TriMas Corp (TRS) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the TriMas Corporation first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Thursday, May 11th, 2006. I'd now like to turn the conference over to Skip Autry, Chief Financial Officer. Please go ahead, sir.

Thank you, Frank, and welcome to our first quarter conference call. Our President and CEO, Grant Beard, and I will review TriMas' first quarter results.

To facilitate the review, we have provided a press release and PowerPoint presentation on our company website, trimascorp.com. After our prepared remarks, we will have a Q&A session for the audience.

Also present with us today from TriMas is Bob Zalupski, Vice President Finance and Treasurer, and Dave Mosteller, our Director of Finance for Operations.

A replay of this call will be available later today by calling 800-633-8284 with reservation number 21291788.

Please note that certain information on this call may be forward-looking and contain statements based on our current plans, expectations, assumptions and environmental trends, which may affect the company's future operating results and financial position. Such statements involve risks and uncertainties which cannot be predicted or quantified and may cause future activities and operating results to differ materially from those discussed. These risks are more fully discussed in our filings with the SEC.

At this point I would like to turn the call over to Grant Beard, our President and CEO.

Thank you, Skip, and welcome to today's call, the TriMas 2006 first quarter earnings call. Today we will profile both our financial and operating highlights of the first quarter.

Skip will then review our financials in detail for the quarter. We will then review and summarize the priorities within the company for the remainder of the year and then open the forum up for Q&A.

With that said, please turn to the first slide titled, “Financial Highlights.” TriMas is, as most of you know, a diversified engineered products company. Our diversity of end markets, customers, products and leading brands are our defining attributes.

Our first quarter earnings performance had four of our five segments improve over the prior year. The one exception, our RV and trailer products segment, was essentially flat as compared to the prior year.

TriMas had sales of $275.3 million in the first quarter of 2006. This represented an increase of $12.9 million or 4.9% over the first quarter of 2005.

Our packaging systems group was up 7.6% as compared to 2005 due to strong market demand, overall economic expansion and its many new products. Our transportation accessories group was down 3.7% as compared to Q1 of '05 due to reduced levels of activity in our towing business' early-order incentive program. Our RV and trailer products group revenue was essentially flat as compared to last year. Our new energy products group saw its revenue increase 18.9%, driven by strong market demand from existing customers, expanded product offerings and increasing international sales. And finally, within our industrial specialty group of companies, revenues increased 15.3% during the quarter, reflecting strong demand for our products, as well as market share gains, new products and overall economic expansion.

TriMas reported in Q1 of '06 operating profit of $29.3 million, an increase of $4.3 million or 17.1% as compared to the operating profit level of $25 million in Q1 of '05. Our adjusted EBITDA within the quarter was $37.8 million. This represented an increase of $4.3 million or 12.8% as compared to Q1 of '05.

This increase in adjusted EBITDA was due to the across-the-board earnings expansion within packaging, energy and our industrial specialty companies. The improved conversion within transportation accessories, which was driven by improved material margins, lower variable costs and fixed overhead spending, also added to the improvement.

The two segments which formerly comprised Cequent Transportation Accessories in aggregate matched prior year earnings performance, which was our stated goal.

First quarter 2006 income from continuing operations was $5.3 million or $0.26 per share on a fully diluted basis versus income from continuing operations of $3.6 million or $0.17 per share in the year-ago period. This increase was driven by the following items -- strong increases in net sales in three of our five business segments and higher operating profit margins due to improved material margins in all segments within TriMas and increased productivity, in particular, within our transportation accessories group within the-- within the quarter. We expect earnings momentum within TriMas to continue as we move through 2006.

Total debt and securitization at March 31, '06, was $779 million. This was a decrease of $34 million when compared to Q1 of '05. TriMas finished the quarter with $179.1 million of net operating working capital or 16.3% of sales. This compares to the $182.5 million or 17.4% of sales we had last year.

