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Edited Transcript of TRS earnings conference call or presentation 30-Jul-19 2:00pm GMT

Q2 2019 TriMas Corp Earnings Call

BLOOMFIELD HILLS Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of TriMas Corp earnings conference call or presentation Tuesday, July 30, 2019 at 2:00:00pm 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 - President, CEO & Director

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Conference Call Participants

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* Kenneth H. Newman

KeyBanc Capital Markets Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day and welcome to the TriMas Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

And at this time, I would now 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's Second Quarter 2019 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 on our second quarter results, we'll open the call up for your questions.

In order to assist with the review of our results, we've included 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 5451030.

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 direct 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 would like to turn the call over to Tom Amato, TriMas' President and CEO. Tom?

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

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Good morning, and thank you for joining us on our second quarter earnings call. If we turn to Slide 3, as a brief reminder, TriMas operates businesses with strong brand names in the specific end markets we serve. On an LTM basis, we achieved $895 million (sic) [$896 million] in net sales, a 19% EBITDA margin, and we are capitalized, with a strong balance sheet and with leverage, nicely below our overarching target of under 2x.

We operate our businesses in 3 segments: Packaging, Aerospace and Specialty Products. And we seek to provide solutions to our customers in the health, beauty and home care, food and beverage, Aerospace, general industrial, petrochemical and oil and gas end markets. While in any period, we may experience cyclical effects in any of our end markets, by design, our end-market diversity, coupled with our sound capital structure, provides the platform for TriMas to generate reliable cash flows, which we in turn reallocate in a disciplined way for our investors. For example, in this quarter, we closed on the transaction of Taplast, a dispenser and closure company, with a strong brand name, particularly in Europe. We have known this company for many years, and we're pleased to add Taplast to our Packaging group.

In addition to broadening our offering of lotion -- of liquid and lotion dispensers and closures, Taplast expands our design and engineering capabilities, provides us with additional production capacity in Europe and adds TriMas' first production facility in Eastern Europe, which we hope to build upon in the future. In addition to this acquisition, we acquired about 1% of our total shares outstanding. We are pleased to return capital to our investors through this type of treasury action, which we believe in the long run will help drive shareholder value.

Let's turn our attention now to our second quarter results on Slide 4. We are pleased to report another solid quarter of performance. Net sales for the quarter were up 6.4% overall, 3% of which was organic net of currency translation and 4.3% from acquisitions. Operating profit was $32.1 million, flat as compared to the prior year quarter, as the positive impact from higher sales was offset primarily by less favorable sales mix and higher input and freight costs.

Earnings per share for the quarter was up 4.2% to $0.50 per share with timing of foreign currency denominate gains providing a benefit in the quarter. For 2019, TriMas continues to remain on plan financially, while executing well against our longer-term strategic initiatives.

Let's now turn to our segment results on Slide 6 beginning with our Packaging segment. Net sales were up for the quarter, 9.4%, driven largely by acquisitions with organic sales up 1.1% net of currency translation. Sales to our industrial end market, where we provide closure and dispenser -- closure and dispensing products for our 55-gallon drum and 5-gallon pail applications, has remained soft since the beginning of the year due to lower global trading activity.

Sales into the food and beverage end market were all lower year-over-year, partly driven by shifts in ordering patterns of certain of our customers some of which we anticipate will pick up in the second half. Sales to our health, beauty and home care end market, which represents about 50% of our segment sales, were up as demand was robust in these product lines.

Operating profit was up 0.4% to $22.9 million, where the impact of the incremental sales of acquisitions and growth and products for the HBHC end market was offset by less favorable product mix, higher depreciation and amortization expense and unfavorable currency. As a side note, excluding sales from acquisitions, operating margin was approximately 23% for the quarter.

In connection with the acquisitions made to date, we expect improving performance as we continue to integrate these operations and capture synergies in the future.

With respect to the outlook for the balance of the year for Packaging, we anticipate higher organic growth in the back half of 2019, driven by ramping up of new dispenser products and increased ordering patterns in certain consumer product lines. Therefore, we are maintaining our outlook of 3% to 5% organic sales growth as provided in February, although sales may trend toward the lower end of the range, given launch and related volume timing. We anticipate operating profit margin to range from 21% to 22%, which we've updated to reflect the mix effect of recently acquired businesses.

