TriMas Corp (TRS) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TriMas Second Quarter 2007 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

I would now like to introduce your host for today's conference, Mr. Skip Autry, CFO. Sir, you may begin the conference.

Thank you, James, and welcome to the second quarter 2007 TriMas Corporation earnings call. Our President and CEO Grant Beard and I will review TriMas's second quarter results. To facilitate the review, we have a 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, our Vice President of Financial and Treasurer, and [David Mostel] our Director of Finance for Operations. A replay of this call will be available later today by calling 866-837-8032 with reservation number 1121377.

Before we get started, I'd 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 uncertainties. We caution everyone to be guided in their analysis of TriMas by referring to our Form 10-Q for a list of factors that can cause our results to differ from those anticipated in any such forward-looking statements. Also, we undertake no obligation publicly to update or revise any forward-looking statements except as required by law. We would also like to direct your attention to our website where considerably more information can be found.

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

Thank you, Skip. Good afternoon to all and welcome to the TriMas Corporation second quarter earnings call. We at TriMas are all very proud to be a new member of the New York Stock Exchange. Our IPO in May was very successful and has been met with great enthusiasm from our employees, customers, suppliers and stakeholders. As TriMas begins its journey as a public diversified engineered products company, our primary focus will be on disciplined growth and further debt reduction. Our growth will be driven by our initiatives in product and market expansion and be augmented by small product-based acquisitions.

For those following along on the slide presentation, please turn to slide 3. I am very pleased to report that during the second quarter of 2007, TriMas posted record revenues of $290.8 million. Our revenue strength was across our portfolio with four of our five reporting segments having revenue growth. Our revenue growth was supported by solid operational performance. Although costs and expenses related to the use of proceeds from our successful IPO impacted our results, as reported under GAAP, TriMas's underlying operational performance was very strong.

Excluding the impact of costs related to the use of IPO proceeds, TriMas's operating income increased 16.1% to $35.9 million and our adjusted EBITDA increased 11.3% to $44.5 million as compared to the second quarter of 2006. Income from continuing operations improved approximately 60% to $10.5 million as compared to $6.5 million in the year ago period. TriMas's strong conversion reflects the benefits of prior period cost initiatives and the new product offerings with good margins. We finished the quarter with solid backlogs and strong daily order activities across our portfolio.

Turning to slide 5, you can see our Packaging Systems group had both positive revenue and earnings growth in the quarter as compared to the second quarter of 2006. Our exposure to softer construction and agricultural market spending was offset by our new product initiatives in Medical, Personal Care and Specialty Beverage. Packaging continues to see expansion opportunities for our specialty dispensing and closure capabilities across these markets and through geographic expansion into Europe and Southeast Asia.

Turning to slide 6, our Energy Products group saw its revenue and earnings expand in the quarter as compared to prior year period. Our gasket business was extremely strong as refineries continue to increase MRO spending. This company has completed its site selection for our new China satellite, which will be operational by year-end. Our engine business, which serves the gas fields of Western U.S. and Canada, saw a revenue decrease as natural gas prices softened in the quarter and capital spending in the field slowed down.

That said, we saw a strengthening in our order intake as we concluded the quarter. This product line is more profitable than our gasket business, which moderated our conversion within the quarter. Our group's new product introductions of compressors and accumulators have gone extremely well. This is a key part of our well-site content expansion strategy, which we believe will drive revenue growth in 2008. We expect gasket sales to continue to be strong with a modest recovery in engine sales as we look out across the remainder of 2007.

Turning to slide 7, our Industrial Specialties group had a very solid quarter with revenues increasing 19% and operating profit up 28.2%. Revenues were driven by our new product initiatives within Aerospace. Our new titanium and composite fastening products continue to gain application at both Airbus and Boeing. In addition, our industrial cylinder business continues to gain market share for its products in Western Europe and South Africa. This group will continue to see revenue growth via increased international sales, new market/product expansions such as medical components.

Turning to slide 8, our RV & Trailer group saw its revenue grow 3.1% against served markets that we believe to be down in North America at least 12%. This performance is based on our market share gains, which were driven by our great brand names, the bundling of our product offering and our many new product introductions. This group's earnings were down slightly as a result of closure costs of a facility in Australia and ramp up launch costs of our new facility in Thailand. We believe the commercial, agricultural, marine and RV trailer markets, which we serve in North America, will continue to be flat for the remainder of 2007. Our initiatives to expand this group in Southeast Asia are ahead of our expectations. This group continues to see great opportunities within this region, benefiting 2008 and beyond.

