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. 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; Mitch 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 the third quarter of 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 components and private label finished mattress needs. Adjusted EBITDA margins in the segment improved over the third quarter 2019 primarily from expanded metal margins in our Steel Rod business and fixed cost actions taken last year. Margins were lower versus the third quarter of 2020, primarily from lower volume, production inefficiencies driven by supply chain constraints and higher freight costs. Sales in our Specialized Products segment were down 3% from the third quarter 2020 and down 12% from the third quarter 2019 due to lower volumes in automotive and aerospace, partially offset by growth in hydraulic cylinders. In our Automotive business, volume was down over the 1- and 2-year periods. The semiconductor issues that have impacted many industries remained the major challenge for the automotive industry with global production forecast for the balance of 2021 declining dramatically this past quarter and again in October. Industry production was impacted to a much larger degree than expected with many OEMs reducing or completely shutting down production of some models for extended periods. Consumer demand remained strong and vehicle inventory remains at record low levels. Once the supply chain stabilizes, the industry should see improving production. Industry forecasts indicate recovery starting in the back half of next year and continuing through 2023. In our Aerospace business, demand for fabricated duct assemblies is near third quarter 2019 levels, but demand for welded and seamless tube products is still well below pre-pandemic levels. With the lingering impact from pandemic-related disruptions in air travel and resulting buildup of aircraft and supply chain inventories, the industry is not anticipated to return to 2019 demand levels until 2024. End-market demand in hydraulic cylinders is very strong and order backlogs continue to grow, however, global supply chain constraints and labor availability has hampered the ability of our OEM customers to ramp up production. We expect our sales to increase as OEM production increases, but supply chain constraints in this business could persist into 2022. EBITDA margins in the segment declined over the 1- and 2-year period, primarily from lower volume, partially offset by fixed cost actions taken last year. Sales in our Furniture, Flooring & Textile Products segment were up 12% versus third quarter 2020 and up 13% versus third quarter 2019, primarily from raw material related selling price increases and demand strength in Home Furniture. We expect strong demand in our Home Furniture business for the remainder of the year and into 2022. While demand remains below 2019 levels, Work Furniture sales continued sequential improvement for the fifth consecutive quarter, with strong demand for products sold for residential use and improving demand in the contract market. Volume was down in our Geo Components business as retail activity returned to more normalized levels after a surge in demand last year from the consumers' focus on home improvements. Volume was also down in Fabric Converting due to the nonrecurrence of the surge in medical and filtration sales last year. In Flooring products, residential end market demand is above pre-pandemic levels, whereas hospitality demand remains well below 2019 levels. Volume was down in the quarter due to limited chemical supply, labor availability and transportation disruptions. Adjusted EBITDA margins in the segment improved over the third quarter of 2019, primarily from improvements in our Home Furniture business and fixed cost actions taken last year. Margins were lower versus the third quarter 2020, primarily from lower volume. Overall, the fixed cost actions we took last year reduced our third quarter cost by approximately $20 million versus the third quarter of 2019. Across all of our businesses, we remain focused on controlling our costs by only adding fixed costs as necessary to support higher volumes and future growth opportunities. With fluctuating demand and limited labor availability, we are making short-term investments to attract and retain our labor force. We have rebuilt inventory in our Steel Rod, Drawn Wire and U.S. Spring businesses following severe depletion in 2020, and are holding slightly higher levels of inventory in order to meet anticipated customer demand as foam and labor availability improves across the industry. We will take our rod mill out of operation for approximately 3 weeks near the end of this year to replace the reheat furnace, and are holding additional safety stock as a precautionary measure. As a result, higher levels of inventory in these businesses are expected through the remainder of the year and will likely alter our normal seasonal cash flow cycle to some degree. I'll now turn the call over to Jeff.

