Q4 2021 TriMas Corp Earnings Call

And ladies and gentlemen, please standby good day and welcome to the Tri math 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 try not corporations fourth quarter and full year 2021 earnings call participating on the call today are Thomas Amato try not this president and CEO and Scott <unk>, Our Chief Financial Officer, We will provide our prepared remarks on our results and on our 2022 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 Dot try not to Corp. Dot com under the investors section. In addition, a replay of this call will be available later today by calling eight a 8203111.

Two with a replay code of 90 503603.

Before we get started I would like to remind everyone that our comments today, which are intended to supplement your understanding of Tri MA may contain forward looking statements that are inherently subject to a number of risks and uncertainties. Please.

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 statement.

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, <unk>, President and CEO Tom Thank.

Thank you Sherry good morning, and welcome to <unk> fourth quarter and full year earnings call.

Let's turn to slide three.

Overall 2021, with a very strong year for <unk>.

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 a balanced approach to capital allocation for example in the fourth quarter. We added the quarterly dividend for the first time since our IPO in 2007 and.

And completed two acquisitions and share buybacks, all while maintaining a strong balance sheet.

Throughout 2021, we also continued to make substantial progress on our ESG journey and we are committed to further enhancing our sustainability performance.

I believe <unk> 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 'twenty 'twenty. One highlights include excellent progress in the launch of our new 235000 square foot production facility in New Albany, Ohio.

Adding more than 175000 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 single brand.

Expanding our beauty and personal care product offering into Latin America, a region, we believe as much future growth opportunity for Tri mix by adding a new captive distribution location in Brazil.

Acquired two businesses Omega and as announced this morning, Intertek, which add applications to support customers in the medical and health related product lines.

Within <unk> aerospace.

We successfully produced nearly $30 million of engineered fasteners to fulfill special stocking orders for certain non U S. Customers. This was a great opportunity, which allowed <unk> 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 fastener product line and vertically integrate selected outsource 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 and told US in Arizona, We believe as the aerospace market recovers. This will put us in a better position to convert well on them.

<unk> and assembled component sales.

And we completed a fastener product line acquisition, which we believe will nicely will be nicely additive to try me 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 nor 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 arrow engine business to expand into agricultural and off highway power generation applications.

So 2021 was an exciting year for the <unk> team as we advance against our long term strategies within each of our businesses.

Let's turn to slide five to discuss two recent acquisitions for which I am particularly excited.

Specifically, they enable able us to expand our product offering into the life Sciences market, which we believe has attractive long term growth characteristics.

Today, we announced the acquisition of Intertek.

Precision injection molding manufacturer with two facilities in Denver, Colorado area.

Intertek specializes in custom injection molded products used in medical consumer and industrial applications.

<unk> previously operated as a family owned company and generate a 2021 sales of approximately $32 million.

<unk> 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 and wellness hospitality and E Commerce logistics applications I would like to welcome the Intertek team into the <unk> family of businesses and we look forward to their future contributions.

Omega plastics acquired in December and located in Clinton Township, Michigan manufacturers custom components and devices for drug delivery diagnostics and orthopedic medical applications.

<unk> leverages its core injection molding capabilities class eight clean room and advanced in house tool, making competency to provide its customers a faster product development to production cycle.

<unk> generated approximately $18 million in sales in 2021.

These two businesses will report into <unk> 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 <unk> aerospace business, driven by specialty fast driven by 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 <unk> 56 per share an increase of 19, 1% as compared to 47% from 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, where just over a half a billion achieving a new full year sales level record.

Additionally, both <unk> aerospace and <unk> specialty products businesses had strong sales as compared to 2020, driven by special stocking orders for <unk> aerospace and demand increases within specialty products.

For the full year organic sales increased four 1% acquisitions added six 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 try minutes. So before turning the call over to Scott I want to thank our global <unk> team for their commitment and dedication as we report these strong results for the quarter and year Scott.

Thanks, Tom.

Let's turn to page seven 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 <unk> 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 one five 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 towards 2022 and beyond we.

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 fourth quarter results and forward outlook for our segments, starting with <unk> packaging.

As was noted earlier on the call while <unk> 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 result against a record fourth quarter of 2020.

Yeah.

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 father 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 six 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 of 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 continued 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 paint.

In 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 the resin cost increases of more than 50% since the beginning of 2021.

While resin 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 recovery of the resin price increases pardon me there.

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 to resume an upward trajectory.

Adjusted EBITDA was $29 7 million, a slight decrease versus the prior year quarter.

Okay.

Pivoting now to the 2022 outlook for our packaging segment.

We expect sales growth of 11% to 14%.

Clothing, the impact of the recently announced acquisition of Intertek.

Organic sales are expected to continue to grow at a rate of GDP plus.

Our operating profit margin is expected to remain in the high teens between <unk> 18, and a half and 19, 5%.

