Leggett & Platt, Incorporated

Greetings and welcome to the Leggett & Platt First Quarter 2024 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, the conference is being recorded. It is now my pleasure to introduce your host, Cassie Branscombe, Vice President, Investor Relations. Thank you, Cassie. You may begin.

Good morning and welcome to Leggett and Platt's first quarter 2024 earnings call. With me on the call today are Mitch Dollop, President and CEO, Ben Burns, Executive Vice President and CFO, Tyson Hagel, Executive Vice President and President of the Betting Products segment, Brian Kleibacher, Executive Vice President and Chief Strategic Planning Officer, and Kalina Talbert, Manager of Investor Relations. The agenda for our call this morning is as follows. Mitch will discuss our near to midterm strategy and operating results, including a summary of the main points we made in yesterday's press release. Then we'll cover capital allocation, additional financial details, and address our outlook for 2024. And the group will answer any questions you have. This conference call is being recorded for Likert and Platt and is copyrighted material. This call may not be transcribed, recorded, or broadcast without our express permission. A replay will be available on the Investor Relations section of our website. We posted to the IR section of our website yesterday's press release in a set of slides that contain summary financial information along with segment details. Those documents supplement the information we discuss on this call, including our non-GAAP reconciliations. Remarks today concerning future expectations, events, objectives, strategies, trends, or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties, and the company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our most recent 10-K entitled Risk Factors and Forward-Looking Statements. I'll now turn the call over to Mitch.

