Greetings, and welcome to the Leggett & Platt Third Quarter 2022 Webcast and Earnings Conference Call. [Operator Instructions] 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 & Platt’s third quarter conference call. On the call today are Mitch Dolloff, President and CEO; Jeff Tate, Executive Vice President and CFO; Steve Henderson, Executive Vice President and President of Specialized Products and Furniture, Flooring & Textile Products segments; Tyson Hagale, Senior Vice President and President of the Bedding Products segment; and Cassie Branscum, 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 our 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 & 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 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 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 $0.52. 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 phone, partially offset by metal margin expansion. Earnings per share decreased 27% versus third quarter 2021. We lowered our full year guidance on October 10 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 2 acquisitions in August and 1 in October. In late August, we acquired Pacoma 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., Pacoma 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…

Thank you, Mitch, and good morning, everyone. In the third quarter, we generated cash from operations of $65 million, up $15 million as compared to $50 million in third quarter 2021, reflecting a much smaller use of cash for working capital, partially offset by lower earnings. Working capital increased significantly last year due to restocking efforts following the inventory depletion in 2020, but increased to a lesser extent this year as we continued to return to inventory levels more reflective of current demand. This improvement was partially offset by a decrease in accounts payable as purchases slowed due to lower volume and our efforts to reduce inventory levels. We ended the third quarter with adjusted working capital as a percentage of annualized sales of 16.6%. Our priorities for use of cash are unchanged. They include an order priority, funding organic growth, paying dividends, funding strategic acquisitions and share repurchases with available cash. Capital expenditures in the third quarter were $25 million. In August, our Board of Directors declared a quarterly dividend of $0.44 per share, $0.02 or 5% higher than last year’s third quarter dividend. At an annual indicated dividend of $1.76, the yield is 5.3% based upon Friday’s closing price, one of the highest among the dividend kings. We used $63 million during the third quarter for 2 acquisitions, a hydraulic cylinders business and a textile business that Mitch previously mentioned. With the deleveraging we accomplished over the past few years, share repurchases have returned as one of our priorities for use of cash. The level of repurchases will vary depending on various considerations, including alternative uses of cash and opportunities to repurchase shares at an attractive price. During the third quarter, we repurchased 90,000 shares at an average price of $38.42 per share, for a total of $3…

Thank you, Jeff. That concludes our prepared remarks. We thank you for your attention, and we’ll be glad to answer your questions. Operator, we’re ready to begin the Q&A session.

[Operator Instructions] And our first question is from the line of Susan Maklari with Goldman Sachs.

My first question is focusing a little bit on some of those inefficiencies that you’re seeing in the specialized foam segment of Bedding. Can you talk a bit about the efforts that you’re undertaking there to move past some of them? And any thoughts on the time line and how that could come together over the next couple of quarters?

Yes. Great question, Susan. Tyson, I’ll pass that over to you. You’re deeply involved in that.

Sure. Good morning, Susan. You’ll recall when Leggett acquired ECS, it was 4 companies that were being brought together, and that was in 2019. So our integration efforts were underway and then really had to be paused once we entered the pandemic. The biggest headwind, of course, we have is demand, and we’ve documented those that channel of the bedding market has been more challenged than the rest due to the customer acquisition costs and a bit of a shift away from direct-to-consumer back to brick-and-mortar over the last 12 months or so. But specifically, during the pandemic, like everybody else, we were really struggling with labor and also had a difficult time obtaining chemicals. And our priority really became to service as much business as we possibly could during that time. And frankly, we developed some production inefficiencies during that time with those efforts, primarily that’s around our labor usage and efficiency and then also our material scrap. And while business has been slow, we are working through those issues. We’ve invested in our equipment and automation. We’re also working to stabilize our labor force and improving our processes and controls around material. We’re already making some progress. It is going to take us a bit of time. I would say it will take us into next year to really get our footing underneath us there. But the good news is these are fixable problems. These aren’t things that are out of our control, and we can definitely address them and already have those underway.

Okay. That’s very helpful color. And then perhaps shifting to the Specialized segment, you obviously saw a really nice lift in those automotive volumes, actually, the volumes across all 3 of those businesses this quarter. Can you just talk a little bit about the outlook there? And how you’re thinking about the rate of production in those 3 businesses? And perhaps with that, too, any commentary on how you’re thinking of the pricing piece of that, the ability to catch up on some of the inflation that you’ve been hit with?

