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Leggett & Platt Inc  (NYSE:LEG)
Q4 2018 Earnings Conference Call
Feb. 05, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Leggett & Platt Incorporated Fourth Quarter 2018 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. Wendy Watson, Director of Investor Relations. Thank you, Ms. Watson. You may begin.

Wendy M. Watson -- Director, Investor Relations

Good morning, and thank you for taking part in Leggett & Platt's fourth quarter conference call. I'm Wendy Watson. With me today are Karl Glassman, President and CEO; Matt Flanigan, EVP and Chief Financial Officer; Mitch Dolloff, EVP, Chief Operating Officer and President of the Furniture Products and Specialized Products segment; Perry Davis, EVP and President of the Residential Products and Industrial Products segment; and Cassie Branscum, Manager of IR.

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, will discuss financial details and address our outlook for 2019; 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 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 today -- 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 in the section in our 10-K and 10-Qs entitled forward-looking statements.

I'll now turn the call over to Karl.

Karl G. Glassman -- President and Chief Executive Officer

Good morning and thank you for participating in our fourth quarter call. First, I would like to thank our dedicated fellow employees around the world for your efforts during this past year. They are very much appreciated.

We are pleased with our 2018 operational performance despite the challenges we faced in some of our businesses, most notably Home Furniture and Fashion Bed. Fourth quarter sales increased 6% to $1.05 billion on flat volume. Raw material related price increases net of currency impact added 3% to sales growth and acquisitions also added 3%.

Fourth quarter earnings per share from continuing operations were $0.39. This includes several items outlined in yesterday's press release that amount to a $0.23 per share reduction in earnings. Excluding these items adjusted fourth quarter earnings increased 5% to $0.62 per share from $0.59 last year. This increase is primarily due to the improved metal margins in our Steel Rod business.

In 2018, sales grew 8% to $4.3 billion with organic sales up 6% from a combination of 3% volume growth and a 3% benefit from raw material related price increases and currency impact.

Acquisitions, net of divestitures completed in 2017, added 2% to sales growth.

Whole year sales benefited from ongoing content gains and new program awards in Automotive, market share gains and continued shift to Comfort Core and Quantum Edge innersprings and U.S. Spring and strong growth in Adjustable Bed, Work Furniture, and Aerospace. These improvements were partially offset by declines in other businesses, primarily Home Furniture, Fashion Bed, and Flooring Products.

Full year earnings per share from continuing operations increased to $2.26 from $2.14 in 2017. Earnings from 2018 include the fourth quarter $0.23 per share reduction just mentioned and a third quarter $0.01 per share benefit related to the Tax Cuts and Jobs Act for a net reduction of $0.22 per share.

Full year 2017 earnings included a $0.32 per share net reduction, primarily from cost associated with the Tax Cuts and Jobs Act. Adjusted full year earnings per share increased 1% to $2.48. Adjusted EPS benefited from improved metal margins are steel mill and higher sales. These improvements were largely offset by higher steel cost including LIFO expense and the lag associated with passing along ongoing inflation.

In 2018, we made some important strategic moves that should reinforce achievement of our long-term financial goals. In January, we acquired Precision Hydraulic Cylinders, a leading global manufacturer of engineered hydraulic cylinders, primarily for the materials handling market. PHC is our first business in the hydraulic cylinder industry, a market we identified through our styles of competition analysis.

In November, we announced the acquisition of Elite Comfort Solutions and we have completed the acquisition last month. ECS is a leader in proprietary specialized foam technology, primarily for the bedding and furniture industries. The purchase price was $1.25 billion and was financed through an expansion of our commercial paper program and the issuance of a $500 million five-year term loan with our current bank group.

Through the ECS acquisition, we have gained critical capabilities in proprietary foam technology along with scale in the production of private label finished mattresses. Our combined expertise in spring and foam technology make us the leading provider of differentiated products for the global bedding industry.

ECS' annualized sales for the fiscal year ended September 2018 were $611 million and we expect ECS to add approximately $675 million to sales growth of 2019. ECS is in our new Specialty Foams business unit within the Residential Products segment reporting to Perry.