Good morning, and thank you for joining our call today. First, I want to share that this will be Cassie's last earnings call with us, as she will be leaving the company for an exciting new opportunity later this month. Cassie has been an instrumental part of our IR team since 2018 and has been an incredible asset to the company throughout her various positions over the last 19 years. We wish her the best in her new role and will sincerely miss her. Before reviewing first quarter results, I'd like to spend a few minutes discussing who we are, where we stand today, and where we are going in the future. Across most of our businesses, we are positioned as a leading provider of differentiated engineered products with opportunities to increase content over time while collaborating with our customers to provide solutions. Our core businesses have strong market positions in industries with large and attractive addressable markets. In bedding products, our 2019 acquisition of ECS meaningfully increased our addressable bedding market, allowing us to expand into specialty foam and compressed mattresses, trends which have significantly changed the domestic bedding landscape in the last 10 years. Although the bedding market has been challenged recently, the strategic rationale for that acquisition remains intact and should enable us to drive long-term growth in product innovations. In specialized products, all three of our businesses supply technical, critical components that are developed with a deep customer relationship and collaborative design. For example, our automotive business is aligned with trends of increasing comfort and convenience features. Our ability to partner directly with OEMs to solve specific problems means we compete on differentiation rather than just price. In furniture, flooring, and textile products, most of our businesses are mature and stable, with steady margins and solid cash generation. These businesses tend to compete based on high levels of customer service or product differentiation and include our home furniture, work furniture, and flooring operations. Within textiles, our geocomponents business leverages sourcing synergies from our fabric converting operations to supply fabrics for applications such as erosion control and landscaping. GeoComponents competes in a fragmented industry with sizable opportunities for growth. With that context in mind, I'll now address our near to midterm strategic priorities, which are a blueprint for ensuring the sustainable long-term success of our business. Our priorities are one, strengthening our balance sheet and liquidity. Two, improving margins by optimizing operations and our general and administrative cost structure. and three, positioning the company for profitable growth opportunities. We're committed to maintaining our long-held financial strength and have recently taken action to support this objective. In March, we proactively amended the agreement for our existing revolving credit facility to provide us with additional liquidity and flexibility. The leverage ratio was increased from 3.5 times to 4 times through June 30, 2025, creating a bigger cushion in a time of near-term weak demand in residential end markets. Yesterday, we announced that the Board of Directors declared a quarterly dividend of $0.05 per share. The decision to reduce the dividend was made following a very thorough evaluation. This action will free up capital to invest in driving improvements in our business and solidify our long-held financial strength. Additionally, we continue to advance our initiatives across our business to drive operational excellence and enhance our efficiency. We expect these initiatives will allow us to drive margin improvement and continue to strengthen our financial foundation in the near to mid-term. Domestic bedding manufacturers are facing numerous challenges, including low demand, overcapacity, and increased pressure for finished mattress imports, resulting in financial stress across the industry. the domestic mattress market has changed dramatically in a relatively short time span. The landscape has shifted from a largely domestic OEM-produced innerspring mattress market to one where innerspring, foam, and hybrid mattresses are sold at a wide range of price points through a variety of channels and produced by a mix of fewer large domestic OEMs, domestic private label producers, and import manufacturers. These changes have effectively reduced the size of the domestic innerspring mattress market by a third. While we anticipate that import mattresses will always have a place in the market, any volume reshored to the U.S. as a result of the ongoing anti-dumping case is beneficial for the domestic industry. In such a dynamic environment, we recognize that we must also make changes to profitably compete in the bedding market today and in the future. Across our bedding product segment, we are executing on the restructuring plan announced in January to optimize our manufacturing and distribution footprint. We are making steady progress and remain on track to achieve our objectives. To date, we have closed four smaller U.S. spring distribution facilities, transitioned manufacturing out of three facilities and into our four larger remaining spring production facilities, and closed a small specialty foam operation. We still expect the consolidation activities within U.S. Spring to be completed by year-end and are currently downsizing our Chinese Interspring operation. Finally, two additional specialty foam facility consolidations are underway and should be complete by year-end. As previously announced, restructuring actions will be complete by the end of 2025. I want to thank our entire team for their dedication and hard work during this time of transition. Our rod, wire, and spring business continues to have healthy margins as a result of our refocus strategy targeting higher value content combined with disciplined cost management from our operations team. However, volume recovery, restructuring activities, and other operational initiatives will drive meaningful improvements. Specialty foam is a significant drag on our company profits, but we continue to drive operational improvements and margin recovery through our four-wall manufacturing improvement plan. Efforts to diversify our customer base have seen initial success, but we have more work to do in the current low demand environment where many market participants are increasingly financially constrained. In adjustable bed, low demand and a market shift towards lower value products have been a meaningful drag on profit. We are working hard to reduce cost and simplify the supply chain to drive profit and cash flow improvements. Our European betting business faces market conditions that are very similar to our domestic challenges. The team continues to drive profitability in Intersprings, but has opportunities to improve our KFoam business, where the customer base has changed meaningfully since acquisition. We remain