TriMas Corp (TRS) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TriMas third quarter 2007 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Sherry Lauderback. Ma'am, you may begin the call.

Thank you. Thank you and welcome to the TriMas Corporation third quarter 2007 earnings call. Our President and CEO, Grant Beard, and our CFO, Skip Autry, will review TriMas' third quarter results. To facilitate this 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 of Finance and Treasurer, and [Dave Mosteller], Director of Finance for Operation.

A replay of this call will be available later today by calling 866-837-8032, with a reservation number of 1162282.

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 10Q for a list of factors that could cause our results to differ from those anticipated in any such 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.

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

Thank you, Sherry. And welcome, everyone, to the TriMas Corporation fiscal 2007 third quarter earnings call.

TriMas Corporation, as most of you know, is a diversified engineered products company servicing a broad range of industries and end markets on a global basis. Our company continues to focus on its guiding principles, which are the backbone of our TriMas management systems. These guiding principles are market leadership, product innovation, operational excellence and excellence in people. We believe these provide a foundation from which our current and future shareholder value is created.

The priorities of TriMas Corporation, post our successful IPO in May of this year, are as follows: drive revenue growth, increase earnings, and reduce relative debt within our company. Our renewed focus on growth is being driven by product innovation, market expansion, such as international growth, and directing our company to high growth market segments such as specialty packaging, aerospace, energy, and medical. These priorities will be augmented by small acquisitions as evidenced by our Quest Technologies and DEW Tech transactions completed within the quarter.

Now let's look at our third quarter in summary. TriMas Corporation had record third quarter revenues and earnings. The third quarter of 2007 represented the company's eighth consecutive quarter of improved earnings on a year-over-year basis. Our third quarter revenues were $262.2 million, or an increase of 7.2% over 2006 levels. Our adjusted EBITDA was $37.1 million, or an increase of 8.4% over the same period of 2006.

Net income from continuing operations was $6.6 million versus a loss of $2.3 million in the third quarter of 2006. This resulted in a diluted EPS of $0.20 per share for the quarter versus a loss of $0.11 a share for the same period a year ago. The diversity of our portfolio supported both our growth in revenues and earnings.

The quarter-end debt level in the company was $668.8 million, including our AR securitization, producing a debt-to-bank EBITDA ratio of 4.1 times. The company had over $112 million of availability under its credit agreements. Revenues and earnings within the quarter were solid, while debt levels continued to move down.

Now let's look -- take a summary look at each of our reporting segments, starting with our Packaging Systems Group. It was our only report segment to experience negative revenue growth within the quarter. Revenues for this group were down 3.1%. This was driven by soft demand for our closures sold into the paint, construction, and related chemical market segments. The demand softness in these sectors was greater than we expected and did impact one of our group's higher margin product lines. At the same time, our group has been increasing its investment in both new product development and supporting several new product launches. The combination of events contributed to an exaggerated earnings decline as compared to revenue performance.

It is important to note that our packaging group will continue to increase its investments in new products, applications, and a global technical sales force. It is our expectation that these investments will drive strengthening performance in the current quarter and great growth opportunities over the long term.

Our next segment, Energy Products, saw its revenue expand in the quarter by 4.8%. This was driven by our MRO gasket business, which continues to expand internationally and take market share in North America. The group's earnings were down, however, 10.4%, as our higher-margin engine and engine repair businesses saw the continuation of soft demand from the natural gas fields of western Canada. This is due largely to the current low prices of natural gas, which have decoupled from their historical relationships with oil prices.

We believe our MRO business will continue to benefit from the high utilization rates being driven at existing oil in petrochemical refineries. Our service model for this produce line is also being expanded into China, Brazil, Europe, and Western Canada to expand our market reach. We believe the long-term demand attributes of our remote, well site engines and related products which service both oil and natural gas wells are very favorable. As pressure levels in the fields continue to drop, more wells will be drilled and more of our engines will be utilized. Therefore, our available Engine Product will expand our Repair Parts business will follow.

Short-term demand, however, will be driven, in large part, by commodity price levels for natural gas, which currently are depressed, impacting capital spend out in the field. That said, our new product initiative supporting our well site content expansions are being well received. As we enter 2008, our new line of compression and accumulation product lines will be positioned commercially across our served markets to further drive our growth initiatives within our group.

Our third segment, our Industrial Specialties Group, experienced very strong growth with revenues increasing 22.3%, compared to the third quarter of 2006. Adjusted EBITDA followed suit, expanding 21.7% over third quarter of a year-ago levels, while being slightly tempered as we continue to invest in incremental growth initiatives across the group. The backlogs within this segment remain solid. Our focus within Industrial Specialties is to sell more of our existing product internationally and to continue to expand our aerospace in medical product line portfolios.

Our fourth segment, RV and Trailer Products, saw its revenues expand by 6% against end markets that are weak, but perhaps at their cyclical bottom. Our growth was driven primarily by new product introductions and market share gains via our bundling strategies. The group's international sales were flat in Australia, but continued to grow in Southeast Asia. Corresponding, adjusted EBITDA expanded 44.3% against the levels of the third quarter in 2006, highlighting the operational leverage that exists within the group. Approximately two-thirds of this segments revenues are in North America, where we believe end market demand will continue to be flat heading into 2008, and our growth will be driven from new product initiatives, aggressive bundling strategies in Southeast Asia market expansion.

