Leggett & Platt, Incorporated (LEG) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to Leggett & Platt Incorporated Third Quarter 2017 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will like to turn the conference over to your host, Dave DeSonier. Thank you. You may begin.

Good morning, and thank you for taking part in Leggett & Platt’s third quarter conference call. With me this morning are the following: Karl Glassman, who is President and CEO; Matt Flanigan, Executive VP and CFO; Perry Davis, Executive VP and President of both the Residential Products and Industrial Products segments; Mitch Dolloff, Executive VP and President of both the Furniture Products and Specialized Products segment; Susan McCoy, our VP of Investor Relations; and Wendy Watson, our Director of Investor Relations. The agenda for our call this morning is as follows: Karl will start with a summary of the major statements we made in yesterday’s press release and provide segment highlights. Matt will discuss financial details and address our outlook for the remainder of the year; and finally the Group will answer any questions that 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 express permission. A replay is available from the IR portion of Leggett’s website. We posted to the IR portion of the website yesterday’s press release and a set of PowerPoint slides that contain summary financial information along with segment details. Those documents supplement the information we discuss on this call, including non-GAAP reconciliations. I need to remind you that remarks today concerning future expectations, events, objectives, strategies, trends, or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties and the company undertakes no obligation to update or revise these statements. For a summary of these Risk Factors and additional information, please refer to yesterday’s press release and the section in our 10-K and 10-Q’s entitled forward-looking statements. I’ll now turn the call over to Karl Glassman.

Good morning, and thank you for participating in our third quarter call. Yesterday, we reported strong quarterly sales growth. Third quarter sales increased 6% to $1.01 billion, organic sales also grew 6% from strength in Automotive, Adjustable Bed and several other businesses, along with raw material related price inflation and currency impact. Acquisitions added 2% to sales growth, but were offset by divestitures, which reduced sales by 2% in the quarter. Third quarter earnings per share from continuing operations were $0.61, down 9% versus $0.67 in third quarter of 2016. As expected, the benefit from stronger sales was more than offset by higher steel cost, including LIFO expense and the timing lag associated with passing along those higher cost. In the third quarter last year, we were still benefiting from steel deflation. As a result, adjusted EBIT decreased in the quarter versus third quarter last year and adjusted EBIT margin declined 210 basis points to 11.6%. We have implemented price increases to recover most of this recent steel cost increases, but are experiencing the typical 90-day pricing lag. Assuming steel cost stabilize, market should improve early next year. During the quarter, we divested the last remaining business within our commercial vehicle products group. From this transaction, we will recognize a total $0.06 per share tax benefit, of which $0.04 was recognized in the third quarter and the remainder will be recognized in the fourth quarter. This third quarter tax benefit was offset by a $0.02 per share loss related to the CVP divestiture and a $0.02 per share impairment charge related to another small business. We acquired a producer of rebond carpet underlay during the quarter with annual revenue of approximately $20 million. This business adds to the production capacity and geographic footprint of our Carpet Cushion business. Now on to the segments. In Residential Products, third quarter total sales increased 6%, with a 2% increase in organic sales and a 4% increase from acquisitions. Volume was flat, with growth in most businesses offset by a 2% sales decrease from lower pass-through sales of adjustable beds. Raw material related price inflation and currency increased sales by 2%. We began to anniversary the Adjustable Bed headwind in the third quarter and the impact on sales will be decreased further over the next few quarters. U.S. Spring component dollar sales were flat with 8% growth in higher content Comfort Core units offsetting a 3% decrease in total innerspring units and a 6% decline in boxspring units. International Spring sales continue to be very strong, with dollars up 15% in the quarter. Segment EBIT and EBIT margin improved, primarily from higher sales. In the Industrial Products segments, third quarter total sales decreased 7% due to divestitures completed in 2016 and a 3% reduction in organic sales. Volume declines were partially offset by steel related price increases. The Industrial segment’s EBIT and EBIT margin decreased due to higher steel costs, including LIFO expense. The timing lag associated with passing along inflation, lower volume and a $5 million impairment of a small wire products operation. In the third quarter last year, we were still benefiting from steel deflation in the segment. In the Furniture Products segment, third quarter sales increased 8%. Organic sales increased 7%, primarily from growth in Adjustable Bed. A small Work Furniture acquisition completed earlier this year added 1% to sales growth. Adjustable Bed sales grew 35% in the third quarter. Segment EBIT and EBIT margin decreased with the benefit from sales growth in Adjustable Bed and Work Furniture more than offset by steel cost increases, including LIFO expense in Home Furniture. In the Specialized Products segment, third quarter total sales increased 4%, organic sales increased 9% from continued strength in Automotive and a currency benefit. The CVP divestiture reduced sales by 5%. Excluding currency, Automotive sales grew 8% in the quarter. The segment’s EBIT and EBIT margin decreased with the benefit from higher sales offset by growth-related costs, currency adjustments and a $3 million loss on the sale of our last remaining CVP business. I’ll now turn the call over to Matt.

