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

Good afternoon, as I believe we're at the noon hour on East Coast Time, and welcome to the Leggett & Platt, Incorporated call fireside chat here. Delighted to have with us today Jeff Tate, who is the CFO of Leggett & Platt; and Karl Glassman, CEO. I've asked Karl to make a few opening comments, upon which I will then ask questions. And I'll be monitoring my screen to see if questions come in from participants, and we'll end promptly at the bottom of the hour. So with that, I will turn it over to you, Karl. Thanks again for participating.

Yes. Thank you to the Stifel team and, John, to you in particular. You've had us under coverage for a long time, and your wisdom is highly valued. So we appreciate that. To give you a quick overview of the company, we called it Leggett Distinctives and, really, from a listener's perspective is what things set Leggett apart from the others and why should we listen, in essence. We have a strong balance sheet and cash flow even in this really uncertain environment. We expect to be cash flow and free cash flow positive for the year. Cash generation really allows us to be flexible in our tactics. We certainly have a disciplined use of cash. It's very predictable. We reinvest in the company first and foremost, and then pay the dividend. We'll talk about that later. We've increased the dividend for 49 consecutive years, 2020 being one of those years of increase. The current yield is approximately 4.3%. We are a member of the Dividend Aristocrats, which we highly value. We're a leader in most of our markets with strong competitive positions, deep competitive moats, few large competitors. Bedding and Automotive are key value drivers, but we have several strong smaller businesses where we have market and innovation, share leads and kind of unique go-to-market positions, home furnishing, work furniture, flooring products, geo components, fabric converting, aerospace, hydraulic cylinders, that diversity that is both product and geographic, we think, helps us in times like this. Beyond the recent COVID challenges, our opportunities for long-term growth, they remain, they're unchanged. Our competitive advantages are no different today than they were 90 days ago. So we expect robust content, gain opportunities in both Bedding and Automotive. We can talk about those in some detail with very large addressable markets. We define the U.S. bedding addressable market as $10 billion. The global automotive addressable market at $20 billion. The trends in bedding play to our integrated value chain, our ability to produce and deliver both components and finished mattresses. We have a long tenured, committed management team, and we very much think like owners because we are. The management team, current team, retired team holds approximately 10% to 12% of our shares. So our team is very much focused. The macro factors that we watch that kind of drive investment, consumer confidence, many of our products are deferrable. So it's good to see some of the consumer confidence statistics begin to recover. And then trying to do an assessment as to what the depth and duration of the pandemic, independent of shape of recovery. Is it a U, a W, a V, who the heck knows? But we're monitoring that daily with macro factors and then company- and industry-specific factors. And then we're very much interested in recent consumer trends of investing in the home. So that's alive and real. We see it in the do-it-yourself inventory -- industry, in Home Depot and Lowe's. So we feel that the consumer has an increased awareness in their home or heartened by the housing statistics that were published this morning. So all that said, John, that's a quick overview and happy to turn it back over to you.

Okay. My next, or from the whiplash I got, the downturn and then the subsequent recovery and I'm thinking particularly about residential furniture and bedding. I can't imagine what it's like to try to run a manufacturing business supporting the down and then the up. But maybe you could give us some color about, over these 2.5 months or so, what you've done and where you went. And then where you are kind of now. And I understand you don't want to give current sales numbers, but I'm really interested operationally where you are and whether there's a backlog that's built now that you're catching up to or anywhere you want to run with that.

Okay. And I'll answer it from a kind of a residential standpoint first, if that's okay, John. I think that's what you're making reference to, that -- we're surprised that from kind of point go, bring us back to middle of March when there was a growing awareness that the globe had a significant problem, we really just pulled back the operations. And as we said on our first quarter call, the first week of May, that we looked at our fixed cost structure very aggressively. We pulled $130 million to $150 million on an annualized basis out of fixed cost. We went to the direct labor side of each one of those facilities and literally shut them down, business stopped. We saw kind of the bottom of the trough, the last week of March, first week of April. And then started to see kind of some slow recovery. And we're -- while we haven't updated current sales trends, we're certainly aware of what's being published in the market. And we're surprised at the recovery that it started probably with people talking about the benefit of stimulus checks. And we were afraid that, that was a head fake, and we were bringing people back into our, our facilities and didn't know what the duration was going to be. And then saw really a strong Memorial Day. And we're heartened by what we've seen in the public space in terms of updates from people like Tempur Sealy and Purple and a number of others, some of the home furniture manufacturers and retailers that have said that there's significant follow-through post Memorial Day. So yes, things are good. We do think that that's steeped in investing in the home. We don't think that stimulus check is really what drove it. We do have a little concern that there is a large population of employees in this country that have uncertainty for sure. And when you peel it all back, and I don't think people totally or really understand that the income of the American worker in April increased 10.5%. Now wages and salaries were down, but government support was up significantly. And the American saving rate was up 33% in the month of April. So a good number of folks had income, many of them because of stimulus and because of the benefit of unemployment dividend checks that -- a little concerned that the extra is expected to expire at the end of July. But people didn't -- they had more money in many cases than they had ever had. They were saving some of it, and they had a heightened awareness of their home environment, and they're investing in their home. So all in all, we're feeling pretty darn good about things and are sympathetic to your neck because we've had to deal with that same thing.