As previously discussed, we continued an in-depth analysis of our Fashion Bed and Home Furniture businesses and initiated restructuring activity late last year. Restructuring related charges in 2018 were $16 million and we expect an additional $17 million of charges in 2019. The restructuring activity should be substantially complete by the end of this year.

In 2019, we expect these acquisitions and Leggett initiatives to drive sales growth and increased margins. Matt will discuss our guidance for the year later in the call. Finally, the quarterly slide decks that we posted to the Investor Relations website contains unit growth rates for innerspring and box spring pieces within our Residential Products segment.

Because of content gains, including strong growth of our Comfort Core innerspring and other higher dollar value units, dollar growth and unit growth have become increasingly disconnected. Accordingly, beginning in the first quarter of 2019 we will stop reporting unit growth for innersprings and box springs. We will continue to provide dollar growth as we do for our other business units.

I'll now turn the call over to Matt.

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

Thank you, Karl, and good morning, everyone. In 2018, we generated operating cash flow of $440 million, which once again included our typically strong fourth quarter cash flow performance. We continue to have a strong and sharp focus on working capital management and we ended the year with adjusted working capital as a percentage of sales at 10.6%.

We repatriated $141 million of offshore cash in the fourth quarter, bringing our full-year total to $314 million. In November, we declared a $0.38 per share quarterly dividend a 6% increase versus the fourth quarter of 2017. Our dividend payout as a percentage of adjusted earnings was 60% for 2018 at the top of our target dividend payout range of 50% to 60%.

Beginning in 2019, in conjunction with the increasing leverage from the ECS acquisition, we announced a modest change in our dividend payout target to approximately 50% of adjusted earnings. We expect to continue increasing the dividend as we repay debt associated with the ECS acquisition.

At Friday's closing price of $14.97, our current yield is 3.7%, which is one of the highest yields among the 57 companies that comprise the S&P 500's Dividend Aristocrats. For the full year, we repurchased 2.6 million shares of our stock at an average price of $43.10 and issued 1.2 million shares, primarily for employee benefit plans and stock option exercises.

During the year, we acquired PHC and two small TL Component operations. We also continued investing capital to support organic growth opportunities, primarily in automotive and bedding. We increased the borrowing capacity under our commercial paper program from $800 million to $1.2 billion in connection with the funding of the ECS transaction.

We ended the year with debt at 1.9 times our trailing 12 months adjusted EBITDA. After completing the ECS acquisition in January, our debt levels increased, as expected, to approximately 3.5 times. We are committed to maintaining a strong investment grade credit rating and expect to deleverage each to a target ratio of debt to trailing 12 months EBITDA of approximately 2.5 times by temporarily suspending share repurchases, reducing other acquisition spending and using our operating cash flow to repay debt.

We asses on 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. While our recent performance has not met this target, we continue to strongly believe our disciplined growth strategy and prudent use of capital will support achievement of our top third goal over time.

Sales growth in 2019 will benefit significantly from the ECS acquisition. We also expect sales growth in automotive, U.S. spring, aerospace and hydraulic cylinders partially offset by planned declines in Fashion Bed and Home Furniture related to restructuring efforts and from less promotional activity in Adjustable Bed.

2019 sales are expected to be $4.95 billion to $5.1 billion, or up 16% to 19% over last year. ECS should add approximately $675 million to sales. In addition to ECS, same location sales growth is expected to be flat to up 3%. Earnings per share are expected to be $2.35 to $2.55 including approximately $0.10 per share of restructuring related cost. Therefore, adjusted EPS is expected to be $2.45 to $2.65 reflecting slightly higher organic sales and moderating steel inflation partially offset by higher tax rate.

As we have previously stated, the ECS acquisition is expected to be neutral to EPS in 2019. EPS guidance assumes a full-year effective tax rate of 24% versus 20% in 2018. This higher rate reflects the non-reoccurrence of some valuation allowance releases we benefited from in 2018. A smaller expected stock-compensation benefit in 2019. The impact of TCJA executive compensation limits and tax implications from higher interest expense due to the financing of the ECS transaction.

