Greetings, and welcome to the Leggett & Platt Third Quarter 2020 Conference Call. At this time, all participants are in 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. Thank you. You may begin.

Good morning and thank you for taking part in Leggett & Platt's third quarter conference call. We are conducting the call from different locations again this quarter. Please bear with us if you experience minor delays or mixed audio quality. On the call today are Karl Glassman, Chairman and CEO; Mitch Dollof, President and COO; Jeff Tate, Executive Vice President and CFO; Steve Henderson, EVP and President of the Specialized Products and Furniture, Flooring & Textile Products segments; Cassie Branscum, Senior Director of IR; and Tarah Sherwood, 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 Jeff will cover financial details. This conference call is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded or broadcast without our express permission. A replay 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 discuss on the 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 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 us today. First and foremost, I would like to thank our employees for their continued commitment to keeping each other safe and healthy while serving our customers. We are pleased to deliver strong third quarter results in these uncertain times, and this could not have happened without the dedication and hard work of our people. As we reported yesterday, third quarter earnings per share were a quarterly record of $0.77; this included $6 million of restructuring charges incurred primarily from pandemic-related cost reductions. Third quarter 2019 EPS was $0.74 and included $0.02 per share of restructuring-related charges. Excluding these items, third quarter adjusted earnings of $0.80 were up $0.04 from adjusted 2019 third quarter earnings. Third quarter EBIT was a quarterly record $147 million. EBIT increased in the quarter versus third quarter last year primarily due to lower fixed costs, partially offset by lower volume and a change in LIFO impact. EBIT margin increased 60 basis points to 12.2%, while adjusted EBIT margin increased 80 basis points to 12.7% and adjusted EBITDA margins increased 80 basis points to 16.6%. Third quarter sales were $1.208 billion, down 3% versus third quarter of 2019. Continued strong demand in residential end markets was more than offset by weaknesses in Aerospace and Work Furniture. Operating cash flow in the quarter was a record $261 million. Adjusted working capital as a percent of annualized sales for the quarter improved to a notable 8.7% versus 10.7% in the third quarter of 2019. As we also reported yesterday, our Board of Directors declared a $0.40 per share fourth quarter dividend. At an annual dividend of $1.60 per share, we have increased our annual dividend for 49 consecutive years. We remain committed to our position as a Dividend Aristocrat. At the end of October, we received positive news regarding the US mattress industry's anti-dumping petition on mattress importers from seven countries including Vietnam, Indonesia and Cambodia. The Department of Commerce made a preliminary determination that mattresses were being sold at prices that violate US trade laws and imposed preliminary duties that range from 3% to 990%. Also, in the quarter, the Department of Commerce imposed preliminary countervailing duties of 98% on China. We anticipate final determinations in these investigations in 2021, likely during the second quarter. This should allow domestic mattress producers to compete on a more level playing field. The Company remains well positioned both competitively and financially to capitalize on long-term opportunities in various end markets. Our enduring long-term fundamentals give us confidence in our ability to continue to create value for our shareholders. I'll now turn the call over to Mitch.

