Leggett & Platt, Incorporated (LEG) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Bobby Griffin from Raymond James, the consumer analyst that covers Leggett & Platt. Today, I have the pleasure of introducing Karl Glassman, Chairman and CEO; Jeff Tate, Executive Vice President and CFO; Wendy Watson, Vice President of Investor Relations as well as Cassie Branscum, Manager of Investor Relations. And with that, I'll turn it over to Karl. And if we have a few minutes at the end, we can do a quick Q&A, if not, the breakouts right afterwards. Karl, thanks again for being here in the ongoing support of our conference.

Thank you, Bobby, and thank you for -- to everyone in the room for being here. It's much appreciated. I know that you have some distractions going on with market uncertainty and coronavirus and all those other issues, which we're actually going to talk through. So again, I appreciate Raymond James certainly for hosting this. And it's awful nice to see my friend, Budd Bugatch in the room. So questions are welcome from anyone other than Mr. Bugatch. Again, Bobby, thank you for the kind invitation. Let's start with coronavirus. I know it's on top of everyone's mind. It's the virus, from our perspective, is very personal and that we have 5,200 employees in China. Their health, their safety and well-being is of what's most important to us. Fortunately, for us, that we're operating 15 of the 16 domestic plants today. The last one of those is expected to come online on March 12. We'll see if that actually happens. They're manufacturing today from a productive output perspective of about 50%, which is probably at a greater rate than many of our customers and our suppliers. So I don't feel like we're negatively impacted on a comparison to others that we're dealing with the challenges. As you know that it has the potential to be a global virus issue. And are we at pandemic standpoint? I don't know, but we also operate in -- I'm sorry, in Korea as well as in Italy. So those employee partners are certainly a top of mind as are their families. We do believe that the virus will have an impact on our customer base and on our supply chain over time. It's hard to define. It's hard to quantify. I'm not going to give you an update. When we gave guidance -- on issued guidance on February 3, we told the investment community that it was agnostic to virus impact. We will -- at the end of the quarter when we issue results, we'll quantify the impact for you. Our teams are doing a fantastic job of working together, tracking this issue. So I do not think in any way that we're in a negative position to the industries or the competitive industries that we serve. A couple of things of note. We do -- our largest footprint in China is automotive based. Most of what we do in China is for Chinese consumption, very little is exported out of Asia, but Moody's last Wednesday decreased their call on global auto build from about 0.9% negative to 2.5% negative. IHS updated just a couple of days ago, saying that major market auto production would be down 2%. In a negative 2% environment, I would expect our global automotive business to grow mid-single digits because of content gains. So happy to answer any specific questions. And I wish we had higher-quality answers. We're making our way through it. But again, what's most important is our safe -- the safety and well-being of our employees. I do expect that there will be global supply chain impacts from the virus. At what rate, we don't yet know. But let's go ahead and get into the presentation. Many of you have heard this presentation before that this TSR-focused mid-cap manufacturer, trying to be -- or targeting the top 1/3 of the S&P 500 from a TSR perspective over time, we measure in 3-year increments. It is how we measure ourselves internally. We compensate ourselves and that's how you should think about us. We'll talk about what that report card looks like in a minute. You can see that dividend is sacrosanct to us. We've increased the dividend for 49 years in a row, that is a record that we expect to continue. This slide says that there was a 3.5% yield. It's north of 4 today. So if you think in terms of dividend aristocrats and if yield is important to you, dividend and this interest rate is important to you, have an expectation that we'll increase the dividend, then keep listening to this presentation or you can buy your seats, if you want, because we are -- we do differentiate ourselves from a dividend yield perspective. We have a very strong balance sheet, has -- as has been our history cash flow generation. We set records in 2019, albeit in a little bit of a tough market, cash generation, working capital efficiency is something that's inherent and ingrained in our people. We are the leader in most of the markets that we serve, not to say we don't have competitors. But we have large market shares. If we're not #1 or to be #1 in a market, we tend to not participate. We are absolutely poised to continue to grow, both from the perspective of internal initiatives