Leggett & Platt Inc Q2 FY2022 Earnings Call

Greetings, and welcome to the Leggett & Platt's Second Quarter 2022 Webcast and Earnings Conference Call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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 for Leggett & Platt. Please go ahead.

Good morning and thank you for taking part in Leggett & Platt's second quarter conference call. On the call today are Mitch Dolloff, President and CEO; Jeff Tate, Executive Vice President and CFO; Steve Henderson, Executive Vice President and President of the Specialized Products and Furniture, Flooring & Textile Products segments; Tyson Hagale, Senior Vice President, President of the Bedding Products; and Cassie Branscum, Senior Director of Investor Relations. The agenda for our call this morning is as follows. Mitch will start with the summary of the main points we made in yesterday's press release and discuss operating results and demand trends; Jeff will cover financial details and address our outlook for 2022; and the group will answer any questions you have. This conference call is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded, or broadcast without our expressed permission. A replay is available from the IR portion of Leggett's website. We posted to the Investor Relations 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.

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

Thank you, Mitch, and good morning, everyone. In the second quarter, we generated cash from operations of $90 million, up $49 million as compared to $41 million in the second quarter 2021, reflecting a much smaller use of cash for working capital. Working capital increased significantly last year due to restocking efforts following inventory depletion in 2020, but increased to a lesser extent this year as we continue to return to inventory levels more reflective of current demand. We expect cash from operations of $550 million to $600 million in 2022, as last year's significant inflationary impact stabilized, and we continue to balance inventory levels. We ended the second quarter with adjusted working capital as a percentage of annualized sales of 15.7%. Our priorities for use of cash are unchanged. They include an order priority, funding organic growth, paying dividends, funding strategic acquisitions and share repurchases with available cash. Capital expenditures in the second quarter were $22 million. In May, our Board of Directors increased the quarterly dividend to $0.44 per share, $0.02 or 5% higher than last year's second quarter dividend. At an annual indicated dividend of $1.76, the yield is 4.4% based upon Friday's closing price, one of the highest among the dividend kings. With deleveraging we accomplished over the past few years, share repurchases have returned as one of our priorities for the use of cash. The level of repurchases will vary depending on various considerations, including alternative uses of cash and the opportunities to repurchase shares at an attractive price. We took advantage of the lower share price during the second quarter and repurchased 1 million shares at an average price of $35.01 per share. Total repurchases for the quarter were $35 million. This brings year-to-date repurchases to 1.6 million shares, or $57 million. We ended the second quarter with net debt to trailing 12-month adjusted EBITDA of 2.39 times. Our strong financial base gives us flexibility when making capital and investment decisions. We remained focused on cash generation, while maintaining our balance sheet strength and deploying capital in a balanced and disciplined manner that positions us to capture near and long-term growth opportunities, both organically and through strategic acquisitions. Now moving to guidance. As Mitch stated earlier, we are lowering our full-year guidance for both sales and earnings per share. 2022 sales are now expected to be $5.2 billion to $5.4 billion or up 2% to 6% over 2021. Guidance reflects volume down low to mid single-digits, with the Bedding Products segment down low double digits, Specialized Products segment up low double digits and Furniture, Flooring & Textile Products roughly flat. The guidance also reflects continued inflationary impact primarily from raw material-related price increases, including those implemented as we move through 2021. The guidance assumes negative currency impact and acquisitions in 2021 should add 1% to sales growth, but will be mostly offset by small divestitures. 2022 earnings per share are now expected to be in the range of $2.65 to $2.80. The decrease versus prior guidance primarily reflects lower expected volume in consumer end markets partially offset by continuing strength in industrial and automotive markets as well as metal margin expansion in our Steel Rod business. Based upon this guidance framework, our 2022 full-year EBIT margin range should be 10.5% to 10.7%. Earnings per share guidance assumes a full-year effective tax rate of 23% and depreciation and amortization to approximate $200 million, net interest expense of approximately $80 million and fully diluted shares of $137 million. For the full year 2022, we expect capital expenditures of approximately $130 million, and dividends should approximate $230 million. In closing, Leggett remains well positioned, both competitively and financially, to capitalize on long-term growth opportunities in our various end markets. Our enduring fundamentals give us confidence in our ability to continue creating long-term value for our shareholders. With those comments, I'll now turn the call back over to Susan.