Sure, Susan. There’s a lot to unpack there. So I’ll dive in a little bit, and then Steve, I’ll turn it over to you. But from an auto side, I think we continue to see production increase as chip shortages start to soften a little bit, but it’s still relatively volatile, but improving. I will remind you that the third quarter of last year was really the lowest point of production for the industry overall. So that big 25%-or-so increase year-over-year was a bit – is a bit of an outlier. But we do expect continued sequential improvement across the industry and in our business as well. So the industry forecast for the fourth quarter is up about 5% or 6% year-over-year, and I think it’s about the same sequentially. So we would see that growth as well. We continue to make progress on the cost recovery in automotive, but it’s taking a little bit longer than expected. The industry, as I’ve commented before, just works on fixed pricing with cost downs over the life of those programs. So it really takes enough time for pressure to mount up across the supply chain that OEMs are really forced to concede on the price changes. And that is taking place, but it’s a really complicated process that takes quite a bit of time. So again, making progress, confident in our ability to continue to make that progress, but it will probably take us through this year and maybe into even the first quarter or so. But hard to predict that, which is part of what changed from our previous guidance. And remind you that those – that recoveries could take multiple forms, whether it’s just price changes or one-off payments or value engineering or delayed cost down. So I think that for us, the outlook for the automotive industry remains very strong, might be a little bit dynamic as we navigate the geopolitical or macroeconomic times that are out there. But the backlog and demand is there. The inventories remain at very low levels and the average age of vehicles is also extended. So I think there’s a long-term tailwind there for us to benefit from. Also very positive dynamics in aerospace and in hydraulic cylinders, probably even stronger growth there in the near term. But Steve, I’ll turn it over to you to add more comments there.

All right, Mitch, thank you. Good morning, Susan. So I’ll start maybe with aerospace, up 26%. So demand is improving, and that’s really being driven still by the single-aisle planes. Consumer travel is at or exceeding numbers prior to the pandemic. Fuel costs are driving the need for more efficient planes. And really, the challenges and cost of making the planes airworthy after sitting 3 years is a challenge. So that’s really what’s driving the growth. And as a result, [TL], which is the company that forecasts in that industry, they’ve reduced 2022 slightly to about 82% of 2018 levels, but have increased the 2023 forecast by 8%, so basically offsetting the 22 -- reduction and getting to 100% of 2018. So pretty significant forecast to increase. Airbus is recovering faster than Boeing, which you probably have heard. So as that demand is improving, raw material and labor shortages are creating a little bit of volatility across that industry, somewhat similar to what we’ve seen in automotive, but very, very positive as we work through that. You mentioned pricing, purchase price cost changes. We’re largely able to pass those on to our customers. And then in the hydraulic cylinders area, as Mitch mentioned, the industry backlogs are at high levels for both material handling and heavy construction. And we’ll probably do that well into 2023. Some of our customers like Caterpillar significantly beat their third quarter earnings and said demand remains healthy across most of their end markets during the quarter. So that’s a positive for us. And then I would be remiss if I didn’t talk a little bit about the acquisition, Pacoma that we made in late August, which fits really well with our hydraulic strategy for technologies and as well as the macro trends towards emission reduction and autonomous equipment in that area. They’re a leading manufacturer of hydraulic cylinders that primarily sort of the heavy construction equipment industry such as like large excavators and wheel loaders, operations in Germany and China and distribution in the U.S. and have ‘21 sales of about $65 million. So it represents our next step to pursue profitable growth in the engineered hydraulic components space; increases our participation in industrial markets, which is also very positive; brings some scale and now the total business to be around $200 million. And that group has been able to largely pass pricing on as necessary as well. So pretty exciting things going on in that business unit.

Great. That was a great overview. And I’ll get back in the queue.

Our next question is from the line of Bobby Griffin with Raymond James.

First one for me is just kind of the earnings power of the business in today's economic environment. I mean, clearly, tough to predict what's going to happen going forward. So when we look at the back half year of 2022 and kind of take that, imply it's going to earn maybe $1, $1 or $2, and we annualize that out. Is the right way for us to think about that in today's economic environment, it's a $2 to $2.05 earnings business? In order for that to grow, we need the economic environment to improve? Or are there some other levers that you would tell us to keep in mind as we're thinking about the underlying earnings power of this business in 2023?

