TriMas Corporation

Thank you for standing by. Good day and welcome to the Trimass First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Sherry Lauterbach. Please go ahead.

Thank you and welcome to Trimass Corporation's First Quarter 2021 Earnings Call. Participating on the call today are Tom Amato, Trimass' President and CEO, and Bob Zalewski, our Chief Financial Officer. We also have with us Scott Mell, who, as we announced yesterday, will succeed Bob as CFO effective May 1st. We will provide our prepared remarks on our results and our outlook, and then we will open the call up for your questions. In order to assist with the review of our results, we have included the press release and PowerPoint presentation on our company website, www.trimaskorp.com, under the Investors section. In addition, a replay of this call will be available later today by calling 888-203-1112 with a replay code of 7033-534. Before we get started, I would like to remind everyone that our comments today, which are intended to supplement your understanding of TriMAS, may contain forward-looking statements that are inherently subject to a number of risks and uncertainties. Please refer to our Form 10-K and our First Quarter 10-Q that will be filed today for a list of factors that could cause our results to differ from those anticipated in any forward-looking statements. Also, we undertake no obligation to publicly update or revise any forward-looking statements except as required by law. We would also direct your attention to our website where considerably more information may be found. In addition, we would like to refer you to the appendix in our press release issued this are included as part of this presentation for the reconciliations between GAAP and non-GAAP financial measures used during this conference call. Today, the discussion on our call regarding our financial results will be on an adjusted basis, excluding the impact of special items. With that, I'll turn the call over to Tom Amato, TriMass' president and CEO. Tom?

Good morning, and welcome to TriMass' first quarter earnings call. On behalf of our global leadership team, we are very pleased with our performance to start the year. Despite continued challenges in accurately forecasting given the pandemic and related demand changes, we are reporting strong first quarter earnings today. Let's turn to slide three. As a reminder, for the first quarter of 2021, we are largely comparing results from a pandemic quarter to essentially a pre-pandemic quarter in 2020. While we work on integrating more recent acquisitions, we continue to have momentum in TriMass' packaging segment which was up 32% for the quarter to $132 million, a record first quarter sales level. We have previously stated that our specialty products businesses would be the first beneficiary from a market recovery. Indeed, we are excited to see sales levels at the high end of our outlook range and with better than anticipated conversion, which we attribute to prior year factory floor improvements. While it is still difficult to predict, we hope this trend continues and perhaps even dovetails into an additional future benefits from increased infrastructure spending that may occur in the US. We did experience higher raw material costs in the quarter, which we largely overcame through better than anticipated volume. So again, we are very pleased with our financial results for the quarter. Additionally, in late March, we announced a successful refinancing of our revolver facility which was otherwise expiring in 2022, and the refinancing of our fixed-rate notes. Given historically low interest rates, we elected to upsize our senior notes from $300 million to $400 million, putting additional cash net of refinancing costs of $86.5 million on our balance sheet. While we have no immediate need for the additional cash, we remain well capitalized and in a solid position to execute our long-range strategy. we are also well positioned to continue to execute share buybacks as part of our overall capital allocation strategy. In the first quarter, we repurchased approximately 0.2% of shares outstanding and have $159 million of availability under our most recent share repurchase authorization. To increase transparency on our earnings, we are also announcing today that we will be redefining adjusted earnings per share, to add back non-cash acquisition-related amortization expense. Given that we currently have more than $20 million of pre-tax non-cash acquisition amortization expense annually, modifying this definition provides our investors a better view of the cash earnings power of TriMass. Now, before I move to our specific results for the quarter, we also announced yesterday that Bob Zalupski, our CFO, will be retiring. Bob has done an incredible job over his career at TriMass, and I personally feel fortunate to have partnered with Bob over my nearly five years with the company as we repositioned TriMass and greatly improved our performance and potential. We also announced that we have hired Scott Mell as our new CFO. Scott comes to TriMass with strong financial acumen and a deep skill set on performance improvement. He has also worked with TriMass on a few high-impact projects over the last couple of years, so he has good familiarity with the company. I've asked Scott to introduce himself, after which he will be leaving the call to continue his onboarding work with the wider TriMAS team. Scott?

