Greetings, and welcome to the Leggett & Platt Fourth Quarter and Full Year 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cassie Branscum, Vice President of Investor Relations for Leggett & Platt. Please go ahead.

Good morning, and welcome to Leggett & Platt's fourth quarter and full year 2023 earnings call. With me on the call today are Mitch Dolloff, President and CEO; Ben Burns, Executive Vice President and CFO; Steve Henderson, Executive Vice President and President of the Specialized Products and Furniture, Flooring & Textile Products segment; Tyson Hagale, Executive Vice President and President of the Bedding Products segment; Susan McCoy, Director of IR Special Projects; and Kolina Talbert, Manager of Investor Relations. 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. Ben will cover financial details and address our outlook for 2024, 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 express permission. A replay will be available on the Investor Relations section of our website. We posted to the IR section of our website, yesterday's press release and a set of slides that contain summary financial information along with segment details. Those documents supplement the information we discuss on this call, including non-GAAP reconciliations. 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 call. First, I would like to recognize Susan McCoy on what will be her final earnings call. She's retired at the end of March after 38 years with the company, including 22 years in Investor Relations. Susan has made enormous contributions to Leggett, including developing an outstanding IR function that has benefited both Leggett and the investment community over the past two decades. Susan, thank you so much for your service and congratulations on your retirement. In what has been a long-planned succession, Cassie Branscum stepped into the lead role as Vice President of Investor Relations, effective the beginning of 2024. Cassie joined the IR team in 2018 after serving in various roles across the company since 2005. She has tremendous financial skills and deep Leggett knowledge that will continue to serve us well as she leads the IR function going forward. 2023 was another challenging year, particularly within our residential end markets. Our employees, once again, persevered to accomplish some notable achievements, including preparing a restructuring plan for our Bedding Products and Furniture, Flooring & Textile Products segment. These efforts will drive improved operating efficiency and profitability while maintaining high quality products and services for our customers, driving strong cash flow with a continued focus on working capital management, and advancing our sustainability data collection efforts to establish baseline metrics and goals that we plan to share in our 2024 report. Thank you for your continued dedication to each other in Leggett & Platt. We have made some difficult but necessary decisions to support the company's long-term success. I sincerely appreciate your ongoing support, and thank you for your efforts each and every day. Before we move on to our fourth quarter and full year 2023 financial results, I would…

Thank you, Mitch, and good morning, everyone. In 2023, we generated cash from operations of $497 million, $56 million higher than the $441 million we generated in 2022. This increase reflects a continued focus on working capital management, partially offset by lower earnings. We ended the year with adjusted working capital as a percentage of annualized sales of 13.9%, a notable improvement from 2022. Consistent with our near-term priorities of managing cash and reducing debt, we did not complete any acquisitions and had minimal share repurchases in 2023. Major uses of cash in 2023 were $114 million of capital expenditures, reflecting a balance of investing for the future while controlling our spending. $239 million for dividend payments, extending our record of consecutive annual dividend increases to 52 years and $107 million to reduce debt. We ended the year with total debt of $2 billion, including $186 million of commercial paper outstanding. Net debt to trailing 12-month adjusted EBITDA was 3.16 times at year end, in line with the third quarter and consistent with our expectations. We monitor our debt leverage and liquidity closely. As a reminder, our covenant calculation is more favorable than our publicly reported leverage ratio, and we expect that favorable difference to expand in 2024. Total liquidity was $697 million at year end comprised of $365 million of cash on hand and $332 million in capacity remaining under our revolving credit facility. As we anticipate weak residential end market demand again this year, we are focused on maintaining our investment grade credit rating and managing debt leverage while balancing continued investment in our business for future growth and our dividend track record. We continue to focus on managing working capital and identifying other opportunities to generate cash. In 2024, we expect pre-tax proceeds of $20 million to…

Thank you, Ben. Operator, we're ready to begin Q&A.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everyone. I first want to congratulate Susan. It's been great working with you all these years, and you are going to be very missed. So congrats and best of luck in your retirement.

Thanks, Susan. I appreciate that. And we will definitely stay in touch.

Yes. So moving on to my questions. I've got a couple of them related to the restructuring that you've announced. And maybe to start with, can you talk a bit about how you think of the long-term dynamics of the Bedding industry? With all the different moves we've seen in the last three or four years or so, how did you determine the level of demand that you need to be sized to? How are those coming together and what are the sort of nuances of what you keep versus what you restructure out of the business, and how do you think about the go forward, I guess, of that operation?

