Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Restructuring plan is on track and some elements are progressing ahead of schedule.
- Operational efficiency improvements are being realized earlier than expected.
- Strong focus on transparent communication and quick wins to drive profitability.
- Commitment to long-term investment in key businesses like bedding, automotive, and geo components.
- Successful execution of real estate sales, generating significant proceeds.
Negative Points
- Second quarter sales and adjusted earnings were lower than anticipated.
- Weak demand in residential end markets and continued raw material deflation.
- Significant non-cash goodwill impairment charge of $675 million.
- Higher bad debt reserves and increased inventory write-downs impacting earnings.
- Lower expected volumes across segments leading to revised sales guidance.
Q & A Highlights
Q: Can you talk about what your clear priorities are at this point and how you're thinking about the positioning of the business and the things that you're especially focused on as you think about that several quarters?
A: It's really to be incredibly transparent with you, the investment community, and with our employees that we're in a tough environment. Transparency is always important but probably never more important than it is now. It's also to have quick wins to continue to do the blocking and tackling that's required to improve our profitability. At the same time, just empowering our people to make decisions to know that they're supported and we're all in this together. Establishing a sense of accountability and urgency is really important. We're also focused on the restructuring plan, which is progressing well. Additionally, we're conducting a portfolio management review to determine which businesses we should be in and how to accelerate profitable growth in those areas.
Q: Maybe shifting to bedding more specifically, you mentioned that there's been some moving parts in there. Can you talk a bit about the new products and some of the other efforts that Leggett is going through to help revitalize and regain share with some of your existing customers?
A: Our development teams are extremely busy working with several of our critical customers on innovation projects, particularly in our spring group. Despite the current challenges, this is a really encouraging sign for us. We're also focusing on short-term opportunities to work with customers on projects that make sense for both parties. Our eco base and automated foaming case comfort core unit production are some tools that help us regain market share. Additionally, our ECS team has been diversifying the customer base and selling accessories, components, and finished mattress projects, which has shown some volume improvement year over year.
Q: Can you talk about the success that SSNT is seeing and the ability to continue to execute at that level even with this tough demand environment?
A: Our teams and leaders across these businesses have become more agile and focused due to the wild spikes and drops in volume, commodity costs, and other factors over the last four years. They've learned to quickly analyze costs and margins, anticipate volumes and costs, and mitigate cost increases. This has allowed us to deliver strong pricing discipline in a tough environment. As volumes improve, we believe we can use these skills and confidence to positively grow on the upside.
Q: Can you unpack the dynamics in the auto business, including the adoption of EVs, Chinese entrants into Europe, and inventory levels in the US?
A: The EV adoption varies by region, and our teams are dealing with elongated programs on ICE vehicles in certain markets and an acceleration of EV adoption in others. We have content on Chinese EVs, but the dollars of sales per unit are less than originally anticipated. However, our profit margins on these legacy models are higher. In the US, inventories are starting to grow, but the affordability of new vehicles remains a challenge. This affordability issue plays into our hands as we have strong market positions in smaller, more affordable vehicles.
Q: Is the metal margin compression a normalization or are there changes in tariff protections or import dynamics?
A: It's primarily a normalization. There's no change in import protection. The shrinking of the spread is more driven by demand or lack of demand domestically across all markets. The excessive difference between the US steel market and Europe has adjusted prices accordingly in our businesses.
Q: On portfolio optimization, what are the hurdles and how do you go about debating that given the macro environment?
A: We're evaluating all businesses based on their profitability, growth potential, and fit with Leggett. You should expect a smaller, more focused company in the future. We don't divulge potential divestitures until we're under an LOI, but there's a lot of activity.
Q: What have been the biggest challenges and issues that Leggett & Platt has faced in recent years?
A: The biggest challenges have been maintaining transparency, establishing a sense of urgency, and making decisions in a tough environment. The bedding industry has been particularly challenging, moving from recession to depression. The whipsaw effect of post-pandemic demand and its subsequent falloff has been tough to manage.
Q: How do you think about the health of the consumer today and the impact of macro and political uncertainty on their willingness to make big-ticket purchases?
A: The health of the consumer is weak. Many premium bedding purchases are financed, and the ultra-premium segment is showing softness. Until the Fed makes a rate adjustment, consumer confidence and household formation will remain low, impacting big-ticket purchases.
Q: How do you think about the impact of macro tailwinds on the business if the Fed starts to move in the back half of this year?
A: Volume is always a good thing. Increased volume through our assets, especially in bedding, would significantly improve profitability. Many of our businesses have similar characteristics, and volume would be welcomed and is needed at this point.
Q: You saw a nice improvement in working capital despite the tough environment. Can you talk about the sources of that and how you plan to continue benefiting from it?
A: Most of the benefit comes from bringing our inventories down. Our teams are focused on this and have done a good job. We expect slight working capital benefits in the back half of the year, with earnings driving the majority of cash flow. We also plan to monetize real estate properties to generate additional cash.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
