TriMas Corp (TRS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TriMas fourth quarter 2006 earnings call. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Skip Autry, Chief Financial Officer. You may begin.

Thank you, Pam, and welcome to our fourth quarter 2006 conference call. Our President and CEO, Grant Beard, and I will review TriMas' fourth quarter results. To facilitate the review, we have provided a press release and power point presentation on our Company website, trimascorp.com. After our prepared comments, we will have a Q&A session for the audience. Also present with us today at TriMas is Bob Zalupski, our Vice President of finance and treasurer, and [David Mostoller], our director of finance for operations. A replay of this call will be available later today by calling 866-836-8032, with reservation number 1061437.

Please note that certain information on this call may be forward-looking and contain statements based on our current plan, 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 qualified, and may cause future activities and operating results to differ materially from those disclosed. These risks are more fully discussed in our filings with the SEC. As you know, we are in the registration process and are unable to comment on progress or any related matters.

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

Thank you, Skip, and welcome to the TriMas 2006 fourth quarter earnings call. Today, Skip and I will profile our Company's fourth quarter performance and then open up the forum for those that may have questions. For those of you following along our slide deck, please turn to the slide titled "2006 Fourth Quarter Highlights." Our Company TriMas Corporation, is a manufacturer of highly-engineered products. We believe our defining attributes including leading market shares, strong brand names, diversity of end markets, customers and products, and most important, great people. TriMas had sales of $223.3 million in the fourth quarter of 2006. TriMas had an operating loss of $99 million in the quarter. This included a $116.5 million non-cash goodwill impairment charge taken in the period. Before consideration of this charge, TriMas had an operating profit of $17.5 million in the quarter, or an increase of $8.5 million as compared to the operating profit of $9 million reported in the fourth quarter of 2005. In conjunction with our annual impairment test, we reported a charge to goodwill relating to our RV and Trailer Products and Recreational Accessory business segment. This impairment charge resulted from a decrease in the implied fair value of goodwill previously allocated to these businesses.

TriMas operationally had a very solid quarter. The Company's adjusted EBITDA was $25.7 million, representing an increase of $6 million or a 30% increase over that of the fourth quarter of 2005. Our improvement in operational performance between years is attributed to several factors which include the continue earnings expansion within our Packaging Systems, Energy Products and Industrial Specialty groups, this in combination with better conversion within our Recreational Accessories group driven by improved material margins and lower spending as a result of cost initiatives previously implemented. The fourth quarter 2006 loss from continuing operations was $117.4 million or a loss of $5.65 per share on a fully-diluted basis, versus a loss from continuing operations of $9.6 million or $0.48 per share on a fully-diluted basis in the year-ago period. Our Company finished the quarter with $168.1 million of net working capital or 21% of sales. This represents an incremental investment in working capital due to several new product launches and safety stock on imported items via the start-up of two new facilities in Southeast Asia. This investment level is prudent, but will be reduced.

TriMas total debt at December 31, 2006, was $754.1 million, a decrease of approximately $11 million as compared to the levels at December 31, 2005. Under our credit agreement, the Company's bank LTM EBITDA at December 31, 2006, was $147.8 million. Our leverage ratio was 5.1X. Our interest coverage ration was 1.87X. TriMas had $3.6 million of cash at quarter end and approximately $96 million of available liquidity. Our sales from discontinued operations were $20.3 million in the fourth quarter of 2006. The loss from discontinued operations, net of tax benefits recorded, was $4.5 million in the quarter. In December of 2006 we completed the sale of our Wood Dale, Illinois, small fastener business and our Lakewood, Ohio, steel processing facility, both which were a part of our industrial fastening business. And in February of this year, 2007, we sold the remaining assets and liabilities of our discontinued industrial fastener business located in Frankfort, Indiana. With the completion of this transaction, TriMas will no longer have any operations accounted for as discontinued.

Now let's profile our reporting segments, first Packaging Systems. Our Packaging Systems revenue grew 3.4% in the fourth quarter of 2006 and 7.5% for the entire year. Our growth was primarily driven by new product introductions within the areas of specialty dispensing, closures and tapes. Within the quarter, Packaging Systems launched several new products with the following companies: McDonald's, Nestle's, and Johns Manville, to name a few. Our outlook for this group into '07 is positive.

