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Edited Transcript of TRS earnings conference call or presentation 28-Feb-19 3:00pm GMT

Q4 2018 TriMas Corp Earnings Call

BLOOMFIELD HILLS Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of TriMas Corp earnings conference call or presentation Thursday, February 28, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert J. Zalupski

TriMas Corporation - CFO

* Sherry Lauderback

TriMas Corporation - VP of IR & Communications

* Thomas A. Amato

TriMas Corporation - CEO, President & Director

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Presentation

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Operator [1]

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Good day, and welcome to the TriMas Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Sherry Lauderback. Please go ahead, ma'am.

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Sherry Lauderback, TriMas Corporation - VP of IR & Communications [2]

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Thank you, and welcome to the TriMas Corporation Fourth Quarter and Full Year 2018 Earnings Call. Participating on the call today are Tom Amato, TriMas' President and CEO; and Bob Zalupski, our Chief Financial Officer. After our prepared remarks discussing our results and 2019 outlook, we will open the call up for your questions. In order to assist with the review of our results, we've included in the press release and PowerPoint presentation on our company website, 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 533510.

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 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 address your attention to our website, where considerably more information may be found.

I would also like to refer you to the appendix in our press release issued this morning or included as part of this presentation, which is available on our website, 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.

At this point, I'd like to turn the call over to Tom Amato, TriMas' President and CEO. Tom?

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Thomas A. Amato, TriMas Corporation - CEO, President & Director [3]

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Good morning, and thank you, Sherry. Let me start by taking a few minutes to remind our investors how we have refocused TriMas over the past few years. While 2017 was a year of overcoming some more significant operational challenges, 2018 was a year of refining our strategy and refocusing on growth and innovation all while better leveraging our continuous improvement culture. The TriMas Business Model is now firmly established in driving how we manage our businesses and how we best utilize it in our decision-making process.

Let's turn to Slide 3. We operate businesses with well-recognized brand names in the niche end markets they serve, each of which rely on product and process innovation to solve our global customers' needs and challenges. It's worthwhile to note that our brand names are key differentiators and serve as important value enhancers to TriMas in each of our businesses.

Overall, TriMas had sales of $877 million and adjusted EBITDA margin of 19.1%. Our diversified portfolio of businesses and cash profile has allowed us to drive net leverage down to 1.3x at year-end from 2.9x in Q3 2016, all while investing in our businesses and even completing share buybacks. This performance also paves the way for TriMas to execute upon a disciplined M&A strategy.

For example, in January, we closed upon a transaction, which is a bolt-on to our European footprint within our Rieke business.

Let me revisit our overarching strategy for our investors on Slide 4. Our strategy to grow shareholder value is straightforward. First, we rely on the TriMas Business Model, which has been covered at length on prior earnings calls and at investor meetings to seek to achieve optimal performance in each of our businesses and throughout every one of our locations.

In turn, our businesses rely on product and process innovation to execute their business-specific strategies and long-term growth plans. For example, at our Rieke business, we recently launched a family of e-commerce dispensing products that are now commercially in use, in the prelaunch process or under testing at key accounts. These are an exciting range of products for multiuse dispensing applications, and which are shown on our Rieke website at www.riekepackaging.com.

Another example is related to process innovation. Our Norris business recently enhanced its production approach by implementing a Kanban system to allow for a reduction in quota delivery time, which improves customer satisfaction and which we believe further differentiates Norris from competitors.

We operate all of our businesses in a culture of a relentless commitment to cash flow, while continuing to reinvest in our businesses to drive future growth.

Finally, a key component of our strategy is our disciplined approach to capital allocation. We do this through our commitment to operating in a data-driven, fact-based decision-making environment. So with this as a backdrop to our overarching strategy, how are we doing?

Let's turn to Slide 5. We finished the fourth quarter and the year strong. For the quarter, net sales were up 8.3% over prior year to $211.4 million. Operating profit was up 9.4% as we gained some leverage on higher sales, and EPS increased 22.6% to $0.38 a share.

Turning to Slide 6. On a full year basis, net sales were up 7.3% to $877.1 million. Operating profit was up 8.5% to $116.1 million. Adjusted EBITDA increased year-over-year by $12.4 million to $167.3 million or 19.1% of sales. EPS was up 25% to $1.75 per share compared to $1.40 per share in 2017 and in line with our increased guidance provided in October.

