Q1 2021 Leggett & Platt Inc Earnings Call

[music].

Greetings and welcome to the Leggett and Platt first quarter 2021 earnings call and webcast at this time all participants on the 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.

Sorry zero on your telephone keypad as a reminder of this conference is being recorded it is now my pleasure to introduce your host Ms. Susan Mccoy Senior Vice President of Investor Relations. Thank you Ms Mccoy and you may begin.

Thanks, Dawn and good morning, and thank you for taking part in Leggett club's first quarter conference call.

We are conducting the call from different locations again this quarter. Please bear with US if you experience minor delays or mixed audio quality.

On the call today are Karl Glassman, Chairman and CEO, Mitch Dolloff, President and C. O O, Jeff Tate Executive Vice President and CFO, Steve Henderson, EVP, and president of the specialized products and furniture flooring and textile products.

Segment Kashi brands from senior director of IR, and chair of Sherwood director of IR.

The agenda for our call. This morning is as follows Karl will start with the summary of the main points. We made in yesterday's press release and comment on some recent activities Mitch will discuss operating results and demand trends and Jeff will cover financial details and the dress our updated outlook for 'twenty.

The 21.

This conference call is being recorded for Leggett and 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 the white goods website.

We posted to the IR Investor Relations portion of the website yesterday's press release and the 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.

As we reported yesterday, we changed the accounting methodology used for valuing our domestic steel related inventories from LIFO to FIFO the and.

Facts of the change in accounting methodology have been retrospectively applied to all prior periods presented in the press release and Powerpoint slides recast financial information for prior periods can be found in the form 8-K, we filed yesterday.

And need to remind you that remarks today concerning future expectations events objectives strategies trends of results constitute forward looking statements.

Actual results or events may differ materially due to a number of risks and uncertainties and the company undertakes no obligation to update or revise these statements.

For a summary of these risk factors and additional information please refer to yesterday's press release and the sections in our most recent 10-K entitled risk factors and forward looking statements and.

I'll now turn the call over to Karl.

Good morning, and thank.

Thank you for joining us today.

We had a very strong start of 2021.

Yesterday, we reported first quarter sales increased 10% to $1.15 billion.

Organic sales grew 11% from a combination of raw material related price increases higher volume and currency benefit volume grew 4% with continued strong demand and residential end markets growth and automotive and modest recovery and hydraulic cylinder.

Partially offset by sales declines in aerospace the bed.

<unk> net of acquisitions reduced sales of 1%.

EBIT was a first quarter record of $128 million EBIT increased $49 million and the.

And the quarter versus first quarter of 2020, primarily due to the volume grow lower fixed cost and the non recurrence of <unk> $8 million of impairment charge related to of note receivable and of $4 million charge to write off stock associated with the prior year.

Best of true.

EBIT margin increased 360 basis points to 11, 1% and increased 240 basis points versus adjusted first quarter 2020, EBIT margins of eight 7%.

First quarter EBIT dollar margin was 15, 1% compared to 2000, Twenty's first quarter adjusted EBITDA margins of 13, 2%.

Earnings per share of worry first quarter record of 64 cents first quarter 2020, EPS was 33 cents exclude including a seven cent per share reduction from the non reoccurring items mentioned.

Excluding these charges first quarter EPS increased 24 cents or 60% versus first quarter 2020, adjusted EPS of <unk> 40 cents.

These.

<unk> occurred versus a first quarter of 2020 that was heavily impacted and the final two weeks by the effects of the COVID-19 pandemic compared to first quarter 2019 sales were down slightly, but EBIT and EBIT margin and EPS.

The improved significantly.

We also reported yesterday that our board of directors and increased our second quarter dividend to <unk> 42 per share a <unk> <unk> per share or 5% increase versus the first quarter of 2020.

This marks our fifth year of consecutive annual dividend increases and places us amongst 31 other companies with at least 50 years of consecutive annual dividend increases and known as dividend the teens.

At Friday's closing price of $49 67.

The current yield is three 2%, which is one of the higher yields among the S&P 500 dividend aristocrats.

I also wanted to update you on some recent activities.

In mid April.

