Leggett & Platt Inc. (NYSE:LEG)
Q1 2016 Earnings Conference Call
April 29, 2016, 8:30 am ET
David DeSonier - SVP, Strategy & IR
Karl Glassman - President & CEO
Matt Flanigan - EVP & CFO
Susan McCoy - VP, IR
Mitch Dolloff - Senior VP & President, Specialized Products
Bobby Griffin - Raymond James
Mark Rupe - Longbow Research
Keith Hughes - SunTrust Robinson Humphrey
Daniel Moore - CJS Securities
Herbert Hardt - Monness Crespi Hardt
Greetings, and welcome to the Leggett & Platt First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, David DeSonier, Senior Vice President of Strategy and Investor Relations. Please go ahead sir.
Good morning and thank you for taking part in Leggett & Platt's first 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 Vice President of Investor Relations. Mitch Dolloff, who is Senior VP of the Company and President of the Specialized Products segment is also joining us this morning to participate in Q&A.
The agenda for our call this morning 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 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 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 of our 10-K entitled forward-looking statements.
I'll now turn the call over to Karl Glassman.
Good morning and thank you for participating in our first quarter call. Before I start with our prepared comments, I want to stop for second and congratulate and thank Susan McCoy. Yesterday marked the 30-year anniversary of her employment with the company. Susan, not only does an outstanding job as our Vice President of Investor Relations, she is also a trusted advisor to many of us and is truly an outstanding person. Congratulations and thank you, Susan from the shareholders, the investment community, our fellow employees, and from me personally.
We are very pleased with our start to 2016. EBIT and EBIT margins were ahead of our initial forecast despite short-term demand softness in a few of our residential end markets. For the full-year, we expect record earnings per share from continuing operations, very strong EBIT margins, and significant improvement in operating cash flow.
As we reported yesterday, first quarter earnings per share from continuing operations were $0.63, up 26% from the $0.50 we posted in the prior year. This increase reflects several factors including higher unit volume, a lower effective tax rate in the non-recurrence of a prior year Steel Tubing impairment charge.
Sales decreased 3% in the quarter to $938 million from the divestitures of the Steel Tubing business and a small portion of commercial vehicle products in late 2015. Higher unit volume added 4% to sales growth in the quarter and acquisitions added 1%. These improvements were offset by raw material related price decreases and currency impact which combined to reduce sales by 5%. Strong sales growth continued in automotive Comfort Core in both the U.S. and the Europe and adjustable bed. EBIT grew 14% and EBIT margin increased 190 basis points to 13.5% in the quarter also benefiting from higher unit volume, improved operational efficiency, and continued portfolio management.
Now on to the segment details. In Residential Furnishings, first quarter sales were down 5%, unit volume grew 2% but was more than offset by raw material related price decreases and currency impact. Sales trends for the major businesses and product categories excluding deflation and currency were as follows: U.S. spring component dollar sales were down 2%, Inner Spring units decreased 7%, and Box Spring unit volumes were down 6%. The favorable mix shift in Inner Springs continued with Comfort Core units up 15% during the quarter.
International spring sales grew 6%. Furniture component sales were up 3% with sales in the seating and sofa sleeper business up 8% and motion hardware unit volume down 6%. Volume also increased in Geo Components.
Segment EBIT and EBIT margin decreased in the quarter with the benefit from overall higher unit volume more than offset by FIFO inventory impacts and lower unit volume and typically stronger margin businesses. The FIFO impact occurred as expected from reducing selling prices as we were consuming higher cost inventory on hand at the end of 2015.
In the commercial product segment, first quarter same location sales increased 7% primarily from growth in adjustable bed with units of 18% during the quarter and continued strength in our fashion bed business. The work furniture acquisition completed in early 2015 also contributed 8% to the segment sales growth in the quarter. Segment EBIT grew and EBIT margin improved 280 basis points to 8.5% primarily from higher sales, operational improvements, and a gain from the sales of the building.
