Leggett & Platt, Incorporated

Greetings and welcome to the Leggett and Platt second quarter 2022 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Susan McCoy, Vice President of Investor Relations for Leggett and Platt.

Please go ahead. Good morning, and thank you for taking part in Leggett and Platt's second quarter conference call. On the call today are Mitch Dollop, President and CEO, Jeff Tate, Executive Vice President and CFO, Steve Henderson, Executive Vice President and President of the Specialized Products and Furniture, Flooring, and Textile Products segments, Tyson Hagel, Senior Vice President and President of the Betting Products Segment, and Tassie Granscombe, Senior Director 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. Jeff will cover financial details and address our outlook for 2022, and the group will answer any questions you have. This conference call is being recorded for Leggett and Platt in its 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 yesterday's press release and a set of PowerPoint slides that contain summary financial information along with segment details. Those documents supplement the information we discussed 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 obligations to update or revise these statements. For a summary of the 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.

Thanks, Susan. Good morning, and thanks, everybody, for participating in our second quarter call. Our employees continued to drive strong results in the quarter despite ongoing macroeconomic, geopolitical, and various in-market challenges. Sales from continuing operations were a quarterly record of $1.33 billion. EBIT was $143 million, and earnings per share was $0.70. Sales in the quarter were up 5% versus second quarter 2021, reflecting our successful pass-through of significant inflation over the past several quarters, partially offset by lower volume and currency impact. EBIT decreased 17% versus second quarter 2021 and was down slightly versus second quarter 2021 adjusted EBIT. Last year's second quarter EBIT included a $28 million gain from the sale of real estate associated with our exited fashion bed business. EBIT decreased slightly versus last year's adjusted EBIT primarily from volume declines and lower overhead absorption, as production and inventory levels were adjusted to meet reduced demand, mostly in bedding. These decreases were largely offset by expanded metal margins in our steel rod business and pricing discipline in our furniture, flooring, and textiles product segment. EPS was 70 cents, a 15% decrease versus second quarter 2021, and a 6% increase versus last year's adjusted EPS. We are lowering our full-year guidance to reflect macroeconomic uncertainties, including impacts of inflation, tightening monetary policy, and softening consumer demand, continuing through the back half of the year. We expect solid demand in our industrial and automotive end markets to partially offset softer consumer markets. Now I'll move on to the segments. Sales in our vetting product segment were up 1% versus second quarter of 2021. Raw material-related selling price increases, strong trade demand in steel rod and drawn wire, and the addition of our CAFOAM acquisition made in the second quarter of last year were largely offset by volume declines from soft demand in U.S. and European betting markets. Market demand was negatively impacted by higher energy costs and general inflation early in the quarter, but then remained relatively consistent. Mattress consumption has been on the leading edge of consumer spending activity and began to slow in the fourth quarter of last year, making year-over-year comparisons difficult. Sequentially, demand was down only slightly from the first quarter. Commodity costs seem to have stabilized, although at historically high levels. Other manufacturing inputs, including energy, continued to increase during the quarter. We are carefully managing these costs and the impact to our business and our customers. Within our vetting businesses, the supply chain remains stable, and we are well protected against future disruptions. We began to adjust production, manufacturing costs, and inventory in the fourth quarter of last year. Inventory levels have turned down since that time, and we will continue to monitor them closely while maintaining our ability to service customer requirements. We are well positioned to address further demand changes, whether up or down, and will respond quickly and responsibly. Provided no major changes in the macroeconomic backdrop, we expect demand in the segment for the back half of the year to remain consistent with levels seen in the first half of the year. EBITDA margins in the segment were lower versus second quarter 2021 adjusted EBITDA margins, primarily from lower volume and lower overhead absorption as production and inventory levels were adjusted to meet reduced demand, mostly offset by expanded metal margin in our steel rod business. Sales in our specialized product segment increased 8% versus second quarter 2021 from strong volume growth in all three businesses. These volume gains were partially offset by currency impact. The industry forecast for global automotive production has stabilized since April. The current forecast anticipates just under 5% growth in the major markets this year. Consumer demand remains strong and vehicle inventory remains at record low levels. As supply chains continue to stabilize, the industry should see improving production for the next several years. Industry forecasts now indicate recovery continuing through 2024. In our aerospace business, demand for fabricated duct assemblies remains at pre-pandemic levels, and we continue to see modest demand recovery for well and seamless tube products. We expect continued recovery in 2022, and the industry is anticipated to return to 2019 demand levels in 2024. End-market demand in hydraulic cylinders is strong, and order backlogs in the industry are at record levels. However, labor availability and global supply chain constraints have hampered the ability of our OEM customers to ramp up production. We're seeing some improvement in these areas, but it could be late 2022 or longer before industry backlogs normalize. We expect our sales in this business to continue to grow as OEM production increases. EBITDA margins in the segment declined primarily from higher raw material and transportation costs, labor inefficiencies, and currency impact, partially offset by higher volume. Sales in our furniture, flooring, and textile product segment were up 10% versus second quarter 2021, primarily from raw material-related selling price increases and volume recovery in work furniture, partially offset by lower volume in home furniture, textiles, and flooring. In home furniture, mid and upper level price points should remain relatively strong through the third quarter due to customer backlogs. However, backlogs are coming down due to consumer demand shifts and macroeconomic uncertainties. Demand at lower price points has continued to soften, negatively impacting our business in China. The Chinese market was also impacted by COVID-related lockdowns during the second quarter. We expect work furniture sales to continue to grow from improving demand in the contract market as companies redesign their footprints and invest in office space. However, demand for products sold for residential use is softening. In textiles, we expect geo components to grow in 2022 as demand remains strong across both the civil construction and retail markets. In flooring products, residential demand has softened with lower home improvement activity and hospitality demand remains well below pre-pandemic levels. EBITDA margins in the segment improved versus second quarter 2021, primarily from pricing discipline partially offset by lower volume. Before I turn the call over to Jeff, I'd like to thank our employees for once again delivering strong quarterly results. Your collective ingenuity, commitment, and effort allows us to effectively navigate this dynamic operating environment. Jeff, I'll hand it over to you.