Thank you, Tom, and good morning to all. I'm excited to be here with you today and look forward to further engagement with our investors in the months and years ahead. My first day with TriMAS was on Monday, and it has been a busy week of onboarding with the leadership teams here at TriMass and our family of businesses. Fortunately for me, I'm very familiar with the TriMass organization. Prior to taking the CFO role, I was a managing director at Riveron Consulting, where I worked closely with Tom, Bob, and others in several high-impact projects over the last 24 months. This work has allowed me to develop a meaningful understanding of the TriMass business model are intrinsic value drivers in the work of the Office of the CFO at TriMass. With that being said, I'm still going to be drinking through the fire hose for these first few weeks. However, most of my career has been focused on providing strategic leadership during times of meaningful change, so I look forward to the challenge. Before I go, I'd like to acknowledge my predecessor, Bob Zalupski, and his almost 20 years with TriMass. I've gotten to know Bob over the last few years, and I wanted to take a moment to simply wish him and his family well. I'm going to drop now and hand it back to Tom and Bob to take you through the first quarter results. Thank you.

Thank you, Scott, and I look forward to your future contributions in helping us advance TriMAS to the next level. If we turn to slide four, I'll review TriMAS's first quarter results before turning the call over to Bob, who will take us through our segment results. Consolidated sales were $206.7 million, up 13.1% as compared to the prior year quarter, driven by acquisitions, organic sales increases, and currency. Organic sales were up 1.9%, driven exclusively by TriMas' packaging group, more than overcoming sales declines in TriMas' aerospace and our specialty product segments. As noted, we are comparing the first quarter of 2021 a pandemic quarter, to an essentially pre-pandemic quarter in 2020. Adjusted operating profit was $26.6 million, or 12.9% for the quarter, up $4.6 million as compared to the prior year quarter. And adjusted net income was $17.4 million, up $2.3 million as compared to the prior year quarter. Adjusted diluted EPS was $0.40 per share, which exceeded the top end of our outlook range of 34 to 39 cents and compares to 34 cents per share for the prior year quarter. As I mentioned earlier, going forward, we will be reporting our adjusted diluted EPS by excluding non-cash acquisition-related amortization expense. For the first quarter of 2021, under this enhanced definition, we achieved 49 cents per share up 16.7% as compared to 42 cents per share for the prior year quarter under the same revised definition. Finally, adjusted EBITDA was 40.6 million or 19.6% of sales. Let's turn to slide five. I would note that our balance sheet statistics shown in this slide has some temporary but not uncommon anomalies given that our refinancing transaction spanned over the quarter. For example, funds were received from our new 4 1⁄8% senior notes due 2029 prior to March 31, 2021. However, we did not yet pay off our 4 7⁄8% senior notes at quarter end. As of today, of course, we have since paid off our 4 7⁄8% senior notes entirely. We delivered free cash flow of $10.3 million as compared to the prior year quarter of $1.8 million. This performance was a result of our year-over-year EBITDA increase plus continued networking capital management, which was partially offset by a higher level of capital spending. Adjusted LTM EBITDA was $162 million. an increase of $5.2 million as compared to the December adjusted LTM EBITDA of $156.8 million, which highlights our continued positive momentum. We believe that driving TriMass' LTM EBITDA higher, while simultaneously maintaining a deleveraging model against net debt, ultimately will drive long-term shareholder value creation. Finally, Our net leverage was 1.7 times, well below our stated long-range goal of two times, and we have sufficient borrowing capacity. When adjusted for the redemption of our 4.78% senior notes, we have more than $400 million of available cash and liquidity at quarter end. I will now turn the call over to Bob, who will take us through our segment results. Bob?