Turning to Slide 7, we'll go through our Aerospace segment. Net sales for the quarter were up 8% to $42.2 million, which is a record sales quarter for these product lines. While we continue to enjoy secular growth in the Aerospace market, sales were higher than industry growth rates given additional factory floor productivity steps we have executed over the prior year.

Operating profit was up 8.7% to $7 million as we converted in line with our plan on higher sales. We remain focused on improving factory floor efficiency given demand for our full range of products and anticipate continuing to make strides in our standard fastener production plan.

We continue to experience robust in-bookings across all of our brands. In fact, we recently announced adding 2 new major Tier 1 customers, Sonaca and Safran. Our global technical, commercial and production teams worked incredibly hard over the past year plus to qualify TriMas Aerospace's products, and I thank them for this hard work and look forward to our supplying these important customers going forward.

With respect to Aerospace's outlook for the balance of the year, we now anticipate sales growth to be in the 4% to 5% range slightly higher than the 3% to 4% outlook provided in February. We are maintaining our outlook of operating profit in the 16% to 17% range. As noted on our last earnings call, we have approximately 25,000 of faster (sic) [fastener] content on each 737 MAX. Currently, we are forecasting no changes to our current supply rate through the balance of the year.

On Slide 8, we'll go through our Specialty Products segment. Specialty Products sales were up 2.7% to $93.1 million driven largely by higher sales in our petrochemical end market under the Lamons brand. These higher sales were offset by softer sales in the upstream oil and gas market with lower wellhead investment activity in Canada and U.S. and lower steel cylinder sales for HVAC applications, which we believe was due to an unusually rainy spring. Operating profit was $10.2 million, down about 4.8% largely driven by product mix and higher input and freight costs.

Overall, as we consider the outlook for the balance of the year for Specialty Products, we are maintaining our 4% to 6% sales growth range as well as maintaining our operating profit in the 11% to 13% range, although each may trend to the lower end if market challenges persist.

So with that, I will now turn the call over to Bob, who will take us through the year-to-date financial performance. Bob?

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

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Thank you, Tom. I will begin by remarks today on Slide 10 with comments on our second quarter year-to-date results. Overall, net sales increased approximately $18.7 million or 4.2% to $460.7 million as compared to the 6 months ended June 30, 2018. Consistent with the quarter, each segment achieved organic growth resulting in higher sales of approximately $10.4 million or an organic growth rate of 2.4% for the company overall during the first half of the year.

In addition, the acquisitions of Taplast, in April and Plastic in January, contributed approximately $12.5 million of sales during the period. However, on a year-to-date basis, our sales were negatively impacted by $4.2 million of net unfavorable currency exchange.

Operating profit increased slightly to $60.5 million from $60.2 million in the prior year period. However, operating margin declined 50 basis points to 13.1% as the impact of higher sales levels was offset by a less favorable product mix across much of our business and the incremental sales of our acquisitions, which have lower margins.

We also experienced increased input and freight costs, primarily in our Specialty Products segment. Notably, volume adjusted freight spend increased approximately 8% compared to the prior year period, which impacted operating margins approximately 20 basis points on a year-to-date basis compared to the year ago period.

Earnings per share for the first half of the year was $0.96 an increase of 7.9% compared to EPS of $0.89 for the same period a year ago, as net income was positively impacted by a lower effective tax rate, reduced interest expense and an increase in gains on foreign currency denominated transactions. As Tom noted, we are pleased with our consolidated results for the first half of the year overall, which were largely consistent with our plan.

Turning to Slide 11, I would now like to shift gears and briefly comment on free cash flow and ending balance sheet for the first half period ended June 30, 2019. We generated $16.6 million of free cash flow in the second quarter and $19.2 million on a year-to-date basis. As expected, year-to-date free cash flow was lower than the prior year, primarily due to timing of cash tax payments and a higher investment and working capital. We expect to monetize working capital back to planned levels in the back half of the year as higher-than-normal inventory purchases, which help manage the impacts of tariffs and planned factory floor improvement initiatives begin to work through our plant. And we expect our free cash flow conversion for the year to be greater than 100% of net income consistent with our previously provided guidance.

We ended the quarter with $40 million of cash on book after consideration of funding $45 million for the acquisition of Taplast and expending $14.7 million in the quarter for the repurchase of 502,500 of our shares or more than 1% of our outstanding common stock. I would also like to note that at the end of second quarter, we have $47.4 million remaining under our existing share repurchase authorization.