Issued our inaugural sustainability report and we believe that reporting on environmental social and governance issues is critical for our stakeholders growing need for information and we are pleased to begin the vital initiative.

Drive to advance sustainable solutions for our customers to achieve the highest standards of ethical conduct to demonstrates strong environmental stewardship and safety performance to enable a culture of inclusion and diversity and equity and employee development at all less.

<unk> sort of the company and to embrace our supply chain responsibilities.

In late April the U S mattress industry's antidumping petition on imported mattresses from seven countries and countervailing duty petition on Chinese imported mattresses came to a successful conclusion with the international Trade Commission, making and affirmative final determination.

And that the U S mattress industry has been material and you're materially injured by these imported mattresses sold at prices that violate U S trade laws with that I will turn the call over to Mitch.

Thank you Karl and good morning, everyone. We're pleased with our first quarter operating performance, despite some difficult supply chain disruptions.

Many of these disruptions, notably and chemicals semiconductors labor and transportation are ongoing and May create continued volatility of both supply and costs.

Demand for home related products and autos remained strong and we are seeing modest recovery and hydraulic cylinders work furniture and aerospace.

Sales and our bedding products segment were up 9% versus the first quarter of 2020.

Sales benefit from benefited from raw material related selling price increases of 9% from steel inflation and steel chemicals, and non woven fabrics and positive currency impact of 1%.

Volume grew 2% from strength and ECS European Spring and U S spring.

Prior year divestitures reduced sales by 3%.

Overall, the mattress production and the industry was constrained throughout the quarter due to the chemical shortages that restricted from supply.

Our supply of non woven fabrics additional staffing and additional machine capacity allowed us to alleviate the backlog associated with their comfort core inner springs.

And the first quarter, we added over half of our planned 25% capacity expansion through a combination of labor and additional production equipment.

And we will continue to add staffing and equipment as we move through the next two quarters.

Mhm.

Supply of the primary chemicals used in our specialty foam operations TDI MDI and polyol, we're significantly restricted by producers after severe winter storms in February.

The improved through April and we expect to return to January allocation levels of roughly 75% by the end of May.

We anticipate chemical allocations will continue to improve that may persist throughout the remainder of the year.

Okay.

Sales and our specialized products segment increased 10% and the first quarter with 6% from currency benefit, 3% from volume growth and 1% from acquisitions.

Growth in automotive and hydraulic cylinders was partially offset by sales declines and aerospace.

And.

And our automotive business volume for the quarter was up 14%.

Industry production has been and continues to be impacted by semiconductor shortages, we anticipate the shortages to continue through the year.

And in market demand and hydraulic cylinders began to improve and late 2020, and we expect that trend to continue throughout 2021.

We expect the aerospace industry to remain challenged over the next few years, given the disruption and air travel and resulting buildup of aircraft and supply chain inventories and.

Our aerospace business, we are seeing sequential sales improvement driven primarily by improved demand for fabricated duct assemblies, where demand is near pre COVID-19 levels.

Demand for welded and seamless tube products remains challenged as customers continue to deplete inventories.

Sales and our furniture flooring and textile products segment were up 12% and the first quarter driven by 8% volume growth raw material related price increases of 3% and the currency benefit of 1%.

We continue to see strong demand and home furniture, geo components and fabric converting.

And flooring price residential end market demand continues to be strong while hospitality demand remains low.

While the recovery and work furniture lags the other businesses and the segment sales continue to improve sequentially.

The fixed cost actions, we took last year reduced our first quarter costs by approximately $20 million.

As we move through the year, we will continue to focus on controlling our costs by keeping our variable cost structure aligned with demand levels and the only adding fixed costs as necessary to support higher volumes and future growth opportunities.

I'll now turn the call over to Jeff.

Thank you Mitch and good morning, everyone.

As we reported yesterday and as Susan mentioned in her opening remarks during the first quarter, we changed the accounting methodology for our domestic steel related inventories, which represented roughly one third of our total inventories at the end of 2020.

And we transitioned from the last and first out or LIFO cost method to the first and first out of FIFO cost method.

This change more closely resembles the physical flow of inventory.

Tablets are the more consistent method of inventory valuation of across our businesses and better aligns with how many of our diversified manufacturing peers report financial results.

