Leggett & Platt, Incorporated

Greetings and welcome to the Leggett and Platt fourth quarter 2022 conference fall. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Susan McCoy, Senior Vice President of Investor Relations. Thank you. You may begin.

Good morning, and thank you for taking part in Leggett and Platt's fourth 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 vetting product 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. Chef will cover financial details and address our outlook for 2023. and the group will answer any questions you have. This conference call is being recorded for Leggett and Platt and provided 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 fourth quarter call. Leggett & Platt's diverse portfolio of businesses, strong cash discipline, and the ingenuity and agility of our employees helped us deliver solid results in 2022, despite weak demand in residential end markets. Sales grew 1% in 2022 to a record from continuing operations of $5.15 billion. primarily from acquisitions. Organic sales were flat, with volume declines of 7% and negative currency impact of 2% offset by raw material-related selling price increases of 9%. Acquisitions net of divestitures added 1% to sales growth. Volume declines were driven by demand softness in residential end markets, partially offset by growth in automotive and industrial end markets. 2022 EBIT was $485 million, a decrease of $111 million versus 2021 EBIT, and a decrease of $83 million versus 2021 adjusted EBIT, primarily from lower volume, lower overhead absorption from reduced production, operational inefficiencies in specialty foam, and higher raw material and transportation costs and operational inefficiencies in automotives. These decreases were partially offset by metal margin expansion in our steel rod business and pricing discipline in the furniture, flooring, and textiles product segment. EBIT margin was 9.4%, down from 2021's EBIT margin of 11.7%, and adjusted EBIT margin of 11.2%. Earnings per share in 2022 was $2.27. a decrease of 23% versus EPS of $2.94 in 2021, and a decrease of 18% versus adjusted EPS of $2.78. Cash flow from operations was $441 million, a 63% increase versus 2021. The current global macroeconomic environment and its impact on the consumer negatively impacted our fourth quarter results. Sales were $1.2 billion, EBIT was $91 million, and earnings per share was $0.39. Sales in the quarter were down 10% versus fourth quarter 2021, primarily from lower volume and currency impact, partially offset by raw material-related price increases. Acquisitions added 2% to sales. The volume decline was driven by continued demand softness in residential end markets, partially offset by growth in automotive, aerospace, and hydraulic cylinders. EBIT decreased 40% versus fourth quarter 2021, primarily from lower volume and lower overhead absorption as we intentionally kept production in our steel rod business below demand to reduce inventory levels. These declines were partially offset by metal margin expansion. As a result of these impacts and inflation, EBIT margin was 7.6%, down from 11.4% in the fourth quarter of 2021. Earnings per share decreased 49% versus fourth quarter 2021. During the year, we completed four strategic acquisitions. In late August, we acquired a leading global manufacturer of hydraulic cylinders for heavy construction equipment with operations in Germany, China, and the U.S., and annualized sales of approximately $100 million. This acquisition builds scale in our hydraulic cylinders growth platform and brings us into an attractive segment of the market that aligns well with trends in automation and autonomous equipment. Also in August, we acquired a small textiles business that converts and distributes construction fabrics for the furniture and bedding industries with annual sales under $10 million. In early October and mid-December, we acquired two Canadian-based distributors of products used for erosion control, stormwater management, and various other applications with combined sales of approximately $50 million. We have successfully expanded our textiles business over the years through small strategic acquisitions that leverage textile supply chain expertise and attractive in markets. Now moving on to the segments. Sales in our betting product segment were down 19% versus fourth quarter of 2021 and decreased 4% for the full year. Demand in the U.S. betting market softened during the fourth quarter as macroeconomic impacts on consumer spending persisted. We expect demand in 2023 to remain consistent with levels experienced in 2022, with relatively consistent sequential volumes continuing in the first half of the year and modest increases in the second half of the year. Volume in U.S. spring was down 22% in 2022, which is comparable to the domestic mattress market. After a mid-single-digit share loss early in the pandemic related to supply shortages, we estimate that our share of the innerspring mattress market has remained stable over the last two years, despite a volatile environment. Although consistent demand is assumed in 2023, we expect to increase production after limiting output in 2022 to align inventory with lower demand levels. Strong trade demand for rod and wire provided earnings benefit in the first half of the year. However, trade rod demand slowed considerably in the back half of 2022, and as a result, we cut production significantly to reduce inventory. Steel rod production in 2023 is expected to be in line with 2022, but remain well below normal levels. We expect higher internal consumption to offset lower trade demand. Increased metal margin provided earnings