Leggett & Platt Inc

NYSE:LEG

Earnings Call Transcript 2017-Q4

[Operator]

Greetings, and welcome to the Leggett & Platt Incorporated Fourth Quarter 2017 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 [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Susan McCoy, Vice President of Investor Relations. Thank you, Ms. McCoy, you may begin.

[Susan McCoy, Vice President of Investor Relations]

Good morning. And thank you for taking part in Leggett & Platt's fourth quarter conference call. Joining me today are Karl Glassman, our President and CEO; Matt Flanigan, EVP and CFO; Perry Davis, who is EVP and President of the Residential and Industrial Segment; Mitch Dolloff, EVP and President of the Furniture and Specialized Segment; Dave DeSonier, our Senior Vice President of Strategy and Investor Relations; and Wendy Watson, who's our Director of Investor Relations.

The agenda for our call this morning is as follows. Karl Glassman will start with a summary of the major statements we made in yesterday’s press release. Matt Flanigan, will discuss financial details and address our outlook for 2018; 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 Web site. We posted to the Investor Relations portion of the Web site 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 entitled forward-looking statements.

With those comments, I’ll turn the call over to Karl Glassman.

[Karl Glassman, President and Chief Executive Officer]

Good morning. And thank you for participating in our fourth quarter call. I want to take a moment and thank our dedicated fellow employees around the world for your efforts this past year, you are very much appreciated. We are pleased with our fourth quarter and full year 2017 sales growth, which was largely driven by new programs, increased content and market share gains. Our EPS was lower in 2017, most significantly from the effect of one-time cost associated with the Tax Cuts and Jobs Act, which Matt will discuss later in the call. Adjusted EPS was 1% lower primarily from rising steel cost over much of the year and LIFO expense, which pressured profit margins.

For 2018, we expect that market improvement and Leggett initiatives will drive sales growth and increases in earnings per share. Last week, we acquired Precision Hydraulics Cylinders, a leading global manufacturer of highly engineered hydraulic cylinders, primarily for the materials handling market. The purchase price was $85 million. PHC has current annual revenues of $81 million and represents an attractive new growth platform for us. Hydraulic cylinders is one of the handful of new markets identified during the styles of competition analysis and growth process we began in 2016.

PHC serves a market of mainly large OEM customers utilizing highly engineered co-designed components with long product life cycles, yet representing of small part of the end products total cost. This business aligns extremely well with the critical component style shared by many of our strongest performing operations and is expected to add 2% to our 2018 sales. Hydraulic cylinders is a new business unit in our specialized product segment and will report to Mitch. We welcome PHC’s employees in North Carolina, the UK and India to the Leggett & Platt family.

Our businesses remained well positioned for long-term profitable growth. Matt will run through our guidance for 2018 and our 2020 financial targets later in the call. Fourth quarter sales increased 9% to $984 million, reflecting 5% higher volume from strengthened Automotive, Adjustable Bed and several other businesses, and 4% growth from raw material related price increases and currency impact.

Acquisitions added 2% to sales growth, but were offset by divestitures. Fourth quarter earnings per share from continuing operations were $0.27. This included several items outlined in yesterday’s press release that net to $0.32 per share reduction in earnings. Excluding these items, adjusted fourth quarter earnings increased 11% to $0.59 per share from $0.53 last year. This increase is primarily due to higher sales in the quarter. For the full year, sales increased 5% with organic sales up 6% from a combination of 4% volume growth and 2% benefit from raw material related price increases and currency impact.

Acquisitions added 2% to sales, but were more than offset by divestitures. Full year earnings per share from continuing operations decreased to $2.14 from $2.62 in 2016. Current year earnings include the fourth quarter $0.32 per share net reduction just mentioned. Full year 2016 earnings included $0.13 per share net benefit from divestiture gains and other small items. Adjusted full year earnings per share decreased 1% to $2.46. Adjusted EPS benefitted from higher sales, a lower effective tax rate and a lower share count. However, these improvements were more than offset by higher steel cost, the lag associated with passing along that ongoing inflation, and several smaller factors.

