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spk01: Good day and welcome to the Trimath fourth quarter and full year 2021 earnings conference call. Today's conference is being recorded. Now at this time, I would like to turn the conference over to Sherry Lauterbach. Please go ahead, ma'am.
spk00: Thank you and welcome to Trimath Corporation's fourth quarter and full year 2021 earnings call. Participating on the call today are Thomas Amato, Trimath's president and CEO, and Scott Mell, our chief financial officer. We will provide our prepared remarks on our results and on our 2022 outlook, and then we'll 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 investor section. In addition, a replay of this call will be available later today by calling 888-203-1112 with a replay code of 9503603. 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 that will be filed later 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 morning or 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 the call regarding our financial results will be on an adjusted basis, excluding the impact of special items. With that, I will turn the call over to Tom Amato, TriMAS' President and CEO. Tom?
spk02: Thank you, Sherry. Good morning, and welcome to TriMAS' fourth quarter and full-year earnings call. Let's turn to slide three. Overall, 2021 was a very strong year for TriMAS. we had many accomplishments while continuing to overcome pandemic-related challenges and rising input costs. Our strategic repositioning and our diversified end market model has allowed us to deliver solid sales, earnings, and cash flow performance, continuing our positive momentum. Our operational execution was complemented by our balanced approach to capital allocation. For example, in the fourth quarter, we added a quarterly dividend for the first time since our IPO in 2007 and completed two acquisitions and share buybacks, all while maintaining a strong balance sheet. Throughout 2021, we also continue to make substantial progress on our ESG journey, and we are committed to further enhancing our sustainability performance. I believe TriMAS is better positioned today than ever before to create long-term value for our customers, employees and shareholders while benefiting the regions where we live and work. Let's turn to slide four. Starting with packaging, some of our 2021 highlights include excellent progress in the launch of our new 235,000 square foot production facility in New Albany, Ohio, adding more than 175,000 square feet of new production space. This not only allows us to grow further in North America, it also repositions production closer to many of our customers' facilities, thereby increasing our competitive advantage. Further developed are ready-to-recycle single-polymer dispensers, including the launch of our new Singolo brand. Expanding our beauty and personal care product offering into Latin America, a region we believe has much future growth opportunity for TriMass, by adding a new captive distribution location in Brazil. Acquired two businesses, Omega and, as announced this morning, Intertech, which add applications to support customers in the medical and health-related product lines. Within Trimass Aerospace, we successfully produced nearly $30 million of engineered fasteners to fulfill special stocking orders for certain non-US customers. This was a great opportunity which allowed Trimass Aerospace to dampen the effect of the significant aerospace production fall-off since mid-2020. We launched a new facility in Mesa, Arizona. This facility allows us to grow our aerospace faster product lines and vertically integrate selected outsourced components for our recently acquired RSA engineered products operation. We successfully consolidated aerospace component machining operations from three separate leased facilities in California into one of our owned facilities in Tolosa, Arizona. We believe, as the aerospace market recovers, this will put us in a better position to convert well on machined and assembled component sales. And we completed a fastener product line acquisition, which we believe will be nicely additive to TriMAS as markets recover. And within specialty products, we enhanced our Norris Cylinder brand by achieving Made in USA status, which has proven to be impeccably timed given the logistics constraints we are seeing in the U.S. for imported products. We successfully enhanced throughput to meet the increased demand within our Norris Cylinder business and remain on pathway to add incremental capacity through continued factory floor improvements. We developed a new line of natural gas-fueled, EPA-certified stationary engines, allowing our aero engine business to expand into agricultural and off-highway power generation applications. So 2021 was an exciting year for the TriMAS team as we advanced against our long-term strategies within each of our businesses. Let's turn to slide five to discuss two recent acquisitions for which I'm particularly excited. Specifically, they enable us to expand our product offering into the life sciences market, which we believe has attractive long-term growth characteristics. Today, we announce the acquisition of Intertech, a precision injection molding manufacturer with two facilities in Denver, Colorado area. Intertech specializes in custom injection molded products used in medical, consumer, and industrial applications. Intertech previously operated as a