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, in order of priority: funding organic growth, paying dividends, funding strategic acquisitions and share repurchases with available cash. For the full year 2021, we expect capital expenditures of approximately $120 million, dividends should approximate $220 million and acquisition spending of approximately $150 million. We do not expect any significant share repurchases as we continue to focus on deleveraging. As announced yesterday, we are narrowing our sales and earnings per share guidance ranges. 2021 sales are now expected to be $5 billion to $5.1 billion or up 17% to 19% over 2020. The guidance reflects mid-single-digit volume growth, raw material related price increases, currency benefit and approximately 1% growth from acquisitions net of divestitures. The change versus prior guidance of $4.9 billion to $5.1 billion primarily reflects higher raw material related price increases and lower expected volume in Automotive resulting from semiconductor shortages impacting industry production. 2021 earnings per share are now expected to be in the range of $2.86 to $2.96, including $0.16 per share from the real estate gain recognized in the second quarter. Full year adjusted earnings per share is now expected to be $2.70 to $2.80 with the change versus prior guidance of $2.70 to $2.90, primarily due to lower Automotive volume. This guidance also assumes fixed cost savings as a result of actions taken in 2020 to now be approximately $75 million. Based upon this guidance framework, our 2021 full year adjusted EBIT margin range should be 11.1% to 11.2%. Earnings per share guidance assumes a full year effective tax rate of 23%, depreciation and amortization to approximate $190 million, net interest expense of approximately $75 million and fully diluted shares of 137 million. In closing, we remain focused on cash generation while reducing debt and deploying capital in a balanced and disciplined manner that positions us to capture near and long-term growth opportunities, both organically and through strategic acquisitions. With those comments, I'll now turn the call back over to Susan.

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.

Our first question has come from 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, thanks, Karl. Let me address that. We're still receiving mixed signals from the OEMs as they are struggling to grasp their production schedules due to the dynamic chip situation. If we look back at the July IHS production forecast for major markets like North America, Europe, and developed Asian countries, which are particularly relevant for us, the forecast indicated a year-over-year production increase of just under 8%. However, that has since declined incrementally month-to-month, and in September, we saw a significant drop, which seems more aligned with the current reality regarding chip availability. Another decrease occurred in October. Consequently, we've shifted from an expected 8% year-over-year growth for 2020 to a forecast suggesting a decline of over 2%. There are still risks involved, but the impact on us is measured, as we utilize mainly generic chips and have managed to navigate their availability so far. Looking at the third quarter, production in major markets was nearly down 23% year-over-year, with Q4 expected to be around a 20% decline. It will remain challenging for the rest of the year. As for the forecast into 2020, we're predicting a slight year-over-year decline in the first quarter, potential improvement in the second, and a more optimistic outlook for the latter half of 2022. We need to keep monitoring that, as the chip situation remains very fluid. Ideally, we'll see improvements in the back half of 2022, and the current forecast suggests returning to 2019 production levels by the end of 2023. You also asked about regional differences, which is an excellent point. The North American OEMs were impacted first as they ramped up production quickly, and it appears that situation may be improving gradually. While I'm not seeing any significant surge, there are signs of leveling out and slight recovery. We're now noticing more effects spreading to Europe and somewhat to Asia. The regional dynamics remain fluid, but I hope we're seeing the worst impacts in Q3, though we've expressed similar sentiments before. I don't expect the pronounced surge in the next quarter or two that the industry had previously forecasted. Let me stop there and see if that answers your questions.

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, I think we're in a strong position. We've made some changes in our Home Furniture restructuring to move away from lower-margin commodity business, which has helped us effectively pass on inflation. Given the high inflation levels, it's necessary for us and our customers to adjust our prices. This situation is different from what we’ve experienced historically. While there may be occasional delays in passing through costs, such as the chemical increase we encountered in the third quarter, we have managed to address those. The automotive sector presents its challenges due to long-term contracts, but we aren’t facing the same inflationary pressures as in the steel, chemicals, and nonwoven sectors. We’ve been able to offset these costs through supplier negotiations or by delaying the typical annual price reductions in the industry, along with other value-added activities. Overall, our teams have done an outstanding job managing inflation thus far, and I believe we are well-equipped to navigate any further increases.