Within our Energy Products group, fourth quarter revenue grew 11.3%. This was driven by market share gains due to expanded product offerings and superior delivery performance. These actions supported total year growth of 19.8%. Within the quarter, we positioned our Lamons, China operation for domestic revenue by receiving supply approvals from both Exxon and Dow. These will support our planned growth initiatives for this Company into Southeast Asia. We also launched our new compressor product line within our Arrow Engine business to be sold into gas fields as an adjacent product to our engines. We believe in time this initiative could double our well site content. Our outlook into 2007 for this group is positive.

Within our Industrial Specialties group, fourth quarter revenue grew 15.7%. This was driven by strong demand for our new products and market share gains. Total revenue for the group grew by 10.5%. Within the quarter, the Industrial Specialties group secured the following new significant business awards. Our Norris Cylinder company was awarded a three-year supply agreement with Air Products in France to supply high pressure cylinders globally. Our Norris Cylinder company was awarded the Australian and the Canadian LAW rocket launcher business. And our Monogram aerospace company was awarded the vertical tail fastener business on the new Airbus A380. Each of these awards represents our focus on growing TriMas internationally. The group -- our outlook for this group as we move into 2007 is positive.

Within our RV and Trailer Products business, fourth quarter revenue declined 16.3%. This group experienced lower sales across all market channels due to soft end-market demand. Total year revenue for the group was down 8.8%. That said, this group has several growth initiatives it's driving while its end-markets cyclically adjust. Within the fourth quarter, this group was awarded $3 million of new business in North America, it launched a new manufacturing facility in Thailand, and secured $2 million of local business to support this facility. We believe that our investment in Thailand will support long-term growth. In addition, the group closed and sold its Wisconsin plating facility and continues to move product into Mexico and Southeast Asia, initiatives we believe will ultimately drive margin improvement. Our outlook for this group coming into 2007 is cautious in terms of end-market demand.

In our last group, Recreational Accessories, fourth quarter revenue declined 10.4% for the quarter. This again was due to end-market demand primarily within our installer channels. Total year revenue for the group declined 6.4%. However, our initiatives drove considerable earnings and margin expansion for the year. We continue to see our accessories sold to specialty and big box retail outlets. This group's operating performance has provided the foundation to improve our market share. We were awarded some $12 million of new business within the fourth quarter of 2006. Our view for this group in 2007 is again cautious as it relates to end-market demand.

Now, Skip, I ask you to review our financial.

Sure. Thanks, Grant. To review the Company's operational performance in Q4, let's focus on the adjusted EBITDA section of the slide, which is on page 13. Packaging Systems EBITDA decreased due to a lower volume of industrial closure business versus the year-ago quarter. We've seen a return to more normal volumes for this particular product line in Q1. Energy Products converted incremental sales to adjusted EBITDA at a 40% rate, which we think is more than acceptable. Industrial Specialties had a very solid quarter. Sales were up, as Grant highlighted. Adjusted EBITDA converted at about a 50% rate, as material margins improved along with the volume increases.

RV and Trailers Product EBITDA decline was primarily related to lower sales levels. However, additionally, the material margin decline in Q4 indicates a less-favorable sales mix and competitive pricing in this segment. Recreational Accessories improved EBITDA against the decline in revenue. This results from improving material margins, from sourcing initiatives, and an improved fixed-cost base is a result of last year's cost reduction initiatives. That leaves us with adjust -- an improved adjusted EBITDA of just about $6 million on flat sales, or roughly a 270 basis point improvement in EBITDA margin quarter over quarter.

Now let's move up a slide to the operating profit section. RV and Trailer and Recreational Accessories operating profit levels were negatively impacted by the year-end goodwill impairment, which will be explained on page 14. Turning to page 14, we have an annual process to evaluate our goodwill balances. As part of the process, we retain a third-party expert to assist us. Essentially we value our reporting units based on their long-range plan by using a discounted cash flow approach. Due to the decline -- continued decline in sales in our RV and Trailer and Recreational Accessories segments, as a result of lower end-market demand, the present value of our current long-range plans for those segments indicated that an impairment existed. This is commonly referred to as a step one test.

