Q3 2023 Leggett & Platt Inc Earnings Call

Greetings welcome to Leggett <unk> Platt third quarter 2000, Twenty's free webcast an 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. If anyone should require operator assistance during the conference. Please.

Star Zero on your telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Cassie Branscum.

Your director of Investor Relations. Thank you Ms. Vance Carver you may begin.

Good morning, and welcome to Leggett <unk> Platt third quarter earnings call with me on the call today are Mitch Dallas, President and CEO, Ben Burns Executive Vice President and CFO, Steve Henderson Executive Vice President and President of the specialized products and furniture flooring and textile products segment.

Tyson Hegel Executive Vice President and President of the bedding products segment.

Isn't Mccoy senior Vice President of Investor Relations and cleaner Tauber manager of Investor Relations.

Agenda for our call. This morning is as follows Mitch will start with a summary of the main points. We made in yesterday's press release and discuss operating results and the main trend.

Dan will cover financial details and address our outlook for the remainder of 2023 and the group will answer any questions you have.

This conference call is being recorded for like an implant and is copyrighted material. This call may not be transcribed recorded or broadcast without our express 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.

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 <unk>.

All 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 Good morning, and thank you for participating in our third quarter call I would like to start the call by thanking our employees for their tremendous efforts in what was another challenging quarter.

Ongoing weak demand impacted our bedding products and furniture flooring and textile products segment that was partially offset by continued demand strength in our specialized products segment.

Sales in the quarter were down 9% versus third quarter, 2022 from lower volume and raw material related price decreases and.

Acquisitions added 2% to sales.

Third quarter earnings per share were 39 says this includes $5 million or three cents per share of gain from the sale of real estate.

Excluding this item adjusted earnings per share were <unk> 36 cents.

Earnings decreased year over year, primarily from lower metal metal margin in our steel rod business and lower volume in our residential end markets.

These decreases were partially offset by lower incentive compensation and bad debt expense.

Cash flow from operations was $144 million up $78 million versus third quarter of 2022.

We are lowering our full year guidance to reflect continued volatility in the macroeconomic environment continued low consumer demand in residential end market and the modest impact we've experienced so far from the UAW strike on our automotive business.

We are focused on anticipating and adapting to market changes improving operating efficiency driving strong cash management and engaging with our customers on new product opportunities, we are evaluating opportunities across our businesses, including further integration of our specialty foam and inner spring operations that are expected to support improved.

Stability, a strong balance sheet and continued shareholder returns.

Now moving on to segment results and demand trends.

Sales in our bedding products segment were down 17% versus third quarter of 2022.

Demand in the U S bedding market remains soft, but relatively stable sequentially.

We continue to anticipate full year mattress consumption to be down high single digits.

In the quarter, we saw a modest sequential improvement in innerspring mattress units, but we expect a deceleration in units sequentially in the fourth quarter due to normal seasonality.

Metal margin expanded to its highest point in mid 2022 and narrowed as expected, we still anticipate metal margin to be down mid teens versus 2022.

While our commercial teams continue to evaluate customer opportunities and commercialize new products soft demand remains the largest headwind to profits.

In the near term, we continue to drive operational efficiencies, especially in our specialty foam business to help offset soft volume.

Additionally, we believe meaningful opportunities to increase profitability exists and are evaluating a number of possibilities, including the further integration of our specialty foam inner spring operations, I mentioned, a moment ago, which should drive manufacturing savings and product development gains.

Optimizing our production and distribution capacity to service, our customers effectively and efficiently.

And enhancing our value proposition to our customers through expanded product capabilities and growing content at attractive price points.

Sales in our specialized products segment increased 10% versus third quarter of 2022, driven by the hydraulic cylinders acquisition completed in August of last year and volume growth in aerospace and automotive.

The UAW strike had minimal impact to our automotive business in the third quarter. So far in the fourth quarter. The sales impact has been approximately $5 million.

As the strike continues and potentially broaden two additional OEM facilities the impact to the industry remains uncertain and unpredictable.

As the situation evolves, we are maintaining communications with our customers and positioning ourselves to quickly react and support their needs.

Sales in our furniture flooring and textile products segment were down 11% versus third quarter 2022, driven by soft demand across the segment.

Sales in home furniture fabric, converting and flooring were down year over year, but roughly in line with second quarter levels.

Work furniture demand does soften modestly he was slower activity in European markets.

G O components demand continued to soften in home improvement retail and civil construction end markets.

We expect demand across the segment to decelerate sequentially in the fourth quarter due to normal seasonality.

With that I'll now turn the call over to Beth Thank.

Thank you mentioned good morning, everyone in the third quarter, we generated cash from operations of $144 million, a $78 million increase versus third quarter of 2022.

This increase reflects our sharp focus on working capital management, we ended the quarter with adjusted working capital as a percentage of annualized sales of 14, 2%, which improved from both last year's third quarter and sequentially from second quarter.

Cash from operations is still expected to be 450 million to $500 million in 2023.

We ended third quarter with total debt of $2 billion, including $171 million of commercial paper outstanding and no significant maturities until November 2024.

Net debt to trailing 12 month adjusted EBITDA was $3 one five times at quarter end as anticipated the ratio increased modestly from last quarter, but we expect to continue to comfortably meet our debt covenant requirements and maintains sufficient liquidity.

We are focused on maintaining investment grade debt ratings and expect this ratio to improve as earnings increase over time, and we use excess cash to pay down debt.

Total liquidity was 595 million at September 30th comprised of 274 million cash on hand, and $321 million in capacity remaining under our revolving credit facility.

In August our board of directors declared a third quarter dividend of 46 cents per share two cents or four 5% higher than last year's third quarter dividend.

We continue to deploy our cash in a balanced and disciplined manner for the full year 2023, we expect capital expenditures of approximately $110 million to $130 million dividends of approximately $240 million and minimal spending for acquisitions and share repurchases as we prioritize debt reduction.

In the near term.

Our long term priorities for use of cash remain unchanged. They include in order of priority funding organic growth paying dividends funding strategic acquisitions and repurchasing shares with available cash.

As announced yesterday, we are lowering our full year sales and earnings guidance due to lower than expected volume, primarily in our furniture flooring and textile and bedding products segments. We are not seeing the fourth quarter improvement in upholstered furniture end markets that was previously anticipated.

As we move through the third quarter demand continued to soften and home improvement retail civil construction and trade rod and wire applications.

This guidance does not include impacts from the UAW strike on our automotive business beyond what we have experienced so far due to uncertainties around the duration and severity of the strike.

2023 sales are now expected to be $4 7 billion to $4 $75 billion or down 8% to 9% versus 2022. This.

This guidance reflects volume at the midpoint and down mid single digits with bedding products down high single digits specialized products up high single digits, and furniture flooring and textile products down low double digits.

The guidance also assumes the impact of deflation and currency combined is expected to reduce sales mid single digits and acquisitions completed in 2022 should add approximately 2% of sales in 2023.

2023 earnings per share are now expected to be in the range of $1 45 to $1 55, including approximately seven cents per share of gain from net insurance proceeds we expect to recognize for the year and <unk> per share of gain from the sale of real estate, we recognized in the third quarter.

