Leggett & Platt, Incorporated

Greetings and welcome to the Leggett and Platt fourth quarter 2022 conference fall. 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, Senior Vice President of Investor Relations. Thank you. You may begin.

Good morning, and thank you for taking part in Leggett and Platt's fourth 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 vetting product segment, and Cassie Branscombe, senior director of IR. 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. Chef will cover financial details and address our outlook for 2023. and the group will answer any questions you have. This conference call is being recorded for Leggett and Platt and provided 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 discuss 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 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.

Good morning, and thank you for participating in our fourth quarter call. Leggett & Platt's diverse portfolio of businesses, strong cash discipline, and the ingenuity and agility of our employees helped us deliver solid results in 2022, despite weak demand in residential end markets. Sales grew 1% in 2022 to a record from continuing operations of $5.15 billion. primarily from acquisitions. Organic sales were flat, with volume declines of 7% and negative currency impact of 2% offset by raw material-related selling price increases of 9%. Acquisitions net of divestitures added 1% to sales growth. Volume declines were driven by demand softness in residential end markets, partially offset by growth in automotive and industrial end markets. 2022 EBIT was $485 million, a decrease of $111 million versus 2021 EBIT, and a decrease of $83 million versus 2021 adjusted EBIT, primarily from lower volume, lower overhead absorption from reduced production, operational inefficiencies in specialty foam, and higher raw material and transportation costs and operational inefficiencies in automotives. These decreases were partially offset by metal margin expansion in our steel rod business and pricing discipline in the furniture, flooring, and textiles product segment. EBIT margin was 9.4%, down from 2021's EBIT margin of 11.7%, and adjusted EBIT margin of 11.2%. Earnings per share in 2022 was $2.27. a decrease of 23% versus EPS of $2.94 in 2021, and a decrease of 18% versus adjusted EPS of $2.78. Cash flow from operations was $441 million, a 63% increase versus 2021. The current global macroeconomic environment and its impact on the consumer negatively impacted our fourth quarter results. Sales were $1.2 billion, EBIT was $91 million, and earnings per share was $0.39. Sales in the quarter were down 10% versus fourth quarter 2021, primarily from lower volume and currency impact, partially offset by raw material-related price increases. Acquisitions added 2% to sales. The volume decline was driven by continued demand softness in residential end markets, partially offset by growth in automotive, aerospace, and hydraulic cylinders. EBIT decreased 40% versus fourth quarter 2021, primarily from lower volume and lower overhead absorption as we intentionally kept production in our steel rod business below demand to reduce inventory levels. These declines were partially offset by metal margin expansion. As a result of these impacts and inflation, EBIT margin was 7.6%, down from 11.4% in the fourth quarter of 2021. Earnings per share decreased 49% versus fourth quarter 2021. During the year, we completed four strategic acquisitions. In late August, we acquired a leading global manufacturer of hydraulic cylinders for heavy construction equipment with operations in Germany, China, and the U.S., and annualized sales of approximately $100 million. This acquisition builds scale in our hydraulic cylinders growth platform and brings us into an attractive segment of the market that aligns well with trends in automation and autonomous equipment. Also in August, we acquired a small textiles business that converts and distributes construction fabrics for the furniture and bedding industries with annual sales under $10 million. In early October and mid-December, we acquired two Canadian-based distributors of products used for erosion control, stormwater management, and various other applications with combined sales of approximately $50 million. We have successfully expanded our textiles business over the years through small strategic acquisitions that leverage textile supply chain expertise and attractive in markets. Now moving on to the segments. Sales in our betting product segment were down 19% versus fourth quarter of 2021 and decreased 4% for the full year. Demand in the U.S. betting market softened during the fourth quarter as macroeconomic impacts on consumer spending persisted. We expect demand in 2023 to remain consistent with levels experienced in 2022, with relatively consistent sequential volumes continuing in the first half of the year and modest increases in the second half of the year. Volume in U.S. spring was down 22% in 2022, which is comparable to the domestic mattress market. After a mid-single-digit share loss early in the pandemic related to supply shortages, we estimate that our share of the innerspring mattress market has remained stable over the last two years, despite a volatile environment. Although consistent demand is assumed in 2023, we expect to increase production after limiting output in 2022 to align inventory with lower demand levels. Strong trade demand for rod and wire provided earnings benefit in the first half of the year. However, trade rod demand slowed considerably in the back half of 2022, and as a result, we cut production significantly to reduce inventory. Steel rod production in 2023 is expected to be in line with 2022, but remain well below normal levels. We expect higher internal consumption to offset lower trade