The company's bank LTM EBITDA was $144.6 million, which supported our lending ratios. Our leverage at the end of the quarter was 5.39 versus a leverage covenant of 5.65 and our interest ratio was 1.89 versus a covenant of 1.8.

TriMas had $1.7 million in cash at the end of the quarter and had $38 million of availability or liquidity, rather, under our revolving credit agreement.

In our industrial fasteners business, which is reported as a discontinued operation, we recorded a $1.3 million loss net of related tax benefits of $800,000.

TriMas continues to use its free cash flow to reduce debt, which, as stated, was reduced by approximately $34 million in the quarter as compared to the year-ago quarter.

TriMas' business future continues to be defined by strong organic growth, increased earnings and free cash flow.

As more fully discussed in our 2005 Form 10-K, our industrial fastener business is reported as a discontinued operation due to our decision to sell the business. The data profiled on today's call reflects performance from continuing operations unless otherwise noted.

In addition, in the first quarter of 2006 we realigned our operating segments within TriMas into five groups. This management structure provides better focus to our various businesses' product line offerings by industry and customer market and related channels of distribution. Our prior period segment financial information has been revised to reflect this new structure.

Turning to our segments, the operating highlights for Q1 are as follows. First, within our packaging group, it had net sales for the quarter of $53.4 million or an increase of 7.6% as compared to the first quarter of 2005. The increase was driven by strong demand for our industrial closure products, specialty tapes, laminates and our many new customer product dispensing applications.

The group's adjusted EBITDA in Q1 of '06 increased to $11.7 million from the $10.1 million in 2005. This was an increase of 16.2% and was related to strong sales levels and the moderating of raw material costs. Our operating profit for the first quarter of '06 improved 15% to $8.5 million.

Strong demand for both industrial and consumer-based products is expected to continue as we march through 2006.

Within our transportation accessories group, first quarter sales decreased by $3.1 million to $81.7 million or a 3.7% decline as compared to the first quarter of 2005. Revenue mix within this group continues to shift toward retail customers at the expense of other channels.

First quarter sales were also impacted by a redesign of our early-order program to incent customers to purchase product in the second quarter of this year.

The group's adjusted EBITDA in the first quarter increased $400,000 to $6.9 million from the $6.5 million level of a year ago. Quarterly operating profit increased $600,000 to $4.4 million from the $3.8 million level of Q1 of '05. This was primarily due to improved material margins, reductions in both variable and fixed costs resulting from the many initiatives implemented during the second half of 2005.

The competitive pressures that impacted margins within our consumer or retail business in 2005 continue to be addressed via sourcing initiatives and selected pricing actions. Our initiatives are on plan and continued margin expansion for this business is expected in 2006.

Turning to our RV and trailer producers group, first quarter sales, operating profit and adjusted EBITDA were all approximately flat with the prior year. Increased sales to the horse, livestock and OE automotive sectors were essentially offset by lower sales to agriculture, industrial markets and the RV wholesale distributor market due to softer demand and increased foreign competition.

Our focus in this segment will be to accelerate sourcing initiatives and continue to provide our customers with engineered product solutions, superior order fill and delivery performance. Our outlook for this group is conservative due to its exposure to consumer spending in areas such as RVs, boats and horse trailers and other lifestyle products and the continued uncertainty around rising interest rates and fuel price.

Turning to our energy products group, it had sales in the quarter of $40 million, an increase of $6.4 million or almost 19% as compared to a year ago. Its adjusted EBITDA in the quarter was $6.5 million compared to the $5.7 million level in Q1 of '05 or an increase of 15.5%. Our operating profit improved $900,000 to $5.9 million.

This segment expects continued earnings momentum throughout 2006, driven by the following -- strong market demand due to favorable conditions for the oil and gas producers; extended product line offerings and expanded sales focus on international markets; and increased market shares due to our superior delivery performance.

Now turning to our final group, the ISG group of companies, it had net sales in Q1 of $44.4 million or an increase of 15.3% as compared to the same period a year ago.