We expect 2019 depreciation and amortization to approximate $210 million net interest of approximately $95 million and fully diluted shares of $136 million. Based upon this guidance framework, our 2019 full-year adjusted EBIT margin should be 10.8% to 11.2%. While we do not issue specific quarterly guidance, we expect revenue growth rates to be somewhat consistent across the quarters in 2019. We expect adjusted margins in the first quarter to be lower than first quarter last year in part, due to the purchase accounting for acquired ECS inventory. And we expect year-over-year adjusted margins to be flat to slightly improving by the second half of the year.

Cash from operations should approximate $550 million in 2019. Capital expenditures should be near $195 million for the year and dividends should require $205 million of cash. Our dividend payout ratio for 2019 is anticipated to be above our target of approximately 50% of adjusted earnings.

Our long-term priorities for use of cash remain. One, organic growth involving capital expenditure and working capital investments; two, dividends; three strategic acquisitions; and four share repurchases. As previously stated, we will temporarily suspended share repurchases, reduce acquisition spending, and prioritize debt repayment after organic growth in dividends.

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

Wendy M. Watson -- Director, Investor Relations

That concludes our prepared remarks. We thank you for your attention and we'll be glad to answer any of 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 will answer those questions as well. Michelle, we're ready to begin the Q&A session.

Questions and Answers:

Operator

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

Chris Kalata -- Credit Suisse -- Analyst

Hi. This is Chris Kalata on for Susan. Thanks for taking our questions. First question is just on the Industrial Products segment. You've been able to realize the significant amount of pricing in the second half of 2018. So, I was just wondering, how much additional pricing are you expecting this year and what benefit could that have to your margins?

Perry E. Davis -- Executive Vice President

Chris, we -- this is Perry Davis. We definitely saw a run-up last year in both scrap and particularly in rod pricing. The -- we feel at this point in time that we are pretty much at the peak. We in fact saw some slight deflation in scrap inputs in January, which is a little uncommon. I don't believe we've seen a January decrease in scrap pricing since 2006. But, overall, we believe that over the next few months our input cost and Rod prices will remain relatively constant.

Chris Kalata -- Credit Suisse -- Analyst

Okay, thanks. And then just my second question, does your full-year guidance that include the impact of the -- a full 25% tariff environment? And are you able to quantify what the incremental headwinds would be between the 10% and 25%?

Karl G. Glassman -- President and Chief Executive Officer

Chris, this is Karl. The answer to that is no. We don't know what to expect as it relates to tariff. We assume that if the tariffs aren't in fact increased to 25% we'll pass them through. But in our top line forecast, they do not include the expansion of tariff activity. We just don't know.

Chris Kalata -- Credit Suisse -- Analyst

Okay. Thanks for that.

Operator

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

Bobby Griffin -- Raymond James Financial -- Analyst

Yes, thank you and good morning everybody and I appreciate you guys taking my question.

Karl G. Glassman -- President and Chief Executive Officer

Good morning, Bobby.

Bobby Griffin -- Raymond James Financial -- Analyst

First of all, touch on the automotive segment and kind of see what the outlook is assuming your guidance for 2019, and how kind of the program wins trended in 2018?

J. Mitchell Dolloff -- Executive Vice President-Chief Operating Officer, President-Specialized Products and Furniture P

Good morning, Bobby. This is Mitch. I'll take that one, of course. Our automotive business continues to perform really well and our long-term outlook hasn't changed. Our strong pipeline of awarded future programs continues to give us confidence in our goal of beating the vehicle production growth by 1,000 basis points. We've had double-digit increases in our new awards every year since I've been counting this, since 2011. Overall, CAGR of over 15% since that time. So, we think the visibility that we have there, it really gives us a strong case to stand by our goal.

For 2019, production is forecasted to be up about 1% globally and about 0.6% in the major market and we look at what we have net of coming online versus programs and then we still feel confident in our double-digit target.

Bobby Griffin -- Raymond James Financial -- Analyst

Okay. Does the production forecast assume any type of stimulate and for China automotive demand that they announced recently?