Thank you, Tom. If we turn to slide 7, I will begin my comments with a review of our packaging segments. I would first like to highlight that TriMas Packaging Group recorded record quarterly sales and operating profit for its first fiscal quarter. This accomplishment is a testimony to the hard work and dedication of all of our packaging team members globally, considering the unprecedented nature of the pandemic and its ongoing impacts. First quarter net sales of 132.1 million increased approximately 32 million or 32% net of foreign currency as compared to the year-ago period. On an organic basis, sales increased 15.9 million, up almost 16%, while acquisitions contributed an additional 13.4 million, and the impact of favorable currency translation added 2.7 million. Sales of our products used in beauty and personal care and home care applications that help fight the spread of germs led the way, increasing approximately $9 million on an organic basis. While Reiki continues to experience strong demand for dispensing products due to the pandemic, we did see some softening in the order book in Q1 as our customers worked through overstocked levels of inventory on certain dispensing product lines. which we believe may have a dampening effect on second quarter 2021 sales levels that Tom will speak to later. Sales of products used in food and beverage applications increased approximately 2 million organically compared to the year-ago period, driven by higher sales of caps and closures, while sales of products used in industrial applications increased approximately 3.3 million organically, due primarily to higher sales of polymeric closures as customers restocked in anticipation of higher demand in a recovering industrial economy. Operating profit increased $5 million to $23.6 million, driven by the higher overall sales levels. Operating margin was 17.9% compared to 18.6% a year ago, due primarily to higher input costs, mainly resin but also freight, and the margin impact of the rate pack acquisition. Higher material costs resulted in an estimated 2 million earnings drag in the quarter as contractual price escalators and commercial actions typically lag input cost increases 60 to 90 days. Although we anticipate input costs will remain elevated through second quarter, we expect pricing escalators and commercial actions implemented will result in full recovery of the higher material costs. And as I noted in our last earnings call, we have now completed the consolidation of the rate pack manufacturing footprint and anticipate operating margins will improve as we progress through the remainder of 2021. Adjusted EBITDA increased 7.1 million or approximately 30% to 31 million versus the prior year quarter of 23.9 million. As we enter second quarter, I wanted to highlight a couple of important developments in the TriMath packaging group. From an innovation perspective, TriMath's Reiki business has introduced the commercial-ready single-polymer dispensing pump, the Mono 2E pump. The patented Mono 2E features six components, all made from one polymer, unlike conventional pumps, which include many parts made from different materials. This first-to-market innovation is 100% recyclable, which contributes to a reduced carbon footprint. In addition, the Mono 2E is e-commerce ready, mitigating the risk of leaking during transit, and is Amazon approved. Our Reiki business is experiencing significant commercial interest in the Mono 2E pump and is actively working to extend the monopolymer technology to several of its dispensing product lines. I would also like to note that we have entered into a new multi-year contract with one of our largest packaging retail customers that commits us to relocate production of existing purchases of certain dispenser products into North America versus what is currently imported. As noted on our last call, this specific onshoring project will require one-time capital spending of an incremental $20 million above our normalized capital spending levels, which will be spread out over the next two years. Each of these items are exciting developments in the longer-term future of the TriMass Packaging Group. Nearer term, as we consider the second quarter of 2021 through the end of year, we anticipate lesser organic sales demand compared to the comparable quarters in 2020 as a result of our expectation that, one, some of the unusually high activity of pandemic-related sales partially recedes, and, two, customers potentially adjusting their overall purchases and inventory planning levels. Turning to slide eight, I will now update you on our TriMAS Aerospace Group. Net sales for the quarter declined 4.3 million or 8.8% to 44.6 million. Sales of core fastener products and machine components declined approximately 8.6 million or 17.5% compared to the year ago period as a result of continued low travel demand and related softness and aircraft build rates due to the global pandemic. RSA engineered products acquired at the end of February 2020 contributed 4.3 million of sales in January and February 2021, which helped offset a portion of the organic sales decline. As a reminder, after the first full year of ownership, we consider any year-over-year sales changes in an acquisition as organic. Operating profit was 5 million or 11.1% of sales, as compared to $6.1 million, or 12.4%, in the prior year. Cost savings resulting from our prior realignment actions helped to substantially offset the impact of lower absorption of fixed costs on the sales volume decline and higher amortization expense related to acquisition intangibles. Adjusted EBITDA for the quarter was $9.5 million, or 21.4%. which represents a 70 basis point improvement compared to the prior year period, primarily as a result of the realignment action and other spending reductions implemented in 2020 in response to the sales volume decline. Although first quarter sales were lower than the year ago period, now that we have nearly lapped the onset of the pandemic, we anticipate sales in the second quarter and for full year 2021 will be higher versus 2020, driven by both a full year of acquisition sales and, secondly, meaningful stocking orders and specialized fasteners from the Duke distributors that begin in Q1 and which we anticipate will continue for the remainder of the year. Our TriMAS leadership, aerospace leadership team continues to evaluate practical steps to further align our manufacturing footprint and related cost structure with current demand levels while balancing its priority of continuing to invest in new and innovative products to support its global customers and positioning itself for future business opportunities. Moving to slide nine, I will now review our specialty product segment. Net sales in the first quarter declined 3.8 million to 30 million, or approximately 11.2% compared to the same period a year ago. Sales of steel cylinders used in construction and packaged gas and markets, as well as sales of engines and compressors used in upstream oil and gas applications, each for the North American market, continued to be impacted by the effects of the global pandemic. However, operating profit in the quarter was 4.5 million, or 15.1% of sales, as compared to 3.4 million and 10.1% in the year-ago period. Operating margin improved significantly in the current quarter, primarily as a result of cost realignment action and factory floor improvement implemented in the prior year. Adjusted EBITDA of 5.5 million, or 18.3% of sales, was also significantly better than the prior year's quarter of 4.4 million, or 13% of sales, a 530 basis point improvement on a year-over-year basis. We continue to closely monitor end market demand impacted by the effects of the pandemic as we believe these businesses are well positioned for improved financial performance and an industrial economic recovery with increased operating leverage as a result of the 2020 realignment action. While recent order intake levels are noticeably stronger relative to the past several months, it is still too soon to know if this trend will sustain over the remainder of the year. We will continue to monitor order activity and backlog and provide an updated market outlook in connection with our Q2 reporting. Before turning the call back to Tom, I would like to comment briefly on my planned retirement from the company. While the decision process was difficult, it was certainly made easier knowing that our businesses have successfully weathered the COVID-19 pandemic and that TriMass is well positioned for its next phase of growth. Over the past 19 years, I've had the distinct honor and privilege of working with many outstanding, talented individuals who contributed not only to the success of the company, but who also assisted me in my career along the way. To all of you, I would like to say thank you, and I would also like to thank Tom, our finance and business leadership teams throughout the company, and the TriMass Board of Directors for your support throughout my tenure as CFO. The company is well prepared to execute on its strategy, and I wish the TriMAS leadership team continued success in all future endeavors. And now I'll turn the call back to Tom to provide our Q2 outlook and his concluding remarks.

