Greetings and welcome to the Leggett & Platt First Quarter 2019 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, Ms. Wendy Watson, Director of Investor Relations. Thank you, Ms. Watson, you may begin.

Good morning, and thank you for taking part in Leggett & Platt First Quarter Conference Call. I'm Wendy Watson, Director of Investor Relations. With me today are Karl Glassman, President and CEO, Matt Flanigan, Executive Vice President and CFO, Mitch Dolloff, EVP, Chief Operating Officer and President of the Furniture Products and Specialized Product segment, Perry Davis, EVP and President of the Residential Products and Industrial Products segment, Susan McCoy, Senior Vice President of Investor Relations and Cassie Branscum, Manager of IR. The agenda for our call this morning is as follows. Karl Glassman will start with a summary of the major statements we made in yesterday's press release. Matt will discuss financial details and address our outlook for 2019. And finally the group will answer any questions that you have. This conference call is being recorded for Leggett & Platt in its 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 Investor Relations 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 had 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 section in our 10-K and 10-Q entitled forward-looking statements. I'll now turn the call over to Karl.

Good morning, and thank you for participating in our first quarter call. As we reported yesterday, first quarter sales increased 12% to $1.16 billion. Growth from ECS and other smaller acquisitions of 13% was slightly offset by a 1% decline in organic sales. Volume was down 3%, market share and content gains led to growth in US Spring of 7%, but this was more than offset by our decision to exit the fashion bed business, software demand in automotive and volume we chose to exit in our home furniture business. Raw material related selling price increases added 4% to organic sales but were partially offset by currency impact of 2%. First quarter earnings per share were $0.45. This included $6 million of restructuring-related charges and $1 million of ECS transaction costs that amount to a $0.04 per share reduction in earnings. Excluding these items, adjusted first quarter earnings were $0.49 per share, down $0.08 from $0.57 in the first quarter last year. Earnings benefited from improved metal margins in our steel rods business and the ECS acquisition even after $14 million of purchase accounting charges. However, these increases were more than offset by declines in automotive fashion bed, flooring products and adjustable bed as well as higher interest expense and a higher effective tax rate. We remain excited about the ECS acquisition and the opportunities it brings, demand for their proprietary specialty foams and downstream products is strong, even while the US bedding industry continues to be impacted by unfairly priced Chinese mattresses that are the subject of a pending anti-dumping matter, since filing the dumping case with the US International Trade Commission and Department of Commerce in September 2018, we have seen a notable increase in imported mattresses from China, which is impacted ECSs sales growth, we expect a…

Thank you, Karl and good morning, everyone. Reflecting normal seasonality, cash from operations was $31 million in the first quarter, a decrease of $13 million versus the first quarter last year, primarily due to increased working capital, a decrease in accounts payable due to the timing of payments and inventory purchases along with wind down activity at restructured locations, led to the increase in working capital investment, we ended the quarter with adjusted working capital as a percentage of sales at 13.4%, that percentage should come back down as 2019 progresses. We continue to expect our full year operating cash flow to approximate $550 million. In February, we declared a $0.38 per share quarterly dividend and extended our record of consecutive annual increases to 48 years. We fully expect to continue increasing the dividend as we repay debt associated with the ECS acquisition. At Friday's closing price of $42.01 our current yield is 3.6%, which is one of the highest yields among the 57 companies that comprise the S&P 500 Dividend Aristocrats. In keeping with our deleveraging plans, we repurchased only 300,000 shares of our stock at an average price of $40.38. These were primarily shares rendered by employees for option exercises. We issued 1 million shares during the quarter primarily for employee benefit plans and stock option exercise, after completing the ECS acquisition in January, we ended the quarter with debt at 3.6 times, our trailing 12 month proforma adjusted EBITDA. We are committed to maintaining a strong investment-grade credit rating and expect to deleverage to a target ratio of debt to trailing 12 months EBITDA of approximately 2.5 times by the end of 2020. We will do this by temporarily limiting share repurchases, reducing other acquisition spending and using our operating cash flow to repay debt. In addition,…

That concludes our prepared remarks. We thank you for your attention, and we will be glad to answer your questions. In order to allow everyone an opportunity to participate, we request that you ask only one question and then yield to the next participant. If you have additional questions, you're welcome to reenter the queue and we will answer those questions as well. Michelle we are ready to begin the Q&A session.

