LEG
#<UNK>, good morning.
It's pretty broad-based.
There's some softness in residential that continues.
Feels a little bit more like home furniture than bedding at this point.
The strength continues to be automotive but it's more of a step function change down from a macro perspective that we perceive to be impacting us.
From a forecast standpoint, there's some softness in our European forecast that has yet to be seen as to what the Brexit impact will have.
Maybe we're a little pessimistic, I don't know.
So, that's a change from the previous forecast.
But I certainly can't isolate it to any one business unit.
A little bit in that if we look at second-quarter to first-quarter scrap, it was up in excess of $50 a ton, which is about 30%.
So, as the quarter continued we continue to see scrap inflation that will manifest itself into, on the flat products side.
US steel cost inflation in the third quarter the forecast is about a 30% level.
And we are now passing through pricing on the long products, the rod and wire.
That impact we told you about last quarter, that we had launched some of those increases.
We continue to implement increases.
There's not real good visibility as to how scrap is going to move in the back half of the year.
It traded down slightly in July.
We think August may be flat to a slightly up bias.
We will see.
Really, what's happened, the way to think about it, <UNK>, is that commodities deflation was a tailwind and now inflation has turned into a bit of a headwind.
Remembering that we have about a 90-day lag of pass-through time.
That's correct.
Absolutely.
Dan, I think it's more of a tough comp issue in that our adjustables in 2Q 2015 were up 70%.
And the fallback actually in this quarter was very much early quarter weighted.
April was tough and then we saw a recovery as the quarter progressed.
We expect units to be positive in the back half of the year, in part because of the significant rollout of a new retail program.
And, frankly, the fourth-quarter comps are very, very easy.
I don't think it's a step function change at all.
Consumer demand is real.
I think it's just a byproduct of a tough comp.
The forecast now ---+ by the way, the CVP business is just one single location after the series of divestitures that we've gone through.
That is an Atlanta-based facility.
It was actually the largest of the CVP businesses, at least in recent years.
Their volume had really been good.
They had a very good first quarter, as well.
So we see some pickup in demand but I'm not willing to claim victory yet.
That business is inherently choppy.
Our current forecasts show a little bit softer demand in the back half, which is typical that we will see some choppiness in that business.
But everything said, it is performing much better than it had in the past.
<UNK>, this is <UNK>.
Although we don't really provide color now on a period-by-period basis because it's so confusing with the different period ends amongst our customers and some of the information that's out there from an industry standpoint, but we did find it pretty choppy throughout the quarter.
We had demand that was well below where we had earlier thought we would be.
However, if you look at the quarter overall, in 2015 in innerspring volume we were up 17% last year, year on year.
So, this year being down about 4%, if you took the two years and put them together it would be a 13% rise over 2014.
If somebody had told me that two years ago I would've been tickled.
<UNK>, we did have some small benefit last year in the second quarter still pertaining to the port situation.
But there have been some shifts within the market.
We are seeing right now raw material, primarily steel, a delta in US versus China pricing at the highest level I have seen.
It's north of 40%, in some cases, on the flat steel we're using in mechanisms we produce both here in the US and in China obviously.
But what that has caused is a shift of product being sourced out of China over the last three or four months.
We've seen a significant shift.
Along with that, we've seen some down specking by some of the manufacturers and retailers, that they will take a product that may not be quite as high of quality as they had before but it's still acceptable to them, with that big delta in steel pricing.
And we consistently are seeing business volumes that are generating below last year's numbers and it's been that way pretty much for the full year.
No, <UNK>, it's very much in line with what our prior guidance would've suggested, if we would've then been guiding for volume growth to have been mid single digits instead of mid to high single digits.
<UNK>, we booked a little over $7 million of LIFO expense in the second quarter, which was basically a first-half catch-up given where quantities have moved during the course of the second quarter.
Our current best view of the LIFO scenario would put us at a little over $14 million for the full year.
But as you well know, that has a tendency to move around and we'll continue to revisit that estimate each quarter.
<UNK>, this is <UNK>.
It's basically reflecting inflation that has occurred from the beginning of the year to where we find ourselves now.
It gets a little confusing when you think about last year and all the deflation that was happening.
LIFO is a calendar quarter phenomenon.
And, so, sure enough, just like <UNK> said, it was $7 million recorded in the second quarter.
Full-year expectation as we sit here today is $14 million.
