禮恩派 (LEG) 2016 Q4 法說會逐字稿

Greetings and welcome to the Leggett & Platt fourth-quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Dave DeSonier, Senior VP of Strategy and Investor Relations.

Good morning and thank you for taking part in the fourth-quarter conference call. With me today are the following: Karl Glassman, who is President and CEO; Matt Flanigan, our Executive VP and CFO; Susan McCoy, our VP of Investor Relations. Perry Davis and Mitch Dolloff, both Executive VPs of the Company, are joining us today to participate in the Q&A and they have each been past participants on these calls and they will now both join us regularly. Also with us today is Wendy Watson, who joined our IR department at the start of the year and will be working directly with Susan as Director of Investor Relations.

Wendy brings a law background with work in M&A, business transaction support, trade law, government relations, and treasury and banking support. She has been with Leggett for 19 years and has worked with our operations for the past five years in a business development role supporting strategy and growth process development. We're excited to have Wendy as the newest member of our IR team.

The agenda for our call this morning is as follows. Karl will start with a summary of the major statement we made in yesterday's press release and provide segment highlights. Matt will discuss financial details and address our outlook for 2017. Finally the group will answer any questions that you have. This conference call 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 our website. We posted to the IR portion of the website yesterday's press release and a set of PowerPoint slides that contain summary financial information along with segment details. Those documents supplement the information we discuss on this call including non-GAAP reconciliations. I need to remind you the 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 in additional information, please refer to yesterday's press release and the section in our 10K entitled forward-looking statements. I will now turn the call over to Karl Glassman.

Good morning and thank you for participating in our fourth-quarter 2016 call. We are pleased with our 2016 operational performance despite the challenging demand environment that persisted throughout the year in many of our markets. We thank our dedicated fellow employees around the world. Their efforts during this past year were impactful and are very much appreciated.

For 2017 we expect market improvement and Leggett initiatives to drive sales growth and further increases in earnings per share. Our businesses are extremely well-positioned for long-term profitable growth and we remain confident in our ability to achieve the 2019 targets we provided last September. Fourth-quarter sales decreased 4% to $904 million largely due to four small divestitures completed in the past 12 months. Unit volume was up slightly.

Fourth-quarter earnings per share from continuing operations were $0.60 compared to $0.57 in the fourth quarter last year. The current fourth-quarter earnings included a $0.07 per share benefit from a divestiture gain in the prior year fourth quarter included a $0.07 per share reduction from a lump sum pension buyout and a litigation settlement. Excluding these unusual items, adjusted fourth-quarter earnings decreased to $0.53 per share from $0.64 last year. This reduction was due in large part to rapid inflation in steel cost in late 2016 versus significant deflation in steel that was occurring in late 2015. The effect in both years were amplified by LIFO accounting.

The commodity impact on earnings was partially offset in the quarter by a lower effective tax rate and reduced share count. For the full-year, sales decreased 4% with 2% unit volume growth and small acquisitions more than offset by divestitures, raw material related price decreases that had occurred before the recent spike in steel costs, and currency impact. Full-year earnings per share from continuing operations increased to $2.62 from $2.27 in 2015.

Current year earnings included a $0.13 per share benefit primarily from divestiture gains and in the prior year included a $0.09 per share reduction from unusual items. Adjusted earnings per share increased to $2.49 from $2.36 in 2015. This increase was largely due to lower effective tax rate related to a new accounting standard for stock-based compensation and reduced share count. The earnings benefit from unit volume growth during the year was more than offset by recent steel inflation and the non-recurrence of the pricing lag benefit that we experienced in late 2015.

In 2015 steel costs deflated significantly especially during the fourth quarter and our earnings benefited from the normal lag we experienced in adjusting selling prices. This cost deflation ultimately led to lower selling prices, which impacted our sales growth throughout 2016. In recent months steel costs have begun to rapidly inflate. We are implementing price increases to recover this recent inflation.