In addition, we believe and believe this change will provide greater shareholder visibility and to the company's year to year profitability.

Over the past 15 years, LIFO, if needed to only $9 million of expense to the company.

While this averages less than $1 million annually year to year changes have been significant at times.

Changes in our portfolio and global growth have resulted in a smaller percentage of LIFO inventories over the last few years.

We believe now is the right time to make this change due to the combination of last year's low ending LIFO inventory levels, and historically low tax and interest rates.

As a result of this accounting change, we expect to make tax payments of approximately $21 million based on current tax rates.

The cash outlay will occur over the three year period of 2021 through 2023.

With approximately $11 million of that to be paid and 2021.

Now moving on to the first quarter performance.

First quarter is typically our lowest cash flow quarter of the year with increased working capital driven by the normal cadence of our business.

Consistent with that pattern of cash from operations, where the negative $11 million and the first quarter of decrease of $21 million.

Versus $10 million and the same quarter of 2020.

Higher earnings were more than offset by planned working capital investments to replenish the inventories and certain businesses and inflation and the cost of those inventories.

We ended the quarter with adjusted working capital as a percentage of annualized sales at 12%.

Our balance sheet remains strong.

We ended the quarter with net debt to trailing 12 month EBITDA of $2 46 times.

And $1 $4 billion of total liquidity.

In addition, we brought back $24 million of offshore cash during the quarter.

As announced yesterday, we are increasing our 2021 sales and earnings per share guidance.

One of 21 sales are now expected to be $4 8 billion to $5 billion.

Or up 12% to 17% over 2020, resulting from mid to single mid to high single digit volume growth raw material related price increases and currency benefit.

The increase versus prior guidance of $4 6 billion to $4 9 billion reflect.

It reflects the combination of higher raw material related price increases and modestly higher volume growth.

We expect continued strong consumer demand for home related products and global automotive.

Along with improvements in supply chain constraints as we move through 2021.

We also expect continued inflation in steel cost and recovery of those higher costs through selling price increases.

2021 earnings per share are now expected to be on the range of $2 55 to.

The $2 75.

Primarily reflecting higher volume and higher metal margin.

This guidance also assumes fixed cost savings as a result of actions taken in 2020 to be approximately $70 million.

Based upon this guidance framework, our 2021 full year EBIT margin should be and the range of 11% to 11, 5%.

Earnings per share guidance assumes the full year effective tax rate of 23%.

Depreciation and amortization to approximate of $195 million net.

Net interest expense of approximately $75 million and fully diluted shares of $137 million.

Additionally, we expect our full year operating cash flow to approximate $500 million.

Capital expenditures to approximate $150 million.

Dividends of approximately $220 million and debt repayment of at least $51 million.

And closing our primary financial focus in 2021 remains on generating cash maintaining discipline and capital allocation and reducing debt.

With the deleveraging progress made over the past year, we on a strong position to capture both near and long term growth opportunities that add capabilities or products to our existing businesses with.

With those comments I will turn the call back over to Susan.

Thanks, 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 question and answer session at the group answers your questions Donna we're ready to begin the Q&A session.

Thank you the floor is now open for question and if he would like to ask the question. Please press star one on your telephone keypad at this time, a confirmation and total indicate your line is and the question queue. You May Press star two if he would like to remove your question from the queue.

Participants using speaker equipment, they may be necessary the pickup your handset before pressing.

Turkeys and once again that is star one to register of questions. At this time. Our first question is coming from Bobby Griffin of Raymond James. Please go ahead.

Good morning, everybody.

Thank you for taking my questions and hope everyone can learn from each day.

I guess first from me I, just wanted to circle up and maybe clean up and clean up a little and our model on the accounting change definitely the Karl can you guys tell us what the impact was the EBIT for the quarter. If you would've still been under LIFO, how would that how of that impacted the quarter from an EBIT perspective.

Hey, good morning, Bob.

Jeff Why don't you go ahead and.

Answer to that one of if you would please.

Absolutely Karl Good morning, Bobby Yes, Bobby if if we were still on LIFO for the first quarter. The approximate impact would have been $5 million and on a full year basis for 2021, we were projecting and the range of $20 million.

Okay.