demand. Increased metal margin provided earnings benefit throughout the year, but to a lesser extent in the latter part of the year as steel prices soften. While it is difficult to predict steel pricing, we anticipate continued softening in 2023. However, we expect rod pricing and metal margins to remain at historically elevated levels due to higher conversion costs. Demand in European betting has stabilized in recent months, and we expect demand in 2023 to be relatively flat with 2022. The actions we took in 2022 to reduce inventory across the segment have brought levels back in line with those needed to support current demand. With the capacity we have in place, we are prepared to respond quickly to changing demand and will remain focused on servicing customer requirements. Full-year 2022 segment earnings were significantly impacted by difficulties experienced in our specialty foam business. About two-thirds of the earnings challenge in specialty foam was a result of low demand, which dropped quickly in the fourth quarter of 2021 and remained at depressed levels throughout 2022. Demand was impacted from three areas. The first being the general betting market decline of approximately 20% following demand surges in 2020 and 2021, and chemical shortages in 2021. The second was channel-focused. Finished goods production in specialty foam is weighted heaviest to digitally native brands, which declined more than the overall market due to changes in consumer privacy laws and customer cash constraints. And finally, we suffered share loss from a small number of customers with sales shifting from finished goods to components in some cases. Specialty foam earnings were also impacted by the volatile chemical supply environment. Like all other foam producers, we experienced significant chemical inflation through the course of 2021 and cost remained at historically high levels in 2022. Given the level of material cost, efficiently pouring and converting foam is of even greater importance than normal. However, because of high demand in 2021 and chemical shortages, our first priority became servicing customers. Between paused integration and the need to service customers, we have not operated at target material efficiency levels. Material inefficiencies at these high chemical costs had a detrimental impact on earnings. While it will take some time to see improvements in specialty foam, especially with the continued challenging demand environment, we're confident in our recovery plan and are making progress. Our team has a strong pipeline of opportunities influenced by our specialty foam technologies. We've also focused on driving improvement in material margins through both process and equipment changes. We remain confident that our specialty foam business will drive long-term, profitable growth for the segment and are placing our highest level of attention on short-term improvements in sales and material management. Sales in our specialized product segment increased 15% versus fourth quarter of 2021, and we're up 12% for the full year. The January forecast for global automotive production shows approximately 4% growth in the major markets in 2023. While improving year over year, automotive industry production forecast could remain dynamic as supply chain, macroeconomic, geopolitical, and COVID impacts bring continued volatility. Cost recovery is continuing in automotive, and we expect to make further progress in 2023. In our aerospace business, We expect continued strong demand in 2023. However, raw material and labor shortages are creating some volatility across the industry. End-market demand in hydraulic cylinders is strong, and order backlogs in both the material handling and heavy construction equipment market segments remain at elevated levels. Demand is expected to remain strong into the first half of 2023, with some potential slowing in the back half of the year as backlogs ease. Sales in our furniture, flooring, and textiles product segment were down 12% versus fourth quarter 2021 and up 3% for the full year. Home furniture demand slowed during the quarter at both the mid and high end of the market, and customer backlogs largely have been depleted. Demand at lower price points remained extremely weak, and customers across all price points are working to reduce inventory levels. This demand softness also impacted volume in fabric converting. We expect lower market volume through at least the first half of 2023. Work furniture sales decreased in the fourth quarter as contract demand slowed and demand for products with residential exposure continued to soften. We expect this trend to continue into 2023. In flooring products, residential demand has softened modestly with the slowing housing market and lower home improvement activity. Hospitality demand is slowly improving, but remains well below pre-pandemic levels. Geo components demand remains solid heading into 2023, particularly in the civil construction market and to a somewhat lesser extent in retail. As we move through 2023, we are focused on improving the things that we can control and continuing to mitigate the impacts of market challenges on our business. We are working with our customers on new product opportunities, continuing our focus on improving operating efficiency and driving strong cash management. Our financial strength gives us confidence in our ability to successfully navigate challenging markets while investing in long-term opportunities. Finally, I would like to thank our employees for your strength, tenacity, and dedication to driving long-term results. Your commitment to our values results in the collaboration, agility, and ingenuity required to drive our company forward despite challenging macroeconomic circumstances. Each of you is key to our continued success. I'll now turn the call over to Jeff.