Turning to slide 9, our final group, Recreational Accessories, had its revenues decrease in the quarter by 5% against served markets we believe to be down between 10% and 15%. This performance was driven again by market share gains, by leveraging our great brand names, our fill rates and again our many new product introductions. The group's earnings, however, were up as we realized the benefits of prior period cost initiatives and the implementation of our Asian sourcing strategy. Within the quarter, this group purchased a product line named Quest, which will broaden our high-end fifth wheel towing product offering. This will drive revenue opportunities in 2008.

The performance of the TriMas portfolio was solid within the quarter. We experienced a 110 basis point expansion at the contribution margin level as compared to the second quarter of 2006. TriMas is currently not under any unique pricing pressures within our portfolio. Our view on material prices is stable. TriMas will continue to drive revenue growth and earnings expansion via the disciplines of our TriMas Management Systems and we look forward to the remainder of the year.

Skip, I will now turn the forum back over to you.

Okay thank you, Grant. On slide 11, just to follow up on Grant's previous comments regarding the IPO, we sold 12.7 million shares of stock at $11 a share, which netted us $126.5 million. And as promised, we paid down $100 million of senior sub notes and terminated expensive operating leases. On page 12, a couple of comments, sales, as Grant mentioned at $291 million, is a record for the company. As you can see, our Industrial Specialties segment led the way with 19% growth. This growth rate was driven by our Aerospace, Industrial Cylinder and Defense businesses.

Packaging and Energy, which were up as expected with a minor bit of explanation needed. In energy, our engine business was down due to reduced drilling activity in Canada. This decrease was more than offset by our refinery and petrochemical gasket business. Sales at Recreational Accessories were off due to reduced end-market demand in our hitch business, partially offset by sales gains at retail. RV & Trailer products were up slightly due to market share gains, more than offsetting reduced end-market demand.

Segment operating profit and EBITDA increased with our sales increase and higher gross margins. Packaging Systems increased profitability comes from higher sales levels in material margin, partially offset by an increased growth-related spending. Energy Products margin decline was primarily due to a mix change in the quarter, more gasket sales and less engine and repair part sales. Industrial Specialties profitability increased due to increased sales, RV&T's performance was down due to duplicate costs at our new Thailand plant and a plant in Australia that is scheduled for closing.

Recreational Accessories improved EBITDA and operating profit as the result of sourcing activities and operational improvement. That leaves us with improved segment adjusted EBITDA of nearly $4 million on $11 million of incremental sales, or roughly a 34% conversion. We think that's a good solid number. Corporate expenses at $21 million were about $13 million above prior year due to the termination fees related to Advisory Services agreement and the early termination of operating leases, which we will cover in more detail on page 13.

To avoid confusion, this page we segregate our IPO related transactions to provide a more normalized view of the quarter. The Advisory Services agreement termination was $10 million in exchange for the elimination of our $4 million annual monitoring fee. Costs for early termination of operating leases essentially is the difference between what we paid to terminate the leases versus the fair market value of the assets, which were all appraised in the quarter. Debt extinguishment costs goes with our retirement of our sub debt, we paid a call premium of roughly $5 million and we wrote off previously deferred financing fees that were associated with $100 million of sub debt.

Turning to page 14, regarding capitalization, we reduced total debt over $100 million and substantially strengthened our balance sheet. Additionally, we have approximately $120 million in availability. Turning the page, regarding guidance as more fully described in our press release, we expect our 2007 adjusted EBITDA, excluding IPO related expenses, to fall in the range of $148 to $156 million. On page 16, to wrap up our prepared comments, Q2 was a record sales quarter for TriMas. Margins and profitability improved, we completed our IPO, we strengthened our balance sheet and, as Grant mentioned, our focus now turns to disciplined growth and we are very excited about our prospects.

This concludes our prepared comments. Operator, you can now open up the call for the Q&A session.

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from Steve Barger of KeyBanc. Your question please.

Hi, good afternoon.

Hi, Steve.

You had very nice gross margin performance in both 1Q and 2Q. Given that volumes typically decline in the back half will you be able to generate similar expansion on a year-over-year basis?

Yes Steve, I think that when we were out on the road and we were explaining the margin potential inside of TriMas, we talked about potentially 70 basis points improvement this year and next. And as you can see, through the second quarter, we've surpassed that. We've had good margin expansion as a result of a lot of operational initiatives that we've undertaken, and we continue to source our well-known branded product to low-cost areas. Relative to expansion for the rest of the year, as you know, we have a little seasonality inside of the business, but year-on-year we would expect the margin improvement to sustain.

