Leggett & Platt, Incorporated (NYSE:LEG) Q4 2023 Earnings Call Transcript
Leggett & Platt, Incorporated (NYSE:LEG) Q4 2023 Earnings Call Transcript February 9, 2024
Leggett & Platt, Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Leggett & Platt Fourth Quarter and Full Year 2023 Webcast and Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Cassie Branscum, Vice President of Investor Relations for Leggett & Platt. Please go ahead.
Cassie Branscum: Good morning, and welcome to Leggett & Platt's fourth quarter and full year 2023 earnings call. With me on the call today are Mitch Dolloff, President and CEO; Ben Burns, Executive Vice President and CFO; Steve Henderson, Executive Vice President and President of the Specialized Products and Furniture, Flooring & Textile Products segment; Tyson Hagale, Executive Vice President and President of the Bedding Products segment; Susan McCoy, Director of IR Special Projects; and Kolina Talbert, Manager of Investor Relations. The agenda for our call this morning is as follows: Mitch will start with a summary of the main points we made in yesterday's press release and discuss operating results and demand trends. Ben will cover financial details and address our outlook for 2024, and the group will answer any questions 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 will be available on the Investor Relations section of our website. We posted to the IR section of our website, yesterday's press release and a set of slides that contain summary financial information along with segment details. Those documents supplement the information we discuss on this call, including non-GAAP reconciliations. 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 sections in our most recent 10-K and subsequent 10-Q entitled Risk Factors and Forward-Looking Statements. I'll now turn the call over to Mitch.
Mitchell Dolloff: Good morning, and thank you for participating in our call. First, I would like to recognize Susan McCoy on what will be her final earnings call. She's retired at the end of March after 38 years with the company, including 22 years in Investor Relations. Susan has made enormous contributions to Leggett, including developing an outstanding IR function that has benefited both Leggett and the investment community over the past two decades. Susan, thank you so much for your service and congratulations on your retirement. In what has been a long-planned succession, Cassie Branscum stepped into the lead role as Vice President of Investor Relations, effective the beginning of 2024. Cassie joined the IR team in 2018 after serving in various roles across the company since 2005.
She has tremendous financial skills and deep Leggett knowledge that will continue to serve us well as she leads the IR function going forward. 2023 was another challenging year, particularly within our residential end markets. Our employees, once again, persevered to accomplish some notable achievements, including preparing a restructuring plan for our Bedding Products and Furniture, Flooring & Textile Products segment. These efforts will drive improved operating efficiency and profitability while maintaining high quality products and services for our customers, driving strong cash flow with a continued focus on working capital management, and advancing our sustainability data collection efforts to establish baseline metrics and goals that we plan to share in our 2024 report.
Thank you for your continued dedication to each other in Leggett & Platt. We have made some difficult but necessary decisions to support the company's long-term success. I sincerely appreciate your ongoing support, and thank you for your efforts each and every day. Before we move on to our fourth quarter and full year 2023 financial results, I would like to walk through the restructuring plan we announced on January 16 that primarily impacts our Bedding Products segment. We're taking actions to create a more focused, agile organization with a portfolio of products that are most in demand and an operating footprint aligned with the markets we serve. These actions build upon work already underway to better position our bedding business for the future.
Optimizing the bedding manufacturing and distribution footprint will drive most of the one-time cost and future EBIT benefits from the plan. The majority of bedding actions will be within our U.S. Spring and specialty foam businesses. We will be winding down operations at our smaller U.S. Spring distribution locations over the next few months and expect to shift innerspring production to four higher output facilities over the course of 2024. Within Specialty Foam, we will be consolidating several manufacturing operations and driving more product synergies across specialty foam and innersprings, including private label and OEM hybrid mattress production over approximately the next 18 months. Few of the higher output manufacturing facilities, combined with an improved distribution network will allow us to manufacture and distribute our products more efficiently and serve our customers more effectively.
While we are reducing capacity in certain product categories to align with consumer preferences that have shifted over time, we are maintaining sufficient capacity to service our customers with the products they deserve most as market demand returns to more normalized levels in the future. Sales attrition from these initiatives is primarily due to discontinuing production of certain commodity bedding products in certain geographies. We are also consolidating a small number of production facilities in our home furniture and flooring products businesses within the Furniture, Flooring & Textile products segment. The home furniture consolidation activity is underway and is expected to be completed in the first half of 2024. The flooring products efforts are also underway, but will likely extend into 2025 as multiple product lines are being shipped among locations.
These actions are being taken to better align capacity with regional demand and drive operating efficiencies. In connection with the restructuring plan, we stepped away from our total shareholder return goal and financial targets, including revenue growth, EBIT margin and dividend payout ratio. We will issue revised financial targets in the future when our restructuring initiatives are implemented, and we have better visibility of further opportunities that could impact our long-term performance. Now moving on to fourth quarter and full year 2023 results. Fourth quarter sales were $1.1 billion, down 7% versus the fourth quarter of 2022. Continued weak demand in residential end markets was partially offset by demand strength in our automotive, aerospace and hydraulic cylinders businesses.