We ended the quarter with net debt of $253.9 million and a leverage ratio of 1.6x, well below our stated target of 2x. TriMas' strong balance sheet, which includes approximately $325 million of cash in aggregate availability under our revolving credit facility, low leverage and a solid track record of free cash flow generation, positions us with ample capacity and flexibility to continue to fund our balance capital allocation priorities.

Turning to Slide 12, I would like to close my remarks by highlighting TriMas' continued positive momentum and progress achieved over the past 2 years. In addition to capitalizing on sales growth opportunities through organic and market-driven initiatives, we are also keenly focused on driving an increase in absolute EBITDA, all while maintaining a strong balance sheet. As noted on this slide, LTM adjusted EBITDA for the period ended June 30, 2019 has increased almost $20 million over a 2-year period and has resulted in more than $185 million in free cash flow generation over that same time frame. We have deployed this cash flow consistent with our stated capital allocation priorities, which we believe when considered collectively, are positively correlated with increasing shareholder value.

In the first half of 2019, we completed 2 bolt-on acquisitions in our Packaging group, retired 1% of our shares outstanding and continued to reinvest in our global businesses for long-term growth, all while maintaining leverage under 2x. As we look forward to the second half of 2019 and beyond, we remain committed to executing against our plan of free cash flow generation and disciplined capital allocation to continue to create value for our shareholders.

At this point, I will now turn the call back to Tom to discuss our outlook. Tom?

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

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Thank you, Bob. With respect to the TriMas' full year outlook, we are reaffirming organic sales growth of 3% to 5%, although we believe it may trend toward the lower end of the range given segment items discussed. However, we are increasing our EPS outlook to $1.85 to $1.95 per share up from $1.82 to $1.92 per share and are reaffirming our cash flow generation of greater than 100% of net income.

Given the progress, we have made strategically and financially and our momentum as Bob just noted, we remain excited about the long-term prospects and many opportunities for TriMas in each of our businesses.

With that, I'll turn the call back over to Sherry.

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

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will be from Steve Barger with KeyBanc Capital Markets.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [2]

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It's actually Ken Newman on for Steve this morning. Just wanted to touch up on the back half for Packaging sales growth. Just curious if you could provide any more color on the visibility of that ramp up. Is that more just a function of timing? Or are there still orders that you need to secure to get to the top end of your guidance?

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

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Well, there is 2 drivers. The first driver, our launch of new products and that is just timing. Clearly, we don't control when our customers launch, but our lines are in place, we're ready to go, so it's just a function of filling the pipeline, and when that officially kicks off is -- at this point, we expect it to be in the second half, but we can't pick precisely the date. And then we did see some orders in the first half that we expect -- were lower than normal that we expect to come in the second half. So those are the 2 drivers to the pickup in the second half.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [4]

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Okay. It sounded like core margins in the Packaging segment were decently strong, I think you said 23%. I'm just curious, can you remind us any color on how you expect the Taplast margin progression to progress over the rest of the year? And when do you think that gets more closer to the legacy profile for that segment?

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

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Well, just to be clear, when we talked about the acquisition early on, we thought it might be a challenge to get it exactly to the types of margins we have in our base business. That being said, it's -- it was appropriately valued. We do expect it to capture some incredible synergies. I mentioned 1 in my script about the plant that came with the acquisition in Eastern Europe, specifically Slovakia. And we'd like that to be our flagship location for Eastern Europe and certainly increase its size significantly over time. So that's -- there's a lot of synergies that come with the deal. It is additive from a value point of view, but on an ROS point, it might be -- it's not large in relation to TriMas overall, but it would be on the lighter side of our average.

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Robert J. Zalupski, TriMas Corporation - CFO [6]

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Well, the other comment I would make is based on the synergies we planned for, which are conservatively stated, our payback on the acquisition price is still within our 3-year time frame.

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Thomas A. Amato, TriMas Corporation - President, CEO & Director [7]

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Absolutely.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [8]

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Got it. And obviously I mean the balance sheet looks pretty strong here despite having the couple of acquisitions under your belt and repurchasing shares in the market. As you think about the acquisition pipeline, any update as to how you think about targets and hurdle rates? Are there more opportunities within the Packaging segment that provide a margin profile kind of closer to what TriMas has kind of historically operated? Any margin accretive opportunities out there that you're seeing?