Could you maybe touch -- and again, this is sort of a furniture-bedding question, but we saw a big shift during this time frame to the -- to e-commerce online and away from brick-and-mortar. And look, I'm sure it will shift back to more normal mix, but could you discuss how that helped or hurt you as a supplier with ECS and yet a big supplier to others in the trade? What was the ying and the yang there?

You know that we -- yes, thank you for that question. I think really what it did is validate some positions that we took when we acquired ECS in January of '19 and that we had an expectation then. We publicly stated that we expected compressed mattresses to be 50% roughly of total sales by 2026. We think that we'll get to that point much earlier than we expected, and that there's this blurring of what we call omnichannel. So -- and I'll get somewhat specific that you have a mattress firm, pure-play brick-and-mortar, well, they really leaned heavily into e-commerce and have a greater percentage of their throughput of sales now are compressed mattresses. So with brick-and-mortar shut, the compressed mattresses grew significantly even in a brick-and-mortar environment because of the curbside pickup. So not only was online growing, but brick-and-mortar from an e-commerce perspective also got benefit. You certainly participated and listened in Tempur Sealy call. They talk about their growth being direct-to-consumer. Admittedly, they would say off a small base, but we're hearing that brick-and-mortar retailer after retailer, there is kind of a blending. So there's always been a consumer shopping on the Internet, and then they would either do more fact-finding in a brick-and-mortar environment or just stay purely online, but there's an acceleration of the merging. And there's also kind of a change in channels. So I mean, heck, you can buy a mattress in Home Depot and Lowe's if you want today. Costco, Sam's have been the sellers of mattresses for a long time, but a higher percentage of those are compressed now than they've ever been. So it's really kind of done a lot to verify the positions and theories that we took when we embarked on the ECS journey. And that business certainly has been good. But not to take anything away from the U.S. spring business because we're continuing to see this growth of hybrid mattresses. So the spring capacity, a lot of it still goes through the old OEM traditional channel, a lot of it goes through the direct-to-consumer players who not only are online, but heck, you can buy Casper in Costco today. You can buy Nectar in brick-and-mortar as well. So there's this emerging omnichannel experience that is really kind of playing to our strengths, both from a historic component manufacturing perspective and from a finished manufacturing perspective, finished mattress manufacturing perspective. And more recently, we're starting to see some increased demand in the traditional home furniture side of the business as well.

Yes. All right. One more for me -- and I am getting several questions online here that I want to get to. But -- and that is the recent filings on Antidumping, CVD. And I guess my simple question is, this is on the 7 countries outside of China, primarily Asia, I believe, but the question simply is this. We made a big deal out of China. We essentially shut down China. It seemed to have morphed through these other countries. Is this kind of going to be it? Or can we move once again in this kind of a whack-a-mole game where, as you know, a bedding plant isn't highly sophisticated with a lot of capital? I'm just kind of curious as to, if successful, and this all takes time to play out, whether we could really see domestic production go back up again of -- in U.S. mattresses?

Yes, John, the expectation is the case will be successful. These cases aren't filed unless there's a significant claim of injury. So there's a lot of work that's done by the law firms in advance. We expect that it will be successful. The ITC voted unanimously 5 to 0 a few weeks ago to continue to prosecute the case through the DOC. So we're feeling good as an industry. Your whack-a-mole question is a good one, again, but really, we've seen almost a complete elimination of China as an exporting country. But as we've seen, Vietnam, Indonesia, Malaysia, Cambodia, Thailand, I mean, there were no mattresses coming from those places 2 years ago, and suddenly there's this giant surge. Vietnam went from 3,000 mattresses in 2018 to 1.7 million in 2019. It would take a pretty naive person to believe that the Vietnamese increased that capacity pretty quick -- that quickly or Indonesia to go from 0 to 1 million mattresses in a year. We believe that certainly some mattresses are produced in Vietnam. But the majority of these mattresses, we believe, are produced in China and transshipped through these countries. And I'll add Cambodia and Thailand to that list. There are 2 European countries that are named Turkey and Serbia. When we look at the total import volume, and if we look at last year at a total of about 7.3 million units, if we take April of 2020 and multiply it out, we could be looking at as many as 9.6 million mattresses on that trend. We think it will be truncated. But 90% of the mattresses that are being shipped into this country today are covered by existing antidumping duties as it relates to China and these additional main countries. So there's not a lot of other places for this to go. So something else will come up in the industry. We'll play whack-a-mole again. But these are the kind of the primary targets. There's not a lot of places to go around the world. And there's some legitimate exportation into the United States. Mexico, as an example, it's been shipping about 1 million mattresses into the United States for years, and the U.S. industry finds no evidence of dumping there. So we do have an expectation in the back half of this year that there will be significant additional U.S. manufacturing required to satisfy the need.