Let's turn to Slide 7. As we discussed earlier, a key tenet to our strategy is operating in a culture of a relentless commitment to cash flow. We believe a critical TriMas attribute is evident here.

Our steady generation of free cash flow and our resulting deleveraging model, coupled with driving a higher absolute EBITDA, demonstrates that our refocusing of TriMas under -- operating under the TriMas Business Model and refining our strategy has been yielding significant value-creating results.

In addition to 2018 being a great year financially, we also had a number of additional successes that we've highlighted on Slide 8. As noted on prior calls, we've refocused our M&A strategy with our first priorities to build out our packaging platform, and also begin the process of identifying opportunities in our Aerospace Fastener product lines. I'm pleased to again report the closing of Plastic Srl, which was executed under a negotiated sale process, directly with the founding family. This operation, located in Forlì, Italy, expands our European footprint and adds adjacent single and multi-body closures and dispensers to our Rieke business.

Next, we successfully retired about 1% of our outstanding shares by acquiring just over 442,000 shares at a collective cost of $12.1 million. As announced this morning, we have authorized an increase in our share repurchase program, enabling TriMas to now purchase up to $75 million of our outstanding common stock. So we have just over $62 million remaining under the revised authorization limit. This larger authorization provides us flexibility to continue to return value to our shareholders as we evaluate these capital-allocation decisions on a number of factors, such as the stock price and internal investment and strategic acquisition opportunities.

Finally, I mentioned open the call that one of our goals is to solve our global customers' need and challenges. So I'm delighted when we receive feedback through customer awards that we indeed are executing on this intent. I've listed a few examples of recent awards here from Amazon, Dow Chemical, Boeing and Airbus. On behalf of the hardworking men and women, at all of our global production sites or in our technical or commercial functions, that have helped us achieve these results, we deeply thank these companies for their acknowledgments.

Now if we turn to Slide 10, we'll go through our segment results. First our packaging group. Net sales were up 5.1% for the quarter to $89.7 million and were up 6.4% for the year to $368.2 million. Our global commercial and technical teams continue to make noteworthy strides and we anticipate keeping this momentum up in 2019. We also continue to enjoy robust quoting activity and have a solid pipeline of innovative products and enhancing features under development.

Segment operating profit for the quarter was up 5.9% to $20.1 million and up 2.8% for the year to $84.6 million, despite higher material and freight costs and continued investment in technical and commercial resources. Even with these higher cost, longer-term investments, operating profit for the full year was 23.1 -- 23%. This level of performance allows us to continue to reinvest in our products, technology and global capacity.

As I mentioned previously, we enter 2019 with a significant number of new and innovative products. We anticipate organic sales growth in the 2019 -- in 2019 of approximately 3% to 5% with operating profit margin remaining in the 22% to 23% range.

Turning to Slide 11. Sales in our Aerospace group were up 6.2% for the quarter to $45.4 million, and up nearly 1% for the year to $185.9 million. As a reminder, we did exit certain machine component sales in 2018, which impacted our 2018 annual growth by about a few million.

Our commercial and technical teams are working diligently to accelerate the growth of TriMas Aerospace, and we continue to enjoy solid order intake and new business opportunities, particularly in our fastener product lines.

Operating profit for the quarter was up 4.7% to $6.9 million, and for the year, it was up 4.3% at $27.5 million. Operating margin for the year was at 14.8% of sales, just slightly below our 2018 guidance, but ahead of prior year. We continue to work closely with one of our production facilities, which manufactures standard fasteners and is faced with factory floor and commercial challenges.

Unfortunately, our performance level at this facility has been weighing down the overall margins in our Aerospace segment and is the primary reason for the segment margin shortfall. We are expending both internal and external resources on fixing the situation and anticipate improvement in the second half of 2019 and into next year.

With respect to 2019 outlook, we expect underlying sales growth of approximately 3% to 4%, generally in line with forecasted industry build rates. We expect operating profit margin to be within the range of 16% to 17%. And this range takes into consideration the new operating structure for TriMas Aerospace, which Bob will discuss shortly.