Tom? Thank you, Bob. And again, on behalf of all TriMAS employees and our board of directors, thank you for your dedication and commitment over your nearly 20-year career at TriMAS, and particularly over this past unprecedented year. And turning to slide 11... Given that we continue to operate in this pandemic period, still with a great deal of uncertainty and demand changes, we are going to again only provide the forward quarter outlook at this time, along with reaffirming our broader views on the full year as provided at the beginning of the year. While there were still some anomalies in the prior year quarter related to the onset of the pandemic, our second quarter of 2021, will be better aligned to the second quarter of 2020 from a comparison perspective than the first quarter. Also, we will reassess returning to full-year guidance when we announce second quarter results, at which time we hope to have better information on overall market dynamics. For Q2, we expect consolidated sales to be 3% to 12% higher as compared to the same quarter last year, driven by anticipated growth in all segments. We expect the growth from acquisitions in our packaging segment, when combined with organic growth in specialty products and TriMass Aerospace, to overcome the anticipated decline of any COVID-19 related dispenser enclosure sales in Q2. As we discussed in our prior earnings call, this decrease of COVID-19 related sales in TriMass' packaging group was anticipated given the very high sales rate in 2020, which began in the second quarter of 2020. We anticipate adjusted earnings per share will be in the $0.50 to $0.57 per share range as compared to $0.52 per share from the prior year quarter. Both of these periods have $0.09 per share from non-cash acquisition-related amortization expense excluded from these numbers. Let's turn to slide 12. We continue to remain excited about the thesis for investing in TriMass today. Our diverse set of end markets allows investors to participate in a positive secular change in demand for our products that are used in applications that improve cleanliness and help fight the spread of germs, product lines which are concentrated in our packaging business. In addition, as markets start to recover, investors are able to participate in our growth first in specialty products, which should be an early beneficiary to a market recovery, and then TriMass Aerospace as the aerospace market begins its long road to recovery over the coming years. If we turn to slide 13, we believe investors will further benefit from our disciplined capital allocation strategy, which is shown on this slide. As we have stated previously, TriMass will ensure that we operate our businesses in a culture of Kaizen built upon a foundation of operational excellence. We'll utilize our TriMass business model to track and measure our near-term performance against our longer-term strategic plans and proactively adjust as markets change. We'll reinvest our cash generation, first to improve and grow our businesses organically, and to also ensure net debt remains in check to protect our shareholders. And we'll deploy capital to augment organic growth through programmatic M&A, and also return value to our shareholders through treasury actions, such as share buybacks. We continue to believe TriMAS is an exciting company to invest in, and with that, I'll turn the call back to Sherry. Sherry?

