Greetings, and welcome to the Leggett & Platt Third Quarter 2021 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, Susan McCoy, Senior Vice President of Investor Relations. Thank you, Ms. McCoy. You may begin.

Good morning, and thank you for taking part in Leggett & Platt's third quarter conference call. On the call today are Karl Glassman, Chairman and CEO; Ms. Dolloff, President and COO; Jeff Tate, Executive Vice President and CFO; Steve Henderson, EVP and President of the Specialized Products and Furniture, Flooring and Textile Products segment; and Cassie Branscum, Senior Director of IR. The agenda for our call this morning is as follows: Karl will start with a summary of the main points we made in yesterday's press release, Mitch will discuss operating results and demand trends, and Jeff will cover financial details and address our updated outlook for 2021. 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-Qs entitled Risk Factors and Forward-Looking Statements. I'll now turn the call over to Karl.

Good morning, and thank you for participating in our third quarter call. Yesterday, we reported record quarterly sales from continuing operations of $1.32 billion, EBIT of $144 million and earnings per share of $0.71. Sales in the quarter were up 9% versus third quarter 2020 and reflect the pass-through of significant inflation in 2021, partially offset by lower volume in several of our businesses. When comparing to the pre-pandemic results of the third quarter 2019, trade sales grew 6%, adjusted EBITDA increased 1% and adjusted EPS was flat. Like many other companies, we continue to navigate a myriad of macro market challenges, including supply chain issues related to semiconductor shortages, foam chemical shortages, labor availability and freight challenges as well as higher costs associated with each of these issues. Given this very challenging operating environment, we are extremely pleased that our teams were able to deliver third quarter earnings in line with a pre-pandemic and relatively strong third quarter of 2019. We narrowed our full year guidance range for both sales and EPS, primarily reflecting lower expected volume in our Automotive business due to declines in global production forecast. Jeff will provide more detail on the updated guidance later in the call. Leggett remains well positioned, both competitively and financially to capitalize on long-term opportunities in our various end markets. Our enduring long-term fundamentals give us confidence in our ability to continue creating long-term value for our shareholders. With that, I'll turn the call over to Mitch.

Thank you, Karl, and good morning, everyone. First, I would like to thank our employees for leading us through another challenging quarter with great success. Your determination and agility helped us to navigate the material, labor and transportation issues that Karl mentioned, allowing us to better serve our valued customers. I greatly appreciate your commitment, ingenuity and forward-looking viewpoint. I'm proud to be a part of your team and of all that we've accomplished together. Sales in our Bedding Products segment were up 13% versus the third quarter of 2020, and up 10% versus the third quarter of 2019 primarily from raw material-related selling price increases from inflation in steel, chemicals and nonwoven fabrics. Volume was down in both the 1- and 2-year periods, primarily due to chemical shortages, labor availability and transportation issues, which continue to constrain U.S. mattress production negatively impacting component demand and our finished goods production. Availability of chemicals used in our Specialty Foam operation is slowly improving but remains challenging and dynamic. We import chemicals to supplement domestic supply, but port delays and logistics issues are limiting access to those products. We now see chemical challenges continuing into 2022. Our European Bedding business softened during the third quarter as consumer demand returned to more normal seasonal levels. In third quarter last year, market demand was very strong as OEMs and retailers built inventory and COVID restrictions began to ease. We anticipate long-term growth opportunities in Europe from the Kayfoam acquisition we completed in June. Similar to the trends we've seen in the U.S. Bedding market over the past several years, European consumers are purchasing more mattresses online and in compressed form, increasing demand for specialty foam and hybrid mattresses. We are well positioned to support our branded mattress customers as a supply chain partner for…

Thank you, Mitch, and good morning, everyone. In the third quarter, our cash from operations was $50 million, down from last year's third quarter record of $261 million, primarily due to planned working capital investments to build and maintain the higher inventory levels that Mitch discussed earlier as well as inflation in the cost of those inventories. With the expectation of carrying higher inventory through the end of the year and lower forecasted earnings, we have reduced our full year operating cash estimate. We now anticipate cash flow from operations to approximate $350 million in 2021. At the end of the quarter, adjusted working capital as a percentage of annualized sales was 14.3%. Through September, we brought back $232 million of offshore cash and currently expect to return over $240 million of cash for the full year. In August, we increased the quarterly dividend by $0.02 to $0.42 per share. At an annual indicated dividend of $1.68, the yield is 3.6% based upon Friday's closing price of $46.85, one of the higher yields among the S&P 500 dividend aristocrats. This year marks our 50th consecutive year of annual increases. We're proud of our dividend record, and we plan to extend it. During the third quarter, we used our commercial paper program to repay the remaining $280 million of the Term Loan A issued when we acquired ECS. We also amended the terms of our $1.2 billion revolving credit facility and extended the maturity to September of 2026. Our strong financial base, along with our deleveraging efforts over the last 2 years give us flexibility when making capital and investment decisions. We ended the quarter with net debt to trailing 12-month EBITDA of 2.41x, and $965 million of total liquidity. Our long-term priorities for use of cash are unchanged. They include,…

Thank you, Jeff. That concludes our prepared remarks. We thank you for your attention, and we'll be glad to answer your questions. Karl will direct our Q&A session as the group answers questions. Darryl, we're ready for the Q&A.

