Greetings, and welcome to the Leggett & Platt's Second Quarter 2022 Webcast and Earnings Conference Call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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 for Leggett & Platt. Please go ahead.

Good morning and thank you for taking part in Leggett & Platt's second 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 the Specialized Products and Furniture, Flooring & Textile Products segments; Tyson Hagale, Senior Vice President, President of the Bedding Products; and Cassie Branscum, Senior Director of Investor Relations The agenda for our call this morning is as follows. Mitch will start with the summary of the main points we made in yesterday's press release and discuss operating results and demand trends; Jeff will cover financial details and address our outlook for 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, 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 discuss on this call including non-GAAP reconciliations. I need to remind you that remarks today concerning future expectations, events, objectives, strategies, trends, or result constitute forward-looking statement. 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.

Thanks Susan. Good morning and thanks, everybody, for participating in our second quarter call. Our employees continued to drive strong results in the quarter despite ongoing macroeconomic, geopolitical, and various end market challenges. Sales from continuing operations were a quarterly record of $1.33 billion, EBIT was $143 million, and earnings per share was $0.70. Sales in the quarter were up 5% versus second quarter of 2021, reflecting our successful pass-through of significant inflation over the past several quarters, partially offset by lower volume and currency impact. EBIT decreased 17% versus second quarter 2021 and was down slightly versus second quarter 2021 adjusted EBIT. Last year's second quarter EBIT included a $28 million gain from the sale of real estate associated with our exited fashion bed business. EBIT decreased slightly versus last year's adjusted EBIT, primarily from volume declines and lower overhead absorption as production and inventory levels were adjusted to meet reduced demand, mostly in bedding. These decreases were largely offset by expanded metal margins in our Steel Rod business and pricing discipline in our Furniture, Flooring and Textiles Products segment. EPS was $0.70, a 15% decrease versus second quarter 2021, and a 6% increase versus last year's adjusted EPS. We are lowering our full year guidance to reflect macroeconomic uncertainties, including impacts of inflation, tightening monetary policy and softening consumer demand continuing through the back half of the year. We expect solid demand in our industrial and automotive end markets to partially offset softer consumer markets. Now, I'll move on to the segments. Sales in our Bedding Products segment were up 1% versus second quarter of 2021. Raw material-related selling price increases, strong trade demand in steel rod and drawn wire and the addition of our Kayfoam acquisition made in the second quarter of last year were largely offset…

Thank you, Mitch, and good morning, everyone. In the second quarter, we generated cash from operations of $90 million, up $49 million as compared to $41 million in the second quarter 2021, reflecting a much smaller use of cash for working capital. Working capital increased significantly last year due to restocking efforts following inventory depletion in 2020, but increased to a lesser extent this year as we continue to return to inventory levels more reflective of current demand. We expect cash from operations of $550 million to $600 million in 2022, as last year's significant inflationary impact stabilized, and we continue to balance inventory levels. We ended the second quarter with adjusted working capital as a percentage of annualized sales of 15.7%. 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 second quarter were $22 million. In May, our Board of Directors increased the quarterly dividend to $0.44 per share, $0.02 or 5% higher than last year's second quarter dividend. At an annual indicated dividend of $1.76, the yield is 4.4% based upon Friday's closing price, one of the highest among the dividend kings. With deleveraging we accomplished over the past few years, share repurchases have returned as one of our priorities for the use of cash. The level of repurchases will vary depending on various considerations, including alternative uses of cash and the opportunities to repurchase shares at an attractive price. We took advantage of the lower share price during the second quarter and repurchased 1 million shares at an average price of $35.01 per share. Total repurchases for the quarter were $35 million. This brings year-to-date repurchases to 1.6 million shares, or $57 million. We ended…

Thanks, 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.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Bobby Griffin with Raymond James. Please proceed with your question.

Good morning, everybody. Thank you for taking my question. So first, Mitch, I want to first start off on Specialized Products segment really a two-part question. I mean, one, we saw you guys pick up the volumes pretty notably in for the full year. So maybe just unpack what areas of that business are coming in stronger than expected and kind of what's -- a little bit more detail on what's going on in those end markets? And then secondly, just what's the pathway back for margins to return to kind of the mid-teens in that segment that we're used to seeing? Is there a path back there or structurally something changed within the business is that it's going to need to be a little bit lower margin business going forward?