Thanks, Karl. And good morning, everyone. Cash from operations was $105 million in the third quarter, a decrease of $18 million versus the third quarter of last year. We ended the quarter with adjusted working capital as a percentage of sales at 11.6%. We expect our full year operating cash to approximate $425 million. Regarding uses of cash for the full year, capital expenditures should be near $160 million and a dividends should require about $185 million. In August, we increased the quarterly dividend by $0.02 to $0.36 per share, a 5.9% increase versus the third quarter of 2016. The dividend payout, as a percentage of adjusted earnings, is within our targeted range of 50% to 60%, and we continue to expect future dividend growth to approximate earnings growth. At yesterday’s closing price of $48.23, our current yield is 3%, which is one of the highest yields among the 51 companies that comprise the S&P 500 Dividend Aristocrats. During the third quarter, we repurchased approximately 900,000 shares of our stock and issued about 400,000 shares. For the first three quarters of 2017, we have repurchased 3.3 million shares and issued 1.6 million, primarily for employee benefit plans. As always, our top priorities for use of cash are organic growth, dividends and strategic acquisitions. After funding these priorities, if there’s still cash available, we generally intend to repurchase stock rather than repay debt early or stockpiling cash. We have a standing authorization from the board to repurchase up to 10 million shares each year. However, those specific repurchase commitment or timetable has been established. Our financial base remains very strong. We ended the third quarter with net debt to net capital of 38%, near the higher end of our long standing target range of 30% to 40%, reflecting working capital investment, stock repurchases and acquisitions. We also monitor debt-to-EBITDA and ended the quarter with debt at 2.1 times our trailing 12 months adjusted EBITDA. We assess our overall performance by comparing our total shareholder return to that of peer companies on a rolling three-year basis. Our target is to achieve TSR in the top one-third of the S&P 500 over the long term, which we believe will require an average TSR of 11% to 14% per year. For the three-year period that will end on December 31, 2017, we have so far generated compound annual TSR of 7% per year and that performance places us in the middle of the S&P 500. As we announced yesterday, we raised the low end of our sales and earnings guidance. Full year sales are now anticipated to be $3.95 billion to $4 billion or up 5% to 7% over the last year. We expect mid single-digit volume growth from strength in Automotive, Adjustable Bed, International Spring, Work Furniture and Geo Components. Raw material related price increases should also add to sales growth. Divestitures should be largely offset by acquisitions. Full year guidance for earnings per share from continuing operations is now $2.49 to $2.54. These earnings include a net $0.04 per share benefit from several items, including a tax benefit from the CVP divestiture, a CVP divestiture loss and a small impairment charge, along with a real estate gain and an anticipated pension settlement charge, both of which will be recognized in the fourth quarter. Full year adjusted EPS guidance is now $2.45 to $2.50. Based upon this guidance range, we anticipate the 2017 full year adjusted EBIT margin to approximate 12%. With those comments, I’ll now turn the call back over to David.

That concludes our prepared remarks. We thank you for your attention and we will be glad to answer your questions. In order to allow everyone an opportunity to participate, we will request that you ask only one question and then give it to the next participant. If you have additional questions, you’re welcomed to reenter the queue and we will answer those questions as well. Sherry, we are ready to begin the Q&A.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Susan Maklari with Credit Suisse. Please state your question.

Good morning.

Good morning.