Full year adjusted earnings per share are now expected to be $1 35 to $1 45.

EPS guidance assumes a full year effective tax rate of 24% depreciation and amortization of approximately $185 million net interest expense of approximately $85 million and fully diluted shares of $137 million.

Based upon this guidance framework, our full year adjusted EBIT margin range is expected to be 7.0 to seven 3%.

Important drivers of margin improvement going forward will be stronger volume continued efficiency and cost improvements pricing discipline as raw material costs fluctuate and innovative products.

We are committed to maintaining our long held financial strength and creating long term value for our shareholders. As is always the case, we achieve our success because of our employees hard work and dedication at all levels of the company with those comments I'll turn the call back over to Kathy.

Thank you Ben operator, we're ready to begin Q&A.

Yeah, if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question friendly Kim and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star T is.

One moment, please while we poll for questions.

Our first question is from Susan Mcclary with Goldman Sachs. Please proceed.

Thank you good morning, everyone.

Okay.

Good morning, and I want to start on the specialized segment and perhaps a couple of things in there. It's as we think about auto, especially I guess at first you know can you talk about your ability to return to volumes as the strike eventually hits full resolution and.

And those Oems start getting back to work in there how should we think about that potentially coming through the business and then I also noticed in the release you mentioned that you had consolidated some facilities in there any thoughts on what the impact to the margin, perhaps this quarter, but to just how we should think about the cost structure of that.

This is and any further improvements or things that you can do there.

Yeah sure so I'll try and get all those remind me if I missed it I know, it's a lot [laughter]. That's good on the UAW impact, let's start there I mean of course, they appear to be moving in a better direction now with tentative agreements reached among the big three D. M. U S. Hydro producers still have to be approved by the union members them.

So still some uncertainty out there, but definitely appear to be moving towards a better spot than could've been possible and so yeah, a little tricky there for us on the guidance because of the way the stretch strike progressed I'm against all three Oems and a different facility. So really each of those steps had it.

Impact you saw for us that the impact was pretty minimal in the third quarter and so far as we've gone through in the fourth quarter through October basically I'm not too significant as well.

That's due mainly for three reasons one as I said, it's very facility specific at the Oems and so yeah. It's different impact everybody also I would say that I think that as you go through the cheaters in the supply chain I think people all of us, including US have tried to learn from that.

Difficulties that we had during the pandemic and so while that orders decrease and a sales decrease people were trying to be very cautious due to supply chain and not put ourselves in a position, where we couldn't respond with the strike and so they get that get to your question. So I think.

As now the labor is coming back in those facilities are getting back up and running I don't think it'll just have to go back to normal overnight as you know, but I think if we continue to move forward as we are there'll be a little bit of a slowdown, but it shouldn't be too significant hard to tell we baked in of course in our outlook, what we've seen through our.

Hmm.

Order book, so far so maybe it gets a little bit worse, but if things return you know in a decent way I think that will continue to move forward pretty much as we are so we'll keep we'll stay posted there I don't think that it is likely to be a significant change to us but if it is then we'll think about whether.

Operator: Greetings. Welcome to Leggett & Platt, third quarter, 2023, 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

We need to report on that or not.

Then is the the consolidation there yeah I think that's a good example of US continuing to look for ways to improve our operating efficiency and cost structure and really optimizing our footprint there and in the automotive business.

Cassie Branscum: It is now my pleasure to introduce your host, Cassie Branscum, senior director of investor relations. Thank you Ms. Branscum, you may begin. Good morning and welcome to Leggett & Platt's third quarter, earnings call. With me on the call today are Mitch Dulles, president and CEO, Ben Burns, Executive Vice President and CFO, Steve Henderson, Executive Vice President and President of the specialized products and furniture, flooring and textile product segments, Tyson Hagle, Executive Vice President and President of the betting product segment, Susan McCoy, Senior Vice President of investor relations and Collina Talbert, manager of investor relations.

Facilities in in Asia.

That you know we had a relatively small one and a large one that made the same type of type of products that after doing some work realize that we can pull those together. So it did have some cost impact for us in the third quarter. It should drive some good gains for us going forward, it's not it wasn't a huge consolidation, but I think it's a good example of taking our advantage.

Of the opportunities that are that we have and will continue to look for more of those across the full business.

And then the outlook for automotive continues to be to be strong and we still have a low inventories we have an aging vehicle fleet theres certainly some dynamics that have been showing up in the market at the end of forecast I would say, especially with the UAW strike, but kind of ups and downs in China as well, but I think the long term.

Cassie Branscum: The agenda for our call this morning is as follows. Mitch will start with a summary of the main points we made in yesterday's press release and discuss operating results in the mantron. Then we'll cover financial detail and address our outlook for the remainder of 2023 and the group will answer any questions you have. This conference call is being recorded for Leggett & Platt in its copyrighted material. This call may not be transcribed, recorded or broadcast without our express permission.

Look as is encourage you there for us.

Finally, I think we are making it the team is doing a good job of making progress in solving some of the production issues that we had here in the U S that we talked about it one of our facilities are earlier in the year. So still have some work to do but have made significant progress there and we will continue to drive margin improvement across the business.

Cassie Branscum: 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. Those documents supplement the information we discuss on this call, including non-gap reconciliation.

We continue to make.

Our progress in our inflation recovery Theyre, probably up to about 85% recovery with some of the commodity cost deflation now probably about the end of us talking about that online, but you feel feel good about our outlook there and we'll continue to drive margin improvements.

Cassie Branscum: 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 risk 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 10K and subsequent 10Q entitled risk factors and forward-looking statements.

Okay that was very helpful. Color I think you are you hit at all so well go.

Okay.

And is you know maybe thinking a bit more about the guidance can you talk to what has and what has not changed within that as we think about the fourth quarter and and where you are today versus your expectation.

Yeah sure happy to do that I know it can be a little bit confusing, but do you mind walking us through that yeah, sure and hi, Susan and thanks for the question Yeah. So maybe let's talk about first what has not changed so our innerspring mattress volumes, mostly are unchanged and we've seen stable demand. There also we've got.

Mitch Dulles: I'll now turn the call over to Mitch.

Mitch Dulles: Good morning and thank you for participating in our third quarter call. I would like to start to call by thanking our employees for their tremendous efforts in what was another challenging quarter, ongoing week-demand impacted our vetting products and furniture flooring and textile product segments but was partially offset by continued demand strength in our specialized product segment. Sales in the quarter were down 9% versus third quarter 2022 from lower volume and raw material related price decreases.

Continued strong demand in our businesses within our specialized segment.

Switching to really what has changed fourth quarter improvement in upholstered furniture end markets has not materialized as that market expected so that impacts not only our home furniture business, but also our fabric converting business and also specialty foam, where we supply a phone bonds to upholstered furniture manufacturers.

Mitch Dulles: Acquisitions added 2% to sales. Third quarter earnings per share were 39 cents. This includes $5 million or $3 cents per share of gain from the sale of real estate excluding this item adjusted earnings per share were 36 cents. Earnings decreased year-over-year primarily from lower metal margin in our steel rod business and lower volume in our residential area. These decreases were partially offset by lower incentive compensation and bad debt expense. Cash flow from operations was $144 million, up $78 million versus third quarter of 2022.