Turning to Slide 12, our Specialty Products group, which is comprised of businesses in the compressed gas and oil and gas facing end markets, had sales in the quarter up 13.6% to $76.3 million and up 11.8% for the year to $323 million.

Our commercial, technical and production teams have done an excellent job over the past few years, increasing throughput and freeing up capacity to allow for the capture of higher end-market demand.

Operating profit for the quarter was up 51.8% to $7.7 million and for the year, up 30.9% to $36.2 million, which are solid results that we anticipate carrying into 2019. We expect Specialty Products to achieve sales growth of 4% to 6% in 2019 and expect to leverage anticipated higher sales levels as well as our continuous improvement initiatives to achieve an overall segment operating margin in the range of [11% to 3%].

With that overview, I'll now turn the call over to Bob. Bob?

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Robert J. Zalupski, TriMas Corporation - CFO [4]

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Thank you, Tom. I will begin my comments on Slide 14. As Tom noted earlier, we delivered another quarter and year of strong cash generation. Free cash flow generated in the fourth quarter was $37.6 million. For the full year, we generated record free cash flow of $108.3 million, which represented 134% conversion of net income and exceeded our previous guidance of greater than 120% conversion.

We were able to accomplish this, despite a modest investment in net working capital to support higher sales activity and somewhat elevated inventory levels to buy ahead of expected tariffs in some cases. Even with the higher sales activity, we were able to maintain our overall day sales and AR and inventory turn metrics, consistent with the prior year. And we believe there are additional opportunities to improve working capital levels, particularly in inventory as we move through 2019.

While our focus on working capital and slightly lower CapEx helped our 2018 free cash flow, the primary driver was increased earnings, resulting from solid operating performance. Adjusted EBITDA improved approximately 8% or $12.4 million to $167.3 million versus the comparable period a year ago.

As a result, we ended the year with $108.2 million of cash and cash equivalents on the balance sheet, even after funding $12.1 million of share repurchases in the ongoing reinvestment in our businesses. Net debt was $185.4 million as of December 31, 2018, a reduction of $90.1 million versus the prior year, with a resulting leverage ratio of 1.3x. Our strong balance sheet, we have more than $390 million of cash and aggregate availability under our revolving credit facility, and track record of strong cash flow generation position us well for 2019 and provides both ample capacity and flexibility to fund our capital allocation priorities.

Turning to Slide 15. I would like to address a few matters that we expect to be a focus of the TriMas leadership team during the year. First, we will be making a reportable segment change, effective Q1 2019, in which we will report the machine components operations, previously a part of the Aerospace segment, within the Specialty Products segment. These operations consist of 2 locations, one in Stanton, California and one in Tolleson, Arizona and have a combined annual revenue of approximately $30 million.

This organization structural change will allow TriMas to better leverage its machining competencies and resources across the businesses within Specialty Products as well as provide the opportunity to expand sales of machine products, utilizing available capacity to customers outside of the Aerospace industry. In addition, this change will also enable the TriMas Aerospace team to better focus on driving growth and innovation in its highly engineered fastener product line, while implementing the operational infrastructure required to support continued growth. Please see today's 8-K filing for historical financial information related to this segment change.

Secondly, I wanted to comment briefly on free cash generation dynamics contemplated for 2019. We expect to continue to grow sales and expand margins during the year, resulting in higher EBITDA or to use more of that cash flow to fund reinvestment in our businesses. As compared to 2018, we expect CapEx levels to approximate 3.5% of sales, due to a shift in timing of a few 2018 programs as well as new investments to support organic growth initiatives, manufacturing productivity improvement opportunities and some IT infrastructure enhancements.

As noted earlier, we will remain focused on improving net working capital as a percent of sales, using Kaizen as a tool to increase inventory turn and support higher levels of anticipated business activity.

Lastly, we do expect an increase in cash taxes, based on our planned higher earnings level, forecasted geographic mix of taxable income and the timing of estimated tax payments.

Finally, we will continue to manage the headwinds associated with the Section 301 tariffs enacted in September 2018. We did a good job of mitigating these impacts during the year through commercial actions and other sourcing initiatives, such that the margin impact was minimal. Assuming the 10% tariff rate remains in effect for 2019, we have plans in place to continue to manage this issue and largely mitigate the impact to our 2019 financial performance. We expect commodity costs, particularly related to resin and steel-based inputs to moderate in 2019, and we'll continue to monitor and address material-related cost pressures through continuous improvement initiatives, sourcing and commercial actions and leveraging our global footprint.