confident that our unique positioning in the betting industry enabled us to drive value for our branded customers, and we are addressing our cost structure to do so as competitively as possible. In specialized products, operational improvement activities are ongoing within each business. In automotive, the team continues to make good progress improving profitability. We continue to evaluate efficiency enhancement opportunities and options to leverage automation and vertical integration. In both aerospace and hydraulic cylinders, efforts to improve production efficiencies are underway. In hydraulic cylinders, we are shifting some production to our operations in India to reduce cost and improve profitability. Restructuring initiatives in the furniture, flooring, and textile product segment are also on track. We have closed a flooring products production line and redeployed the manufacturing equipment to one of our other production facilities. In home furniture, we closed one plant and have transferred that production to other remaining facilities. We expect to market that real estate by mid-summer. In work furniture, we continue to explore opportunities to reduce cost and improve profitability. Beyond our manufacturing operations, we are evaluating our general and administrative cost structure to drive further improvements in profitability. Shifting our focus to the future, in the long term, we plan to invest in key focus areas including bedding, automotive, and geocomponents. The changes underway now in our bedding business support our future ability to drive product synergies across specialty foam and innersprings and capture greater product content through semi-finished and private label finished goods. We are committed to leveraging our capabilities in springs and foam to expand our hybrid mattress programs and drive value for our customers through product development activities. Additionally, we expect that future growth in adjustable beds will stem from higher attachment rates and innovative product designs tailored to meet consumer needs. In automotive, we see growth potential in our convenience products offerings, such as motors and actuators, particularly as vehicle technology and electrification increases. Our geocomponents business has grown via greenfields and small bolt-on acquisitions over time, and we anticipate further growth as we continue to expand our product lines and geographic footprint. We are confident that the actions we are taking in the near to midterm will better position us for the future and enhance shareholder value. Our current profitability does not meet our expectations, but we are taking the necessary steps to improve our performance. Moving on to first quarter 2024. Results were in line with our expectations at the beginning of the year. First quarter sales were $1.1 billion, down 10% versus the first quarter of 2023 from volume declines, primarily in residential end markets and raw material related selling price decreases. First quarter EBIT was $63 million, down $26 million versus the first quarter of 2023. Adjusted EBIT was $64 million, down $25 million versus first quarter 2023. EBIT and adjusted EBIT decreased primarily from lower volume, increased bad debt reserve, less benefit from a reduction to a contingent purchase price liability associated with a prior year acquisition, and the non-recurrence of pandemic-related cost reimbursements. These decreases were partially offset by lower current year amortization expense. Restructuring costs during the quarter were $11 million, comprised of $6 million in cash costs and $5 million in non-cash costs. The restructuring charges were mostly offset by gains from idle real estate sales and insurance proceeds of $8 million and $2 million, respectively. First quarter earnings per share and adjusted earnings per share were 23 cents, a 41% decrease from first quarter 2023 EPS of 39 cents. Moving on to segment results. Sales in our bedding product segment decreased 15% versus first quarter 2023. Ongoing weakness in domestic and international bedding markets negatively impact volume this quarter as demand continues to bounce along the bottom. U.S. spring volume was down 15% versus first quarter 2023, driven by declines in open coil and wire grids, partially offset by growth in higher value semi-finished products such as Combination Pocket and EcoBase. Domestic mattress market production was likely down high single digits, and we saw similar trends in comfort core demand. For the full year, we expect US mattress consumption to be slightly down versus 2023. Sales in our specialized product segment decreased 1% compared to first quarter 2023. In automotive, our volumes were in line with the market in the first quarter. We still expect our automotive business will outperform global automotive production in 2024, primarily due to new programs initiating production throughout the year. We continue to experience strong demand and benefit from lengthy industry backlogs in our aerospace business. First quarter volume was up 13% as industry production continues to recover from pandemic impacts. In hydraulic cylinders, First quarter sales were negatively impacted by softer demand in heavy construction markets and the lagged timing of index-based price changes. For the full year, we anticipate flat demand with weakness in European heavy construction markets offset by material handling backlogs in the U.S. Sales in our furniture, flooring, and textile product segment were down 9% versus first quarter 2023. Demand in home furniture continues to be soft. We have recently seen stronger performance in Asia than in the US and believe this is related to consumer trade down. Work furniture demand also remains low. Pockets of improvements in contract markets are offset by softness in residential markets. We expect 2024 demand to be in line with 2023. In flooring products, we anticipate another year of lower residential demand driven by lower levels of residential construction and remodeling activity. Hospitality demand has recovered slower than expected and remains well below pre-pandemic levels. Within textiles, first quarter sales were negatively impacted by weak bedding and furniture demand within our fabric converting business, partially offset by growth in U.S. civil construction demand within our geocomponents business. We expect infrastructure funding will be a tailwind later this year and anticipate full-year demand in geocomponents will be modestly higher year over year. Despite an uncertain macroeconomic environment and challenging demand in residential end markets, our full-year sales and earnings guidance has not changed. Our ongoing initiatives, including our restructuring plan, remain on track, and the management team is executing against our near- to mid-term strategic priorities outlined earlier. I'll now turn the call over to Ben to review our updated capital allocation priorities, additional first quarter financial details, and our outlook for the year.