Excellent. And I know that the rationalization of your [book bring] continues, especially in the RV&T and RA segments. What do you think peak gross margin can be, kind of holding volumes steady? Where can the business get to?

Well Steve, you know we've improved and it's kind of a Tale of Two Cities, when you look at Recreational Accessories, margin improvement has been, for the most part has already taken place. That's not to say we won't continue to try to expand margin in that business. But Recreational Vehicle and Trailer is behind in terms of sourcing product of China, vis--vis Recreational Accessories. So when you look at RV&T in terms of expansion, I think there's more opportunity for that business to expand margin in the future than Recreational Accessories.

All right, thanks for that. A couple of segment questions. In energy products, will the new and existing drilling be delayed until natural gas prices pick up in Western Canada, in general? I mean, is that the right way to think about it, that it's a function of natural gas prices?

Well, I think that's certainly a driver. I mean, obviously when commodity prices are rising, people are going to deploy capital. In the shortest of term, there's a fair amount of supply of gas right now, but we think over the longer term, really two factors are going to drive our business. Demand for gas is only going to go up because of the need for increased electricity production, and you use gas in that setting, and secondly, as pressures go down in these big fields in Western Canada and Western United States, you're going to punch a lot more holes in the ground to get like and similar volume out. And that fits our product quite well, so we're actually quite bullish over the long term.

In the short term, clearly, as commodity prices retracted we saw capital spend pull back a little bit. As they stabilized at the end of the quarter, we saw order activity firm a little bit. But I think that's probably the right way to look at it.

Thanks. Any idea -- I mean, I know it's lumpy right now, but how much revenue do you think you -- what was pushed into the next quarter, given the delays that you're seeing? Is it even possible to quantify?

I think not material and very hard to quantify.

Okay. One other, the -- you talked about the operating margin being affected by the mix. Was there any mix issue in [Layman's] itself or is that all due to the Aero Engine business versus Layman's?

It's pretty much between the two businesses, really no margin decline at either one of the businesses individually, correct.

Okay. And then one more and then I'll just jump back in line. For the packaging business, you talked about new products being offset by a customer loss. Do new products typically have significantly higher margins than the legacy products or I guess in other words, if you lose a customer for X-dollars and then gain X-dollars in new product, is that margin accretive?

Our new products are typically very profitable and we have a line of lamination products that we sell into the construction world that is not as profitable as some of the other activities within the group and that's frankly where we lost some business. So we actually lost low-margin business and we were replacing it with higher margin new business. The comment within the group, however, is that in some of our large traditional sectors, we saw a lot of closure in dispensing product into agriculture, paint that goes into construction applications. Those had a little bit of softening because of what's happening out in their broader markets and we offset that pressure with our new initiatives in the medical specialty beverage and personal care applications.

Very good. Thanks. I'll get back in line. Thank you.

Thank you, Steve.

Thanks, Steve.

Thank you. Our next question comes from [Al Cabeli] of Goldman Sachs. Your question, please?

Hi. Good afternoon guys and congratulations on a very strong quarter.

Thanks, Al.

Thank you, Al.

A question on the RV&T and recreational accessories businesses. Clearly very difficult end markets, which you're able to mostly overcome here with some share gains. How sustainable do you think the trend is and share gains and did you benefit at all from a one-time improvement in channel fill with that or is this something that we think is sustainable over the year?

I think you've got a couple of things driving this, Al. I think that as you know, we spent a lot of time and effort variabilizing these businesses over the last couple of years and we sort of are back on offence and focused, not just on share gains by selling more like consumer, but we are expanding our product offering. So that certainly has aided our performance. Most of our competitors are retracking and citing costs at a time when we are out pushing ourselves into the market.

The broader market is not right now littered with unnatural inventory levels. So, where we've seen the aftermarket before maybe not have discipline at the dealer level, there being a lot of inventory, that's not the case. So if you get a sale at the end-user, it really comes through the system pretty quick. We don't see the market deteriorating from this point for our outlook for the remainder of the year, really, in the many served channels we're in. We see it to be sort of more the same, relatively flat.

So, I guess the short answer is that we see increased opportunities and incremental opportunities to continue to push ourselves and our product and our bundling product offerings out in the channels we serve. So, we don't see what we've done as a one-time hit, we see ourselves working sort of project by project through the many end markets we serve and we're picking up new business along the way.

