Good day, and welcome to the TriMas 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 Lauderback. Please go ahead, ma'am.

Thank you, and welcome to TriMas Corporation's Fourth Quarter and Full Year 2021 Earnings Call. Participating on the call today are Thomas Amato, TriMas' 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 at www.trimascorp.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 950-3603. 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'll turn the call over to Tom Amato, TriMas' President and CEO. Tom?

Thank you, Sherry. Good morning, and welcome to TriMas' Fourth Quarter and Full Year Earnings Call. Let's turn to Slide 3. 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 2 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 4. 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 our 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 TriMas by adding a new captive distribution location in Brazil. Acquired 2 businesses, Omega and as announced this morning, Intertech, which add applications to support customers in the medical…

Thanks, Tom. Let's turn to Page 7 for a review of our key credit statistics and liquidity profile. 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 1.5x at the end of the year, well below our long-range target of 2x 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 8, and I will review our fourth quarter results and forward outlook for our segments starting with TriMas packaging. As was noted earlier on the call, while TriMas' Packaging group had 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 search [indiscernible], which began in the second…

Thank you, Scott. Let's turn to Slide 12. During the past 2 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 impact of the -- the impact this will have in the world economy, let alone TriMas. 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 nonmaterial 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, TriMas 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 that Scott presented on Slide 9, will be…

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

[Operator Instructions] We will begin with Ken Newman with KeyBanc Capital Markets.

So I appreciate the color on the resin 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 any -- 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?

Well, as far as the first part of the question, I think we're going to have -- we'll continue to have a little bit of drag in the first quarter, but we do expect price to cost on material to be closer to 1:1 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 1:1 as we went through the balance of the year.

Understood.

And what was the second question you had?

Yes.

The second part of the question?

You also mentioned just the impact from higher production and labor costs potentially impacting margins in the year. And I'm curious if you could help us understand the moving pieces and the magnitude of those costs?

Yes, it's a little bit challenging 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 U.S. 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 absenteeisms, 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 -- you don't run the plant as efficient. There were operations and 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 planned shut down specifically, but it was just an overprecaution 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 nonlabor inflationary expenses that we're anticipating. Again, we don't really have a specific quantification of it could be in the $4 million 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 of added color towards your question.

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 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?

Great question, and thank you for the question. As we talked about throughout the past couple of 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 med tech applications and industrial applications. And in some ways, TriMas made -- that profile made TriMas the logical acquirer, both from our point of view and I think the seller's point of view is because we understood all aspects of their business. So as we look at going forward, we've now added, again, Intertech in Omega, but also with our pharmaceutical and nutraceutical product lines, a nice vertical 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 environment. Some of them are aseptic in nature. There's often a sophisticated filtration units that change out the air of the -- in the production environment continuously. So we have -- 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.

Just a follow-up on that, I guess. I mean, 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, does carry a higher multiple than you would usually look at across -- versus the rest of your packaging acquisitions you've done?

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 TriMas as a company to allow their 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 Salik working on these deals personally. So they're out there. They take a lot of work. We like -- 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 med tech space and might be $200 million in revenue. Those tend to be a little bit different type of deals.

Just a few more from me, if you don't mind. I just wanted to see if you guys could clarify that $10 million depreciation comment 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?

Just -- sorry, this is Scott Mell. Just to clarify, it's 10%, not $10 million on an annualized basis for Aerospace on the D&A. I'm sorry, repeat the second part of the question?

Just is that excluded from the adjusted EPS guidance? Or is that still running through your adjusted results? So you already exclude intangible and or?

Yes. Depreciation is but the intangible amortization is not.

And then lastly, I just wanted to get a better understanding on free cash flow. 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 build in the year? And what gives you confidence that you can generate GAAP free cash flow over 100% of net income?

Yes. I think for this particular year, we expect working capital to be – any working capital build to be on the lower end. I mean, on an absolute basis through acquisitions, it might go up, but that comes with the purchase price.

[Operator Instrucitons] And we have Ken Newman back in the queue. We'll hear from him.

Just a few more follow-ups for me. The implied EBIT margins for Aerospace, obviously, I think that's being impacted by the mix impacts from the onetime stocking orders. But 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 may be 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?

Well, this is Scott. I think we gave an indication that the stocking order, the -- close to $30 million in '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 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, 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, 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 have and Tom mentioned on this, specifically within Aerospace, given their geographical location in California, labor inefficiencies around the COVID-19 pandemic. So we continue to see those factors impacting 2022. And then we've got -- while we've taken out a significant amount of our fixed cost base through some realignment actions in aerospace, 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 we need to have the ability to meet our customers' demand. 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.

Last one for me, just from a strategic capital deployment perspective, obviously, you announced the dividend this last quarter. I mean still remains a big priority. I think a share repo has also played a little bit of a piece this year. As you think about just 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 3 buckets? And if a deal is -- the timing of the deal is unable to come in a timely fashion, how do you kind of look at the preference between dividend increases and share repurchases.

Okay. Good question. And I think a year and 2 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 0.5% share repurchases, we would expect to be at least the like amount. So an investor in TriMas would enjoy that capital -- 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% there -- 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 do -- 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 the -- for 2020, the pit debit 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 TriMas. 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 2x. 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 [indiscernible]?

No.

Did we lose you, Ken [indiscernible]?

[indiscernible].

Any more questions in queue?

And at this time, there're no additional questions in the queue.

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.

And ladies and gentlemen, this does conclude your conference for today. We thank you for your participation, and you may now disconnect.