Within the group, our Monogram Aerospace Company continues to experience strong demand for its highly engineered fasteners with increased sales within the quarter of approximately 27%. Our fittings company saw an increase of sales of approximately $1 million or 23.7% as it gains market share as a result of its excellent delivery performance. Our Norris Cylinder Company sales increased 14.3% over Q1 '05 levels, with continued strong backlog as we come into Q2 and our Precision Tool Company continues to grow in the specialty medical equipment market.

The group's adjusted EBITDA for the quarter was $9.8 million as compared to the $7.2 million level in Q1 of '05 or an increase of 36.8%. Its operating profit for the quarter increased $2.5 million to $8.4 million from the $5.9 million level a year ago. The group benefited from higher sales volume during the quarter and operating profits improved to 18.9% as compared to the 15.3% in the year-ago period. This group of companies expects continued earnings momentum, again, as we walk across 2006.

I would now like to turn the mike over to you, Skip, and ask you to further profile the financials within TriMas.

Thank you, Grant. Turning to page 14, I'd like to note again that the results from our industrial fastener businesses-- business have been excluded from this data.

Starting with sales, packaging system sales increased almost 8% as our specialty laminates business was up about 10%, driven primarily by stronger commercial construction demand. Our closure business was about 6% on stronger demand for industrial closures and the continued penetration of our recently introduced new products. Transportation accessory sales were up slightly due to lower demand from our installer and WD customers. RV and trailer product sales neared year-ago levels. Energy products sales increased 19%. Industrial specialty sales increased about 15%. These two segments continue to benefit from strong markets, along with expanding product lines, customers and geographies.

Related to adjusted EBITDA, packaging systems' increased EBITDA comes from improved material margins as raw material costs begin to settle down and higher sales levels. Transportation accessories' improved EBITDA is the result of an improved fixed and variable cost base as a result of last year's cost reduction initiatives. RV and trailers performance was flat with year-ago on very similar sales levels. Energy products' improvement was primarily sales related, offset partially due to fixed cost investments aimed at growing these businesses. Industrial specialties increased conversion at about 44% on an incremental sales dollar basis, principally related to improving material margins.

That leaves us with an improved adjusted EBITDA of $4.3 million on $12.9 million of incremental sales or roughly a 33% conversion.

Turning to page 16, we lowered debt over year-ago levels over $34 million as we continued to focus on debt reduction. It should also be noted that debt increased in the quarter due to the seasonal nature of our transportation accessories business and that the debt increase of roughly $14 million was about half that experienced in Q1 of 2005. As Grant mentioned, our availability at quarter end stood at approximately $38 million.

And now I'd like to turn it back to Grant for a wrap-up prior to our Q&A session.

Thank you, Skip. Our focus within TriMas is fairly straightforward. It's debt reduction, it's earning expansion and it's the continued support of organic growth driven by product innovation and market expansion.

Our focus is supported by the following priorities -- again, profitable growth via product and market expansion; increase our utilization of low-cost purchasing, manufacturing and support options; free cash flow generation; continue to take down our investment in working capital; continue to rationalize our fixed cost footprint; and continue to drive the TriMas management system and embrace our guiding principles of market leadership, financial discipline, operational excellence and people development.

In summary, TriMas had a solid first quarter. TriMas improved earnings and reduced debt. Skip and I and our team are completely focused on the continuation of earnings improvement and debt reduction. Strengthening our balance sheet remains the number one tactical objective within TriMas -- free cash flow, selected asset dispositions.

TriMas continues to see great growth opportunities across all of our portfolio. The economic outlook seems positive, but we are watching demand in our transportation accessories and RV trailer product businesses very closely.

Our goal is very simple -- drive credibility via performance, lower our debt and continue to build TriMas with discipline.

That concludes our formal remarks. Frank, if you would now please open the mike and the forum for Q&A?

Yes, sir. Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of [Larry Fisher] in Cequent. Please go ahead, sir.

I'm sorry. I pushed the button by mistake.

Not a problem, sir. Thank you.

Our next question comes the line of Tom Klamka. Please go ahead.

Good afternoon.