Thank you, Karl, and good morning, everyone. As we discussed last quarter, our operational priorities for the third quarter included increasing production to meet strong bedding demand, tackling widespread labor shortages, especially in the US, managing supply chain issues associated with a global shortage of non-woven fabrics stemming from a surge in demand for medical PPE applications, responding to evolving government restrictions on production capacity in various parts of the world, and monitoring changes in demand signals and responding rapidly to control costs and optimize cash flow. While challenges remain in most of these areas, we continue to make headway and will provide more detail as we discuss each segment. Sales in our Bedding Products segment were down 2% in the third quarter. Strong demand throughout the quarter in the bedding market drove sales growth in ECS, US Spring, and European Spring. This growth was more than offset by lower volume in Adjustable bed and exited volume in Fashion Bed and Drawn Wire. We continue to increase production while managing supply challenges with non-woven fabrics and labor shortages. We found some alternatives for our non-woven fabrics, but they are less efficient and constrained production and are higher cost. We also incurred significant additional costs to air freight non-woven materials in an effort to better meet demand. In our US Spring business, staffing is above the pre-COVID levels and we continue adding employees in response to strong demand. During the quarter, we also began to face supply constraints on TDI, a chemical used in the production of foam. Producers of TDI declared force majeure and significantly reduced the supply of the chemical. While the supply constraints have relaxed to a degree, we expect to see reduced supply through at least the end of the year. Within the last month, we have also seen shortages of polyols and MDI, chemicals more widely used in our specialty foams. Producers have pointed to equipment outages and hurricanes in the Gulf as well as raw material availability as impediments to production. We anticipate a tight supply of these chemicals through mid-2021. Our supply chains have also been hampered by congested ports, especially on the West Coast of the US. We are working diligently to address these issues and increase production so that we can better meet growing levels of market demand. Sales in our Specialized Products segment were down 9% in the third quarter, primarily from weak demand in Aerospace and Hydraulic Cylinders. We expect demand in Aerospace to be challenged over the next few years, given the disruption in air travel and resulting buildup of aircraft and supply chain inventories. In our Automotive business, sales for the quarter were roughly flat as demand trends continue to improve throughout the quarter. We are currently operating at near pre-COVID capacity levels in all regions. Sales in our Furniture, Flooring & Textile Products segment were up 1% in the third quarter, driven by continued strong demand in Fabric Converting, Geo Textile Components, and Home Furniture. Recovery in Work Furniture continues to lag the other businesses in this segment, as the industry has been heavily impacted by the effects of the pandemic. In Flooring products, residential sales held up well, but hospitality sales have been weak due to disruptions in the travel industry. Across our businesses, we continue to focus on controlling costs by keeping our variable cost structure aligned with current demand levels and maintaining as much fixed cost savings as practical. The fixed cost actions we took earlier in the year reduced our third quarter costs by approximately $30 million and we expect full-year fixed cost savings of nearly $100 million. In the last few weeks, COVID-19 infections again began to surge across much of North America and Europe, reinforcing that we remain in an uncertain economic environment. Our first priority is to keep our employees safe and healthy, and I'm pleased that the safety protocols our team has developed and implemented are working very well. We cannot control the impacts of broad-based community spread, however. We continue to closely monitor government orders and demand signals across our markets and stand ready to rapidly respond to control costs and optimize cash flow should economic conditions decline. For now, we'll continue to do all that we can to bridge supply and demand gaps, particularly in our Bedding business. I want to thank our employees for their dedication, ingenuity and resilience. Your actions are the key to our success and your efforts to overcome the many challenges that have developed this year are greatly appreciated. I'll now turn the call over to Jeff.

Thank you, Mitch, and good morning, everyone. Throughout the third quarter, our primary financial focus has been on maximizing liquidity, generating cash, and disciplined uses of cash. As previously mentioned, cash from operations was a record $261 million in the third quarter, an increase of $48 million versus the same quarter last year, primarily due to working capital improvements. We ended the quarter with adjusted working capital as a percentage of annualized sales at 8.7%, an outstanding result, reflecting our continued priority on closely controlling all elements of working capital. Our balance sheet remains strong and we ended the quarter with total liquidity of $1.4 billion, comprised of $245 million in cash on hand and $1.2 billion in available capacity under the $1.2 billion revolving credit facility. In the quarter, we reduced debt by $173 million, including a $60 million prepayment of a portion of our Term Loan A. As of September 30, our net debt to trailing 12-month EBITDA was 2.74 times, an improvement over second quarter's 3.1 times. As it relates to the tax rate, the Company benefited from new tax guidance issued in the third quarter related to global intangible low tax income commonly referred to as GILTI, which lowered our adjusted tax rate to approximately 18%. These newly issued regulations reduced the amount of tax in certain situations where companies are paying a high rate of foreign tax. The changes were retroactively applied to the beginning of 2018 when the GILTI rules were first put in place. From a uses of cash perspective, we continue to deploy our cash in a balanced and disciplined manner. We expect our capital expenditures to approximate $70 million for the year. Dividends should require approximately $210 million for the full year. Our scheduled debt repayments for the remainder of the year are approximately $12 million, and we continue to limit our acquisition activity. In summary, we are committed to maintaining our long hailed financial strength and investment-grade debt ratings. This discipline, along with the hard work and dedication of all of our employees, allows us to withstand these uncertain times and capture long-term opportunities. With those comments, I will turn the call back over to Susan.

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 your questions. Jessie, we're ready to begin the Q&A session.

Our first 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 about the challenges you're experiencing in the bedding supply chains. Can you provide more details on the initiatives you're pursuing in areas like non-wovens and chemicals? Also, how are you considering potential solutions to address these issues sooner than expected, particularly since you mentioned they might be a challenge through the second quarter of next year?

Mitch, you want to take it.

Sure, we're actively addressing a variety of challenges. The main issue we face is the scarcity of non-woven materials, which are being redirected to medical PPE applications. We've transformed our supply chain, moving from a few top-tier suppliers in the US to finding alternative materials globally. These alternatives are typically less efficient, requiring us to slow down our machines, which limits our supply. However, we've increased our supplier count significantly. We've even air freighted products to meet demand. Despite our efforts, the diversion of our preferred spun bond non-woven products continues to pose challenges. We're also increasing our workforce and are already above pre-COVID staffing levels, striving to achieve four shifts in all our major facilities operating 24/7, although finding labor remains challenging. Additionally, there have been recent supply issues with chemicals like TDI, MDI, and polyols, and we're continuously searching for available chemicals. Our teams are working on formulations to maximize efficiency, and we're adding equipment for our comfort core products, expecting production to ramp up early next year. Unfortunately, there are no quick fixes that will provide an immediate significant improvement.