Yes. Good morning, Bobby. Thanks for participating today. I appreciate the good question. So, I think a couple of things here. I'll take your questions in order. First, the volume up from the prior guidance why? I think it's really just more confidence in the actual improvement of production across all three of those businesses. We've seen significant improvement in aerospace and hydraulic cylinders, although that's still somewhat impacted by the OEM's ability to navigate labor and chip issues, but we have seen increased production over the last several months. And then similar in automotive as well, where while they're not getting all of the chips that are needed to enhance production there, it has become more stable. And so that production schedules are way less dynamic than they were probably last year. And so, we continue to see some improvement there. I think in automotive, the projection for the major markets is second half production up about 11% versus the first half. So, all of those things kind of holding up are what really gave us the confidence to increase our guidance around the volume there. And then your questions around the margins is also a good one. So, I do think that we have a path forward to those mid-teens kind of margins again. I think a few things, dynamics are in play there. First, all three of those businesses were the most impacted at different times, but as the pandemic hit and in 2020, we saw the volumes there just declined very, very significantly. And this is I think old news, right? Everybody knows that it's been a really struggle for those industries to regain their traction. But as I just said, they're starting to now. So, we certainly have the impacts from lower volume, which is…

Very good. I appreciate that details. That was very helpful. Thank you, Mitch. And then I guess, secondly, just as a follow-up maybe on the commodity or steel side of the business. We have started to recently see some of the steel commodities roll over. Has that – has the spread or the metal margins changed at all with the recent kind of reduction in some of the steel indexes? And it's been a very long time since we've kind of seen steel deflation in the last couple of years have been inflation. How do you think the business will respond to potential deflation of steel products similar to the history we're used to seeing with Leggett when they see deflation?

Yeah. Great question, Bobby, I'll take the easy part and then hand it over to Tyson. But on the – on the steel side, think about the separation between where we're using flat products in Home Furniture, and we have seen some reduction there, and teams are managing that very, very well, managing our inventory and also managing our pricing. A little bit different on the rod side with increased other input costs there. So Tyson, I'll hand it over to you on that one.

Sure. Yeah. And it is a little bit of a complicated story. But – but you're right, Bobby. Even recently, we have started to see some softening in rod pricing, but to a lesser extent than we've even seen some changes in scrap, it started to hint at it. But I think some of that is just general industrial demand has remained relatively strong for steel products and then also some of the conversion costs that have increased pretty substantially, that I don't think get quite as much notice. But energy, just general utility usage, consumables that go into it, have also, I think, helped support some of the higher pricing. But we have seen it start to stabilize and all start to come down a bit. We've been monitoring that closely on the way up, and also will do the same as things decrease. And we have also a large part of our steel-based business that's contractual. So we'll obviously see those things pass through as necessary.

Thank you. I appreciate the details. Best of luck here in the second half.

Thank you, Bobby.

Thank you. Our next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everyone. My first question is talking a little bit about the consumer perhaps. You mentioned in your comments, Mitch, that you have seen bedding demand stabilize in quarter. You expect it to hold flat. Can you talk in general just about the state of the consumer, the health of the consumer that you're hearing from your customers? And perhaps with that, any commentary on the elasticity of demand that you're seeing in bedding, especially as you're continuing to put price in to offset those inflationary pressures.

Yes, sure. I'll take a shot at that, and good morning, Susan. Thanks for the good question. I think it's tough to predict, but I think the fact that we've seen demand being pretty stable is probably a good thing, right? It's tough in this type of inflationary environment with monetary policy tightening and all of the other economic disorders that are out there. So I think that led to the step down. But I think that, if we can see that inflation is starting to stabilize and then starting to gently come down. I really don't see it just dropping off very swiftly. But if it starts to stabilize, I think that we will see that consumer hold in there for us at least at decent levels. And then depending upon what happens going forward, if we are able to avoid a super recessionary cycle, I think that we should be in pretty good shape. But we've certainly been planning in all of our businesses for this kind of uncertainty and really starting last year to make sure we're managing inventory closely that we're managing our variable costs and our production levels, so that we are really ready to move either way. If it gets a little bit softer to be able to take a step back and control our costs or to be able to respond very quickly if we're able to see pickup. So I think that's the really big question that's out there for the world, right, is what's going to happen with consumer demand and inflation out there. But I’m relatively optimistic with the trends that we're seeing. But Tyson, any -- what are you hearing?