I guess, first question is you had some really nice growth in auto and I know that there’s been a little bit of concern there around the U.S. producers and what’s been going on in that market. Can you just talk a little bit to what you’re seeing in some of the out performance that you’ve realized?

Sure. This is Mitch Dolloff. Thanks for the question. Yes. Definitely, we see some changes in North America for the third quarter. We think production in North America was off about 8% and the real change there is having plant shutdowns over the summer season. But some of those continue today where we didn’t see those in the last few years. I think in the long run, that’s probably a positive thing as the OEMs ramped down production in an effort to balance vehicle inventories at the dealerships. I think that we see – we’re seeing that to be effective, the latest data I see shows that the vehicle inventories are, indeed, coming down from August. And then we see the fourth quarter forecast – production forecast for North America has been down about 3% year-over-year. So definitely more paying in the third quarter than we see going forward. But that puts the full year year-over-year unit production down somewhere around 2.5%, 2.7%. And then, the longer term forecast is relatively flat. So the 2018, the latest forecast shows that 2% unit increase, but – so, but out during the longer term, probably relatively flat. But remember that, that’s at a really high number of vehicles. So at 17.5 million vehicles produced a year in North America, we’re happy with that. And then if you remember, we’re very much a global business. So if we look across the industry as a whole, I think it still remains very healthy. See good performance in Europe, in Asia as well. So for what we would consider our major developed markets, I think that long-term CAGR were around 1.5% looks pretty solid. And again, we continue to pledge and are determined to outperform in the market. We continue to do so, not only from vehicle unit growth, but increased content gains and different product categories that we’re participating in.

Okay. That’s very helpful. And then in terms of scrap steel prices, following these storms, it sounds like there could be some more volume that comes in as we get all of those sort of cars and appliances and what have you into that market. Can you just talk a little bit to maybe what you’ve seen on the pricing there? And what that could mean for you guys looking out to 2018?

Yes. Susan, this is Perry Davis. If you go back through the latter part of the quarter, we were rolling along in September, hearing a lot of chatter around considerably higher scrap prices coming. And within probably three days towards the end of the settlement period, totally reversed. And in fact, we saw some decreases in scrap, but there were some already announced increases in the rod side of the business. So actually the scrap market right now, compared to the year, for the most part, looks to be relatively stable through the remainder of this year. However, as always, I put a caveat on that, that things can change quickly.

Okay. And have you seen rod today elevated? Rod as well as….

Rod, has – like I said, did go up in October. We are seeing rumblings in the marketplace of that coming back off some as scrap prices, like I said, have stayed stable to down.

Okay. Perfect, thank you guys.

Our next question is from Budd Bugatch with Raymond James. Please state your question.

Hi, guys. This is for Bobby, actually filling for Budd. Hope everybody’s doing well. And I will thank you for taking my question. I just wanted to first touch on Bedding. Units were still down this quarter, but it looks like they performed better than kind of what we saw in the first half. What exactly are you kind of hearing from your customers as any type of indication, maybe that end market’s finally starting to stabilize a little bit?

Yes. Generally, seems like a little better mood in the Bedding category. We did see strengthening of our business on year-to-year comps as we went through the quarter. As I talked about on the last call, in June, business was not good at all and we began to see just a little bit of improvement in July. And then August and September were considerably better, although still slightly down from last year. One of the big issues right now that many of our customers are dealing with is because of the increased chemical input cost, we’re seeing a lot of rising foam cost. And that, in a way, could serve to help us with some of our content gains with regards to Quantum Edge and some of the other things that we’re doing with upholstery layers made out of springs as opposed to foam. But it will be interesting to see there, the foam cost, we’ve heard, for the year, for a lot of our customers, increased by 20% to 25%, and those are just simply cost increases that they can’t absorb. So I would expect to see some of those costs be passed through to retail.

Appreciate that. And that was actually part of my second question. The Quantum Edge, if the uptake does come because of the higher foam prices that would be something we probably see in the January Las Vegas market? In terms of more manufacturers adopting the product and moving towards that way. Or is that something they can do on the fly, basically to say, like as we move through the rest of the year?