Our commitment to portfolio management over the last several years has resulted in higher margins and returns and stronger strategic positioning for the Company as a whole. During 2016 we completed three small acquisitions including a manufacturer of aerospace tube assemblies, a distributor of geosynthetic products, and a South African innerspring manufacturer. We also purchased the remaining minority interest in a key automotive joint venture in China and continued investing capital to support organic growth opportunities in automotive and bedding.

During the year we completed the divestiture of four small businesses with annual revenue of approximately $100 million. This included a Wire Products business sold in late December that resulted in a pretax gain of $16 million or $0.07 per share. In September 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 growth in our end markets over the next few years.

In addition we continue our focus on content gains and new program awards across our businesses and therefore expect to grow 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 each contribute 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 total shareholder return that ranks in the top third of the S&P 500.

In November we filed an 8K that discussed changes to the management organizational structure in our segments. As a reminder, effective January 1, Perry Davis was promoted to Executive Vice President and is now President of Residential Products and Industrial Products segments. Also effective January 1, Mitch Dolloff was promoted to Executive Vice President and is now President of the Specialized Products and Furniture Product segments. We continue to report under the prior management structure throughout the end of 2016. So all of the segment commentary that we make today is based upon historical reporting formats.

In Residential Furnishings fourth-quarter same location sales were down 7%. Unit volume decreased 5%, half of which resulted from lower pass-through sales of adjustable beds. Raw material related price deflation and currency reduced sales by 2%. Sales trends for the major businesses and product categories excluding deflation and currency were as follows. US spring component dollars sales decreased 4%. Innerspring units decreased 5% and box spring unit volume was down 7%. Comfort core units decreased 6% during the quarter. International spring sales increased 3%.

Home furniture component sales were down slightly, with sales in the seating and sofa sleeper business down 2% and motion hardware unit volume down 1%. Segment EBIT increased during the quarter as a result of lower foam litigation expense. Excluding these charges, EBIT decreased primarily from lower unit volume partially offset by continued pricing discipline. Adjusted EBIT margin improved slightly in part due to the lower adjustable bed pass-through sales.

For the full-year, total sales in the segment decreased 6%. Unit volume was down 3%, about half of which resulted from lower pass-through sales of adjustable beds. Commodity deflation and currency impacts also reduced sales by 3%. US innerspring units were down 6% and Comfort Core units were up 4% for the year. Full-year segment EBIT increased as a result of a $7 million benefit from a litigation settlement and lower foam litigation expense. Excluding these items, EBIT for the year decreased slightly, with lower unit volume largely offset by pricing discipline.

Adjusted EBIT margin improved 50 basis points to 10.7% in part due to lower adjustable bed pass-through sales. In the Commercial products segment, fourth-quarter same-location sales were flat. Adjustable bed units grew 4% and work furniture sales were up slightly, but these increases were offset by lower sales in fashion bed. Segment EBIT increased and EBIT margin improved primarily from a favorable sales mix and a $1 million gain from a building sale. For the full-year, total sales in the segment grew 1%. Adjustable bed units were up slightly for the year.

The segment's full-year EBIT increased and EBIT margin improved 150 basis points to 8.3% primarily from operational improvements, gains from building sales of $3 million, and a favorable sales mix. In the Industrial Materials segment, fourth-quarter same location sales were down 4% from steel related price decreases that had occurred before the recent spike in steel costs. Unit volume was essentially flat in the quarter. Total sales also decreased as a result of divestitures.

The segment EBIT increased significantly in the quarter due to a $16 million gain from the sale of a Wire Products business and the non-recurrence from a $3 million loss from last year's divestiture of the steel tubing business. Excluding these unusual items, fourth-quarter adjusted EBIT and adjusted EBIT margin decreased largely due to recent still cost inflation that had not yet been recovered through selling price increases. For the full year, total sales in the segment decreased 25% from a combination of divestitures, still-related price decreases, and lower unit volume.

