Leggett & Platt, Incorporated

Greetings and welcome to the LEG 2Q 2023 Webcast and 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. If anyone should require operator assistance during the conference, please place star then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host. Susan McCoy, S&P Investor Relations. Thank you. You may begin.

Good morning, and thank you for taking part in Leggett & Platt's second quarter conference call. On the call today are Mitch Dollop, President and CEO, Ben Burns, Executive Vice President and CFO, Steve Henderson, Executive Vice President and President of the Specialized Products and furniture, boring, and textile product segments. Tyson Hagel, Executive Vice President and President of the Bedding Product Segment. Tassie Branscombe, Senior Director of IR. And Collina Talbert, Manager of IR. The agenda for our call this morning is as follows. Mitch will start with a summary of the main points we named yesterday's press release and discuss operating results and demand trends. Ben 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 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 in 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 second quarter call. First, I would like to welcome Ben Burns, who stepped into the CFO role effective June 21st. Ben has been with the company for 20 years and previously led our internal audit department, served as our treasurer, and most recently led our business support services functions, including procurement, logistics, and risk. Ben brings a deep knowledge of our business, strong financial capabilities, and an ability to drive change that has benefited and will continue to benefit Leggett and Platt. Now turning to second quarter results. Sales in the quarter were down 8% versus second quarter 2022 from lower volume and raw material related price decreases. 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. Second quarter earnings per share were $0.40. This included $4 million, or $0.02 per share, of gain from net insurance proceeds from April tornado damage at a shared home furniture and bedding manufacturing facility. Excluding this item, adjusted earnings per share were $0.38. Earnings decreased primarily from lower volume in residential end markets and lower metal margin in our steel rod business. Cash flow from operations was $111 million, up $21 million versus second quarter of 2022. We are lowering our full year guidance to reflect continued volatility in macroeconomic environment and low visibility in several of our end markets. Our previous guidance anticipated a modest improvement in residential end markets in the second half of the year. We are encouraged by the continued recovery in our industrial businesses but have yet to see an upward trajectory in the residential markets. Moving on to our business segment results and outlook. Sales in our betting product segment were down 18% versus second quarter of 2022. We previously expected 2023 market volume to be flat with modest improvement in the back half of the year. Although the market improved sequentially in May and June from seasonal lows in April, the second quarter was weaker than expected. In addition, signals from the broad market and customers are less optimistic than earlier in the year. We now expect demand to remain at or slightly below current levels. This suggests volume in the back half of the year will be down mid-single digits and full-year mattress consumption will be down high single digits versus 2022. This estimate results in consumption down 25% to 30% from the 2021 peak and at levels comparable to 2016. In the quarter, our volume generally tracked the overall market, but there is some variability within specific product categories. Trade rod and wire volume declined year over year, as industrial demand was strong until the third quarter of last year. Steel rod production through the first half of the year was consistent with initial plans. However, full year production is now expected to be approximately 25% below historical levels to align with current demand, versus our previous expectations of 20% below historical levels. Volume in U.S. spring was down 13% in the second quarter. Comfort core unit volumes declined versus last year, but tracked near or positive to the overall market. Lower-priced open-coil inner springs and wire foundations declined more, which we believe is indicative of broader market trends. Volume in specialty foam was up 8%, Successful efforts to diversify our customer base led to growth in finished mattress units and accessories such as mattress toppers. As expected, metal margin narrowed in the first half of the year, and we still anticipate metal margin to be down mid-teens versus 2022. Market volume continues to be the greatest headwind in impact to earnings and margin. However, our teams continue to work to improve internal capabilities and bring value to our customers despite the challenging environments. In recent years, we've strategically shifted our focus in the bedding market by expanding product capabilities and growing content at attractive price points. Our in-a-spring components business has moved more towards mid- to higher-end price points and greater content within each unit. Our specialty foam business allows us to produce specialty foam components and finished products for our branded partners. Consumer interest in adjustable beds continues to grow, providing us with an additional opportunity to increase content. This strategic approach enables us to innovate high-quality, differentiated products for our customers and improve comfort for the end consumer. We intend to grow our market share and increase profitability by focusing on three key areas. First, we will continue to pursue opportunities to enhance our value proposition by offering product differentiation and reducing total mattress production costs for our OEM customers. For example, our new combination pocket combines perimeter edge innersprings and specialty foam to create a fabric-encased innerspring and foam column that minimizes motion disturbance from a sleeping partner and improves airflow. EcoBase is another new product that allows our customers to streamline their manufacturing process, lower costs, and reduce environmental impact by replacing commodity-based foam with a lighter polyester nonwoven material under a comfort core unit. Our second area of focus is improving specialty foam's performance and continuing to improve costs. Continued integration of our foam and innerspring operations will drive opportunities for manufacturing savings and product development gains. And our third area of focus is maintaining our production flexibility and ensuring appropriate levels of inventory. Our competitive position is unique. From our vertical integration of steel, rod, and wire, specialty polyols and additives, and efficient and flexible machine technology to innovative products that service our customers anywhere in the value chain, our bedding business is well positioned to bring value to our customers and end consumers. Sales in our specialized product segment increased 23% versus second quarter of 2022, driven by the hydraulic cylinders acquisition completed in August of last year and continued recovery in all three businesses. The July forecast for global automotive production shows 6.5% growth in the major markets in 2023, as the industry is seeing stronger production recovery and inventory restocking than anticipated earlier in the year. While improving, automotive industry production remains dynamic as supply chain, macroeconomic, and geopolitical impacts bring volatility across different regions. Cost recovery is continuing in our automotive business, and we expect to make further progress as we move through the second half of the year. Strong in-market demand in hydraulic cylinders is expected through the remainder of the year. Order backlogs in the material handling and heavy construction equipment market segments remain at elevated levels, but have started to moderate as our customer supply chain and labor issues have improved, allowing them to increase production levels. In our aerospace business, We expect strong demand in the second half of the year as industry recovery continues. OEM backlogs remain strong. However, build rates fluctuate based on supply chain availability. Sales in our furniture, flooring, and textiles product segment were down 14% versus second quarter of 2022. Home furniture demand remained slow during the quarter with high end price points softening. The lower demand also impacted volume and fabric converting. While inventory levels across the market continue to improve, we expect demand to remain soft through the third quarter with the potential for some improvement in the fourth quarter. Work furniture demand for both contract and residential end-use products remained at low levels consistent with previous quarters. We expect demand to continue at these levels for the rest of the year. In flooring products, residential demand improves sequentially but remains slow in what is typically a seasonally stronger quarter largely due to softer remodeling activity. Hospitality demand continues to improve but remains below pre-pandemic levels. In geo components, we expect slower demand in the back half of the year as home improvement retail is softened and civil construction is slower than anticipated. We are maintaining our emphasis on improving areas within our control and proactively addressing the effects of the macroeconomic impacts on our businesses. Our employees have done an excellent job in driving these efforts, which include engaging with our customers on new product opportunities, some of which we mentioned earlier in our bedding segment commentary, improving operating efficiency, as we have done in a North American automotive facility as progress continues in specialty foam, and driving strong cash management, as demonstrated by our working capital improvements and year-to-date operating cash flow of $207 million. Our focused execution and enduring fundamentals position Ligon and Platt for long-term success. I'll now turn the call over to Ben.