So that means that in the next two quarters that that turns out to be exactly right.
You'd see another $3.5 million of LIFO expense in 3Q and then in 4Q, as well.
Correct.
Herb, this is Dave.
We're not forecasting any change in our mix.
In the frozen plans, we're roughly 60% bond, 40% stock, and we feel pretty good about that.
If you could tell me when interest rates were going to move, we would be able to forecast better what we should do with pension.
But we feel pretty good with the mix we've got and we're pretty well-balanced obligations versus asset mix.
I will have to get that, Herb.
I don't recall off-hand.
No.
You can see a line item in our cash flow statement that actually isn't in investing activities.
Because it was a JV before, it lands down in the financing section.
I want to say $35 million or something, in that ballpark, for what we spent.
We were already consolidating all of it, sales and EBIT, under the accounting rules for treating the positions in businesses where we had the majority ownership already.
So, all that's really changing from our financials relative to the earnings profile is that the next to last line on our income statement that used to back out the noncontrolling interest is no longer going to exist.
That's really the extent of the disclosures that we'll make around this.
Pretty small, but it has been a really important part of that profile for the business unit and one we're happy to have full ownership of.
Dan, this is <UNK>.
Thanks for the question.
A combination of things, really.
First of all, the market is quite receptive, as you well know.
And we decided it was a good time to go ahead and extend our facility, the additional two years out to May of 2021.
We have done so much divesture work, as everyone is well aware of, over the last several years.
And, so, we do believe that we're basically largely done with that effort, so there's an opportunity to continue.
And this has always been the case, to be mindful of any attractive growth opportunities that are coming through the M&A pipeline.
Certainly <UNK> can comment how he views the pipeline looking right now.
We just wanted to take advantage of the market as it currently resides to make sure we have plenty of flexibility.
And that really is the number one driver behind that.
And, sure enough, we do anticipate that we will have perhaps a bit more opportunity to look at some growth prospects.
Not that we haven't been looking at them all along, but since so much of the divesture work has now been done, it's a natural opportunity, it appears, for the next 12 to 24 months.
And of course that credit goes out five years.
So it's a nice position to be in.
<UNK>, you are right, it has not been done in the past.
It actually was up greater than double digits into 2Q 2015, so that's what the comp was out there.
The newly acquired or more recently acquired businesses are performing very well.
Those are the more value-added businesses.
I will say the French operation continues to exceed all expectations.
Our people in France are doing a great job.
The softness that we experienced was just some demand choppiness.
And it's back at the original Western Pneumatic investment that we made in the first quarter of 2012.
You remember, that's just a straight tube business.
It's just aerospace demand is inherently choppy.
Yes.
There were a lot of sales and not much EBIT.
The return profile wasn't acceptable.
We were pleased with that divestiture that we received a long-term supply agreement with the acquirer of that business.
So it was originally purchased many years ago to be a wire play.
So from a future standpoint, will still have those wire tons to run through our operation, we just won't have the low-margin sales associated with the value-added product.
This is steeped in basically the current guidance, I would say, midpoint, but we've got an approximate revenue guidance down 3.9%.
At this point we would assume full-year residential sales volume that would be down probably low single digit.
We will have some volume growth, we think, in the segment but we also have some first-half deflation.
Not sure that that deflation is going to be completely overcome with price increases in the back half of the year.
Commercial would be looking at up high single digits, a combination of acquisition and some volume growth.
Industrial is still looking to be down quite notably, and, in fact, mid 20%s is where it would be.
But keep in mind that they are taking the largest hit from divestitures.
So, simple math would say 15%, 16% off just because of the divestitures and maybe 8% to 10% down organic, which is also a major reflection of steel deflation.
And then specialized up high single digits with continued good growth across most of that segment.
The margin profiles, interestingly enough, and it's similar to what we said before, those don't really look very different from what we said last time.
In fact, residential is still 10% to 11% range, up slightly from where they were last year.
Commercial up 50 to 100 basis points from last year, which would put them in the 7% to 8% range.
Industrial 10% to 11% or so, which is up a lot from last year.
We mentioned structurally a lot of improvement because of the divestitures.
And then specialized up 100 basis points from where they were last year, which puts them in the high teens, as well.
So, when you blend all that together you're still closing in on about somewhere close to a 13% blended margin for overall.
We'll just say thank you for your participation.
We do appreciate your time and we will talk to you next quarter.