Thank you. [Operator Instructions] Our first question comes from the line of Peter Keith with Piper Jaffray. Please proceed with your question. Our next question comes from a line of Susan Maklari with Credit Suisse. Please proceed with your question.

Good morning, everybody. My first question is just you know, now that you've actually closed ECS and had some time with it this quarter, can you just talk to -- was there anything in there that has surprised you how the integration is going and it seems like things are on track in terms of the guidance that Matt talked to in the sales line, but just talk to us generally about how it's going, especially with the impact that is seen from imports maybe?

So if you don't mind Perry Davis, I'll address that. I just said in an integration meeting at the end of last week, which we have on a regular cadence and I can tell you that the level of engagement between the Leggett folks and the ECS people is extremely good. We're tracking a lot of different work streams that range from sales and marketing all the way to IT integration and a lot of the back office functions and it's going very smoothly. We have some great people working on that, tracking that, facilitating that and we're quite pleased, we sensed prior the acquisition, the cooperative spirit of those people that ECS and I'm happy to report that our expectations, they have been realized and working together quite well.

Okay. thank you.

Add to that, from a business perspective, the surprise is that we knew at the time of the acquisition that we were starting to see some chemical deflation. So it's pressured selling prices, a little bit, but certainly not profitability and margins are enhanced as a percentage. So not a big surprise because TDI had -- had increased significantly and now is coming back. So we're seeing deflation, but it's from legacy from a profitability standpoint, it's not at all negative. The surprise probably has been the point that you started to make and that's the significant storage of dump products in advance of the ruling that we expect will take place by statutory rules, the end of May. So there is a 90-day look back from a retro duty perspective. So we knew that product it come into the country before the end of February was in effect duty-free. But the significant surge of imports 17% -- 71% in December, 63% in January, 56% in February has surprised us. So which dampened not only ECS is volume, certainly the whole US industries volume, so it impacted the conventional players in the US as well. We expect that we'll start to get some relief. The challenge is, there's a lot of inventory in this country, it's being peeled out, but it will take a while to all sort through. So we're certainly optimistic about the duties in the duty rates. We are really pleased that we made the ECS acquisitions, there is a whole lot of conversation. Perry has been involved with Chris Chrisafides who runs ECS and the rest of the ECS team and our historic Bedding group, about new programs of on-shoring and reshoring, part of US growth has been the growth of hybrids and boxed and in conventional platforms. So things are going really well. But those were kind of the two surprises.

Okay, that's helpful, Karl. Thank you. And then just following up more broadly, I guess, as we look across your end markets you've talked to weakness in autos obviously, globally I know carpet underlay had some pressures this quarter and I guess, we've kind of heard that coming out of the fourth quarter, it seems like the year started off a little slow, but then has kind of improved as we move through closer into the spring. Can you talk to what you've seen in bedding and our housing markets and those kinds of things and how you're thinking about demand coming through as we look out?

So Susan this is quite an argument, in bedding, I can tell you that as we progressed through the quarter, it got stronger and stronger, relatively good sales promotion and activity around President's Day. But again, the impact of the imports, it's hard to gauge because, we perceive that there is so much of that in the system. But I can tell you as the quarter went along the cadence got quicker and more robust. We actually saw in one of the other business units, that's been a factor that you mentioned in carpet or in our flooring products group. We did see some headwinds at the start of the year, some of that obviously construction related and weather impacted. But as we go along now and we entered into the second quarter, we've seen our business volumes there recover and where we're bullish on that business as we go forward. Now, we're beginning to see some raw material relief there also.

Okay, all right, that's helpful. And what about you know, just thinking in terms of some of your more industrial end markets, I know hydraulics had a really good quarter. But can you just talk to what you've been seeing on that side in general?