Thank you, Mitch, and good morning, everyone. In second quarter, we generated cash from operations of $90 million, up $49 million as compared to $41 million in second quarter 2021, reflecting a much smaller use of cash for working capital. Working capital increased significantly last year due to restocking efforts following inventory depletion in 2020. but increased to a lesser extent this year as we continue to return to inventory levels more reflective of current demand. We expect cash from operations of $550 million to $600 million in 2022, as last year's significant inflationary impact stabilized and we continue to balance inventory levels. We ended the second quarter with adjusted working capital at a percentage of annualized sales of 15.7%. Our priorities for use of cash are unchanged. They include an order priority, funding organic growth, paying dividends, funding strategic acquisitions, and share repurchases with available cash. Capital expenditures in the second quarter were $22 million. In May, our Board of Directors increased the quarterly dividend to 44 cents per share, 2 cents or 5% higher than last year's second quarter dividend. At an annual indicated dividend of $1.76, the yield is 4.4% based upon Friday's closing price, one of the highest among the dividend kings. With the leveraging we accomplished over the past few years, share repurchases have returned as one of our priorities for use of cash. The level of repurchases will vary depending on various considerations, including alternative uses of cash and opportunities to repurchase shares at an attractive price. We took advantage of the lower share price during the second quarter and repurchased 1 million shares at an average price of $35.01 per share. Total repurchases for the quarter were $35 million. This brings due-to-date repurchases to 1.6 million shares, or $57 million. We ended the second quarter with net debt to trailing 12-month adjusted EBITDA of 2.39 times. Our strong financial base gives us flexibility when making capital and investment decisions. We remain focused on cash generation while maintaining our balance sheet strength and deploying capital in a balanced and disciplined manner that positions us to capture near and long-term growth opportunities, both organically and through strategic acquisition. Now moving to guidance. As Mitch stated earlier, we are lowering our full-year guidance for both sales and earnings per share. 2022 sales are now expected to be $5.2 billion to $5.4 billion, or up 2% to 6% over 2021. Guidance reflects volume down low to mid-single digits, with the bedding product segment down low double digits, specialized product segment up low double digits, and furniture, flooring, and textile products roughly flat. The guidance also reflects continued inflationary impact primarily from raw material-related price increases, including those implemented as we move through 2021. The guidance assumes negative currency impact, and acquisitions in 2021 should add 1% to sales growth but will be mostly offset by small divestitures. 2022 earnings per share are now expected to be in the range of $2.65 to $2.80. The decrease versus prior guidance primarily reflects lower expected volume in consumer end markets, partially offset by continuing strength in industrial and automotive markets, as well as metal margin expansion in our steel rod business. Based upon this guidance framework, our 2022 full-year EBIT margin range should be 10.5% to 10.7%. Earnings per share guidance assumes a full-year effective tax rate of 23%, depreciation and amortization to approximate $200 million, net interest expense of approximately $80 million, and fully diluted shares of $137 million. For the full year 2022, we expect capital expenditures of approximately $130 million and dividends should approximate $230 million. In closing, Leggett remains well positioned both competitively and financially to capitalize on long-term growth opportunities in our various end markets. Our enduring fundamentals give us confidence in our ability to continue creating long-term value for our shareholders. With those comments, I'll now turn the call back over to Susan.