family-owned company and generated 2021 sales of approximately $32 million. Intertech's medical-related product offering, manufactured in a dedicated facility with a Class A controlled environment, includes highly engineered and tight tolerance components predominantly used in vascular access and in vitro diagnostic applications. In a separate facility, Intertek manufactures injection molded products for food, wellness, hospitality, and e-commerce logistics applications. I would like to welcome the Intertek team into the TriMass family of businesses, and we look forward to their future contributions. Omega Plastics, acquired in December and located in Clinton Township, Michigan, manufactures custom components and devices for drug delivery, diagnostics, and orthopedic medical applications. Omega leverages its core injection molding capabilities, Class A clean room, and advanced in-house tool-making competency to provide its customers a faster product development to production cycle. Omega generated approximately 18 million in sales in 2021. These two businesses will report into TriMass packaging, and we will seek to accelerate growth in life sciences applications, which will also include our current pharmaceutical and nutraceutical product lines. Let's turn to slide six, where I will cover our financial performance. As noted to start the call, 2021 was a strong year. In the fourth quarter, sales were $209 million, up 11.1% as compared to the prior year quarter. Adjusted operating profit for the quarter was $24.5 million, up 16.4% as compared to the prior year period. This increase was largely driven by conversion on higher sales within TriMass' aerospace business, driven by a specialty fastener stocking order, which we fulfilled in the quarter. and within specialty products driven by higher demand-related volume. A key attribute of our long-term strategy is to seek to continuously drive EBITDA higher while maintaining a strong balance sheet. In this regard, we ended fourth quarter with LTM EBITDA of 172 million as compared to 168.5 million at the end of the third quarter in 2021. Adjusted diluted EPS for the quarter was $0.56 per share, an increase of 19.1% as compared to $0.47 in the prior year quarter. On a full year basis, sales were $857.1 million, up 11.3% as compared to prior year. Sales in our packaging group were just over half a billion, achieving a new full year sales level record. Additionally, both TriMass Aerospace and TriMass Specialty Products businesses had strong sales as compared to 2020, driven by special stocking orders for TriMass Aerospace and demand increases within specialty products. For the full year, organic sales increased 4.1%, acquisitions added 6.1%, and currency had a favorable impact of approximately 1%. Adjusted operating profit for the year was $112.8 million, up 12.6% as compared to the prior year, with higher operating profit in each of our three segments in 2021. Adjusted EBITDA for the year was $172 million as compared to prior year of $156.8 million. Adjusted diluted EPS for the year was $2.24, up 16.7% as compared to the prior year. So as I said, it is an exciting time to be at TriMet. So before turning the call over to Scott, I want to thank our global TriMAS team for their commitment and dedication as we report these strong results for the quarter and year. Scott?
spk03: Thanks, Tom. Let's turn to page seven for a review of our key credit statistics and liquidity profiles. We ended another year with a strong balance sheet. Our net debt of $253.1 million represents a reduction of more than $19 million from our December 2020 year-end level. During the fourth quarter, we continued to deliver exceptional free cash flow, generating nearly 44 million. For the full year 2021, we generated almost 100 million of free cash flow, more than sufficient to support the key components of our capital allocation strategy, including the acquisitions of TFI and Omega Plastics, additional share repurchases, and the commencement of shareholder dividends. Given our continuing positive momentum in adjusted EBITDA, and by managing our net debt, our net leverage was 1.5 times at the end of the year, well below our long-range target of two times, and providing ample room for additional strategic acquisitions. At the end of the year, we had more than $400 million of unrestricted cash and available liquidity. As we look forward toward 2022 and beyond, we believe we continue to have sufficient liquidity to execute on our capital allocation priorities of reinvestment in our businesses, programmatic M&A, and return of capital to our investors through both additional share repurchases and dividend payments. Now, let's turn to slide eight, and I will review our first quarter results in Forward Outlook for our segment starting with TriMAS Packaging. As was noted earlier on the call, while TriMAS's packaging group has record annual sales for the full year, our sales of $123.5 million for the fourth quarter were relatively flat year over year as we are comparing sales results against a record fourth quarter of 2020. Sales in the fourth quarter of 2020 were positively impacted by a pandemic-related demand surge, which began in the second quarter of 2020 and peaked during the fourth quarter of 2020, as many of our customers, given the uncertainties of the COVID-19 pandemic, accelerated purchases in advance of anticipated demand increases during the 2020 holiday season and then ahead