Leggett & Platt, Incorporated

Greetings and welcome to the Leggett & Platt 3rd Quarter 2022 Webcast and Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. At this time, I will now introduce your host, Susan McCoy, Vice President of Investor Relations. Thank you, Ms. McCoy. You may now begin.

Good morning and thank you for taking part in Leggett and Platt's third quarter conference call. On the call today are Mitch Dollop, President and CEO. Jeff Tate, Executive Vice President and CFO. Steve Henderson, Executive Vice President and President of the Specialized Products and Furniture, Flooring and Textile Products segments. Tyson Hagel, Senior Vice President and President of the Bedding Products segment. and Cassie Branscombe, Senior Director of IR. The agenda for our call this morning is as follows. Mitch will start with a summary of the main points we made in yesterday's press release and discuss operating results and demand trends. Jeff will cover financial details and address our outlook for the remainder of 2022. And the group will answer any questions you have. This conference call is being recorded for Leggett and 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 sections in our most recent 10-K and subsequent 10-Q entitled Risk Factors and Forward Looking Statements. I'll now turn the call over to Mitch.

Good morning, and thank you for participating in our third quarter call. The current global economic environment and its impact on the consumer negatively impacted our third quarter results. Sales were $1.29 billion, EBIT was $113 million, and earnings per share was 52 cents. Sales in the quarter were down 2% versus third quarter 2021, primarily from lower volume and currency impact, partially offset by raw material-related price increases. The volume decline was driven by continued demand softness in residential end markets, partially offset by growth in automotive and industrial end markets. EBIT decreased 21% versus third quarter 2021, primarily from lower volume, lower overhead absorption from reduced production, and operational inefficiencies in specialty foam, partially offset by metal margin expansion. Earnings per share decreased 27% versus third quarter 2021. We lowered our full year guidance on October 10th to reflect lower demand levels in the increasingly challenging macroeconomic environment. Third quarter earnings per share were slightly better than expected, primarily due to incentive compensation adjustments. At the midpoint of guidance, fourth quarter is now expected to be slightly lower than the third quarter, primarily due to further reductions in steel rod production in response to the slowing steel market. We completed two acquisitions in August and one in October. In late August, we acquired Vekoma Hydraulic Technology, a leading global manufacturer of hydraulic cylinders, primarily for the heavy construction equipment industry. With sales of approximately $65 million in 2021 and operations in Germany, China, and the U.S., Vekoma is the next step in executing our strategy to pursue profitable growth in the engineered hydraulics component industry. In August, we also acquired a small textiles business that converts and distributes construction fabrics for the furniture and bedding industries. In early October, we acquired a small Canadian-based distributor of products used for erosion control, stormwater management, and various other applications. We welcome the employees from all three businesses to Leggett & Platt. Now moving on to the segments. Sales in our betting product segment were down 12% versus third quarter of 2021. Volume declines for soft demand in U.S. and European betting markets, along with currency impacts, were partially offset by raw material-related selling price increases and trade sales growth in our steel rod and drawn wire businesses. Demand in the U.S. betting market was fairly stable versus second quarter, but remained at relatively weak levels as macroeconomic impacts on consumer spending persist. Our specialty phone business has experienced larger demand impacts as a result of previous pandemic-related supply issues and channel-specific pressures. Demand in European betting has declined more significantly amid geopolitical disruptions, the ensuing energy crisis, and the related impact on consumer spending. Commodity costs have been more stable, although at historically high levels. other manufacturing inputs, including energy costs, continue to increase. We are carefully managing these costs and the impact to our business and customers. We are reducing inventory across the segment to levels needed to support demand while maintaining focus on our ability to service customer requirements. Sequential softening and trade demand for steel rod drove third quarter steel inventory levels higher. Given the betting demand environment and the slowing steel market, We are cutting production days in our steel rod business during the fourth quarter to reduce those inventories. EBITDA margins in the segment were lower versus third quarter 2021, primarily from lower volume and lower overhead absorption as production levels were adjusted to meet reduced demand, and operational efficiencies in specialty foam, which are being addressed by continuing integration work. These decreases were partially offset by expanded metal margins in our steel rod business. Sales in our specialized product segment increased 24% versus third quarter 2021 from strong volume growth in all three businesses, raw material related price increases, and to the Coma acquisition in late August. These improvements were partially offset by currency impact. While improving year over year, Automotive industry production forecasts remain dynamic as supply chain and geopolitical impacts bring continued volatility. The current industry forecast for global production shows just over 5% growth in the major markets this year, reflecting relative strength in North America and China and weakness in Europe. Consumer demand remains strong, and vehicle inventories, while continuing to recover, still remain at record low levels. As supply chains continue to stabilize, industry production should further improve. In our aerospace business, demand also is improving. However, raw material and labor shortages are creating some volatility across the industry. In-market demand in hydraulic cylinders is strong, and order backlogs in both the material handling and heavy construction equipment market segments remain at elevated levels. Our OEM customers generally are seeing some improvement in production levels. However, elevated order backlogs are expected to remain into 2023. While EBITDA margins decreased, EBITDA dollars increased, primarily from higher volume, partially offset by currency impact, higher raw material cost, and laboring efficiencies. Cost recovery is improving in automotive, but at a slower rate than expected. Sales in our furniture, flooring, and textile product segment were flat with third quarter 2021 as raw material-related selling price increases and higher volume in geocomponents and work furniture were offset by lower volume in home furniture, flooring, and fabric converting, and currency impact. Home furniture demand has softened significantly in the last few months, particularly at mid to lower price points, with slower consumer demand and excess inventory at retail. This is also impacting volume in fabric converting. Work furniture sales continue to grow in the third quarter, largely from improved contract demand. However, overall order rates are beginning to soften, reflecting economic uncertainties. In flooring products, residential demand has softened modestly with lower home improvement activity. Hospitality demand is slowly improving but remains well below pre-pandemic levels. Geo component demand remains solid, particularly in the civil construction market and, to a somewhat lesser extent, in retail. EBITDA margins in the segment decreased versus third quarter 2021, primarily from lower volume partially offset by pricing discipline. We continue to focus on the things we can control and are taking actions to mitigate the impact of this challenging environment by aligning cost, production levels, and inventory with demand. We also are evaluating near-term opportunities with our customers and are working with them on new product developments. And we are continuing to build out our existing businesses through acquisitions. Our strong balance sheet and cash flow give us confidence in our ability to navigate challenging markets while investing in long-term opportunities. Finally, I would like to thank our employees for your dedication, commitment, and strength. Your collaboration and agility enables us to rapidly assess and respond to dynamic circumstances in our various markets around the world. Your efforts are very much appreciated. I'll now turn the call over to Jeff.