Thanks, Jeff. That concludes our prepared remarks. We thank you for your attention, and we'll be glad to answer your questions. Operators, we're ready to begin the Q&A session. Thank you.

We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Bobby Griffin with Raymond James. Please proceed with your questions.

Good morning, buddy. Thank you for taking my questions. So first, Mitch, I want to first start off on specialized products segment. It's really a two-part question. I mean, one, we saw you guys pick up the volumes pretty notably and for the full year. So maybe just unpack what areas of that business are coming in stronger than expected and kind of what's a little bit more detail what's going on in those end markets. And then secondly, just what's the pathway back for margins to return to kind of the mid-teens in that segment that we're used to seeing. Is there a path back there, or is structurally something changed within the businesses that it's going to need to be a little bit lower margin business going forward?

Yeah, good morning, Bobby, and thanks for participating today. Appreciate the good question. So, I think a couple of things here. I'll take your questions in order. First, the volume up, you know, from the prior guidance, why I think it's really just more confidence in the actual improvement of production across all three of those businesses. We've seen significant improvement in aerospace and hydraulic cylinders, although that's still somewhat impacted by the OEM's ability to navigate labor and chip issues. But we have seen increased production over the last several months. And then similar in automotive as well, where while they're not getting all of the chips that are needed to enhance production there, it has become more stable. And so that the production schedules are way less, you know, dynamic than they were, you know, probably last year. And so we continue to see some improvement there. I think in automotive, the projection for the major markets is, you know, second half production up about 11% versus the first half. So all of those things kind of holding up. are what really gave us the confidence to increase our guidance around the volume there. And then your questions around the margins is also a good one. So I do think that we have a path forward to those mid-teens kind of margins again. I think a few things, dynamics are in play there. First, all three of those businesses were the most impacted at different times, but as the pandemic hit and in 2020, we saw the volumes there just declined very, very significantly. And this is, I think, old news, right? Everybody knows that it's been a really struggle for those industries to regain their traction. But as I just said, they're starting to now. So we certainly have the impacts from lower volume, which is significant, lower overhead recovery, and then just some of the inefficiencies as the production schedules, as I said, are so dynamic. The other element that is critical, and we talked about this on the call, last quarter that it started more significantly to impact us in automotive is the impact of commodity inflation. It's less of a commodity business than if you think about the steel products embedded in our own furniture or things like that, so it's normally not much of an issue. But over time, over the course of this dynamic last year or two, there have been inflationary impacts that have built up, whether it's around resins or steel impacts or just other raw materials, transportation, that had built up, and we talked about it last quarter, to become relatively significant for the business. And we've made really material progress, I would say, in the cost recovery starting in the second quarter. And I would expect that to continue sequentially as we go through the year. One thing to note is that pricing in automotive is very, very different than any other of our businesses, maybe similar to aerospace, but that the industry generally works on fixed pricing with cost downs over the life of a program. So prices typically don't go up and down throughout the life of a program unless there is some really significant event, like we've seen over the last couple of years, really the last year. And so it takes time for enough pressure to build through the supply chain that the OEMs are then sort of forced to concede price changes. So it's tough to predict exactly the timing. It's not as simple as industries were built to have these kind of pricing fluctuations. So we have seen that momentum build and start to see actual tangible benefits of that in the second quarter. Again, tough to predict exactly in the timing, but we do expect to continue to make significant progress over the second half of the year. And that recovery can take the form of a number of items. It could be actual price changes. It could be delaying cost downs. It could be some engineering changes or even one-off payments. But we do feel confident that the ball is rolling now. We're starting to see the results, and that will continue. The second area that we talked about, probably just one more thing real quick. Last time we talked about some operational issues that we're having in one of our facilities in the U.S. We've also made substantial progress there in that plant. Inventory positions are improved. The resulting premium freight is going down, and our excess labor costs are going down. Not done, still work to do, but making progress.