Very similar, Mitch. We've shared that we felt some of the slowdown earlier than a lot of others when it started happening in the fourth quarter of last year. Both, I think, from the lower-end price points slowing first, but then also as it moved into some mid and even to a lesser extent, some of the higher price points, as we move through the early part of this year. And also, not just from the impacts of inflation and other things, but consumers shifting to spending on services, travel and some other areas like that, like Mitch said, what gives us confidence even as we watch consumer sentiment be at low levels, is that we've seen some step downs over the course of the last nine months or so, but it's been really consistent, especially as we move through the second quarter. One thing I think we'll be watching closely, as we've watched some of the retail activity is, just especially consumers on the lower end and how they react to the continued inflation or even prices staying at high levels. But overall, I think we feel pretty confident just in some consistency as we get into the back half of the year.

Tyson, maybe I'll add, I think in the longer term, right, in this bedding side, really historically don't see multi-year downward trends, that's something that would be outside of the norm of what we see. And even if we think about the housing market softening a little bit, even in places like our Home Furniture business, for example, maybe less impacted consumer sentiment and people even if -- with all of the home traffic that has happened over the last couple of years, probably some return to that repurchasing cycle there. I will say that, we've been more -- see more negative impact on the Home Furniture side, particularly at the low end recently.

Okay. That's all very helpful color. And following up, obviously, the macro environment has shifted in the quarter. There's a lot of debate about where we sort of are from a broader perspective there. But as you think about the business, Mitch, how are you preparing for a shift in the macro landscape. What is the playbook that you'll go to if we do see things deteriorate more than where we currently are at? And what are you watching in order to determine what needs to happen to the business to protect it in a weaker macro?

Great question, Susan. Thank you. And I guess we've kind of been through a similar type of circumstance before we were in 2020 with the downturn after the onset of the pandemic. So I think that we've learned some new skills that we certainly haven't forgotten then. But first off, I would say, I expect that we'll benefit from our portfolio diversity, right? We're seeing stronger demand hold up in our industrial and automotive businesses compared to our more consumer-facing businesses. So I do think that, that will continue to hold up. But we also regardless be able to continue aligning our variable costs and our inventories to demand. I think the good news there, as I mentioned on the call that we've been doing this since we first started to see demand slowing a little bit in the fourth quarter of last year in Bedding, as well as across our other businesses. It's something, frankly, that we talk about on a regular basis across all of our businesses. In this environment, since we're well positioned, we're already -- we're not scrambling to catch up with what's happening in the macroeconomic circumstances. We continue to drive strong free cash flow. We have really strong liquidity. So we'll be able to benefit from those things as well. In 2020, we cut about $90 million of cost, mainly overhead costs. And I never thought about that as something that was temporary that we would take those costs out and we would bring them back. But I did think about it as that we would make investments for our future. And we have been doing that. And I think that our portfolio diversity and our strong cash flow and liquidity will allow us to continue to make those investments. So we'll have more capacity to implement those activities if demand is slower and we'll benefit from the improved efficiencies, the capabilities and be ready to take advantage of stronger demand when those conditions improve. If it's worse than that, then we'll take those actions, and we'll go back to more radical cost cutting. But I really think that we're well positioned to be able to invest in our future and really benefit from the recovery as we come out of the cycle.

That's great, Mitch. Thank you for the color. I’ll re-queue and turn it over to someone else.

Right. Thanks, Susan.

Yes.

Thank you. Our next question comes from the line of Keith Hughes with Truist Securities. Please proceed with your question.

Thank you. First question on one of the earlier comments you talked about metal margins, I think, they are particularly ticking down a little bit and we make sure I heard that right. And kind of what have you assumed in the guidance for the second half of the year on those margins?

Tyson, do you want to take that one?

Sure. And Keith, just to clear that up, what I was suggesting was that we're seeing some softening in rod pricing. But overall, I think we've seen -- and actually, maybe take a quick step back. In the second quarter, metal margins actually expanded a bit beyond our expectations and some of the drivers there that that kind of caught us a little bit by surprise, but the Beijing, Ukraine had an impact on scrap pricing as an input, people were trying to scramble around fine scrap, it which drove up the demand for scrap supply. We also saw a sharp increase in energy costs and then just general steel demand, all put to some higher metal margin expansion in the second quarter. In the third quarter, we've seen rods start to soften a bit, scrap as well as some of those things have backed off. But generally, we would still see overall metal margins being relatively consistent in the third quarter and right now, we're expecting some modest compression as we get into the fourth quarter just with overall supply and demand. But at this point, it's still tough to predict, but we would then think for the full year, we'd still be up year-over-year.

Okay. And in the prepared comments, you talked about textiles and flooring, kind of it seems like you made in different directions right now. Just relative side, kind of lump those together in the 10-K. Can you just talk about how what those two represent as a percentage of the FFT segment.

Let me see here. If I could think about it that--

Just roughly on our main--.