The segment's full-year EBIT increased due to the divestiture gain and the non-recurrence of a prior-year impairment charge and divestiture loss. Excluding these unusual items, EBIT was down slightly, with the impact from lower sales largely offset by operational improvements. Adjusted EBIT margin increased 290 basis points to 10.1% in part from the divestiture of lower margin businesses.

In the Specialized Product segment, fourth-quarter same location sales increased 4% with continued strength in automotive partially offset by currency impact and lower volume in Machinery and Aerospace. Excluding currency changes, Automotive sales grew 15%. Machinery sales decreased 23% and Aerospace same location sales were down 9% in the quarter. The segment's EBIT grew and EBIT margin improved primarily from higher unit volume and currency impact.

Full-year total sales in the segment grew 6% with a 9% volume increase and a small acquisition partially offset by divestitures and currency impact. Strong performance in our Automotive business drove the majority of the sales growth. Excluding currency changes, Automotive sales increased 13% for the full-year. The segment's full-year EBIT benefited from an $11 million divestiture gain partially offset by a $4 million goodwill impairment charge. Excluding these unusual items, EBIT grew and and EBIT margin improved primarily from higher sales and currency impact. I will now turn the call over to Matt.

Thanks, Karl, and good morning, everyone. In 2016 we generated very strong operating cash flow of $553 million, which included $25 million of after-tax litigation settlement proceeds. Operating cash flow continues to benefit from a sharp focus on working capital management.

We ended the year with adjusted working capital as a percentage of annualized sales at 9.4%. In November we declared a quarterly dividend of $0.34 per share, which represented a $0.02 per share or 6% increase versus the fourth quarter of 2015. Our target range for dividend payout is 50% to 60% of net earnings and we have been within that range each of the past two years.

Looking forward we would expect future dividend growth to approximate earnings growth. At yesterday's closing price of $47.19, the current dividend yield is 2.9%, which is one of the highest yields among the 51 companies that comprise the S&P 500's Dividends Aristocrats. We repurchased 400,000 shares of our stock in the fourth quarter at an average price of $47.10. For the full-year we repurchased 4.5 million shares at an average price of $46.52 and issued 2.4 million shares primarily for employee benefit plans and stock option exercises.

Our financial base remains very strong and this gives us considerable flexibility when making capital and investment decisions. During the year we expanded the capacity under our revolver and commercial paper program from $600 million to $750 million and extended the term by two years to 2021. We ended 2016 with over $550 million available under the commercial paper program and our net debt to net capital ratio was at 34%, comfortably within our long-standing targeted range of 30% to 40%.

We also monitor debt to EBITDA and ended 2016 with debt at 1.6 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 ended on December 31, 2016, we generated compound annual TSR of 20% per year and that performance placed us within the top 11% of the S&P 500. As Karl mentioned earlier, we believe the macro environment should support modest growth in our end markets over the next few years. Even more importantly, we expect to grow organically at a faster pace than our markets as a result of content gains and new program awards.

As we enter 2017 with renewed inflation, we also expect sales to increase from the pass through of higher commodity costs, although there will be a lag in timing which typically occurs when we adjust our own selling prices. With this collective backdrop for 2017, we are forecasting another year of strong performance. Sales from continuing operations are expected to be $3.95 billion to $4.05 billion or up 5% to 8% versus 2016. We expect mid single-digit unit volume growth from strength in automotive, bedding, adjustable bed, work furniture, and geo components.

The sales impact from divestitures completed during 2016 should be largely offset by small acquisitions and as just mentioned raw material-related price increases should also add to sales growth. We expect 2017 earnings per share of $2.55 to $2.75. Bridging from our 2016 adjusted EPS of $2.49, we therefore expect earnings to grow from between 2% to 10%. This guidance assumes that the benefit from higher unit volume will be partially offset by the pricing lag we typically experience in recovering increased raw material costs.