During 2017, we completed three small acquisitions, including a distributor and installer of Geo Components, a surface critical bent tube manufacturer supporting our private label ceiling strategy and work furniture and a producer of bonded carpet underway. We also continued investing capital to support organic growth opportunities, primarily in automotive, Bedding and Adjustable Bed. During the year, we divested the last remaining business within our commercial vehicle products.

In the past, we have provided segment narrative in our prepared remarks during this call. We are departing from that practice, since those results were both the quarter and the year are detailed in the yesterday's press release and in the slide deck we posted to the Investor Relations Web site. We are making this change to reduce repetition and allow more time for Q&A. We will be happy to discuss any questions you have relating to the segments during Q&A at the end of the call.

I'll now turn the call over to Matt.

[Matt Flanigan]

Thanks Karl and good morning everyone. First, I'll address the recently enacted Tax Cuts and Jobs Act. Our fourth quarter and full year 2017 earnings include a net $50 million or $0.37 per share charge for the estimated impact of the TCJA. This is comprised of $57 million charge related to the deemed repatriation of accumulated foreign earnings, a $9 million charge for accrual of foreign withholding taxes on expected future cash repatriations and $26 million tax benefit from the revaluation of tax liabilities at the new lower U.S. federal tax rate. As provided in the act, the deemed repatriation tax will be paid over eight years.

We expect our 2018 effective tax rate to approximate 22%. This rate reflects the lower U.S. federal tax rate or anticipated mix of domestic and foreign earnings and the impact of state income taxes. While the U.S. tax rate has decreased, the benefit to Leggett is not as significant as might first be assumed. A larger share of our income is expected to be earned in higher tax foreign jurisdictions. The U.S. domestic production activities deduction has been eliminated and the deduction for a portion of executive compensation will be phased out. The 2018 rate also includes an ongoing accrual for taxes payable to foreign jurisdictions associated with repatriation of cash from future earnings. Finally, our tax rate is impacted by changes in stock compensation, which vary from year-to-year and is forecasted to be lower in 2018.

During 2018, we expect to repatriate approximately $300 million of cash currently held in foreign accounts. Both the timing and exact amount of this repatriation activity is difficult to predict and is subject to local foreign governmental requirements among other things. In keeping with our long standing priorities, cash will be used for; one, organic growth involving capital expenditures and working capital investments; two, dividends; three, strategic acquisitions; and four, share repurchases. In the short term, we may use a portion of that cash to repay $150 million of debt that matures in July. We do not plan to pay a special dividend or undertake significant incremental share repurchases with this cash.

Now back to our 2017 financial performance. We generated operating cash flow of $444 million. We continue to have a sharp focus on working capital management and we ended the year with adjusted working capital as a percentage of sales at 10.6%, which was a notable improvement from our recent trends. In November, we declared $0.36 per share quarterly dividend, which was 6% increase versus the fourth quarter of 2016. The dividend payout as a percentage of adjusted earnings is within our targeted range of 50% to 60%, and we expect future dividend growth to approximate earnings growth.

At yesterday’s closing price of $43.45, the current yield is 3.3%, which is one of the highest yields among the 53 companies that comprise the S&P 500 Dividend Aristocrats. For the full year, we repurchased 3.3 million shares of our stock at an average price of $48.66 and issued 1.7 million shares primarily for employee benefit plans.

Our financial base remains very strong and this gives us considerable flexibility when making capital and investment decisions. In November, we issued $500 million of 10 year notes with a 3.5% coupon and used the proceeds primarily to repay outstanding commercial paper. We also increased our revolving credit facility, which supports our commercial paper program from $750 million to $800 million and extended the term of the facility to November 2022. We ended 2017 with net debt to net capital of 33% comfortably within our longstanding target range of 30% to 40%, and we have the full $800 million of credit available to us.

We also monitor debt-to-EBITDA and ended 2017 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 ended on December 31, 2017, we generated compound annual TSR of 7% per year. That performance places just below the midpoint of the S&P 500. While this is disappointing, we continue to believe our disciplined growth strategy and improved use of capital will support achievement of our top third goal.

We believe the macro environment should support modest growth in our end markets over the next few years. More importantly, we expect to grow organically at a faster pace in our markets as a result of content gains, program wins and other opportunities we have developed within our growth businesses such as Automotive, Bedding, Adjustable Bed, Work Furniture, Geo Components, and Aerospace. As we entered 2018 with continued steel inflation, we also expect sales to increase from the pass-through of higher raw material cost. Although, there will again be a lag in timing which occurs when we adjust our own selling prices.