Sure. Susan. This is Mitch. Let me start with auto. As you probably recall that production, the vehicle production forecast has declined consistently since the middle of last year, in fact vehicles are down almost 2.8 million vehicles since the December forecast with over 2 million of those units coming out of the first half of the year. So we're looking at a forecast for the market that shows continued softness in the first half of the year with production down year-over-year about 5% and then the forecast improves in the back half of the year with production increasing year-over-year, 3% to 4% and that's pretty much that's reflective of the trends that we see as well. Remember that, so we're facing pretty tough comps with the first half of last year being pretty strong and then falling off in the back half. So we expect to see a reverse of that this year. In PHV in the hydraulic cylinders. Yes last year was very strong. I think unit growth in Material Handling was up nearly 15%, Q1 was actually a little bit softer down about 3%. We now have good industry forecast there. So we ---unit pressure remains strong. But we'll keep an eye out for that. Aerospace build remained strong, so that we're in good shape there as well.

Thank you. Our next question comes from the line of Peter Keith with Piper Jaffray. Please proceed with your question. Mr Keith is your line on mute?

I'm here. Sorry about that. I've had that finger around the mute button this morning. I do have a question just follow-up to Mitch. So interesting on the auto forecast down 5%, but then pretty sharp inflection in the back half of the year I guess up 3% to 4% would seem to run above historical demand figures that seems a little overly optimistic, I guess, do you, what do you think that forecast would be driving that sharp acceleration in the back half?

Well, I think you have a lot of uncertainty that had been negatively impacting the back half of last year and into the first half of this year, particularly the trade disputes impacting North America, China, and the European Union. I think we are impacting consumer confidence certainly, retaliatory tariffs in China have reduced demand for inputs there. They continued steel and aluminum tariffs are raising transaction prices in the US slowing sales and those are really coming through lower incentives that the consumers having to absorb and then we also had the the WLTEP emissions testing backlog last year and I think it's starting to work itself out. But people expect, we'll be in better position in the second half of the year. And then I think finally, there is an expectation that will be tax incentives in China, that will help boost demand in the second half of 2019. So, I think that part of the year-over-year negative reflection in the first half is that it was really strong in '18 and we see a softer in '19 and we have the reverse scenario, so I don't think that production rates that are forecast in the back half are unrealistic.

Okay, that's helpful. Thank you. And I actually wanted to pivot the next question back to Karl around ECS and I certainly agree with the acceleration of Chinese imports. But my impression was that imports are trying to get ahead of potential duties so that they would have inventory in place to last potentially through Q2 not as the demand accelerates and we haven't seen much pricing change on the import pricing, at least when we see online. So I guess, for the -- the core of my question is, why would the acceleration imports be impacting overall demand trends as it relates to ECS?

I think it's a continuation of low-cost product being sold in the country and the surge that exist in that inventory. So it's the growth that really started in 2016 and the acceleration of that growth continues to pressure the entry price points in the US, which the first quarter is heavily sensitive to that seasonality. So there is a continuation of a loss of business, to imports, so you know, here I fundamentally agree with your point, that it's just -- it's an acceleration. The inventory is a bigger issue from a go-forward perspective that we expect will be melted off probably sometime by the end, middle of the end of the 3rd quarter. It will be interesting to see what the import statistics for March look like, but short answer is a continued pressure on the entry price points in the US. And from our perspective and from an ECS perspective, there had been a lot of conversation and continues to be a lot of conversation of the domestic players moving to US sourcing, some of them are reassuring a good part of them are onshoring for the first time and as that inventory continues to grow, the start of those ECS programs gets pushed out. So there is a backward forecast in ECS that we think is appropriate and they will also be an impact, a knock on benefit to our conventional US spring business and as I said in the prepared comments to the US bedding industry as a whole.

Okay, thank you. And I do agree with that onshoring comments, just lastly on that residential segments, so the margins continue to trend down, I thought by this point with ECS and stabilization in steel that at the margins there would be flat to up. Could you give us a little color on that specific segment?

Well, remember ECS pressure is EBIT margins in that segment. I wish we could report EBITDA margins, that's the issue.

Okay, fair enough. Thank you very much guys. Appreciate it.

Thank you. Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question.