Very good. I appreciate that detail. It was very helpful. Thank you, Mitch. And then I guess, secondly, just as a follow-up, maybe on the commodity or steel side of the business, we have started to recently see some of the steel commodities roll over. Has the spread or the metal margins changed at all with the recent kind of reduction in some of the steel indexes? And it's been a very long time since we've kind of seen steel deflation. The last couple years have been inflation. How do you think the business, you know, will respond to potential deflation of steel products, you know, similar to the history we're used to seeing with Leggett when they see deflation?

Yeah, great question, Bobby. I'll take the easy part and then hand it over to Tyson. But on the steel side, think about the separation between where we're using flat products in home furniture, and we have seen some reduction there. Teams are managing that very, very well, managing our inventory and also managing our pricing. A little bit different on the rod side with increased other input costs there. So Tyson, I'll hand it over to you on that one.

Sure. Yeah, and it is a little bit of a complicated story, but But you're right, Bobby, even recently we have started to see some softening in rod pricing, but to a lesser extent than we've even seen some changes in scrap. Mitch started to hint at it, but I think some of that is just general industrial demand has remained relatively strong for steel products, and then also some of the conversion costs that have increased pretty substantially that I don't think get quite as much notice. But energy, just general utility usage, consumables that go into it have also, I think, helped support some of the higher pricing. but we have seen it start to stabilize and start to come down a bit. We've been monitoring that closely on the way up and also do the same as things decrease. We have also a large part of our steel-based business that's contractual, so we'll obviously see those things pass through as necessary.

Thank you. I appreciate the details. Best of luck here in the second half.

Thank you, Bobby.

Thank you. Our next question comes from the line of Susan McClary with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everyone. My first question is, you know, talking a little bit about the consumer perhaps. You mentioned in your comments, Mitch, that you have seen betting demand stabilize in the quarter. You expect it to hold flat. talk in general just about the state of the consumer, the health of the consumer that you're hearing from your customers? And perhaps with that, any commentary on the elasticity of demand that you're seeing in betting, especially as you're continuing to put price in to offset those inflationary pressures?

Yeah, sure. I'll take a shot at that. And good morning, Susan. Thanks for the good question. I think it's tough to predict, but I think the fact that we've seen demand being pretty stable is is probably a good thing, right? It's tough in this type of inflationary environment with monetary policy tightening and all of the other macroeconomic disorders that are out there. So I think that led to the step down. But I think that if we can see that inflation is starting to stabilize and then starting to gently come down, I really don't see it just dropping off very swiftly. But if it starts to stabilize, I think that we will see that consumer hold in there for us, at least at decent levels. And then depending upon what happens going forward, if we are able to avoid a severe recessionary cycle, I think that we should be in pretty good shape. But we've certainly been planning in all of our businesses for this kind of uncertainty, and really starting last year to make sure we're managing inventory closely, that we're you know, managing our variable costs and our production levels so that we're really ready to move either way. If it gets a little bit softer, to be able to take a step back and control our costs or to be able to respond very quickly if we're able to see pickups. So I think that's the really big question that's out there for the world, right, is what's going to happen with consumer demand and inflation out there. But I'm relatively optimistic with the trends that we're seeing. But Tyson, what are you hearing?

Very similar, Mitch. We've shared that we felt some of the slowdown earlier than a lot of others when it started happening in the fourth quarter of last year. Both, I think, from the lower end price points slowing first, but then also as it moved into some mid and even to a lesser extent some of the higher price points as it moved through the early part of this year. And also, not just from the impact of inflation and other things, but consumers shifting to spending on services, travel, and some other areas like that. Like Mitch said, what gives us confidence, even as we watch consumer sentiment be at low levels, is that we've seen some step-downs over the course of the last nine months or so, but it's been really consistent, especially as we move through the second quarter. One thing I think we'll be watching closely as we watch some of the retail activity is just especially consumers on the lower end and how they react to the continued inflation or even prices staying at high levels. But overall, I think we feel pretty confident just in some consistency as we get to the back half of the year.

In the longer term, in this betting side, we really historically don't see multi-year downward trends. That's something that would be outside of the norm of what we see. Even if we think about the housing market softening a little bit, even in places like our home furniture business, for example, maybe less impact in consumer sentiment. With all of the home traffic that has happened over the last couple of years, probably some return to that repurchasing cycle there. I will say that we've seen more negative impact on the home furniture side, particularly at the low end recently.