We expect the largest impact from the pricing lag to occur during the first quarter. We also anticipate a higher effective full-year tax rate of approximately 26% this year. Of course this tax rate estimate is assuming that current laws do not change in 2017. Based upon this guidance, we currently expect a full-year EBIT margin between 12.8% and 13.5%. Operating cash flow should exceed $450 million in 2017, with working capital increases attributable to sales growth and inflation expected to be a use of cash.

Dividends should require about $185 million of cash and capital expenditure should approximate $150 million for the year. As has been our practice, after funding capital expenditures and dividends, remaining cash flow will be prioritized towards 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 between 3 million to 4 million shares in 2017 and issue approximately 2,000,000 shares primarily for employee benefit plans. With those calls, I will 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 on the call, we request that you ask only one question and yield to the next participant. If you have additional questions, you are welcome to re-enter the queue and we will answer those questions as well. Michelle, we are ready to begin the Q&A.

(Operator Instructions) Budd Bugatch, Raymond James.

This is Bobby filling in for Budd. I appreciate everyone taking my questions. Just real quickly I was hoping to get a little bit more color on the volume guide of mid-single-digits assumed in the sales guidance and maybe just kind of what your assumptions are that kind of give you confidence of unit volume accelerating here. And is there any timing that you guys expect for kind of the accelerations, is it more backend weighted or are you seeing stuff already that gives you that confidence early on in the quarter?

Good morning, Bobby. This is Karl. I will deal with kind of the high level and Susan will take a swing at quarterizing it for you. The way that we build our forecast up is we use a baseline of GDP, so then we adjust by product category. So as an example we were pretty confident using the IHS forecast, the global autobuild in the major markets is going to be 1.7% in 2017, so that's the spark for Auto.

We have in US spring as an example, we have an expectation that units will grow 2%. Then we go back and look at each one of the markets around the world, have a greater expectation for growth based on market drivers in the bedding industry as an example in Asia and in Europe. So that becomes baseline. Then we have a high degree of confidence of content gains in automotive. We continue to believe based on awarded programs that will grow at 1000 basis points greater than global build, so call it 12% forecast there.

And in US spring as you saw in Las Vegas, we are very confident with the advent of the Quantum Edge and the proliferation of that product just as examples in the comfort layer of micro coils. Adjustable bed, significant market share gains and then also a market that is growing greater than GDP, so we boil that altogether knowing that there are new product innovations in each one of our disparate markets and feel really comfortable from a unit perspective of that call it 5% so Susan from --.

Yes, Bobby, so to take a step further and think about by quarter and then our total sales guidance I would -- obviously we have talked about mid single-digit unit volume growth. Think of unit volume growth as strengthening as the year progresses. Some of those new programs and products ramp up. Inflation is the other part of our forecast for sales and I would also allow for inflation increasing, particularly in second quarter, third quarter. This is the impact on sales of course based on recent commodity trends and then to kind of complete the view on all in sales, completed divestitures and small acquisitions that we know about right now would effectively offset in the year.

Now you usually go on to ask about a sort of segment level assumption around that midpoint sales growth so I'll offer that up too. With the comment around residential being mid-single-digit. Commercial up much stronger than that, more like midteens and again the growth that we've got in adjustables but also in work furniture will contribute to that. Industrial would be flat.

We do have some carry on impact from divestitures that have been completed in 2016 but would expect that to be offset by steel inflation and some higher volume and then specialized as it's been doing, likely growing high single-digits. So when you blend all that together, you get back to that midpoint call it 6.5%, 7% all in sales growth for the full-year.

Okay, I appreciate that. Susan, you did read my mind. That was going to be my follow-up but I do have one other one. On the timing of the pricing increases, can you help us maybe understand if there's a timing difference between the segments? I realize bedding might be a little bit later, more towards April, and wire could be a little sooner. Is there anything else we need to keep in mind as we try to model out 1Q?

