Trimas Corp Q4 FY2021 Earnings Call

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 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 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. We further developed our ready-to-recycle single polymer dispensers, including the launch of our new Singolo brand. We expanded 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. We 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 TriMas 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 TriMas Aerospace to dampen the effect of the significant aerospace production falloff since mid-2020. We launched a new facility in Mesa, Arizona. This facility allows us to grow our aerospace fastener product lines and vertically integrate selected outsourced components for our recently acquired RSA Engineered Products operations. We successfully consolidated aerospace component machining operations from three separate lease facilities in California into one of our owned facilities in Tolleson, 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. We also completed a fastener product line acquisition, which we believe will be nicely additive to TriMas as markets recover. 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 5 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 announced the acquisition of Intertech, a precision injection molding manufacturer with two facilities in the 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 8 controlled environment, includes highly engineered and tight tolerance components predominantly used in vascular access and in vitro diagnostic applications. In a separate facility, Intertech manufactures injection molded products for food, wellness, hospitality, and e-commerce logistics applications. I would like to welcome the Intertech team into the TriMas 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 TriMas 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 6, where I will cover our financial performance. As noted at the start of 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 TriMas' 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 the 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 $0.5 billion, achieving a new full year sales level record. Additionally, both TriMas Aerospace and TriMas Specialty Products businesses had strong sales as compared to 2020, driven by special stocking orders for TriMas 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 TriMas. 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?

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 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 Affaba & Ferrari acquisition completed in December of 2020 and our Omega 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 $0.6 million. 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 helped 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 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 closures 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 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 the full recovery of the resin cost increases we've experienced. We estimate these 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; 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 9, 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 TriMas Aerospace Group was positively impacted in 2021 by approximately $30 million of special fastener stocking orders. The chart on the left side of Slide 9 provides TriMas 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 TriMas Aerospace's 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 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 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 TriMas 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 noncash 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 Products 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 Products segment. Consistent with performance since Q2 of 2021, demand for steel cylinders and engines providing supplemental power 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, Norris 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 Products 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. At this point, I'd like to hand it back over to Tom to provide our consolidated outlook and his concluding remarks.

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 impact of this on 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 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 TriMas 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 TriMas, 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 by TriMas Packaging group. As discussed on prior calls, we believe there are attractive characteristics in this segment through our many submarkets, 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 TriMas 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 to better understand TriMas. Again, we continue to believe TriMas is an exciting company to invest in. And with that, I'll turn the call back to Sherry.

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

We will now conduct the question-and-answer session. We will begin with Ken Newman with KeyBanc Capital Markets.

I appreciate the color on the resin costs in the quarter. I'm curious, is there any way that you can 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, I'm 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'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 one-to-one as we get into the second quarter and the 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. What was the second part of your question?

Yes. The second part was the impact from higher production and labor costs potentially impacting margins in the year. I'm curious if you could help us understand the moving pieces and the magnitude of those costs?

It's a little bit challenging to specifically quantify, but I'll give you an example of what we're seeing. 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 absenteeism rates below 7% because if a person who is more specialized doesn't show up for their shift, there tends to be bumping and disruption. You just don't run the plant as efficiently. There were operations and facilities that had absenteeism rates in the low teens toward the end of the year and to start this year. We don't quite know the exact cost related to that, but if you think about all of the plants we have, these were related to people either having come into contact with somebody who had Omicron or they were sick. We didn't have any planned shutdowns specifically, but it was an overprecaution that took place towards the end of the year and into the start of 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 in our outlook for 2022. We also have some other nonlabor inflationary expenses that we're anticipating; those 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 what would normally be in our cost savings program. So I think that gives you a little bit of added color.

You've obviously been very active on the M&A pipeline these last few months. I'm curious if you could 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. Given Intertech's exposure to the medical end markets, is it fair to assume that business is margin accretive to the segment? And 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. As we talked about over the past couple of years, as we re-engaged our acquisition program, we wanted to first and foremost continue to build out our TriMas Packaging platform. When we looked and studied some of the product lines we're in and where we have the ability to grow, as well as some applications that were logical extensions to our pharmaceutical and nutraceutical lines (which approximate about $25 million, plus or minus, of sales annually), it made sense to do more in that area — pharmaceutical, nutraceutical, and life sciences, which would include some medical applications. Larger deals are very competitive, so we have been focusing on more manageable bolt-on acquisitions in terms of size and fit for us. We were actually looking at Intertech before we closed Omega, and we thought it was incredibly compelling to put these companies together. Both companies have med-tech and industrial applications. In some ways, TriMas was the logical acquirer because we understood all aspects of their businesses. Going forward, we've now added Intertech and Omega alongside our pharmaceutical and nutraceutical product lines to create a nice vertical in the life sciences area, which we would like to continue to build upon. We'll also continue to add within the product areas we are in today and expand geographically. When you walk into a food components production plant and a medical component production plant, they tend to look pretty similar: highly clean environments, sometimes aseptic in nature, with sophisticated filtration systems. So in addition to the product offering, the manufacturing processes are very similar to what we're doing today. Regarding multiples, these are premium multiples relative to our average bolt-on acquisitions, but they're not the multiples you would see for large, pure med-tech businesses. We did not disclose specific multiples for the transactions.