Thank you, Mitch, and good morning, everyone. As Mitch discussed in his remarks, our management team and board of directors have made the decision to reduce the quarterly dividend to five cents per share. We carefully evaluated our capital allocation priorities and determined that reallocating a large portion of cash spent on dividends to deleverage our balance sheet while continuing to invest in our business, will enhance our financial position in the near term as weak demand in our residential end markets continues to pressure earnings. Additionally, cash generated from real estate sales will be used for debt reduction. We are targeting a long-term leverage ratio of two times net debt to adjusted EBITDA, which we expect will allow us to maintain a solid investment-grade credit rating. In the long term, we expect to grow our business both organically and through strategic acquisitions, while also returning cash to shareholders via a combination of dividends and share buybacks. In the first quarter, operating cash flow was negative $6 million, a decrease of $103 million versus the first quarter, 2023, primarily driven by lower accounts payable due to timing of purchases, reduced purchasing volumes, and deflation, as well as lower earnings. We ended the quarter with adjusted working capital as a percentage of annualized sales of 15.3% and improvement of 50 basis points versus first quarter 2023. Cash from operations is now expected to be $300 to $350 million in 2024 versus our prior guidance of $325 to $375 million as we expect less benefit from working capital than previously anticipated. We ended the first quarter with total debt of $2.1 billion, including $279 million of commercial paper outstanding. Net debt trailing 12-month adjusted EBITDA was 3.61 times at quarter end. We expect our leverage ratio to modestly increase in the second quarter before improving as we progress toward our long-term target of two times. We still expect to predominantly use our commercial paper program to repay $300 million of 3.8% 10-year notes maturing in November. Our amended credit agreement provides us with ample liquidity while we execute our current operating initiatives and navigate weak residential and market demand. The leverage ratio increased from 3.5 times to 4.0 times through June 30, 2025, and will revert to 3.5 times as of September 30, 2025, remaining at that level until maturity on September 30, 2026. No other material changes were made to the credit agreement. Total liquidity was $806 million at March 31, comprised of $361 million cash on hand and $445 million in capacity remaining under our revolving credit facility. As Mitch stated earlier, our 2024 sales and EPS guidance range remains unchanged. 2024 sales are expected to be $4.35 billion to $4.65 billion or down 2% to 8% versus 2023, reflecting continued weak demand in our residential end markets, partially offset by growth in automotive and our industrial end markets. Volume is expected to be down low to mid-single digits, with volume at the midpoint down high single digits in bedding products, up low single digits in specialized products, and down low single digits in furniture, flooring, and textile products. Deflation and currency combined are expected to reduce sales low single digits. 2024 earnings per share are expected to be in the range of $0.95 to $1.25, including approximately $0.20 to $0.25 per share of negative impact from restructuring costs and $0.10 to $0.15 per share gain from the sale of real estate. Full year adjusted earnings per share are expected to be $1.05 to $1.35, primarily reflecting lower volume, pricing responses related to global steel cost differentials, modest metal margin compression, and several expense items that were abnormally low in 2023 and are expected to normalize in 2024, including bad debt expense, a reduction to a contingent purchase price liability associated with a prior year acquisition, and incentive compensation. These decreases are partially offset by lower amortization from the 2023 intangible asset impairment. Based upon this guidance framework, our 2024 full-year adjusted EBIT margin range is expected to be 6.4% to 7.2%. EPS guidance assumes a full-year effective tax rate of 25%, depreciation and amortization of approximately $135 million, net interest expense of approximately $85 million, and fully diluted shares of $138 million. For the full year 2024, we assume capital expenditures of $100 million to $120 million, dividends of approximately $135 million, reflecting two quarters of cash payments at 46 cents per share and two quarters at 5 cents per share, and minimal spending for acquisitions and share of our purchases. Lastly, I want to reiterate that we are proactively making changes where needed to strengthen our business and better position us to capture long-term opportunities. This discipline, combined with the dedication and hard work of our employees, will pave the way for future success. With those comments, I'll turn the call back over to Cassie.