Yes my question is in the furniture segment. How much of the businesses that you're exiting, how much of the 5% decline does that represent?

Yes, most of it for sure, the significant declines in that fashion bed business I think it was down by 30% and home furniture down 12%. There is little bit of decline in adjustable bed as well, but most of -- of that is from home furniture and fashion bed.

I'm sure we get out of those, because they are not very profitable. So, I was surprised that the EBIT was down so much on that decline. What's going on with that?

Well, I think that you have a couple of factors. You have some restructuring costs that are running through there, particularly the fashion bed business in lower margin, and so we are exiting now, we are not exiting the home furniture business, we've undertaken some significant restructuring activity really over the last several quarters there. And that business is stabilized and actually performed pretty well. We still have some work to do, but we saw margins improve there. So yes, negative impact from fashion bed also down a little bit in adjustable EBIT.

And just finally on adjustables, can you talk about, I mean, it still seems to be all the rage in the mattress industry, what, why your business is down, what's kind of the outlook?

Yes, you're right our growth definitely began to slow in Q4 in adjustable beds and that continued in Q1 with sales down 5%, some ups and downs for sure across the different customer base, volume was negative impacted there also by our decision to exit fashion bed, fashion bed had been way to distribute to some smaller retailers adjustable beds, but it just wasn't economical for us to continue to do that. Given the decline in the other fashion bed product categories, 2018 was really volatile with really strong sales based on heavy promotional activity in the first half of the year and then a slower second half of the year. So this definitely presents challenging counts for us in 2019 like we see without the heavy promotional activity we see 2019 volume probably down somewhere in the mid-single digits. So you're right that there continues to be growth in the industry at stronger growth at really lower entry level price points. We tend to play a little bit higher price points.

Okay. Thank you.

Indeed that the risk is talking about specific customers. I feel like we need to get only this business, because as you know we're heavy weighted to Mattress Firm and sleep number in our adjustable bed sales, so Mitch is exactly right. Remember, Matt firm was incredibly aggressive from a promotional perspective in the first half of last year with fewer stores and a change of philosophy. We expect that, that will be muted significantly. We're pleased with our Mattress Firm program. We think that the current program is healthier than the historic program, sleep number is doing just fine. So, I just don't like to talk about specific customers, but felt like we needed to be here .

Thanks, Karl. I would just add on to that too, in that second half of last year we struggled through some inventory overhang and adjustables and I think by the end of Q1, we've largely worked through that. So we think we'll see some improvement in the second half of the year as well.

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

Thank you for taking my questions. I just want to circle back on Susan's question from earlier. And maybe could you just give a little bit more color what you're either hearing from customers or seeing in some of your large business units throughout the quarter. That gives you and the team the confidence around the full-year sales guidance?

Yes, Bobby, this is going to take a little while. But I read your quick note, I'm going to give you and everyone listening, kind of a quick view of each business unit, so we'll go business unit by -- business unit organized by segment. US spring, you saw 7% growth, we expect that to continue. Certainly the bedding industry was impacted in January and February to Perry's comments by weather but there's an acceleration of our content gains market share pickup hybrids are a contributor to that. We expect dumping benefit in the -- certainly in the back half in US spring, so everything's really going well in US spring. I made the comments on ECS, we expect their back-half business to significantly improve, international spring performed well in the first quarter, we expect that to continue. There's a story by geography. Perry made a comment on flooring significantly negatively impacted in January, February. I think that's highly correlated to weather, so again in March, we expect kind of flat for the whole year there, fabric converting highly correlated to bedding and furniture, for the full year we expect flat -- because of acquisitions, we expect 20% growth in that business and machinery is relatively small, it will be flat to slightly down, because of softness in the US bedding industry. Industrial, you saw a negative in the first quarter that was caused by our closure of a formed wire business, the anniversary is actually next week. So with cost in the first quarter, about $10 million of volume. So that negative will not repeat in the remainder of the year. Echoing some of Mitch's comments, work furniture, we expect mid-single digit growth through the year. Home furniture should be flat with units down, dollars up because of the benefit of pricing actions that were taken in the back half of last year. Mitch, both to the impact of the FPG closure and adjustable beds, auto for the year should be up mid to high single digits. Aerospace and hydraulic cylinders both up in about 10% range. So we feel really good about our guidance. I will admit that the sales guidance is probably more questionable than the EPS guidance, but as we sit here you know, end of April, we feel pretty good about our guidance.