Fourth quarter EBIT was a loss of $367 million, resulting from a $444 million non-cash intangible asset impairment charge. This impairment was associated with the ECS and [indiscernible] acquisitions and primarily related to customer relationships, technology and trademark intangible assets. Prolonged weak demand and changing market dynamics have created disruption and financial instability for some of our customers. As such, recent efforts by certain customers to improve their financial position are expected to reduce our future sales and earnings. This triggered an evaluation of intangible assets and resulted in the impairment charge in the fourth quarter of 2023. Adjusted EBIT was $66 million in the quarter, down $25 million versus fourth quarter 2022, primarily due to lower metal margins in our Steel Rod business and lower volume in our residential end markets.
Fourth quarter earnings per share was a loss of $2.18 due to the items discussed in yesterday's press release. Excluding these items, adjusted fourth quarter EPS was $0.26, a 33% decrease from fourth quarter 2022 EPS of $0.39. For the full year, 2023 sales decreased 8% to $4.7 billion, primarily from weak residential end market demand and raw material related selling price decreases, partially offset by acquisitions and demand strength in industrial end markets. EBIT decreased $575 million, primarily from the $444 million intangible asset impairment. Adjusted EBIT decreased $151 million to $334 million, primarily for metal margin compression and lower volume in our residential end markets. Full year EPS was a loss of $1 and adjusted EPS was $1.39, a 39% decrease from 2022 EPS of $2.27.
Cash flow from operations was $497 million, a $56 million increase versus 2022. Moving on to the segments. The U.S. Bedding market continues to be in a deep recession with mattress consumption at levels comparable to 2016. We believe 2023 U.S. mattress consumption was down high-single digits versus 2022 and expect mattress demand in 2024 to be flat to down slightly versus last year. Imported finished mattresses are putting additional pressure on U.S. production in this low demand environment. Sales in our Bedding Products segment were down 14% versus fourth quarter of 2022 and decreased 17% for the full year. While volume in U.S. Spring was down 12% in 2023, ComfortCore performance was consistent with overall mattress market trends. We expect 2024 volume in U.S. Spring to be down modestly, primarily due to anticipated sales attrition from the restructuring plan and further declines in lower value Open Coil (ph) layer springs and wire grids.
These declines are expected to be partially offset by growth in ComfortCore innerspring units, including growth in our new combination pocket and eco based products. Metal margin declined slightly more than expected in 2023, primarily due to mix. We anticipate further modest declines in 2024. To stay competitive with global steel cost, both contract and non-contract innerspring pricing was adjusted in the back half of '23. Pricing impacts began in the fourth quarter, but will be fully realized in 2024. Specialty Foam volume in 2024 is expected to be down high-single to low-double digits, primarily as a result of customer actions that led to the impairment charge we discussed earlier. These impacts are anticipated to be realized as we move through the course of the year.
We expect 2024 adjusted segment EBIT to be modestly lower year-over-year from lower volume, pricing responses related to global steel cost differentials and modest metal margin compression, partially offset by approximately $45 million of lower amortization from the intangible asset impairment taken in the fourth quarter of 2023. Despite current challenging market dynamics, the actions we are taking aim to position our Bedding business for long-term success as we improve operating efficiencies and continue to drive valuable product solutions for our customers. Sales in our Specialized Products segment increased 5% versus fourth quarter of 2022 and were up 14% for the full year. In our automotive business, the UAW strike impact on fourth quarter sales was approximately $5 million, and we do not expect any follow-on impacts from the strike in 2024.
We continue to see volatility in certain regions due to geopolitical and supply chain impacts. We anticipate growth in 2024 and expect to outperform global automotive production, primarily due to new programs initiated production throughout the year. We expect continued strong demand in our aerospace business in 2024 with commercial aerospace backlogs at historic highs. 2024 industry production is anticipated to be modestly above pre-pandemic levels. In hydraulic cylinders, U.S. demand continues to be strong with backlogs driving growth through at least the first half of 2024. Domestic growth is expected to be mostly offset by softening demand in Europe. In 2024, we expect segment EBIT to be flat with 2023 as volume growth is anticipated to be offset by less benefit from a reduction to a contingent purchase price liability associated with the prior year acquisition.