While our outlook for 2022 assumes the stabilization of key material cost, 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 <unk> 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 I'll try mass Aerospace group was positively impacted in 2021 by approximately $30 million of special fasteners stocking orders.

The chart on the left side of Slide nine provides try mass aerospace's annual sales starting with the pre pandemic period of 2019 through in early 2024 forecast.

Then overlaid estimated commercial jet production rates for the two largest commercial aircraft providers over the same period.

As you can see we expect <unk> aerospace sales in 2022 to increase by approximately 20% when compared to a normalized 2021, which excludes the impact of the special fasteners stocking orders.

This normalized increase is driven primarily by new business Awards.

Start of a market recovery in the 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 and 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 Tri mass 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 fasteners stocking orders during the quarter.

Operating profit for the quarter was $3 5 million or seven 4% of sales as compared to <unk> 5 million or one 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 <unk> aerospace.

We expect year over year sales growth of 1% to 3% as new business awards, the expected startup of a market recovery and a product line acquisition offsets the impact of the now fulfilled 2021 special special fasteners stocking orders.

As I mentioned earlier, please remember that excluding the impact of the special fasteners stocking orders 2022 sales growth would be approximately 20%.

Operating profit margin for the year is expected to be between four and 6%. However, it is worth noting that at these sales levels, we have approximately $10 million of noncash depreciation and amortization running through our operating profit.

So earnings on a cash basis pardon me 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.

Yeah.

Now on page 11, let's review our specialty products segment.

Net sales in the fourth quarter increased 11 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 products 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 continued to see strong demand for our products serving the construction <unk>.

Back in 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 factually 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.

$4 5 million or 16, 7% of sales.

At the end of the quarter North cylinders 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 in input costs and take appropriate actions as necessary.

Finally, our outlook for the specialty products segment assumes a continued market demand recovery across our key end markets, including construction HVAC and general industrial we.

We expect sales growth of between eight and 12% and operating profit margin of 16% to 17% as we continued 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 in his concluding remarks Tom.

Thank you Scott and 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 .

Is difficult to accurately predict the impacts.

The impact this will have on the world economy, let alone try Miss.

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 variance have impacted our production efficiency for.

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.

We work to recover some of these non material input cost commercial negotiations related to these sectors tend to be more intricate and take longer to achieve a mutually reasonable outcome.

Finally, as we have discussed throughout 2021.

<unk> Aerospace is special stocking orders have been fulfilled.

The product and these orders command premium margins given that they are some of the more highly engineered fasteners and our portfolio.

This means that the sales for this segment, while remaining ahead of accumulative commercial jet production rates as Scott presented on slide nine will be approximately flat as compared to 2021 while.

While margins will be pressured with less favorable mix in 2022.

Despite these challenges and when considering recent acquisitions, we expect <unk> 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 <unk> 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 <unk>.

Through methodical repositioning of <unk> nearly two thirds of our revenues are now generated from <unk> 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.

In addition to our financial progress our leadership team remains committed to operating <unk> 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 <unk>.

Again, we continue to believe <unk> is an exciting company to invest in and with that I'll turn the call back to Sharon Sheri. Thanks, Tom at this point, we would like to open the call up to your questions.

Ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad just keep in mind. If you are using a speakerphone ensure the mute function is released so that signal to reach our equipment. Once again for your questions today Star one.

We will begin with Ken Newman with Keybanc capital markets.

Hey, good morning, guys.

Good morning, Ken.

Good 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 2012 2022 outlook for higher costs versus when you expect the pricing to recover those costs and then on top of that just curious if you can help us understand the impacts from higher production and labor costs that's embedded.

And within that guidance for that segment.

Well as far as the.

First part of the question.

I think we're going to have we will continue to have a little bit of a drag in the first quarter.

But we do expect.

Our price to cost on material to be closer to one to one 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 were we would be closer to one to one as we went through the balance of the year.

And what was the second question you had.

Yeah. The second part of the question and just the impact from higher production and labor cost potentially impacting margins in the year and I am curious if you could help us understand the moving pieces in and the magnitude of those of those costs.

Yeah.

It's a little bit challenging to specifically quantify but I'm going to give you. An example of what of what we're seeing and this is not any one specific plant, but at several of our plants in the U S and even other parts of the world normally for a <unk>.

Well run manufacturing operation.

Very good labor relations.

Would typically like to shoot for absenteeism absenteeism rate rates.

Below 7%.

What happens if you can imagine the intricacies of the manufacturing plant if a person doesn't show up as 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 to start the quarter, where absenteeism rates were in the low teens and we.

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 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 plants shut shut down specifically, but it was just an over precaution that took place.

At towards the end of the year and to start this year.

That to me is a very difficult item to quantify but it's it's 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 were 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 are 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.

Yes, that's very helpful.

And my next question is you've obviously been very active on the M&A pipeline. These last few months.

I'm curious if you can 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're paying for both <unk> and Omega.

Just given enter tax exposure to the medical end markets is it fair to assume that that business is margin accretive to the segments 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 re engaged our acquisition program.