Yeah. Good morning, Susan. Thanks for the question. I think the big picture for me is the restructuring is more than just thinking about our capacity. But Tyson, let me turn it over to you to share your thoughts.

Sure. Thanks. Good morning, Susan. I'll start by saying, and I know this is pretty obvious, but these are really difficult decisions, and we didn't take them lightly. And part of it is what Mitch said too, it goes beyond just capacity. I mean really if you think about how our business has been changing over several years, we've been changing our product lineup with the acquisition of specialty foam, how we've been pivoting to more semifinished products, incorporating foam into our innerspring products as well and a continued long-term shift on Open Coil to ComfortCore. So we've seen our product mix and what we're offering our customers change quite a lot over the last several years. So as we thought about the manufacturing part of the restructuring plan, also over the last several years, even during the pandemic. We've invested heavily in ComfortCore productive capacity and really efficient capacity. We've done the same thing at ECS after acquisition. We've been making investments there as well. So as we look at where the market is headed and what our customers really want and their products, we also still had some longer-term legacy capacity still in place from Open Coil in our innerspring business. So we've added the ComfortCore capacity and hadn't necessarily taken off as much of the good capacity as we needed to. So looking at that, we're not looking at today's market environment. We're at a really, really low point for U.S. mattress manufacturing. So we're not looking at today as the long-term needs. We really are looking at what we think to be the long-term trajectory of the overall market and more of a move towards ComfortCore and semifinished products. So as we looked at just our overall footprint and our manufacturing capacity with what we've put into place, we saw an opportunity to go through the consolidations and still maintain our capacity and ability to flex up to whatever the market needs might be with our customers with just a smaller footprint, higher opted (ph) facilities and then also adjusting our distribution network to have a fewer number of larger regional sites that will support our customers in a better way. So it's a long-winded answer, but really taking a lot of things into account and not necessarily walking away from active capacity, but more to where we think the market is headed.

Okay. That's great color, Tyson. Thank you. And then I know that with the release a couple of weeks ago, you walked away from the long-term margin guide. But I guess, as you think about coming through this restructuring and being on the other side of it. How do we think about what that could mean for the margins, both within Bedding and then within Leggett just as a total, relative to where we are today, anything that you can sort of give us in terms of a general path there?

Yeah. I'll take that one, Susan. So great question. Yeah. I think the restructuring is certainly important for us. I think it resets us for sort of the more forward-looking market environment. And I don't mean that from a capacity standpoint, as Tyson said, we're really looking at sort of the normalized growth that we would achieve in bedding over the longer term. But beyond that, I think we have other actions that we can take and we are taking. The biggest one, of course, is volume. So when markets are residential end markets start to come back with volume, that has a huge, huge impact on the EBIT margins for the company overall. But beyond the restructuring, I think we have opportunities to continue to optimize our operating efficiency making sure that we are being as effective as we can and that we are producing products and even in certain lines that are value added to us. Continuing to recover cost impacts outside of just raw materials and whether that's through pricing actions or continuous improvement activities are just new product introductions that give us those opportunities as well. And then, I think it's always been a priority for us, but to continue to closely manage our corporate costs, make sure that they're aligned with services that are providing value and improving efficiency. As we always say, continuing to drive innovation and providing solutions for our customers to enhance our partnership with those key customers as well. And then finally, continuing to assess our portfolio management. So we see that there's opportunity for us to continue to drive improvement for the longer term across the company beyond just the restructuring. There's restructuring is certainly important. It's near-term focus, but [Technical Difficulty] on these things. So I think we need to get to some visibility about the volume recovery, get more -- progress going on the restructuring and get some more insights into the benefits from some of these other items I mentioned, and then we'll get those targets back on the table. But certainly, we believe it's something that's important, and we're focused on it.

Okay. That's helpful. And then maybe I'll sneak one last one in for Ben. Everyone will get one this morning, which is, Ben, can you walk us through the change, when we think about the $500 million of operating cash flows from '23 million relative to the $325 million to $375 million that you guided us to for this year? And then I guess with that too, when you think about the long-term cash generation of Leggett, where can that come together and how do we think about, again, what these changes will mean for the cash flow of the business?