We've got some of them have any impact on the guidance and raised or at that point because of just work its way through and that and it won't know.

And packages of the Susan and Craig numbers up.

No Bobby did not have any impact on our guidance. If you recall the initial guidance that we brought out in February did not include and include any LIFO impact associated with it at that time and so therefore moving forward the numbers that we've shared today also did not have an impact.

Alright, perfect. That's very helpful. And then I guess next for me maybe.

And maybe make sure Karl just I want to maybe connect the little bit of the U S spring sales up 2% versus some of the growth we've been seeing and the industry from.

And from some of the public peers and understanding that not everybody is public and and that 2% number doesn't include in place and you guys are of price increases, but maybe can you just walk us through kind of what you think the industry did and how your inner spring business performed and connecting those two aspects together.

And yeah Bobby.

As we said and our opening remarks, we're really pleased with the quarter, but in many respects, it's a quarter of what could have been.

And I mean that from the standpoint that you listen to what our public.

Bedding and furniture customers have to say and many of them have talked about the significant backlogs that they have and diving down a little deeper that many of them were non operating their plants and.

Many cases only half time during the first quarter because of the lack of availability of from chemicals.

So while we don't have of backlog per se from the standpoint that our customers only order from us when they need it our customers' backlogs are extreme so said differently, our 2% unit growth and U S. Spring would have been a lot higher of our customers had commodity selling the availability.

And even and home furniture, you saw the commentary there that home furniture grew really well most of that growth was not in the United States.

So the chemical constraints are not a problem in Asia or in Europe. So you saw European spring grow dramatically.

Since the quarter ended we've seen a significant uplift in our U S spring shipments as phones become more available and I know that I would probably just stole most of niches Thunder, but Mitch do.

And for that.

Well, it's hard to follow that Karl but I'll tell you about that and maybe just a couple of comments to add and good morning Bobby.

Of course, absolutely right when we saw the the weather impacts from February from the U S strength standpoint of course that impacted our customers and we saw our demand declined pretty pretty significantly. We took advantage of that time, however to rebuild inventories as you know we've been struggling to keep up before that so there was some positive news out of the.

And as we entered into April we started to see demand recover a bit and we've continued to see that in.

In the coming in the past week. So I think our customers are reporting that their backlogs are growing and expect their production to rebound and may and June as their phone situation and improves and I would add too we were a bit better on the cover of core side and a bit lower on the on the <unk>.

Open coil side, we've seen both of those recover as we come into the the last few weeks I think Karl is right. It was a bit of of struggled through the quarter, but the outlook.

And certainly the consumer outlook is strong it and I think our outlook is very strong as well.

Thank you and I guess the last one from me here before I jump back into queue I mean of course.

And Mitch the flow through of of this business for the quarter was a lot stronger than really we've seen from leg and and other and <unk>.

<unk> time so.

Can you maybe talk about some of the drivers of that and and is that maybe a function of the cost cuts or just better pricing realization and the businesses and anything around that because I think it was the 35% contribution margin here during this quarter, which really don't see during and.

<unk> times like this.

Yeah, Bobby I think you really hit it.

It's a testimony to the good work that our teams have done in terms of cost savings and then with the recovery of demand the disciplines around maintaining that.

And those cost inputs of our teams have done a wonderful job. The other side of that is that we're more efficient probably and passing through commodity inflation now than we have and the past ECS passes through pretty quickly.

And even on the U S spring side of the only 60% of our business and as is protected by long term supply agreements that have the 90 day lag on the the non contract customers, we pass through pretty quickly so and this time of hyper inflation and price recovery does.

Supply and on a price pass through efficiency has really been pretty high. So it's a combination of all of those things and lastly to michel's point the.

And we're picking up some overhead recovery and our U S spring business as were.

Putting ourselves in a position where we are.

Strong inventory position so all of the stars aligned.

We're really kind of dressed up and ready to go and really feel good about the future because of the strength of our customers' backlogs.

Thank you well congrats on a strong quarter from them on top.

On an operating perspective, and the best of luck here from the remainder of the year.

And thank you Bobby Thanks, Bobby.

Thank you. Our next question is coming from Susan.

What's the Macquarie of Goldman Sachs. Please go ahead.