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 foreseeable 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, I believe you are right. It is dependent on volume. We require productive activity and some stability in the supply chain. This will help us move past the manufacturing inefficiency caused by supply chain disruptions. Achieving consistent unit production and a reliable supply chain would significantly contribute to increasing our margins.

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 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 real 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, thank you, Karl. That's a great question, Bobby. I believe there was some optimism that this situation would eventually be resolved, but that's not how it seems to be shaping up. As we've discussed, we anticipate some modest improvement in the first half of next year. It's important to note that consumer demand for vehicles remains very strong while inventories are quite low. At some point, once this constraint is lifted, there will be a significant boost for us and the industry overall. This will not only help get vehicles on the lots to meet service demand but will also aid in replenishing inventory levels. Fortunately, much of automotive production is more automated compared to other sectors. Therefore, it's crucial to maintain appropriate labor levels; investing in our workforce during these challenging times is key. As conditions start to improve, we will have the visibility and time needed to ramp up production, but it won't primarily be about adding equipment.

Okay. That's helpful. Lastly, Karl, regarding the Bedding segment, it’s challenging to gauge the industry’s performance on a quarterly basis. Can you provide insights into the U.S. spring volumes and foam volumes along with your expectations? Also, how did the U.S. industry perform in the third quarter? Is it possible to identify the impact of labor and availability challenges on volume?

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?

Sure. Let me address that, Karl. Bobby, let’s first discuss the U.S. Spring side. We have been experiencing a different cycle compared to the industry. Looking back at Q2 of last year, when the pandemic struck, everything slowed down, and we saw a surge in demand for medical products. By the end of the second quarter, demand began to rise again, and we viewed that positively. The demand became quite strong in the third quarter. However, we faced nonwoven and labor shortages, making us one of the first companies negatively affected by the widespread supply chain issues that are frequently discussed today. In the third quarter, we were depleting inventory and producing as much as we could, yet we couldn’t keep pace. Those were indeed challenging times. From a comfort coal perspective, Q3 last year even surpassed levels from 2019, marking a peak for us while we continued to run down our inventory. As we moved into Q4, our volumes significantly decreased, not due to a lack of demand, but because we simply couldn’t source the necessary labor and nonwoven materials. Additionally, we opted to step back from some low-margin Open Coil business, which has slightly hindered sales, though not profitability. Since Q4 last year, we've been progressively improving both production and sales. Unfortunately, during the period when we couldn't adequately support our customers, many began turning to imported products, which started to arrive by the end of last year and increased at the beginning of this year as OEMs dealt with their own foam and labor shortages. There was some excess inventory that has since been absorbed. With hindsight, we see that imports of component intersprings have decreased, while our volumes have been steadily improving each quarter since last year's fourth quarter. We are currently in a different cycle and are maintaining a strong inventory position and sufficient labor to support our customers as they enhance their production and resolve their backlogs, foam shortages, and labor issues as we move into next year. Let me stop there. Does that clarify things?

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 believe there was a misunderstanding regarding my earlier comment. What I meant to convey is that our volume was quite strong in the third quarter of last year at ECS as we were securing new business. However, our results have been more aligned with the overall impact felt across the OEM industry due to supply chain challenges stemming from chemical shortages throughout the year, including in the third quarter. The outlook for chemical availability in the fourth quarter seems to be improving to some extent, which we hope will enable us to better meet the full demand we have. The ongoing issue for us is the availability of chemicals, which continues to be a difficult and evolving situation, but I do see signs of improvement.

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. A significant portion of the increase you are observing will come from inflation when looking at a two-year perspective. I believe the volume is flat or slightly down.

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

Yes. If you recall, we were experiencing a deflationary environment in the latter half of 2019, particularly in the second year. Last year, we had only just started to increase our selling prices in the fourth quarter. We remained flat in the third quarter, had deflation in the first half, and finally saw a slight inflation in the fourth quarter. With all the inflation we've experienced this year, a significant portion of the year-over-year change—regardless of which quarter you compare to the prior one or two years—is primarily due to 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.

Our next questions come from 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.