Yes. Great question, Bobby. And I'll make some initial comments, and Jeff, maybe ask you to jump in as well with some of the maybe financial details. But Bobby, I think it's undoubtedly a dynamic environment has been for quite a while. We all know that. Tyson talked about some of the improvement efforts that we have underway at this. Yes, we mentioned the cost recovery that we're making in automotive, also improving some of the operational execution there. But beyond that, I think that there is more that we can do to control that business -- those businesses. I mean, first off, you see the stronger performance in the industrial markets and automotive. So we expect that to continue to benefit from the diversity of our portfolio. We've also seen, while maybe a little bit lower in some of the Furniture, Flooring & Textiles business is still relatively stable. But beyond that, we can move to really balance our variable cost structure and inventories with demand. We've been doing that, I think, very actively. But we can also really actively assess our fixed cost across the whole business and our corporate structure. You remember that in 2020, we reduced fixed costs by about $90 million and kept most of that in place. And we could -- I think to me, that's a really valuable lesson, and that we continue to really eliminate lower value historical fixed cost to support investments that we need to drive key capabilities and infrastructure in our business to prepare us for the future. So I think that we'll continue to do that. I know that we'll continue to do that and to help us benefit in the future at both the business unit level and the corporate level. I also think, as we mentioned, that portfolio diversity, our strong cash flow will allow us to continue to make those investments. So I think it's dynamics. We're not just content with sitting here waiting for the economy to improve. We're very focused on continuing to grow and improve our capabilities and across our businesses and prioritize the opportunities that these volatile times present for us. Jeffrey, turn it over to you. Anything you would add from a more financial perspective?

I think you covered it well, Mitch. And good morning, Bobby. I think the things that we definitely want to emphasize here is that as we look at the agility and the flexibility that we have around a number of those levers that Mitch just mentioned, we'll continue to take action on those because we've already started to execute on a number of those actions internally, and we'll continue to move forward in that regard. And Bobby, you know our company well. In challenging times, we continue to have very strong cash flow generation as we work through some of that demand softness and really manage our working capital extremely well as we go through quarter-to-quarter dynamics.

That's helpful. And I guess 2 quick follow-up questions for me on both bedding-related. One, if we're looking at the volumes here implied for the year, I think it does imply a modest acceleration in 4Q bedding volumes. Is that correct? And maybe unpack that if that's the case? And then secondly, can you just give a little bit more detail on the integration of ECS? Is it new systems, combining manufacturing plants, adding a new manufacturing plant somewhere? Just anything there about what type of integration is taking place.

Sure, Bobby. So on your first question around demand, we've seen things remain relatively stable, fairly stable still at weak levels. And into the fourth quarter, I think we'd see things remaining pretty consistent with the third quarter. Remember, we started to see the slowdown last year, late third quarter, early fourth quarter. So our comparison is a little different than the rest of the market. But generally, right now, we're still planning on things to remain pretty consistent. At ECS, with the integration work, we are working on new IT systems, trying to bring that business more together and having better visibility into our data inventory, et cetera. It's not a combination of plants. It's more around our equipment; our automation, like I mentioned; and just our processes and controls that we generally use to manage our other business like our U.S. Spring business.

Thank you. I appreciate. Best of luck here on the fourth quarter and into 2023.

[Operator Instructions] The next question comes from the line of Keith Hughes with Truist.

You referred in the prepared comments to building inventory in the steel markets and cutting production as a result of that. Is there any indication that's affecting the metal margin? I know it was a positive in the third quarter. Is that going to turn around given that dynamic in the fourth and into next year?

Yes. Great question, Keith. Thanks. Tyson, I'll let you handle that one as well.

Sure. Keith, so it's not so much about the metal margin. Actually, I think we'd say -- although we've seen some softening in rod pricing of late, we've also seen some declines in scrap, but rod pricing not declining as much as scrap. And I think that's attributable to just the conversion cost and the increase that we've seen. And the market has seen utilities, the consumables and everything goes into producing steel. We have seen sequentially softening in our trade rod business, and that's really where we've seen some of our inventories increased. And that's why we're being proactive in trying to take some days out, kind of just looking at what we've seen in the fourth quarter and making sure we don't build steel inventory. And it might be a bit confusing. Normally, I don't think that the business is quite this dynamic. But when you look at the mix of our business in steel, probably the bigger impact has been of late, our mix has been more towards billets. So more of a semi-finished steel product and getting into full rod. And while that helps us cover overhead costs in the melt shop, it doesn't provide the same type of profits that we get from either internal rod production or selling rod to the trade.