of the Chinese New Year. Our Afaba and Ferrari acquisition, completed in December of 2020, And our mega plastics acquisition completed in December of 2021 contributed approximately 7.8 million of incremental sales during the quarter, while the impact of unfavorable foreign currency translation reduced sales by approximately 6.6 million. Pardon me. On an organic basis and as anticipated, sales decreased by approximately 6.2% or 7.8 million. Again, this year-over-year organic decline was expected as demand for our products, which help fight the spread of germs, specifically within our beauty and personal care and home care applications, abated by more than 20 million from surge demand levels in Q4 2020. We do, however, believe that going forward there is a positive secular trend focused on consumers' desire to stop the spread of germs and improve personal hygiene. During the fourth quarter, and consistent with the third quarter, we continue to experience year-over-year organic growth in both our food and beverage and industrial and agricultural end markets. Specifically, sales for our caps and closures products used in food and beverage applications and pumps used in quick service restaurants experienced double-digit percentage growth during the quarter. Likewise, sales for our caps and closure products used in industrial and agricultural end markets experienced similar double-digit percentage growth during the period as we continue to see robust demand for our products serving rebounding sectors of the economy, including shipping, janitorial, paints and coatings, and petrochemicals. Operating profit when compared to Q4 2020 decreased by $2.1 million to $22.1 million primarily as a result of higher input costs and labor inefficiencies. Operating margin was 17.9% compared to 19.4% a year ago. With regard to input costs, and as mentioned during our Q3 earnings call, we have experienced resident cost increases of more than 50% since the beginning of 2021. While resident pricing started to plateau during the fourth quarter, our contractual price recovery mechanisms which in many cases provide for commercial adjustments only at quarter end, have not allowed for full recovery of the resin cost increases we've experienced. We estimate these resin cost increases net of price recovery unfavorably impacted profitability this quarter by approximately 2 million or 160 basis points. If not for this impact, our margins for the quarter would have been comparable to the prior year period. Our expectation is that resin costs will remain relatively stable in 2022, as otherwise operating margins may be further impacted if resin costs resume an upward trajectory. Adjusted EBITDA was $29.7 million, a slight decrease versus the prior year quarter. Pivoting now to the 2022 outlook for our packaging segment, we expect sales growth of 11% to 14%, including the impact of the recently announced acquisition of Intertech. Organic sales are expected to continue to grow at a rate of GDP plus, while operating profit margin is expected to remain in the high teens between 18.5% and 19.5%. While our outlook for 2022 assumes the stabilization of key material costs, including resin, we do expect other inflationary pressures to continue, including labor and energy costs. Turning to slide nine, I will now provide an update on our TriMAS Aerospace Group, starting with an overview of how we envision the timing and pace of a market recovery. As Tom mentioned earlier in the call, Our Trimass Aerospace Group was positively impacted in 2021 by approximately 30 million of special fastener stocking orders. The chart on the left side of slide nine provides Trimass Aerospace's annual sales, starting with the pre-pandemic period of 2019 through an early 2024 forecast. We've then overlaid estimated commercial jet production rates for the two largest commercial aircraft providers over the same period. As you can see, we expect TriMass Aerospace sales in 2022 to increase by approximately 20% when compared to a normalized 2021, which excludes the impact of the special fastener stocking orders. This normalized increase is driven primarily by new business awards, the start of a market recovery, and a product line acquisition. Finally, given our new business awards, market share gains, and an expected commercial jet production recovery, we are anticipating returning to our pre-pandemic sales levels in 2024, which we believe is trending ahead of the production recovery rate for the two largest commercial aircraft providers. Turning now to slide 10, I will review our fourth quarter results and forward outlook for TriMAS Aerospace. Net sales for the quarter improved by 10.6 million or 28.5% to 47.7 million. Sales of our fastener product lines increased by approximately 10.2 million compared to the year-ago period, primarily as a result of 8.5 million of special fastener stocking orders during the quarter. Operating profit for the quarter was 3.5 million or 7.4% of sales as compared to 0.5 million or 1.3% in the prior year. This year-over-year improvement is primarily attributable to the stocking orders, which included a meaningful amount of high-margin specialty fasteners, commercial actions initiated during the third quarter of 2021, and savings from realignment actions, which more than offset pandemic-related inefficiencies. Adjusted EBITDA for the quarter was $8.3 million, or 17.4%, compared to $5 million for the prior year period. Pivoting