In the G O components business civil construction continues to be softer than anticipated as project funding releases keep getting pushed out we think that's a timing thing, but still haven't seen the momentum. There. We expected him also continued softening in their home or in the home.

Improvement retail, which also impacts our geo components business, but also impacts our flooring business as well.

And then lastly, I'd say related to betting we've seen lower trade rod and wire demand as well as continued declines in our wire grid volumes. So a lot of different things moving there, but those are the key highlights.

Mitch Dulles: We are lowering our full year guidance to reflect continued volatility in the macroeconomic environment, continued low consumer demand and residential in markets, and the modest impact we've experienced so far from the UAW strike on our automotive business. We are focused on anticipating and adapting to market changes, improving operating efficiency, driving strong cash management, and engaging with our customers on new product opportunities. We are evaluating opportunities across our businesses, including further integration of our specialty foam and inner spring operations that are expected to support improved profitability, a strong balance sheet, and continued shareholder returns.

Okay. That's helpful and then I'm going to sneak one more in for you.

The improvement in the working capital continues to be very impressive and you did not change your outlook for cash generation, despite having taking the earnings down again.

For this year can you talk to the ability to continue to drive that cash generation and other lovers that perhaps you can pull if the demand doesn't come back in and we're hoping for.

Mitch Dulles: Now moving on to segment results and demand trends. Sales in our vetting product segment were down 17% versus third quarter of 2022. Demand in the US vetting market remained soft but relatively stable sequentially. We continued to anticipate full year mattress consumption to be down high single digits. In the quarter, we saw modest sequential improvement in inner spring and mattress units, but we expected desaleration in units sequentially in the fourth quarter due to normal seasonality.

Sure Susan Yeah. That's another great question. So we we definitely had some really good cash generation in the third quarter as we've talked about our portfolio is has really gone through some dynamic times over the last couple of years with working capital as a result of supply chain challenges and inflated costs, but our teams have really done a good job.

Managing inventory that was built up and Ah in 2022, and then the demand started to weaken so we've continued to bring that inventory down and driven cash as a result of that we also have done a good job of focusing on our receivables I think our our receivables or isn't as bad as good a shape as they've been.

Mitch Dulles: Metal margin expanded to its highest point in mid 2022 and narrowed as expected. We still anticipate metal margin to be down mid teens versus 2022. While our commercial teams continue to evaluate customer opportunities and commercialize new products, soft demand remains the largest headwind to profits. In the near term, we continue to drive operational efficiencies, especially in our specialty foam business, to help offset soft volume. Additionally, we believe meaningful opportunities to increase profitability exist and are evaluating a number of possibilities, including the further integration of our specialty foam and inner spring operations, I mentioned a moment ago, which should drive manufacturing savings and product development gains, optimizing our production and distribution capacity to service our customers effectively and efficiently, and enhancing our value proposition to our customers through expanded product capabilities and growing content at attractive price points.

In a long time and payables as well so really looking at all levers there from a working capital perspective and saw really good performance in the third quarter with that said, we do think there's a little bit more improvements that we can look at going forward.

So as you think about cash generation for the fourth quarter.

We through earnings and then a little bit more improvement in working capital we feel good about getting to that 450 to 500 million in operating cash. So those are really the things that we're focused on and and the teams have done a great job.

Okay. That's that's very helpful I'll.

I'll come back into the queue, if theres anything else. Thanks.

Thank you Susan.

Our next question is from Bobby Griffin with Raymond James. Please proceed.

Mitch Dulles: They'll then our specialized product segment increased 10% versus third quarter of 2022, driven by the hydraulic cylinders acquisition completed in August of last year and volume growth in aerospace and automotive. The UAW strike had minimal impact to our automotive business in the third quarter. So far in the fourth quarter, the sales impact has been approximately $5 million. As the strike continues and potentially broadens to additional OEM facilities, the impact to the industry remains uncertain and unpredictable.

Hello, everybody. Thanks for taking my questions.

I guess first of all talk about first I wanted to hit on the bedding product segment. It's more just of a longer term question a lot's changed in that segment over the last call. It 18 months, especially with the spread coming down. So we're in a world where the spread on on Rod is it kind of stays where it is today or is under a little bit further.

Pressure what volumes come back in a recovery scenario, what what is the margin profile of that business and that type of setup. We used to be used we used to think of that business that they know 10 ish nine years to probably 11 ish EBIT margin business, what could it be if the spread.

Mitch Dulles: As the situation evolves, we are maintaining communications with our customers and positioning ourselves to quickly react and support their needs. Sales in our furniture flooring and textile product segment were down 11% versus third quarter of 2022, driven by soft demand across the segment. Sales and home furniture, fabric converting and flooring were down year over year but roughly in line with second quarter levels. Work furniture demand has often modestly was slower activity in European markets. In Geo component, demand continued to soften in home improvement retail and civil construction in markets.

You know it doesn't ever go back to this all time high levels.

Hey, Bobby this is Tyson I'll I'll jump in and try to answer for you.

Hum.

Obviously, there have been a lot of change over the last 18 months, there's a lot of craziness, our supply chain and demand related.

I think over the longer term, we still think that the fundamental margin profile exists we.

We have some work to do there.

The top drag of course, we've said quite a few times, but as volume and so a big part of it will be what the recovery looks like and exactly where it comes from and what type of products.

Mitch Dulles: We expect demand across the segment to decelerate sequentially in the fourth quarter due to normal seasonality.

Ben Burns: With that, I'll now turn the call over to Ben. Thank you, Mitch, and good morning everyone. In the third quarter, we generated cash from operations of $144 million, a $78 million increase versus third quarter of 2022. This increase reflects our sharp focus on working capital management. We ended the quarter with adjusted working capital as a percentage of annualized sales of 14.2%, which improved from both last year's third quarter and sequentially from second quarter.

We've mentioned our work that we need to do to not only integrate but improve the operating efficiencies in our specialty film business. That's that's a big driver for us as well.

On top of that just continuing to try to I think.

How we can most effectively serve our customer base from our manufacturing operations and distribution and then also continuing to work in our product development in commercializing, our new products and especially with content gains. So I think all of the market is changing a lot and continues to we have a lot of different things that we push on that we think gets us kind of do the same.

Ben Burns: Cash from operations is still expected to be $450 million to $500 million in 2023. We ended third quarter with total debt of $2 billion including $171 million of commercial paper outstanding and no significant maturities until November 2024. Net debt to trailing 12 months adjusted EBITDA was 3.15 times at quarter end. As anticipated, the ratio increased modestly from last quarter, but we expected continue to comfortably meet our debt covenant requirements and maintain sufficient liquidity.

Type level in terms of margin.

Okay, and then I think this is the second time, you guys have called out about the potential.

So these rationalizations or you know just some work you're doing inside.

The ECS business and looking at some different options is there a timeframe to kind of complete that initial dive through where we could you know think about maybe the potential impact from some of these changes are we still in the early innings of looking at all the different options.