As a result of the indication of impairment, we then compared current values of these segments balance sheets based upon a current purchase price allocation to the underlying recorded values. The result of this exercise was an impairment of $97.5 million at RV and Trailer Products and $19 million in Recreational Accessories. It should be noted that in our 2005 financial statements, we indicated that an impairment was very close to occuring in 2005 for those businesses. Turning to page 15, during the year we lowered debt levels by approximately $11 million, as we continue to focus on debt reduction. Our availability at quarter end stood at approximately $96 million under our new credit agreement.

And now I'd like to turn it over to Grant for a quick summary.

Thank you, Skip. In summary, we believe TriMas had a solid fourth quarter. We improved operational earnings as measured by adjusted EBITDA by 30%, and when we look at the year the same measure is up 16.5%. The Company and our team are focused on driving sales growth, continued earnings improvement, and debt reduction. Strengthening our balance sheet remains our critical tactical objective. TriMas continues to see outstanding growth opportunities across our entire portfolio. Our goals are very simple. Drive credibility via sales and earnings performance, lower debt, and continue to build our Company with discipline that this management team has created.

Skip and I thank you for your attention. That concludes our formal remarks, and I would ask our operator, Pam, to open the forum for Q&A.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Sarah Thompson. Your line is open.

Hi, good morning.

Hi, Sarah.

A few questions for you. I apologize if I missed some of this, but on the Packaging in the quarter, can you talk a little bit about what happened and led to the 200 basis point margin deterioration?

Well, in the prepared comments, Sarah, we talked about a decline -- it's basically a mix issue. We had a decline in our industrial sales in that segment, which have really returned in the first quarter. And we believe it's the result of our customers adjusting inventories at year end.

So there's nothing in there around raw material?

No, no, absolutely not.

Okay.

No pricing, no raw material.

No, it's just -- it's mix.

Okay. Okay. And on the RV side, the closing of the plating facility, have you detailed the cost savings from that?

Yes, we -- well, that's why we closed it, Sarah, because --

No, no. I mean, have you detailed what that number is, the cost savings?

Well, we have, but that's typically something we don't like to furnish.

Okay. And then on the --

But rest assured, Sarah, that's why we did it. We can buy plated product cheaper than we can make it, so that's why we moved out of that business.

This is just a part of our manufacturing footprint strategy as we continue to move standard production items either into our own facilities in Mexico or in Southeast Asia, or to third party sources in Southeast Asia. And this facility just simply did not have a basis to be in the footprint.

Okay. Well, maybe you can talk about it in general. because I think --

I think, Sarah, the pay back was less than two years.

Okay. And then I think you guys had talked before about a number of sourcing initiatives and operating efficiencies, I think both on the RV side and the recreational vehicle side. Can you just give us an update in terms of where you are in those numbers? Are you --

Yes, I think, Sarah, when you look at Recreational Accessories business, the sourcing initiatives and the cost balancing have occurred. So what you should expect to see is the kind of improvement that we've had in Recreational Accessories morph over to RV&T as they begin their sourcing initiatives, which are being done essentially by the same folks.

So you would have had a full quarter of those initiatives for the recreational vehicles?

Yes, Recreational Accessories is essentially done. So what you're seeing there when you look at Q4 results, the improvement is a result of sourcing and cost outs. Sales were a lot lower, but profits were actually up quite a bit.

It's for the year, Sarah, we had almost a 400 basis point improvement in margins in our Recreational Accessory business. We think that the longer term impact of the same strategies at RV&T will be seen in margins there, as well. And the strategy's very simple. We're taking sort of standard high labor type production and moving it into low-cost environments, some to our own assets, some to third-party assets. And where we continue to sell highly-customized low-volume high SKU items that are defined by quick delivery, we will continue to do those types of products and that type of activity in our assets here in the United States.

But, Sarah, you should also be aware that the margin improvement in RV&T won't really start to occur until the second half.

Okay. Okay. That's helpful.

That's critical for you to understand.

Okay. And then just last question. And again, I apologize if I missed this, but on the working capital, obviously up I think about 300 basis points as a percentage of sales versus last year. Can you talk a little bit about that?