Thank you, Ben. Operator, we're ready to begin Q&A.

Thank you. We will now be conducting a question and answer session. If you'd 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 keys. One moment, please, while we poll for questions. Thank you. Our first question is from Susan McLaurie with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everyone.

Good morning.

Good morning. My first question is I want to start on the dividend. I guess, Mitch, can you just give us a bit more perspective on how the board arrived at that $0.05 and maybe even some color on what it implies for the future earnings of Leggett? How do you think about what the business can generate once you get past the restructuring and all the changes that you're implementing? Just any color there on how we should be thinking about those two pieces.

Sure, Susan. You know, making a change to the dividend was, of course, a decision that we took very seriously. And it was important for us to consider a variety of options in making that change, as well as near and long-term impacts to our business. So the downturn in our residential end market demand has continued to pressure earnings for longer than we originally anticipated. And, you know, as we went through this process, we shifted from considering it to be a question of how can we fund the dividend at the current levels to whether we should fund the dividend at the current levels as it became harder to balance our lower earnings, the increasing leverage, and the elevated dividend payout ratio. So, you know, we've landed at the 20 cents because reducing to that level allows us to deleverage our balance sheet in a reasonable timeframe. continue to invest in our business, which we've mentioned before, we hadn't been compromising CapEx or things like that. But as this drove on and the payout ratio continued to be really high, it was putting us in a spot to maybe have to make some changes. And it also gives us the flexibility to find our portfolio in the future if we think that's appropriate. So we remain committed to returning capital to shareholders, and we're not walking away from that priority. But we'll balance that with retaining the flexibility to invest in future growth. And we'll also think about that, the shareholder returns both through dividends and share repurchases over time. You know, to your question about the future earnings, you know, we still feel really good about the restructuring activity that's underway and some of the additional actions that we talked about in our reporting of operational improvements and looking at our G&A cost structure. things like that. So we feel like we still see that improvement in our earnings, even in this near-term low-demand environment. We continue to see improvement and growth in specialized products earnings. And demand will start to come back at some point, but it's hard to estimate when that is. Probably depends on interest rates and inflation and some things like that. So we're really focused on dealing with the situation that we have on our hands today and driving improvement in our earnings in the near term, the midterm, and then returning to longer-term growth when things normalize a bit. So we're confident in the situation we're in and the opportunities that we have, but we felt like this was an appropriate action to give us the flexibility that we need to run our business for the long term.

Okay, that's helpful color. And then just maybe digging a little deeper into one of the points that you made there, which is just the commitment to shareholder returns. I guess, is the plan to continue to raise the dividend from here? Or should we expect that we're just going to stay at the 20 cents for a while and then, you know, sort of take things from there?

Well, I think, Susan, as we move closer to our leverage target, and the long-term target that's been mentioned two times is long-term. It doesn't mean that we won't do anything until we get there. But I think we'll continue to evaluate the situation. We definitely want to continue to give ourselves the flexibility, and probably we'll have not as much of an only dividend focus as we've had over the last five-plus years. So we'll take advantage of flexibility between share repurchases and the dividend. But we'll continue to evaluate that as we make progress in our earnings and our deleveraging.

Okay. All right. Thank you. I just want to get one more in, which is that it does sound like the restructuring is on track and that's progressing. Just anything, I guess, that has surprised you or that has been different as you've actually started to get a bit deeper into that process and, you know, perhaps anything that could be changed or adjusted given that?

You're right. It is going very well, and things, I think, remain on track. But, Dyson, do you want to comment?

Because vetting is the biggest part of that. Sure thing. Good morning, Susan. Yes, it is on track. We're doing well with the plan. I'd say we're on track from both the timing and financial estimates that we've made as part of the plan. I think maybe what's been surprising is it's a heavy lift. There's a lot of activity across the segment. And all of it has been well planned out and it's being executed really well. But in terms of maybe some things are being a surprise, we decided we needed to move aggressively. We're adjusting to a fast-changing market and wanted to do this in an appropriate way. But I think we continue to find along the way other opportunities that we can continue to drive cost improvement as part of the plan. And I think that really gives us a lot of confidence back to what Mitch said about improving the longer-term margin profile is that we continue to find other opportunities to add to the restructuring plan and help us continue to drive efficiency while still supporting our customers and not jeopardizing that.

Okay. All right. Thank you all for the color. I'll get back in the queue.

All right. Thank you, Susan.

Our next question is from Bobby Griffin with Raymond James. Please proceed with your question.

Good morning, buddy. Thanks for taking my questions. I guess first, Mitch, I wanted to talk a little bit about the betting segment itself and the performance during the quarter. When you look at kind of the delta between what you guys estimate the consumption was in the industry, I believe you mentioned down high single digits and then the innerspring foam volume down 15%. What is driving that gap still? I know we've talked a little bit about market share losses, but is that also from some of the restructuring initiatives where you've had to walk away from some business temporarily or anything, any additional color there?

Tyson, I'll turn it over to you if you're an expert. I'll take that one. Good morning, Bobby. No, we're not walking away from anything in the first quarter. That's not been a drag. If anything, I know we put out the sales nutrition estimates early in the first quarter as part of the restructuring announcement. And, you know, to date, I think we've found that so far it's been less than what we originally put out. We were conservative in that estimate. The big drag, and we've talked about this before, but, you know, we've really had struggles around volume in both open-coiling grids. And it's a combination of, you know, product and consumer preference moving away from some of those product categories and also extreme price competition on some of those, especially on open-coil and even on lower end commodity pockets that just don't make sense for us. But those continue to be a longer term drag on the overall volume. But we do feel like our comfort core, especially with some of the newer products, are more in line with the domestic market.