That's all very helpful, Culler. And, you know, following up, obviously the macro environment has shifted in the quarter. There's a lot of debate about where we sort of are you know, from a broader perspective there. But as you speak about the business, Mitch, how are you preparing for a shift in the macro landscape? You know, what is the playbook that you'll go to if we do see things deteriorate more than, you know, where we currently are at? And, you know, what are you watching in order to determine what needs to happen to the business to protect it in a weaker macro?

Great question, Susan. Thank you. And I guess, you know, we've kind of been through a similar type of circumstance before, you know, when we were in 2020 with the downturn after the onset of the pandemic. So I think that we've learned some new skills that we certainly haven't forgotten then. But first off, though, I would say I expect that we'll benefit from our portfolio diversity, right? We're seeing, you know, stronger demand hold up in our industrial and automotive businesses compared to our more consumer-facing businesses. So I do think that that will continue to hold up. But You know, we'll also, regardless, be able to continue aligning our variable costs and our inventories to demand. I think the good news there, as I mentioned on the call, is that we've been doing this since we first started to see demand slowing a little bit in the fourth quarter of last year in betting, as well as across our other businesses. It's something, frankly, that we talk about on a regular basis across all of our businesses. In this environment, since we're well positioned, we're not scrambling to catch up with what's happening in the macroeconomic circumstances. We continue to drive strong free cash flow. We have really strong liquidity. So we'll be able to benefit from those things as well. In 2020, we cut about $90 million of cost, mainly overhead costs. And I never thought about that as something that was temporary, that we would take those costs out and we would bring them back. But I did think about it as that we would make investments for our future. And we have been doing that. And I think that our portfolio diversity and our strong cash flow and liquidity will allow us to continue to make those investments. So, you know, we'll have more capacity to implement those activities if demand is slower. And we'll benefit from the improved efficiencies, the capabilities, and be ready to take advantage of stronger demand when those conditions improve. You know, if it's worse than that, then we'll take those actions and we'll go back to more radical cost-cutting. But I really think that we're well-positioned to be able to invest in our future and really benefit from the recovery as we come out of the cycle.

That's great, Mitch. Thank you for the color. I'll re-cue and turn it over to someone else.

All right. Thanks, Susan.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Keith Hughes with Truist Security. Please proceed with your question.

Thank you. First question, on one of the earlier comments, you talked about metal margins. I think they were particularly ticking down a little bit. I want to make sure I heard that right. And kind of what have you assumed in the guidance for the second half of the year on those margins?

Tyson, do you want to take that one? Sure. And just to clear that up, what I was suggesting was that we're seeing some softening in rod pricing. But overall, I think we've seen – and actually, maybe take a quick step back. In the second quarter, metal margins actually expanded a bit beyond our expectations. And some of the drivers there that kind of caught us a little bit by surprise, but the invasion of Ukraine had an impact on scrap pricing as – As an input, people were trying to scramble around, find scrap, which drove up the demand for scrap supply. We also saw a sharp increase in energy costs and then just general steel demand all put to some higher metal margin expansion in the second quarter. In the third quarter, we see rods start to soften a bit, scrap as well, as some of those things have backed off. But generally, we would still see overall metal margins being relatively consistent in the third quarter. And right now, we're expecting some modest compression as we get into the fourth quarter, just with overall supply and demand. But at this point, it's still tough to predict. But we would then, you know, think for the full year, we'd still be up here every year.

Okay. And in the prepared comments, you talked about textiles and flooring kind of seem like they're moving in different directions right now. Just relative size, you kind of lump those together in the 10K. Can you just talk about how what those two represent as a percentage of the FFT segment.

Let me see here.

I don't know if I can think about it that way.

Yeah, okay. And Steve, chime in if you have that handy. I think that textiles is about 35% or so of the business of the segment. Is that about right, Steve? Yeah.

Yeah, textiles about 35%. Flooring probably about 25%. Yeah, about 20%. 20%.

Okay. And then I guess final question. You had the compression and specializes you discussed earlier on the call and the kind of lag on pricing there. Would we continue to see similar types of margin compression based on your revenue guidance the next couple of quarters? And will that start to narrow as you get at least some more price?