Sure. We've got a number of initiatives going on. We were launching a new facility in Thailand, which is going be a investment in growth, but it's also going to benefit us in allowing us to shut one of our facilities down in Australia. So we've had to carry. in a sense. double inventories. We ramp one facility up and ramp another one down. As we continue to move more of our RV and Trailer Product offshore, we have -- for a period you sort of have the worst of both worlds. You're filling a supply line from Southeast Asia, but you have to build stock here in the United States to make sure that you don't have order fill and delivery issues. We launched a new facility for our laymen's gasket company to give us a beach head in Southeast Asia to sell into that part of the world, and we've had to make some investment there in terms of finished goods. So this investment in initiatives, I don't think it's a representation of a new higher level that we expect to exist within the Company. That's why my comments were, I believe that they were prudent investments, but that relative investment will come down as we walk across '07.

Great. Thanks for the extra color, I appreciate it. That's all I had.

Thanks, Sarah.

Thanks, Sarah.

Our next question comes from Yilma Abebe. Your line is open.

Morning.

My question was on -- I believe you said you're seeing a competitor pricing on a mix shift in your RV and Recreational businesses. Can you give us a little bit more color in terms of where the competition is coming from and a little bit more color on the mix issue there?

Well, the mix issue was in relationship to fourth quarter performance within packaging, which drove --

Okay, I missed that.

-- some margin where we just simply have some higher margin on some stuff that we didn't sell as much of, but there wasn't a material or pricing issue. I think in the RVT world, that is an end market that clearly is cyclically down in its trough, and I think that we're not seeing different pricing pressure than we anticipated. We believe we are being very proactive in driving our historical activities from us -- or North American footprint as a manufacturer to a Southeast Asia low cost environment. And so we think we're being proactive. I don't know if I'manswering your question or not.

No, that's helpful.

So we don't -- there is sort of no material movement from a cost or there isn't any on or new expected pricing activity going.

Okay.

Yes, just to understand, Yilma, that when we source the product, typically in advance of sourcing the product we have to -- we have to lower our price to retain the sales. And then as we source, then obviously we reduce our costs. So that's what's going on in RV&T right now. We're in some cases lowering our sales price in advance of sourcing to a low-cost region.

Okay.

But that same dynamic occurred in Recreational Accessories, and once you get the product sourced, your margins then improve.

Okay. Thanks, that's helpful. I guess in both of these segments, the RV and Recreational, as you -- I guess in the first half or the first quarter of this year and as you look out, what are you hearing anecdotally in terms of the end-market demand? Are you continuing to see some softness there, or what's the latest color that you --?

I think if you look at other people's press releases and look at third-party data, I think coming into '07 most people thought that the year at best would be flat and maybe a couple percentage points down from a -- on a broad base unit volume. Recognize that we sell into an awful lot of end markets; marine, RV, agriculture, construction, and what not. I think that being down a couple basis points in a broader unit volume perspective is about what we're seeing in the first quarter. Our expectations are being met. But I think that we have a cautious view to that end market and how the discretionary spend in the consumer side of our exposure gets impacted, probably most by housing bouncing around and interest rate movement. So far so good, but we've got our eye on it.

Thanks. That's very helpful.

Our next question comes from Phillip Rueppel. Your line is open.

Hi, Phil.

With regard to the IPO, is there a deadline with the S1 filing that it has to be completed by or is that just an open-ended process?

Basically the way the process works, Phil, is that when you amend your S1, it has a period of time before it -- the data inside of it becomes stale. So basically that's what happens when you -- when your financials inside of the S1 become stale, then you have to update them for the new financials.

Okay.

That's basically what happened to us before.

And that can continue in perpetuity?

Probably not, but it can continue.

Understand, okay. Obviously that's your top priority. If you were -- now that you've fixed the business a little bit and gotten back on some more sure footing, are there any acquisitions out there or any markets that you would look to get in -- to more involved in or to vest in the product portfolio?

Yes, I think our focus certainly is getting more defined, Phil. And we like our growing exposure in medical-related components and medical-related -- pharma-related markets, whether it be through our Packaging group or our Tooling group, and that's an area that we certainly want to continue to push in. The broader Packaging group is one we feel very good about. We think that our product initiatives in Energy and the complementary products that we have to offer will drive great growth in those areas. And the relative strength of aerospace right now positions our Monogram company in a great spot, and we are looking at product expansion opportunities for them. So probably no surprise we're aiming the barrel where there is real organic growth opportunities for the Company and we think our portfolio is position for great growth. And I think you're right. I think our focus has been get sure footing and then put the more aggressive, go-to-market focus into the Company and that's what we are starting to do. And I think by the types of business awards that we were getting and have gotten at the end of the year, I think are a direct result of our focus.

