Greetings and welcome to the Leggett & Platt Third Quarter 2024 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, Cassie Branscum, Vice President of Investor Relations. Thank you. You may begin.

Good morning and welcome to Leggett & Platt third quarter 2024 earnings call. With me on the call today are Karl Glassman, CEO; Ben Burns, CFO; Tyson Hagale, President of the Bedding Products segment; Sam Smith, President of the Furniture, Flooring & Textile Products segment; and Kolina Talbert, Manager of Investor Relations. The agenda for our call this morning is as follows. Karl will discuss current demand trends and provide an update on the restructuring plan and other ongoing initiatives. Ben will cover our operating results and additional financial details and address our revised 2024 outlets 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 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 and a restructuring update. 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 Karl.

Good morning, and thank you for joining our call today. As we begin, I want to thank our employees for their continued hard work and dedication as we navigated a challenging macro backdrop. Our third quarter sales and earnings were below our expectations, largely due to weaker than anticipated demand in residential end markets in headwinds, in Automotive, Hydraulic Cylinders and Geo Components. Sluggish demand in these businesses is expected to persist through the fourth quarter and is expected to be more impactful than previously anticipated. As a result, we are reducing full year sales and earnings guidance, which Ben will detail later in the call. Now, I'd like to highlight a few of the current demand dynamics in our key end markets. The US bedding market continues to experience negative volume comps. Although some improvement in demand has been observed during holiday sales in between periods has been softer. We estimate that US mattress consumption was approximately flat in the third quarter, but domestic production was likely down high single digits. Given a more challenging macro environment and softening in consumer spending, we expect the domestic market will continue to be pressured in the fourth quarter and expect 2024 domestic units to be down mid single digits versus last year. While we are encouraged to see the Fed begin a cycle of interest rate cuts, we know a series of cuts is needed to meaningfully impact housing turnover. And there will also be a lag between improvement in housing trends and an improvement in mattress demand. We still anticipate that our 2024 Bedding Products segment volume will be down high single digits due to company-specific factors. Excluding higher trade rod sales for non-bedding applications, segment volume would be expected to be down low double digits. However, it's important to…

Thank you, Karl and good morning, everyone. Third quarter sales were $1.1 billion, down 6% versus the third quarter of 2023, due to volume declines across all three segments and raw material related selling price decreases. Compared to third quarter 2023, sales in our Bedding Product segment decreased 8%. Third quarter sales in Specialized Products declined 6% year-over-year and sales and Furniture, Flooring & Textile Products were down 4%. Third quarter EBIT was $78 million and adjusted EBIT was $76 million, down 10 million versus Q3 2023, primarily due to unfavorable product mix and betting process, lower volume, metal margin compression and higher bad debt reserves, partially offset by lower amortization expense, operational efficiency improvements and restructuring benefit. Despite weaker than expected results, adjusted EBIT margin improved by 60 basis points sequentially this quarter. Third quarter earnings per share was $0.33. On an adjusted basis, third quarter EPS was $0.32 and 11% decrease versus third quarter 2023, adjusted EPS of $0.36. Cash generation remains a sharp focus. Our long-term priorities for use of cash our funding organic growth, funding strategic acquisitions and returning cash to shareholders through dividends and share repurchases. However, in the near-term, we are prioritizing debt reduction while continuing to fund organic growth. In the third quarter, operating cash flow was $95 million, a decrease of $48 million versus the third quarter 2023. This decrease was primarily driven by less benefit from working capital and lower earnings. We ended the quarter with adjusted working capital as a percentage of annualized sales of 14.5%, an increase of 30 basis points versus third quarter 2023. Cash from operations is now expected to be approximately $300 million in 2024 versus our prior guidance of $300 million to $350 million. In the third quarter, we made progress on debt reduction as…

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

Thank you. We'll 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 questions.

Thank you. Good morning, everyone.

Good morning, Susan.