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

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Bobby Griffin with Raymond James. Please proceed with your question.

Good morning, everyone. Thank you for taking my question. Mitch, I'd like to start with the Specialized Products segment. First, I noticed that your volume has increased significantly over the full year. Could you elaborate on which areas of this business are performing better than expected and provide more details on the trends in those end markets? Secondly, what can we expect regarding the pathway for margins to return to the mid-teens in that segment, which we were accustomed to? Is there a viable path for that, or has something structurally changed in the business that might result in lower margins going forward?

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

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

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

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

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

Thank you, Bobby.

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

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

Yes, I'd be happy to address that, and good morning, Susan. Thanks for the insightful question. It’s challenging to make predictions, but the stability we’re observing in demand is encouraging. The current inflationary environment, combined with tightening monetary policy and other economic challenges, has contributed to a slowdown. If we can see inflation begin to stabilize and gradually decrease, I doubt we’ll experience a rapid drop. However, if stability occurs, I believe consumers will maintain their spending at reasonable levels. As we look ahead, if we can steer clear of a severe recession, we should be in a good position. We've been preparing across all our businesses for this uncertainty, having started last year to manage our inventory, variable costs, and production levels closely. This allows us to adapt to either a softer market by controlling costs or to respond quickly should conditions improve. The major question remains about future consumer demand and inflation. Overall, I'm cautiously optimistic about the trends we're observing. Tyson, what insights do you have?

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

In the long term, historically, we don't typically observe multi-year downward trends in the bedding sector. This would be unusual based on our past experiences. Even with a slight softening in the housing market, we expect consumer sentiment in areas like our Home Furniture business to remain relatively resilient. Despite the significant home traffic we've seen in recent years, there may be a return to repurchasing cycles. However, I must point out that we've recently observed a more pronounced negative impact on the lower end of the Home Furniture market.

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

Thank you for the insightful question, Susan. We've navigated similar challenges before, particularly during the downturn in 2020 following the pandemic's onset. From those experiences, we've gained valuable insights that have stayed with us. I anticipate that our diverse portfolio will serve us well, as we're observing stronger demand in our industrial and automotive sectors compared to our consumer-facing businesses. I believe this trend will persist. Additionally, we'll keep aligning our variable costs and inventory with demand. As I noted earlier, we've been proactive since we first noticed a slowdown in demand last year, particularly in Bedding and other sectors. This is a regular topic of discussion across our operations. We are well-prepared in this environment and not scrambling to adapt to macroeconomic changes. We continue to generate strong free cash flow and maintain robust liquidity, which are significant advantages. Back in 2020, we reduced around $90 million in costs, primarily in overhead. I never viewed those cuts as temporary measures but rather as steps to invest in our future. We have been making those investments, and I believe our portfolio diversity, cash flow, and liquidity will enable us to continue doing so. This will give us the capacity to act accordingly if demand slows, while also benefiting from enhanced efficiencies and capabilities to capitalize on any future demand rebound. If conditions worsen, we can implement more aggressive cost-cutting measures. However, I truly believe we are well-positioned to invest in our future and benefit from the recovery as the cycle progresses.

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

Right. Thanks, Susan.

Thank you. Our next question comes from the line of Keith Hughes with Truist Securities. Please proceed with your question.

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

Tyson, do you want to take that one?

Sure. To clarify, we are noticing a slight decrease in rod pricing. However, in the second quarter, metal margins actually increased slightly more than we anticipated. Factors that contributed to this included the impact of events in Beijing and Ukraine on scrap pricing, which led to heightened demand for scrap supply. We also experienced a significant rise in energy costs and overall steel demand, resulting in higher metal margin growth in the second quarter. In the third quarter, we observed a decrease in rod pricing and a decline in scrap prices, but overall metal margins have remained relatively steady. Looking ahead to the fourth quarter, we anticipate some modest compression due to supply and demand dynamics. It's still challenging to make precise predictions, but we expect to see a year-over-year increase for the full year.

Okay. And in the prepared comments, you talked about textiles and flooring, kind of it seems like you made in different directions right now. Just relative side, kind of lump those together in the 10-K. Can you just talk about how what those two represent as a percentage of the FFT segment?

Let me consider this for a moment.