Are there more deals like Intertech that are out there in your pipeline that you're chasing? How common are these smaller life sciences deals, and do they generally carry a higher multiple than the packaging acquisitions you've done historically?

Yes, they are out there, but they require a lot of work. In both the cases of Omega and Intertech, the owners were extremely passionate about their businesses. The processes for us to work with the owners and have them select TriMas took senior-level involvement, including myself and Fabio Salik, President of our Packaging group. These deals take time. We like this size, though we would welcome larger deals as well. As far as multiples, these are higher than our typical bolt-ons but not the very high multiples you'd see for large, pure med-tech businesses with much larger revenue bases. We continue to pursue these opportunities and are working on additional deals for TriMas.

Just to clarify the depreciation/amortization comment you made earlier for Aerospace: is that $10 million D&A charge related to the segment, and is that included or excluded from the adjusted EPS guidance you announced today?

Just to clarify, the figure we're referencing is approximately $10 million of noncash depreciation and amortization running through Aerospace operating profit on an annualized basis. Regarding adjusted EPS, depreciation is excluded from adjusted operating profit, but intangible amortization is not excluded from adjusted results.

Lastly from me on free cash flow: you mentioned an expectation to generate greater than 100% conversion of net income to free cash flow. Given the expectation for organic growth in 2022 and higher CapEx, how should we think about working capital build during the year, and what gives you confidence you can generate GAAP free cash flow over 100% of net income?

For this particular year, we expect working capital build to be on the lower end. On an absolute basis through acquisitions it might increase, but that comes with the purchase price. Our expectation for the year is that free cash flow will remain strong relative to net income given our operating cash generation and despite somewhat higher CapEx as we invest in new U.S. production capacity.

We have Ken Newman back in the queue. He may have additional questions.

The implied EBIT margins for Aerospace are clearly being impacted by the mix effect from the one-time stocking orders. Can you help us understand how much of the margin decline is really just lower mix, and where the higher operating costs are coming from within that segment? Also, can you outline the cadence for Aerospace margins throughout the year given the 4% to 6% target?

We indicated that the approximately $30 million in stocking orders in 2021 was a highly profitable book of business, and we won't give explicit contribution numbers for that book. Looking forward, 2022 is expected to be a trough year for Aerospace relative to that exceptional 2021 result. As you look at volume relative to our fixed cost base, we expect any incremental revenue to meaningfully contribute to operating profit and EBITDA as volumes recover. Headwinds include rising aluminum alloy and steel costs, which were present prior to the recent geopolitical events, and we have not factored any additional impacts from those events into our 2022 outlook yet. We are also seeing labor inefficiencies in Aerospace, particularly given geographic concentration in California and COVID-related absenteeism. While we've taken out a significant amount of fixed cost through realignment actions, we must remain capable of meeting customer demand as the market recovers; we are already seeing supply chain partners having challenges ramping back up. Those factors together lead to the 4% to 6% operating margin outlook for 2022.

From a strategic capital deployment perspective, you've announced a dividend, done share repurchases, and continue to pursue M&A. Given current leverage and cadence of deals, can you help us understand priorities between reinvesting in the business, M&A, and returning capital to shareholders? If deals don't materialize quickly, how do you balance dividend increases versus share repurchases?

Good question. Our near-term priority is to deliver a consistent return of capital to shareholders. Ideally, between dividends and share repurchases we'd like to see at least a 1% return annually — roughly 0.5% from dividends and 0.5% from buybacks. That gives investors a predictable return. At the same time, given our cash flow profile and current leverage, we have ample capacity to continue executing our acquisition strategy with bolt-on deals. Deals can be lumpy, so if the timing of acquisitions doesn't line up, we'll continue returning capital and hold cash until the right deals emerge. Our long-term leverage target is approximately 2x, so we have room to be opportunistic with acquisitions while maintaining returns to shareholders.

At this time, there are 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.

This concludes today's conference. We thank you for your participation, and you may now disconnect.