My first question of regarding -- one of the things that you noticed was that unfavorable mix in terms of both the sales and the margins just given the Steel Rod and what's coming through there. Can you talk a little bit about that mix shift and what it implies for profitability as we think about the outlook in the forward quarters perhaps?

Yeah, happy to Susan. Keeping the rod mill full is really important. But Tyson if you don't mind, why don’t you kind of unwind the details for Susan.

Yeah, sure thanks. Good morning, Susan. You're right, our volume in bedding is down just 3% year-over-year. But in our four products, it was down more than that. So filling in with the mix of trade rod and some other products with ECS did offset some of those declines. But going forward, we do expect a higher mix of trade rod and wire tons. And you remember that the trade market is much more low-carbon than hydrocarbons what we use internally. And while those margins are lower, they are important. Karl said it's important for us just from an operating perspective to operate the mill as slow as we possibly can. It helps us lower or at least maintain our scrap costs. And it also helps us maintain or lower our conversion costs, which is really critical. And also it's a row really skilled workforce. So maintaining our workforce and running in those fields we can is really important thing for us. But just the reality of where we see both the long-term decline as to my flex or grid and doc springs, the de-contenting or this lower material usage within mattress products and also just imported finished mattresses in the US. It’s just a reality for us in running the mill. So that will be a long-term expectation of ours that trade rod mix will be part of our business. Longer term, volume remains the number one headwind for us in terms of margin and recovery. Our restructuring plan and operating efficiency improvements will certainly help, they are on the flip side of the lower mix or margin from the trade rod will be a negative or take away from that.

Okay. That's great color. Thank you, Tyson. And then on shifting to auto, Karl you mentioned some of those bigger moves that are coming through in that business that are reflected in the results. As you think about your expectations for new programs this year, how has that shifted given what's going on in the broader industry? Can you talk a bit about some of the company's specific efforts that are also coming through in that business?

Yeah, Susan thank you for that as well. AS I said in the prepared remarks, the global automotive business is in flux and is variable by region as well. So said differently what's happening in North America would slow, easy uptake is very different than what's happening in China. And Europe has completely different issues based around cost and affordability. So there has been a delay in the program starts. That's not all bad because we have a lot of legacy programs that we're running out. There very profitable programs. Our teams can focus on them. The challenge is kind of the stop-start nature of things and the uncertainty. But in terms of actions that we are taking Sam Smith has done a wonderful job of helping me oversee the Specialized Products segment. So Sam, if you don't mind will you kind of detail those items for Susan and clean up? Any of my comments if you would.

Yes. Sure, Karl. Thanks. And the words you used influx are definitely the right words, I think. And Susan if you go back to the beginning of the year our assumptions were that the underlying business the programs that we had were really going to be flat coming into 2024. And that our volume growth would come from these new program launches. And Karl talked about the tremendous amount of change has impacted the business across all the regions in the single biggest impact to our business from a top-line standpoint has been that those new programs just haven't launched. He mentioned the ICE to EV transition and how it's been impactful across all the different regions and in different ways across each region. Most of our customers wants -- expectations really changed in one way or another and many of those programs that we won and then we were going to start up this year, they've really been delayed or indeed selling the even pushed out with no clear start date yet. So these program delays account for about 40% of where we thought our top line would be at the beginning of the year versus where we see it be it now. The other 60% come from a variety of reasons that Karl has already mentioned at a high level. So I mention that at the beginning of the year the 2024 major market production forecasts were supposed to be relatively flat year-over-year. And what's happened is that since the middle of this year IHS' forecast has dropped a little bit each month. So now they're major market. October 2024 forecast excluding Russia is about 2.5% lower than it was a year ago. And that drops significant to our business. And it's being driven by the difficulties they…

Good. That is great color Sam. Thank you all that detail from. I just have two more quick ones on maybe for Ben. The first is -- Ben we think about the CapEx guide that you've laid out for the full year relative to what you've done in the first three quarters would -- there's about $40 million more spend coming during the fourth quarter. Can you talk through what some of those projects are in how we should think about the timing of that?