Thanks, Tom. At this point, we'd like to open the call up to your questions.

Thank you. To signal for a question, please press star 1 on your telephone keypad. Also, if you are using a speakerphone, please make sure that your mute button is turned off to allow your signal to reach our equipment. Once again, please press star one at this time for questions, and we'll pause to give everyone the opportunity to signal.

And our first question will come from Brendan Popson with CJS Securities.

Good morning. First of all, I just wanted to thank Bob and wish him well in retirement.

Thank you, Brendan.

And Looking at packaging, I wanted to ask about your guidance or your outlook for the next quarter. Obviously, you guys have, the last few quarters, have exceeded your outlook. And understandably, you have to consider potential, at some point, a reduction in demand. But obviously, it keeps beating and exceeding expectations. I just want to ask how much upside you think there could be in packaging, and then also just what you're hearing from the channel, considering we are kind of nearing an inflection point where we'll see, I guess, how consumers behave and how much of this demand is sustained versus isn't.

Brandon, thank you very much for the question. It is a little bit challenging as we're clearly staying very close to our customers during this period as we have, obviously, most of last year. We're seeing sort of a customer-dependent or specific challenge. So some customers, for example, could be a little bit longer on inventory going into Q2 and and we're seeing some effects from planning, you know, their planning and order intake related to those specific customers. And then we have other customers where demand remains pretty robust, and also we're seeing differences by end market. You know, when we talk about presenting our forecast only on a quarterly basis right now, given some of the challenges we have in forecasting, and I'm glad you sort of subtly pointed that out, that's not necessarily a negative. it's difficult for us to rely on some of the lumpiness we've seen in various ordering patterns, particularly over the past few quarters. So, you know, hard for us to say specifically on balance, taking a look at our total customer pool, all end markets, you know, we continue to see some of the positive trends that we felt would emerge from this secular change in the use of some of our products, with the only challenge being the very robust levels of orders in 2020 that we believe will start to rescind here as we go into Q2 and beyond. And it's really difficult for us to put an exact number on it. Obviously, we'll know more at the end of the quarter, and then hopefully that helps us with predicting you know, a little bit more, a better cadence for the rest of the year.

Okay, great. And talking about a specialty in aerospace, I think the margin and both of those segments really helped, you know, offset obviously the resin cost headwinds. Well, you know, what, I guess, how much did that exceed your expectations? And I also want to ask about specialty In particular, a larger range, I guess more upside than I would expect for Q2, but I saw your 2021 thoughts still say relatively flat sales year to year. Is there a potentially large order in there, or how should we think about specialty for us this year?

So let me just touch upon aerospace. I would say aerospace was largely what we anticipated on balance. But yes, for specialty products, we were positively surprised and excited about the outlook and the reason why, or the performance, and the reason why we haven't adjusted sort of the full year views yet on it is we really want to see what happens with order order intake and shipments this quarter and towards the end of the quarter. I would note that our specialty products business, the largest driver of it is our Norris Cylinder business. It's a pretty short cycle, so we could get an order today that ships out in, you know, next week, late next week. So it's really difficult from a planning perspective for us to copy and paste what happened in Q1 and drive it through the rest of the year. We certainly hope that's the case, and maybe even more so, but that's one of the reasons why I wanted to point out, as I did earlier, that it shouldn't be read into the fact that we're not forecasting out more than a quarter as potentially a negative. I mean, there could be some positive impacts from specialty products, which would be great for us overall.