Karl G. Glassman -- President and Chief Executive Officer

I don't know. I think it's kind of hard to tell with a variety of factors that are happening in China. Certainly, people have been hopeful that there's some kind of incentive that kicks in. But you still have some general economic release malaise there and certainly some impact from the trade disputes. So I think that China forecast for 2019 is a little bit better, so it was down 3.5% in 2018, the forecast that I see shows it up 1.7% in 2019. So by historical term that's still not -- still fairly low for China.

Bobby Griffin -- Raymond James Financial -- Analyst

Okay. I appreciate that detail. And then lastly, for me, just from a modeling standpoint is there any help you guys can offer on the sales wind down of Home Furniture and Fashion Bed. I know Fashion Bed was probably roughly $200 million or so business last year and Home Furniture half that businesses motion and half stationary and that was probably around $370 million combined. How should we think about those two businesses in 2019? And I understand, they're going to be smaller, but from a modeling standpoint any help would be greatly appreciated.

J. Mitchell Dolloff -- Executive Vice President-Chief Operating Officer, President-Specialized Products and Furniture P

Okay. Bobby, this is Mitch again. I'll take a shot and Wendy can jump-in, if there is additional detail. But on the Home -- let me talk about Home Furniture first. I think that we're making good progress there. We've got a lot of good activity under way in terms of passing loan price increases or shedding low-margin business. We made good progress transferring production to our Chinese operations to take advantage of lower input cost and we've been reducing overhead and operating cost and we will look forward to further reduce excess capacity.

I think you're starting to see that performance stabilize in the fourth quarter. We are moving aggressively and expect to complete the implementation largely by the end of the first half of the year. So for 2019 in that business, I think we do see some shrinkage of sales -- think about it in terms of like mid-single-digit. But with increased -- significantly increased earnings power on that side.

On the Fashion Bed side, I think we'll see more significant sales declines as we continue to trim the product categories there and really focus on monetizing inventory. I'd think about the sales decline there being closer in the 20% to 30% range with probably very little earnings impact.

Bobby Griffin -- Raymond James Financial -- Analyst

Okay. I appreciate all the details. I will jump back in the queue. And best of luck this year.

J. Mitchell Dolloff -- Executive Vice President-Chief Operating Officer, President-Specialized Products and Furniture P

Thank you, Bobby.

Operator

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

John Baugh -- Stifel -- Analyst

Thank you. Good morning. I just have two questions. I guess first 2019 guidance. Is there anything assumed around timing or rate on the antidumping situation?

Karl G. Glassman -- President and Chief Executive Officer

John, no that -- we continue to be optimistic and have every reason to be optimistic. The timing with the government shutdown is pushed out until end of May for the early determination. We do expect some positive impact that don't know how to quantify us. So we just were kind of ignored it, from a guidance perspective.

John Baugh -- Stifel -- Analyst

Okay. Thank you. And then as a follow-up, could you comment on one on the flooring weakness, what you saw both in the fourth quarter and maybe for the year last year and what you're seeing right now? And then, anyway appreciate the comment about not giving us units like on box springs, and obviously they're in steep decline. But how do we think about the dollar, maybe the net dollar impact of gaining units on the adjustable side, but then losing the box springs. What's that net trade? Thank you.

Karl G. Glassman -- President and Chief Executive Officer

I'll take the last one. Remember those two are in different segments. So they're reported differently with adjustables being in furniture and box springs being a subset of U.S. Spring in Residential. But I guess the one order is significantly positive, the average unit selling price of an Adjustable Bed is in the $200 to $300 range, higher in some cases, and of a box spring is probably $10 to $15.

Remember, that's just a steel bridge structure, so that trade is a good trade. There's other things going on in that, there are fewer bed frames sold because of the advent of box beds and platform beds, when there's fewer box springs, there's -- fewer bed frames and box springs correlate, so there's just a lot going on in those markets. As it relates to flooring weakness, go ahead, Perry.