Yeah, great question. And Steve's having here, but I think that we expect to see sequential improvement in the margins and specialize as we move through the back half of the year. We, you know, as I said, we've made progress on passing through some of the inflationary impacts in automotive and the increase in volume will help us there. We have had a bit of a hit from exchange rates impacting margins, but we do expect to see meaningful improvement in the back half. Okay. Thank you. Yeah, thank you, Keith.

Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Hey, thanks. Good morning, everyone. I did want to focus this morning on the betting business. And I guess I'm just looking at the volume trends with the steady declines. My calculation, the betting volumes are down about 22% on a three-year basis. And so I know we're waiting for macro headwinds to abate, and it's really anyone's guess to when that happens. So I wanted to ask, what are sort of the strategic initiatives to really get the betting volumes going and to put yourself in a position to be taking market share?

Yeah, good morning, Peter. Great question. Tyson, I'll let you take that one.

Sure thing. Hi, Peter. So I'll put it into some short, medium, and long-term buckets for you. In the short term, you know, it's been a chaotic two and a half years that we've been dealing with customers, supply chain, high and low levels of demand. But our teams are working really hard on evaluating near-term opportunities for our customers. You know, what can we go do? What makes sense? And there are things out there, even in this little environment, where we think we can provide some value to our customers. We are carefully balancing the economics of those opportunities and also kind of as we look at the risk and economics of those. But we do expect to start to see some of the benefits even now and through the back half of the year. So we do see some opportunities for improvement there even in the short run. In the medium term, it's a tough time to do this, but we do have customers that are interested in new product developments, both from a VAVE standpoint and just differentiation, and we have some new things that we're working on with customers right now. But those will take some time to gain steam and actually gain a foothold in the market, so that would be more of a medium-term initiative. And over the longer term, we've been pretty public about our investments in vetting, and you can kind of see where we've been heading with our investments at ECS, KFoam, also within our adjustable bed business, we've been investing in areas where we feel like we can increase our addressable market size. And although we're pretty specific about our position as a supply chain partner, also gives us still opportunities and segments of the market to increase our content as well. We've also continued to invest in our ability to supply our customers in our core components business. We're in a good place there as well. So we've been investing even as we've gone through the downturn and positioning ourselves for the long run of being in a better place to grow again.

Okay, thanks for the summary. And then we talked about the weak economy, but one area that does seem to be getting weaker for the foreseeable future is housing. And I guess I want to understand your views on housing and its impact on your guidance as home sales are slowing quite a bit here. It seems like it could have further negative impact on bedding and furniture, flooring, some various segments. Is that something that you're contemplating as you look out over the next six to 12 months?

Yeah, I think so. I think it's tough to predict exactly, Peter. But, I mean, as we said, that's really the take on our guidance was understanding that there is this macroeconomic uncertainty out there, including the housing market, and likely to have some impact. We think that consumer sentiment and other factors have a bigger impact and that there's even with – you know, housing movement helps us and lasts over some period of time. But I think that we've factored in at least what we anticipate as the impact there.

Okay. Very good. Thanks so much.

Thank you.

Thank you. Our next question is a follow-up from the line of Susan McClary with Goldman Sachs. Please proceed with your question.

Thank you. Hello again. My first question is, you know, we've talked a lot about the supply chains in production as it relates to auto within specialized, but can you talk a little bit about the improvements or how you're thinking about the improvements coming through in aero as well as in hydraulic cylinders? I mean, obviously in aerospace, one of the big OEMs just got approval to start shipping one of their products. Are you seeing that there is some improvement increase there, some improvements that are coming through, and how are you thinking about that flowing in and contributing to that margin improvement in the back half and into 23?

Yeah, great question, Susan. Thank you. Steve, I'll let you take that one, but I think it's a positive outlook for us.

Yeah, for sure. Good morning, Susan. Yeah, aerospace demand growth is tracking pretty much as we expected as the industry continues to recover. And as Mitch said, that will hit 2019 levels in about 2024. Aircraft backlogs are near their peak levels at this point, so the demand is there. We saw year-on-year sequential volume growth in Q2. We expect that to continue going forward. As Mitch also mentioned, the assembly business has recovered quite quickly, and now we're starting to see that happen for the tubing side of the business. And as that demand returns, the industry is starting to see some of the same things we saw in our auto. You know, orders being pulled forward, expedited delivery, short lead times becoming the norms. We're also starting to see some extended lead times for raw materials, and we're taking that into consideration. So, our team's doing a really good job of dealing with that situation as it goes forward. In hydraulics, you know, the end market for forklifts remains strong, particularly in North America. That market's sitting at about 22 months of backlog. We're also seeing that reflected in our orders, which we think positions the business well for the second half of the year. You know, the OEMs don't backtrack on their production capabilities.