now to our 2022 outlook for TriMass Aerospace. We expect year-over-year sales growth of 1% to 3% as new business awards, the expected start of a market recovery, and a product line acquisition offsets the impact of the now-fulfilled 2021 special fastener stocking orders. As I mentioned earlier, please remember that excluding the impact of the special fastener stocking orders 2022 sales growth would be approximately 20%. Operating profit margin for the year is expected to be between 4% and 6%. However, it is worth noting that at these sales levels, we have approximately $10 million of non-cash depreciation and amortization running through our operating profit. So earnings on a cash basis would be in the mid-teens. While we do expect to see a modest market recovery during the year, we also expect labor inefficiencies to continue, with higher than historical levels of absenteeism, and we are also starting to experience inflationary pressures with some of our key raw materials, including aluminum alloy and stainless steel. Now on page 11, let's review our specialty product segment. Net sales in the fourth quarter increased 11 million to 37.8 million, a more than 40% increase when compared to the same period a year ago. This is now three straight quarters of 20% plus growth for our specialty product segment. Consistent with performance since Q2 of 2021, demand for steel cylinders and engines providing supplemental power, each for the North America region, were significantly higher in the quarter, when compared to the same period in 2020. We continue to see strong demand for our products serving the construction, HVAC, and general industrial end markets. Operating profit in the quarter was 5.4 million, or 14.2% of sales, as compared to 3.5 million, or 13% in the previous year. Operating margin improved significantly in the current quarter, primarily as a result of leveraging previous factory floor improvement actions and higher sales from increased demand. Adjusted EBITDA of $6.4 million, or 17% of sales, was also significantly better than the prior year's quarter of $4.5 million, or 16.7% of sales. At the end of the quarter, North Cylinder's order book remains at record levels, which we believe is indicative of our customers' continued confidence in a market recovery. However, we will continue to closely monitor order changes and input costs and take appropriate actions as necessary. Finally, our outlook for the specialty product segment assumes a continued market demand recovery across our key end markets, including construction, HVAC, and general industrial. We expect sales growth of between 8% and 12% and operating profit margin of 16 to 17% as we continue to invest in process and product innovation and believe we have meaningful opportunities to accelerate growth in our core steel cylinder and engine businesses. Now I'd like to hand it back over to Tom to provide our consolidated outlook and his concluding remarks. Tom?
spk02: Thank you, Scott. Thank you, Scott. Let's turn to slide 12. During the past two years, we faced uncertainty resulting from the pandemic, and now in 2022, we face new uncertainties. We are deeply saddened by the tragic events we are seeing in Eastern Europe. It is difficult to accurately predict the impacts this will have on the world economy, let alone trimass. Therefore, while we are providing full-year 2022 outlook today, This outlook does not include any specific impacts of the situation in Eastern Europe. As we look to our 2022 full year expectations, there are also a few other key realities we must acknowledge. First, we are continuing to operate in a pandemic environment. And although some of the recent news has been encouraging, towards the end of 2021 and start of 2022, New COVID-19 variants have impacted our production efficiency. For example, absenteeism rates for some of our manufacturing plants are running at well beyond normal levels, and that makes us less efficient as compared to the pre-pandemic period. Next, while we experienced a rise in material costs in 2021, which we've been seeking to recover commercially, We have also been seeing other inflationary costs, for example, energy, labor, and logistics. While we work to recover some of these non-material input costs, commercial negotiations related to these factors tend to be more intricate and take longer to achieve a mutually reasonable outcome. Finally, as we have discussed throughout 2021, TriMass Aerospace's special stocking orders have been fulfilled. The product in these orders command premium margins, given that they are some of the more highly engineered fasteners in our portfolio. This means that the sales for this segment, while remaining ahead of cumulative commercial jet production rates as Scott presented on slide nine, will be approximately flat as compared to 2021, while margins will be pressured with less favorable mix in 2022. Despite these challenges, And when considering recent acquisitions, we expect trimass sales to be up between 8 to 11% as compared to 2021 levels. We also expect EPS to be in the $2.25 to $2.35 range. Normalizing for 2021 special stocking orders, the 2022 adjusted EPS midpoint would represent a 15% increase as compared to 2021. I would also like to note that the first quarter of 2021 was a particularly strong quarter for TriMass, and therefore we anticipate Q1 2022 to be flat or slightly down as compared to the prior year quarter. We are also