Okay. And the volume in rod was up really big in the third quarter. Is that a decision to sell more into the trade because you just didn't need as much given what's going on in the mattress industry? Is that the right interpretation of that number?

Yes, year-over-year, it is a lower utilization for internal rod production, but really the bigger volume impact that you're seeing there is the large increase in billet sales rather than even trade rod.

Okay. Okay. And if we switch over to bedding real quick. The adjustable number year-over-year decelerated into the third quarter, in terms of units, had been up slightly in the first half of the year, down 22% here in the third. Can you talk about what happened and what the outlook on adjustables are?

Adjustables held up better than our direct mattress-related businesses over the last 3 quarters or so. But we did see, as you noted, some slowdown in the third quarter. And it's mostly as things had held up, it's been just where we've been partnered with our customers. We have seen some more supply chain-related impacts in the third quarter and some slowdown in consumer activity around adjustables. I think as we kind of look forward, we'd probably see more consistency there, some improvement as some of those things get better. But it's getting more in line with what we've seen the rest of our mattress-related business.

And maybe just to clarify, from a supply chain standpoint, I think our team has been tough, but they've been navigating, and it's more impacts for the rest of the chain.

Right.

Our next question is from the line of Peter Keith with Piper Sandler.

The first question I just had was on your U.S. Spring business. And I think we and others have historically have thought about the U.S. Spring businesses like having a very dominant position. But just looking now that the sales on a 3-year basis are down negative, has the competitive landscape with Spring's changed at all, whether it's from increased imports or maybe some other domestic production?

Good morning, Peter. Yes, thanks. That's a good question. I mean I think the answer is degree, yes, as we've gone through the dynamic situation over the last few years. But I would say that not really meaningfully, and I think that it's stabilizing to a large degree. But Tyson, let me turn it over to you for more detail.

Sure. That's right. Recently, I think it has stabilized. We certainly saw impacts that we've talked about during the pandemic, from when we had customers on allocations and really just did not have production available for the market demand and did see impacts for our customers having to go find import sources and did see some pick up in some merchant and maker-user activity in the U.S. Recently, we have seen importers as spring activity decline even more than the market in our estimation year-over-year, down more than 30% in imported activity. I think another thing for us to keep in mind is what we sell is a little different now in our U.S. Spring business. We do focus more on content with some of our products and especially in Comfort Core than historically we've done as well. So while the unit picture has been changing our content, it is also a little different.

Yes. I'd add to that, just maybe the credit profile out there, we're very cognizant of not only the profitability of the business but making sure that we're able to get paid.

Okay. All right. How about -- if we just now pivot over to the European side, which obviously remains very dynamic, maybe if you could just talk a little bit more of what you're seeing there. Has it gotten weaker sequentially kind of month-over-month? And is there any difference between kind of higher-end or lower-end bedding as you're seeing in Europe today?

Sure. I'll jump in on that one, too, Peter. So yes, we would see that the European business is facing more challenges than we are here in the U.S. Over the last couple of years, things have tracked pretty closely between the European market and here in the U.S., but just with what's been happening with energy cost, availability, the impact to consumers. We have seen things slow down more of late in our European activity. It is a little bit mixed between some of our finished product activity there with Cape Home and our innerspring business. But generally, yes, we feel like it is being impacted more than the U.S. On your question, just generally about high end versus low end, we feel like that's still been a pretty consistent trend over time, but the high end being impacted a little less or less than the low end. That's where we've seen the slowdown have the biggest effect.

And you mentioned this, but just to emphasize some of the energy issues and the impact of that in chemical production and chemical supply, right? And that's somewhat of a challenge there is also -- and also impacting pricing in the U.S., right, where, albeit a softer market, the exports to some of those chemicals is holding pricing up.

At this time, there are no further questions. I would like to turn the floor back over to Susan McCoy for closing comments.

Thank you for joining us today. We will speak to you again on February 7 after we report fourth quarter results. If you have questions, please contact us using the information in yesterday's press release. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.