Okay, and then where can the margin get to for specialty? I mean, you got almost to 20% on the EVTA, 18 and change. And where can that go? And can you talk to like incrementals at all? And I guess for specialty or either of those segments?

Well, look, if we stay with... With Norris, which again is the main driver for specialty products, it's contributing to this result largely. The incremental should be pretty positive. We're coming off a sales base that is pretty low for this business. And we have obviously some fixed costs related to the business. And as we get in each incremental dollar of profitable orders and additional cylinder sales, we should get pretty good conversion. So I don't want to say exactly what, you know, we see the margin, you know, going to, but I'd like all of our businesses to be no less than 20%. I'd like TriMass and the EBTA basis. I'd like TriMass overall to be, you know, over 20%. I said that before. And my expectation for our specialty product segment is that with demand getting to a more normalized level, we should be there.

Yeah.

I mean, if you look at the trend in operating profitability over the last three quarters, it's improved each quarter, you know, over different levels of demand. And so it would be, you know, very likely that with more volume, the leverage would continue.

Great. Thank you for the color. Thanks, Brendan.

And once again, it is star one for questions. Moving on, we'll go to Steve Barger with KeyBank Capital Markets.

Hey, good morning, everybody. It's Ken Newman on for Steve. Hi, Ken. Hi, Ken. Good luck on the retirement. So it's been great working with you. Thank you. So first question, you know, I did want to go back to the margins, particularly on Arrow. I guess asked another way, you know, Would you view the first quarter for Arrow as maybe the baseline for the rest of the year, just given the expectation for higher revenue for the entire year broadly?

No, I would say that the margin performance in Q1 was a bit stronger than what we anticipated, and it was largely due to the mix of products that was manufactured in that quarter. While volumes will be up over the remainder of the year, we have to look really hard at what's the mix of those products. At least for the foreseeable future, we do not see that mix as being as favorable as it was in Q1.

Understood. Bob, just to clarify, on the packaging price comment you made, Did you say you expect margins for the segment to return back to those high teen levels in the second quarter, or is that something that you think you recoup closer into the second half?

I think it probably happens over the balance of the year. From a cost input perspective, with rising prices, there is the lag that we experience in terms of our ability to pass that through. in the first quarter, you know, we had about a $2 million impact that as we look at quarter two and beyond, we would expect our recovery to be about one for one on those higher material costs. So that drag will work its way out as we go through quarter two and beyond. Depending on what happens with input costs, you know, there may be some tailwind on the back end of that where you get the benefit of the higher price before they get passed back to the customer. In the main, I think over the course of the year, that will be neutralized. Of course, with the rate tax situation, as volumes improve there and productivity improves, that will be less of a drag on that margin. Getting our operating margins back into that 19% to 20% range where we've been at pretty consistently over the past several quarters, I do think is in the offing.

Understood. One more for me, if you don't mind. I was curious if you could just talk to the preference of capital deployment between M&A and share repurchases. Obviously, you've refinanced the balance sheet. There's a lot of capacity here. I'm curious, should we imply that means that you're willing to look at larger deals or is this really just to give you some more dry powder and more optionality going forward?

Yeah, I think, well, first of all, it's yes to both. But the biggest driver to taking advantage of the refinancing when we did, as I noted, we essentially had to go into the market anyway because of our revolver just to get that out of the way. And then we want to take advantage of what we thought was this historic period in time with low interest rates and took advantage of an opportunistic step. As I look forward over the next more than a few years, our balance sheet is essentially set opposite our strategic plan that we have in place. We could do a few larger deals without disrupting our balance sheet, or we could do several smaller deals. But there's nothing that I would read into this, Ken, specifically that says because of the refinancing, we're now going to do that.

Great. And I guess back to the first part of that question on the preference between deals and share repurchase, you did a little bit this quarter. Can you just talk about how strategically or is this more opportunistic? Is there an internal price point that you guys are looking to protect?