forecasting free cash flow to be greater than 100% of net income, despite a CapEx investment rate higher than our historical averages, given our continued investment in new production capacity in the United States. Let's turn to slide 13. I will close out our prepared remarks by showing just a few examples of why we remain excited about the long-term prospects for TriMAS. Through methodical repositioning of TriMAS, nearly two-thirds of our revenues are now generated for TriMAS' packaging group. As discussed on prior calls, we believe there are attractive characteristics in this segment through our many sub-markets, and we believe we have a robust pipeline of innovative product solutions. Next, we expect to have further long-term performance gains in specialty products and in aerospace as we continue to recover, especially given previous realignment actions. Also, we have excellent cash flow and financial capacity to continue to augment our organic growth with strategic acquisitions. And while we continue to reinvest in our businesses for long-term growth, we also anticipate continuing to return capital to our shareholders both through share buybacks and now dividends. In addition to our financial progress, our leadership team remains committed to operating TriMass in a responsible way to positively contribute to society, particularly in the communities where we live and work. In fact, we have recently updated our sustainability report, which is posted on our website and which highlights our progress throughout the year, as well as enhanced disclosures for our investors and better understanding of TriMass. Again, we continue to believe TriMass is an exciting company to invest in. And with that, I'll turn the call back to Sherry. Sherry?
spk00: Thanks, Tom. At this point, we would like to open the call up to your questions.
spk01: Ladies and gentlemen, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. Just keep in mind, if you are using a speakerphone, make sure the mute function is released so that signal can reach our equipment. Once again, for questions today, star 1. We will begin with Ken Newman. Ken? with KeyBank Capital Markets.
spk04: Hey, good morning, guys. Morning, Ken. Morning. So I appreciate the color on the rising costs in the quarter. I'm curious, is there any way that you can kind of help us square what's embedded in the 2022 outlook for higher costs versus when you expect the pricing to recover for those costs? And then on top of that, just curious if you can help us understand the impact from higher production and labor costs that's embedded within that guide for that segment.
spk02: Well, as far as the first part of the question, I think we'll continue to have a little bit of drag in the first quarter. But we do expect a price to cost on material to be closer to 1 to 1 as we get into the second quarter and balance of the year. Now, recognize there probably is some pullback. Again, we don't have all the effects of what's happening in Eastern Europe in here and potential effects of crude pricing. But that was the trend we saw coming into the year and at the end of the fourth quarter. So a little bit of a drag coming into the quarter to start. And then we felt like we would be closer to one-to-one as we went through the balance of the year. Understood.
spk03: And what was the second question you had?
spk04: Yeah, you also mentioned just the impact from higher production and labor costs potentially impacting margins in the year. And I'm curious if you can help us understand the moving pieces and the magnitude of those costs.
spk02: Yeah, it's a little bit challenging to to specifically quantify, but I'm going to give you an example of what we're seeing. And this is not at any one specific plant, but at several of our plants in the US and even other parts of the world. Normally, for a well-run manufacturing operation with very good labor relations, you would typically like to shoot for absenteeism, absenteeism rates below 7% because what happens, if you can imagine the intricacies of a manufacturing plant, if a person doesn't show up who's more specialized in their shift, there tends to be bumping and grinding that goes in the plant. You just don't run the plant as efficient. There were operations in facilities that we had to start towards the end of the year and to start the quarter where absenteeism rates were in the low teens. And we don't quite know the exact cost related to that, but if you think about all of the plants we have, and it was all related to people either had come into contact with somebody that had Omicron or they were sick. We didn't have any plant shutdown specifically, but it was just an over precaution that took place towards the end of the year and to start this year. That to me is a very difficult item to quantify, but it's one of the drags to our margin, certainly in 2021 and as we put forward here for 2022 in our outlook. We also have some other non-labor inflationary expenses that we're anticipating. Again, we don't really have a specific quantification of it. It could be in the $4 to $5 million range in our plan. We typically like to recover that as much as possible through our annual cost savings initiatives. But given the rate increases towards the second half of 2021 and coming into 2022, they're typically higher than would be normally in our cost savings program. So I think that gives you a little bit added color towards your question.