Thank you good morning, and let me add my congratulations for a great quarter.

And thank you Mike.

And building on Bobby's question can you talk to us a little bit about inflation and how that came together on the quarter I know that in the and.

And the guide you kind of highlight better metal margins and there can you just give us some sense of what's going on there and how do you think about the timing maybe as we move through the year, and then especially relating that back to the pricing power that you have seen today and how we should be thinking about price cost for this year.

Mitch do you want to.

Try to unravel that.

Yeah. It did put a lot of the area now.

Feel free to jump into Karl.

Yes, so for sure we've seen.

Scrap inflation and rod inflation I think.

And an increase and the spread I think the Q1.

Average spread was about.

<unk> 50 versus $4 50 last year and 515 versus the prior year. So the.

And the steel market demand is strong we expect to see that inflation hold for a while and as we just talked about we've done a good job of passing that through and of course, a large portion of our U S. Spring business is contractual and we pass that through as well on.

And the chemical side I'd say chemicals are up about 60% from Q1 of 'twenty as Karl mentioned, we were able to pass that through more quickly and have been able to do so the chemical supply remains constrained and I think we might see cost dropped a little bit as supply improves, but I think there'll still be of elevated over the prior year. So.

I think that.

That we are in an inflationary environment, probably some ups and downs, along the way, but probably anticipate that it'll remain elevated here through most of the rest of the year.

And.

Okay, but it sounds like from your commentary that you are capturing that price and so as we think about moving through the quarters. It seems like you are fairly caught up and therefore of price costs should be relatively speaking and line is that the way to think about it.

Susan and I think Thats right I think.

Or is a little bit of pass through as we move through rod wire and screen, but I think we are relatively current.

Okay. Okay.

Yeah.

Sorry go ahead, and I was just going to kind of add we talked about the upstream side and the and.

And the ECS, but I think that also holds true with steel inflation through home furniture, and other places where after the following our restructuring and exiting some business. We're in a much better positioned to pass that along as well.

Yeah.

And power of this quarter certainly speaks to your ability to to realize that for sure. So it's.

Very well done.

And my next question is around thinking about the cadence of the margins you know you had especially strong margins on.

And bedding and and specialized and they really across all three segments, but those two especially.

We think about the and normal seasonality and the business moving to the second and third quarter and then even into force can you talk to how you expect those margins to trend and I guess, especially considering that there has been pretty well, it's really thinking more difficult comps that you have and the back half of the year for some of the what's your ability to kind of comp against those.

Oh, I'll take a shot of that to begin with them on a call.

Carl and Jeff and nuts.

Correct me, where you need to but.

And if you think about.

We saw the relative to volume on that.

And we expect that supply chains.

And my chain constraints and creative as we move the real.

Second and third quarters keep in mind that our fourth quarter is typically our lowest sales quarter.

And if you look at the I think the pattern of sales versus 2019, I think you will see some similarities as we move through the year and so thinking about margin progression you need to bear in mind I think.

That cadence of sales and.

And and see them somewhat normal earnings leverage.

On that on the volume changes.

And and I'd say all together.

Our first half sales because of you know and.

Some of the the.

Albeit less intense but still on going.

Pricing and loss.

<unk> issues.

The.

Two because of that first half margins.

And would be expected to be somewhat lower than we would anticipate in the second half.

Okay. That's helpful. Thank you good luck with everything going on.

Thanks, Susan.

Thank you. Our next question is coming from of.

True Securities. Please go ahead.

Thank you.

Question is on automotive.

The strong volume in the in the quarter.

I guess moving forward is the are the numbers from all of out of just gonna be all of in place and in some of the supply shortages and production thing we hear about or you you're going to see something more consistent given your position on the industry.

Yes, Keith good morning.

Certainly wanted to give a shout out to our global automotive team they've done an outstanding job dealing with many of the issues that you spoke of and the uncertainty.

The supply chain challenges, but Steve if you would want to wait and to the answer.

Sure. Thanks, Karl Good morning, Keith, Yes, I'd, just like to Echo your comments to the team the auto team Karl and they've done a pair of assets for 15 months and with more volatility than I've ever seen in my and my career and they are doing.