And Tyson, when you look at that, is that trend leveling out where that incremental pressure is leveling out? Or is that incremental pressure still growing? And if you're to unpack that further within the industry, is that, you know, you mentioned the price side, but is there just a function where there's better spring making machinery available from other countries today than there used to be five or seven years ago?

For sure. On the last part, Bobby, I mean, you know, that we have to recognize that, that we have some competitors making innerspring equipment internationally that are very capable and they can make some good equipment. And that is a part of the market that we have to deal with at this point. We still feel good about what we can do internally and the efficiencies that we have with our fuel business. But that is a challenge and something that we have to deal with. There is, you know, we have to be mindful that it's a very competitive market, especially right now where there is overcapacity that exists, not just in finished mattresses, but in components. And so it makes it a very aggressive marketplace right now. And we're going to have to continue to deal with that as long as we're in kind of this low demand environment, especially. But we think we're dealing with it well. And that's why we're also investing heavily in not just differentiated product offerings, but also trying to find cost solutions for our customers that get away, not just from commodity products, but helping them save money in their assembly process.

Okay. Go ahead. I'm sorry, Matt.

Sorry, Bobby. I was just going to add, you know, this goes into our focus in those higher value products, right? So we're not just chasing the low value products, but continuing the shift, and that's having a positive impact, right?

That's right. They come at lower units overall, especially relative to some of the legacy products, but they have been successful so far, and we are seeing improvements there.

Okay, that's helpful. And then maybe switching gears a little just to overall raw material deflation. I've covered you guys for a while, and there was a typical relationship between kind of when you'd get the deflation, you'd kind of hold on to it a little bit, and you'd see it help a little of the margins, but it would hurt, obviously, the top line. Is the business still behaving that way in a deflationary environment, or has some of these pressures that have taken place caused the prototypical relationship that we're used to on the street to be a little bit different when Legit experiences deflation across some of its product categories?

Yeah. Bobby, I think it's pretty similar. We just probably have a little bit different timing dynamics. Like with specialty foam, the timing is a bit different than what we'd see in Intersprings. But I think it's probably pretty similar.

Okay. And then I guess, Mitch, lastly for me, it's back on the steel mill. I think I talked to you guys about this last quarter as well. It's just What, what, you know, that, that is part of the big vertically integrated strategy, but at the same time with it running at a less than full capacity, it does have probably a drag on the operations. Is there, is that just purely market related that have to come back or is there some, is there some external kind of sales force things you can do to drive that back to full capacity? Or are we just, you know, kind of at the beholden of the end market and the consumer?

Yeah, I'll take that one again, Bobby. Yes, it is a drag. You know, it is, you know, a high fixed cost operation, and it is something that, you know, running at below capacity is definitely impactful to our margins. But, you know, we do see that, you know, just over time, you know, as products have changed, grid zero is an example. That's been historically a big use of rod tons, and we see a pretty permanent shift in the attachment rate for that long term. So, It does require us to go out and diversify in some of the markets we can serve. And we are actively doing that. You know, we have seen, you know, even over the last year where some of the industrial markets were stronger, that there's been some more weakness there. So that's still a challenge in the near term. But we are actively looking at other end markets, more industrial markets that help us offset some of that. We're not just solely relying on the recovery of the innerspring market.

Very good. I appreciate the details this morning. I'll jump back in the queue.

Thank you, Bobby.

Thank you. Our next question is from Peter Keith with Piper Sandler. Please proceed with your question.

Hi. Thank you. Good morning, everyone. Thanks for taking my questions. I actually want to ask a few follow-ups. So to Susan's question on capital allocation, you mentioned maybe not as focused on dividends like you have been the last five years. I guess it applies maybe thinking about share repurchases. The question is, are you thinking about, you know, getting to two times that leverage as that target before you contemplate acquisitions or share repurchases? Or are you going to be opportunistic? I guess just trying to understand the timing of when, you know, some of the cash return of the shareholders could pick up.