With this backdrop for 2018, we are forecasting stronger sales growth. Sales from continuing operations are expected to be $4.2 billion to $4.3 billion or up 6% to 9% over last year. We expect mid-single digit volume growth from strength in many of our businesses. The PHC acquisition should add 2% to sales growth and raw material related price increases should also add to sales growth.

We expect 2018 earnings per share of $2.65 to $2.85 compared to our 2017 adjusted EPS of $2.46. We therefore expect earnings to grow 8% to 16%. This assumes an effective full year tax rate of approximately 22% as mentioned earlier. Based upon this guidance range, our 2018 full year adjusted EBIT margin should be 12% to 12.5%. Recent steel cost inflation is expected to pressure margins during the first quarter. Assuming cost stabilize, margin should improve for the remainder of the year.

Operating cash flow should approximate $500 million in 2018 with working capital expected to be a smaller use of cash than in 2017. Capital expenditures should be near $160 million for the year and dividend should require approximately $195 million. As has been our practice, after funding organic growth and dividends, remaining cash flow will be prioritized toward competitively advantaged acquisitions. Potential acquisitions must meet stringent, strategic and financial criteria. Should no acquisitions come to fruition, we have a standing authorization from the board to repurchase up to 10 million shares each year. No specific repurchase commitment or time table has been established. However, we currently expect to repurchase between 2 million to 3 million shares in 2018 and issue approximately 1 million, primarily for employee benefit plans.

18 months ago, we shared a set of three year operating targets that reflected our top TSR goal through 2019. With the modest decline in 2017's adjusted EPS from continuing operations, we're extending by year and slightly modifying our longer term targets. The 2020 operating targets are revenue of $5 billion and EBIT margin of 13%, and EPS of $3.50. This EPS target reflects our anticipated 22% tax rate. These targets assume a stable microenvironment that yields moderate demand growth. And they also assume that content gains continue and then organic growth will be augmented by strategic acquisitions. The targets anticipate no significant inflation, deflation, currency fluctuation or divestitures.

With those comments, I'll turn the call back over to Susan.

[Susan McCoy, Vice President of Investor Relations]

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 request that you ask only one question and then yield to the next participant. If you have additional questions, you are welcome to reenter the queue, and we'll answer those questions as well.

Mitchell, we're ready to begin Q&A.

[Operator]

Thank you [Operator Instructions]. Our first question comes from the line of Susan Maklari with Credit Suisse. Please proceed with your question.

[Susan Maklari, Credit Suisse]

I guess my first question is can you just talk a little bit to what you’re seeing in terms of the Bedding side of things. The spring components look like they were basically flat in the fourth quarter. But given some of the events that are going on on the retail side that could come down over the course of 2018 and the fact that we’ve got some easier comps coming into the first half of the year based on what happened last year. Can you just help us put that all together and give us some sense of how we should be thinking about that?

[Perry Davis]

We as you know just completed last week the January Las Vegas market in which most of the large Bedding producers roll out at least partial line introductions. And during the market last week, we saw some really significant action with regards to several of our key components. New introductions by most of the majors, particularly in the hybrid category which generally contains our Comfort Core product lines. We saw continued growth and introductions related to nano type upholstery coils, those coils that in a lot of cases will replace polyurethane or foam related type components and which incidentally have inflated significantly over the last year. But we’re well pleased with the positioning of our products that we introduced last week. There are some headwinds that we’ve seen so far this year. We’ve seen some particularly the first couple of weeks of the New Year, we’ve seen weather related issues that had stanched some of the weekend shopping activity. But overall, we think we’re well positioned with not only our product category mix changes to higher price higher margin products, but also related to content gains that we continue to see as we go forward and we’ll expect to see those throughout 2018.