Further, higher volumes in 2019 in the majority of our end markets provided a nice offset to some of the increased costs we experienced. And we anticipate that higher-end market demand will continue in 2019 and provide such additional opportunities.

Turning to Slide 16. I would now like to discuss our expectations for 2019 full year guidance. Tom already provided some color on our outlook for each segment, and Slide 20 in the appendix provides a summary of that guidance, taking into account the segment modification I previously discussed. The remainder of my comments will address TriMas in total.

For 2019, our objective is to continue the momentum in each of our businesses under the TriMas Business Model, while strategically positioning each to drive further growth through innovation and capitalize on available market opportunities through manufacturing efficiency.

Overall, we expect organic sales growth in the range of 3% to 5% with growth in each segment, notwithstanding the strong year of growth achieved in 2018. We will also achieve sales growth from our recent acquisition of Plastic Srl, which had 2018 sales of approximately 20 -- or $12 million.

We are guiding full year 2019 diluted EPS to range between $1.82 to $1.92 per share, with the midpoint representing an increase of approximately 7% compared to 2018. And while we do not provide quarterly guidance, given the short-cycle nature of the majority of our businesses, we do expect first quarter to be our lowest sales and earnings quarter in 2019, due to the second timing -- second half timing of certain new customer program launches at Rieke, operational improvements at our standard fastener manufacturing operations and integration activities at Plastic Srl.

Finally, as mentioned on the previous slide, we again anticipate 2019 free cash flow conversion of greater than 100% of net income. We are planning for an effective tax rate for the year between 22% and 23% and corporate cash expenses to be relatively flat compared to the prior year.

At this point, I will now turn the call back to Tom for his final remarks and wrap-up. Tom?

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Thomas A. Amato, TriMas Corporation - CEO, President & Director [5]

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Thank you, Bob. Before I give my final remarks, I do need to clarify the operating margin range for our Specialty Products group. We anticipated it to be in the 11% to 13% range for 2019 and the guidance for all of our segments are shown in our appendix in the presentation.

So prior to opening the call up to Q&A, I'd like to remind you why I remain excited about our future prospects on Slide 17. By utilizing the TriMas Business Model, we will always drive continuous improvement in all that we do. And we'll do this through championing a culture of Kaizen and operational excellence. We have not only been operationally improving TriMas' businesses, but we are also starting to see the benefits of our investment in innovation and growth.

For example, our Rieke business is leveraging its innovation centers of excellence on 3 continents and is actively quoting many new product developments related to product recyclability, child safety and consumer convenience. And our TriMas Aerospace, engineering and commercial teams are working on a number of projects for our OEM and Tier-1 customers to commercialize automated installation-ready fasteners and even lower-weight fasteners.

Our capital allocation priorities remain to first reinvest in our businesses with a key focus on the highest return and factory floor improvement projects. And secondarily, ensure we operate with a net debt ratio below our overarching target of 2x, a level which we are now comfortably below today, while seeking to grow our highest potential platforms through M&A as well as continuing to take other treasury actions to benefit shareholders.

I remain excited about the prospect for TriMas and the multiple levers we have available to us to drive shareholder value. Thank you.

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Sherry Lauderback, TriMas Corporation - VP of IR & Communications [6]

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Thank you, Tom. At this point, we would like to open the call up for your questions. Ryan?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Matt Koranda with ROTH Capital Partners.

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Unidentified Analyst [2]

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This is Mike on for Matt. So first question. I was wondering can you quantify how much of the margin improvement in Aerospace for 2019 is due to the transfer of the machine components operations to Specialty Products?

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Thomas A. Amato, TriMas Corporation - CEO, President & Director [3]

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Yes, that's a good question. The machine components business was a drag on our overall margin for TriMas Aerospace. And indeed, if you look at the closeout year of TriMas Aerospace compared to our guidance, generally speaking, within about 50 bps or so, that's the lift that we will receive from moving that product line out of TriMas Aerospace.

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Robert J. Zalupski, TriMas Corporation - CFO [4]

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The operating margins in that business were kind up in the high single digits as a percent of sales, Mike.