Thank you, Mitch, and good morning, everyone. In 2022, we generated cash from operations of $441 million. $170 million higher than the $271 million we generated in 2021. This large increase reflects a much smaller use of cash for working capital, partially offset by lower earnings. Working capital increased significantly in 2021 due to restocking efforts following inventory depletion in 2020, but increased to a much lesser extent in 2022 as we return to inventory levels more reflective of current demand. This improvement was partially offset by a decrease in accounts payable as purchases slowed due to lower volume and our efforts to reduce inventory levels. We ended the year with adjusted working capital as a percentage of annualized sales of 15.3%. Cash from operations is expected to be $450 million to $500 million in 2023. as we continue to focus on optimizing working capital in a softer macroeconomic environment. Our long-term priorities for use of cash are consistent and unchanged. They include an order priority, funding organic growth, paying dividends, funding strategic acquisitions, and share repurchases with available cash. Total capital expenditures in 2022 were $100 million. reflecting a balance of investing for the future while controlling our spending. We raised our annual dividend for the 51st consecutive year in 2022, honoring our ongoing commitment to return value to our shareholders. In November, our board of directors declared a quarterly dividend of 44 cents per share, 2 cents or 5% higher than last year's fourth quarter dividend. At an annual indicated dividend of $1.76 cents, The yield is 4.7% based upon Friday's closing price, one of the highest among the dividend kings. We used $83 million during the year for the four strategic acquisitions that Mitch discussed earlier. With the deleveraging we accomplished over the past few years, share repurchases returned as one of our uses of cash in 2022. During the year, we used $60 million to repurchase 1.7 million shares at an average price of $35.94. We used our commercial paper program to repay $300 million of 3.4% 10-year bonds that matured in August. We ended the year with net debt to trailing 12-month adjusted EBITDA of 2.66 times and total liquidity of $1 billion. 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. Now moving to the 2023 full-year guidance. 2023 sales are expected to be $4.8 billion to $5.2 billion, or down 7%, to up 1% versus 2022, reflecting macro uncertainty across our markets. Volume at the midpoint of our guidance is expected to be down low single digits, with vetting products down low single digits, specialized products up high single digits, and furniture, flooring, and textile products down low single digits. The guidance also assumes the impact of deflation and currency combined is expected to reduce sales mid single digits. and acquisitions in 2022 should add approximately 3% to sales growth in 2023. Volume growth is expected to continue in automotive, aerospace, hydraulic cylinders, and geocomponents, with declines expected in work furniture, home furniture, adjustable beds, and trade sales of steel rods and drawn wire. We expect generally stable demand in our other betting businesses, reflecting continued low volume levels. 2023 earnings per share are expected to be in the range of $1.50 to $1.90. The midpoint primarily reflects lower metal margins in our steel rod business, lower volume in some of our businesses, and moderate pricing pressure from deflation. Based upon this guidance framework, our 2023 full-year EBIT margin range is expected to be 7.5% to 8%. Earnings per share guidance assumes a full-year effective tax rate of 24%, depreciation and amortization of approximately $200 million, net interest expense of approximately $85 million, and fully diluted shares of $137 million. For the full-year 2023 We expect capital expenditures of approximately $100 million in line with 2022, dividends of approximately $240 million, and spending for acquisitions and share repurchases are expected to be minimal as we focus on conserving cash. And while we're not providing quarterly guidance, we do expect first quarter earnings to be down meaningfully versus fourth quarter 2022, primarily due to the timing of performance-based compensation accruals which are typically highest in first quarter, as well as normal seasonality in some of our businesses. We expect a continuation of normal seasonality with higher earnings in the second and third quarters of the year. In closing, while the macroeconomic environment remains challenging, especially in the first half of the year, Leggett is well positioned to navigate these challenges with continued operating and financial discipline. We are keenly focused on strong cash generation and our enduring fundamentals give us confidence in our ability to continue creating long-term value for our shareholders. With those comments, I'll turn the call back over to Susan.

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

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 keys. One moment, please, while we poll for your questions. Our first questions come from the line of Susan McLaurie with Goldman Sachs. Please proceed with your questions.

Thank you. Good morning, everyone.

Good morning, Susan.

My first question is, you know, and thank you for all the details and the prepared comments. I think it was very helpful. When you think about the efforts in specialty foam and you walk through some of those changes that you're making, Can you give us a sense of where you are within that process and how we should be thinking about the benefits of that starting to flow through to the results perhaps later this year, or is it something that will be more of a 2024 event?