benefit throughout the year, but to a lesser extent in the latter part of the year as steel prices soften. While it is difficult to predict steel pricing, we anticipate continued softening in 2023. However, we expect rod pricing and metal margins to remain at historically elevated levels due to higher conversion costs. Demand in European betting has stabilized in recent months, and we expect demand in 2023 to be relatively flat with 2022. The actions we took in 2022 to reduce inventory across the segment have brought levels back in line with those needed to support current demand. With the capacity we have in place, we are prepared to respond quickly to changing demand and will remain focused on servicing customer requirements. Full-year 2022 segment earnings were significantly impacted by difficulties experienced in our specialty foam business. About two-thirds of the earnings challenge in specialty foam was a result of low demand, which dropped quickly in the fourth quarter of 2021 and remained at depressed levels throughout 2022. Demand was impacted from three areas. The first being the general betting market decline of approximately 20% following demand surges in 2020 and 2021, and chemical shortages in 2021. The second was channel-focused. Finished goods production in specialty foam is weighted heaviest to digitally native brands, which declined more than the overall market due to changes in consumer privacy laws and customer cash constraints. And finally, we suffered share loss from a small number of customers with sales shifting from finished goods to components in some cases. Specialty foam earnings were also impacted by the volatile chemical supply environment. Like all other foam producers, we experienced significant chemical inflation through the course of 2021 and cost remained at historically high levels in 2022. Given the level of material cost, efficiently pouring and converting foam is of even greater importance than normal. However, because of high demand in 2021 and chemical shortages, our first priority became servicing customers. Between paused integration and the need to service customers, we have not operated at target material efficiency levels. Material inefficiencies at these high chemical costs had a detrimental impact on earnings. While it will take some time to see improvements in specialty foam, especially with the continued challenging demand environment, we're confident in our recovery plan and are making progress. Our team has a strong pipeline of opportunities influenced by our specialty foam technologies. We've also focused on driving improvement in material margins through both process and equipment changes. We remain confident that our specialty foam business will drive long-term, profitable growth for the segment and are placing our highest level of attention on short-term improvements in sales and material management. Sales in our specialized product segment increased 15% versus fourth quarter of 2021, and we're up 12% for the full year. The January forecast for global automotive production shows approximately 4% growth in the major markets in 2023. While improving year over year, automotive industry production forecast could remain dynamic as supply chain, macroeconomic, geopolitical, and COVID impacts bring continued volatility. Cost recovery is continuing in automotive, and we expect to make further progress in 2023. In our aerospace business, We expect continued strong demand in 2023. However, raw material and labor shortages are creating some volatility across the industry. End-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. Demand is expected to remain strong into the first half of 2023, with some potential slowing in the back half of the year as backlogs ease. Sales in our furniture, flooring, and textiles product segment were down 12% versus fourth quarter 2021 and up 3% for the full year. Home furniture demand slowed during the quarter at both the mid and high end of the market, and customer backlogs largely have been depleted. Demand at lower price points remained extremely weak, and customers across all price points are working to reduce inventory levels. This demand softness also impacted volume in fabric converting. We expect lower market volume through at least the first half of 2023. Work furniture sales decreased in the fourth quarter as contract demand slowed and demand for products with residential exposure continued to soften. We expect this trend to continue into 2023. In flooring products, residential demand has softened modestly with the slowing housing market and lower home improvement activity. Hospitality demand is slowly improving, but remains well below pre-pandemic levels. Geo components demand remains solid heading into 2023, particularly in the civil construction market and to a somewhat lesser extent in retail. As we move through 2023, we are focused on improving the things that we can control and continuing to mitigate the impacts of market challenges on our business. We are working with our customers on new product opportunities, continuing our focus on improving operating efficiency and driving strong cash management. Our financial strength gives us confidence in our ability to successfully navigate challenging markets while investing in long-term opportunities. Finally, I would like to thank our employees for your strength, tenacity, and dedication to driving long-term results. Your commitment to our values results in the collaboration, agility, and ingenuity required to drive our company forward despite challenging macroeconomic circumstances. Each of you is key to our continued success. I'll now turn the call over to Jeff.