In the industrial material segment, first quarter same location sales were down 19% from steel related price decreases and lower unit volume and drawn wire. Total sales also decreased versus first of last year from the divesture of the steel tubing business in late 2015. The segments EBIT and EBIT margin increased significantly during the quarter from the non-recurrence of last year’s steel tubing impairment along with cost and efficiency improvements, partially offset by lower unit volume.
In the specialized product segment, first quarter same location sales increased 10% with a 12% volume improvement, partially offset by currency impact. Excluding currency changes, automotive sales grew 11%, aerospace same location sales increased 7%, machinery sales grew 19%, and commercial vehicle product same location sales were up 7%. The segments EBIT increased and EBIT margin improved 140 basis points primarily from higher volume.
During the first quarter we acquired a small U.S. manufacturer of aerospace tube assemblies with annual sales of approximately $20 million. This business further expands our tube forming and fabrication capabilities and also adds precision meaning -- machining to our aerospace platform.
I will now turn the call over to Matt Flanigan.
Thanks, Karl. Good morning everyone. A lower effective tax rate at $0.04 to first quarter earnings per share, this benefit resulted from the adoption of a new accounting standard related to stock-based compensation that was just issued by the Financial Accounting Standards Board.
The tax effect that arrives as when stock units or options are converted into shares will now be recognized as an adjustment to income tax expense instead of shareholders equity. While we have some of this activity in most quarters, the first quarter each year is impacted to a great degree due to the timing of issuances under our major stock compensation programs. As a result, we anticipate an approximate 28% tax rate for each of the remaining three quarters this year which should average to a whole year rate of 27%.
Cash from operations was a very strong $111 million in the first quarter. Operating cash flow increased $79 million versus first quarter last year due to higher earnings and a smaller increase in working capital. We entered the quarter with adjusted working capital as a percentage of annualized sales at a seasonally normal 11.1%.
In February, we declared a quarterly dividend of $0.32 per share and extended our record of consecutive annual dividend increases to 45 years. At yesterday’s closing price of $47.69, the current yield is 2.7%, which is one of the higher yields among the 50 companies that comprise the S&P 500 Dividend Aristocrats.
We also repurchased 2.5 million shares of our stock in the first quarter at an average price of $43.75 and issued 1.1 million 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. We ended the first quarter with net debt-to-net capital of 37% well within our longstanding target range of 30% to 40%. We also monitored debt-to-EBITDA. At the end of March, our debt was 1.6 times our trailing 12-months adjusted EBITDA.
We assess our overall performance by comparing our total shareholder returns 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 about 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 25% per year. That performance places us within the top 10% of the S&P 500.
As we look forward in 2016, we believe the key macro drivers for our market remains favorable and positive trends continue in several of our businesses and product categories. With this backdrop, along with strong earnings in the first quarter, we’ve raised our 2016 EPS guidance and now expect record full-year earnings from continuing operations of $2.40 to $2.60 per share. Bridging from 2015, this earnings guidance assumes that unit volume will generate typical 25% to 30% incremental margins but that benefit is expected to be partially offset by the non-recurrence from the 2015 pricing lag.
Sales guidance is unchanged at $3.9 billion to $4.1 billion or flat to 5% higher than 2015. This guidance assumes unit volume growth in the mid-to-high-single-digits. As partial offsets to the volume growth, sales guidance includes a 2% decrease from late 2015 divestitures we had a small acquisitions and an approximate 2% reduction from commodity deflation.
Steel scrap costs have began to re-inflate since the beginning of the year and we are implementing price increases in some of our businesses. As a result, full-year sales guidance now reflects slightly less deflation than previously anticipated.
We expect another year of very strong margin performance based upon our guidance range, we currently expect a full-year EBIT margin between 12.9% and 13.3% which is flat to up slightly compared to 2015.
In April, we settled, as plaintiff, a longstanding antitrust claim and expect to receive $25 million of after-tax cash proceeds in the second quarter. This claim was primarily related to the Prime Foam Products business that we divested in 2007. The majority of the benefit or $0.15 per share will be recognized in discontinued operations. The remaining $0.03 per share benefit will be recognized in continuing operations during the second quarter.