We wanted to first and foremost continued to build out our <unk> 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 have been studying.

Penetrating these product areas for some time.

Typically larger deals are very difficult to.

<unk>.

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 Intertek 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 <unk> made.

That that profile may try mass the logical acquirer, both from our point of view and I think the sellers' point of views because we understood all aspects of their business.

So as we look at as we look at going forward, we've now added.

Intertek and Omega, but also with our pharmaceutical and nutraceutical product lines are 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 and all of the product areas that we're in today.

And not only in the countries that we're in but we will expand geographically as well and I was just going to go one step further.

And.

Note that it's it's a pretty 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.

Bob.

Components production plants, and a medical component production plant they tend to look pretty close.

They're highly clean environment. Some of them are a septic in nature. There is often a sophisticated filtration.

Units of debt.

Change out the air of the product and the production Ironman environment continuously. So we have in addition to the product offering which is exciting for us when we look at the manufacturing processes.

It is extremely similar to what we're doing today.

Okay.

Just just a follow up on that I guess.

Are there more deals like <unk> that are.

That are out there within your pipeline that you're chasing or just how how common are these smaller at 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 looked at across versus the rest of your packaging acquisitions you've done.

First of all they are out there they require a lot of work in both the cases of Omega and Intertek.

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 try mass as a company to.

Allow there many cases their babies enter the next phase of development.

Were lengthy processes and took at the most senior levels of our company myself in.

Our president of our packaging group of <unk>.

Working on these deals personally.

So they are out there they take a lot of work.

Wed like this size is good certainly we'd like some bigger ones as well.

And as far as as far as the multiple goes.

So these are these are.

Nice sized multiples theyre premium multiples, but theyre 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.

Right that makes sense.

Just a few more for me if you don't mind I just wanted to see if you guys could clarify the 10 million dollar depreciation comments, that's running through the aerospace segment.

What is that charge related to you and as I. Just wanted to clarify is that included or excluded from the adjusted EPS guidance you announced today.

Sorry, This is Scott and I will just to clarify it's 10% not 10 million on an annualized basis for aerospace on the DNA.

I am sorry repeat the second part of the question.

Yes, and just to that is that <unk>.

Excluded from the adjusted EPS guidance or is that still running through your adjusted results.

We're already exclude intangible landmark.

The Nics, yes, yes, yes, but depreciation is but the intangible amortization is not.

Understood.

Okay.

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 'twenty two.

And and the higher Capex that you've kind of outlined relative to 'twenty. One 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 in the lower end and the absolute basis through acquisitions it might go up but.

That comes with the purchase price.

Okay.

Thanks for the color I'll get back in queue.

Thank you.

And once again anyone with a question by pressing star one.

We will pause to allow everyone an opportunity to signal.

And we have Ken Newman it back in the queue, we'll hear from him.

Yes.

Thanks.

Just a few more follow ups from me.

The implied EBIT margins for aerospace, obviously, I think that's being impacted by the mix impacts from the the onetime stocking orders, but can you 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.

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.

Yeah.

Well this is Scott.

I think we gave an indication that the stocking order.

Close to $30 million in 'twenty, one was a highly profitable book of business. We're in.

Not going to give.

Explicit numbers around that.

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 the aerospace, it's 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 in that business as I mentioned it briefly.

During my comments on the call, we're seeing aluminum alloys and.

In steel costs.

<unk> 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.

Labour 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 are we.

We need to have.

The ability to meet our customers' demands and so we're being very cognizant of that fact, and so those those factors in totality or kind of implicating what youre seeing for the 22 outlook in aerospace.

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 got share repo has also played a little bit of a piece this year.

As you think about just you know 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 a deal is.

Is that the timing of a deal is unable to comment on in a timely fashion how.

How do you kind of look at the preference between dividend increases and share repurchases.

Okay. Good good question and I think.

A year and two years from now how that's going to be easier for us to talk about because youre going to see what we expect to do occurring in our numbers, but.

We would like to see between dividend 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 and try mass would enjoy that capital return of capital that they can count on from us and maybe as time goes on the shift changes a little bit with a little bit more dividend.

Little 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%, they're 1% return therefore, 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 are right I mean doing deals can be a little bit lumpy I think.

Normalizing for the 2020, the pin 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 <unk> I have nothing further to report today.

But we'll we'll hold our cash.

Until we 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.

You know Gabe gain a little bit more leverage.

Sorry did we lose you candidate.

No.

Zero.

Okay.

Alright, well, thanks, guys I appreciate the time.

Alright take care. Thanks.

Any more questions in queue.

And at this time Theres no additional questions in the queue.

Okay. Thank you for joining us on our earnings call. We look forward to updating you again next quarter stays safe and healthy. Thank you.

And ladies and gentlemen, this does conclude your conference for today. Thank you. Thank you for your participation.

And you may now disconnect.

Yeah.

[music].

Okay.