Perry E. Davis -- Executive Vice President

Yeah. John, looking at Q4, and there were a few factors that kind of played into a little bit of a down drop. First of all, we had some customers and then some secondary customers, which -- secondary, I mean, down the value chain. So during the fourth quarter, mattress firm went through a, where they -- a period of time where they liquidated some excessive inventories.

We also had that occur among some of our major customer groups during the fourth quarter. And then, also, we feel like, based on the conversations we've been having, that in preparation for the preliminary determinations of the dumping duties, we saw a glut of dumped Chinese mattresses that have been exported into the U.S. And so as they work through that, we think probably through the first quarter, something like that, that had an effect definitely on fourth quarter results.

The other thing, going back to Karl's comments on the effort to get in place a dumping order. With that delay, because of the government shut down being pushed out, we now feel like that somewhere around the end of February, product that is landed would be subject to the 90-day look back.

And in a lot of cases that has a cooling effect, because obviously an importer of record needs to understand their cost basis whenever they're importing product. So we still believe that somewhere around the end of May or somewhere along in there, we'll see that preliminary determination, hopefully it's favorable and we'll repatriate to the U.S. product in place of some of that dumb product.

Karl G. Glassman -- President and Chief Executive Officer

Hey, John, I think you also asked about flooring. Flooring, the external reports on carpet sales in the fourth quarter, they were down 9% in the square yards. So that led -- there's obviously a high correlation between our Carpet Cushion sales and carpet sales.

Again, highly correlated with the housing market in total, so I think it's just that general softness. We have not at all lost share. The answer to your question, just through January, the flooring products business is down about 2%., but with one fewer shipping day, so it's flattish in January.

John Baugh -- Stifel -- Analyst

Thank you for that color. Good luck.

Karl G. Glassman -- President and Chief Executive Officer

Thanks John.

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 -- Analyst

Thank you. One question on Elite. Do you have a better feel at this point what the purchase accounting kit in 2019 is going to be on Elite?

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

Keith, this is Matt. We're still reviewing that but the upshot is in the first quarter, we will have some inventory accounting impact, it will be a few million dollars we don't it specifically quantified. And bigger picture we currently estimate that the goodwill associated with the transaction would be something around 40% to 50% of purchase price. I don't know if that helps some of your modeling expectations, but that's all very much being finalized and you'll certainly see all that as we get the case filed.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

And the amortize that goodwill over kind of what period of time, right now, there's different parts of it, but some of it drops off after like three years.

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

That's just straightforward goodwill that will be on the balance sheet.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. And then second question on LIFO, that was a negative here in the year as you've discussed in the press release. Did it impact the fourth quarter? And what kind of expectations do you have in your guidance from 2019 on LIFO?

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

As of -- Keith, this is Matt, again. As always we start the year not assuming we have a better crystal ball than anything else, anyone else and that we assume there will be basically flat LIFO to the year neither income nor expense. You certainly heard Perry talk a bit about commodity trends right now and trends will move around all throughout the year. But at the moment, we don't have any assumption of LIFO income or expense in the guidance we provided and that's consistent with all of our past practice historically.

Wendy M. Watson -- Director, Investor Relations

And I'd just say, Keith, we expect full year LIFO would be lower than $31 million it was in 2018.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. And it play over on the fourth quarter positive or negative?

Wendy M. Watson -- Director, Investor Relations

It will -- it was we had estimated at the end of the third quarter that it was going to be $33 million and when we trued-it out as of the fourth quarter, it came in at $31 million.

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

So, it basically came in almost spot on with what we thought 90 days before and that rarely happens of course.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay.

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

But if you look forward to this year, we don't anticipate nearly that magnitude of LIFO expense of 2019 and for modeling purposes here, we assume right now out of the gate that there won't be any LIFO in some of our expense.

Wendy M. Watson -- Director, Investor Relations

And we'll estimate that each -- we'll update that estimate each quarter.

Karl G. Glassman -- President and Chief Executive Officer

Keith the impact to the fourth quarter of LIFO was $7 million.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Fourth quarter was $7 million, OK, $7 million negative, right?

Karl G. Glassman -- President and Chief Executive Officer

The expense, that's correct.

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

That's correct.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

All right. Thank you.