spk04: Yeah, that's very helpful. My next question is, you've obviously been very active on the M&A pipeline these last few months. I'm curious if you could just give a little bit more color on the the decision-making process on which deals you decide to go after and just the color on the multiples you paid for both Intertech and Omega. Just given Intertech's exposure to the medical end markets, is it fair to assume that that business is margin accretive to the segment? And I guess just what's the thought process for deals or the strategy for M&A in terms of going after specific end markets going forward?
spk02: Great question, and thank you for the question. As we talked about throughout the past couple years, as we reengaged our acquisition program, we wanted to first and foremost continue to build out our TriMAS packaging platform. And when we looked and studied certainly some of the product lines that we're in and where we have the ability to grow, as well as some applications that we were not in, a logical extension to our pharmaceutical and nutraceutical lines, which approximate about 25 million plus or minus I think of sales annually, was to do more in that area of pharmaceutical, nutraceutical, and I'll go as far as to say life sciences, which would include some medical applications. So we've been studying penetrating these product areas for some time. Typically larger deals are very difficult to acquire. They tend to have a lot of competition. So we have been focusing on more manageable acquisitions in terms of their size and bolt-on capability for us. So we were actually looking at, before we closed Omega, we were looking at Intertech and we thought it was incredibly compelling to put these companies together. Now, both of these companies have MedTech applications and industrial applications. And in some ways, TriMet's made that profile made TriMath the logical acquirer, both from our point of view and I think the seller's point of view, because we understood all aspects of their business. So as we look at going forward, we've now added, again, Intertech and Omega, but also with our pharmaceutical and nutraceutical product lines, a nice vertical line in the life sciences area, which we would like to continue to build upon. But in addition to that, we'll continue to add in all of the product areas that we're in today, and not only in the countries that we're in, but we'll expand geographically as well. And I'm just going to go one step further and note that it's a pretty easy decision for us when we look at companies like that because when we look behind the product line and look at the manufacturing process, when you walk into, for example, one of our food components production plants and a medical component production plant, they tend to look pretty close. They're highly clean environments. Some of them are aseptic in nature. There's often sophisticated filtration units that change out the air in the production environment continuously. In addition to the product offering, which is exciting for us, when we look at the manufacturing processes, it's extremely similar to what we're doing today.
spk04: Just to follow up on that, I guess. Are there more deals like Intertech that are out there within your pipeline that you're chasing? Or just how common are these smaller life sciences deals? And is it, again, I guess, is it fair to assume that those, because of their exposure to life sciences, those carry a higher multiple than you would usually look at across, you know, versus the rest of your packaging acquisitions you've done?
spk02: First of all, they're out there. They require a lot of work. In both the cases of Omega and Intertech, the owners were extremely, extremely passionate about their businesses. And the processes for us to work with the owners and have them decide to select Trimass as a company to allow their customers in many cases, their babies, enter that next phase of development, were lengthy processes and took, at the most senior levels of our company, myself and our president of our packaging group, Fabio Salek, working on these deals personally. So they're out there. They take a lot of work. This size is good. Certainly would like some bigger ones as well. And as far as the multiple goes, these are nice-sized multiples. They're premium multiples, but they're not typically the size multiples you would see, for example, with businesses that are 100% in the MedTech space and might be $200 million in revenue. Those tend to be a little bit different type of deals.
spk04: Right. That makes sense. Just a few more from me, if you don't mind. You know, I just wanted to see if you guys could clarify the $10 million depreciation comments that's running through the aerospace segment. What is that charge related to? And I just want to clarify, is that included or excluded from the adjusted EPS guidance you announced today?
spk03: Sorry, this is Scott Mel. Just to clarify, it's 10%, not $10 million on an annualized basis. for aerospace on the DNA. I'm sorry, repeat the second part of the question.
spk04: Yeah, is that excluded from the adjusted EPS guidance, or is that still running through your adjusted results? Because you already exclude intangible amort.
spk03: In EPS, yeah. Yeah, the depreciation is, but the intangible amortization is not. Understood.
spk04: Okay. And then lastly, you know, I just wanted to get a better understanding on free cash flow. You know, I think you had mentioned an expectation to generate more than 100% conversion. Just given the expectation for organic growth in 22 and the higher capex that you kind of outlined relative to 21, just how should we think about the working capital builds in the year and what gives you confidence that you can generate, you know, gap-free cash flow over 100% of net income?