that we'll speak about, and that's content gains in 2 particular markets, Automotive and Bedding. Market growth, we call, GDP, probably at 2% and will, over time, grow via acquisition. We'll speak about the largest acquisition in our history that we made in January of last year. This is a company that you can invest in knowing that management is in the game with you, that from a personal perspective, 87% of my compensation is variable to performance. That is not typical of a CEO in an S&P 500 company. The management team is probably in aggregate, of about 24% of their compensation is fixed. So we defer a lot of our compensation. We act and think and operate as owners because, in fact, we are. Our markets, pretty diverse. You can see that consumer durables are 55%, automotive at a roughly 20%, commercial/industrial at 25%. The geographic split, which is probably a timely analysis, U.S. is 66%, and you can see China at 9%. Virtually, every one of these pieces of these market pies assume that manufacturing takes place in the geographic area of consumption with a slight difference from the Chinese perspective and that we do make some fractional horsepower motors in China that are exported to Europe and to North America for automotive consumption. But other than that, we're producing in geography of consumption. Bedding at 46% of our product mix. This is a new slide from the perspective that it would have been about 22% if we would have rolled back a year or so ago, a large acquisition in specialty foam that we'll speak to. Automotive at 18%. You can see the other pieces of the pie notable is aerospace and hydraulic cylinders, which are relatively new investment, but there's geographic diversity, there's consumer diversity, there's product diversity. We're not singly focused on any industry. U.S. Bedding market is a wonderful opportunity. Many of you have heard of the changes that have taken place in this market. Two years ago, when I was here, we would have defined the addressable market as just $3 billion with the acquisition of ECS, a specialty foam manufacturer, and the size and expansion from just a component play into finished product, private label finished product. That definition of a $5 billion -- or I'm sorry, a $10 billion addressable market is a tremendous opportunity for our shareholders. So we break those down. Mattresses, either in component form or finished mattress form is about $8 billion of availability, adjustable foundations at $1 billion. We're the largest player in that area. It's the same with static foundations. Our competitors tend to be really pretty small. In innerspring manufacturing, there's a little bit of imported product. There's a maker user that still produces about 50% of their needs. It would be virtually impossible for you to name a bedding manufacturer or a digitally native marketer of finished mattresses that we do not do business with. So we are very much ingrained in the product development methodology and timeliness with our customers. We're important to them and they are important to us as well. The Bedding market has gone through significant change in the last 5 years. Consumers have now accepted the online purchasing of compressed mattresses, which truly is novel, that Casper and some others deserve credit for growing this market, Tuff & Needle would be another that didn't even exist 5 years ago. And what they did is they talked to consumer that a product that has been compressed to 0, folded in half, rolled in a box arrives at your door from UPS or FedEx is an acceptable sleep surface, and it is an acceptable sleep surface. It gave us an opportunity to redefine our addressable market. So not only have we been selling springs for 137 years, not only do we have a very important share of the market in the United States and Europe from a bedding perspective, what we didn't have was this other piece, specialty foam. So there's -- at one time, going back to 2007, we were in the commodity foam business. We reentered the foam business in January of last year, but only from the word specialty, which is important, that is IP-protected or trademark-protected capability to differentiate one product from another. Not all mattresses are the same. So it's allowed us the combination of specialty foam and compressed -- and hybrids to be compressed mattresses, and it's allowed us to redefine our addressable market. So nontraditional mattress distribution channels was unheard of 5 years ago for Mrs. consumer to buy a mattress via online, would not have bought mattresses in a do-it-yourself center. The logistics didn't work, they do work today because of compression. Today, we believe about 30% of the mattresses sold in this country have been once compressed. It's an efficient delivery method. Not to say that the OEMs, the very important customer base and the brands that you're more well aware of that you kind of grew up with, they're absolutely relevant. The brick-and-mortar distribution, they are major players in direct to consumer. They are also major players in compressed