Karl G. Glassman -- President and Chief Executive Officer

You're welcome. Thank you.

Operator

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

Daniel Moore -- CJS Securities -- Analyst

Good morning, thanks for taking the questions. As it relates to Elite, it's only been only a very short while now, but wondering what you've learned, if anything good or bad, since closing the acquisition.

Karl G. Glassman -- President and Chief Executive Officer

Dan it's -- you are right, it will be just three weeks tomorrow, but a number of us were at the Las Vegas Furniture Market last week and Perry and I've had a number of conversations as among ourselves and then with the elite management team. And all I can tell you is thank goodness that we own that business with the growth of high-grade products, the numbers of boxed bed mattresses that were displayed in Las Vegas, really it's very, very early but for the predictions that we made in our analysis of the strategies around Elite are proving true and that we're seeing a lot of box beds that are being sold or marketed to conventional brick-and-mortar environments that are very, very apparent in Las Vegas.

We're also seeing significant increased conversation around specialty foams and the attributes of specialty foams in terms of heat dissipation. So we feel, again, admittedly early, we're always cautious, but thank goodness we've done that deal. And what a fantastic group of managers and employees in that business. Culturally, there's such an incredible connectivity that frankly we're blessed to have them on the team.

Daniel Moore -- CJS Securities -- Analyst

Got it. And just a little bit of pencil sharpening in terms of the remaining restructuring charges, do you expect those to be frontend loaded, more evenly spread through the year, any sense there?

Karl G. Glassman -- President and Chief Executive Officer

First half loaded for sure, there may be a little residual into the back half but heavily loaded to the first half.

Daniel Moore -- CJS Securities -- Analyst

Got it. And then lastly, little bit more philosophical. But just a thought process, understanding you are very cognizant of leverage and it's appreciated. But why automatically suspend share repurchase rather than remain opportunistic given the really strong free cash flow outlook?

Karl G. Glassman -- President and Chief Executive Officer

Dan, it almost sounds like you're trying to pick a fight between Matt and I, but -- because we have that conversation. It will be very difficult based on our belief as to what the value of the equity is for us not to repurchase shares, if there's any fall off in the stock price. We are extremely bullish on the company's future and believe -- well, personal opinion the stock is probably undervalued from a trade perspective right now.

So it's difficult but we've made a commitment to the lenders and to ourselves that we'll continue to deleverage for us to be at 3.5 times is remarkably high in either, Matt or I's history for sure, and Perry has been here longer than both of us. So it will -- we'll continue to watch it but any melt off, it would be hard to pounce. But Matt and I will arm wrestle for that one later.

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

Yes, Dan. We're all certainly aligned with the considerations in order deployment of cash and capital and the very good news is our cash flow is quite predictable typically. There's some seasonality to it but it is predictable, and we have a lot of it. So the deleveraging that we're earmarking take place over the next 12 to 18 months is something we feel very comfortable in estimating and that it will happen promptly.

Daniel Moore -- CJS Securities -- Analyst

Okay. Understood. Appreciate the color again.

Operator

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

Peter Keith -- Piper Jaffray & Co -- Analyst

Thanks. Good morning, everyone. So just to follow-on that last point, the operating cash flow of $550 million is pretty big step up from the $450 million run rate in the last two years. Could you just get us comfortable on, I guess, your comfort of that acceleration? What is the key levers you plan on pulling and what are the drivers?

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

Yeah, Peter, this is Matt. I'll jump in and then Wendy and Karl, Perry and Mitch certainly can amplify. But first of all, don't be surprised of course that it reflects the ECS acquisition, and we have been very clearly stating that the sales expectation that will arrive from ECS this year is estimated to be $675 million.

You also recall reading that we anticipate fully that the EBITDA margin on that sales base will be higher than the company average. So you could do math there, to see the EBITDA will be driving significantly higher from this 2018 level of $573 million that we just posted companywide for Leggett before we owned ECS.

