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TriMas Corp (TRS) Q4 2018 Earnings Conference Call Transcript

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TriMas Corp  (NASDAQ: TRS)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Sherry Lauderback -- VP, Investor Relations and Communications

Thank you, and welcome to the TriMas Corporation's 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 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'd like to turn the call over to Tom Amato, TriMas' President and CEO. Tom?

Thomas Amato -- President and Chief Executive Officer

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 and driving how we manage our businesses and how we best utilize it in our decision-making progress.

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 businesses and cash profile has allowed us to drive net leverage down to 1.3 times at year-end from 2.9 times 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 pre-launch process or under testing at key accounts. These are an exciting range of products for multi-use 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 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 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, demonstrate that our refocusing of TriMas under -- operating under the TriMas Business Model and refining our strategy have 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 refocused our M&A strategy with our first priority is 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 Forli, 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 investment opportunities.

Finally, I mentioned to open the call that one of our goals is to solve our global customers' needs and challenges. So I'm delighted, when we receive feedback or 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 will 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 tactical 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 entered 2019 with a significant number of new and innovative products. We anticipate organic sales growth 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 machined 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, 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 manufacture 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're 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 (ph) 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% (ph).

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

Robert Zalupski -- Chief Financial Officer

Thank you, Tom. I will begin my comments on Slide 14. As Tom noted earlier, we delivered another year -- 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 days sales in 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 and 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 1.3 times.

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 provide 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 machined components operations, previously a part of the Aerospace segment, within the Specialty Products segment. These operations consist of two 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 machined 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 lines, 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, but 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 turns 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 experience, 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 approx. $12 million. We are guiding full year 2019 diluted EPS to range between $1.82 to a $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?

Thomas Amato -- President and Chief Executive Officer

Thank you Bob. Before I give my final remarks, I do need to clarify the operating margin range for our Specialty Products group, we anticipate 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 three 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 business 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 2 times, 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 prospects for TriMas and the multiple levers we have available to us to drive shareholder value. Thank you.

Sherry Lauderback -- VP, Investor Relations and Communications

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

Questions and Answers:

Operator

Thank you. (Operator Instructions)

We'll take our first questions from Matt Koranda with ROTH Capital Partners. Please go ahead.

Mike -- ROTH Capital Partners -- Analyst

Hey, good morning. This is Mike on for Matt. Thanks for taking my questions.

Thomas Amato -- President and Chief Executive Officer

Good morning, Mike.

Robert Zalupski -- Chief Financial Officer

Hi, Mike.

Mike -- ROTH Capital Partners -- Analyst

Thank you. 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 machined components operations to Specialty Products?

Thomas Amato -- President and Chief Executive Officer

Yeah, that's a good question. The machined components business was a drag on our overall margins for TriMas Aerospace. And indeed, if you look at the close-out 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.

Robert Zalupski -- Chief Financial Officer

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

Mike -- ROTH Capital Partners -- Analyst

Okay, great. Thanks. That's helpful. And then, I was also wondering, 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?

Thomas Amato -- President and Chief Executive Officer

I think generally speaking, we had a good year in 2018, and we're continuing to be excited and optimistic about 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 for 2019. Bob, anything you want to add to that?

Robert Zalupski -- Chief Financial Officer

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 the 3% to 5% range.

Mike -- ROTH Capital Partners -- Analyst

Okay, great. That's helpful. And then last one from 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?

Thomas Amato -- President and Chief Executive Officer

Yeah, 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 and what we're looking at. But we do feel, at least as we look over the course of the nearer term, if we can call that, to next year, we've got some opportunities in front of us to at least research and assess.

Mike -- ROTH Capital Partners -- Analyst

Okay. That's helpful. Thanks, guys.

Thomas Amato -- President and Chief Executive Officer

Thank you.

Operator

Thank you. We will take our next question from Scott Graham with BMO Capital Markets. Please go ahead.

Thomas Amato -- President and Chief Executive Officer

Good morning, Scott.

Robert Zalupski -- Chief Financial Officer

Hello.

Katia -- BMO Capital Markets -- Analyst

Hello? Can you hear (ph) me?

Sherry Lauderback -- VP, Investor Relations and Communications

Hello? Yes.

Katia -- BMO Capital Markets -- Analyst

Hello?

Thomas Amato -- President and Chief Executive Officer

We can hear you.

Katia -- BMO Capital Markets -- Analyst

Oh, sorry. This is Katia (ph) 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?

Robert Zalupski -- Chief Financial Officer

Yeah. The order intake in quarter four was quite solid. We typically see a little bit of a drop-off 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 bookings 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.

Katia -- BMO Capital Markets -- Analyst

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

Thomas Amato -- President and Chief Executive Officer

Yeah. 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 another way, 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.

Katia -- BMO Capital Markets -- Analyst

Okay. That's all from me. Thanks.

Robert Zalupski -- Chief Financial Officer

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 seem -- costs seem 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.

Katia -- BMO Capital Markets -- Analyst

Okay. Thank you.

Thomas Amato -- President and Chief Executive Officer

Thank you.

Operator

Thank you. (Operator Instructions)

Okay. It looks like there are no questions at this time.

Thomas Amato -- President and Chief Executive Officer

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 a regularly scheduled earnings call. Thank you very much.

Robert Zalupski -- Chief Financial Officer

Thank you.

Operator

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.

Duration: 31 minutes

Call participants:

Sherry Lauderback -- VP, Investor Relations and Communications

Thomas Amato -- President and Chief Executive Officer

Robert Zalupski -- Chief Financial Officer

Mike -- ROTH Capital Partners -- Analyst

Katia -- BMO Capital Markets -- Analyst

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