On a great job of managing through it so thanks to them.

In terms of the the and.

And markets, we see the demand signals and continuing to improve and Theres a lot of economic indicators that are favorable so of positive GDP unemployment is improving low interest rates are continuing and theres gov.

The government stimulus and the U S. Our auto specific incentives in Europe and.

And new home construction remained strong and North America and that drives kind of truck sales. So.

We're also seeing historically low inventory levels, particularly in North America.

And as Lockdowns are eased and travel picks up with bank of the fleet segment will start to recover so so with China being up 75% and March obviously against an easy comp of 12 straight months of again, that's positive and March the <unk>.

<unk> and North America was $17 million. So that's the highest and three year. So momentum is as good and then on the other side.

The semiconductor shortages and definitely have impacted us in Q1 and and wells for the for the rest of this year.

And in terms of supply our team has done a great job of keeping our call. So we are.

And navigated through that to this point and we think we're okay going forward, but we know there are some challenges that could come there.

In terms of demand degradation of the industry thought the first quarter was the worst of it and then there was a fire and mid March at the masses Chip factory and in Japan, the tightened everything up even more and.

<unk> added some of the Japanese Oems to the to the list.

They are back online and that facility and working to get back to full capacity.

Capacity, but that facility was really a part of the strategy to meet the the.

The MCU demand and the third quarter. So that's kind of push it out of it. So yes at this point, we're expecting the second quarter to be at.

At least as impacted as the first quarter of a little bit over $1 1 million units and we could begin to see improvement and the second half of the year and get more towards supply demand balance in terms of the chips and.

And then really the industry recovery can happen after that so all of that said, it's still very challenging to get a clear picture on many of the things can impact the outlook. There is still resins and foam and the recent weather conditions that are also impacting and so it's I.

And I guess, the fords CEO of the other day called the situation of opaque and I think we would agree with us.

And as commentary on that in that regard.

Okay.

Just shifting over the bedding and you've talked a lot of about the margins there.

And the the metal margins specifically can.

Can you characterize characterize as the raw and spreads there is that would that is that what drove a larger portion of the of.

Of the margin gain or is it more the just the quick pass through.

All of these prices on to your finished goods, obviously of your bed and customers.

Keith it's the combination of the two.

The industry macro industry metal margins being being wide.

And there's certainly a good thing for us.

As we said, we expect that to continue because of really strong global steel demand and a lack of <unk>.

Scrap availability so that the steel manufacturers these of certainly have some.

And the their industry have some pricing power and so we were pretty bullish going forward and as we said the pass through has been pretty quick.

To the with the guardrails of our contracts. So it's a combination of that too.

Okay and.

I think you had said this earlier on your contracted customers at U S. Spring what is the pass through lag.

For those customers on inflation.

Certainly the 90 days.

And I know, it's okay, alright, thank you very much.

Thank you Keith.

Thank you once again that is star one if you would like to register a question at this time. Our next question is coming from Peter Keith with Piper Sandler. Please go ahead.

Alright. Thank you good morning, everyone and a nice job and our sustainability report and it looked like a lot of hard effort went into that.

I did also just wanted to follow up on on betting and and I guess, what what sort of struck a Bobby and me by surprise here was the modeling off of 2019 on the adjusted numbers.

So of bedding is still down on the two year basis, but at the same time, the the margin expansion.

It's been the strongest with embedding relative to the other two segments. So could you just kind of help unpack that a little bit for us and and understand and what's driving margin and a period when the sales have been down for I guess the last two years.

Down because of the industry film and supply constraints that we spoke of earlier not of Leggett endemic issue at all and the reason that the margins are up is simply a better mix of product as we've been telling you and the rest of the investment community.

And have an expectation that we'll index too.

Higher quality higher content product going forward, so comfort core being 62% of total.

The U S sales comfort core with quantum edge being greater than 50% of total comfort core it's of content story and as Mitch said comfort core up greater than units open coil being down.

The continued strength and <unk>.

And the box certainly helps our couple of calls going forward as hybrid applications expand so and it's really a good story and betting happy to hear that our customers have more availability of asphalt and supply.

Karl and I would add similar on the ECS side, right with higher value products selling there as well.