Ben Burns: We are focused on maintaining investment grade debt ratings and expect this ratio to improve as earnings increase over time and we use XS cash to pay down debt. Total liquidity was $595 million at September 30th comprised of 274 million cash on hand and $321 million in capacity remaining under our revolving credit facility. In August, our Board of Directors declared a third quarter dividend of 46 cents per share, two cents or 4.5% higher than last year's third quarter dividend.

Bobby I think we're still in the early early innings. It's a great question and also about the changes in the bedding market and I think that's really fueling us to go back and say Hey, how do we need to adjust our outlook and take actions to make sure we're driving profitability and strong cash flow and shareholder returns and so that's what we're doing we still have.

Work to do I think the consolidation that we mentioned in automotive is a good small example of that so when we look across other businesses, but certainly a lot in embedding that that we've mentioned before but Tyson anything you would add there I know there's not a lot more that we can say at this point sure no I mean, we're working on a couple within specialty film I can't remember, if we mentioned them in the past.

Ben Burns: We continued to deploy our cash in a balanced and disciplined manner. For the full year 2023, we expect capital expenditures of approximately $110 to $130 million dividends of approximately $240 million and minimal spending for acquisitions and share repurchases as we prioritize debt reduction in the near term. Our long-term priorities for use of cash remain unchanged. They include in order of priority funding organic growth, paying dividends, funding strategic acquisitions, and repurchasing shares with available cash.

But I'm just trying to optimize our footprint we have someone on the west coast, where we're just trying to reduce some of the complexity and also in the southeast part of the United States. We're already working on some there as well, but I think it probably also it goes Bobby to what we've talked about what we had to pause the integration of specialty film into M. P and.

Even beyond that will make it acquired ECS business. It was for companies that are also being brought together so on top of that as you know Mitch said its early innings, because we still have a lot of that work that needs to be completed.

Ben Burns: As announced yesterday, we are lowering our full year sales and earnings guidance due to lower than expected volume, primarily in our furniture flooring and textile and vetting product segments. We are not seeing the fourth quarter improvement in a poll-stored furniture and markets that was previously anticipated. As we move through the third quarter, demand continued to soften in home improvement retail, civil construction, and trade rod and wire applications. This guidance does not include impacts from the UAW strike on our automotive business beyond what we have experienced so far due to uncertainties around the duration and severity of the strike.

Okay. That's helpful and I guess last thing for me you know Ben we've talked a couple of times about maintaining I guess investment grade and I know you guys don't have a leverage target out there, but maybe I'll come at the question a little bit differently, what what would be the net leverage ratio that you feel would give way get a great opportunity to stay well within kind of the low investment grade.

Aspect when you talk and I know you guys were just recently visiting some of the.

The credit rating agencies and stuff.

Yeah, Bob Thanks for the question Yeah, like we've said, we don't have a formal target out there right now, but we really think about net debt to EBITDA, a two and a half times or under is really that strong investment grade and so that's how we think about it.

Ben Burns: 2023 sales are now expected to be $4.7 billion to $4.75 billion or down 8% to 9% versus 2022. This guidance reflects volume at the midpoint down mid single digits with betting products down high single digits, specialized products up high single digits, and furniture flooring and textile products down low double digits. The guidance also assumes the impact of deflation and currency combined is expected to reduce sales mid single digits, and acquisitions completed in 2022 should add approximately 2% to sales in 2023.

Alright, that's helpful. I appreciate the details you best of luck here in the fourth quarter.

Thank you Bobby Bobby.

Our next question is from Keith Hughes with true Securities. Please proceed.

Okay. Thank you.

That was kind of murky in the automotive or just directionally. If there was a settlement to the stride given how far back with watchman. Your would you still feel some after effects of the events of the last couple of months into early 'twenty 'twenty four before it got better, but that's kind of how it's going to work.

Ben Burns: 2023 earnings per share are now expected to be in the range of $1.45 to $1.55 including approximately seven cents per share of gain from net insurance proceeds we expect to recognize for the year and three cents per share of gain from the sale of real estate we recognized in the third quarter. Full year adjusted earnings per share are now expected to be $1.35 to $1.45. EPS guidance assumes a full year effective tax rate of 24 percent depreciation and amortization of approximately $185 million net interest expense of approximately $85 million and fully deluded shares of $137 million.

That's a great question and I wish I had a precise answer to that.

But I don't know like a point or anything I'm just directionally yeah, Yeah. No. It's a good question I think you know that if it if it gets approved in the state that it is today you know there's been some disruption for sure at the Oes, but youre right as we go back through the supply chain, we've been less impacted by that so I think there.

<unk> be a little bit of a push out that they go into the early part of next year for that recovery, but I don't feel like it'll be too significant for us or the industry I think the fear that everyone had is it that the extent and the timeframe expanded then I think if you went back through the supply chain you'd have.

Ben Burns: Based upon this guidance framework our full year adjusted EBIT margin range is expected to be 7.0 to 7.3 percent. Important drivers of margin improvement going for will be stronger volume, continued efficiency and cost improvements, pricing discipline as raw material costs fluctuate and innovative products. We are committed to maintaining our long-held financial strength and creating long-term value for our shareholders. As is always the case we achieve our success because of our employees' hard work and dedication at all levels of the company.

No choice, but to start really slowing down production and dealing with labor issues and then as we know from recent experiences ramping that back up would be hard. So hopefully I think we've gotten to a spot again. If this if the contracts get approved that there won't be too much disruption I think right now that forecast the IHS work.

As in the other outlooks for the market are probably a little sketchy given these dynamics, but I think the outlook is still positive, but the demand is still there.

Okay and in the bedding.

Ben Burns: With those comments I'll turn the call back over to Cassie. Thank you Ben.

Specialty foam business could you explain what's done better really for every quarter. This year could you talk about when you think that share wins, it's not just the market as a whole what's what's going on with the dynamic between those two and I'm speaking to you about performance share sake. This is tyson.

Operator: Operator we're ready to begin Q&A. Thank you. If you would like to ask a question please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue and for participants using speaker equipment and maybe necessary to pick up your handset before pressing the star keys. One moment please will we pull for questions.

You know we talked about this I think going back to last year, where we had a pretty heavy emphasis in our specialty film business with our digitally native customers and even more so than the broad the bedding market in the U S that that segment of the market was really disrupted and so we've talked about the need that we had even in the early part of the recovery, whereas the mark.

Susan Maklari: Our first question is from Susan Mallari with Goldman Sachs please proceed. Thank you. Good morning everyone. Good morning. I want to start on the specialized segment. Perhaps a couple of things in there as we think about auto especially. I guess first you know can you talk about your ability to return to volumes as the strike eventually hit full resolution and in those OEMs start getting back to work in there. How should we think about that potentially coming through the business and then I also noticed in the release you mentioned that you had consolidated some facilities in there.

Recovers that we needed to diversify our customer base and so our commercial team has been working really hard you know even in a tough market trying to uncover those opportunities and they've been making some progress there and so I think it's more of the you know more of that that the nature of the improvement. There is just as we've been able to pick up some wins, even if so.