Okay. Great. And I know one of your larger competitors just recently got sold and have you had -- experienced any change in competitive dynamics as a result of that?

Well, we certainly like to see that outlook got [slowed] for, seven times for a company that makes 7% EBITDA and that's always reassuring at the valuation side, Al. Their relative weakness has been an opportunity for us. And obviously with new ownership, they'll probably get stabilized and be a formidable competitor, which they have been in the past.

Okay. Great. And then a question for Skip. You mentioned the closing of an Australian facility negatively impacted RV&T this quarter. Could you give us a relative size of that?

Sure, Al. First of all, it's probably important to point out that by the fourth quarter, we expect this issue to be behind us. But in the quarter, we think it probably had a $750,000 impact on profits.

Okay. And then this will continue through the fourth quarter at a similar rate?

No, it'll decline as we near the end of the year and by the end of the year, it should be gone.

Okay. Great. And then, just looking towards the cash flow statement, you guys did a great job kind of breaking out on a net income basis the one-time IPO costs. From a cash -- free cash flow perspective, how should we be thinking about what the IPO cost? I know you had the -- you had $10 million --?

I think, Al, a good way to look at it is when you look at our published cash flow statement for the second quarter, you have to understand that's year-to-date. So you have to back out the first quarter's cash flow and then you have to add back the effect of a couple of these transactions, which were included in the operating results of the company. So, you have to add back the $10 million, you have to add back the $5 million in call premium and you have to add back the lease write-off. So, you probably have about $20 million to add back in the quarter. And again, our capital spending in the quarter for assets not related to the leased assets was about $8 million. So, again, a good solid positive cash flow quarter for the company.

Okay. And then, we're still thinking what for CapEx for the full year?

Al, the 3% of top line is still a pretty good estimate for that.

Okay. And then, in terms of the outlook for the full year, can you give us some of the puts and takes in terms of the low end versus the high end? Is it mostly just variability in sequence with the tough end markets? Or --?

Well, we've got a little bit of variability going on, Al and as a new public company, we wanted to provide some guidance, but we didn't want to overdo it, as you know. And I would say probably the differences between the top of the range and the bottom of the range have to do with the little bit of uncertainty in the energy market. A little bit of uncertainty relative to our aftermarket businesses and what their end markets are going to look like, but I would say that on balance it's a very conservative range.

Okay. And then, last question for Grant. With the deleveraging following the IPO, it certainly is going to boost your financial flexibility. We saw you make a small acquisition already. Any rule of thumb that you're thinking about in terms of the amount of free cash flow you want to use for deleveraging and that that you want to use for strategic acquisitions?

Well, I think when we're out on the road, Al, we told people that our goal and target was to try to pin down half a turn a year and we are very focused on growing our core properties and using selective small product-based companies to augment that activity. So again, you will see us buy businesses, but they will be small and most likely very accretive or quick to be accretive and [won't] take a big capital deployment. So, sort of $15 million, $10 million, $5 million type additives. We're very close to one now that hopefully we'll announce soon. It would sort of fall into that category and it would be a natural extension of one of our strategies.

So, I don't know if I'm answering your question, but what we've told you and what we told the folks out on the road is what we're going to do.

Okay. Okay. Great.

We have to grow, but we have to moderate our balance sheet. So we have to do both.

Right. Fair enough. Okay. I'll jump back in the queue and thanks a lot guys.

Okay. Thanks a lot, Al.

Thank you. Our next question comes from [Jane Gale-Orger] of Halcyon Asset Management. Your question, please?

Hi Jane.

Hi. I -- yes, congratulations on a good quarter. Most of my questions have been answered. I was just wondering if you can give us any color on debt reduction and potential take out of the remaining bond [tranche]? I know that's something you've been talking about before the closure of the capital markets. Can you give us an idea on how you think about that?

Well, Jane, as you know, there's been a fair amount of volatility in the debt market now and we continue to evaluate whether it makes sense for us to go back into the debt market and do a refinance.

At this point, it's really too soon to talk about whether or not we're going to be able to accomplish that.

In terms of debt reduction, when we were out on the road, we had a roughly circa $50 million cash flow on an LTM basis through the first quarter. It really didn't change a whole lot through Q2. So you would expect to, as Grant said, try to knock off about a half a turn of debt a year. So that kind of puts it -- a ring of funds around it.

Okay. Okay. And what ultimate leverage level would you be most comfortable with?