Absolutely much and I apologize for overlooking that Mitch you're right, there's a much better mix and <unk>.

The higher percentage of mattresses versus commodity volume as our teams do a really good job of applying the.

Favorable chemicals to the greatest use.

Okay, that's great answer and I guess the to your point earlier, it's nice to make this accounting change to get a better picture of the underlying margin trends. So that's great to see.

Maybe sticking on betting there's some questions that I'm getting out there is it possible for you to quantify what you think the.

And the drag was in the quarter or what the backlog might be to you that could show up in Q2.

Mitch why don't you go ahead.

That is a tough one.

And as we've all said and we think that the and consumer demand has declined right. It's still out there. We are we don't see that backlog directly and we haven't gotten.

Very quantifiable insight into it we do expect that we will see our customers production increase in May and June and we are prepared to support that and hopefully we all get back in line and start reducing those backlogs, but but I think there will be hopefully a fairly meaningful increase.

A bit of a surge here is it chemicals supported.

And Peter the only.

The only.

And that we can.

The direct you to is.

Sleep number and.

And Tempur Sealy of both recently reported they both talked about record backlogs of the Sealy at the C level and and.

And sleep number as well so there is such a high correlation and so we're confident that those backlogs are significant but they're our customers backlog. So it's tough for us to quantify.

Okay fair enough.

One last question I had and maybe it would be for Jeff.

Just on the the leverage ratio, so it's coming down at least and our model it looks like and you guys might be at the.

Two times by the end of the year I guess does that seem like a reasonable target and and therefore, we could potentially start thinking about buyback presuming in 2022.

Good morning, Peter and thanks for the question.

Making tremendous progress as you noted in our deleveraging efforts and you've seen that over the past year, and a half or so and Europe projections around potentially where we could land at year and I would say at the very realistic at this stage.

And in terms of buybacks, we're going to stick with the.

The priorities that we set in terms of our uses of cash and and how that plays out here and the near term in terms of funding our organic growth continued to be very focused on our dividend commitment.

And so continuing to continue that deleveraging effort moving forward and then looking at M&A opportunities and we've been very clear that we will continue to look for those bolt on small type of M&A targets that would be a good fit with our portfolio moving forward and if there is additional cash after that it would be used for buybacks.

So I would say, we're not at that stage right now to be in the near term.

Identifying buyback opportunities because we've got some other priorities that we are really focused on that I just mentioned.

Okay. That's.

That's very helpful. Thanks, so much of everyone and good luck.

And you.

Thank you our next question.

And the Glory of Goldman Sachs. Please go ahead.

Yeah.

Low up question around.

Can you touch on what Youre seeing and from the the non residential parts of the business. It seems like we're starting to hear of some improvement there.

No that and aerospace you also highlighted the fact that your assembly business is actually back to 2019 levels can you just give us some color on what you're seeing and that side of the business and maybe commenting on aero, specifically and how it seems like there is some divergence between assemblies relative to tubing and there.

Yeah, Susan Thank you for the question and the opportunity to talk about some of our other businesses because of really awesome. Some good stories and good trends there, but Steve if you don't mind, why don't you and kind of and pass the ball, while yet get errors.

Sure. Good morning, Susan So, yes from Arrow and aerospace perspective, certainly it's down 43% from a strong Q1 of 2020.

But we have now seen two quarters of sequential sales growth.

And it hit this part of the portfolio of little bit later due to the extended supply chain that you.

We are aware of but the.

Assembly portion of the businesses closer to the end customers and the tube sales of those have recovered.

Foster than the tube sales, which typically run through distribution and those.

The supply chain are being completed right now and we expect that at some point those will those will recover as.

As the as the supply chain dries up but we don't have.

Very very detailed understanding of what that is but in general the industry is recovering and it should call that should pull that forward and certainly much of that is dependent on.

Traps air traffic picking back up again, and we're helping with vaccines and thats going to happen sooner than later.

That said the industry is still projected and not to recover until <unk>.

2023, something like that so it'll be a long road forward for that sort.

Of that business, but and it.

Good position.

To grow going going forward.

On hydraulic cylinders and.

And that portfolio up 2% so demand signals on that business are pretty short term in nature, but they are trending up steadily and modestly.