Just roughly on our main business.

Yes. Okay. And Steve, if you have that information available, please share. I believe textiles make up about 35% of the segment, is that correct, Steve?

Yes, textile is about 35%, flooring, probably about 25%.

Yes. About 20%.

Okay. That’s what I was looking at. Okay. And then, I guess, final question. You had the compression in specialized that you discussed earlier on the call, the kind of lag on pricing there. Would we continue to see similar types of margin compression based on your revenue guidance for the next couple of quarters, or will that start to narrow as you get at least some more price?

Yes. Great question and Steve chime in here. But I think that we expect to see sequential improvement in the margins and specialized as we move through the back half of the year. As I said, we've made progress on passing through some of the inflationary impacts in Automotive and the increase in volume will help us there. We have had a bit of a hit from exchange rates impacting margins, but we do expect to see meaningful improvement in the back half.

Okay. Thank you.

Yes, thank you, Keith.

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

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

Yes, Peter, great question. Tyson, I'll let you see that one.

Sure. In the short term, we've had a challenging couple of years with customers and supply chain issues, fluctuating demand, but our teams are actively looking for opportunities with our customers to provide value, even in a slow environment. We expect to see some benefits starting now and continuing into the latter part of the year, indicating potential short-term improvements. In the medium term, despite the challenges, there are customers interested in developing new products, and we're working on some innovative solutions with them that will take time to establish in the market. Looking at the long term, we are committed to investing in areas like bedding, including ECS and Kayfoam, as well as our Adjustable Bed business, which we believe will expand our market reach. We’ve maintained a focus on our core components business as well, ensuring we're well-positioned to support our customers. Even during the downturn, we've continued to invest, aiming to emerge stronger for future growth.

Okay. Good. Thanks for the summary. And then, we talk about the weak economy, but an area that does seem to be getting weaker for the foreseeable future is housing. And I guess, I want to understand your views on housing and its impact on your guidance as home sales are slowing quite a bit here. It seems like it could have a further negative impact on Bedding and Furniture or Flooring, some various segments. So is that something that you're contemplating as you look out over the next 6 months to 12 months?

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

Okay. Very good. Thanks so much.

Thank you.

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

Thank you. Hello, again. My first question is, we've talked a lot about the supply chains and production as it relates to auto within specialized. But can you talk a little bit about the improvements, or how you're thinking about the improvements coming through in Arrow as well as in hydraulic cylinders? I mean, obviously, in Aerospace, one of the big OEMs just got approval to start shipping one of their products. Are you seeing that, there is some increase there, some improvements that are coming through? And how are you thinking about that flowing in and contributing to that margin improvement in the back half and into 2023?

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

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

Okay. Just...

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

Yes, certainly.

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

Yes. Another great question. Tyson, do you want to take that one?

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

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

Good morning, Susan, and thank you for acknowledging the $35 million in repurchases. It's essential to highlight the significant progress our team has made with our deleveraging efforts over the past few years since the ECS acquisition, as this has positioned us favorably for our overall capital allocation strategy. Our priorities continue to be funding organic growth, maintaining flexibility for strategic growth opportunities related to M&A, and supporting our dividend. With our progress on deleveraging, we are now better positioned to be more active in share repurchases, and we were more aggressive in the second quarter due to the share price at that time. Year-to-date, we've repurchased 1.6 million shares and allocated approximately $57 million for this purpose. Moving forward, we will continue to assess our share repurchases alongside other investment opportunities while monitoring our cash flow from operations. This is something we will evaluate every quarter in relation to our available investment opportunities. Regarding your second question about our leverage target, it's important to consider our ideal target range for net debt to EBITDA. We aim to maintain a capital structure that allows us to pursue strategic growth opportunities, return cash to shareholders, and uphold a solid investment-grade profile. Back in 2019, at the time of the ECS acquisition, we publicly stated a leverage target of 2.5 times total debt to EBITDA. In May 2020, we amended our revolving credit facility to switch from a total debt metric to a net debt metric. Subsequently, in September 2021, we successfully retained the net debt covenant with a maximum leverage of 3.5 times. While we haven't formally updated our leverage target going forward, it's safe to say that it will be well below a net debt of 2.5 times.

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

Thank you.

Thank you very much, Susan.

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

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

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