I appreciate all that detail that was a lot and very helpful. So thank you a lot and very helpful. So thank you. And then I guess also on Mitch on the comments about the decision to exit some of the bedding, fashion bed business and furniture products business, was that, if I take the math and I do the math on that, was that basically a 1% drag to consolidated volumes as well, your own decisions to exit those businesses?

Bobby we are in thinking about the math here for a second.

Probably a little bit more than that Bobby on an annualized basis, it's not a huge hit to the sales line.

Okay, that's helpful.

And sorry. It's a little bit tough to predict as we decided to exit fashion bed. We're really in a mood of liquidating that inventory so we're out of a normal kind of some of the selling cycle, that's going really well. We're having a lot of success with that. But it's just started thinking about that.

And remember fashion bed was shrinking as the year progressed last year too so.

$40 million to $50 million is what 1% percent looks like and maybe a little bit more than that, but not a lot.

Okay. And Susan, I didn't hear you that in, it's a little stronger in Q2, is that what you're saying? I couldn't -- the phone broke up a little bit. I'm sorry.

No, I said $40 million to $50 million, this what's a 1% decline looks like in the downdraft because of our exit of much of that volume is probably I'm little bit larger number than that, but not a lot.

Okay. Okay. And then should I expect some similar in Q2, then and then we start to anniversary and we start starting to lessen throughout the back half?

Well, Bobby to be clear, the 40 to 50, is an annual number, not a quarter number.

Okay.

And second quarter, Mitch?

Yes, I think it goes the other way, at least in regards to fashion bed. So in 2018 trade sales and fashion bed were something like $170 million as we ramp it down. I think they were a over $30 million in the first quarter, I expect they're probably closer to $20 million in the second and third quarter spread across there and then probably very little if anything by the fourth quarter.

Yeah initial 1% a little more.

Okay. I appreciate the detail. And then I guess lastly, also is when we model in ECS does that business follow the kind of typical seasonality of the bedding business that where we're used to, with the holidays, causing spike in three Q being a big quarter?

It's a little bit different, Bobby. We would expect that fourth quarter buy would be a little more skewed to the busier season and the reason for that is the amount of product that's moved on Black Friday and Cyber Monday, that is a tremendous injection of volume that happens around that time frame. We also see some product toward the end of the year in December and Christmas and things like that. So it's a little bit more skewed. Now, the part of the business that's related to box, beds and that type of product that probably would follow a little more seasonal -- seasonality, that's traditional. But remember, it's not all that it's things like toppers and pillows and other products that are lending themselves more to promotional activity around those a year end events. That's a very good point it's more e-commerce sensitive so it has more of e-commerce cycle than a traditional brick and motor cycle.

Okay, I appreciate the detail. Thanks for answering my questions again, and best of luck going forward.

Thank you, Bobby.

[Operator Instructions] Our next question comes from the line of Dan Moore with CJS Securities. Please proceed with your question.

This is [Stefan Oskris] calling in for Dan Moore. My apologies if you've addressed this in prior calls, but given the new mix of these ECS can you walk us through your COGS on outdated basis of a percentage like raw materials versus labor?

Stephan, this is Susan. We don't have that updated from our historical presentation. I don't know what the revised split is.

Yes, we are going to need a little bit more time, remember we only ended less than a quarter. But yeah, let us say it's a good question we going to update that schedule. Obviously there is a chemical element that is while chemical input costs have always been an issue to our flooring products business is significantly larger now with the ECS, so, yes good question.

And we are actually in the process of doing that update, we just don't have it done yet. It will be soon.

I will jump back in the queue.

Our next question comes from the line of John Baugh with Stifel. Please proceed with your question.

Good morning and thanks for taking my questions. I was wondering on content gains that you referenced in bedding, is there any way to quantify sort of what you're seeing year-over-year in Q1, what you expect to see for the entire year of '19?