We expect to generate full-year cash from operations of approximately $500 million, which includes the cash proceeds from the litigation settlement. Dividend should require about $175 million of cash and capital expenditures should approximate $130 million for the year.
Our target range for dividend payout is 50% to 60% of net earnings. Actual payout had been higher until 2015, and as a result, dividend growth has been modest at about 3% per year. However, recent growth in annual earnings we are now comfortably within our target and payout range. This gives us greater flexibility to consider future dividend growth that will more closely align with our EPS growth. 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 4 million to 5 million shares in 2016 and issue approximately 2 million shares primarily for employee benefit plans.
With those comments, I’ll 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 question and then yield to the next participant. If you have additional questions, you’re welcome to reenter the queue and we will answer those questions as well. Kevin, we are ready to begin the Q&A.
Certainly. [Operator Instructions].
Our first question today is coming from Budd Bugatch from Raymond James. Please proceed with your question.
Good morning everyone. This is Bobby filling in for Budd. Appreciate you guys taking my questions and congrats on another strong operational quarter.
Thank you, Bobby.
Karl, in your prepared remarks that you talked quickly about kind of some short term demand softness in residential and I was wondering if you can may be provide some color as you saw some stuff in April that gave you confidence that it pick back up and that was only short-term in nature?
Bobby that first off, you will remember that from a residential perspective we were and continue to be up against some really difficult comps. Inner Springs volume in the first quarter of last year was up 15% from the previous year, we have those same headwinds in the second quarter with second quarter last year being up 17%. But direct answer to your question the first quarter was a little bit choppy. February was the softest; we think that it was correlated to a lesser tax refund season than is typical. March improved somewhat certainly compared to February and through the first three weeks of April, U.S. Springs sales are flat. So it was unit flat and the real favorable mix benefit that we have going forward, we were pretty bullish from a selling price perspective as our customers start to launch their new product lines that are very heavily weighted to our technology.
Appreciate it. Comfort Core now crossed 30% of Inner Springs units?
33% in the first quarter.
Thank you. I appreciate the color and best of luck moving forward.
Thank you. Our next question today is coming from Mark Rupe from Longbow Research. Please proceed with your question.
Good morning and congrats as well. On the upholstered furniture and the motion furniture down 6%, I know it was down a little bit in the fourth quarter, similar kind of choppiness or is there anything else to play there?
No, Mark it’s actually furniture as we speak is softer than bedding, its April, as you know, isn’t the strongest month for furniture, home furniture typically anyway and it is a little softer. We have a dynamic that’s taking place in that, you’ll remember year ago the industry or oil industry was significantly impacted by the West Coast port strikes. So we think that there was significant demand or shipment built in Asia product that did not hit the U.S. shores. So we saw abnormal growth in the U.S. mechanism business, in the first really half of last year that normalized in the back half. So those columns are difficult but admittedly, furniture is a little softer as we speak than bedding.
Okay. Just real quick on the Comfort Core just following up on Bobby’s question, is the profile consistent in Europe as it is in the U.S. or is it a smaller piece of your business there?
In Europe actually it’s 59% of our sales, total units in the first quarter. Now I will say in Europe we tend to mix higher to the medium price points and premium price points and for margin reasons, really don’t participate in the real low entry price points in the bedding industry, where in the U.S.
Thank you. Our next question today is coming from Keith Hughes from SunTrust Robinson Humphrey. Please proceed with your question.
Thank you. Just shifting over to raw materials with steel now accelerating historically that’s been a better environment for you but can you just give an update where the spread lies right now. How you think that will play out over the short-term?
Yes, Keith that market scrap was up $20 in the first quarter, selling prices didn’t follow that. So the spread was tighter in the first quarter than it was during any of the quarters in 2015. With a $50 market increase in scrap in April and an expectation of another $50 increase in May that we have announced wire based increases. So the wire, the rod, and the wire level and has started to implement selling price increases in the bedding industry. So we were narrower on spread in the first quarter, the second quarter we will probably have that typical lag where you start to see inflation, there is a 90-day lag before we can recover it, we should start to see normal spreads in the back half of the year.