[Susan Maklari, Credit Suisse]

And then my second question is perhaps a little bit bigger picture. But a lot of the steel inflation or some of the steel inflation that you’ve seen I assume is coming off of some of the uncertainty around the section 232 and what can come down with that. And as we think about the potential for some lower imports on the steel side coming in, can you help us understand some of the puts and takes for Leggett as it could relate to that? And maybe within that remind us some of the economics around the rod mill and how that could potentially come together over time? I know it’s a lot, but…

[Karl Glassman, President and Chief Executive Officer]

Really at this point, 232 potential action is we don’t think has had any effect to our steel pricing. We did see at the end of the year about $30 cost input from scrap at our Shorling mill and then we saw another $30 scrap increase in January. So as we talked before, those take a while to roll through the system, but they do impact rod pricing, which in turn impacts wire pricing which in turn impacts spring pricing. And by the time that all gets rolled through, we generally are talking about a quarter or so of activity.

The word I got yesterday for February scrap is side waste. So we don't see any additional inflation at this point in time, could happen later on. It's hard to predict 30 days out what's going to happen in the steel markets. But as we see those roll through, we'll begin to get recovery in early Q2. And at this point in time, it looks like if you look at year-on-year probably, we've seen inflation in steel components somewhere in the 8% to 10% range. But once those are in place as we've said in the past, they bode well for us and then once we lap those cost increases and we're able to recover, it's good for our margin outlook.

[Susan Maklari, Credit Suisse]

And then if we do see perhaps a shift in the volumes coming into the U.S., is there the potential that you could get more volume domestically from your rod mill?

[Karl Glassman, President and Chief Executive Officer]

I agree with Perry, 232 is just out there. It probably will be more impactful on flat product than long products. The long products being rod and wire round products are being impacted by significant demand increases globally, which are driving the primary input cost which as Perry said are scrap and iron ore back to its most basic form. There are anti-dumping provisions in place already that are protecting the domestic producers of rod and wired in some categories. Those recently lavvy will be in place for at least another four years, and then there will be a sunset review after that. So 232 is unknown at this point but I just don't think it will be impactful.

[Operator]

Thank you. Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question.

[Keith Hughes, SunTrust Robinson Humphrey]

Margins were for the full company effectively flat in the fourth quarter given the steel movement in January. Are we must likely going to see down margins in the first quarter as you deal with this recent inflation?

[Susan McCoy, Vice President of Investor Relations]

Keith that was basically the comment we were making when we're talking about full year guidance. It's a bit qualitative set. But yes, I would say first quarter margins down because of the steel influence and pricing lag associated with that. But if we were just stabilize as move forward, we would expect to be up in margins in the back half of the year. And that's the full year improvement in overall margins.

[Keith Hughes, SunTrust Robinson Humphrey]

And then on the acquisition, Karl. Is this going to be a platform for growth in the future? And if so, can you give us some kind of feel of what the structure of that market is the number players and sizes and maybe of that nature?

[Karl Glassman, President and Chief Executive Officer]

Keith, it certainly will be a platform for growth going into the future. We're really pleased to welcome PHC into Leggett & Platt. There has probably been more robust due diligence around not only the company but the sector than anything that I've seen in my 30 something years of Leggett. But I'll ask Mitch to go through the market dynamics. But I will say we would not have made this acquisition if we didn’t intend to substantially grow our position in that arena.

[Mitch Dolloff]

So yes, we are very much excited about growing PHC. We see this as a very attractive market. The market overall is about $11 billion and we see our addressable portion at about $5 billion, so lots of room for us to play. We particularly like the fit of this business with the businesses where we win today. So the products are highly engineered. There is co-design with the customers, a deep interaction. There is a lot of large customers and a fragmented supply base. The products are programmatic in nature so you win it for program and it lasts for a number of years. It has long life cycles and it requires flexible manufacturing with large volumes across many product variations.

It sounds a lot like some of our businesses that are doing pretty well. So we think that it’s something that’s a really good fit for us. It’s also a global business as you may have seen in the press release we have, PHC has operations both in the U.S. in the UK and in India. We think there is opportunity to help grow in other parts of the world, and they’re heavily planed in lift trucks today. There is also opportunity to gain some traction in some other important segments, most notably construction where we achieve some activity today, but we think that’s an opportunity for further growth down the road.

[Keith Hughes, SunTrust Robinson Humphrey]

And this will be reported in specialized division, is that correct?

[Mitch Dolloff]

That’s correct.

[Operator]

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

[Bobby Griffin, Raymond James]

Just on the furniture product segment in the slide some production efficiencies were referenced. Just curious if maybe you could expand upon what those were and maybe what business units those impacted within the segment?