Yeah, that's a great question, Susan, and thanks for listening in on the comments. I know it was long, but we wanted to try and provide some clarification there. Tyson, I'll let you comment on ECS. I know you've been working really diligently with the team there to assess where we are and put some recovery plans in place.

Sure thing. And good morning, Susan. I'll start with the commercial side of our plans. As was noted in the pre-recorded remarks, it's tough in a slow demand environment, especially where we've weighted our business historically, but our commercial team has done a really good job, even in the slow environment, building our commercial pipeline and looking at opportunities to diversify our customer base. So despite some near-term headwinds just with the overall market slowness, I feel good about our pipeline there. And especially because we're able to really return and our customers are interested in returning to looking at some of our specialty foam technologies. When chemicals got really short, our development team really had to pivot and spend more of their time and resources working on formulations just to make sure we could continue servicing our customers. But as those have improved, as our constraints have eased, and our customers have returned to looking at differentiation and other new product introductions, we've been able to get back to that as well. So I feel good about our pipeline, both from the quality of leads and opportunities that we have, and those are developing throughout the year. We'll start to see Some of the benefits in the back half of the year, I think, from some of the business that we're being awarded, but still overall with slow demand and the full benefit probably coming into next year, but also the fact that we're using our specialty foam technologies as part of those projects as well. So on the commercial side of things, that's how I would feel about it. The operations, which we've mentioned as well, working through challenges there. I feel good about the team that's being put together, both from The team that came along with the acquisition and then also filling in some gaps along the way. So we're in a good place with our operational leadership. Some of the things that we've talked about, I think, before as well, just being able to really get back to the integration of four companies now being brought under the L&P umbrella. But, you know, a heavy focus just on our overall data and process control. And I feel good about the steps we're taking there. And I think we'll see those really take hold as we move through the year. We're also investing and rolling out an improved IT system. That's already underway, but we're being, not cautious, but realistic about the timeframe to install the IT system across all of our specialty phone business. We also, during the pandemic, made investments in equipment, especially focused on automation and helping us control material efficiency. That equipment is starting to arrive But like a lot of investments over the last couple of years, lead times are pretty long. So even if they start to show up, it'll take some time to get it integrated and up and running to full efficiency. So I would say back half of this year and into next year, we'll start to see more of the benefits from our equipment investments. So I know that was a lot, but just to give you a little bit of a frame of reference both on the commercial and operational side, just how things are rolling out.

Yeah, no, that's very helpful. Thank you. And I guess following up on that, as we do think about the outlook that you gave us for 2023, especially as it does relate to some of the different parts of the betting business, How are you thinking about the cadence of the margins in that segment for this year? When you think about normal seasonality on top of some of these company-specific dynamics that are coming through, any thoughts on how we should be thinking about where that margin eventually gets to and the path of getting from where we are today to that end point?

Susan, Cassie, do you have any detail there that you'd like to share? I think for us, one of the biggest impact is you know, what happens from a scrap to rod spread. And, you know, it's really difficult to precisely predict that. You know, we have anticipated some contraction over the course of the year. You know, that's probably that and volume would be the biggest impacts.

Okay.

And I'll jump in just with one more comment. Yes, we do see the market returning to more normal seasonal patterns. And also, we talked about this before as well, but over the course of the last year, demand was soft. But we were also really intentional about bringing down our inventory. Our production was below even the demand level so that we could control that, which is tough to do in a slow demand environment. But our team really did a good job in delivering pushing that through even towards the end of the year. So I think even as we get back to this year and more seasonal patterns, we should be back to a place where we're producing and have better overhead recovery because that was a real challenge for us over the last year.

Yeah, particularly at the end of the year. I think that's a great point, Tyson. So if we looked at the first half of the year, call it, or even a little longer, we had really strong trade rod volumes. And now we're anticipating that to be a little bit lower than last year, but pretty similar, but much more consistent, right, as opposed to the big high levels we had the first part of the year and low in the last half of the year. And then similarly, as you said, with just overall production being more similar. So I think it would just be a bit more normalized, hopefully, than what we saw last year.

Okay. That's very helpful. Yeah. Susan, a little bit specific on your margin question. We talked about lower first quarter expectations for the company overall. That holds true with betting with a return to more seasonal patterns as we move through the year. So that also holds true to betting with, again, their historically highest seasonal quarter has been third quarter. So a step up in margins as we move through the year is from a margin percentage perspective what we're showing. Okay. Okay.