Yes. For the larger producers, it would be tougher to kind of do it on the fly. Those lead times for rollouts of those introductions are longer than this. They’re probably, I would say set, with what they’re going to be at in January. However, they’ve known for some time that foam pricing is escalating. So we expect to see continued penetration of Quantum Edge in the category. I remember back in July on the call, we were talking about the fact that we were seeing those content gains, but it was hard to pull them out because the overall macro conditions of the Bedding market were so poor at that time. Now in the third quarter, we began to really see the benefit from our side on content gains associated with Quantum Edge.

Thank you. And then lastly for me, on the adjustable base sales growth, can you maybe update us just on how the timing of the new programs have been rolling out? Are we kind of towards the end of rod and new programs? Or do you expect more programs through the fourth quarter and kind of into 2018 to help me think about modeling that growth?

Bobby, this is Mitch. Yes, I think that we’ll continue to see those programs roll out as some of the select business programs continue to ramp up. So it’s something that I think, is still dynamic for us.

Okay, in ex-select – on the non-select based programs, is it new retail doors or you adding SKUs to independent kind of specialty retailers? How do I think about that, that way the growth is driving?

Well, I think it’s continued growth at the major retailers and then also additional penetration, I think, at some of the top 20 kind of accounts and below that we service through our patch specialty bed group, some of them are programs that we manufacture ourselves and some of them are import program. So it’s really kind of across the board. We try and have the right solution for the different retailer’s need.

Okay. I appreciate all the detail. Congratulations on the result, and I will jump back in the queue.

Our next question is from Keith Hughes with SunTrust Robinson & Humphrey. Please state your question.

Thank you. First question on the Furniture business, you had some nice revenue growth, still some steel issues there in the quarter. As you move into the fourth, do you see this kind of revenue gain, do you think margins will turn positive year-over-year in furniture or there’s still be a steel lag?

Mitch again. Yes, I think we have a couple of different dynamics in the Work Furniture business. We’re very pleased there. We continue to see volume gains and improved profitability. The real drag on the quarter was in Home Furniture where unit volumes were off about 3%, and that was then more impacted by higher steel costs. So we’re starting to pass through some of the steel costs. So we expect that will continue to see that recovery improve through the fourth quarter and into 2018. So we’re optimistic that we’ll be back in the cost of the territory that you mentioned as we go further into 2018.

Okay. And just a big picture question in terms of demand. As you look into the fourth quarter, is your businesses that you expect to accelerate or doing better than we saw in the third quarter? I mean, your guidance across something better…

Keith, actually I think, what you’re making reference to is the expectation that we’re going to see stronger sales dollars in the fourth quarter from a sequential basis. And a good bit of that is recognition of the pricing rolling through. So there’s the catch-up impact of that. Auto should be a little stronger because we’ll, as Mitch said, we won’t have this headwind of North American challenges. But in the content gains, we’ll continue. But there’s not one business unit that we say is going to have spectacular growth. We’re really pleased with the growth across all of Leggett. Admittedly, the U.S. Bedding comps get a little easier going forward. But my goodness, the company from a top line is performing pretty well. Give us the benefit of the continued inflation pass-through and it gets that much better.

Okay. So it’s price. That’s – you expect, price to accelerate?

Yes.

Okay. Thank you

You’re welcome.

Our next question is from Paul Pets [ph] with Stifel. Please take your question.

Hi, thanks for taking my question. I appreciate the color on the Automotive industry and your outlook. You mentioned the CAGR growing about 1%, does that mean that you guys still think this – long term could be double-digit growing business?

This is Mitch again. Yes, we do. We still stand by our statement that we’re determined to grow 1,000 basis points faster than the market. In the long run, we’ve seen that, and we believe we’ll continue to be capable of doing that.

We’ve taken the position historically based on awarded programs and the visibility that we have that we’re confident through 2019 based on awards that we have recently received. I think Mitch would, well I’m committing Mitch now, to continue that 10 basis points or 1,000 basis points, I’m sorry, over global build at least through 2020. The good thing of Automotive is we have really good long-term visibility.

Great. And then back to the Bedding market. Spring volumes weren’t down as much. Is that an improvement in your customer base? You mentioned customers a lot. Or is that the way the industry is tracking? I’m trying to wonder if maybe you are gaining market share or if you could just provide a little more color there, industry versus what your customers are doing?