Actually you characterized it accurately, Bobby. Wire closer to raw material the earlier so we've announced wire, rod and wire increases and have implemented them already based on the scrap moves that we saw in November. The only outlier to what you said is that steel prices have inflated earlier and to a greater degree in China so as an example in our furniture hardware facilities in China, we are implementing price increases that are significant in the 9% to 11% range depending on product category that go into effect next Monday when the Chinese are back from new year. And then bedding, as you said, starts to roll through. Domestic bedding would roll through really early second quarter.

I appreciate all the detail. Best of luck in 2017.

Daniel Moore, CJS Securities.

Thank you and good morning. I just wanted to follow up a little on those price increases. Obviously you gave us good detail in terms of the timing. It's still early but how are those being received thus far and obviously you sound very confident about your ability, as you usually do, to push those through. I just wanted to get a sense of that.

Dan, this is Perry Davis. As we look at recent history, through the latter part of the fourth quarter and going into the first quarter this year we have seen pretty significant movement on scrap, up somewhere in the neighborhood of $110 and that ramp up really did accelerate at the end the year. So as we move forward, that scrap then turns to rod and to wire in the following months.

We anticipate that we will have early second-quarter price increases reflected from that movement. Now bear in mind some of our contracts that we have in the bedding group at least are formulaic and are delayed by about 90 days. We talk about that regularly so we will begin to see those movements as we get into the early part of the second quarter.

Very good. CapEx ticking up a bit in 2017, just talk about where the incremental spend is going and do you expect it to remain at those levels looking out beyond this year?

Dan, this is Karl. The CapEx ticking up is really good news for us. It is a tribute to organic growth. It goes back to those awarded automotive programs. Additional investment in adjustable bed as we gain market share, significant investment in US bedding as this Quantum Edge and microcoils roll out, products all introduced in Las Vegas being extremely well received. And investment in Europe where our bedding operations continue to gain share in premium products. So that capital is the best money that we can spend and feel really good about $150 million forecast. If there is a bias it could be slightly higher but it will be steeped in every one of those programs having excellent returns for our shareholders. In the out years I would assume $150 million at this point. I don't have any better data.

Got it, I appreciate the color. Thanks very much.

John Baugh, Stifel.

Good morning and thanks for taking my questions. I guess this is directed at Perry or Karl. There was a small announcement in the bedding trade yesterday that changed some things and was curious. I know Serta is a big customer and it seems like they're going to gain from this but you were very excited about your placements with Sealy and I guess my question is for Leggett, how do you see that playing out and does Serta Simmons bedding have enough capacity to take on all the extra business? I'm just curious how you see that yin and the yang.

John, Perry and I talked about this last night and I thought he should answer the questions and he thought I should answer the questions and he's bigger than I am, so I guess I'll take a swing at it and Perry will interject at anytime that he wants. That you are right. Serta appears to be the primary beneficiary. In Mattress Firm's announcement they specifically cited an exclusive launch of the iSeries product line, which has a lot of our product in it, and iComfort, which to us it's a foam product, there are some hybrid iComforts that are good for us. We will get all the foundations related to those products.

As regards capacity, that's really a Serta Simmons question. There's capacity in the market. There's always the ability to flex shifts. I was told yesterday that the majority of the Serta facilities are running single shift. They can ramp those to a two second shift. The majority of the Simmons facilities were running two shifts but there's capacity.

From our perspective as Simmons historically gets busier, we have always been the beneficiary of the overflow in the demand. We also expect Mattress Firm to continue to heavyweight their private label programs. We are in exclusive supply agreements with those two vendors. So to go back though we are -- we continue to be very enthused about the Sealy introduction of Quantum Edge. We think -- we know that that product was extremely well received at retail and we expect significant demand there as well.

What I think is most notable about the announcements and the decisions and I'm not going to get into why the decisions were made, that's none of our business but what Tempur Sealy has said and Mattress Firm has said and SSB Serta Simmons have said is we are going to jointly or individually but from an industry perspective, have a significant impact by increased consumer-faced advertising spend.