Yes. Okay. And Steve, chime in, if you have that handy. I think that textiles is about 35% or so of the business -- of the segment -- is that about right, Steve?

Yes, textile is about 35%, flooring, probably about 25%.

Yes. About 20%.

20%.

Okay. That’s what I was looking at. Okay. And then, I guess, final question. You had the compression in specialized that you discussed earlier on the call, the kind of lag on pricing there. Would we continue to see similar types of margin compression based on your revenue guidance for the next couple of quarters, or will that start to narrow as you get at least some more price?

Yes. Great question and Steve chime in here. But I think that we expect to see sequential improvement in the margins and specialized as we move through the back half of the year. We -- as I said, we've made progress on passing through some of the inflationary impacts in Automotive and the increase in volume will help us there. We have had a bit of a hit from exchange rates impacting margins, but we do expect to see meaningful improvement in the back half.

Okay. Thank you.

Yes, thank you, Keith.

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

Hey, thanks. Good morning everyone. I did want to focus this morning on the bedding business. And I guess I'm just looking at the volume trends with the steady declines. My calculation that bedding volumes are down about 22% on a three-year basis. And so I know we're waiting for macro headwinds to abate and it's really anyone's guess to when that happens. So, I wanted to ask what are sort of the strategic initiatives to really get the betting volumes going and to put yourself in a position to be taking market share?

Yes, Peter, great question. Tyson, I'll let you see that one.

Sure thing. Hi Peter. So, I'll put it into some short, medium and long-term buckets for you. In the short-term, it's been a chaotic two and a half years that we've been dealing with, with customers, supply chain, high and low levels of demand, but our teams are working really hard on evaluating near-term opportunities with our customers. What can we do and what makes sense. And there are things out there even in a slow environment that -- where we think we can provide some value to our customers. We are carefully balancing the economics of those opportunities also kind of as we look at the risk and economics of those. But we do expect to start to see some of the benefits even now and through the back half of the year. So, we do see some opportunities for improvement there even in the short run. In the medium term, it's a tough time to do this, but we do have customers that are interested in new product developments, both from a VA/VE standpoint and just differentiation, and we have some new things that we're working on with customers right now. But those will take some time to gain steam and actually gain a foothold in the market. So that would be more of a medium-term initiative. And over the longer term, we've been pretty public about our investments in bedding and you kind of see where we've been heading, with our investments at ECS, Kayfoam, also within our Adjustable Bed business. We've been investing in areas where we feel like we can increase our addressable market size. And although, we're pretty specific about our position as a supply chain partner, also gives us still opportunities in segments of the market to increase our content as well. We've also continued to invest in our ability to supply our customers in our core components business. We're in a good place there as well. So we've been investing even as we've gone through the downturn and listing ourselves through the long run of being in a better place to grow again.

Okay. Good. Thanks for the summary. And then, we talk about the weak economy, but an area that does seem to be getting weaker for the foreseeable future is housing. And I guess, I want to understand your – your views on housing and its impact on your guidance as home sales are slowing quite a bit here. It seems like it could have a further negative impact on Bedding and Furniture or Flooring, some various segments. So is that something that you're contemplating as you look out over the next 6 months to 12 months?

Yeah, I think so. I think it's tough to predict exactly Peter, but I mean, as we’ve said that's really the – the take on our guidance was understanding that, there is this macroeconomic uncertainty out there, including the housing market and likely to have some impact. We think that, consumer sentiment and other factors have a bigger impact, and that there's even with housing movement helps us and last over some period of time. But I think that we've factored in at least what we anticipate as the impact there.

Okay. Very good. Thanks so much.

Thank you.

Thank you. Our next question is a follow-up from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Thank you. Hello, again. My first question is, we've talked a lot about the supply chains and production as it relates to auto within specialized. But can you talk a little bit about the improvements, or how you're thinking about the improvements coming through in Arrow as well as in hydraulic cylinders? I mean, obviously, in Aerospace, one of the big OEMs just got approval to start shipping one of their products. Are you seeing that, there is some increase there, some improvements that are coming through? And how are you thinking about that flowing in and contributing to that margin improvement in the back half and into 2023?

Yeah, great question, Susan. Thank you. Steve, I'll let you take that one, but I think it's a positive outlook for us.