Hi, Tom.

Hi, Tom.

Can you start, I guess, with Rieke? It looks like the margins came back nicely and they were down for a while. Is that mix-related? Is it raw materials? What's driving that?

It's a little bit of two things, Tom. We're seeing really good strength in our core industrial products, both here in the States and in Europe. That's a fairly profitable product mix.

And the impact that we fought coming across 2005 with resins really going up quite dramatically in the back half of the year have really moderated and, in some cases, actually come down.

Okay. And then the-- how is the consumer side of that business coming?

Within the packaging group?

Right.

We think that we're doing great. We continue to find new applications in pharma and in medical and in personal care for our engineered dispensing and we saw great growth last year and we continue to have high expectations for our efforts in that area as we go forward, Tom.

Okay and on the Cequent side, both sides of that business, can you talk about this early-order program and what that is and how is it impacting the numbers? And then just, I guess, some general color as you look into May and June what the sales are like of your product going off the shelves at installers and at retail?

Yes. This is an industry that has early-order discounting. It has for a long, long time, with the idea to incentivize the distributor network to sort of load up in the front end of the year.

We cut our discounting back a little bit, which is a good thing, and did not want to draw unnatural demand into the first quarter and wanted to level out that activity. So we modified our program to have it be not so-- not to disincentive people for waiting, if you will.

The impacts of our offshore initiatives are really taking hold and we're seeing great pull-through as we start to moderate the more standard commodity-type stuffs that are in our offering versus the small-run, customized engineered stuff that we build in our factories here in North America. And I think you'll see material margins continue to work their way back up as we go across-- go across the year.

As for demand, Tom, it's still a little bit early. The business' order intake is acting as we expected sort of through the first week and a half of May. But I've got to tell you, we've got our eye very closely on inventory levels and daily intake. Rising gas costs and rising interest rates certainly have some level of consumer spend impact on things like boats and RVs and what-not, all those things you need to tow, which requires our product. So it's too early to tell and the dailies have been fine to date, but those are a couple of forces that we're going to keep our eye on real close.

Okay. Anything happening on the pricing side?

In terms of pricing pressure down or pricing opportunities up?

Well, either way, actually.

Well--

Tom-- Let me just take this one, Grant. As you know, Tom, raw material prices or cost to the company have been coming down and that's helped us in the quarter and we don't feel like we're in a position now to begin raising prices with-- with the backdrop of decreasing raw material costs, but that may not be the case later in the year and if raw material costs begin to go up as we're starting to see in some commodities, that's when we'll address a pricing increase.

Okay, great. Thanks, gentlemen.

Okay. Thanks, Tom.

Your next question comes from the line of Philip Volpicelli of CIBC. Please go ahead.

Thanks. Nice quarter, guys.

Thank you.

Thank you, Phil.

Just building on that last question, what-- I mean, steel, obviously plastic. Is there any aluminum exposure that you guys have? And we've seen some dramatic increases in that commodity, are you able to pass along certain price increases for anything that's aluminum based?

Yes, we have-- Aluminum certainly has moved, but we have very small content of aluminum in our product offering here in North America and for some reason aluminum where we have content exposure down in Australia has not behaved quite the way it has here in North America and we've been able to get pricing.

So we do sell a family of ramps, but it's a very small product line in the overall offering of our RV and transportation business.

Great. Could you just update us on where we are with the fastening systems divestiture?

Sure. We are right in the middle of a process that does not lend itself to really formal comment, but we are in the middle of a process and it's going forward as we expected.

Okay. No-- no sense of time? You're going to leave that open?

At this point we'll just have to say no comment.

That's okay. I appreciate that. And then, Skip, we talked last conference call about the covenants going down to 5 times total leverage by the end of the year. Do you remain confident that you'll be able to meet that without any additional-- just with operating the business?

Our current-- our current forecast, Phil, would indicate that through the year we'll be able to be in compliance with our covenants.