Yes, good morning Susan and thanks for the question. And yes, you're right, we've spent about $60 million year-to-date, which would imply $40 million in the fourth quarter, which is a pretty heavy dose compared to what we've done so far. But these are things that we see right in front of us that we feel are very likely. And the first one I had mentioned is around our rod mill and just the regular maintenance that we typically do this time of year. So, that's a critical or it will be doing and we know that that's ongoing. Also embedding we've got some new programs and growth initiatives and some efficiency projects that are underway that we're getting ready to launch. And in fact some of those are already said starting. So, that's really positive. And then I would also say despite some of the challenges Karl and Sam talked about on the automotive side, we do have some new programs are launching in the fourth quarter and some CapEx that we'll be spending there. So, it's a variety of things, but it is a heavier dose in the fourth quarter. But we feel like that's really some good things. And maybe I'll ask Tyson to jump in there with a little bit more color on some of the new initiatives that we have embedding which are pretty exciting.

Yes, they both relate to spring. I mean you mentioned that the normal shutdown we take at Sterling is normal maintenance capital is required, but the other projects or return-based. And so we do have a really important initiative for both one of our customers and also for us a product line Refresh. And it does require capital spending for equipment for us to have to manufacture the product that’s required. And I will be rolling out in the early part of next year but the capital spend is taking place in Q4. So, that's a really important thing for both the customer and us. And then also we have additional equipment spend also U.S. spring to help with manufacturing efficiency both with material and labor content. So, that will be also a good return projects for us both in 2025 and move forward.

Yes, thanks. Good investments for here.

Okay, all right. Thank you for that. And then just one last one then. With when we think about where we are year to date, can you just walk us through the margin expectations for each of the segments for this year? And any changes that you would note relative to your prior guide?

Yes, sure, thanks, Susan, happy to do it. Let's start with bedding. Compared to what we thought before, we see margins now down about 200 basis points. And that's largely an impact from unfavorable sales mix that we talked about earlier. Our specialized products basis, we would expect margins to be down slightly. And then on the furniture Flooring and Textile side, we expect those margins to be flat.

Okay. Thank you very much. I'll pass it along. Thanks for the color guys.

Thank you, Susan.

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

Good morning everybody. Thanks for taking my questions. Talking more about -- the first thing I want to chat on Karl maybe just the comments on 3Q bedding consumption being flat year over year that, I understand the mix between domestic and imports was a move those numbers around some, but I guess the overall flat surprised me a little. Do you believe that’s just a function of a flush of imports coming into the market are kind of what do you think that’s driving that? Because I guess the flat to me in today's macro was a little bit better just from a pure consumption standpoint.

Yes, Bobby, thanks for the question. I remember it's off a relatively easy comp in 3Q, '23. The imports have slowed. But as we had said previously, there was a significant amount of imports that came in right before the duties were levy [ph] and read. We believe that those are underway windy. But Tyson, how else would you answer that question?

Sure, thanks and good morning Bobby. You got the right call. We did see the significant ramp up late last year with the imports coming in ahead of the duties and then they slowed in the first and second quarter. But there was a pretty significant overhang for what came in at the end of last year. We did see some incremental growth in inflated imports into the third quarter versus second quarter, but still not nearly to the levels that we saw last year. But really Bobby, I just kind of looking at some of the channel information that we review and especially on some of the e-com channels, we did see quite a lot of activity in the third quarter. And so that's where we get to overall flat, but much slower and softer for our domestic production and consumption.

Understand. That's helpful. And then advertising, you heard anything interesting from your customers or just how the brand behaving during these next couple of weeks for the election of a pullback on ad spend just because of the crowd out a fair or anything interesting just flowed through the channel there to help us understand really kind of the two, three week impact here?

