Day, we outlined our TSR framework, including an expectation for long-term revenue growth of 6% to 9%. We believe the macro environment, driven by consumer confidence, housing, employment, wages and interest rates, should support modest revenue growth in our end markets over the next few years. In addition, we continue to focus on content gains and new program awards across our businesses and therefore expect to continue growing organically at a rate faster than our markets.

Strategic acquisitions are also expected to add to long-term growth. Margin expansion and share repurchases should contribute modestly to long-term TSR and our commitment to dividend growth is unwavering. In short, we remain fully committed to our long-standing goal of achieving TSR that ranks in the top third of the S&P 500.

Now to the segments. In Residential Furnishings, third-quarter same-location sales were down 8%; unit volume decreased 6% and raw material-related price deflation and currency reduced sales by 2%. Lower passthrough sales of adjustable beds represented 3% of the unit volume decreased. Sales trends for the major businesses and product categories, excluding deflation and currency, were as follows. US spring component dollar sales decreased 6%; innerspring units decreased 7%; and box spring unit volume was down 9%; Comfort Core units decreased 2% during the quarter; international spring sales decreased 3%; furniture component sales were down 5% with sales in the seating and sofa sleeper businesses down 7%; and motion hardware unit volume down 2%.

The segment's EBIT decreased slightly in the quarter with the impact from lower unit volume largely offset by pricing discipline. EBIT margin improved in part to the lower adjustable bed passthrough sales.

In the commercial products segment, third-quarter same-location sales decreased 4%. Growth in work furniture was more than offset by lower sales on adjustable bed with those units down 10% during the quarter. Segment EBIT and EBIT margin decreased slightly, primarily from lower volume.

In the industrial materials segment, third-quarter same-location sales were down 8% 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 we sold in the second quarter. The segment's EBIT decreased slightly in the quarter primarily from lower unit volume. EBIT margin improved 110 basis points to 9% in part from divesting lower-margin businesses.

In the specialized products segment, third-quarter same-location sales increased 6% from continued strength in automotive. Excluding minor currency changes, automotive sales grew 14%; machinery sales decreased 5%; and aerospace same-location sales were down 9% in the quarter. The segment's EBIT grew and EBIT margin improved 150 basis points primarily from higher volume and currency benefits. I will now turn the call over to Matt.

Thanks, Karl and good morning, everyone. Cash from operations was once again strong during the quarter at $124 million bringing the year-to-date total to $386 million. Operating cash flow continues to benefit from working capital management. We ended the quarter with adjusted working capital as a percentage of annualized sales at 10.8%. With strong year-to-date performance through the third quarter, we now expect full-year cash from operations to exceed $525 million.

As uses of cash for the full year, dividends should require about $175 million and capital expenditure should approximate $125 million. In August, we declared a quarterly dividend of $0.34 per share, which represents a 6.3% increase versus the third 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 our strong earnings growth, we are now within the targeted payout range. Accordingly, future dividend growth should more closely align with earnings growth. At yesterday's closing price of $44.39, the current yield is 3.1%, which is one of the higher yields among the 50 companies that comprise the S&P 500's Dividend Aristocrats.

During the third quarter, we repurchased 500,000 shares of our stock at an average price of $52.77 and issued 800,000 shares through employee benefit plans and option exercises. Year-to-date, we have repurchased 4.2 million shares at an average price of $46.47 and issued 2.2 million shares.

As has been our practice, after funding capital expenditures and dividends, the 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. However, no specific repurchase commitment or timetable has been established.

Our financial base remains very strong and this gives us considerable flexibility when making capital and investment decisions. We ended the third quarter with net debt to net capital at 36%, well within our long-standing targeted range of 30% to 40%. We also monitor debt to EBITDA. At the end of September, our debt was 1.7 times our trailing 12-months adjusted EBITDA.

We assess our overall performance by comparing our 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 11% to 14% per year.