Okay.

Steve, would you say in books – Sorry, Steve, I just got to say, Steve, when you say in both those businesses, we're likely to see a little bit of hiccups as the production ramps up, but are really much more confident in that production ramp up taking place and improving as we go in the back half.

Yeah, certainly. Okay.

That's very helpful. The other thing that I want to go back to is the inflation question. We talked a lot about the metal margins, but can you talk to what you're seeing in terms of the inflationary pressures on perhaps ECS, things that go back more to those oil sort of supply chains in there? You know, one, what is the availability of a lot of those key inputs? And two, what are you seeing in terms of the input cost side?

Yeah, another great question.

Tyson, you want to take that? Sure. Susan, so from a supply standpoint at this point, things are good. We've gotten hesitant to say all clear, never a problem, but we've really been in a stable place in terms of the supply chain there for a while now and feel good about it, and we've taken some actions even beyond just our typical market supply that gives us some options to give us backup and insurance with some storage tanks and things that would allow us to stay covered even if there was a short-term supply constraint. In terms of pricing, you're right. Energy costs have had an impact, but we feel like where prices have been or our costs, they've been relatively stable. I think as demand overall in the chemical market has softened, the energy costs have probably kept some of the pricing more stable. But it's similar to some other things we've seen. We haven't seen an increasing trend overall with chemical pricing. They've been more stable.

Okay. Good. That's helpful. I'm going to squeeze one more in here, and maybe this one's more for Jeff. I'd be remiss if I didn't mention the $35 million of buybacks that you did this quarter. Okay. Can you talk a little bit about what drove that decision, how you're thinking about the willingness to continue to buy back the stock going forward? And perhaps with that, anything that you'd like to share with us in terms of a target for leverage or just the overall sort of capital structure of the business?

Great. Good morning, Susan. And thank you for noticing the $35 million of repurchases there. I think it's important to start with the tremendous progress that the team has made around our deleveraging efforts over the past few years since the ECS acquisition, because I think that really has positioned us well as we think about our overall capital allocation strategy. You know, our priorities still remain funding organic growth, maintaining the flexibility around our strategic growth opportunities around M&A and supporting our dividend. But as we've made that deleveraging progress, we've well positioned ourselves now to to be more active from a share repurchase perspective. And we were, you know, much more aggressive in the second quarter because of, you know, where we saw our share price during the period. But if you look at your date, we've repurchased 1.6 million shares and allocated about $57 million in that regard. As we look towards the future, Susan, you know, we're going to continue to evaluate our share repurchases in the context of our other investment opportunities while at the same time monitoring the our cash flow from operations. So it's one of those things we'll evaluate each and every quarter and compare it to our other opportunities that we have as we think about investments. And in terms of your second question around our leverage target, I think it's important there to think about the view that we have around an ideal target range for net debt to EBITDA, which for us is to maintain a capital structure that we feel that allows us to do a couple of things. One is to pursue strategic growth opportunities Another is around returning cash to our shareholders. And then thirdly, ensuring that we can maintain a solid investment grade profile. If you rewind back to 2019 at the time of the ECF acquisition, that was the last time we stated publicly a target from a leverage standpoint of 2.5 times on a total debt basis to EBITDA. Fast forward to May of 2020, we amended our covenant and our revolving credit facility to go from a total debt to a net debt metric And then in September of 21, we successfully amended our facility again and retained the net debt covenant as well from a metric standpoint with a maximum leverage of 3.5 times. Now, we haven't formally updated what we feel is a leverage target moving forward, but it's safe to assume, Susan, that it will be something well below a net debt of 2.5 times basis.

Okay, great. I appreciate all the color today, and good luck with the second half.

Thank you. Thank you very much, Susan.

Thank you. Ladies and gentlemen, this concludes our flexible answer session. I'll turn this way back to Ms. McCoy for any final comments.

Thank you for joining us today. We'll speak to you again on November 1st when we report third quarter results. As always, if you have questions, please contact us using the information in yesterday's press release. Hope everybody has a good day. Thanks. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.