[Operator Instructions] Our first question has come from the line of Susan Maklari with Goldman Sachs.

My question is around maybe could we get some more color on what you're hearing from some of your customers in terms of auto production, understanding that chip headwinds are obviously pretty tough out there? But just any kind of incremental commentary around what some of the OEMs are telling you? And any regional difference as you think about the different parts of the world that you're seeing in terms of production levels and availability?

Well, Mitch will answer the question, and we'll kind of marry that with some IHS data, which helps us from a directional perspective. But Mitch, why don't you go ahead and start it, if you don't mind?

Yes, sure. Thanks, Karl. Yes, let me take a shot at that. It's kind of mixed signal still from the OEMs, right, as they're challenge with understanding what their production schedules are going to be as the chips situation remains very dynamic. But if we step back to the July IHS production forecast for the major markets, so that would be North America and Europe and the sort of developed Asian countries, which is most impactful to us. As we -- that July forecast showed year-over-year production being up just under 8%. And so then it has declined and had been declining sort of month-to-month in small increments. And then all of a sudden in September, took a big drop down, which I think became sort of more realistic to what's actually happening out there in the -- with the chip availability and then took another step down in October. So now we've gone from being up 8% year-over-year for 2020 to down over 2%, is the forecast. And I think there's still risk there. But I think, again, this is -- chip production on OEM production that trails back to us. From our standpoint, we do use some chips, but they're pretty generic and we've so far been able to navigate the availability there. So this is an industry impact on us. As we look into the third quarter here, we would see production for the major markets was down almost 23% year-over-year, and the outlook for Q4 is down just about 20%. So I think it continues to be challenging through the remainder of the year. And then as -- for the forecast looking out into 2020, I think you see year-over-year, maybe down a bit in the first quarter and maybe a little bit of improvement in…

No, that's very helpful. That was great, Mitch. And my follow-up question is you've obviously proven the ability to get price even this quarter across Bedding and Furniture and Flooring. I mean, you're seeing that kind of mid high teens pricing. Where are you just kind of across the business as you think about price cost? And how should we be thinking about that as we look to 2022? Are you positive? Are you fairly caught up? Is there more to come? Just any color there.

Yes, sure. Yes, I think we're in a really good spot. I mean, I think that we have been -- made some changes in some of the restructuring we did in Home Furniture to walk away from sort of lower margin of business, commodity business, has allowed us to be more impactful in passing along inflation. And I think inflation levels are high enough that we're having to pass it along. Our customers are having to pass it along, and it's just a different dynamic than historically. So I feel like we're pretty well caught up. Sometimes we have a bit of a lag. But let's say, for example, there was a chemical increase that came through sort of in the mid of the third quarter. It took us a little bit longer than it had to pass that through. But now that's through as well. So I don't see that dynamic changing. I think where it's most challenging, of course, is in the Automotive side, where we have long-term contracts. But we don't have the same kind of inflationary impacts that we have, say, across steel and chemicals and nonwoven. So we're able to offset those either through discussions with our suppliers or through delayed or eliminating the sort of annual price downs that are traditional in that industry or through other VA/VE activity. So I feel like the teams have done an incredibly good job of passing through the inflation that we've seen so far. And I think we're well positioned to do that, should it continue.

To follow on to that, Susan, that as Mitch said, I think we're fully caught up now with the foam increase that went into place early October. The issue that's out there is it looks like there'll be some steel inflation, some scrap forecasts are up in November when scrap settles here next week. So I think that we'll probably see some continued inflation in the steel market that will recover as we always do with a historic lag. But we're not done from an industry perspective as it relates to steel. So some people have asked about metal margin. I expect that the metal margin is sustainable for the forecastable future and may even expand because of really strong demand signals augmented by commodity inflation and basic scrap.

Okay. That's very helpful. I'm just going to squeeze one more in, which is kind of continuing on this conversation of price versus volume. When we look at the update to the margin guidance that you gave and that incremental move down, my assumption is that's really reflecting all the pricing that's coming through while the volumes have come off. As we think about next year, if we assume that, that volume recovery starts to come back in and production levels rise kind of across Bedding, Autos, all these segments. Is it fair to assume that you should see incremental margin along with that?