Great. And then on the working capital, just to follow-up on Sarah's question. Should we expect the full 300 basis point change year over year to come back during the year, so to have a source of working capital in 2007?

Phil, I would estimate that it's going to improve. But we're launching growth initiatives across the Company, and to do that sometimes requires an investment in inventory. So I -- I would assume that the working capital's going to come back. I wouldn't assume that it's coming all the way back to where it was.

Great. Okay, that's helpful. Thanks, guys.

Okay, thank you.

Our next question comes from [Tom Glampy]. Our line is -- your line is open.

Good morning.

Hi, Tom.

Can you talk about ISG a little bit? The growth there, was that concentrated in any one of those companies or was it spread out?

Excuse me -- no, the good news, Tom, is it's pretty spread out. We had a great initiative with our cylinder business getting into these global ISO cylinders and now we're selling into markets like South America and Western Europe and smaller portions of Southeast Asia. Clearly there's been pretty good strength in our Monogram aerospace business, but we're really getting new applications for product, mostly in Western Europe through Airbus. As you know we've always had a great relationship with Boeing and the U.S. military airplane builds. So those two were probably the key drivers, but nobody's going in the wrong direction and the growth has been pretty balanced across the board.

Okay. And when you look at the -- the whole -- the sequent businesses overall. On Rec Accessories you did your outsourcing, cost savings and all and yet margins are up over 50%, I guess, on a declining, top line. As you roll that sourcing initiative into RVT, do you have the same potential to improve margins off of where they were in 2006? How do you quantify the potential there versus the turn around in Rec Accessories?

Well, we'll be a little coy, Tom. I think we see, certainly, potential, that's why we're doing it. I think to Skip's point, we don't anticipate a great deal of movement as we walk through '07 because '07 really is an implementation year. We're ramping up in Thailand and we're carrying some dual costs with that activity as we displace some infrastructure in Australia. And we will move a significant amount of activity this year into Southeast Asia for the benefit of that group. But I think most of that benefit will be seen coming into '08, frankly. Skip, is that a fair --?

Yes. I think, Tom, if you were to view our margin over a couple of year time period in that segment, you'd see that it's come down quarter by quarter, and by the third quarter I think it would be reasonable to assume that it would start to go back up.

Okay. Now it's still a higher margin business than Rec Accessories, even though you haven't really implemented these changes yet?

That's right.

So I guess my question goes to -- but you still see significant cost savings potential as a result of this, even though you won't see it until the second half of the year?

Yes.

Okay, all right. And then what kind of -- when you talk about the investments in Thailand, additional investments in Mexico, can you quantify that in dollar terms? And I guess when you -- I'm not sure if it's all going through CapEx or not, so what do you see for your CapEx and inves --?

You know, I think -- CapEx from a planning perspective, it's probably about 3% of revenue I think would be a good benchmark. Most of the infrastructure investment, Tom, has already been made. That's really what we were doing in '04, sort of the back end of '03 and '04 and coming through '05. So the good news is that there isn't a lot of investment in building or base operating assets. Those have been made.

Yes. And, Tom, this is probably a comment for everybody. If you look at our traditional financial statements and you see CapEx, that includes the buy back of assets related to the industrial fastener business of about $7 million, so our CapEx for '06 was around $22million, $23 million.

Before the buy backs?

Yes. So, frankly our CapEx has been quite a bit below 3% for the last couple of years.

There's a lot of operational leverage in the Company and I -- and the CapEx that we have planned is fairly flexible because I'd say two-thirds of it is oriented to growth and new products.

It's more product specific, Tom, and what we're finding is as we source, we're creating capacity here, which we're able to use for pur -- for new product.

Okay. And what are you seeing in --ISG, Energy, Packaging, what are you seeing in the first quarter, top line?

So far --

So far, so good.

Good. Thank you.

You're welcome.

Thanks, Tom.

I'm not showing any further questions at this time.

If that concludes our questions, we'd like to thank everybody for taking the time to listen to TriMas and we thank you for your support. Have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.