Well, I think there’s two sides to that. In the U.S. I’d say it’s more a function of just an overall – a bit of a lift to the market. If you look at our international business, particularly in Europe and in South America, we have made some strides there as far as gaining share and increasing our business in both of those geographies.

Okay. Thank you. That’s all from me.

Yes. Our next question is from Justin Bergner with Gabelli & Company. Please take your question.

Thank you. Good morning and appreciate taking my questions. To start, I wanted to just touch on the issue of market share in Bedding. You mentioned on the last question that you were gaining share in Europe and South America. Do you think you’re also gaining share in U.S. and sort of how do you measure share given some of the dynamic changes in the market towards that in the box and that sort of trend?

Justin, we don’t talk in specific with regards to share, but we believe our share of the U.S. market is relatively stable. There are, obviously, and has been for quite some time, talk about alternative bedding producers. Producers who make primarily for the digital marketplace and we participate in that business. Maybe not quite to the degree that we do in the standard legacy Bedding business, but our position there is growing and growing quickly. A lot of the producers of those products are OEM manufacturers who simply make those products and put a brand label on them. They’re produced to their specifications and a lot of that is innerspring, specifically Comfort Core. And while we’re talking about that, Comfort Core obviously is a category that continues to grow for us year-on-year. But if you look at the quarter, we’re up over about 36.5% of the units we sell our Comfort Core. But if you look a little deeper, in September, that was generally a five-week period for us, five-week month in our accounting system. Our share of innerspring represent by Comfort Core ramped up about 39% and that is just an indication to me of continued growth of the category, which is good for us. Curious with the higher average in the selling prices.

Okay, got it. So it seems like what you’re suggesting is that you’re – outside of the bed-in-the-box, you’re actually gaining share and making off – making up for whatever, I guess, headwinds might be created from that alternative channel.

Yes. And we’re definitely gaining content. It’s difficult in the U.S. for us to gain absolute share other than the domestic produced bed-in-the-box conversion to hybrid that Perry made reference to, but in the traditional bedding environment, we are gaining significant content per bed, not only in this Quantum Edge configuration, but in the micro-coils at the top layer. And based on the conversation with, I think it was Bobby earlier, that because of foam inflation, we expect that to accelerate.

Okay. Okay. Switching gears. You mentioned a couple small acquisitions, one that you made, I think a quarter or two ago, one that you made this quarter. Could you just provide us a little bit more detail?

Yes. The most recent one was a carpet cushion acquisition in North Carolina that are – we were at capacity running near 100%. We were fortunate enough to pick up a large regional program from one of the very large U.S. retailers. So we were able to fill in some needed capacity there and pick up some innovative manufacturing techniques in that industry as well. So we’re really pleased to have made that acquisition. The earlier year acquisition was a company based in Michigan that produces decorative exposed tubing into the office Work Furniture business. That acquisition has been performing very, very well. So we’re pleased to have both of them as part of the Leggett family.

Okay. That’s helpful. And then lastly, on the Work Furniture side, it seems like there’s been some deceleration in that business. Is there any meaningful driver behind that, be it end market trends or otherwise? Obviously, you’re including some inorganic factors there as well on the current quarter’s numbers.

This is Mitch again. I don’t really think so. I mean, bit more forecast is around 2%. We continue to, I think, have strong growth, particularly on the finished goods or collaborative seating side. So we remain optimistic about that business in the longer term.

And the growth forecast of 2%, is that for you or is that sort of the market?

That’s the market.

Okay. Thanks for taking my questions.

Thank you.

Our next question is from Spencer Joyce with Hilliard Lyons. Please take your question.

Good morning, thanks for taking the call.

Good morning.

A lot covered so far, so I’ll try to be brief for you. I want to talk about specialized or specialty products segment for a second. Adjusted EBITDA margin at 16.4%, by my model, looks like the lowest we’ve seen, at least for us the last past couple of years. And I know on the slides, you mentioned some growth-related cost and some growth-oriented spending there. And I’m wondering if there were some one-off items that hit the third quarter or if perhaps the 16.4% we have from Q3 has some read through value into mid-Q4 and Q1?