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

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Okay. Well, first of all, I want to thank you for acknowledging that because we think that's a key point on the quarter and the year-to-date in that we were -- we closed on 2 deals. We acquired a sizeable amount of shares. And our leverage is still in check, which we think is one of the great powers of TriMas and our capitalization profile and expect that to be the thesis going forward. With respect to the pipeline, we're actively looking at a number of deals in the Packaging sector. As I've mentioned on previous calls, an ideal deal for us would be one that is more in the characterization of being bolt-on. We're certainly not pounding the pavement looking for transformative type deals. We do see them come every now and then, but we sort of like the ability to bring in a more manageable deal size, drive the synergies we expect and grow the company through this more disciplined approach. We're also looking at some deals in the -- on the Aerospace side, but particularly focused in the fastener area how we restructured this segment.

With respect to sort of margin profiles, as I said -- it's been I think 3 years I've been with the company. When I came to the company, I said it was tough -- it would be tough to find deals with the margin profile that we have. They're out there, extremely expensive, tend to be a little bit larger, but there are -- we're looking more towards deals that help round out our product line, expand us geographically, add some technical capability, innovation capability, and we would not be hesitant if the margin profile's a little bit lower than where we're at today to take that on.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [10]

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Right. That make sense here. And I just wanted to make sure we -- you can help us bridge the guidance you provided this morning. Obviously, it seems like you're being a little bit cautious with regard to the organic growth range. You maintained it, but you are -- kind of maintained it, but there are potential macro disruptions that could lead you towards the lower end of that range, but the EPS number is coming up. So help me kind of bridge that gap, is this really just acquisition revenue? Or do you see potential opportunities from the ramp-ups in Packaging new product sales? Or is there something else here that I'm missing?

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Thomas A. Amato, TriMas Corporation - President, CEO & Director [11]

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So we don't have acquisition revenue in our top line growth. We do expect some pickup in certain of our product lines and certain of our end markets. If there was any cautious expression of the outlook, as I said in my script, there are some of the end markets that we're that are a bit challenged. And fortunately, we're in a lot of different end markets, so we can overcome that, but there are some end markets that we're in that are a little bit softer, particularly, I mentioned oil and gas extraction in Canada, which is off double digits and the industrial sector is off low-double digits and you're hearing that from folks that are closer to the front lines on the drum and pail supply position.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [12]

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Right. Okay. And then just one last question for me. With regard to the free cash flow bridge, Bob I think you had mentioned getting working capital back into more in line with traditional, I guess, positioning within the cash flow statement. Is it -- is there anything else there in terms of getting the free cash back up to 100% on an adjusted basis that you guide to that we're not really thinking of? As you think, about any forward capital expenditures that we should kind of be wary of as the year progresses?

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Robert J. Zalupski, TriMas Corporation - CFO [13]

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No. From a capital standpoint, both our -- our guidance contemplated all the necessary projects that we identified early on in the process in terms of both growth and productivity initiatives, which clearly are the focus, along with, to a lesser degree, the maintenance side of things. But I think really the big driver is going to be monetization of working capital and in particular, inventory. In terms of our metrics relative to day sales and AR and related to AP, pretty much in line with where we've been historically.

It's really just a matter of liquidating inventory levels, which as I commented in my remarks, were really planned builds that dealt with getting ahead of tariffs, which at the time it was unclear whether there was a much larger bucket going from 10% to 25%. And then also, we had some planned upgrades to equipment and production processes, which, again, we built some inventory buffer that we expect to burn down as we move through the second half of the year.

So at this point, the plans are in place to achieve that burn down, and if we do that, we'll be able to execute on our plan of 100% conversion of net income as free cash flow.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [14]

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Any help with the cadence at how we should think about the free cash flow coming in between the third and fourth quarter?

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Robert J. Zalupski, TriMas Corporation - CFO [15]

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Well, you'll see it accelerate in the third quarter. And then certainly, we, generally speaking, generate a lot of cash in the fourth quarter just because of the natural cycle of our businesses and they wind down a little bit in Q4, which does lead to some additional working capital liquidation.

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Operator [16]

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(Operator Instructions) And I'm showing no further questions in the queue at this time.

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Thomas A. Amato, TriMas Corporation - President, CEO & Director [17]

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Okay. Thank you for joining us on our earnings call, and we look forward to updating you, again, next quarter. Have a great day.

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Robert J. Zalupski, TriMas Corporation - CFO [18]

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Thank you.

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Operator [19]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.