Okay, great. And in terms of any other divestitures, it seems at this point you're not really looking to do anything more. Any thoughts to any other IPOs, divestitures, acquisitions, anything along those lines that you guys might be considering?

I think what you're going to see us continually do -- and we're in the process of doing it now, Phil -- is really rationalizing not just the portfolio of businesses but the product lines within some of those businesses. So none of them would be real big movers, but we have identified a series of things that we may contemplate over time to exit because they're not core, they're not driving any strategic value and they might supplement the opportunity to drive strength a little quicker into our balance sheet.

Great. Last question. In terms of the hurdle from-- for second quarter of '05, what are the numbers? It's $294.6 of sales and $37.5 of EBITDA is what I have. Is that right or can you adjust it for the fasteners business?

Well-- Are you talking about Q2, Phil? I didn't hear you.

Yes. I just-- I just want to see what last year's Q2 is on an apples-to-apples basis when we get the next quarter's earnings from you guys.

Well, we-- in terms of taking out Lake Erie?

Yes, if that's possible.

I don't-- I haven't don't that yet, Phil, so--

All right. I'll call you offline.

When we do we'll talk to you about it.

Thank you. Good luck.

Okay. Thank you.

Our next question comes from the line of Manish Somaiya of Banc of America. Please go ahead.

Hi, Manish.

Yes, hi. Hi, Grant. Hi, Skip.

Hi, Manish.

Hello?

Hello. We're here.

Okay. A couple of questions. One, the last couple of presentations have had language on IPO and I did not see that in this presentation so I'm just trying to figure out if it's-- if that's still a goal or is that in the back burner?

Well, you can't win either way, so we thought we'd take it out so we didn't, hopefully, have to answer the question. I think over the long term we are a company that would like to access all capital markets, but that will be defined by market conditions and our company's performance and time. So there really is nothing more to say to that than that.

Okay. Secondly, on industrial fasteners, I guess that process still-- the process is still continuing and we're not sure about the timing. For modeling purposes, is it fair to assume $15 million to $20 million of proceeds?

I'd rather say this, Manish, give us a little time. We're in a very private process and I would prefer not to get into guidance on a public call. We're in a process with interested parties and when we have some meaningful guidance or have conclusions we'll obviously bring it out publicly.

Okay. I guess, turning to the industrial segment, obviously that business has done quite well the last few quarters and I'm just trying to figure out, I mean, has that-- do you think that that business has peaked in terms of revenue growth and margins or is there still more room for growth in that business?

Well, we think we've got a pretty good portfolio of businesses, Manish, and we're working very hard with all those businesses to get their product accessed, if you will, to markets outside of North America where they've traditionally done business and we're seeing some nice movement there. So on that score, yes.

I think it's certainly debatable whether the economic engine of North America will continue to pull forward at the same rate it has over the last three years. So we could, in time, expect some moderation from those properties.

But I guess you're not seeing that right now?

No, we had a good-- we had a very solid first quarter.

Okay. In the energy segment, I noticed obviously the top line was quite strong, up 18%-19%, but the margins weakened a bit and I just wanted to get some clarity on that.

Yes, Manish, and I said in my prepared comments, we-- we have made some investments in this-- in this segment to facilitate future growth and those investments include things like increased selling expenses as we enter new markets around the world and as expand our product offerings.

Okay. And then lastly, from a debt perspective, is it fair to assume that sequentially we should see debt increase at the end of the second quarter and then, obviously, as you guys generate cash in the third and fourth quarter, we'll see that come down?

One thing I wanted to also point out, Manish, relative to our energy businesses, we're-- we've recently invested in a manufacturing facility in China to make gaskets and that's also reflected in the earnings of that segment.

Okay.

Turning-- turning to debt, I would say that as we march through the year we expect debt to continue to go down sequentially.

Okay. And that's just coming from higher earnings and working capital?

Higher earnings, lower capital investment, working capital improvement, other cash actions that we are contemplating.

Okay, great. Thank you so much. I appreciate it.

Thanks, Manish.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of Laurence Jollon of Lehman Brothers. Go ahead, sir.