No, there's not necessarily an internal price point we're looking to protect. That being said, if there was disruption, obviously we would take advantage of that opportunity. But we're looking at share repurchasing more as a a capital allocation strategy and a means to return capital to shareholders through taking out shares outstanding. And, you know, we haven't quite said this specifically, but if you look at our cadence over the past couple of years, we've made great progress. Personally, I'd like it to be above 1%, you know, as a minimum on an annualized basis. We're sort of on that track currently. You know, we'll have to assess what we do going forward if we pick up that pace or not. But But I would consider it more of our normal capital allocation strategy going forward versus just purely opportunistic.

Understood.

Great, Keller. Thank you. Thanks, Ken. Thank you.

And as a final reminder, star one at this time for questions.

We'll pause for just a moment.

And we do have a follow-up from the line of Steve Barger with KeyBank Capital Markets.

Hey, thanks for the follow-up. Just quickly, I was curious if you could just talk about, you know, any impact from supply chains that you've, you know, seen in the quarter and just how are you kind of thinking about tighter supply chain across all of the segments and with regard either to the second quarter outlook or just your broader 2021 views?

Well, the supply chain challenges are very real, like all companies are seeing. It is in our Q2 thinking, and it's in our broader range views. And we've been working very hard, particularly in our packaging business, some input materials that are a little more scarce than normal. And then also, obviously, there's two components, right? There's a scarcity and price. So there's availability for the most part on metals, so we're not experiencing any scarcity there, but we're just dealing with price here. So overall, we're working through it. We've had to bring on some additional suppliers to protect supply for our customers. That has been a bit of a drag and hard to quantify exactly how much in Q1. We might have some lingering effect in Q2. But, you know, my hope, as Bob sort of alluded to as well, as we get into the second half, there's some easing on that front, both in terms of supply and hopefully in terms of economics.

Yep. When I think about that in the context of specialty, particularly in the Norris business, given how steel-heavy it can be, can you just talk about the expected impact on price-cost for some of those products and just the price escalators, if there are any?

It's a mix of contractual price escalators and commercial negotiations. I would say if we get into a run rate that is a little more sustained at a higher base and surcharge level on SPQ, special bar quality steel, we tend to get pretty close to a one-to-one price-cost ratio. Okay.

And then just lastly, sticking on this whole supply chain issue or just theme, I guess, can you just talk a little bit about, you know, how much – Obviously, you're pulling a little bit more from your suppliers. I think everyone is to try to protect delivery and lead times. Are you seeing any customers pull product as well to maybe try to get ahead of potential further tightness? I'd be curious to hear about ordering queries across all the businesses as it relates to trying to I guess, protect inventory levels from a go-forward basis?

You know, that's a good question, and that is something that we see. As Brandon from CJS asked sort of a similar type of question, and I'll answer with a little more specificity, Ken, in how you phrased it. You know, it's very customer-specific, right? And some of our retail customers going into the year-end holiday season are ordered pretty heavy and sort of going into their selling season sort of ordered heavy. And now we're starting to see a little bit of what looks like very temporary higher levels of inventory on their end. So the planning numbers that come to us get revised to a softer level. Again, these aren't panic levels for us. It's what I would call sort of normal planning. I do think that that there has been a bit of a ripple effect, right? Given the uncertainty of COVID, given the pandemic, given the uncertainty of planning, our customers' ordering patterns have been, you know, somewhat lumpy as well. So, you know, fortunately, we're maintaining very good communication with our customer base, and they're giving us good forewarning. So we're trying to not get into situations where we produce something for them that they don't take. I mean, that gets a little bit challenging for us. So we're really getting good, for the most part, for warnings on future production levels and planning levels. And that's just part of what I'll call normal planning with our customers, but in this uncertain period.

That's very helpful. Thanks again for the follow-up here.

Thank you.

And there are no further questions at this time. I'd like to turn it back to our presenters for any additional or closing comments.

Thank you, everyone, again, for joining us on our earnings call. We look forward to updating you again next quarter. Please, everyone, stay safe and healthy. Thank you.

Thank you. And that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.