Yes. It's -- I think your suspicion is correct. It's volume dependent, Susan. We need productive activity, and we need some supply chain stability. So we get past the manufacturing inefficiency that's caused by the supply chain disruption. So units and predictable supply chain would go a long way in adding incremental margin.

Our next questions come from the line of Bobby Griffin with Raymond James.

I guess, first, I want to, Karl, since you brought up on Susan's questions, just touch back on steel real quick. There's been over the last couple of days some talk about changes in the EU, U.S. aluminum and steel tariffs. I don't quite know exactly what's changing or if it's been settled completely yet. But do you see any impact to Leggett from those changes? And anything there that could to change the dynamics happening right now with the steel and rod spread?

Bobby, it's a really good question. And we actually don't know what those negotiations are at this point. We do not believe that they'll have an impact from the standpoint that the Steel business is truly local. And the U.S. rod and wire producers have been assisted by antidumping actions that are in place, will continue to be in place that are separate and apart from any tariffs. So we do not think that it will be disruptive in any way. Somewhat dependent on a strong EU economy and the steel market in the EU itself is pretty tight, too. So while it's early, we don't expect any really impact at this point.

Okay. That's helpful. And then I just want to maybe also touch on Automotive. Clearly, a very dynamic supply chain environment. And I was just curious from your perspective, is there things you guys can do where you're prepared when the chip availability at least comes back? And maybe talk a little bit about the ability of the Automotive segment to ramp up quickly in production? Because I have a feeling once chips open back up, there's going to be a flood of orders from the OEM to try to get these cars back on the lots and stuff.

Yes, it's a great question.

Mitch can take it.

Yes, sure. Thanks, Karl. That's a great question, Bobby. I think -- one, I think that there had been this optimism of, hey, these are going to -- this is going to get resolved one day and it's going to come pouring back. And I don't think that that's what it looks like. As we talked about, I think we see some modest improvement through the first half of next year. But I do think, I mean, a really important point to this is that the consumer demand for vehicles is very, very strong and inventories are very, very low. And so at some point, you are right, When this constraint resolves itself, there's going to be a very strong tailwind for us and for the industry in general. But not only to get vehicles on the lots on service demand, but then to build back up inventory levels. Fortunately for us, this -- a lot of the automotive production is more automated than some of our other production. And so I think that there's not -- I think it's that balance of making sure that we're maintaining the appropriate levels of labor, as I mentioned, like investing in our labor force and these times are difficult to bring people on. And as we see things start to improve, we'll make sure that -- I think that it will have visibility and time to continue to ramp up. But I don't think it's equipment adds or things like that.

Okay. That's helpful. And then lastly for me and I'll turn it over. Just, Karl, inside the Bedding segment. Clearly, hard to kind of see what the industry does on a quarter-by-quarter basis. But maybe can we unpack the U.S. spring volumes and the foam volumes versus what your expectations or what you kind of heard how the industry -- the U.S. industry performed in 3Q? And is there any way to maybe parse out what some of the labor and availability challenges cost from a volume standpoint?

Well, that is a complex question, Bobby, and we're going to actually take it back. Mitch and I have been talking about this a lot, so he's going to answer it. But we're going to kind of take you back in history a little bit to give you kind of a status update of where we think the industry, where it's come from. So Mitch, if you don't mind, will you unravel all that?

Yes. Let me take a shot at it, Karl. So Bobby, let's focus on the U.S. Spring side here first, right? So on the component cycle here. And we've been in a little bit of a different cycle dynamic than the industry. So if we step back and we think about Q2 of last year, when the pandemic hit, everything slowed down. We had the surge in need for medical products. And so all of a sudden, at the end of the second quarter, demand started to creep back up. We all thought that was a great thing. And then really became very strong in the third quarter of last year. And for us, we had nonwoven shortages, we had labor shortages. So we were sort of the first negatively impacted by all of these supply chain constraints that are so common in our dialogue today. And so in the third quarter of last year, we were just literally depleting our inventory and making all we could, but we couldn't keep up. And you probably remember those challenging times for us. But so from a comfort coal perspective, for example, that was a -- Q3 of last year was even higher than of 2019. So it was a bit of a peak for us. And again, just depleting our inventory. And then as we went into Q4, our volumes dropped significantly, not because there wasn't demand but because we just couldn't get the labor in the nonwovens material that we needed to keep up. We also, at that time, walked away from a decent volume of low-margin Open Coil business. So that has been a bit of a drag, but from a sales standpoint, but not really from a profitability standpoint. Since that time in, call it Q4 of last year, been sequentially improving our production and our sales. And so I guess as we went through that time where we were unable to fully support our customers, they -- not surprisingly, some of them turned to some imported product, which finally started to come towards the end of last year. More of it sort of hit at the beginning of this year just as the OEMs then started facing their foam shortages and then later some of their labor constraints. So there was a bit of excess inventory that's been worked through. Now we have the data with hindsight that shows like those imports of component intersprings are coming down, and our volumes are sequentially improving and have every quarter since the fourth quarter of last year. So we're just on a little bit of a different dynamic cycle. And so as we said, we are here with strong inventory position, keeping labor in place to be able to support our customers as their production improves. And they work through their backlogs, work through the foam shortages and their labor constraints and move into next year. Let me pause there. Does that help?