Frankly, Select Comfort has been on their own investing in a lot of ad dollars over the last couple of years. Mattress Firm certainly participates in advertising, but with elections last year you just didn't see a lot of ad spend. You will see significant ad spend by all of those players. That historically is really good for the bedding industry. It's what the industry has been lacking the last few years.

While we use that baseline of 2% unit growth I would probably bias it up based on these announcements because of that investment and consumer awareness. We will see how it all sorts out. I think it will be good for the consumer. Perry, do you have anything?

I would just add that in the area of adjustable beds and maybe Mitch could add some color to this, but we do anticipate that our position as the market has shifted over the last couple of years from an OEM model to a direct to retail model, we expect also there that we should enjoy some additional pickups in adjustable beds as it relates to Mattress Firm.

Just a follow-up, I don't know if I heard or if I did I didn't understand it or missed it. What were units of inner springs in calendar 2016 in terms of the percent change?

John, for the year on a per day basis 2016 versus 2015, units were down 5%. With regards to the fourth quarter basically they were down 5% there also, so 5% for the year.

And that's a springs comment. It doesn't have this pass through of adjustables or it does?

That is just innerspring shipments.

In just the units.

In just the units, yes.

So we I guess -- the point is we do have at least to your 2% or bias upwards, that's quite a steep decline so we have if nothing else, a very easy comparison?

That's a fair statement. 2016 had a very, very difficult comparison to an abnormally strong 2015. We are reversing that this year, where 2017 frankly is up against a pretty easy 2016.

Thank you and good luck.

(Operator Instructions) Keith Hughes, SunTrust Robinson Humphrey.

Thank you. Within Specialized we had Aerospace and Machinery down. You talked a little bit about it before but can you just give us more detail what's going on there and will those turn positive here near-term in the new year?

I'll tell you what, Mitch has got the best story in the room to tell on Automotive and you ask them about the two negatives, but go ahead, Mitch.

You just brought the numbers down, guys.

Okay, On Aerospace I think a couple of factors at play. Mainly we had some really aggressive pricing in our North American tube operations. I think cost us some market share. We've adjusted our pricing to be more competitive as appropriate there and we think that we stabilized.

We also have experienced some year-over-year declines in the space business that we have in that area, and that business is inherently less steady so it tends to come and go year-to-year. So I do think that we will see some positive impact in 2017 in that aerospace business. Our operations in Europe and our two forming operations continue to perform really well, so it's more an issue of getting our pricing correct in this North American tube market.

On the machinery side, the first half of the year was really strong and it started to slow down in the second half of some, at some of our major bedding customers curtailed their capital spending. That's really the driver there. It's really tale of two halves of the year.

Okay, and the adjustables within Specialty, up 4%, can you -- I know you've done a lot of introductions, a lot of focus on that for you selling directly to retailers as opposed to going through just the OEMs. So I guess my question is within that number are you seeing strong new account growth, strong existing growth? How does it breakdown?

That's a great question. I will kind of tag along to what Perry mentioned earlier. I think there is really three factors impacting our growth there. The first as you said sales to our bedding OEMs are down as we shift to the direct-to-retail strategy. That's not a surprise and some of that shows up through the bedding numbers. Sales to our existing retailers are up as the market continues to grow and then finally we are gaining share as we ramp up programs with new retail customers. So really all of those factors are helping at this point.

Just final issue on that, are you seeing the price point, are you seeing faster growth at the lower price points in adjustables?

I think that we continue to see pressure on price points for sure. Think we look at it as a higher more feature-driven segment as well as a larger -- the larger more price-conscious segment and we are playing into both of those.

Okay, thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. DeSonier for closing remarks.

Thank you. We appreciate your participation. We don't have anything else to add, so we will talk to again next quarter.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.