Yes, thanks for asking that question. And we tried to comment on that, but I'm glad to clarify, you know, the two times leverage target is a long-term target. and we will try and be opportunistic along the way. It's a priority. We want to make sure we're maintaining our investment-grade credit rating and access to commercial paper, but that doesn't mean we won't pass up opportunities, for example, small bolts on acquisitions or things like that. Nothing is on the list right now, but we do plan to maintain some flexibility. Ben, anything you would add there?

Yeah, no, I think that's right, and as we make progress on that deleveraging, I think, like Mitch said, that gives us the

flexibility to start to look at some of those other opportunities to drive growth. And so, again, you know, if we redirected all available free cash flow to debt reduction, it would probably take us a couple of years. But, again, as we make progress, we'll have the ability to be a little bit more flexible and look at those other opportunities. So I think flexibility is the word, right, Mitch?

Yeah. For sure. But we'll definitely be opportunistic in those other opportunities.

Okay, very good. And then to follow up on Bobby's question regarding spring competition, I think he had referenced there's some larger international players that are competitive. What about the domestic market? It does seem like there's more spring factories popping up in the U.S. Has the level of U.S. domestic competition also intensified in recent years? Yes, we have seen some of that. Bobby asked the question about equipment. That is something, especially during the pandemic, that we saw a rise in some of the capacity ads. Some of that has also come from a result of the anti-dumping cases where we've seen some reshoring of mattress production in the U.S., and so some of it that wasn't part of our addressable market to begin with was being imported, and now we're competing with them domestically. So we have seen that as part of the market, and that's as part of what we're talking about with the changing domestic market and why we're making adjustments from our business as well. Okay, very good. And then the last one for me is that the last quarter you had referenced that some customers looking to improve their financial position and that can negatively impact your sales. You took the impairment charge on especially phone business. The heart of the question is some of those lost sales, I guess customers might be going elsewhere, shutting down, did that show up fully in Q1, or is there more impact to come as we think about Q2 and going forward from this customer changes? Go ahead. I'll take that one as well, Peter. We didn't see, we saw some just general slowdown from some of those accounts, but more that would track the market in the first quarter. But most of the impacts that we've talked about previously and we're taking impairment charge, we'll start to really see in the back half of the year, and that's part of our guidance. Okay. So I'll just develop on that. I understand the guidance. No one has the perfect crystal ball. But certainly, like, we look at vetting. Yeah, you have units down high single. I guess from where you're training first half of the year, it does imply some healthy improvement in the back half. Is it a function of compares? Does it seem like you've got the customer headwind coming? What gives the confidence in that general improvement as we look to the back half of the year?

Ben, I'll let you take that one. But, I mean, there's some seasonality, too, particularly in, like, automotive and things like that.

Yeah, and then I'd say on the betting side, it's really the comparisons get a bit easier in the back half of the year.

Yeah, when we really, from a demand standpoint, plan for it to be more of the same. I mean, really, what we saw late last year, we haven't forecasted any optimistic recovery or anything like that in demand, and we have baked in the customer attrition that we talked about. Okay, very good. Thanks so much. Thank you.

As a reminder, if you'd like to ask a question, please press star 1. Our next question is from Keith Hughes with Truett Securities. Please proceed with your question.

Thank you. A couple questions. First, on the dividend, I understand why you're cutting the dividend. I'm a little confused at why that dividend in February was paid at the old rate. I mean, that The landscape looks very similar to what you thought the last earnings release, probably what you were forecasting in January. Can you go through the thought process of the board of the path that we got to where we are right now?

Yeah, and I tried to comment on this earlier, Keith, but, I mean, it really goes back to how seriously we took that decision and we wanted to do the work that we needed to explore the various options that were in front of us. and what the impacts were for us, both in the near and the long term. And so it was a long and vigorous and thorough discussion and investigation of different opportunities. And so while we wanted to make sure we were making the right choice and also signaling that it was a discussion that we were having. And so just that's how the timing worked out.

Okay, so you brought up the long-term ramifications of this. So you've got a bigger restructuring plan you're working on that you highlighted at the beginning of the year that's a lot of cost takeout and things like that. But without a big dividend, it kind of changes how the stock's gonna trade. I guess my question is will there be a real look inside this portfolio to say what businesses are really growth engines moving forward and which may be ones you don't need to be in in the future?