Sales in our Furniture, Flooring & Textile Products segment were down 6% versus fourth quarter of 2022, and down 11% for the full year. Demand in home furniture continues to be soft. We expect 2024 to be similar to last year with improvements in low end market demand, offset by continued weakness in mid to high-end market demand. Work Furniture demand remains low in both contract and residential markets. We expect 2024 demand be in line with 2023. In Flooring Products, we are anticipating another year of lower residential demand due to low existing home sales and renovation activity. Hospitality demand continues to slowly improve, but remains well below pre-pandemic levels. After weaker than expected demand in 2023, we anticipate Geo Components demand to improve through the course of the year, infrastructure and commercial spending in civil construction markets, while retail sales are expected to be flat.
In 2024, we expect adjusted segment EBIT to be down modestly year-over-year from lower volume and moderate pricing pressure from deflation. The largest headwind to earnings continues to be low volume levels in our residential end markets. In the near term, we are focused on improving operating efficiency across our businesses, driving cash flow and executing our restructuring plan. Additionally, we believe the longer term benefits from our refocused bedding strategy will advance key product growth, improve profitability and drive enhanced value for our customers and shareholders. I'll now turn the call over to Ben.
Benjamin Burns: Thank you, Mitch, and good morning, everyone. In 2023, we generated cash from operations of $497 million, $56 million higher than the $441 million we generated in 2022. This increase reflects a continued focus on working capital management, partially offset by lower earnings. We ended the year with adjusted working capital as a percentage of annualized sales of 13.9%, a notable improvement from 2022. Consistent with our near-term priorities of managing cash and reducing debt, we did not complete any acquisitions and had minimal share repurchases in 2023. Major uses of cash in 2023 were $114 million of capital expenditures, reflecting a balance of investing for the future while controlling our spending. $239 million for dividend payments, extending our record of consecutive annual dividend increases to 52 years and $107 million to reduce debt.
We ended the year with total debt of $2 billion, including $186 million of commercial paper outstanding. Net debt to trailing 12-month adjusted EBITDA was 3.16 times at year end, in line with the third quarter and consistent with our expectations. We monitor our debt leverage and liquidity closely. As a reminder, our covenant calculation is more favorable than our publicly reported leverage ratio, and we expect that favorable difference to expand in 2024. Total liquidity was $697 million at year end comprised of $365 million of cash on hand and $332 million in capacity remaining under our revolving credit facility. As we anticipate weak residential end market demand again this year, we are focused on maintaining our investment grade credit rating and managing debt leverage while balancing continued investment in our business for future growth and our dividend track record.
We continue to focus on managing working capital and identifying other opportunities to generate cash. In 2024, we expect pre-tax proceeds of $20 million to $30 million from real estate sales, consisting of idle real estate, we are actively marketing and to a lesser extent, real estate that we will be exiting as a result of our restructuring initiatives. We expect to predominantly use our commercial paper program to repay $300 million of 3.8%, 10-year notes maturing in November. Now moving to the 2024 full year guidance. 2024 sales are expected to be $4.35 billion to $4.65 billion were down 2% to 8% versus 2023, reflecting continued weak demand in our residential end markets, partially offset by growth in automotive and our industrial end markets.
Volume is expected to be down low to mid-single digits with volume at the midpoint, down high-single digits and bedding products, up low-single digits in Specialized Products and down low-single digits in Furniture, Flooring & Textile products. Deflation and currency combined is expected to reduce sales low-single digits. 2024 earnings per share expected to be in the range of $0.95 to $1.25, including approximately $0.20 to $0.25 per share of negative impact from restructuring costs and $0.10 to $0.15 per share gain from the sale of real estate. Full year adjusted earnings per share are expected to be $1.05 to $1.35 primarily reflecting lower volume, pricing responses related to global steel cost differentials, modest metal margin compression and several expense items that were abnormally low in 2023 and are expected to normalize in 2024, including bad debt expense, a reduction to a contingent purchase price liability associated with the prior year acquisition and incentive compensation.
These decreases are partially offset by lower amortization from the 2023 intangible asset impairment. Based upon this guidance framework, our 2024 full year adjusted EBIT margin range is expected to be 6.4% to 7.2%. EPS guidance assumes a full year effective tax rate of 25% versus an adjusted rate of 24% in 2023. Depreciation and amortization of approximately $135 million, which is approximately $45 million lower as a result of the impairment taken last year. Net interest expense of approximately $85 million and fully diluted shares of $138 million. Cash from operations is expected to be $325 million to $375 million in 2024, as we expect fewer opportunities for working capital improvement year-over-year. We will continue to closely manage all elements of working capital.
For the full year 2024, we assumed capital expenditures of $100 million to $120 million, dividends of approximately $245 million, indicating $1.84 annual dividend in 2024 versus $1.82 in 2023 and minimal spending for acquisitions and share repurchases as we focus on managing cash. In closing, I would like to thank our employees. Your continued efforts to drive value for our customers and shareholders while supporting and keeping each other safe is very much appreciated. With those comments, I’ll turn the call back over to Cassie.
Cassie Branscum: Thank you, Ben. Operator, we're ready to begin Q&A.
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