That's very helpful. I'll get back in the queue. Thank you.

Thank you. Our next question has come from the line of Keith Hughes with Truett Securities. Please proceed with your questions.

Thank you. I guess you had indicated the slow start to the year in the first quarter. Are you still planning to see rod production curtailments into the first quarter? Is that playing a role?

Morning, Keith. Good question. Tyson, I'll let you handle that one.

Sure. Good morning, Keith. Yes, you know, really, Keith, that's something that at this point we're playing really throughout the year. As we got into the back half of 2022 and we saw trade demand slow, we had to take more aggressive action in the back half of the year. So it was really heavily weighted towards the third and fourth quarter and pulling our production down. especially in the fourth quarter. So overall, through the course this year, we expect things to be relatively consistent from a total production standpoint, but more evenly balanced throughout the year.

So Tyson, if we looked at it sequentially from the fourth quarter of 22 to the first quarter of 23, we would see increased production.

That's right.

But if we looked at it year over year, we'd see significantly lower production because it was so strong in Q1 of 22. Is that the right way to think about it?

I think that's the right way to think about it. Okay. And so, if that's the case, I'm a little confused with why the EPS is going to be so much lower. I know there's seasonal change. Seasonally, your EPS comes down from fourth to first, given the seasonality in the business. But it seems like some higher production would be offsetting that. Are you assuming the metal margin steps down a lot in the first quarter?

Versus last year, we're starting to... Well, we are expecting and experiencing some modest decline in overall metal margins, especially compared to the first part of last year when the conflict in Ukraine and just overall market capacity constraints really drove things up higher in the first part of the year. So it's overall relatively modest, but still less than the first half of last year when we look at our production and metal margins.

Okay. And are you assuming for the guidance for 23, are you assuming those metal margins deteriorate all through the year? And what do they end up at the end of the year?

Sure. So through the course of the year, we have some modest compression. It's really hard to predict. It's been especially difficult over the last couple of years. But for the full year, yes, it's down modestly as we move through the year. And if we looked at the year in total, so 2023 versus 2022, on a percentage basis, we would expect right now a metal margin to be down in the mid-teens.

Down mid-teens. Okay. Is there more of an emphasis in the second half of the year on that?

Slightly more, but still relatively consistent as we get through the back half of the year. Okay.

To get a little deeper here, maybe I should, but the In the first, that's probably three quarters, we saw metal margins continuing to expand. And then in the fourth quarter, contracted a little bit, like... 10%-ish in the fourth quarter. Exactly. So nothing's tanking. They're just moderating.

That's right. And fourth quarter was a little difficult as an indicator just because I think the overall steel market was soft as people got to the end of the year and there was quite a bit of uncertainty. People bring inventory or consumers bring inventories down. might be a little tough to predict, especially if we started off 2023. Scrap's been a little higher in demand. Prices have been going up. Conversion costs remain high. So it's still pretty dynamic in trying to predict, but I think that's right, Mitch.

So one final question. Sorry to pause the call here. So particularly at the low end of the range, it's a pretty substantial reduction in EPS from what we saw in 22. If you had to kind of list one, two, three, the biggest drivers for that, What would those be for the reduction?

Susan, Cassie, you guys want to take that?

Keith, as always, volume is the driver. Could be, but we're trying to predict what's happening with metal margin, and frankly, nobody knows that. So we have our assumption built into the forecast, but if it drops more than we're expecting, then that's also meaningful downsides.

So number one would be volume and then things like metal margin and maybe some deflation would be secondary drivers. Is that a fair statement?

Yes, that's a fair statement. It definitely leads with volume. That's where probably the greatest amount of uncertainty exists in this environment. And it could be up, it could be down. That's why we've got such a wide range.

Okay. All right. Thank you very much.

Thank you, Keith.

Thank you. Our next question questions come from the line of Bobby Griffin with Raymond James. Please proceed with your questions.

Good morning, everybody. Thanks for taking my questions and appreciate the detail there on the metal margins. Um, always hard to predict, but helpful to know what the underlying assumption is in the guidance. I guess first Mitch, I wanted to ask about specialized products and you know, where you guys are in the journey of the cost recovery and kind of what's embedded for 2023. Um, I was admittedly a little surprised to kind of see them step back down sequentially, despite a little bit better volume sequentially, but understand that there is a lot moving around inside that segment. So maybe just kind of given how each business is recovering at a different rate, can you talk about what the drivers would be kind of for those margins in 2023 and, and where you and the company are on the journey of trying to get back the very high margins that, uh, you guys used to be able to do in those businesses? Hmm.