Yes, that's helpful, Mitch. I appreciate the detail. Sorry to end on a complex one, but I do appreciate you taking the time to walk through it.

Okay. All right. Great, Bobby. And then I think if we say from a foam standpoint for us, Q3 was also very strong from an ECS standpoint just because of the business we were winning. And then more in line with the overall industry, we hit the chemical constraints that have been continuing to impact us but are hopefully getting a little bit better in Q4.

Our next questions come from the line of Peter Keith with Piper Sandler.

Maybe I'll just follow up on that last comment from Mitch just around the Foam business and feeling pretty good about it. I'm having a hard time reconciling the negative 17% drop in volume year-on-year. I know there's the chemical constraints, but we thought at this point, you'd be having some benefit from antidumping and it does seem like the demand backdrop through Q3 has been pretty good. So can you just help me understand what's going on with that drop in volume?

Sure, Peter. I'll take a shot at it. I think maybe you misunderstood my comment. So what I was saying was that our volume was really strong in the third quarter of last year at ECS as we were winning new business. And then our impact has been more like the overall OEM industry impact as we've continued to face supply chain constraints due to chemical shortages throughout the year, including during the third quarter. I think the outlook for us for chemicals in the fourth quarter is improving some -- to some degree, hopefully, would allow us to be more in line to service the full demand that we have. But that is really the constraint for us is the chemical availability, and it remains a very challenging and dynamic situation, but I think it's improving.

Okay. All right. That's helpful. And so maybe this is related to it, but if we're just looking at the sales guidance for the fourth quarter, it looks like you're calling for, again, high single-digit year-on-year growth, but it's against a tougher comparison than Q3. So the 2-year growth needs to accelerate quite a bit. Can you just help us get comfortable with what part of the business should be accelerating on a 2-year basis?

Peter, this is Susan. And a big part of that increase that you're looking at will be on a 2-year basis, actually will be inflation. I think volume for the -- and to your look is flat, slightly down.

Okay. So it's more price increases coming through for the full quarter?

Yes. And if you remember -- well, I have to look this up myself, so you may not remember, but we were in a deflationary setting in the back half of 2019, thinking of the 2 year. And actually, last year, we were -- we just had just begun to inflate the selling prices in the fourth quarter. So we were flat in third quarter, deflationary first half, flat third quarter and finally had a little bit of inflation in the fourth quarter. So yes, we've had, with all the inflation we got in this year, most of that year-over-year change no matter which quarter you're looking at versus which prior 1-year or 2-year look back, a big part of all of that is pricing.

Okay. Very helpful. And then I had one last question just on labor availability. You've mentioned this now for both mattresses and flooring, I believe. So what actions are you taking to address the labor availability? This seems to be prevalent everywhere. So it doesn't seem like an issue that's going to be going away.

Yes. I think there's 2 different issues, Peter. And when we spoke to labor availability on the Bedding side, it was primarily a customer issue. So what our customers are telling us is as foam is becoming more available to them, that they're having a more difficult time ramping their productive capacity because of the availability and/or ability to retain labor. So that is more of an external issue. We have had pockets of labor availability issues from time to time, it's very, very local. In our comment on the Flooring side, is in the third quarter, we had some lack of available labor in 2 geographies. That has been partially mitigated, augmented by the challenges that we face from a trucking and transportation labor that our Flooring business is all delivered to stores, primarily retail outlets. And that availability of trucking and delivery labor has been a challenge. So it's not a comp issue at all. It's a matter of just live bodies willing to work and come to work on a repetitive basis.

[Operator Instructions] Our next questions come from the line of Judy Merrick with Truist.

This is Judy on for Keith Hughes. Just can I clarify one on your answer, Karl, on the industry for Bedding for Bobby's question? So your Spring's inventory is in good shape, even though this one was not expected to be resolved into 2022, but where your inventory is now in the Springs?

Yes. Inventory is in really good shape. The foam situation is improving slowly but is incredibly volatile. And we don't think that there will be full availability of chemicals into 2022. So Judy, you have it right.

There are no further questions at this time. I would like to turn the floor back over to Susan McCoy for any closing comments.

Thanks, Darryl. All I have to say is just thank you for joining us today, and we look forward to talking to you again next quarter. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.