Yeah, great, great question, Keith. I mean, portfolio management is always something that's on our radar. You know, we think about and have conversations about the complexity of our business and what can we do to maybe simplify that. And it means not only our portfolio, but even within some of our BUs, there's a lot of complicated elements to it. So, you know, it's something that is definitely always on our radar and that, you know, we'll continue to dig into.

And is there an ongoing review? Is there some kind of date we might see a result of that? Or is this more just traditional review business every six months, 12 months, whenever you do it?

I think it's a little bit of both. I mean, we have a lot of activity that's underway right now. So we want to make sure that we're advancing on the restructuring, that we're taking these other operational efficiency improvement activities, that we're looking at our G&A costs and all those things. as well, and also digging into the portfolio. So, you know, it's something that's definitely an ongoing priority for us. So I don't want it to sound like that it's not something that's on our radar, but I think we have work to do to determine where we go.

Okay. Thank you. Thank you. Our next question is from Susan McClary with Goldman Sachs. Please proceed with your question. Susan, are you on mute?

Yep. Can you hear me?

We can now.

Okay. Sorry about that. I was on mute. I just wanted to follow up on a couple of points. One is you mentioned in your remarks a focus on administrative costs in addition to the operational side of the business. And the SG&A was higher in dollars and as a percent of the revenues year over year in the first quarter. Is there anything specific there that you're looking to or anything that you could kind of highlight in terms of the SG&A and the opportunity there?

Sure. Then I'll let you take that one.

Yeah. Thanks for the question, Susan. I'd say at this point we're just in the very early stages of this evaluation, and we really don't have an estimate on the impact at this point, but what we're doing is investigating opportunities such as streamlining our processes, eliminating duplicate activities between our shared services and our business units, and then taking a look at some of the elements of our IT systems to see what opportunities we might have to prune out some costs there. Just like I said, early innings of that, but that's really what that entails.

Okay. All right. And then I also just want to touch a bit on the cost structure. I know that you mentioned that you still expect deflation this year, but can you just talk about, you know, how costs are moving more recently? It does seem like, you know, some of these commodities have kind of come up off the bottom. Just any thoughts on how that's trending and where things are going?

Yeah, I think that things have been, you know, maybe we've even seen modest deflation, but some ups and downs on different things, maybe chemicals and things like that, but relatively stable. But Tyson, anything you would add?

No, it is relatively stable at this point. I mean, you know, supply is back in a good place, and I think overall where demand has been that we've seen some bumps up and down to relatively minor, and overall it's still in a pretty stable place.

Okay, all right. And then I just have one last one, which is that it seems like especially as we've gone through earnings, there's been some sort of mixed maybe commentary and color on the state of the consumer. When you step back and you sort of look at your business and the overall trends that you are seeing broadly, I guess, how would you characterize the overall state of the consumer and where you think they are today? And has anything changed there?

Yeah, that's a great question. I think there are mixed views. I don't feel like a lot has changed since we last talked about this, but I think it depends on where their focus is, right? I think on the consumer durable products, there's still not a focus there. And I think it's impacted by higher interest rates and inflation and just the need of people to dedicate their income to their products. to food and resources and things like that and more still have a bit of a focus on services. But I don't know, Tyson, anything you see differently?

No, I think that's the core issue in the short run. I think you see where the inflation is definitely having a major impact on basic staples and that takes the focus away from longer-term durables and they can push some of those products off. I think the other thing that we're watching really closely is just housing affordability. It goes back to both availability and mortgage rates, and that tends to be a big driver for a lot of our products, and we're in a pretty rough spot for that right now as well. So I think those things go hand in hand, but that's definitely a big macro trend that we're watching.

Yeah, and I think with what we've seen in the recent inflation and the Fed's position, I think there's less optimism that those rates are going to come down in the near term. So that's why we're preparing to just deal with this current environment as long as we need to.

Okay. All right. Thank you for all the color, and good luck with everything.

Okay. Thank you, Susan.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Cassie Branscombe for closing comments.

Thank you for joining us and your interest in Leggett and Platt. Have a good day.

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