For the three-year period that will end on December 31, 2016, we have so far generated compound annual TSR of 17% per year. That performance places us within the top 14% of the S&P 500. As we announced yesterday, we are raising our 2016 EPS guidance. We now expect record full-year earnings from continuing operations of $2.55 to $2.62 per share versus our prior EPS range of $2.45 to $2.60. Full-year guidance now anticipates 2016 sales of approximately $3.75 billion, or a 4% decrease from 2015. This assumes approximately 2% unit volume growth offset by a 3% reduction from divestitures net of small acquisitions and a 3% decrease from commodity deflation and currency.

Prior guidance anticipates sales of approximately $3.9 billion on mid-single digit unit volume growth and slightly less impact from commodity deflation. Our implied fourth-quarter EPS guidance range is now $0.53 to $0.60 on sales of approximately $900 million. We expect to close the year with strong margin performance. Based upon our guidance range, the full-year adjusted EBIT margin should be between 13.3% and 13.7%.

The two main changes in our full-year EPS guidance are, one, the lower expected level of unit volume growth and, two, an offsetting benefit from lower-than-expected steel prices, both of which were also reflected in our strong third-quarter EPS performance.

In our July forecast, we assumed that the second-quarter steel cost inflation would hold through the remainder of the year. Therefore, our prior guidance reflected short-term earnings and margin pressure from the typical pricing lag associated with passing along higher costs. Instead of inflation holding, market prices for certain types of steel actually began to deflate as the third quarter progressed. Our updated full-year EPS guidance now assumes less benefit from unit volume growth, but that impact is offset by lower commodity costs. With those comments, I will now turn the call back over to Dave DeSonier.

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

Thank you. (Operator Instructions). Dan Moore, CJS Securities.

Good morning. Thanks for taking the questions. Wanted to just drill down on Residential Furnishings volumes a little bit. Maybe give us a little bit more color. Over the last few months, obviously, decelerated. Is it simply tough comps? Do you see the consumer pulling back a little bit, or was it more primarily office and commercial? Maybe just a little bit more color around the trends that you are seeing there?

I think it's a little bit of a combination of both. Things are a little bit tough at retail. Just was at the High Point Furniture Market over the weekend and that was generally the mood that, although in the furniture business there seems to be a little momentum building right now, but it has been kind of a tough slog there.

In bedding, we really do have some tough comps with last year. As an example, we reported here a 2% drop in our Comfort Core volume, which had been on pretty much a tear for the last couple of years. We are lapping some strong numbers last year and if you look at the increase in Comfort Core in the third quarter of 2015 as opposed to the third quarter of 2014, we were up 37%. So being down 2% here, while that's not where we want to be, obviously, it's still indicative of some of the pretty tough comps we've had.

One quick follow-up, perhaps. Just wanted to talk a little bit about 2017. In your Analyst Day, you gave a three-year TSR guidance range in terms of high-single digit, or I should say earnings guidance range in terms of high single-digit CAGR. Next year, you've got perhaps tax rates normalize a bit higher, maybe a little bit more LIFO headwind if steel picks up. How should we think about 2017 as it relates to that longer-term guide?

Dan, we will talk about our 2017 guidance when we get to the end of January and we release on the full year. You touched on a couple of the independent variables to think about. We don't know when we will have sustained inflation, but, at some point, we would expect to encounter some and that would typically give us a little bit of short-term margin headwind that we'd have to deal with for a while.

Our tax rate this year at 25% is probably lower than where we will end next year. Something in the 27%, 28% range would be a reasonable place to start thinking about, and you will remember that we also last quarter had $0.06 of unusual things that are embedded in the $2.55 to $2.62 continuing ops guidance. And so from there, it goes to top line and, like I said, we will create some framework around that after we get another quarter behind us, get a better look at forecasts and try to get a feel for where we think next year will go.

Understand that the 2019 framework that we put out there, as I know you do, is clearly a bit longer term and to the comment that Karl had in his prepared remarks, we still feel good about the macro backdrop being supportive of reasonable health in our markets and the things that we've been doing on the content front in auto and bedding and category growth in adjustables and the other things that we highlighted at Investor Day, we still have confidence in our ability to make those things happen over the next two to three years.