mattresses. So the lines are getting somewhat blurry. The approach from Leggett & Platt's perspective is to play in every channel of distribution with every technology and to satisfy every one of the end consumers' needs as we define the end consumer. This value chain is very different for us. We have always viewed ourselves from a factory-led perspective. So we are wonderful converters of raw material into finished product. Have a long legacy, as I said, 137 years of making innersprings. Just not everybody's proud of that, but it's what we do, and we're darn good at it. So now we've redefined ourselves from this value chain that you see. So we have basic raw materials of steel, rod and wire, we've long time owned a steel mill, produced the vast majority of our own wire. Specialty foam is certainly a new technology for us, but what makes it specialized is our proprietary development of chemicals and additives that allow for the functionality of the end product in terms of heat dissipation, recovery and support. So raw materials, we migrate to a value-added step of componentry. So as I said, we're working with our customers every day based on how they define the end consumer, how they differentiate themselves to develop innersprings and specialty foam components and/or finished products. So it would have been unheard of just 2 years ago for Leggett to sell finished mattresses. But we do that. The digital -- I mean digitally native sellers, marketers, they are marketers. None of them -- there is not an exception that any of them produce their own product. They rely on people like Leggett to do so for them. So it's a great opportunity. We're adding value to every one of these points of transformation. So we're learning new skills in terms of distribution or fulfillment. So we not only go B2B, which we have been for a very long time, but B2B2C. Where we draw this literal red line is we are not a brand marketer. We are not a retailer. We, at times, are supplier of private label product. We will win in an omni-channel environment. We're the lowest-cost producer, where our people are wonderfully capable at R&D capability. ECS allows us to have every one of the components, and you add in this transformation from steel to rod to wire with machinery that we totally control from an innerspring perspective, marry all of that innovation with value engineering into a private-label finished mattress environment, pair it with us being the largest manufacturer and distributor of adjustable bases in North America. And for a long period of time, the largest producer of flat or static foundations. And then as we build out this distribution capability, we have a competitive moat that is extremely wide and extremely deep. It is very, very difficult to compete with us on any of these attributes. Bedding is exciting enough. Automotive is more exciting. So another place where our addressable market has been redefined. So 2 years ago, this slide said that the addressable market for our Automotive business, which today is about an $850 million business, was about $10 billion. Today, we redefine the opportunity, the addressable market is $20 billion, and we split it into each one of these channels. So from a comfort perspective, we are the company that allows you to articulate and personalize your automotive seat. And it's interesting, if you're an automotive OEM manufacturer. In today's world, you're marketing yourself on seat comfort and cup holders. It's not RPMs, it's not what is under the hood, nobody knows what's under there. You're really differentiating yourself by seat comfort. And our position is very large. What's interesting about that is the market CAGR is 5%, so significantly greater than GDP. Cables, some people would -- automotive cables, people would consider somewhat of a commodity. Its competitive landscape is somewhat fragmented. It's a wonderful opportunity for us. It connects to our motors and actuators that allows seats to function for the consumer to interface and drive their own comfort features. And then there's the opportunity to apply each one of these attributes into other areas of the vehicle using the electrification that comes with that. So in an EV or totally autonomous environment, the future is actually greater, more attractive than the past. So we're investing in long-term advanced engineering teams to optimize each one of these attributes, and we believe that the areas that we operate in has a 6% CAGR. So last year, global auto build was negative 6%. Leggett grew 2%. Wonderfully profitable business. Our people are very capable. What differentiates us is our ability to work with the OEMs and purposely design every one of the attributes that have to do with noise mitigation, reducing weight, running global programs and being truly different than anyone else. And it's our OEM customers that are saying, help us from an electrification standpoint, that's allowed for the doubling of the addressable market. I've hit on each one of these, I think, that people will hear automotive, and