[Mitch Dolloff]

They’re really primarily growth related issues that we had. First is in Adjustable Bed where you saw our huge volume increases in the fourth quarter and in some cases we struggled just to get enough capacity to get those out the door that led to some additional cost there. We’ll get that worked out over time and we’ll improve our processes. We’re adding capacity, but in the near term it could cause some headaches. And I would say also in Work Furniture, primarily on our collaborative seeding growth, where also that business is growing rapidly and sometimes we struggle just to keep up with the demand there, same thing. We work on improving our processes. We work on increasing our capacity, but in the fourth quarter it definitely caused us a bit of pain.

[Bobby Griffin, Raymond James]

And then on the margin pressure faced in that segment furniture products. Was the majority of steel related or how do I think about the production issues versus steel related cost? And maybe the second part, how is the pricing recapture trending in that segment, because I know it’s a longer and little bit more painful of a process to pass through price in there versus the Bedding components area?

[Mitch Dolloff]

Absolutely right that the biggest piece of it is the material related versus the price, and most painful in home furniture and fashion bed, are static base line there. So that is the biggest wait by far. In terms of the recovery of the steel inflation, a little bit of a complicated dynamic. So we have production in Home Furniture in Asia where we have been able to recover some of the material increase, probably about 70% of it or so in the fourth quarter. And continue to work there but it's challenging.

Then the other element of that dynamic is that the continued lower cost of steel in general in China than in the U.S. And so in our U.S. production, it’s been really difficult to recover any of the material inflation. So we will work and we are working to not only continue to price increases, but to reduce cost significantly in that business unit, also to ship production to our lowest cost opportunity. So we think that while the market dynamics may remain a little bit challenging for us, there’re some things that we can do to control our own destiny and improve our results.

[Bobby Griffin, Raymond James]

And then just lastly from me from a modeling standpoint. What is the forecast I guess for the Global Auto Build in '18? The most updated one imply for your markets when you guys weighted by the markets you’re in?

[Mitch Dolloff]

Bobby, I think it's pretty consistent with what we've seen. We'll see a little bit of recovery in North America versus the decline last year. We're heavy weighted still, just from history, towards North America but have significant operations in throughout Asia and in Europe and those are growing as well as North America. But when we look overall at the developed markets, so call it North America, Europe, China, Japan, South Korea, pretty similar. Up about 1%, not a big change from what we've seen in the last few years. So we see steady as it goes. For sure, there were some disruption in North America as the first part of the year start up strong and then really fell apart in Q3 and Q4. That will give us some tough comps in Q1, but for the big picture for the long term, we still see the market growing 1% or 2% and we're still committed to beating the market growth by 1000 basis points. We really look to our program wins, what we did in 2017 and what we continue to do and we see it fueling that growth.

[Operator]

Thank you. Our next question comes from the line of Daniel Moore with CJS Securities. Please proceed with your questions.

[Daniel Moore, CJS Securities]

I wanted to circle back and drill down a little bit more on PHC as well. You gave some detail in terms of what's unique and what’s attractive at the market. Maybe talk a little bit about the margin profile today expectations where we can get over the next couple of years, and the EPS accretion embedded in your 2018 guide?

[Mitch Dolloff]

So market margins are double digit EBIT. And of course, we will be impacted by purchase accounting when we have that. We see the business as being modestly accretive to EPS in year one.

[Daniel Moore, CJS Securities]

And in terms of opportunities, I think synergies, cost savings and opportunity for larger expansion as we look out a little further?

[Mitch Dolloff]

I think as we build the platform, for sure that will be part of what we're looking for in the long term. This is our first swing in this area, so we've got some building to do.

[Daniel Moore, CJS Securities]

And lastly 2020 goals. Any split between your organic growth, range of organic growth assumptions embedded versus what you might add the acquisitions?

[Matt Flanigan]

Definitely heavily leaned towards organic growth. We'd say of that 6% to 9%, you would imply closer to 5% to 6% be organic and then supplemented with strategic acquisitions. Certainly, not in any sense attempting to time acquisition of course, never do that. But we certainly anticipate that they will be part of that mix but it’s definitely heavily weighted towards organic growth and the content gains and wins and programs we can see on the horizon to a great extent already.