Market diversifying the customer base and that's that is helping us even if the markets are recovering.

And that's a thumb, you're referring to correct that I'm, referring to film yes.

Yeah, Okay, and I guess the final thing on this.

Look at the customer list and specialty foam or art.

Susan Maklari: Any thoughts on one the impact to the margin perhaps this quarter but two just how we should think about the cost structure of business and in any further improvements or things that you can do there. Yeah, sure, Susan, I'll try and get to all those, remind me if I'm this one. I know it's a lot. That's good.

At one time I think you can see I thought it was very concentrated with a couple of if you could give us an idea of the largest customers how much of that represented phones sales.

Yes, it's it's kind of a tough question to answer Keith, but you're going back into history. It was more concentrated like with the digitally native customer list them don't want to get into how many beds that are represented but.

Mitch Dulles: On the UAW impact, let's start there. I mean, of course things appear to be moving in a better direction now with tentative agreements reached among the big three US auto producers. Still have to be approved by the union members themselves, so still some uncertainty out there, but definitely appear to be moving towards a better spot than could have been possible. And so it was tricky there for us on the guidance because of the way the strike progressed against all three OEMs in a different facility.

We still have to some key customers, but we are growing that as we tried to diversify the customer base. Yes. So testing is it right to say I mean at the time of acquisition as you said focused in the D. B.

Decent list of I mean, it wasn't just one or two and as that you know that part that segment of the market has struggled a little bit the team has done a good job of diversifying our customer base. That's right. Yeah. That's fair to say, okay. All right. Okay. Thank you.

Mitch Dulles: So really each of those steps had a different impact. You saw for us that the impact was pretty minimal in the third quarter. And so far as we've gone through the fourth quarter through October, basically, not too significant as well. I think that's due mainly for three reasons. One, as I said, it's, you know, very facility specific at the OEMs. And so, you know, it's different impact to everybody. Also, I would say that I think that as you go through the cheaters in the supply chain, I think people, all of us, including us have tried to learn from the difficulties that we had during the pandemic.

Thanks Keith.

As a reminder, its star one on your telephone keypad, if he would like to ask a question. Our next question is from Peter Keith with Piper Sandler. Please proceed.

Hi, Thanks, Good morning, everyone hope you're well.

I wanted to ask about the metal margin you did call that out as an impact to EPS is there any way to quantify that.

That impact on our EPS year on year, and then on a related note you've talked about some weakening demand with rod and wire whats been the direction of the metal margin just in the last couple of weeks to months.

Mitch Dulles: And so, you know, while the orders decrease some and sales decrease some people were trying to be very cautious through the supply chain and not put ourselves in a position where we're going to work. Where we couldn't respond with the strike ended. And so that gets to your question. So I think that as now the labor is coming back and those facilities are getting back up and running. I don't think it'll just happen.

Hey, Peter this is Tyson I'll jump in so yeah.

It was expected but year over year metal margin declined was it was a major driver of the decline in the bedding EBIT.

But that was expected like I said, because we're really comparing against last year. When it was as high as you know after the run up in scrap and rod through the second into the third quarter last year, and we did call out the the softness that we're seeing and that is a combination of both volume just being lower what we're selling to the trade but I'll.

Mitch Dulles: Go back to normal overnight, as we know. But I think if we continue to move forward as we are, there'll be a little bit of a slowdown, but shouldn't be too significant. Hard to tell. You know, we've baked it, of course, in our outlook what we've seen through our order book so far. So maybe it gets a little bit worse, but if things return, you know, in a decent way, I think that will continue to move forward pretty much as we are.

Also the mix of what we're selling them more trending towards a lower carbon applications, which has a lower price side and then the high carbon rods.

So we're seeing I think we'd say still stability in overall metal margin gets really kind of where we expected it but our mix of product were selling to the trade AR is almost at the lower end and so that does have an impact on us.

Mitch Dulles: So we'll keep, we'll stay posted there. I don't think that it is likely to be a significant change to us, but if it is, then we'll think about whether we need to report on that or not.

Maybe just a couple of points on there, but just you called it out but in the middle of last year with sort of the historical highs for that spread and so we expected it to come down when we say mid teens.

Mitch Dulles: Then in the consolidation there, yeah, I think that's a good example of us continuing to look for ways to improve our operating efficiency and cost structure and really optimizing our footprint there in the automotive business. The facilities in Asia that we had a relatively small one and a large one that made the same type of products and after doing some work realized that we could pull those together. So it did have some cost impact for us in the third quarter.

It is where it is but that still remains at very very high levels. It has been relatively stable I think as we go through there and then.

The other thing our focus really is on consumption of our rod internally right. It just depends on the spring volume in some of the other things that we do so that trade is almost an ancillary market force.

Mitch Dulles: It should drive some good gains for us going forward. It wasn't a huge consolidation, but I think it's a good example of taking advantage of the opportunities that we have. And we'll continue to look for more of those across the full business. I think the outlook for automotive continues to be to be strong. We still have low inventories. We have an aging vehicle fleet. There's certainly some dynamics that have been showing up in the market and the forecast, I would say, especially with the UAW strike but kind of ups and downs in China as well.

And sometimes it is stronger and sometimes it's weaker it's trending a little bit weaker but you know it's it's.

Not really.

Part of our strategy, it's more a part of our capacity utilization is that right way to think about it that's right.

Okay.

I can put that together I guess youre still looking for mid teens.

The decline in margin, but does that shift to lower price, presumably lower margin or rod yeah.

That outlook at all.

No I don't think that we still we still expect that and that is what what's been covered that as part of our updated guidance for the betting some of it is having just that that lower.

Mitch Dulles: But I think the long-term outlook is encouraging there for us. Finally, I think we've making the team is doing a good job of making progress in solving some of the production issues that we had here in the US that we talked about in one of our facilities earlier in the year. So still have some work to do but have made significant progress there. And you know, we'll continue to drive large and improvement across the business, continue to make progress in our inflation recovery there, probably up to about 85% recovery. And with some of the commodity costs, deflating now, probably about the end of us talking about that online, but you'll feel good about our outlook there. We'll continue to drive large improvements.

The lower carbon.

And part of the mix for the fourth quarter.

Okay, alright, good enough.

And then pivoting over just to the pricing environment because.

Demand in in embedding and furniture and the like has remained weak obviously, there's some commodity deflation, but whats the competitive pricing environment like has that intensified as well.

As companies are perhaps looking to drive production to keep the factories running.

Well, Peter it's it's always a competitive market, especially when when times are soft like this is something that we're always having to be on top of and so we have to watch that very closely along with just our ability to serve our customers and drive the value that they need them like we just said that overall commodities are although they are down from last year. They are relatively stable.

Susan Maklari: Okay, that was very helpful color. I think you hit it all so well done.

Ben Burns: My second question is, you know, maybe thinking a bit more about the guidance, can you talk to what has and what has not changed within that as we think about the fourth quarter and where you are today versus your expectations. Yeah, sure. Happy to do that. I know it can be a little bit confusing, but then I'll give my luck in the student. Yeah, sure. And hi Susan, and thanks for the question.