Yes. For sure. Good morning, Susan. Yeah, Aerospace demand growth is tracking pretty much as we expected as the industry continues to recover. And as Mitch said, that will hit 2019 levels and about 2024. Aircraft, the backlogs are near their peak levels at this point. So the demand is there. We saw year-on-year sequential volume growth in Q2. We expect that to continue going forward. As Mitch also mentioned, assembly – the assembly business has recovered quite quickly. And now we're starting to see that happen for the tubing side of the business. And as that demand returns to the industry is starting to see some of the same things we saw in our Automotive, orders being pulled forward, expedited delivery short lead times becoming the norms. We're also starting to see some extended lead times for raw materials, and we're taking that into consideration. So our team is doing a really good job of dealing with that situation as it goes forward. Hydraulics, the end market for forklifts remains strong, particularly in North America, that market is sitting about 22 months of backlog. We're also seeing that reflected in our orders, which we think positions the business well for the second half of the year. The OEMs don't backtrack on their production capabilities.

Okay. Just…

Sorry, Susan. I'm just going to say, Steve, when you say in both of those businesses, we likely to see a little bit of hiccups as the production ramps up, but are really much more confident in that production ramp-up taking place and improving as we go in the back half.

Yes, certainly.

Okay. That's very helpful. And the other thing that I want to go back to is the inflation question. We talked a lot about the metal margins. But can you talk to what you're seeing in terms of the inflationary pressures on perhaps ECS, things that go back more to those oil, sort of, supply chains in there. One, what is the availability of a lot of those key inputs? And two, what are you seeing in terms of the input cost side?

Yes. Another great question. Tyson, do you want to take that one?

Sure. Yes, Susan. So from a supply standpoint at this point, things are good. We've gotten hesitant to say all clear and never a problem, but we've really been in a stable place in terms of the supply chain there for a while and feel good about it. And we've taken some actions even beyond just our typical market supply that gives us some options to give us back up and insurance with storage tanks and things that would allow us to stay covered even if there was a short-term supply constraint. In terms of pricing, you're right, energy costs have had an impact, but we feel like where prices have been or our costs. They've been relatively stable. And so, I think, as demand overall in the chemical market has softened, the energy costs have probably kept some of the pricing more stable. But it's similar to some other things we've seen. We haven't seen an increasing trend overall with chemical prices that have been more stable.

Okay. Okay. That's helpful. I'm going to squeeze one more in here. And maybe this one is more for Jeff. I'd be remiss if I didn't mention the $35 million of buybacks that you did this quarter, can you talk a little bit about what drove that decision? How you're thinking about the willingness to continue to buy back the stock going forward. And perhaps, with that, anything that you'd like to share with us in terms of a target for leverage or just the overall sort of capital structure of the business?

Great. Good morning, Susan, and thank you for noticing the $35 million of repurchases there. I think it's important to start with the tremendous progress that the team has made around our deleveraging efforts over the past few years since the ECS acquisition, because I think that really has positioned us well, as we think about our overall capital allocation strategy. Our priorities still remain funding organic growth, maintaining the flexibility around our strategic growth opportunities around M&A and supporting our dividend. But as we've made that deleveraging progress, we well positioned ourselves now to be more active from a share repurchase perspective. And we were much more aggressive in the second quarter, because of, where we saw our share price during the period. But if you look year-to-date, we've repurchased 1.6 million shares and allocate about $57 million in that regard. As we look towards the future, Susan, we're going to continue to evaluate our share repurchases in the context of our other investment opportunities, while at the same time, monitoring our cash flow from operations. So it's one of those things we'll evaluate each and every quarter and compare it to our other opportunities that we have as we think about investments. In terms of your second question around our leverage target, I think, it's important there to think about the view that we have around an ideal target range for net debt to EBITDA, which for us is to maintain a capital structure that we feel that allows us to do a couple of things. One is to pursue strategic growth opportunities. Another is around returning cash to our shareholders. And then thirdly, ensuring that we can maintain a solid investment-grade profile. If you rewind back to 2019 at the time of the ECS acquisition, that was the last time we stated publicly a target from a leverage standpoint of 2.5 times on a total debt basis to EBITDA. Fast forward to May of 2020, we amended our covenant in our revolving credit facility to go from a total debt to a net debt metric. And then in September of 2021, we successfully amended our facility again and retained the net debt covenant as well from a metric standpoint with a maximum leverage of 3.5 times. Now we haven't formally updated what we feel is a leverage target moving forward. But it's safe to assume, Susan, that it will be something below -- well below a net debt of 2.5 times basis.

Okay. Great. I appreciate all the color today and good luck with the second half.

Thank you.

Thank you very much, Susan.

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

Thank you for joining us today. We'll speak to you again on November 1st, when we report third quarter results. As always, if you have questions, please contact us using the information in yesterday's press release. Hope everybody has a good day. Thanks.

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