This is Mitch again. Yes, you’re right. We did have growth related costs that impacted us in the third quarter year-over-year. Those are mainly investments in fixed overhead that we’re making to support our future growth that we’ve been talking about so much this morning. Those include buildings, equipment, tooling and people. For example, we have ramping up a new plant in China, a new one in Mexico or we have an expansion under way in Canada. All of those things are to support new programs that we’ve won. We have to ramp up that capacity ahead of the start of production of those programs and then those programs ramp up and hit full volume over time. So it does get a little choppy some time. So yes, I think that the third quarter margin was a little bit lower than it has been historically and we expect to see that improve as those volumes ramp up and start to fill that capacity.

Okay. So obviously, you’ve been making some similar investments over the past few years. I guess, is it fair to say there was just kind of a confluence of items maybe that hit Q3?

Yes, that’s absolutely right.

Okay. And then just kind of a follow-up here on the Specialized segment. It really seems like the Automotive piece has been dominating the conversation for that segment on this call and in kind of over most of this year and I’m wondering if you can talk a little bit about the aerospace side, either qualitatively, trends that you’re seeing there and then more specifically for Leggett, is that saving a little bit as far as strategic importance goes, kind of as we look out over the next handful of years?

Okay. Great question. So, no. I think that we – I think we talk more about Automotive just because the size is so much bigger, right? Aerospace remains a relatively small business for us today, but we’ve done a lot of work around finding the right spot for us to really grow that business in the industry and especially this year and I think we’re coming out of that with a strategy that we feel really good about. We’ve done a few small acquisitions over the last couple of years and those are performing well, particularly on the fabricated side. And we’re starting to – and we are seeing organic program wins on the good programs that are going forward in the future and I hope that you’ll see us continue to do some more acquisitions there over time. So we remain very positive on the aerospace business.

Okay. Thanks for the comments and congrats on a nice calls after the quarter here. That’s all I had.

Our next question is from Herbert Hardt with Monness, Crespi, Hardt & Co. Please take your question.

Good morning. I also have a question on aerospace. You folks since spent a great deal of time, I believe, on acquisitions and have made at least five, if not a few more, along the way. And is that still a focus for expansion at this point?

This is Mitch again. Yes, it definitely is a focus for expansion for us. We think that we have some attractive areas that we can participate in that will build-out our competitive advantage in this – in the market, and we’re pursuing acquisitions as we speak.

Great. Thank you.

Our next question is from Peter Keith with Piper Jaffray. Please take your question.

Hi, good morning everyone. Couple of questions for you. First off, on the hurricane impacts or the hurricane dynamics during the quarter. Curious on some of your U.S. segments, if you saw any disruption and maybe how kind of trends progressed before during and after those hurricane events?

Peter, it points in time, there were probably some minimal disruption. The large bedding retailers literally weren’t functioning in, first, Texas and then Florida for a few days. We’ve made no effort to try to quantify hurricane impact. There probably was a little bit of pick up in Carpet Cushion. We saw that Bedding generally, you’ll see a little bit of a pick up on the promotional side longer term, which we have not yet seen the premium part of the industry picks up. So disruptive for sure, impacted our people and our customers and our customers’ people, almost impossible to quantify.

Okay. Fair enough. And then as we’re looking at continued inflation, do you have – a couple of your U.S. segments have been a bit challenge from a unit perspective and we’re looking specifically like Bedding and the Domestic Furniture. Are you in a position where you’re having any difficulty passing through full price increases? Or are you getting any push back from some of your customers?

Yes. In Bedding, there’s – not to say there’s never difficulty because it’s always a conversation, but those – the pricing pass-through is so program-specific that we do not have a hard time at all recovering inflation. Home Furniture is a little different challenge in that there are – there’s an additional dynamic of steel inflation or deflation in China that is not connected to the timing of inflation or deflation in the U.S. And that industry has been a little bit soft from a demand perspective. So as Mitch said earlier, we certainly had a hard time passing through in the Asian operations a spike in inflation. Now that steel inflation has started to regress somewhat where we saw a 23% increase in flat steel in China over a two-month period of July and August. Yet we’ve seen some of that pull back at the same time. We now have an ability to recover some of it from a pricing perspective. U.S. steel is flatter, if that makes sense, that there’s been less movement in U.S. steel than there has been in Chinese steel inflation.