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Unidentified Analyst [5]

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Okay, great. That's helpful. And then I was also wondering for the packaging growth rate, it seems to be moderating a little bit in 2019. Can you just talk about some of the puts and takes there?

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Thomas A. Amato, TriMas Corporation - CEO, President & Director [6]

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I think, generally speaking, we had a good year in 2018, and we're -- continue to be excited and optimistic about on our long-term prospects for our packaging group. We do have some programs that are naturally ramping up, but unfortunately, not until later in the year. But generally speaking, we're excited about -- 2018 was a great year, and we're excited about this level for 2019. Rob, anything you want to add to that?

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Robert J. Zalupski, TriMas Corporation - CFO [7]

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No, I think 2018 was a very successful year in terms of volumetric growth and success like that leads to additional opportunities. And I think the lead times to get those opportunities from sort of discussion with the customers, all the way through to commercial sales, does take longer than anyone would like, but we do expect that, that will continue to drive sustainable growth rates in that 3% to 5% range.

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Unidentified Analyst [8]

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Okay, great, that's helpful. And then last one for me, in terms of M&A, you closed on Plastic last month. Can you talk a little bit more about what you're seeing in the pipeline for further opportunities and just sort of what the environment is like there?

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Thomas A. Amato, TriMas Corporation - CEO, President & Director [9]

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Yes, great question as well. And we are spending a fair amount of time on M&A, both preparedness and planning as well as looking at some deals that are in the market. So we're seeing a fairly robust pipeline. Companies range from smaller in scale to mid-market companies, we're pretty disciplined in our approach on what we're looking at. But we do feel, at least as we look over the course of the nearer term, if we call that the next year, we've got some opportunities in front of us to at least research and assess.

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Operator [10]

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We will take our next question from Scott Graham with BMO Capital Markets.

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Unidentified Analyst [11]

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This is Katya on for Scott. Can you guys hear me?

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Sherry Lauderback, TriMas Corporation - VP of IR & Communications [12]

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Yes.

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Thomas A. Amato, TriMas Corporation - CEO, President & Director [13]

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We can hear you.

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Unidentified Analyst [14]

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Sorry, this is Katya on for Scott. I think I was on mute, sorry about that. Can you discuss a little bit about how were orders as the quarter progressed and maybe what you're seeing right now?

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Thomas A. Amato, TriMas Corporation - CEO, President & Director [15]

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Yes, the order intake in quarter 4 was quite solid. We typically see a little bit of a dropoff in December, just due to the seasonal nature of certain of our businesses and our customer actions. January was a little slower start from a booking standpoint than we had anticipated, but we've recovered nicely in February. And the trends in order intake look pretty solid across all of our businesses.

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Unidentified Analyst [16]

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On the pricing side, can you talk a little bit about what you see, how is the environment in each of the segments?

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Robert J. Zalupski, TriMas Corporation - CFO [17]

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Yes, I mean, generally speaking, when tariffs started to creep in last year and material costs started to go up last year, a number of companies in our spaces addressed, as we did, these matters through some commercial actions. So some of that was able to stick, some of that resulted in some other commercial approaches to sort of skin the cat in other ways, as we say.

So generally speaking, when we look back at 2018, where we had the onset of material cost increases and tariffs really coming into play, we were really pleased that we were able to deliver the year despite those matters. And as we look out at 2019, the tariff question is still out there. We're planning at tariff rates being at a 10% level. And from a commodity cost standpoint, we are seeing some moderation, if you will, and they seemed -- costs seemed to have stabilized in both resin-based products or inputs as well as steel. So hopefully, that will continue, and it won't be as disruptive as it was in the prior year.

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Operator [18]

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(Operator Instructions) Okay, looks like there are no questions at this time.

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Thomas A. Amato, TriMas Corporation - CEO, President & Director [19]

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Well, I'd like to thank our investors, again, for taking the time today to listen to our report out of our earnings. And we look forward to our next update at our regularly scheduled earnings call. Thank you very much.

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Robert J. Zalupski, TriMas Corporation - CFO [20]

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Thank you.

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Operator [21]

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Ladies and gentlemen, thank you for joining today's conference call. The call has now concluded. Please disconnect your lines, and have a great day.