Yeah. Good morning, Susan and thanks for the question. I appreciate it. Yeah. So our guidance for this year is $325 million to $375 million as compared to roughly $500 million in 2023. So I'd say, the biggest drivers there are the contribution that we had from improvements in working capital in 2023, we're really outstanding. Our teams did a great job and we drove over $100 million of working capital improvements. So that will be a contributor to cash flow in 2024, but it will be a much lower contributor because we've done such a great job. And just those opportunities are still there. We still think we have some pockets, but it will be a little bit more smaller in nature. And then the second thing I'd mention is just the lower earnings with the volumes continuing to be lower, that's going to be another contributor to the lower cash flow this year. And then, the last thing is there's a little bit of a drag from the cash costs associated with our restructuring plan that will be a bit of a drag again on cash flow. If we think about from a longer-term perspective, I think it kind of goes back to the things Mitch and Tyson were just talking about with the actions that we're taking through, the restructuring and just other opportunities to drive operational efficiencies, those will really benefit us and especially as those volumes come back. I think Mitch just said it, but it's such a huge benefit to us with those incremental margins when those volumes are back to just normal levels or somewhere close to normal levels. So those are the biggest drivers. But I'd mention we’ll continue to manage our working capital really tightly and look for those opportunities to drive out costs and lower value items as well. But over the long run, I think that's kind of how I think about it.

Okay. All right. Well, that’s helpful color. Thank you, all and I’ll turn it over.

Thank you. Our next question comes from the line of Bobby Griffin with Raymond James. Please proceed with your question.

Good morning, . Thanks for taking my questions and let me also echo a big thank you and congratulations to Susan on your retirement. It's been great working and getting to know you for the last 10 years.

Thanks, Bobby. I appreciate you, too.

Yeah. I guess first, maybe let's start off in the Bedding segment. Obviously, a lot going on here to unpack with the restructuring stuff. I guess the first aspect I wanted to talk about is just the difference in the performance of ComfortCore and I guess the Open Coil part of the business. And I'm asking more in kind of the context of, by my math, it looks like bedding innerspring volumes for Leggett versus 2019 are down, call it, mid to high-30s. And the industry collectively is down maybe mid-20s to high-20s, right? So there's a fairly big gap there in Leggett volumes versus industry volumes. And so I'm asking, are the Open Coil customers going elsewhere, sourcing differently? Like what is driving that gap? And then kind of when we look at the go forward, how do we think about this restructuring and how it impacts the business with your vertically integrated steel mill because I think volumes really need to run through that to make that profitable. So just kind of connecting all that aspect is the question.

Tyson, I’m happy to hand that over to you.

Sure. Thanks for the question, Bobby. So I'll start just with the Open Coil part. We have seen just a long-term trend down in that category. Some of it has been just a shift from our customers from Open Coil to ComfortCore. So there has been -- some of that drag on Open Coil has just been a shift. There has been some different sourcing options, especially during the pandemic when things were short. And then there's also been some differences in U.S. steel costs versus Europe. So we have seen some growth in imported innerspring, especially on the lower end and then Open Coil. The other part you didn't mention but does get wrapped up in our volume around innerspring is wire grids. And that's been a significant decline in overall volume. And that's more of just a shift in consumer preference in type of foundations. So that also is impactful in overall volume in our innerspring business. The other part of it, back to rod mill, you're absolutely right. I mean volume is a critical part. As we have seen the Open Coil decline in wire grids, a lot of our products that go into ComfortCore also consume more wire because we have products that go fully to the edge, replacing some phone components. So there is still a an offset, even with fewer units, we are still driving tons. And right now, it is a big drag because overall it's the market where we are, we do have open capacity at the rod mill. But between market recovery and some of our efforts just to diversify out and selling into some industrial markets, we still feel good about the overall capacity utilization at sterling.

I guess two follow-ups on that, Tyson. I mean the different sourcing options that are popping up, I've noticed as well kind of just checking the industry. Are those -- is there a way to compete better against those? Does -- do we need to have lower pricing or do we have some type of different product offering to compete against the different sourcing options to maintain those customer relations? And then just more of a financial question. Hypothetically, if the rod -- or I guess not hypothetically, if the rod mill goes back to full capacity, what does that benefit? What is the drag on segment profitability from the rod mill running at partial capacity today?

Sure. Yeah. So to your first question, yes, I mean, our biggest job is to help our customers succeed. And so we want to make sure that we're giving them options to compete with especially just low-priced goods. So we will help them with VAV opportunities even on the low end, but also offering them different product options that help them compete there. I mean our restructuring effort is a big part of that as well. I mean us becoming more efficient utilizing our assets in a more efficient way in distribution is in a large part to serve our customer better and help them succeed. So all of those things factor in. I mean, definitely around the innovation, trying to do the VAV work and just in the different options is a way to help offset some of those low price options. And then overall, I mean, not just in the rod mill, but running all the way through our vertically integrated rod wire spring value chain and also at ECS, the volume has, by far, the most significant impact to our margin profile. So that would be the biggest driver of recovery overall for the venting (ph) segment.