Had been demand had been about 60% and late 2020, but like we said orders and then picking up and our customers' expectations are that that will continue through the through the balance of the balance of the year. So we're cautiously optimistic and.

That regard.

And then shifting to the the furniture flooring and textile segments.

Both geo components and converting are doing very well and those teams and pivoted to growing segments really really quickly.

The near term outlook is pretty strong as projects that are funded continue around the U S. On their project tracking pipeline remains strong.

They had been.

Have been negatively impacted by energy slowdowns.

That's a pretty small part of the portfolio and that's been more than offset by the strength and the retail business, which is which is up and.

And they're still they're dealing with many of the inflationary.

And what's the other businesses are doing a great job of getting the pricing that they need to to offset that.

Fabric converting certainly benefiting from the core market rebound.

And with medical and filtration.

<unk> has been pretty pretty strong for them and furniture and automotive activity is pretty close to pre COVID-19.

COVID-19 levels.

And that team has really done a great job of strategic aggressive purchases beyond what the competition has done so it's really.

The good news story.

A little impacted by the phone shortages, which will probably start to ease of.

And she had mentioned from the bedding side of things so really the good news story there.

Home furniture demand has been strong through the quarter and as Karl said Asia remains particularly strong the order backlog is strong and the customers are saying that will continue for the foreseeable.

Future and the team's been able to add some.

Capacity to help work down that.

And that backlog and we have the you know the ability to add more if we need to depending on how long that on that last on theirs.

A light amount of impact in North America from that business, but not as bad as we had anticipated so that's positive.

And flooring the volumes are stable at a pretty good level, but in the past you know as we've said in the past still have limited visibility of their residential demand rate remains strong and hospitality remains off with projects getting pushed further into 2021 and.

2022.

Inflation is being recovered with our pricing and we believe the strong demand signals that we're seeing.

Will lead us to believe that we can get the needed relief that we have of air and all of the homebuilding and other things that give us any kind of view into the future of are still strong.

And then finally with the work furniture.

And you still lag the other businesses and the segment, but there's three quarters of sequential sales improvement there.

Our results are basically in line with our largest customers. We still believe the industry demand will be challenged for some time.

But we are seeing like I said, the slow recovery being primarily retail oriented one of the contract work continues to lag.

But it is increasing and that should lead to some improvements and the late fourth quarter early first quarter of next year as we have vaccines rolled out so.

From all of the all of the retail oriented aspects are driving this portion of the portfolio.

Yes.

Okay. That's very helpful color. Thank you for all that detail I guess one last question is you know, we've obviously talked about the impact of weather, especially in Texas as it relates to the supply chain and the availability of some raw materials, but were there any other impacts to the business in terms of maybe production or your ability to flow.

Product or anything of that nature of that we should be thinking about it and things there have improved and we move through the second quarter.

Yes.

And we have Mitch why don't you talk about the logistics issues that we continue to deal with it.

Okay. Yeah. Thanks, Karl I think that Theres, a variety of issues, but it feels like it's been happening first of all along now that its just part of part of the normal operations right. So the teams have done an incredible job really working around the inherent inefficiencies that come from whether it's the chip shortages of chemical shortages or material.

Mortgages, but as Karl mentioned and I think globally, we see transportation issues continue as well we see.

The lack of container availability, we see congestion at ports.

We see.

Both the supply constraints, there as well as inflation and I think we also continue to see.

The labor challenges around the world, but I don't think I think those are more of like Hey. These are things that we are dealing with and we probably will continue to deal with and for the foreseeable future.

Fully they they don't get worse.

But I think that will probably continue to have similar impacts that we have had here and the last few quarters with them going forward.

Okay Alright, thank you very much for all the for all of the call guys and good luck with every day.

Thank you ladies and gentlemen, this brings us to the end of our question and answer session I would like to turn the floor back over to MS. Mccoy for closing comments.

Well, we don't have anything else to add that we appreciate your time today and we look forward to speaking with you next next quarter.

Yeah.

Ladies and gentlemen, thank you for your interest and they get and thoughts you may disconnect. Your lines at this time for log off of the webcast and have a wonderful day.

[music].

Okay.

Yes.

[music].