they think, okay, you have LTAs and your force cost downs. I will tell you that our profitability profile was greater in the program. Then beginning a program, even with the LTAs in place because our engineers are so capable. They're always working on value engineering opportunities. We have a position in automotive that is truly unique. And as we move and I think many of you think of EV and autonomous is possibly a threat. Well, this CASE acronym is very much an opportunity. So we see the next 5 to 10 years as a greater growth opportunity than the last 5 or 10, and those of you that have known us, Automotive has performed very, very well. So hit that next one. So what does CASE mean? Connected, autonomous, shared and electrification. All of the buzzwords that you hear about the automotive supply chain, what are our advantages? Why Leggett? We have a great reputation of performing for our customers, not only in comfort, but from a cost perspective. Because of our vertical integration, we have very deep-seated intellectual property and trade secrets, engineering capability, and we are totally flexible from a global footprint. So we have a large manufacturing footprint in Europe, North America and, as I said when I started, in China. What's the outcome of that? Long-term growth that's well above the industry average, 800 basis points last year. We expect to be able to maintain that. We are absolutely the share leader in each one of these segments. When you think of the attributes of auto going forward, not only is the driver side seat important from a comfort perspective, but so is front passenger and in an SUV and CUV environment, comfort being demanded in second and third row seating. The electrification of a vehicle is in our sweet spot. And I don't want to undersell our competitive situation, but the OEMs come to us because of this capability, I mean, the auto space is incredibly competitive now, but everyone is working to a future that looks a lot different. Our engineers have a seat at every one of those tables. Let's go back to TSR. How do we drive TSR? Well, revenue growth, we expect revenue growth to be 6% to 9%. It sounds kind of outsized. Well, how do you get there? You have baseline GDP of 2%, you have acquisitions over time at 2%, you have markets like Automotive and Bedding that are going to grow greater than GDP, and we feel pretty comfortable about the 6% to 9%, and I'll show you the report card is how we got their margin improvement, it's incremental, it's continuous improvement. It's portfolio management. We've gone through the restructuring of 2 relatively large businesses, totally got out of 1 business, which is a Fashion Bed business, and our teams did an incredible job of monetizing that inventory last year. And our Home Furniture business, which is a legacy business, is healthier today than it's ever been in our history. It might be a little smaller, but it's healthier, deep-seated IP. Dividend. I told you we have a 4% yield. Long term, we have a target of a 50% payout of earnings. Last year, it was 62%. We will continue to increase our dividend. That's what we do. That's our commitment to our shareholders. That's the way we view ourselves. We generate a tremendous amount of cash. We're consistent at it. And quite frankly, when you do something for 49 years in a row, it's a habit. And I promise you, this management team is going to deal with the first digit of 5 going forward. So I don't care -- I mean I don't care is a wrong statement. Whatever the impact of coronavirus is, it's going to be relatively short term. Cash generation is important. So that's the commitment that we have to this dividend. And from a long-term basis, we will buy stock back on an opportunistic opportunity other than in the forecastable future because we are in a leverage situation that is outside our comfort zone. After we made the ECS acquisition, we paid $1.25 billion for January of 2019, our leverage was 3.7x. It was 2.9x at the end of the year, indicative of cash generation. We have an expectation it'll be 2.5x at the end of this year. So you will not see us in the open market on buybacks. Here's a report card. It looks a little ugly. We've done pretty well from a revenue perspective. The target out on the right side, 6% to 9%. You can see that we've -- in the last 5 years, we've comfortably been in that area. EBIT margin has been a little under pressure. Some of it is because of working through the portfolio management, some is we have some significant swings in commodity. We have a time frame where we sometimes have a recovery period. It's only 90 days, but we're subject to swings and commodities up and down. We will pass through, we always pass through but with a 90-day lag. The dividend, you can see, is consistent. The stock buyback is really kind of nonexistent last year. But that target of 11% to 14% is what we hold ourselves accountable to. And frankly, what we're compensated on. The growth rate framework, I believe I hit every one of these. Expanding the addressable markets, which you heard