Okay, that's very helpful color, Mitch. Thank you. And then following up, can you talk a little bit about pricing. Obviously, given a lot of these headwinds that you're facing, how are you thinking about offsetting some of those as well as some of the inflation that we are seeing in underlying input costs? Just talk about your efforts there and how that's coming together?

Thank you. We have been significantly impacted by non-woven pricing, and we have had to pass those costs on to our customers while continuing to collaborate with them to achieve a fair resolution. The same applies to chemical costs; if there have been increases, we have successfully transmitted those costs as well.

Okay. Thank you, guys and good luck with everything.

Thank you, Susan.

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

Good morning, everybody. Thank you for taking my questions. I hope everyone is staying safe and healthy.

Thank you, Bobby. Same with you.

I guess, Mitch, maybe to circle back first on Susan's question, can you maybe just help us put into context, kind of the progression of the bedding production and supply constraints over the quarter versus the July commentary of sales up 1%? I fully understand that three weeks of commentary is not a full 13-week quarter, but did the fabric and woven supply constraints get worse throughout the quarter and that offset the gains you made in labor and stuff like that or any additional color to kind of help us understand the puts and takes of why the quarter ended up maybe down and sales were starting up, when the industry probably at least got a little better throughout the quarter, at least from a pure bedding perspective.

Yes, sure, Bobby, and you got it pretty close to right there. So a couple of things too. From a finished goods inventory standpoint that at the end of September, we are well less than half of what our finished goods inventory would have been in January or March. So we are basically shipping what we're producing at this point. So that obviously impacts sales from a sort of year-over-year and a normal year perspective. You are right that even as we ramped up our headcount from taking it really down deep during the March and April timeframe and continue to make gains there, the quarter was also the worst impact for us on the availability of non-wovens, as we had sort of last minute what we thought supply that we could count on diverted from us. And so that absolutely did impact our production. We are still in difficult times, but getting a little bit more inventory that is having less impact on our production from a non-woven standpoint from just availability, but still less efficient as we are having to run needle punch instead of spun bond in many areas. So from a sequential standpoint, we still continue to make gains throughout the quarter, but when we look year-over-year, particularly in September, we were down a bit.

Okay. To provide some context, while we don't disclose specific unit numbers, can you share if the amount of innersprings you are able to produce in October is an improvement compared to September or August? Additionally, could you give us a rough estimate in comparison to last year? Are you operating at around 90% of last year's production or perhaps 85%?

I think that we're, Bobby, probably pretty close to where we were last year with a lot more hours and a lot more efforts.

Okay. And then to pivot off that, clearly some inefficiencies and stuff running through the P&L that way with more hours, more overtime, that's air freighting things in, but still record level EPS and a record level EBIT in the quarter. So if were to think out when things get back to more normal, should the Leggett enterprise earn more money, earn more EBIT on 2019 sales? If we got back to the prior peak in sales, would it earn a higher operating income than it had before given these fixed cost reductions could be permanent? Is that the right way to think about all this, just for context to help us bridging what 2021 could be like.

Hey, Bobby.

Go ahead, Susan.

Okay, Bobby. I was just going to reinforce our long-term margin target is still 11.5% to 12.5%. We appreciate how strong our margins were this quarter, I mean that we had a great quarter push and close to 13%. It's been a while since we've seen that level of performance. But we are not changing that long-term 11.5% to 12.5% for our target based upon this quarter's performance.

Okay. Bobby…

Bobby, I agree with what Susan said, and based on the efficiencies we've developed in cost reduction, particularly in overhead, we anticipate that this cost efficiency will be sustainable. To answer your question, if we consider the same volume from 2019 as a hypothetical example for 2021, while this is not guidance, based on our current cost structure and our confidence in maintaining that efficiency, we will indeed be more profitable. To put it another way, although our long-term targets remain unchanged, we fully expect to operate at the higher end of those targets going forward. We will explore this further as we prepare guidance for 2021.

Yes, that's very helpful, Karl. You've explained it a lot better than I think I asked the questions, so thank you, appreciate that. That's exactly what I was looking for. I appreciate the details. I'll jump back in the queue. Thank you.

Thanks, Bobby.

Thanks, Bobby.

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

Thank you. A couple of questions. First, your Specialty Foam sales were up as you noted in the slides. Given some of these force majeure on various chemicals, is growth going to deteriorate during the fourth quarter as a result of the actions that occurred?

Mitch, do you want to handle it?