Okay. So turning to some questions that are coming in. And I think we can thank the New York Post for this article on SSB and rumored liquidity crisis that came out a few weeks ago. And I know you don't like talking about customers specifically, but is there any color you could add, not just SSB, but are you seeing any AR concerns and/or slow pay from any significant customers?

Yes. I'll address the SSB issue and then ask Jeff to address the bigger trade exposure issue because he and his team have done just a wonderful job. But as it relates to SSB, they were very quick to place a call after that Post article was written and told us that they were going through a process to increase their liquidity and late last night made an announcement that they had done so. So there was a press release issued that there's significant liquidity available now to SSB. We were not overly concerned about that particular account. They are current on the -- their payables, our receivables. They continue to be. But this liquidity event that they announced yesterday is very helpful. As business picks up, as you said, John, that we've written all these receivables down but the working capital that's required to kind of replace that with new demand, it helps that this -- SSB got this resolved. But Jeff, from a broader view, why don't you weigh in this subject, if you don't mind?

Sure, Karl. And John, thanks for the question, and good afternoon, everyone. I think just to maybe complement some of Karl's comments here, a couple of other comments I would add on are really no surprise as you think about the volatility that the industry has experienced, not only in bedding, but across a number of our different markets. A number of our customers have come to us and asked for extension of terms. And we've been very consistent in taking it on a case-by-case basis with our customers, but also remaining very rigid and very consistent in terms of our policies and procedures and how we monitor that AR exposure. And I would say, John, one of the things we're most proud of is not only the performance we've seen in terms of optimizing our DSO and our overall working capital, but also the very, very strong collaboration we've seen internally between our business units and our functional disciplines, while at the same time, working very closely with our customers to try to come up with an answer that makes sense for both parties.

And Jeff, on that, I think there was some concern in the -- about smaller retailers surviving in both sort of bedding and furniture. And yet it seems like the government's stepping in with the PPPs may have saved a lot of businesses. Is that -- from your lenses, is that a fair assessment? Are you feeling a lot better about your AR exposure today than when we started this process?

I would say we feel better today than we did a few weeks ago as we're starting to see in some of the trends that Karl articulated earlier in his opening remarks. And we've seen a very stabilized approach from our customers in terms of their pay habits and pay practices. Some of that could be stimulus-based, some of that pent-up demand. From our vantage point, we're just primarily focused on ensuring that our customer base remains current with us.

Great. Karl, you had a question here about SomniGel and how is that going. I guess it's somewhat similar to Purple talking about their less-gel polymer product. Could you sort of update us on that? And how excited you are or not excited about that product?

I'm sorry. John, what product? I heard the Purple comment but...

Yes. SomniGel, S-O-M-N-I-G-E-L, that's the question.

No -- I'm sorry. I'm not...

Not related to you. Okay.

We're certainly involved in the Purple product, and that they are a very good customer. We do a lot of partial assembly for them. They do make the gel product themselves. But yes, I don't have -- I don't know what SomniGel is. I'm sorry.

Okay. No worries. I wasn't sure either. So getting back to maybe some non-bedding and furniture markets. I mean, where are we with Auto, number one; and then maybe Aerospace? And what's the outlook around the globe for those 2 businesses, maybe 24-month view?