Sure. Thanks, Bobby. It really just even getting into October, things have been soft. And I think it's for what you said, I mean that’s always is the expectation of getting crowded out yet the high ever take -- higher advertising costs, but also just generally distracted consumer as we get closer to the election. So definitely, it's has an impact and also our customers watching inventories in the fourth quarter. But still overall has been expecting kind of normal seasonal pattern in the fourth quarter.

Perfect. And then on specialized products, understand you guys are in the process of seeing what you can get for aerospace. So don't expect you to kind of comment on pure profitability, but could you rank order the three businesses in that segment in terms of EBITDA margins of which one is the strongest to the low and I have a feeling hydraulic cylinders is roughly around breakeven and my guess that would be at the bottom. But just any color on, how aerospace stacks up versus auto would be helpful for us running some analysis on what potentially it could be worth.

Got it. Interesting approach that Bobby I can kind of picture gas. I get nervous, but I'm going to tell you the answer is Automotive Aerospace Hydraulics.

Thank you. : Thank you. I learned from the master of how to try to fit those questions than the former guy worked for.

You absolutely did. And actually, I do want to digress for a second. Bobby, you made reference to him. Budd Bugatch was very much a friend of Leggett and Platt, covered us for 35 years and we miss Budd. And thank you. I kind of feel a little bit of Budd in you every time you ask a question and he would be pleased. That was masterful the way you slipped that in.

I appreciate, Karl. Thank you. Kind words. Great analyst, even better human, I always say. So, I hope you like that question. I guess, lastly for me, just a question for Ben. Great to see the debt pay down here in the quarter. Just as we think further out and you got some wins of cash coming into the business, what's the interest savings on say $100 million of debt pay down and we can run that then in our models?

Yes. Thanks, Bobby, for the question. As we kind of think about it looking forward, we'll pay off the bonds here in a few weeks with commercial paper. So that really will be the deleveraging path that is reducing our commercial paper. So think about $5 million reduction for every $100 million in debt. I'm sorry, $5 million in expense going down for every $100 million that we reduce.

Perfect. Very helpful. Congrats on the early progress within the restructuring and best of luck here in 4Q.

Thank you, Bobby.

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

Hi, good morning everyone. One category you hadn't talked about yet was the home furniture piece and it does sound like that was a little bit of the guide down. I guess, I was a bit confused. I think you talked about geo components, but home furniture did take a pretty notable step down sequentially on both the sales and volume basis. And I'm wondering if that's industry backdrop or something company specific?

Yeah. Good morning, Peter, and thanks for the question. It is absolutely your observation is right, first off, and it is industry. The home furniture industry is actually probably softer than bedding, if that's possible. That industry has been terribly disrupted by retailer bankruptcies. The bedding industry has been impacted to some degree, but certainly home furniture more. And it's been challenged. The consumer has some of the same challenges. But, Sam, you know that. I mean, heck, that's your home. Why don't you plow into Peter's question, if you don't mind?

Sure, Karl. And thanks for the question, Peter. So, yes, the retail bankruptcies that Karl mentioned are a big impact, especially at those price points, because they're being serviced by some of our domestic customers, but also some of our a lot of our Asian customers. So, that was a big impact during the quarter. I'll tell you the next factor is more of a historical perspective and kind of a comp issue, Peter. This big industry wide slowdown started back in 2022 and our business, especially our business in Asia was impacted first as retailers right-size their inventories from 2022 right up through the middle of 2023. Now by Q3 of last year, those retail inventories, especially at the lower price points were a lot healthier. So what happened in Q3 of last year, retailers started ordering again, and we started getting quite a few more orders in China than we've gotten for almost a year. So our Q3 China volumes were actually fairly decent last year. Now this year, the industries continue to soften as we've talked about, supply chain is caught up, and there are just simply fewer orders in the chain that are coming our way than there were last year. So that comp issue is a factor. And there's another smaller thing that I want to make sure we cover. And at the beginning of this year, we moved some of our production from the US to Asia and into a few of our other US locations. And some of our larger customers who are ordering out of that location started ordering really heavy in the first half of the year to make sure they had plenty of stock. So we had a really strong Q2 from a volume standpoint. By the beginning of the third quarter this year, they realized that their warehouses were packed and they really held off ordering any new product until late in the quarter. So that was another factor. And those folks are ordering again, and we'll see more consistency going through Q4 from them.