And again, I will remind listeners, our people do a great job of passing through inflation but there is a little bit of a lag on the upside, inflation is very, very good for our shareholders and badly needed at this point.
Okay. Just switching to the year, your same-store sales were down 1%, while I guess you were down 3% in total for the quarter, you’re looking to be up flat to 5% for the year, I mean it feels like you would probably be towards the lower-end of that range given the slow start to the year but is there something that offsets that moving forward?
Yes, Keith, let me help you a little bit with that. We should, as we get into second quarter start to see some sales growth in the back half of the year we would expect more sales growth obviously we’re gradually anniversarying the 2015 deflation as we move through the year. In first quarter of ‘15, we really didn’t have too much price deflation has started to ramp up in second quarter and then we had quite a lot in the back half of the year.
And then to Karl’s point, we also based on current commodity environment should start to see some inflation growing as we move through certainly in late second quarter but in the third quarter, fourth quarter. That along with the comp dynamics, if you will remember first quarter of last year was actually our most challenging kind of total company comp quarter with units up 8%. When you roll all that together it -- I think it helps to make some sense out of our expectation that our sales growth should start to improve, when we get into second quarter and certainly back half.
Thank you. Our next question today is coming from Daniel Moore from CJS Securities. Please proceed with your question.
I just wanted to echo your initial comments on Susan did the best in the business, so thank you for your hard work.
Quickly you just in terms of industrial side, can you quantify the decline year-over-year in drawn wire volumes and perhaps what your expectations are for the remainder of the year?
Dan, it would be correlated to the relative softness in U.S. Spring. So the expectation is as the comps get easier that we will start up to consume more tons of wire internally were heavy weighted to internal consumption. So that’s the softness. We don’t quantify it in terms of tons.
Got it. But similar expectations for improved volumes as we go – as we move out through the year?
Excellent. And then just kind of a housekeeping but the tax rate 27% lower given the changes, are those likely sustainable as you look out to fiscal ‘17 and beyond?
No, Dan actually 27% was, it was clinical that’s not what our full-year tax rate for 2015 also. The dynamics that we’re seeing this year are ongoing and first quarter in most years assuming that our shipments continues to over time move up, will typically kick out a tax benefit that will lower our effective tax rates in the first quarters. And then subsequent quarters just don’t have as much of that new phenomenon that hits them because when our cost programs, stock-based comp programs ultimately payout.
But yes it’s the wrong way of answering that 27% is reasonable this year, it was consistent with last year well we set our expectations at the start of each year but there would be no reasons I think ongoing years of the meaningful difference in that based on what we would know right now.
It’s helpful and lastly and I’ll jump back the 13-ish percent EBIT margin guide for the full-year obviously you started out the year higher than that, based on the lag that you described is Q2 likely to be the low point for margin and then start to be rebuild as the year goes on or there other factors that might cause that to be different?
That’s a good question relative to progression. We would expect year-over-year in both the first and second quarter, obviously we did in the first quarter 150 to 200 basis points improvement back half. Year-over-year it’s going to be down because of prior year comps being fairly challenging and collectively that gets us to the flat guidance that we’ve issued.
Yes and Dan this is Matt, I would just weigh in and echo what Susan basically said that first quarter came in very strong as you see the second quarter you should expect a pretty strong EBIT performance, internationally with some of the seasonality business as well as the lag going the other way with inflation possibly taking up in the back half of the year. You should see those likely to be a bit lower than the 13 what is going to be all year long we think the third and fourth quarters might be a tad on the underside of that, whereas the first two quarters will be on the tad on the upper side.
But we will see, we’re certainly not surrendering at all to the margin opportunities for the rest of the year. But you should expect the second quarter also to be strong and then third and fourth quarter will probably be closer to our full-year guidance if not just a tad below that.
Thank you. [Operator Instructions].
Our next question today is coming from Herbert Hardt from Monness Crespi Hardt. Please proceed with your question.
Good morning. And I would also say good quarter. I have two questions one is regarding aerospace; there are several suppliers to Boeing and Airbus you said there have been delays. So I would ask if you experienced the same thing. And secondly, on a broader basis, given the fact you’ve held revenue guidance roughly the same margins going up, where do you really see the changes in terms of margins?