spk02: Yeah, I think for this particular year, we expect working capital to be, any working capital bill to be on the lower end. I mean, on an absolute basis, through acquisitions, it might go up. But, you know, that comes with the purchase price.
spk04: Okay. Thanks for the call. I'll get back into you. Thank you.
spk01: And once again, anyone with a question can signal by pressing star 1. We'll pause to allow everyone an opportunity to signal. And we have Ken Newman back in the queue. We'll hear from him.
spk04: Hey, thanks. Just a few more follow-ups from me. The implied even margins for aerospace, obviously I think that's being impacted by the mixed impacts from the one-time stocking orders. Can you just help us understand the margin declines, how much of that is really just lower mix, and then where are the higher operating costs maybe kind of coming from within that segment? And I'm also trying to get a better sense of the cadence for aero margins throughout the year as we think about that 4% to 6% target.
spk03: Well, this is Scott. I think we gave an indication that the stocking order, the close to 30 million and 21 was a highly profitable book of business. We're not going to give explicit numbers around that. I mean, you can, I think you can back into, you know, what the contribution margin of that book of business was. I mean, as it relates to looking forward in 2022, I mean, within aerospace, it's really a trough year for us. And so as you look at our volume relative to our fixed cost base, you know, we expect to see with any incremental revenue a meaningful contribution to operating profit and EBITDA as we go forward. I think relative to the headwinds in that business, I mentioned it briefly during my comments on the call, you know, we're seeing aluminum alloys and steel costs rising. And we haven't factored in any further impact of commodity costs related to the geopolitical situation in Eastern Europe yet. But we certainly saw those headwinds before recent events. We've also had, and Tom mentioned on this, specifically within aerospace, given their geographical location in California, labor inefficiencies around the COVID-19 pandemic. So, you know, we continue to see those factors impacting 2022. And then, you know, we've got – while we've taken out a significant amount of our fixed cost base through some realignment actions in aerospace, you know, we're being very cognizant of the expected – market recovery in aerospace at some point during 2022. And we're already starting to see that in the supply chain of other organizations having challenges ramping back up. So, you know, we need to have the ability to meet our customers' demands. And so we're being very cognizant of that fact. And so those factors in totality are kind of implicating what you're seeing for the 22 outlook in aerospace.
spk04: Understood. Last one for me, just from a strategic capital deployment perspective. Obviously, you announced the dividend this last quarter. M&A still remains a big priority. I think ShareRepo has also played a little bit of a piece this year. As you think about, obviously, timing of deals can fluctuate, but with the leverage where it's at, maybe just kind of help us understand the priorities for capital deployment between those three buckets and if the timing of a deal is unable to come in a timely fashion, how do you kind of look at the preference between dividend increases and share purchases?
spk02: Okay. Good question. And I think, you know, a year and two years from now, that's going to be easier for us to talk about because you're going to see what we expect to do occurring in our numbers. But we would like to see between dividends and share repurchases at least a 1% return to our shareholders. So if from dividends it's about half a percent, share repurchases we would expect to be at least the like amount. So an investor in TriMass would enjoy that capital return return of capital that they could count on from us. And maybe as time goes on, the shift changes a little bit with a little bit more dividends, a little less share repurchases. But at least as we think about that aspect of the swim lane today, I would like to see a minimum of 1% return there for our shareholders. Now, that will still leave us given our cash flow profile and our current leverage, ample room for us to continue to execute our strategy and do further bolt-on deals. You're right. I mean, doing deals can be a little bit lumpy. I think normalizing for 2020, the pandemic period, we were on a nice cadence. If you remove that period, we've been on a nice cadence. We're continuing to work on the next deals for TriMass. I have nothing further to report today. But we'll hold our cash until we have deals ready to do. And my expectation is our long-term leverage position is to be about two times. So we've got plenty of capacity to do some more deals and gain a little bit more leverage. Sorry, did we lose you, Ken? There was a beep.
spk04: No, I got all that there. Okay. All right, well, thanks, guys. I appreciate the time.
spk02: All right, take care. Any more questions in queue?
spk01: And at this time, there's no additional questions in the queue.
spk02: Okay, thank you for joining us on our earnings call, and we look forward to updating you again next quarter. Stay safe and healthy. Thank you.
spk01: And ladies and gentlemen, this does conclude your conference for today. We thank you for your participation, and you may now disconnect.
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