At this point.

You know what we just talked about I think we'd probably see some modest deflation into the fourth quarter, but at this point, that's that's kind of where we see it yeah and I think you said this before I mean, we have to be competitive, but we also need to deliver value to our customers in different ways, whether it's through our ability to service them throughout the country or through innovation and I think that holds true.

Ben Burns: Yeah, so maybe let's talk about first what has not changed. So inner spring and mattress volumes mostly are unchanged. And we've seen a stable demand there. Also, we've got continued strong demand in our businesses within the specialized segment, switching to really what has changed. Fourth quarter improvement in a poster furniture in markets has not materialized as that market expected. So that impact not only our home furniture business, but also our fabric converting business and also specialty foam where we supply foam buns to poster furniture manufacturers.

In our home furniture business as well.

Okay, Great. One last question just on the.

The leverage ratio I guess, it's a follow up to Bob's question.

So you had talked about kind of an ideal leverage ratio of two and a half times is there a is there a threshold that you would like to avoid Ah you know in order to maintain that investment grade rating I guess, three and a half kind of comes to mind, but I don't want to make sure. My my thinking is level set.

Yeah, I think that's a good.

Way to think about it obviously, you know our leverages a little bit higher than we'd like we're at 3.15 times at the end of the third quarter, which is up modestly from last quarter at $3. One zero times, but you know we believe were at or near the peak, we think fourth quarter will look a lot like our third quarter so that.

Ben Burns: In the geo components business civil construction continues to be softer than anticipated as project funding releases keep getting pushed out. We think that's a timing thing, but still haven't seen the moment on there we expected. Also continued softening in our home or in home improvement retail, which also impacts our geo components business, but also impacts our flooring business as well. And then lastly, I would say related to bedding. We've seen lower trade rod and wire demand, as well as continued declines in our wire grid volume. So a lot of different things moving there, but those are the key highlights. Okay, that's helpful.

Metrics should be about in that range and really the the thing that we look at too is our debt covenant.

And that calculation, so that's a little bit more favorable to us so there's a little bit more headroom there than then.

The $3 one five times indicates so that's that's really a few of the key points that we take a look at from a leverage perspective.

Okay sounds good thank you very much.

Ben Burns: And then I'm going to sneak one more in for you. The improvement in the working capital continues to be very impressive. And you did not change your outlook for cash generations despite having taken the earnings down again for this year. Can you talk to the ability to continue to drive that cash generation and you know other lovers that perhaps you can pull if the demand doesn't come back as we're hoping for.

Thanks.

And our final question is a follow up from Susan Mcclary with Goldman Sachs. Please proceed.

Hi, again, Theres just a couple of things that I wanted to follow up on what is when you think about the weakness that you highlighted with and furniture, the residential furniture and flooring in those segments.

Do you think about that relative to the health of the consumer and what we're seeing within the consumer overall I would say one of the things. We're hearing this earnings season is that some of those higher end consumers are actually a relatively stronger would you say that you're seeing some of that in and if you are what could that imply for a pickup in some of those.

Ben Burns: Sure Susan, yeah, that's another great question. So we definitely had some really good cash generation in the third quarter. As we've talked about our portfolio is really gone through some dynamic times over the last couple of years with working capital. As a result of supply chain challenges and inflated costs, but our teams have really done a good job of managing inventory where that was built up and in 2022 and then the demand started to weaken.

Business is and then coming quarters.

Yeah, Great question, Susan I'll kick it off tightened and then you can come in and help them yet, but you know I think you're right that consumers continue spending you know we've seen the economy holding up better than certainly you would have thought at the beginning of the year that I think prospects for a soft landing or feeling for a likely these day.

Ben Burns: So we've continued to bring that inventory down and driven cash as a result of that. We also have done a good job of focusing on our receivables. I think our receivables are in as bad a good a shape as they've been in a long time and payables as well. So really looking at all levers there from a working capital perspective and saw really good performance in the third quarter. With that said, we do think there's a little bit more improvements that we can look at going forward.

But there's consumers are spending on travel in services in other areas outside of consumer durables. So after that shift to the home during the pandemic and now there's a strong shift away from it.

And that's you know impacting remodel units impacting you know some of the housing market and so I think it's sort of mixed signals people are continuing to spend sentiment is improving but it's still relatively weak job market remained strong I think that provides some confidence, but we're starting to see sort of credit credit balances.

Ben Burns: So as you think about cash generation for the fourth quarter, we through earnings and then a little bit more improvement in working capital, we feel good about getting to that 450 to 500 million in operating cash. So those are really the things that we're focused on and the teams have done a great job. Okay, that's very helpful. I'll I'll come back into the queue if there's anything else. Thanks.

You have a little bit in savings starting to decline a little bit.

Course installation is elevated and interest rates are up that creates them you know concerns I think around the economy.

And I would say a little bit concerned around the resumption of the student loan payments could be a little bit of a drag as well, so but with the strong job market and the spending that we're seeing today I remain relatively optimistic that the consumer strength will hang in there I think for US. It just did we get.

Robert Griffin: Our next question is from Bobby Griffin with Raymond James. Please proceed. Good morning, buddy. Thanks for taking my questions. I guess first I'll talk about first. I want to sit on the bedding product segment. It's more just of a longer term question. A lot's changed in that segment over the last called 18 months, especially with the spread coming down. So if we're in a world where the spread on on rod is kind of stays where it is today or is under a little bit further pressure.

Robert Griffin: What volumes come back in a recovery scenario? What what is the margin profile of that business and in that type of setup? We used to be used. We used to think of that business as a tennis, nine is probably 11 is even margin business. What could it be if the spread, you know, doesn't ever go back to those all time high levels.

A bit of a more normal shift to their focus more balanced between there's a services and travel and and the durables, but testing any different view or things you would have no not really meant to me I think you hit it.

The consumers' focus away from the home and then just also the general housing trends kind of suggest more of the same of what we've what we've seen so we're continuing to planed for slow, but stable levels of demand and it gets back to your question Susan.

And I think is more consistently and that's what we hear from our customers and the way we feel about it as well, but it's still slow and I think overall, we'd probably take that part of the market would also start to recover them first but yes generally I think mentioned, it's kind of more of the same yeah I feel like that there is some optimism as we went into the year that debt.

Tyson Hagle: Hey, Bob, this is Tyson. I'll jump in and try to answer for you. You know, I think we obviously there have been a lot of changes over the last 18 months. A lot of craziness supply chain and demand related. I think over the longer term, we still think that the fundamental larger profile exists. We have some work to do. You know, the top drag. Of course, we said it quite a few times, but it's volume.

Residential end markets start to recover in the middle of the year and it really didn't and then there was some optimism that you know we'd see stronger home furniture sales in the fourth quarter, and we really didn't and so I think that there's you know a little bit of I don't mean, just say concerned about being too.

Tyson Hagle: And so a big part of this will be what the recovery looks like and exactly where it comes from and what type of product. We've mentioned our work that we need to do to not only integrate but improve the operating efficiencies in our specialty film business. That's that's a big driver force as well. On top of that, just continuing to try to think how we can most effectively serve our customer base from our manufacturing operations and distribution.