Great color as always. Thank you. I will jump back in queue.

Keith Hughes, SunTrust, Robinson, Humphrey.

Thank you. Could you talk about, within the furniture and mattress components, the pace of business in the quarter and any update you could give us in October in terms of how trends are going month to date?

Keith, it was -- generally, there wasn't a lot of fluctuation between the particular periods in the quarter. It was pretty much evenly spread over that period of time. Looking at current business through the first three weeks of October, our business is flat to just slightly up compared to a year ago. If you look at our bedding business in Europe currently, we have been successful in taking some share there and I think in a market that's a little bit sluggish right now, the first three weeks have been up a healthy amount.

So I think right now from a comparison standpoint, we are holding our own with last year. Obviously, we are early into the quarter, so yet to be seen how that plays out.

In the furniture market, you would say that, not to put words in your mouth, that things seem to be reasonably strong to your comments regarding High Point, that things are less bad?

Yes. We saw -- although I wasn't particularly impressed with the attendance at High Point, it seemed like our furniture customers were happy with the order writing they were doing. We obviously have had some opportunities there that we spoke about at Investor Day with some content gains with things like tilt head rests and lumbars and things like that. So that all bodes well for us, but it does seem like there has been a bit of a step change in the pace for furniture, which we normally would expect this time of year.

That flat comment through October, is that both mattress and furniture, or is that a mix of both?

Well, I was referring specifically to bedding on the first three weeks of October, but furniture would be probably outpacing that just a little bit right now.

Okay. Thank you.

Leah Villalobos, Longbow Research.

Thank you. I wanted to talk a little bit about what pricing looks like going forward with the recent steel deflation. And then, Susan, I know you just said you expect steel inflation at some point. What does that mean for pricing going forward?

Steel is really tough for us to forecast. Susan's commentary on an expectation of ultimate inflation is steeped in the thought process that it can't go much lower at this point. We had a little bit of a head fake on steel where scrap traded up a little north of $50 a ton in the second quarter. We expected that there would be inflation off of that. It did not take place. Actually, scrap traded down about $20 a ton in September and now $20 in October. So there's a little bit of softness.

At the current price of scrap, scrap probably won't be collected. So hopefully into 2017 that there will be a resurgence in demand. There will be an equalization of pricing. As odd as it sounds, we badly want inflation, that admittedly there's a 90-day lag on passthrough. While we appreciate the short-term margins that we booked in the third quarter of this year, we want inflation, we need inflation and we expect it to some degree next year, but to predict timing is a real challenge.

Thank you.

Bobby Griffin, Raymond James.

Good morning, everybody. This is Bobby filling in for Budd. I appreciate you guys taking my questions. I just wanted to touch real quick on the adjustable base business. I believe this is the I think -- I believe it's the second quarter in a row units were down. Is that just a function of tougher comps, maybe some competition at a lower price point, or are you seeing a change in consumer behavior and some pressure on attachment rates?

Bobby, actually all those things. As you know, the comp was tough. Adjustables were up 55% in 3Q 2015. Some of that was a pull-forward by a large customer of ours that was about to go through an ERP implementation, so they pulled forward some 4Q 2015 volume into 3Q 2015. So that made that comp that much tougher.

There's no question that we are being impacted by soft market demand. We are also going through a conversion of adjustables being sold through OEM mattress manufacturers and taking out that inefficiency and now being sold directly to retail. So, therefore, you should see significantly fewer adjustables sold through the residential side of the business, which, as the commentary previous stated, as you know, those were just passthrough sales, had very little margin impact on the residential side, but certainly there were a lot of sales dollars associated with that.

The product is manufactured and the commercial segment will now primarily be sold out of the commercial segment and we are going through this transition where we are ramping down inventories at the OEM side, ramping up inventories at the direct to retail. So mix that altogether, we have not lost share, by the way, at the low end. You made reference there that there is no question that AUSPs are dropping in adjustables, which is probably a good thing for the business from a long-term perspective in that it means longer term there will be more units sold, but we are not disadvantaged in that equation.