on Bedding and Furniture, identifying new growth platforms -- go ahead. So this is the critical components. The critical components are a study that we undertook a couple of years ago. We said, how do we win? What is the goodness of our Bedding and Automotive business? And the commonality, functionally, essential components, less than 25% of the cost of goods sold from our customers' perspective, attractive returns, pull-through absolutely in Automotive and Bedding, deep understanding of our customer, co-development seat at the table trying to help our customers differentiate their product. That's what we do. We co-design at every turn. And in each one of these markets, we're dealing with growth rates that are greater than GDP. Examples of critical components has been our bet in Hydraulic Cylinders a couple of years ago, and aerospace before that. So you can -- you'll see us when we get our leverage back into our comfort zone and expect every acquisition of size will fit this critical component criteria, that's how we win. Okay, I hit every one of these as well. These are just tactical activities, they're restructuring the portfolio management, which is part of our DNA. Wendy, let's go. Priorities of use of cash. This slide hasn't changed much since we first introduced it in 2007. We'll continue to fund organic growth, certainly continue to increase the dividend. We will, most recently, pay down the debt, longer term will regress to the mean. We'll continue to make bolt-on acquisitions. And when there's available cash left over, we'll certainly repurchase shares. Notably, that operating cash has exceeded dividends and CapEx every year for over 30 years. Leggett & Platt is a cash-generation machine. Dividend growth, I spoke to it. The only thing wrong on this slide is the yield is greater than 3.5%. I spoke to each one of the drivers of the commitment that we made to our investors, to our lenders, to the rating agencies. We keep our commitments. Go ahead, Wendy. I didn't leave myself much time for this intentionally. 2019 is a long time ago. The highlights. Sales up 11%. Most of it came through acquisition. You can see that the acquisitions were 14%. Sales up 11%. What was the differential? Think in terms of restructuring and the impact of restructuring. The most important number on this page, well, Jeff Tate probably thinks that 2.9x is the most important number. I guarantee I mentioned all of things, the most important number is the $668 million of cash generation. Mitch operating as a President of the company and COO, and Steve Henderson running the other half of the company, and all of our people deserve a tremendous amount of credit for the generation of cash. Guidance. When we issued this guidance on February 3, as I said, we told you this was agnostic to coronavirus impact. It would be illogical to think that there is not an impact in 1Q. We'll quantify that impact, as I said, when we release. From a growth perspective, expect volume after we adjust for the exited businesses to be up from flat to 2% -- 4%, so call it a 2% midpoint. Some of you may ask comparing actual '19 to forecasted 2020, what happened? We are moving from what we thought was a steel deflationary environment to a steel inflationary environment. That inflation may be off the table now, who knows? It's really hard. Steel prices reset every 30 days. Scrap steel went up $30 a ton in January. We did not expect it to peel off $20 a ton in February. As I stand here today, I cannot tell you what steel is going to settle, scrap is going to settle at in March. It usually sets middle of month, so it's volatile. You can see all the assumptions on guidance. Every one of those levers we can pull. CapEx will be less than that if we get concerned. Cash will be greater than that if we monetize inventories. What -- this is kind of a tough slide because the housing numbers are so great. What happens to consumer confidence near term, none of us know. Certainly, it has been working in our favor. Interest rate sensitivity from an investment in an auto is an issue. But my goodness. I mean, who would have ever thought we would be in the rate environment that we're in now? So if we can maintain confidence in this rate environment, we could have one heck of a year. All summary. I make a commitment to you. We will maintain our capital discipline. We always have, we will. We invest for the long term. We view the company from a long-term perspective. There's always quarter and year issues, but we think like owners, we invest like owners, we act like owners. And I'm telling you that every corporation, I think, is proud of their people. But I assure you Leggett people are different. And it's because they're invested. They're emotionally invested. They're financially invested, they take this all very, very seriously. So I appreciate your time and attention at any time. I think one of our competencies is IR communication. So if you ever have any questions, please reach out to us. We'd love to talk about the company and its people.

So the breakout.