Secondly, as you saw on the fourth quarter once again our working capital performance strongly ended the year and I know both Mitch and Perry and certainly Karl are working hard to be able to not ride in that 12% range of working capital, which we did most of 2018. We're working hard to make sure that improve performance of a pretty significant nature by the end of the year is sustained throughout 2019. That will naturally flush up in meaningful amount of cash. And otherwise, when you think about go further to the cash flow statement and capital expenditure is pretty predictable. We talked about M&A dialing down significantly share repurchases same as Karl just mentioned. So that circa $550 million of operating cash flow is readily correlated to the higher earnings ECS being part of the family, working capital concentration and focus and really no surprise uses of cash on the operating side. And again, we feel very confident about that expectation that you should use in your model.

Peter Keith -- Piper Jaffray & Co -- Analyst

Okay. Thank you, Matt. One of the bigger picture follow-up and I guess I'm just refer back to the TSR target where you are looking for historically around 7% to 10% EPS growth. And this year, at the midpoint, I guess, you are guiding for 3%. So there's sort of lots of puts and takes in the business right now, but I was hoping you could maybe just provide a high-level sweep on, what are the main challenges to not being in line with your TSR for 2019?

Wendy M. Watson -- Director, Investor Relations

Yeah. This is Wendy. I'll take a stab at this. If you think about EPS, it's going to be a big generator in the short-term really over at least the first three year period for the sales growth. We expect margin to be consistent of course share repurchases are going to be lower. But as Matt said with the strong operating performance in ECS added to expected margin improvement in our other businesses, we think we're going to be able to achieve that 11% to 14% TSR. So think about it as long-term, we're not changing our TSR target and we're not changing the individual components of TSR. In the short term, while we for instance, it's been share repurchase, they'll change a little bit, but we think we position the company well to achieve that 11% to 14%.

Peter Keith -- Piper Jaffray & Co -- Analyst

Okay. And maybe just a follow up, I guess I was even -- I was speaking about earnings growth ex buyback is at 7% to 10%. So the top line growth is a little light, margins are kind of flat to down. If someone say, why is Leggett in that guiding a mic, could you just give us, again any broad brush strokes on what the key challenges are for this year even if those are going to go away looking out to 2020?

Karl G. Glassman -- President and Chief Executive Officer

Yeah. The key challenge is, well we have the -- from an ECS perspective. We are dealing with the purchase accounting issue which will be mitigated to some degree in time. So that's one issue, one of the challenges with doing an acquisition of that size you kind of pay for it from an accounting perspective in year one to a lesser degree in year two. There certainly is uncertainty in the macro environment it's difficult to guide in this environment, the other good earlier good question about tariffs we don't know. Government shut down we, don't know. Brexit impact we don't know. So, we're coming up with the best guidance that we feel comfortable putting out there. And as Wendy said, those TSR targets are longer term and we feel very comfortable as we sit here today that we'll be in that range.

Peter Keith -- Piper Jaffray & Co -- Analyst

Okay. I appreciate all the color Karl. Thanks a lot.

Karl G. Glassman -- President and Chief Executive Officer

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Justin Bergner with Gabelli & Co. Please proceed with your question.

Justin Bergner -- Gabelli & Company -- Analyst

Hello, good morning everyone.

Karl G. Glassman -- President and Chief Executive Officer

Good morning.

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

Good morning Justin.

Justin Bergner -- Gabelli & Company -- Analyst

I guess just to start with ECS, should I think of the increase in depreciation and amortization from sort of that $140 million run rate at the end of the year to $210 million, that step up is almost all ECS?

Karl G. Glassman -- President and Chief Executive Officer

Virtually all.

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

Yes. So, we've had some higher capital spending as you know in the last few years, but yes, the vast majority of that is associated with ECS.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. So, you're not adding back any ECS cost outside of transaction cost in your adjusted EPS framework, correct?

Karl G. Glassman -- President and Chief Executive Officer

We are not adding back any additional -- make sure I understand your question. So...

Justin Bergner -- Gabelli & Company -- Analyst

The only cost you're adding back for ECS are transaction cost.

Karl G. Glassman -- President and Chief Executive Officer

Well, we've got the inventory write-up phenomena. It's an accounting gap treatment that will happen in the first quarter that we've talked about, but beyond that there is no significant add back in costs associated with ECS.