Mitch, why don’t you hit the aerospace side of things.
Okay. I think for our aerospace business, I think it’s been relatively steady. I think in the broader market, there is really solid build rates through 2019 mainly driven by more fuel efficient aircrafts, but I think that does create some disruption just through in the life of programs and new programs starting create some disruption at individual suppliers on those programs. But for us I would say it’s been relatively steady.
And as it relates to global demand, Mitch, actually should probably answer part of that too because we continue to see really strong global auto demand, Europe is recovering significantly in the markets that we serve not only from an automotive perspective but from a bedding components perspective but there is a lot written about Asian automotive, it continues to perform extremely well. So we’re -- if there is a little bit of softness it’s hardly it’s in U.S. residential, the rest of the globe and the rest of our businesses are performing extremely well.
And on your margin question, our full-year earnings guidance has come up by about $0.10 as we noted, but that’s partly the tax benefit in the first quarter we’re allowing for the $0.03 benefit from the litigation settlement that Matt made mention of. Our overall margin framework has improved a little bit. We were previously thinking that we would be flattish may be down a bit from last year’s 12.9 and now we’re thinking 12.9. So may be a few basis points higher than that even with current guidance and that essentially reflects the strong performance that we had in the first quarter and the fact that even though we had the FIFO carryover as we would have expected in residential, much of that impact was offset with really strong operating improvements happening in our industrial segment and in commercial some other parts of the company too.
So I think collectively those things are helping to buy us modestly, our overall margin being higher for the full-year. We have recognized to Karl’s earlier point on potential on commodity inflation as we start to inflate that we would expect to come out by the end of the year in pretty good shape.
Thank you. Our next question today is a follow-up from Budd Bugatch from Raymond James. Please proceed with your question.
Yes, this is Bobby again. I appreciate you guys let me ask one more question. I just want to touch real quickly on Susan’s comments about the operational improvements really inside commercial products and industrial materials those two segments we saw very nice margin improvements in. I was hoping just to get a little color on what’s taking place in those segments to drive that?
Yes, from a commercial standpoint it was volume that our people in fashion bed are doing a great job of picking up share, the recovery in adjustables is notable and a very good thing for us, so that the expansion is really just contribution margin on additional volume. Those businesses are all extremely well managed.
As regards industrial, the primary drivers margin improvement is significantly improved performance in our steel mill, it is running at record levels of productivity and obviously a tough market from a spread perspective with the tons output per hour, per kilowatt, both are fantastic and we were implementing some new manufacturing processes year ago first quarter. So we are comping at that steel mill to some a little bit of year-on-year softness but they are just doing a great job of executing.
I appreciate that and one quick-follow on how is the capacity for the adjustable base business in terms of your guys -- are you guys riding CapEx for all last year?
Bobby, I would encourage you and any of your friends to buy adjustable. We can ship and I would promise you. I would not have said that a year ago but with four manufacturing sites our people are very well aware of the market demand expectation for growth in that category and we are all -- we are dressed up and ready to go. We can serve this any bit of business that we are raised with.
Are we starting to see that adjustable bed attachment move down to kind of the call it sub $1,500 to sub $1000 mattress units now?
Yes, I think that’s actually been the real growth in the category but that’s a story from 2015 as well that if the ultra premium side the attach rates probably continue to expand slightly but as you know there is not a lot of units there but to be able to sell more adjustables in that pricing band between a $1,000 and $2,000 all of the manufacturers and the retailers are attacking that brand and that’s where we are seeing in the largest unit growth for sure.
Thank you. We’ve reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.
Just one quick one, before we sign off. If this was really a great quarter from an operating perspective but our tax, our accounting and legal people really did some herculean work with adopting new accounting rules and the tax folks working well together and the legal folks getting some of this home litigation behind us. So to each and every one of them, I want to thank them as well. Dave?
And with that, we will just say we do appreciate your participation on the call and we will talk to you again next quarter. Thank you.
Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.
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