[Operator]

Thank you. Our next question comes from the line of John Baugh with Stifel Nicolaus. Please proceed with your question.

[John Baugh, Stifel Nicolaus]

If you can address and you already did Fashion Bed and residential Furniture. But are there any other parts of your business where you are seeing input cost inflation where you don’t expect to fully offset the pressure with price increases. How might you otherwise combat that margin compression in those areas?

[Karl Glassman, President and Chief Executive Officer]

The short answer is no. We will get albeit with the lag that Perry spoke of get full recovery in Bedding than you know the connectivity to industrial. The Bedding commentaries global we are passing through that inflation in Europe, as we speak. So there is just no hesitation about our ability to get full recovery with the lag. We will continue to get recovery in the Home Furniture and to some degree in the fashion side of the business, but as Mitch said, add a lower than lesser rate. Though it’s a more competitive and more commodity oriented business, though it really -- those businesses the opportunity really is a cost gain at this point.

[John Baugh, Stifel Nicolaus]

And so there are -- Karl that sounded like a steel answer. Are there foam issues or fabric issues or anything relating to input cost outside of steel or new concerns there?

[Karl Glassman, President and Chief Executive Officer]

The foam cost, the global foam inflation, is really, really good for our Bedding businesses. As Perry said, we were getting content gain because of consumer preference anyway. It’s been accelerated by the significant foam inflation not only the penetration of Quantum Edge. It’s remarkable to me that while Comfort Core is 40% of our U.S. innersprings, Quantum Edge is 33% of that 40% for product that was introduced just two years ago. We expect that attachment rate to grow significantly this year. You would seen evidence of that last week in Las Vegas.

So foam inflation is good, doesn’t impact us negatively is only a positive. Fabric inflation, we are seeing fabric inflation for sure in our Hanes businesses, both in the industry side and the Geo Component side. They do a wonderful job of full recovery so they have announced increases as well. They will get those. We’re just not exposed anywhere else other than as we discussed in the Home Furniture and to a lesser degree, Fashion Bed because it’s smaller business.

The question about the impact of commodity inflation on Automotive, our Automotive business is not real steel sensitive. Though, we’re just not concerned about commodity inflation in our Automotive business.

[John Baugh, Stifel Nicolaus]

And then international Bedding, I’d like some color on trends there and what maybe similar or different from the U.S., which you always seem to talk about in the U.S. but it’s an important part of your business? Thank you.

[Perry Davis]

John, this is Perry. It is an important part of our business and a growing part. The overall unit growth of about 11% year-on-year in the fourth quarter is significant, because of inflation, that growth also in excess of 20% in the fourth quarter and about 20% for the year last year. Significant growth in Europe. We've got an outstanding management team in Europe that continues to grow that business. We're building out infrastructure there to support that with a significant add-on to one of our facilities. We also see good opportunities right now in South America and in Brazil.

We've grown our position there significantly. Looking at opportunities in other geographies there to expand that business and doing it profitably. And in light of a pretty heavy economic headwinds in the Brazilian market, but we've been appropriately cautious in our growth there. And it's paying off for us and that we've been able to introduce new products. There has been a bit of winnowing out of some of our competitive activity because of the rough economic climate that all bodes well for us. So overall, those two markets in particular have been growth areas.

Other areas where we play to a lesser degree, but we do play is in the Pacific, Asia-Pacific, those are good strong markets for us that continue to grow modestly. And we provide in those areas products that generally are somewhat differentiated. We don't compete as heavily on the commodity side. And then we have small operations in South Africa. Well, that economy has definitely been not strong over the last two to three years, we continue to operate there and weather and the storms and at some point that will turn. But primarily our international business represented heavily by Europe and by South America. Those markets are strong for us.

[Operator]

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

[Peter Keith, Piper Jaffray]

I've question on the Auto business. So we've now had two quarters in a row of 8% growth. And then Mitch I think you addressed some of the destocking in the U.S. How should we think about that going forward for next few quarters? Because now you're bringing up the dynamic of tough compares. I guess when should we think about that segment getting back to double digit growth?

