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Text: 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 COO; Jeff Tate, Executive Vice President and CFO; Steve Henderson, EVP and President of the Specialized Products and Furniture, Flooring and Textile Products segment; Cassie Branscum, Senior Director of IR; and Tarah Sherwood, Director of IR.
This conference call is being recorded for Leggett & Platt and is copyrighted material.
A replay is available from the IR portion of Leggett's website.
As we reported yesterday, we changed the accounting methodology used for valuing our domestic steel-related inventories from LIFO to FIFO.
Recast financial information for prior periods can be found in the Form 8-K we filed yesterday.
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.
We had a very strong start to 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 in residential end markets, growth in automotive and modest recovery in hydraulic cylinders, partially offset by sales declines in Aerospace.
Divestitures net of acquisitions reduced sales 1%.
EBIT was a first quarter record of $128 million.
EBIT increased $49 million in the versus first quarter of 2020, primarily due to volume growth, lower fixed cost and the non-recurrence of 2020's $8 million impairment charge related to a note receivable and a $4 million charge to write off stock associated with a prior year divestiture.
EBIT margin increased 360 basis points to 11.1% and increased 240 basis points versus adjusted first quarter 2020 EBIT margins of 8.7%.
First quarter EBITDA margin was 15.1% compared to 2020's first quarter adjusted EBITDA margin of 13.2%.
Earnings per share were a first quarter record of $0.64.
First quarter 2020 earnings per share was $0.33, including a $0.07 per share reduction from the non-recurring items mentioned.
Excluding these charges, first quarter earnings per share increased $0.24 or 60% versus first quarter 2020 adjusted earnings per share of $0.40.
These improvements occurred versus a first quarter of 2020 that was heavily impacted in the final two weeks by the effects of the COVID-19 pandemic.
Compared to first quarter 2019, sales were down slightly, but EBIT, EBIT margin and earnings per share improved significantly.
We also reported yesterday that our Board of Directors increased our second quarter dividend to $0.42 per share, a $0.02 per share or 5% increase versus the first quarter of 2020.
This marks our 50th year of consecutive annual dividend increases and places us among 31 other companies with at least 50 years of consecutive annual dividend increases known as Dividend Kings.
At Friday's closing price of $49.67, the current yield is 3.2%, 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, we issued our inaugural sustainability report.
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 this vital initiative.
We strive to advance sustainable solutions for our customers to achieve the highest standards of ethical conduct to demonstrate strong environmental stewardship and safety performance to enable a culture of inclusion, diversity and equity, and employee development at all levels of the Company, and to embrace our supply chain responsibilities.
In late April, the US mattress industry's anti-dumping 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 an affirmative final determination that the US mattress industry has been materially injured by these imported mattresses sold at prices that violate US trade laws.
We're pleased with our first quarter operating performance despite some difficult supply chain disruptions.
Many of these disruptions notably in chemical, semiconductors, labor and transportation are ongoing and may create continued volatility in both supply and cost.
Demand for home-related products and autos remain strong and we are seeing modest recovery in Hydraulic Cylinders, Work Furniture and Aerospace.
Sales in our Bedding Products segment were up 9% versus the first quarter of 2020.
Sales benefited from raw material related selling price increases of 9% from inflation in steel, chemicals and non-woven fabrics, and positive currency impact of 1%.
Volume grew 2% from the strength in ECS, European Spring and US Spring.
Prior year divestitures reduced sales by 3%.
Overall, mattress production in the industry was constrained throughout the quarter due to chemical shortages that restricted foam supply.
Our supply of non-woven fabrics, additional staffing and additional machine capacity allowed us to alleviate the backlog associated with our comfort core inner springs.
In the first quarter, we added over half of our planned 25% capacity expansion through a combination of labor and additional production equipment.
We will continue to add staffing and equipment as we move through the next two quarters.
Supply of the primary chemicals used in our specialty foam operations, TDI, MDI and polyol, were significantly restricted by producers after severe winter storms in February.
Supply improve 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.
Sales in our Specialized Products segment increased 10% in 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 in Aerospace.
In our Automotive business, volume for the quarter was up 14%.
Industry production has been and continues to be impacted by semiconductor shortages.
We anticipate these shortages to continue through the year.
Market demand in Hydraulic Cylinders began to improve in 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 in air travel and resulting buildup of aircraft and supply chain inventories.
In our Aerospace business, we've seen sequential sales improvement driven primarily by improved demand for fabricated duct assemblies where demand is near pre-COVID levels.
Demand for welded and seamless tube products remains challenged as customers continue to deplete inventories.
Sales in our Furniture, Flooring at Textile Products segment were up 12% in the first quarter, driven by 8% volume growth, raw material related price increases of 3% and a currency benefit of 1%.
We continue to see strong demand in Home Furniture, Geo Components and Fabric Converting.
In Flooring products, residential end market demand continues to be strong while hospitality demand remains low.
While recovery in Work Furniture lags the other businesses in the segment, sales continue to improve sequentially.
The fixed cost actions we took last year reduced our first quarter cost 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 only adding fixed cost as necessary to support higher volumes and future growth opportunities.
We transitioned from the last-in, first-out, or LIFO, cost method to the first-in, first-out, or FIFO, cost method.
This change more closely resembles the physical flow of inventory, establishes a more consistent method of inventory valuation across our businesses and better aligns with how many of our diversified manufacturing peers report financial results.
In addition, we believe this change will provide greater shareholder visibility into the Company's year-to-year profitability.
Over the past 15 years, LIFO has netted to only $9 million of expense to the Company.
While this average is 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 rate.
The cash outlay will occur over the three-year period of 2021 through 2023, with approximately $11 million of that to be paid in 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, cash from operations was a negative $11 million in the first quarter, a decrease of $21 million versus $10 million in 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 in 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.
2021 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 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 costs and recovery of those higher costs through selling price increases.
2021 earnings per share are now expected to be in the range of $2.55 to $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 in the range of 11% to 11.5%.
Earnings per share guidance assumes a full year effective tax rate of 23%, depreciation and amortization to approximate $195 million, 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.
In closing, our primary financial focus in 2021 remains on generating cash, maintaining discipline in capital allocation and reducing debt.
With the deleveraging progress made over the past year, we are in a strong position to capture both near and long-term growth opportunities that add capabilities or products products to our existing businesses.
Donna, we're ready to begin the Q&A session.

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q1 sales rose 10 percent to $1.151 billion.
q1 earnings per share $0.64.
increased 2021 guidance: sales of $4.8 - $5.0 billion and earnings per share of $2.55 - $2.75.
increased q2 dividend $0.02 to $.42 per share.

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