Given that the ASUPs are dropping as you referenced, have you seen attachment rates start to pick up at the lower end of the mattress industry, the sub-$1,000 mattresses?

Yes. There's no question that there's a pickup at the lower end and there probably is a little bit of softness at the ultra-premium end. That ultra-premium consumer is probably a little cautious and I would think that -- well, you heard on Tempur's call yesterday that they made reference to the fact that their attach rates were less at premium price points. We are seeing that across the market.

Okay, I appreciate the color. Maybe lastly from me, at the Investor Day, we saw some exciting things with Quantum Edge and micro coils inside the bedding division. Can you maybe update us on how the penetration is going for those items and maybe what we might see next year for some of those?

Bobby, you are really becoming a bedding guy. I appreciate the fact that you thought that was exciting because it is really exciting. But anyway, go ahead, Perry.

Bobby, we are seeing some pretty steady growth on the upholstery layer replacement side of our business, which is basically our NanoCoils and our Softech-type products, the lower height pocket springs that we manufacture. Quantum Edge is -- I really am excited about. I think as we get into next year, I believe that we will see that pace really quicken. That obviously gives us content gains. It also will affect our average unit selling prices going forward. There will be a little bit of a disconnect there with where we are now, but we think there's some really strong introduction that's going to happen the first part of the year in Las Vegas and we are excited about being able to replace a lot of that foam edge with spring products.

I appreciate the color. Best of luck in the fourth quarter.

Dillard Watt, Stifel.

Thanks. Good morning, everyone. I wonder if you could talk a little bit about the aerospace business. That's I guess two quarters in a row here where we are negative. Anything in particular going on, or is it just some lumpy orders?

No, Dillard, actually we are experiencing some softness in our welded tube business, the straight tube business which was the first acquisition Western, where there's a little reduction in selling price and candidly we've lost a little bit of marketshare. In the seamless tube, the French business, that business is performing really, really well, as is the value-added businesses that we added subsequent bolt-on acquisitions. So it's the original base business where we are experiencing some softness. The market is lumpy over time, but two quarters in a row I can't blame on lumpiness.

Thank you very much.

(Operator Instructions). Keith Hughes, SunTrust, Robinson, Humphrey.

Just wanted to drill down a little bit, Karl, on your discussion on the adjustables. Specific to Leggett, are you having any shifts of your customers or accounts you've won, or accounts you've lost, things of that nature? And also just do you expect overall the price point of the adjustables to continue to fall? I think that's what you were saying, and does that mean some of the functionality in adjustables will go away?

Keith, thanks for the questions. Yes, there are customer wins and losses all the time, especially as we migrate -- the industry migrates from a predominantly distributed through OEM to predominantly distributed through retail. So there's those shifts and the magnitude of volume through each channel changing pretty significantly. Interestingly enough, as the product is decreasing, or let's call it more fully penetrated in terms of units at price points, the features aren't changing all that much, that as you drop into the promotional price points historically that would be a wired bed. It's a wireless product today. The head-only product hasn't sold significantly well.

So as the cost of electronics drop, the significant volume growth from the macro market in terms of throughput through assets that the consumer is not losing much functionality as the pricing at retail drops.

And just one other question on bedding. The Comfort Core negative 2%, looking like the industry right now, it had been well outperforming. Do you think that's its top in terms of its marketshare?

No, Keith, I don't. We are in the mid-30%s now as far as percentage of springs that we sell that are in the Comfort Core category. We have debates among ourselves as to how strong it will get in the US market, but I certainly think we've got opportunities to go well north of 40%. Some people say it could be 50% in the future, but I don't think we are by any means done with the growth of that category and, like I said just a little bit ago, I don't think we've even scratched the surface with the content gain that we look to gain over the next couple years.

Thank you.

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

We will just quickly close by saying thank you. We appreciate your time and we will talk to you again in about three months.

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