Yes, I believe that's the best way to respond, Karl. We are experiencing allocation issues with all those chemicals due to force majeure. Various problems have arisen, including mechanical issues, availability of raw materials, and hurricanes and tropical storms, all of which have affected our operations. We are managing, but the situation is tight, and it's difficult to predict how long it will continue. At this moment, I wouldn't characterize the fourth quarter negatively, but it will be challenging.

Okay. If we look at Home Furniture, it saw a 4% increase in the quarter, which reflects strong sales. Were there any operational or production challenges, or how do you feel you compare to overall market growth?

Yes, I'll begin and then Steve can add to that. In the Furniture, Flooring & Textile Products segment, we reported that sales increased by 7% during the first three weeks of July, but ultimately ended at 1%. I don't want anyone to misinterpret this as a negative signal for Home Furniture, which performed well in early July. In 2020, U.S. Home Furniture manufacturers were more active than usual, as they opted to produce instead of taking their customary break during the July 4 week and sometimes the following weeks. This led to a significant increase in comparisons. Demand for Home Furniture remained strong after those initial three weeks of the quarter. Our customers have faced challenges related to labor availability, and we've experienced similar issues to a lesser extent. They were also affected by the TDI problem that was most pronounced in September, as mentioned by Mitch. Overall, furniture demand is solid, and we feel very confident about our market share and the industry's standing. In other words, there is a backlog in Home Furniture similar to that in Bedding, so everything is on track for Home Furniture. But I've jumped ahead of you, Steve.

That's all I think you said, virtually, what I would say. We had some labor constraints in China, in the US in the quarter, which are gradually improving. So we ended the quarter with a backlog as did most of the downstream players in the supply chain, and that unfulfilled demand will push into Q4. And on top of that, orders increased through the quarter adding to that, so you know we're going to see demand strong through the first quarter of next year and probably into the second quarter as companies are placing their orders out further and further as they get some clarity. And that's the upside. And then on the other side, seating business in the US is running at about 90% of the pre-COVID levels due to depressed sleeper sofa demand, which is primarily driven by the hospitality industry slowdown and we are making all that our customers can take in that space as well.

Okay, thank you.

Thank you, Keith.

Thank you. Our next question comes from Robert Friedner with Piper Sandler. Please proceed with your question.

Good morning, everyone. It's Bobby here for Peter this morning. I wanted to start by asking about trends in the auto business. It's good to see stabilization compared to Q2. Are you observing a consistent month-over-month improvement in auto-related sales? Also, do you have any insight into how auto dealers are managing inventory replenishment, given that current inventory levels seem to be at multi-year lows? Thank you.

Steve, you want to take that?

Yes, for sure. Good morning. First, I have to say, we're really, really proud of the automotive team for their diligent efforts to keep our customers running, and they have done that. In auto, we've seen significant monthly growth from May through September; we expect that to peak and come off some in the last two months of the year as the holidays impact the calendar. We don't have real-time visibility into OEM inventories, but we do know they are at very low levels in the US and China and they are trying to rebuild them to normal levels. And that's particularly true for trucks and SUVs. So in North America, September inventory ended at about 2.6 million units or only 49 days of supply, which is down significantly from the normal range. And in China, we've now seen five consecutive months of year-over-year sales growth, which is pulling on those inventories and that's due partially to government incentives. And these will drive the higher production into the first half of 2021, again, particularly in China and North America where those sales have been strong. But eventually, the normalized sales levels will not support these production levels that we've seen in Q3 and Q4, we will come back to a normalized production to sales ratio.

I appreciate that. For my second question, considering the supply chain constraints you're experiencing across various categories, could you share the feedback you're receiving from customers? Are there any long-term risks with customers trying to diversify their suppliers due to the ongoing bottlenecks?

Yes. Bobby, this is Karl. I'll take a swing at it and then ask Mitch to chime in. The supply chain issues, the non-woven challenges that Mitch spoke of, the labor constraints, they are not Leggett-only issues. It is a global issue. Demand in Europe is extremely strong. So there is no spring manufacturer anywhere in the world that has excess capacity. So yes, our customers are working diligently to try to fill gaps. It's very, very difficult for them to do that and there is no spring manufacturer globally that can recover through these short-term issues as well as Leggett. We have the best machinery available in the world, we're backwardly integrated, we have strong IP. So there is people trying to kind of fill gaps which we respect, but from a long-term perspective, we're not concerned. This is a temporary set of circumstances that our people are doing a Herculean task of recovering from and we'll get ahead of this thing. And I'm not long-term concern that nobody can handle these issues better than Leggett. And Mitch, I don't know if you have anything to add.

All right, thanks Karl, appreciate it.

Thank you. We have no additional questions at this time. So I'd like to pass the floor back to management for any additional closing comments.

We'll just say thank you for joining the call today, and we'll talk to you next quarter.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.