Right. Okay. Let's kind of level set as to what our position is as it relates to global auto exposure. So sales, about 40%, North America; 40%, Asia; 20%, Europe. [ That's a little different production ] 45%, Asia -- that's in Asia; 35%, North America; and 20%, Europe. But basically, we're producing in a geography of consumption. China was the first to recover. So production is up and running, has been for a couple of months. Still a little bit wobbly because of the stops and starts and impacts from other countries. There is some auto componentry that's produced in Asia, shipped to other parts of the world. But from a localized demand standpoint, they've had 2 months, April and May, of demand increases after 21 months of decline. So certainly Asia is first to recover. Europe was second from a manufacturing standpoint, production starting the first and second week of May. So we're starting to see certainly some supply chain issues as it ramps, but production starting to kind of get normalized. North America was last where the big 3 didn't start production until the week of May 18. And they have been somewhat handicapped because of Mexican production. Mexico is very, very important to U.S. and Canadian auto assembly. A good bit of it is there's certainly finished autos produced in Mexico, but they are a supplier to the other 2 countries from the standpoint, as an example, about 80% or north of 80% of the wiring harnesses that go into North American vehicles are produced in Mexico. And you can't build the car without the wiring harness. The car is literally built around them. So Mexico didn't start production until last week. They are allowed to produce at a 30% of normal rate. So it will probably take the end of this month, maybe to middle of July before the supply chain is full and robust. The good news is that U.S. inventories, we only have good inventory data in the U.S., are very low from a historic basis. That there is -- really, there are very few pickup trucks on lots around the country. The big 3 are really focused on pickup truck and, to a lesser degree, SUV demand. So -- which is good for us because we have high content in both of those vehicle sizes. In terms of demand, I'll try to take you out the rest of this year. 24 months is going to be a challenge just because of the volatility. But IHS, which is probably the most reliable industry statistic, which is looking at it from a global production standpoint, they're forecasting, again, global, down 23% for the year. First quarter was down 23%, you'll remember, like it was down 10%. So we outperformed the industry by 1,300 basis points. But the IHS forecast is 2Q down 48%, 3Q down 11%, 4Q down 10%. In our internal thinking, we think IHS data is probably too aggressive. We're a little bit more conservative than they. We're trying to balance their forecast kind of against the customer demand signals that we're getting and there's not a lot of clarity from a customer demand standpoint because the real focus is on getting capacity in place and filling inventory. So it will take us probably 30 to 45 days to sort all of this out. But the good news is vehicles are being produced, and it feels like there's global demand. So a healthy automotive industry is really important for us. So we'll see how it plays out. It's really hard to forecast 2021 at this point, though.

Okay. Fair enough. Maybe you were obviously successful in revising your covenants, and then were able to get through the Board the dividend. And I was just curious, maybe you could share a little color around those discussions and the pitch you obviously made and the confidence the Board and your lenders had with the ultimate decision here.

Yes. That we were in a tough bit of timing. We had pulled our full year guidance. Jeff and his team were renegotiating our lending agreements. And as you said, getting some addendum to the covenants. Jeff and the rest of the treasury team did a fabulous job. He can talk about those issues. But -- so we were kind of stuck in the middle a little bit. We didn't have enough information. We had a forecast that was -- knew we were -- didn't -- we thought that we knew where bottom was, but we weren't real sure. But I will tell you, John, that the Board certainly understands the importance of the dividend to our shareholder base. And we know that 30% to 40% of the shares are held by dividend-sensitive investors. From a liquidity standpoint, now because of the covenant amendments done, we feel like we've got really adequate headroom. We generate significant positive cash flow. We've increased the dividend for 49 years in a row. We're Dividend Aristocrats. We're proud of that. So said differently, the cash flow supports the dividend. We're dedicated to the dividend, but we're also operating in times of uncertainty.

Okay. Terrific. I appreciate that answer. Is there anything you'd like to perhaps share with the broader audience before we hit the bottom half of the hour here that I did not cover, Karl or Jeff?

No, I think you hit the high points. It's -- like I said, Jeff and his team have done a great job on the agreements. We have certainty going to a net debt measure is really a good thing. And demand in the home space is improving. We gave you an update on auto. So Jeff, unless you -- and certainly, the AR side of things was a focus. And also, John, I got to call out our team. Our team has done a great job of keeping our people safe. That was first and foremost of importance. We've had very few cases. We continue to operate the facilities with safety in mind. Our team has really coalesced around all of the issues. And the competitive advantages that we had before the pandemic hit, if anything, have been enhanced through all of these challenges and to reduce our fixed cost structure, the way that we have, is a true kind of a testimony to our people. But Jeff, do you have anything? I probably took your some couple of minutes.

No. I think, Karl, you hit it spot on. I think the last thing I was going to mention were just some of the operational improvements that the entire organization has focused on during the pandemic. And even as things continue to improve from a demand perspective in the marketplace, that discipline remains in place across our business units and our operations.

Great. Well, and I didn't call out Susan, Wendy, and Cathy, the IR team, thank you for your support. And Jeff and Karl, thank you for your time here today to update us on Leggett & Platt, and we look forward to continuing following your progress. Thank you.

Yes. Thanks, John.

Thank you, John.