Yeah, first quarter, we used to talk about. I was -- I thought that comfort core as a percent of the units that we sold likely would top out somewhere in the mid '40s as a percentage range. Well, in the first quarter of this year, copper core was actually 50% of the units sold is up about 24% if you look year-on-year. And then the other layer on content gains is not only the shift from open core to comfort core but the quantum part of the story and that was 43% of all the comfort core that we shipped in Q1 had a quantum edge element to it. So why do we attribute that to? I think it's a variety of things. But there's clearly a preference in the mid-line premium categories of comfort core and also on the box bed category. We're seeing continued penetration and expect that to go even further in the future, quantum edge is so prevalent and becoming so prevalent in box beds, because of the product itself is so good it just makes sense. Our customers see the benefits of that product in that it opens up and it has from the start from the opening process an enhanced edge prior to that most of the foam products and a lot of the the inner spring products had no support on the edge. This product does, it's got integrity, and it stays through the life of the mattress. So we're excited about that. And again, all those products as they get sold through that's additional volume for us and that's an additional opportunities for margin and it makes a great product.

Okay. And then, I assume we're anxiously awaiting this March China import data number one and we're awaiting to get a final duty number two, and I assume you have better guess where those may come in than I do, is there any way to quantify in your guidance. Once all the inventory, excess inventory that's been built ahead of these duties, what kind of impact favorably you're expecting in your bedding business, is there anything and say the back half or I think you mentioned middle of Q3 like see all the inventory work that, what do you expect the benefit maybe?

It's hard to say. John, I can tell you this, if you take there 7-8 million mattresses run rate that was coming from China, some of that goes elsewhere around the world. Obviously, we think a lot of it gets repatriated to the US and we're seeing our coal process in both among traditional customers and the box bed part of the business would indicate that there is a lot of that going to reshore, and it's a tremendous opportunity for us and for the industry and that's the reason for the filing. If you look at the schedule, as we know what today around the end of May commerce will make a preliminary determination of duties if those are favorable. There's also among the petitioners beyond the filing to have some retroactive element applied to those duties and that would be a 90-day look back if it's approved. We don't know for sure that it will be, but we believe will put a cooling effect on all of that importation, we think it already has. And if you look at the 90-day look back from the end of May in the February, so it will be interesting to see what the March numbers look like when we finally see those, but we expect the level of importation to certainly decelerate and to the degree of how quickly that happens, I don't know, but I think that the word is out. I think from all indications, we would look for a positive finding at the end of May, and that begins to flow through, will there be other glator products still sitting out there, all through the second quarter? Don't know. Could be, it's just hard to know where those sit.

John, the other element to that is, as you know, most of the imported product today is phone and as we have conversation with our customers, as they talk about new product lines don't no longer have an expectation that they'll compete against a $200 that there is a lot of conversation about hybrid and, it goes to the conversation that Perry had a minute ago of comfort core and quantum edge so both the ECS level and the historic Leggett level and again, hard to quantify, but there is an expectation that whatever percentage of those 8 million units come back, a higher percentage of them will be hybrid, than are currently formed today. So we're excited, mostly because of conversation with customers. You would know that -- launched on their website, a hybrid effective two weeks ago, so that's new, they and other customers are talking about hybrids where historically had been foam. So the combination of our comfort core and the exclusion of materials from ECS are really, really powerful.

Okay. And secondly, just I guess a question, a clarification, given your commentary about China imports being higher than you'd thought and that being mostly foam product and impacting ECS, you are not changing at all your post January forecast for revenue growth for ECS for the year?

We are not, we are optimistic that we don't have to change.

And why would that not be the case, if you know really imports in January and February and presume or December were a lot higher than you thought?

It wasn't in our original guidance, the benefit of the surge wasn't in our original guidance. I would say, if you look back, this whole process on dumping has been delayed out about 40 days because of the government shutdown and we would not have known at that time, the timing of how that would affect the timing of this.

Thank you. There are no further questions at this time, I would like to turn the call back over to Ms. Watson for any closing remarks.

Thank you everyone and we look forward to talking to you again next quarter.

Thank you, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.