[Mitch Dolloff]

We did have double digit growth for the full year. So I look at this as very much a long term view. We may have some gyration to quarter-to-quarter as program launches happened, as other disruptions happened in the market. But over the long term, we see that double digit growth being really what our target is and what we've achieved. So I'm not -- I don't know that I can comment on it quarter-to-quarter fluctuation.

[Karl Glassman, President and Chief Executive Officer]

Peter to add, to pile on a little bit, based on significant program awards, we have clear visibility into 2020 and feel completely confident of that 1000 basis points growth over Global Build. And it looks like Global Build is forecasted to be in the 1.5% to 2% range. So our position hasn't changed at all. We are wonderfully happy with our position in Automotive.

[Peter Keith, Piper Jaffray]

And then separate follow up is just on the adjustable base side. So there is absolutely phenomenal growth there right now. I am curious if that is primarily being driven by the maybe the gains at Mattress Firm this year, which will be launched in the first half of ’18 or conversely are you seeing strong growth from multiple large customers that’s driving that 40 plus percent growth right now?

[Mitch Dolloff]

I think it’s more broad-based than that. For sure we’re seeing growth with our large customers but we’re also doing what we can to penetrate further down throughout the retail base, offering different types of programs to service those retailers and quick ship program, direct from factory, container direct program. So it’s really important part of the combination of our Fashion Bed and Adjustable Bed business. So fortunately strong both at our major customers and continuing to drive further penetration throughout the retail chain.

[Operator]

Thank you [Operator Instructions]. Our next question comes from the line of Justin Bergner with Gabelli & Company. Please proceed with your question.

[Justin Bergner, Gabelli & Company]

My first question just relates to the 2018 guide. Are you expecting I guess U.S. spring component dollars to be up in 2018 within your guide and how about innerspring unit, how does that shape out within your 2018 guide?

[Karl Glassman, President and Chief Executive Officer]

The answer is yes. We expect dollars to be up as they were in 2017. And yes specific to innerspring so we tend to give you a Bedding data there, U.S. aggregated Bedding data. In the fourth quarter, innersprings were down 2% but dollars of just innersprings, take box spring constructions out of it, which is actually a comfortable loss, because it becomes really good Adjustable Bed business. But if it’s just innersprings, we were up mid single digits, lot of it content gains and some pricing. We expect that same dynamic to continue through all of 2018. The answer to your last question, Justin, we do expect units to be positive in the U.S. in calendar 2018.

[Justin Bergner, Gabelli & Company]

And then switching over to your long-term 2020 targets, it seems like the sales go slightly higher than what your previously budgeted for 2019, the margin goal slightly lower and then the EPS slightly higher when you adjust for the lower go forward tax rate. Is that the right way to think about things versus the prior long-term guide?

[Susan McCoy, Vice President of Investor Relations]

Justin yes, I think it is. We would be, with this framework, assuming somewhat higher EBIT dollars but also a beneficial impact from the tax rate. And I mean bear in mind that all of these targets were intentionally round and ended to be directionally where we’re headed for 2020.

[Justin Bergner, Gabelli & Company]

And then the earlier question asked about organic growth within the 2020 targets, and I think the answer was 5% to 6% organic. How much raw material inflation should we think of as being embedded in that organic growth to back out the underlying volume trend?

[Susan McCoy, Vice President of Investor Relations]

We have a qualifier, I think, in our narrative. So it basically is relatively neutral for inflation-deflation divestitures, et cetera.

[Karl Glassman, President and Chief Executive Officer]

Yes, in currency.

[Justin Bergner, Gabelli & Company]

So neutral would assume some modest inflation then, or zero?

[Karl Glassman, President and Chief Executive Officer]

No, we don't assume any significant inflation-deflation currency or divestitures. We'll be wrong on all four of those points, but for the purpose of the guideline and the targets, we assume that they are basically benign.

[Justin Bergner, Gabelli & Company]

And then just one quick one. What was the adjusted tax rate for Q4, '17?

[Susan McCoy, Vice President of Investor Relations]

23%.

[Operator]

Thank you. There are no further questions at this time. I would like to turn the call back over to Ms. McCoy for any closing remarks.

[Susan McCoy, Vice President of Investor Relations]

Okay. I'll just say thank you for taking time to joining us today. And we'll speak to you next quarter.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for participation and have a wonderful day.