Justin Bergner -- Gabelli & Company -- Analyst

But the inventory cost will not be added back for your adjusted EPS framework. You'll eat that cost in the first quarter for your adjusted.

Karl G. Glassman -- President and Chief Executive Officer

Yes.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. Should I think of the 10% sales growth for ECS in 2019, maybe a little bit less than 10% sales because it's compared to a $611 million for the 12 months through September? I mean, it seems like when you announced the deal, you might have had expectations for sort of sales growth more in the double-digit range. Has that tapered down or the end markets caused that view to taper down?

Karl G. Glassman -- President and Chief Executive Officer

It's not -- Justin, this is Karl. It's not end market, its deflation. So, there's about 5% of the early expected growth in ECS that is being pulled back. Said differently that the chemical input cost have decreased significantly. So, the resultant sales dollars will be lower than originally expected, but the EBITDA margins will not been negatively impacted by that.

So you are -- your observation is correct. The forecast is about a 10% growth. If raw material input cost would have stayed neutral, we would have been looking at about a 15% growth rate.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. So when you said EBITDA margin will stay similar, or do you mean EBITDA dollars will stay similar?

Karl G. Glassman -- President and Chief Executive Officer

I should have said dollars.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. That's what I thought. And then just two other non-ECS related questions. You mentioned that in the earnings framework for 2019, you have some benefit from the timing related to steel pricing offsetting tax, keeping your margin profile I guess pretty constant, or at least organically. And I guess I'm wondering, why aren't you seeing operating leverage besides deal timing related from the 0% to 3% organic sales growth, given that you should be seeing some benefit in your Fashion Bed and Home Furniture from the actions you're taking.

Wendy M. Watson -- Director, Investor Relations

Justin, we do expect to see some margin improvement from our -- in the core Leggett business. Remember, ECS is going to be slightly dilutive to EBIT margins. And in addition to higher tax rate, we've got higher interest expense and we're going to have a higher share count. So we have a few small headwinds, if you will. But we do expect to see margin improvement in the core Leggett business.

Justin Bergner -- Gabelli & Company -- Analyst

Okay, that's helpful. And then lastly, any comment on Quantum Edge growth in the quarter. I think you spoke about last quarter.

Perry E. Davis -- Executive Vice President

Justin, this is Perry. Yeah. Quantum Edge and the overall category of Comfort Core continues to grow. For the full year last year, our Comfort Core as a percentage of our innersprings is about 46%. It was a little stronger than that in the fourth quarter. And of those, Comfort Core innerspring, in the fourth quarter, about 37% were Quantum Edge.

That continues to grow. In fact, we saw great representation of what we call ActiveEdge, which encompasses Quantum Edge. All of those coil encased products as opposed to foaming case products, we saw a great representation of new introductions and existing product lines at the recently completed Las Vegas market. So we believe that content gain story that we've been preaching for some time now will continue throughout 2019.

Justin Bergner -- Gabelli & Company -- Analyst

Thank you for taking all my questions.

Karl G. Glassman -- President and Chief Executive Officer

Thank you.

Perry E. Davis -- Executive Vice President

Thanks, Justin

Operator

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

Wendy M. Watson -- Director, Investor Relations

Thank you everybody for participating today and we'll talk to you again next quarter.

Operator

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

Duration: 46 minutes

Call participants:

Wendy M. Watson -- Director, Investor Relations

Karl G. Glassman -- President and Chief Executive Officer

Matthew C. Flanigan -- Executive Vice President and Chief Financial Officer

Chris Kalata -- Credit Suisse -- Analyst

Perry E. Davis -- Executive Vice President

Bobby Griffin -- Raymond James Financial -- Analyst

J. Mitchell Dolloff -- Executive Vice President-Chief Operating Officer, President-Specialized Products and Furniture P

John Baugh -- Stifel -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Daniel Moore -- CJS Securities -- Analyst

Peter Keith -- Piper Jaffray & Co -- Analyst

Justin Bergner -- Gabelli & Company -- Analyst

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