Hi, guys. I just wanted to follow up on your last comment. I mean, in the first quarter total debt was down sequentially but if you add the increase in the AR securitization total debt actually increased. Can you clarify in terms of your last comment around sequential improvements in debt, is that including the AR facility?

Absolutely, Laurence, and if you look, a year ago in the first quarter we did a one-time sale of receivables to actually accelerate cash into the company. We didn't do that this year. So if you kind of take that out, our performance is even better than reflected.

Okay, thanks. The rest of my questions have been answered. Thanks.

Okay. Thank you, Laurence. Say hi to Sarah for us.

Our next question comes from the line of [Bill Teacher] of [Aristeia Capital].

Hi, guys. Nice quarter.

Thank you.

Thanks, Bill.

Most of my questions were answered. Just I don't think you touched on this one. In your last call you had mentioned you expect less than $30 million of '06 CapEx. Can you firm up that range a little at this point?

Well, Phil, as you'll see we spent about $5 to $6 in Q1. That's probably a little low. I'd say in the $25 to $30 range is still-- is still a good range.

Okay, great. Thanks, guys.

You're welcome.

Sure.

Our next question comes from the line of Trent Porter of Claren Road Asset Management. Please go ahead.

Hi, guys. Forgive me if I missed this. The-- given the improvements that you've made in your working capital management and also ex-Rieke, are you able to sort of update us on expected peak-to-trough working capital?

And then the second question, you've talked about watching the transportation sales demand in the transportation segment very closely. I wonder if you could talk about flexibility or just how flexible are you with respect to variable costs, being able to react quickly if you see a downturn?

You want to take the last one?

Yes, we'll go in reverse order. I mean, we're watching intake daily, as I mentioned, and, we have made these businesses much, much more flexible than they've ever been. We-- as you may or may not know, we went through a couple years of infrastructure restructuring and we have simplified and made the fixed cost portion of our business more flexible. On top of that, we have taken or will take this year well over $100 million of product purchases sort of out the factory and into the import column.

Okay.

So a little bit easier to flex. We have less facilities, less inventory and have a different kind of supply line, which is a little bit more flexible than managing your own finished goods. We feel very comfortable that if required we can moderate production, moderate variable costs, both on the direct and indirect sides.

So I think the short answer is yes. I hope we don't have to do that, but we're going to watch it real closely, as I said. The end market demand has not really defined itself yet. The first four months were fine, but the selling season really is just starting and there's certainly aspects of the cost of money and the cost of gas that we think may undermine ultimate demand.

Okay.

Now, Skip?

In terms of kind of peak-to-trough working capital, I would say that our business gets seasonal in the first quarter because of our early-order programs, but in the main TriMas doesn't have much seasonality in the business.

Okay.

So if-- what typically happens is at the end-- towards the end of the year in the cold months our working capital investment shortens up a little bit and then it expands up in the first quarter and stays pretty flat through the year.

Okay, great. Got it. And just one final question. I just wanted to clarify my understanding of your response to Manish's question on the IPO. Nothing's changed with respect to your strategy or outlook, it's just a change in your disclosure or presentation. Does that sum it up correctly?

I think that's a good summary.

Okay, great. Thank you very much.

Okay, thank you.

Thank you.

Gentlemen, we have a followup question from Philip Volpicelli. Please go ahead, sir.

I think Trent just asked it, but I'll try to go in a different fashion. The covenant falls to 3.25 in the first quarter of 2007. You had stated you'll get to the 5 times just organically. Is the thought process that an IPO gets you down to 3.25 or will you go back and talk to your banks at some point this year?

I think the latter statement is appropriate in any case, Phil.

Okay, so you'll go back to the bank.

We'll be talking with the banks at some point in the future, either way.

Great. Okay. Thanks, guys.

Okay.

Gentlemen, there are no further questions at this time. I'll turn the call back to you, sir.

Okay. We'd like to thank all of you for your participation and support and with that, this concludes the first quarter earnings call for TriMas. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.