Sure. Good morning, Bobby. And Steve, I'll make a few comments, but then invite you to join in as well. So yeah, it is a little bit dynamic for sure. We continue to see strong volume gains in specialized across all three of the businesses and expect those to continue as we go into 2023. We definitely had some impacts in the fourth quarter, particularly in automotive. We had a little bit higher material costs, as you mentioned, we've been working on those but also some labor inflation, particularly where we had increased overtime premiums in China when the COVID restrictions were lifted. And then there was the large outbreak there that certainly impacted us like it did the rest of the country pretty much. And we saw a big surge in our employees who had to not come to work. And so that led to additional overtime for some of those. So that was a bit of a one-off there. I would say in automotive overall, I don't want to go into too much detail here, but we continue to make good progress in the pricing recovery, in the cost recovery. I'd say that we got about 60% to 65% of it recovered in 2022 with the balance we expect to come in 2023. We've talked about that. It's a challenging thing to accomplish. The team has done a great job, and we're confident in our ability to close that. But we have made really, really good progress there. The outlook for production in automotive, see the major markets forecast to be up about 3.6% year over year, which is good. Continued progress. It continues to be dynamic, right? There's supply chain labor shortages throughout the supply chain at the OEM level as well. But making progress. Continue to see really low inventories. and vehicles age rates at very high levels are around 12 years or so in the US. So I think that outlook is good. We see that kind of 3% to 4% growth forecasted for the next three years or so, 23 to 25. But I would just remind, too, the folks that if we look at the forecast for major market Production in 23 is about 70 million vehicles just below that. You know, improving back in 2019, which is actually a down year, is still 75 million. So we're still below where we were pre-pandemic, but I think what it does provide is a long-term tailwind for the recovery in the automotive market. I think we've seen the really strong backlogs in hydraulic cylinders. And that's, you know, I think a strong benefit for our business there. We also see strong demand in aerospace, although, you know, it's hard to start anything up really fast, especially with the lead times that we see there. But I think that those tailwinds and the outlook for all three of those businesses is very positive for us. Steve, let me pause my rambling there and let you chime in as well.

Good morning, Bobby. I think, Mitch, you hit most of it. In hydraulics, we have seen orders continue to increase as the OEMs recover their production challenges, and we expect that to continue through the year. And as Mitch said, we're hopeful that that'll carry on into the second half of the year. We did have a few operational challenges that the team has done a really good job of dealing with, so looking for continued growth there. You know, in aerospace, air travel continues to recover. We don't see business travel recovering until 2025, so there's still some tailwinds there. That kind of, as Mitch has alluded to, you know, the operation performance across the supply chain is kind of similar to automotive as they look to ramp back up. You know, we're seeing the same types of order changes and cancellations, short lead times, and other things that are making it really challenging to respond, but the you know, long-term fundamentals are, are definitely there for continued growth in aerospace.

Thank you. I appreciate the detail. And Mitch, maybe on, on CapEx, just, uh, you know, thinking out a little further is, is there a catch up period that's going to have to come on capital spending? And I guess I'm just asking, you know, in the context that I think pre COVID, this was 140 to $150 million a year CapEx business, at least in 2019. And we're not coming up on two years of just a hundred million and it's running well below DNA. So as the businesses change where the capital requirements are just not as much, or is there going to be kind of a cap catch up period here? If the economy improves that we have to kind of spend a little bit more to, uh, you know, on, on the capital side.

Yeah, that's a great question, Bobby. Thanks for asking that. You know, I don't see that there's a big catch up. We haven't been, um, constraining any kind of critical investment in fact, You know, we've had some things like, for example, IT that we've had to increase our investment in, and we think that those are critical to do, and we continue to do so. I think, you know, historically the biggest use of CapEx comes in embedding US Spring historically as well. I think we've done a good job of managing that a little bit differently. Not that we don't invest in capacity or in innovation. We'll continue to do so, but we think we can do that a little bit more efficiently. And then the second one would be in automotive. And I think part of the impact there's been, with all the volatility, there's been just less new programs starting. And so some of that has been pushed out as well. But it's not like it's going to get pushed out. It's just going to change the whole timeframe. So you don't get double the investment in one year. It's just going to change the timeframe a little bit. So, you know, I think we probably will, you know, hopefully as we get back to a stronger growth environment, increase our capex some. But I don't see any big catch-up or big surge that will negatively impact us.