Okay. That's very helpful. I do agree. The furniture industry backdrop seems challenged and interesting comments on the retail bankruptcies. I did want to pivot back to the steel rod business. and then the reverse side where furniture slowed, steel rod just accelerated massively. And it feels like there's a strategic shift here that might stick around. So the sales were up a lot. You say you want to run full capacity, still some metal margin. Are you cutting prices a little bit in order to be hypercompetitive and drive volumes? And is that a shift that we should expect going forward?

Hey. Peter, this is Tyson.

No, Peter. Yeah. Why don't you go ahead. I just want to -- we're not disrupting the market in any way that market pricings have been depressed in the steel market, but there has been some capacity that's been taken offline. So we're -- our mill is incredibly efficient as compared to others. But Tyson, please elaborate.

Sure, thanks. And Peter, no, we're not changing our pricing strategy and lowering market prices or anything like that. It is a realization, like I mentioned earlier, that the trade market will be necessary for us to run full. We do have our team that is actively and all the time exploring the market and determining what makes sense for us to run a mill. I mean you probably know our mill is pretty focused, and that's what allows us to keep our costs in line. So it is a balance of what makes sense for us and what we're actually able to serve. But it's not a pricing strategy. It's more just a market evaluation and opportunities and what makes sense for us in the mill.

Okay. And sticking on that, the metal margin was called out again as a headwind. Is there any visibility into when that will eventually normalize and no longer be a headwind on margins?

It's difficult to predict exactly when. We have seen things, like Karl mentioned, just kind of with the softness in the market, we have seen the steel market soften a bit. But overall, it's down obviously from historical highs that we've seen over the last several years. And so we're getting into a more normal range that we've seen.

Okay, great. And then lastly just to circle back on automotive, again, focusing on segments that I saw quite a bit of sequential change from last quarter. So, the automotive volume is down 9, is that based on your visibility, something that should continue for a while? Or was this just a notable air pocket in the third quarter?

Sam?

Yes. Thanks Karl. That's a great question. We normally going into Q4 see a pickup for a variety of reasons. One of which is, we got a large Asian net of factories and what we do see some pickup before Chinese New Year. That's just a routine thing. We believe we will see some pickup before Chinese New Year this year. Will it be as big as normal, that's what we're still trying to work through, Peter.

Okay. Very good. Thanks so much, guys. I appreciate the feedback.

Thank you.

Thank you. Our next questions come from the line of Judy Merrick with Truist Securities. Please proceed with your questions.

Great. Thanks. This is Judy on for Keith Hughes. I just -- if you could kind of clarify the pace at the mattress component sales. You said the domestic production was down high-single-digits and you're looking for mid-single-digit decline in the fourth quarter, is that still on flat US consumption?

Well, we believe that US market will be down in the fourth quarter. The domestic market is down more than the overall consumption due to the impact of the imports.

Okay. And then there's we saw ComfortCore. You said it was a little better than the industry. Did that show improvements in the quarter or is that just -- how it's performing?

That's just generally how it's been performing over time. And some of it is, obviously, the shift from open coil to ComfortCore for a long period of time and also just the performance of some of our customers. We've been more in line with the market or slightly ahead with ComfortCore than we have open coil and certainly the box spring product.

Got you. Okay. Great. Thank you.

Thank you, Judy.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Cassie Branscum for any closing comments.

Thank you for joining us and your interest in Leggett & Platt and have a great day.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.