Okay. Thanks, Karl. And maybe to follow on that big picture wise, if we’re just looking at the EBIT margins of the business, down 210 basis points, so you’re down on declining margins from last year and, I guess, the big picture question is, is it just a function of you were getting inflation on top of inflation? Or is there something mix-wise that’s starting to put some pressure on the overall margin structure?

I think it’s a deflation versus inflation answer in that our margins at the company level in 3Q 2017 were extremely high because we were getting the benefit of a deflationary environment having not past that deflation yet through to our customers and we have the absolute inverse situation 3Q 2017, where we’ve received the inflation and have not yet fully recovered. So it’s really just a delta point in time issue.

Okay. Fair enough. One last question, maybe for Matt. On my math, we had your tax rate for the full year at 25%. It looks like now you’re implying kind of 22% to 23%. So two questions there. Did it step down for the back half of the year? And I guess, as the race to the high end of the guidance will exits only from the lower tax rate?

Well, generally, it’s stepping down a bit once again largely a function of where is the income coming from and what are the tax impacts associated with that. So it’s a bit noisy, of course, for some of the tax benefit activity that happened in the third quarter and prospectively in the fourth quarter. And this might be a little bit of help. As you look to 2018, as we sit here today, we’re estimating our tax rate will be something around 25% to 26%. Who knows what happens with tax reform, but that’s currently what we’re ballparking for 2018 as we’re thinking about the next 12 months.

Peter, I’m going to add on a little bit onto that if I can. We would have been about 24%, I think, it’s the last second quarter for our full year assumed tax rate when we announced in early September, we’ve moved that down to about 23% given a couple more months of progression. I would tell you that our third quarter adjusted tax rate, when you allow for the one-off things that we put in the table at the back of the press release was 24%. And based on what we know right now, an adjusted tax rate for the fourth quarter would also be 24%. The change in our guidance from the September release is volume. It’s not a change tax rate assumption, it’s us getting more confident around kind of that upper half of the volume range and it’s kind of a reassessment of where we sit from a steel perspective and confidence and to what – to the extent that we can have confidence in the volatile steel market that kind of how the next two months might look.

Yes, to pile on to what Susan said, I completely agree with her, which is usually, but it’s a big thing for me to do. But it is volume, but understand, Perry made reference to the steel dynamics in our – the assumptions that we made over steel inflation on September 6 versus what we experienced is very, very different and that we were expecting significant scrap inflation on September 6 by – when we print release. By September 20th, we knew that scrap was going to soften some. And had no ability to forecast the softness that we’ve experienced in October. So the steel industry is very, very difficult to forecast. That is a U.S. steel manufacturer, it really is up to what global demand looks like and what China decides to do.

Okay. Thanks to all the color guys and good luck to the rest of the year.

Thanks Peter.

[Operator Instructions] We have a follow-up question from Keith Hughes of SunTrust Robinson & Humphrey. Please take your question.

Yes, just turning back to mattresses with the growth in bed-in-the-box. I know you’ve done some work for folk doing spring in a box, you can just out of talk about where you are there and what kind of trend you’re seeing.

Well, yes, Keith, a couple of areas where we’ve got kind of longer term established players in the market. We’re seeing a – continuing to see interest in diversifying product lines. Some of the people that had one bed early on, as you know, are now coming out with multiple lines. We also are seeing an increase in the number of those folks that want to participate in the foundation market and have developed products specifically for that, that can be shipped, UPS of all type products and it’s an add-on sales for those customers. Other OEM manufacturers and also some of the Internet purveyors of mattresses are heavily into innerspring and that skews heavily, as I said earlier, to Comfort Core. And that’s been the case for some period of time. We’ve got a large manufacturers producing both for direct consumer and boxed products B2B, boxed products going on anywhere from – to Amazon, you name it, any of those large, large sellers.

Thank you.

[Operator Instructions] Okay. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will like to turn the call back over to management for closing remarks.

We appreciate your time and we will do this again on February 5, I think it’s after the New Year. Thank you very much.

Thank you. This concludes today’s conference. You may disconnect your lines at this time, and thank you for your participation.