Optimistic about until we start to really see some changes in demand that so that's why we're trying to manage the current environment no volume will come back okay sooner rather than later, but it's very hard to predict.

Tyson Hagle: And then also continuing to work in our product development and commercializing our new products and especially with content games. So I think all of the market is changing a lot and continues to we have a lot of different things that we push on that we think gets us kind of to the same type level in terms of margin. Okay. And then I think this is the second time you guys have called out about the potential, you know, the facilities, rationalizations or, you know, just some work you're doing inside.

Yeah, Okay I appreciate the color and one last thing when you think about the business overall and the potential for some continued deflation on the commodity side do you think that you can continue to hold price cost positive across most of those businesses.

Any thoughts there yeah.

Yeah, I do I think there are our folks have done a terrific job managing managing that so far as you've gone through inflation and deflation you know many of our businesses our contract base and movements that go on indexes, maybe with a little bit of lag that some of them are and so I think overall, we have done a good job managing that.

Tyson Hagle: The ECS business and looking at some different options. Is there a timeframe to kind of complete that initial dive through where we could, you know, think about maybe the potential impact from some of these changes or we still in the early innings of looking at all the different options. So I think we're still in the early innings. It's a great question and also about the changes in the betting market. I think that's really fueling us to go back and say, hey, how, how do we need to adjust our outlook and take actions to make sure we're driving profitability and strong cash flow and share all the returns.

And well continue to see that if we continue to see some modest despite deflation I think that helps with our margin percentage as well a little bit and that's been a drag on it too so I feel confident in our ability to maintain that.

Okay, alright, well, thanks for answering all the questions and good luck with everything.

Thank you very much Susan.

This concludes the question and answer session I would like to turn the floor back over to Kathy for closing comments.

Tyson Hagle: And so that's what we're doing. We still have work to do. I think the consolidation that we mentioned in automotive is a good small example of that. So we'll look across other businesses. But certainly a lot in in betting that that we've mentioned before but hasn't anything you would add there. I know there's not a lot more that we can say at this point. Sure. No, I mean, we're working on a couple of especially foam.

Thank you for joining us and your interest in like in it and have a great day.

Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Okay.

Tyson Hagle: I can't remember if we mentioned them in the past, but just trying to optimize our footprint. We have some of the west coast where we're just trying to reduce some of the complexity. And also in the southeast part of the United States, we're working on some there as well. But I think it probably also goes Bobby to what we've talked about where we had to pause the integration of especially foam into L&P.

[music].

Tyson Hagle: And even beyond that, when I get acquired ETS business, it was four companies that were also being brought together. So on top of that's what you mentioned, it's early in the excuse we still have a lot of that work that they need to be, completed.

Ben Burns: Okay, and I guess, lastly for me, you know, Ben, we've talked a couple times about maintaining, I guess, investment grade and I know you guys don't have a leverage target out there, but maybe I'll come at the question a little bit differently. What would be the net leverage ratio that you feel would give Lady a great opportunity to stay well within kind of the investment grade aspect when you talk, and I know you guys were just recently visiting some of the credit rate you just see some stuff.

Ben Burns: Yeah, Bobby, thanks for the question. Yeah, like we've said, we don't have a formal target out there right now, but we really think about net debt to EBITDAH two and a half times or under as really that strong investment grade. So that's how we think about it. Alright, that's helpful. I appreciate the details your best luck here in the fourth quarter. Thank you, Bobby.

Keith Hughes: Our next question is from Keith Hughes, but truly securities, please proceed. Okay, thank you. I know it's kind of murky in the automotive, but just directionally, if there's a settlement to this strike, given how far back this is watching, you're, would you still feel some. After effects of the events for the last couple months and early 2024 before, you know, got better, is that time of how it's going to work? It's a great question.

Keith Hughes: I wish I precise the answer to that. But you know, I'm just directing. Yeah, yeah, no, it's a good question. I say, you know, that if it gets approved in the state that it is today, you know, there's been some disruption for sure at the OEMs, but you're right, as we go back through the supply chain, we've been less impacted by that. So I think there might be a little bit of a push out that may go into the early part of next year for that recovery, but I don't feel like it'll be too significant for us or the industry.

Keith Hughes: I think the fear that everyone had is if that the extent and the timeframe expanded, then I think as you went back through the supply chain, you'd have no choice but to start really slowing down production and dealing with labor issues. And then, as we know, from recent experiences, wrapping that back up would be hard. So hopefully, I think we've gotten to a spot. Again, if this, if the contracts get approved, that there won't be too much disruption.

Keith Hughes: I think right now that forecast, the IHS forecast and other outlets for the market are probably a little sketchy given these dynamics, but I think, you know, the outlook is still positive. The demand is still there.

Tyson Hagle: OK, and in the betting, especially some business compared to us playing has done that really for every quarter this year, could you talk about it? Do you think that share wins? Is that just the market as a whole? What's going on with the dynamic between us too? And I'm speaking to you that performance. Sure. This is tight. You know, we talked about this, I think going back to last year, where we had a pretty heavy emphasis in our specialty film business with our digitally native customers.

Tyson Hagle: And, you know, even more so than the broad betting market in the US, that that segment of the market was really disrupted. And so we talked about the need that we had, even in the early part of the recovery at the market recovers that we needed to diversify our customer base. And so our commercial team has been working really hard, you know, even in a tough market, trying to uncover those opportunities and they've been making some progress there.

Tyson Hagle: And so I think it's more of, you know, more that the nature of the improvement there is just as we've been able to pick up some wins, even the film market, diversifying the customer base. And that's helping us even as a market recover. And that's in the phone, you're referring to it, right? That's on your phone, yes. Yeah, okay.

Tyson Hagle: And I guess final thing on this. If you look at the customer list and specialty phone art, at one time, I think the CSI was very concentrated with a couple. It can give us an idea of the largest customers, how much they represented phones, sales. It's kind of a tough question to answer, Keith, but going back into history, it was more concentrated like with the visually native customer list. Don't want to get into how many that that represented, but we still have some key customers, but we aren't growing that as we try to diversify the customer base.

Tyson Hagle: Yes, so testing is the right to say, I mean, at the time of acquisition, necessary to focus in the DBs, still a decent list of them. It wasn't just one or two. And as that part, that segment of the market has struggled a little bit, the team has done a good job of diversifying our customer base. That's right. That's very fair.

Operator: Okay. Thank you.

Peter Keith: As a reminder, star one on your telephone keypad.

Tyson Hagle: If you would like to ask a question, our next question is from Peter Keith with Paper Sandler. Please proceed. Hey, thanks. Good morning, everyone. Hope you're well. I wanted to ask about the Metamorgin. You did call that out as an impact to EPS. Is there any way to quantify that impact on EPS here and here? And then on a related note, you've talked about some weakening demand with rod and wire. What's been the direction of the Metamorgin just in the last couple of weeks and months?

