Leggett & Platt, Incorporated

Greetings and welcome to the Leggett and Platt first quarter 2023 earnings call and webcast. 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's now my pleasure to introduce your host, Susan McCoy, Senior Vice President of Investor Relations for Leggett and Platt. Thank you. You may begin.

Good morning, and thank you for taking part in Leggett and Platt's first quarter conference call. On the call today are Mitch Dulles, President and CEO, Jeff Tate, Executive Vice President and CFO, Steve Henderson, Executive Vice President and President of Specialized Products and Furniture, Flooring, and Textile Products segments, Tyson Hagel, Executive Vice President and President of the Betting Products Segment, Cassie Branscombe, Senior Director of IR. And joining us for the first time today is Colina Talbert, Manager of Investor Relations, who will be working directly with Cassie and me. Colina joined Legit in 2014 and has served in various roles, most recently working with the Betting Segments Strategy and Business Intelligence team. We are excited to have Colina as the newest member 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 2023. 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 reconciliation. 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 entitled Risk Factors and Forward-Looking Statements. I'll now turn the call over to Mitch.

Good morning. Thank you for participating in our first quarter call. As expected, the current global macroeconomic environment and its impact on the consumer negatively impacted our first quarter results. Sales were $1.21 billion, EBIT was $89 million, and earnings per share was 39 cents. These results were better than anticipated but declined versus record first quarter results last year. Sales in the quarter were down 8% versus first quarter 2022 from lower volume, raw material-related price decreases, and currency impact. Acquisitions added 3% 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 35% versus prior year, primarily from lower volume and lower metal margin in our steel rod business. As a result of these impacts, EBIT margin was 7.4%, down from 10.4% in the first quarter of 2022. Earnings per share decreased 41% versus first quarter 2022. First quarter earnings were better than anticipated. While operating results were largely in line with our expectations, several expenses were lower due to other factors totaling approximately $20 million. Those included lower incentive compensation, favorable medical claims and other insurance trends, lower bad debt expense, a reduction to a contingent purchase price liability associated with a prior year acquisition, and pandemic-related cost reimbursements. Cash flow from operations was $97 million, up $58 million versus first quarter 2022. Our full year guidance range remains unchanged as we balance better than expected first quarter results with continuing macroeconomic uncertainty. Our diverse portfolio of businesses, solid financial position, and the ingenuity and agility of our employees continue to help us navigate challenging markets. Moving on to segment results and outlook. Sales in our betting product segment were down 17% versus first quarter of 2022. Demand in the U.S. betting market appears to have stabilized at low levels consistent with those experienced in the second half of 2022. We expect demand to remain at current levels through at least the first half of the year, with the potential for modest increases in the second half of the year. Volume in U.S. Spring was down 13% in the first quarter, which we believe is comparable to the domestic mattress market. Although relatively consistent demand is assumed in 2023, we expect to increase production in our U.S. Spring business after limiting output last year to align inventory with lower demand levels. Similar to 2022, Steel rod production is expected to remain approximately 20% below historical levels. However, we believe it should be relatively consistent across quarters. We expect higher internal consumption to offset lower trade demand. As expected, metal margin has begun to narrow moderately as scrap costs increased and steel prices softened. While it is difficult to predict changes in the steel market, we anticipate metal margin to be down mid-teens versus 2022. However, we also expect broad pricing and metal margins to remain at historically elevated levels due to higher conversion costs. The actions we have taken 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 we remain focused on servicing customer requirements. Improving the performance of specialty foam remains a top priority. About two-thirds of the earnings challenge is a result of low demand driven by the general betting market decline, the outside's impact on digitally native brands from changes in consumer privacy laws and cash constraints, and share loss from a small number of customers with some of those sales shifting from finished goods to components. The remaining challenges relate primarily to material inefficiency from practices that emerged during the pandemic as we prioritized servicing customers amid chemical shortages and surging demand. While it will take some time to see significant improvements in specialty foam, especially with the continuing weak demand environment, we're confident in our recovery plan and are making progress. Our team has a strong pipeline of opportunities supported by our specialty foam technologies. We also are 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 improvements in sales and material management. Sales in our specialized product segment increased 21% versus first quarter of 2022, in part from the hydraulic cylinders acquisition completed in August of last year. The April forecast for global automotive production shows approximately 4% growth in the major markets in 2023, consistent with industry forecasts last quarter. While improving year over year, we expect automotive industry production to remain dynamic as supply chain, macroeconomic, and geopolitical impacts bring continued volatility across different regions. Cost recovery is continuing in our automotive business, and we expect to make further progress as we move through 2023. In our aerospace business, we expect continued strong demand throughout 2023. Demand for fabricated duct assemblies remained strong, and recovery of welded and seamless tube products accelerated in the quarter. Market production is expected to recover to pre-pandemic levels by the end of 2024. 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. Supply chain and labor issues have moderated, but still impact our customers' ability to expand production. Demand is expected to remain strong throughout 2023. Sales in our furniture, flooring, and textile product segment were down 13% versus first quarter 2022. Home furniture demand remained slow during the quarter, with the high-end modestly outperforming low and middle price points. This demand softness also impacted volume and fabric converting. While improving, inventory levels across the market remain high. we expect lower market volume through at least the first half of 2023 as consumer demand remains soft and inventory reduction continues. Work furniture sales decreased in the first quarter as contract demand slowed and demand for products with residential exposure continued to soften. We expect demand to remain at these levels for the remainder of 2023. In flooring products, residential demand remains soft due to a slowing housing market and lower home improvement activity. Hospitality demand has improved but remains below pre-pandemic levels. While the first quarter is seasonally soft for geocomponents, demand remains solid, particularly in the civil construction market. Infrastructure spending is expected to help support demand over the next few years. We are focused on improving the things that we can control and are continuing to mitigate the macroeconomic impacts on our businesses. We are working with our customers on new product opportunities, continuing our focus on improving operating efficiency and driving strong cash management. Our financial discipline allows us to withstand periods of economic uncertainty and enables us to manage our company for long-term success. Before I turn the call over to Jeff, I would like to update you on some of our ESG activities. Last year, we conducted our first materiality assessment to identify opportunities that will drive the most value for our company. In mid-April of this year, we issued our third sustainability report. As we move through this year and into 2024, our key ESG activities include obtaining third-party limited assurance of our greenhouse gas emissions data and publicly reporting our data, developing and communicating our ESG goals, including climate-related targets, establishing a roadmap of actions that will support us in meeting our ESG goals and targets, continuing to advance our inclusion, diversity, and equity efforts, upgrading our management systems to improve data collection and contribute to broader company-wise sustainability advancements, and continuing to enhance our supplier assessment process, including a heightened emphasis on labor and social standards and cybersecurity controls. We're proud of the progress we have made in modernizing our businesses, building critical infrastructure, and advancing our culture. Thanks to the skills and dedicated efforts of our teams, we are making significant progress in bringing these capabilities to life while navigating a challenging macroeconomic environment. I'll now turn the call over to Jeff.