Well, our comps in the diversified area have less leverage than we do. We kind of look at that two ways. We look at that in terms of what we need to strengthen our balance sheet and that was one of the primary reasons we did the IPO, but we also look at that as a benefit. Because when we did our IPO, we had an immediate use of the IPO proceeds to pay down expensive debt. So we look at leverage as a positive as well as a negative.

All right. Thank you.

Thank you. Our next question comes from [Velna Abiz] of JP Morgan. Your question, please?

Thank you. One question for me. As you look at your five businesses and as you look at acquisitions, are there any one or two segments you think will be a focus for you in terms of acquiring businesses in?

I think that there's some themes that we very much like and we like having more exposure to medical and medical components and we're seeing the opportunity in our packaging, in ISG groups to migrate into those end-markets given our capabilities. And we like aerospace and our relative space position there. I see opportunities again to take our skill sets and apply them more into more content in that end market. I believe that TriMas is a portfolio of wonderful companies. We have a little bit of a balance issue with our exposure into the aftermarket, so I think that you will see us work very deliberately to build and expand our energy packaging and broader ISG businesses. Not to the detriment of our wonderful RVT and RAG businesses, but I think we'd like our portfolio to be more diverse than it is today and more balanced.

Thanks. That's it for me.

Thank you, Velna.

Our next question comes from [Steven Wen] of Pilot Investors. Your question please?

Hi. How are you? I've got three questions for your industrial specialty business.

The first question, the shell casing business is growing pretty strong this quarter. Is that just a one quarter phenomenon? Because I couldn't remember that should be a very high growth product?

I mean, that is a very small business within TriMas and it is certainly running the benefit this year of some military spend and stockpiling. I do not expect the kind of performance we saw from that property in the first half of this year is sustainable over the long term.

Got you, okay. And the cylinder, what should be the sustainable long-term growth rate for cylinder business?

Well, our cylinder business is really been benefiting by a series of new products that we've brought out to sell different types of containment cylinders into western Europe, southeast Asia and South Africa. So we're actually selling products into markets where we've never participated before. And we're seeing a great deal of market acceptance and market sponsorship, if you will, for those products. So, if you sort of dissect that business, its sort following the basic industrial curve in North America where we have very large market share, but we see a great opportunity in these new serve markets that I just mentioned and see frankly a fair amount of growth opportunities as we walk forward.

So, could you break out roughly what percentage of the cylinder business right now from North America, what percentage from outside North America?

Probably about 15% to 20% outside North America and the rest inside of North America.

And a year ago, it was 100% North America.

So, I guess the non-U.S. business is growing like 50%, something like that?

You know it's kind of -- Steven, it's a little hard to say because in terms of percent, last year we really weren't selling any cylinders. Very few of them.

Not 100%, but it's growing very fast.

Okay. Last one.

Obviously, that's going to moderate over time as we sort of fill in the space, but we're getting good receptivity for our product and good sponsorship.

Right. Right. And there's no capacity constraints for your international expansion?

There is capacity constraints. Ultimately, we had -- when we get there, we'll really have to figure out do we -- how do we incrementally put more capacity on.

But before you get there, probably you can get to what percent of the revenue from non-U.S.? Maybe 30%?

Well, Steven, we're looking at the base business being able to improve capacity by say 10%.

Oh, okay. And last question for this business for monogram aerospace fastener business, could you tell me roughly what kind of revenue and EBITDA roundly for this business?

Steven, we really don't like to get into individual business. We like to keep it at the segment level. But I would tell you that the monogram business is more profitable than the segment.

Okay. And is there any new program or new platform that you're adding on for this business?

Our product, which is blind bolts that are used in both metal and composite applications, really are spread across almost every plane manufacturer. What is really happening is that our new titanium and new composite based product is finding new applications. So where we have traditionally sold into the structural skeleton of the airplane, we're now finding new applications in the fuselage, in the tail, in the wings, and this is why our company is growing faster than the underlying market and we see frankly a fair amount of growth opportunity going forward.

Okay. Great. Terrific. And what type of private market transaction multiple for monogram business? And the EBITDA multiple?

Yes, Steven, it's hard for us to say what kind of a multiple this kind of a company would garner. I mean there's a lot of places to find that kind of information out. And we're really not in a position to comment.

But it would be big.

It would be more than seven.

More than seven? As a minimum, seven?

Yes. Absolutely.

But -- okay. Okay. I'll just leave it there. Thanks.

Thank you.

Thank you. At this time, I show no further questions.

Okay. If there are no further questions, we thank everybody for your support and your attention and that formally concludes our call. Thank you.

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