Tyson Hagle: Peter, this is Tyson. I'll jump in. So, you know, it was expected that year-over-year Metamorgin decline was a major driver of the decline in the betting EBIT. But that was expected, like I said, because we're really comparing against last year when it was the highest, you know, after the run-up and scrap and rods through the second and the third quarter last year. We did call out the softness that we're seeing. And that is a combination of both volumes just being lower what we're selling to the trade, but also the mix of what we're selling.

Tyson Hagle: We're trending towards lower carbon applications, which is a lower price item than high carbon rod. So, we're seeing, I think we'd say, still stability and overall Metamorgin. Kids really kind of where we expected it, but our mix of product or sound to the trade is on the lower end and so that does have an impact on us. Tyson, maybe just a couple of points on that on there. You called it out, but in the middle of last year was sort of the historical highs for that spread.

Tyson Hagle: And so, we expected it to come down, but we say it teens, which is where it is. But that still reigns at very, very high levels and has been relatively stable, I think, as we go through there. And then the other thing, our focus really is on consumption of our rod internally, right? It just depends on the spring volume and some of the other things that we do. So, the trade is almost an ancillary market force.

Tyson Hagle: And sometimes it's stronger and sometimes it's weaker. It's kind of a little bit weaker, but it's not really a part of our strategy. It's more a part of capacity utilization, is that right? Way to think about it. That's right. Okay. So I can put that together. I guess you're just looking for mid teens decline in margin, but does that shift to lower price, presumably lower margin, rod, you know, change that outlook at all? No, I don't think so. We still we still expect that. And that is what case for the fourth quarter. Okay. All right. Good enough.

Ben Burns: And then pivoting over just to the pricing environment because, you know, demand in embedding and furniture and the like has remained weak. Obviously, there's some commodity deflation. But what's the competitive pricing environment like? Has that intensified as companies are perhaps looking to drive production and to keep the factories running? Well, Peter, it's always a competitive market, you know, especially when when times are soft like this, it's something that we're always having down top of.

Ben Burns: So we have to watch that very closely along with just our ability to serve our customers and drive the value that they need. Like we just said, that overall commodities are, although they're down from last year, they are relatively stable at this point. You know, what we just talked about, I think we'd probably see some modest deflation into the fourth quarter, but at this point, that's that's kind of where we see it.

Ben Burns: Yeah. I think you said this before. I mean, we have to be competitive, but we also need to deliver value to our customers in different ways, whether it's through our ability to service them throughout the country or through innovation. And I think that holds up true in our own furniture business as well. Okay. Great. One last question. Just on the leverage ratio, I guess it's a follow up to Bobby's question. So you had talked about kind of an ideal leverage ratio of two and a half times.

Ben Burns: Is there, is there a threshold that you would like to avoid, you know, in order to maintain that investment grade rating? I guess three and a half kind of comes to mind, but I want to make sure my thinking is level set. Yeah. I think that's a good way to think about it. Obviously, you know, our leverage is a little bit higher than we'd like. We're at 3.15 times at the end of the third quarter, which is up modestly from last quarter at 3.10 times.

Ben Burns: But, you know, we believe we're at or near the peak. We think fourth quarter will look a lot like third quarter so that metric should be about in that range. And really the thing that we look at too is our debt covenant and that calculation. So that's a little bit more favorable to us. So there's a little bit more headroom there than, you know, the 3.15 times indicates. So that's really a few of the key points that we take a look at from leverage perspective. Okay. Sounds good. Thank you very much. Thanks.

Susan Maklari: And our final question is a follow up from Susan McLeary with Goldman Sachs, please proceed. Hi again. There's just a couple of things that I wanted to follow up on. One is, when you think about the weakness that you highlighted within furniture, the residential furniture, and flooring in those segments, how do you think about that relative to the health of the consumer? And what we're seeing within the consumer overall, I would say one of the things we're hearing this earnings season is that some of those higher end consumers are actually relatively stronger.

Susan Maklari: Would you say that you're seeing some of that? And if you are, what could that imply for a pickup in some of those businesses and then coming quarters? Yeah, great question, Susan. I'll kick it off Tyson, and then you can come and help me out. But, you know, I think you're right that consumers continue spending, you know, we've seen the economy holding up better than certainly what I thought at the beginning of the year, the, I think, prospects for soft landing or feeling more likely these days.

Susan Maklari: But those consumers are spending on travel and services and other areas outside of consumer durable. So after that shift to the home during the pandemic, and now there's this strong shift away from it. And that's, you know, impacting, remodeling, it's impacting, you know, some of the housing markets. So I think it's sort of mixed signals. People are continuing to spend, cinnamon is improving, but it's still relatively weak, job market remains strong.

Susan Maklari: I think that provides some confidence. But we're starting to see sort of credit, credit balances be up a little bit and saving, starting to climb a little bit. Of course, inflation is elevated and interest rates are, are up, but create some, you know, concerns, I think, around the economy. And I would say a little bit concerned around the resumption of the student loan payments could be a little bit of a drag ahead as well.

Susan Maklari: So, you know, but, but with the strong job market and the spending that we're seeing today, I remain relatively optimistic that the consumer strength will hang in there. I think for us, it just do we get a bit of a more normal shift to their focus and more ballast between those services and travel and the durables. But hasn't any different view or things you would add there? No, not really much. I think you hit it.

Susan Maklari: The consumer's focus away from the home and then just also the general housing trends kind of suggest more of the same of what we've seen. So we're continuing to plan for slow but stable levels of demand. And I get back to your question, Susan, the high end, I think, is more consistently. That's what we hear from our customers in the way we feel about it as well. But, you know, it's still slow.

Susan Maklari: And I think overall, we probably think that part of the market would also start to recover first. But generally, I think it's kind of more the same. Yeah, I feel like that there was some optimism as we went into the year that residential and markets were starting to recover in the middle of the year. And they really didn't. And then there was some optimism that we'd see stronger home furniture sales in the fourth quarter.

Susan Maklari: And we really didn't. And so I think that there's a little bit of, I don't even, I'm just concerned about being too optimistic event until we start to really see some changes in demand. And so that's why we're trying to manage the current environment where no volume will come back over soon or rather than later, but it's sure hard to predict. Yeah, OK, I appreciate the color. And one last thing, when you think about the business overall, and the potential for some continued deflation on the commodity side, do you think that you can continue to hold price cost positive across most of those businesses, any thoughts there?

Susan Maklari: Yeah, I do. I think that our folks have done a terrific job like managing managing that so far has gone through inflation and deflation. You know, many of our businesses are contract based and movements go on indexes maybe with a little bit of lag, but some of them aren't. And so I think overall, we have done a good job managing that. And we'll continue to see some modest display deflation. I think that helps with our margin percentage as well a little bit.

Susan Maklari: That's been a drag on it too. So feel confident in our ability. Okay. All right. Well, thanks for answering all the questions and good luck with everything. Thank you very much, Susan. This concludes the question and answer session.

Cassie Branscum: I would like to turn the floor back over to Cassie for closing comments. Thank you for joining us and your interest in Leggett & Platt and have a great day. Thank you. This will conclude today's conference. You made this connector lines at this time and thank you for your participation. Thank you very much.