Thank you. I appreciate the details and best of luck.

Thanks, Bobby. Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Peter Keith with Piper Sandler. Please proceed with your questions.

Good morning. This is Matt Egger on for Peter. Thanks for taking our questions. First off for me, we're just curious what happens to gross profit dollars if we see commodity-led price decreases? And maybe you can compare to what you would expect to see now versus what historically happened with the LIFO accounting change. That's my first one.

Okay, thanks. Good question. And I'll take the easy part of it and then turn it over to Susan or Cassie for the LIFO piece. I think in general, you know, we've talked about as inflation has occurred throughout the last couple of years that we've been successful in passing it on, but largely passing on the dollar amounts, right? For the most part. And so that's had a drag on our margin. So I think as we see deflation and we pass that along to our customers, we see that same dollar change, but we shouldn't see a big impact in our margin profile. You know, there's some pluses and minuses. Some of that is timing around what kind of inventory we have. And for the most part, we're in very good shape there. Don't have a lot of high-cost inventory. And sometimes timing around how it moves through our supply chain or how contractual agreements work. But overall, I think it should stand up to reflect what we've been commenting on as we've passed on the inflation, that we've done that largely on a dollar basis and expect to see the same thing. as we see a little bit of deflation as well. Susan, Cassie, anything you would add to that?

Yeah, LIFO, our favorite topic. It's actually directionally very predictable in an inflationary environment. LIFO will, without fail, generate expense. In a deflationary environment, as predictably, it would generate a benefit. So that's just high level what to expect. And thankfully, we don't have to deal with that anymore.

Great, thanks. And then secondly, can you walk us through the furniture segment and maybe explain why the year-over-year volumes in furniture are starting to kind of drop off?

Yeah, sure. Steve, I'll ask you to jump in there, but it's really a couple of dynamics. After a big surge in home furniture that we saw over last year and in the beginning of this year, we really saw that soften across the industry. That shouldn't really be new news. And then if we look at work furniture, that is probably the change, where after being so soft, we saw a strong recovery in the first three quarters of 2022, and then really started to see the contract business, which had been recovering, slow down in the fourth quarter. So that's probably the biggest change there. But Steve, I'll let you chime in as well.

Yeah, thanks. Good morning. Yeah, from a home furniture perspective, the answer is, you know, much, much lower retail demand. So we had seen the low-end drop, but then we saw the mid- mid and high price points drop even further than what we expected. And that's led to some fairly significant inventory levels, which we couldn't see earlier in 2022. And we expect those to be worked off here, hopefully in the first half of 2023 and start to return to a more, you know, normalized demand level. And from a work furniture perspective, as Mitch said, you know, our customers are reporting, you know, volume declines and incoming contract orders. And that's really driven by the surge of, you know, back to office that they saw. And that's worked its way through. And now they're seeing a little bit more lower level of return to office trends, particularly in the Americas, which is lowering that demand. And then you can add on top of that, you know, the retail residential slowdown that we spoke to from a home furniture perspective. So those are the two, you know, big issues that are impacting work furniture at this point in time.

Yeah. Steve, if I remember right, the BIFMA forecast, which would be for North America, was down about 8% or so for this year. Yeah, 8 or 9. Yeah, yeah. So in line with industry dynamics there, unfortunately. And as we've mentioned before, so the fabric converting side of our textiles business also moves along largely with bedding and home furniture, so we see that down. But what does not is the geotextiles component side of that, and we see that driven by construction industry to continue to be strong as we go into 2023. Great.

Thank you all.

Thank you. Thank you. Our next questions come from the line of Susan McElroy with Goldman Sachs. Please proceed with your questions.

Thank you. My first question is on input costs. And we've touched a bit on this across the questions, but can you give us a sense of what you're actually seeing in the various inputs, maybe outside especially of the metal margins, and how you're thinking about the puts and takes there for 2023?