Tyson, maybe just to add on there. So a little bit in the -- what you talked about is refocusing our strategy and not just focusing on volumes. So if we talk about the Open Coil opportunities are after [indiscernible]. We could go chase pricing, but that comes with our risk, right?

Definitely.

In terms of some of the financial stability to [indiscernible] participate in the market today and just what the margin proposals of those products would look like. Do you agree with that?

Absolutely Yeah.

Perfect. And I guess, Mitch, switching gears here, and sorry just to kind of zero on our margins, but I think that is the kind of the debate over the next couple of years. A lot of news in the bedding products and getting that restructured differently, specialized roughly a 10%-ish EBIT margin versus historical high-teens levels, auto production globally is coming back. What is the other aspects that need to happen there to rebuild the margin profile of that business over the next, call it, one, two and three years?

Yeah. Thanks, Bobby. I think that we have been making progress as we've gone through the last couple of years. We've seen still a lot of dynamics in the automotive industry, but we definitely see volume coming at back and that's helping and we see improved margins and in automotive we still have work to do and room to make those improvements, but we're definitely on the right path. Similarly, although, it's smaller in aerospace, very strong backlogs in the industry. So that volume will continue to come back, again, not as just as large of an impact as automotive, but it certainly will help. And then we're seeing a little bit of a challenge in the year -- in this year on hydraulics, where there's really strong backlogs, both in material handling and heavy construction markets. And we see, the strong backlog at least through the first half in the U.S. on the on that part of the market. But the heavy construction side in Europe, particularly in Germany, it seems like it may be a little bit more challenged in demand. So we’ll see some ups and downs. But I think that the progress that we’ve made over the last couple of years in specialized, I think, demonstrates our confidence in the ability to return back to a higher margin profile, certainly, maybe it doesn’t go back to the peak margins that we had. But certainly back to the higher margin profile that will provide a lot of benefit to the company.

Okay. I appreciate the details. Best of the luck here in the first quarter.

All right. Thank you, Bobby.

Thank you. [Operator Instructions] Our next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Hi. Good morning. This is Alexia Morgan on for Peter Keith. My question is on anti-dumping scenarios. I know we're expecting a decision later this month. Can you give us an update on antidumping legislation? And then what are the best and worst case outcomes that you're thinking about once there's a ruling?

Sure. This is Tyson. I'll jump in and tackle that one. So yes, we're a part of that. And kind of what we said in past cases, the U.S. industry just needs a level playing field, and that's really what the industry is after. No matter which scenario we think might play out. We fully expect to see some level of imported mattress activity. It may move around to some different countries. There may be some shoring in the U.S. for former importers. But we still see that dynamic playing out regardless of scenario. It really is difficult to say how much will come back to U.S. producers just given potential moves to other regions. Also right now, things are a little muddy just because ahead of a potential decision. We have seen a higher level of imports over the last couple of quarters, just I think with some of the importers attempting to get in ahead of any impose duties. So that will take some time to work through, especially in a really soft market. So we'll see what kind of overhang there is in kind of the near term. But overall, I think we would see just that kind of helps support the continued hub of the industry. So overall, I think we'd say it's still to be determined how much impact would come back to the U.S. producers.

Okay. Thank you. And then my next question is related to spring and foam pricing. Is there any deflation within those categories? And then any deflation baked into the sales outlook?

Sure. I'll take that one as well. Yes, we've seen commodities at prices, both chemicals and steel moderate over the last year. Over the last year, we've seen pricing in our specialty foam business decline, as we've been trying to compensate for those clients declines (ph) given that back to our customers. In our steel business, we've seen [indiscernible] last year, we saw middle margins decline overall. We also mentioned in the prepared remarks that we’ve also adjusted innerspring pricing just relative to overall competitive global steel market. In the past, we’ve seen Europe and U.S. steel be in a pretty tight range, but we’ve seen a divergence of that last year. So we have adjusted pricing just to fairly compensate for that with our customers. As far as 2024, there is – since most of the steel impact came in the back part of 2023, the full year annualization of those price changes would be reflected in our guidance.

Great. Thank you.

You’re welcome.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Branscum for any final comments.

Thank you for joining us this morning and your interest in Leggett, and have a great weekend.

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