Yeah, I'll make a general comment, and then Tyson, Steve, I'll ask you to join in. But, you know, Susan, I think that we see inflation moderating. Maybe in some things we see a little bit of deflation kicking in, but we don't see any really significant declines across the board. In fact, really anywhere that I can think of. And so I think it remains, you know, I think for the large part, commodity costs remain at elevated levels. are generally neutralizing or starting to come down a little bit, but we just don't see huge, huge declines. But Ty, is there anything different you'd see in chemicals or anything?

Mostly the same as what you just said, Mitch. We've talked quite a little bit about metal margins, but part of the reason why that's been difficult to predict is because our conversion costs, not just the scrap input cost, but the cost of everything else that goes to converting that into rod, energy costs, the consumables, you know, our refractories and electrodes and everything else, those have increased significantly as well. So when all of those input items that even go into our overall costs are increasing as well, it becomes difficult to predict. But overall, I agree with what you said, Mitch. There's, you know, some general moderation in some of those costs. On chemicals, we've seen some of that as well, some moderation, but not, you know, dropping off a cliff because a lot of the same issues, energy costs being high, there's still global constraints around certain types of chemicals, and just overall capacity in the market to produce still makes it difficult to see exactly where those will land, but it's been relatively stable.

Yeah. Okay, thanks. And Steve, I think that holds up pretty much across specialized that we don't see a lot of change there. Maybe in foreign and textiles can be a little bit more dynamic, but anything that you would add?

I would just say most of the inputs are stabilizing, but we have seen relatively few signs of deflation outside of certain types of steel, but like Tyson said, resins, chemicals, other things remain at an elevated level. There's a lot of talk of them coming down, but we haven't seen that turn into reality at this point.

Okay. And then I have one more, which is on the cash flow side of things. Can you talk about the ability to generate cash this year, even when we think about the EPS guide that you have put out there? And maybe just any commentary on some of the uses of that cash. You did several small acquisitions in 2022. How is that pipeline coming together? And perhaps how are you thinking about the opportunities there or other uses of the money?

Yeah, sure. That's a great question, Susan. And Jeff, I'll chime in first and then ask you to come in on the uses. But Susan, I feel really confident about our cash flow generation. You saw us this year. And I think even though we see in a lot of our businesses volume levels low, I think we feel a little bit more stability as we talked about with inflation and things like that. So the teams have done an incredible job managing our working capital. In particular, even as the pandemic hit and the first part of the crisis hit, just improving our receivables management, and we continue to maintain that in a really, really good spot. We talked about how we worked through the second half of the year, particularly the fourth quarter, to bring down inventory levels to align with the slower demand and you know, taking, you know, a lot of time out of the rod mill was painful from a margin standpoint, but it certainly got us to the right place from a cash flow and from an inventory standpoint. So we're starting in a really good position there. And then I think hopefully a little bit less volatile arena, it'll be a little bit easier to manage that working capital. So I expect inventory, especially, so I expect to see less volatility there. And then The other thing you probably noticed is that our payables were down significantly as we ended the year, and not surprising, right? As we're taking down inventory, we're buying less. So I think from a working capital standpoint, we're in a very good position to manage that. You know, while we wish we had more volume, though, continue to drive cash through the company. And, you know, Jeff mentioned our CapEx. We expect it to be pretty consistent with where we were in 2022. So I don't think we have any big plans for acquisitions at this time. We'll share repurchases, continue to focus on funding the dividend. Jeff, let me turn it over to you. Anything that I missed?

Thanks, Mitch, and good morning, Susan. Just a couple of comments I would make. Susan, as you look at the company's history of operating cash flow and the ability to have that operating cash flow exceed our capex spend, as well as our dividend support, we have been able to exceed that 33 out of the past 34 years with the one year that we did not was when we needed to replenish the inventory, which we talked about earlier in 2021. So we've got a strong trend of being able to demonstrate that ability to do so. And as Mitch mentioned earlier, on the CapEx side, we feel reasonably comfortable there with the $100 million that we're guiding towards. In terms of our acquisitions, you know, we spent $83 million in 2022 on acquisitions. You can expect that number to be lower in 2023. And we spent $60 million in 2022 on share repurchases. And you can definitely expect that number to be lower in 2023 as well. So as we discussed in the prepared remarks, you know, definitely minimal participation and activity around share repurchases as well as M&A activity for the upcoming year.

Okay. Thank you very much and good luck.

Thank you.

Thank you, Susan.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Susan McCoy for any closing comments.

Thank you for joining us today. We'll speak to you again on May 2nd after we report first quarter results. If you have questions, please contact us using the information in yesterday's press release. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.