And our final group, our Recreational Accessories Group, saw its revenue expand by 7.4% over the levels of the third quarter of 2006. The group's adjusted EBITDA expanded by 17.9%, also highlighting the operational leverage that our prior period initiatives have created. As with RVT Products Group, the served end markets for this segment remain soft. Our growth resulted from new products, bundling strategies, and superior service levels. We expect our initiative to drive growth into 2008, although we do expect end markets to remain flat in North America, while we expect continued expansion for our products sold in Southeast Asia, Western Europe, and South America.

I would now ask Skip to please profile the financial highlights for the third quarter of 2007.

Thank you, Grant. To supplement Grant's comments, let's first look at sales. Sales of $262 million in the quarter were a record for the third quarter. And we were very happy with our 7.2% increase over last year. It should be noted that less than $2 million of the increase in sales is the result of acquisitions.

Packaging Systems sales were off 3.1% for a couple of reasons. Last year in Q3, we were launching our new vice grip product, which pulled sales out of Q4 2006. Additionally, in Q3 2007, we began to see end market weakness in our industrial paint and chemical end markets, which accounts for about one-third of the segment. And new product sales were not up as much as expected. For Q4, we currently expect sales to be up versus a year-ago period.

Energy Products continues to be a tail of two cities. Lamons, our MRO refinery business, is up over 20%, and Arrow Engines is down about 20%. Regarding Lamons, we continued to gain share in North America, as we begin to globalize the business. Arrow continues to be negatively impacted by relatively inexpensive natural gas and the Alberta-Canadian gas royalty issue. On the plus side, Arrow continues to launch its new compressor and gas production equipment. Additionally, we believe that at some point extremely high oil prices will begin to benefit our Arrow business.

Industrial Specialty continues to out-perform last year on the strength of our Monogram Aerospace and Norris Cylinder businesses.

RV and Trailer Products and Recreational Accessory sales in the quarter were very strong, given the approximate 10 to 15% weakness in their collective end markets. These businesses are performing very well, and we like their future prospects.

Regarding EBITDA, TriMas' EBITDA margin was up slightly as compared to prior year.

Packaging Systems' margin decline is due to the sales change in the quarter, cost increases, which we expect to pass along in Q4, for the most part, and our continued investment in future growth in this segment.

Energy's decline is totally related to a mix shift towards Lamon -- Lamons and away from the more profitable Arrow Product offer. Industrial Specialties' margin is essentially in line with the underlying sales increase. RV and Trailer's margin expansion, as we have been discussing for a couple of quarters now, benefiting from restructuring and sourcing initiatives, and which we can clearly see coming through. And for recreational accessories, a very solid quarter when compared to last year.

Regarding corporate expenses, with the IPO, the $1 million quarterly heartland monitoring fee stopped. You don't see the benefit pull-through, as we are spending more money as we approach the final phases of our Sarbanes-Oxley Compliance Program. We expect to have higher level of spending through Q4, and we also expect that level of spending to taper off next year.

As you can see on the bottom of page 13, for those of you who are following along on the deck, and Grant also mentioned that our leverage ratio is now at 4.11, a full turn lower than it was a year ago. I'd also like to point out that in the quarter, we generated $21 million of cash from operations and we think that that was a very solid quarter.

Prior to turning the call back over to Grant, I would like to just take a moment to summarize our results for the quarter. We were pleased with the positive results of our growth strategies in our improved year-over-year earnings performance from operations for the eighth consecutive quarter. We did, however, see weakness in certain of our end markets. And while we are not changing our previously disclosed adjusted EBITDA guidance range of $148 to $156 million, we feel more comfortable directing you to the lower end of the range.

As Grant will highlight in his concluding remarks, we were very pleased with our third quarter results. Grant.

Thank you, Skip. The initiatives driving TriMas Corporation are very straight-forward. Our focus is to continue to grow our company organically and do that across our entire portfolio. We focus on expanding our product offerings to serve aerospace, energy, packaging, and medical market segments, as we work to re-balance our total portfolio. We will continue to augment our strategies by acquiring small product-based businesses. And finally, we will continue to reduce the debt leverage within TriMas.

We believe the opportunities for our newly established public company are astounding. Our focus, hard work, and discipline can and will continue to drive shareholder value.

That concludes our formal remarks for the call. I would now ask the operator to open up the forum for questions and answers. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Al Cabeli of Goldman Sachs. Your question, please.

Good morning, guys.

Hi, Al.

Morning, Al.

I guess first question on the Packaging Segment. You know, with the increased investment that you're putting in, and it doesn't sound like the new product initiatives have grown as quickly as hoped, what's the outlook there? Next year do you moderate investment or do you expect a near-term pickup happening?

Al, I think that our investment cycle continues and we continue to be very bullish about our view of that group and its ability to transition itself more into end product closures and dispensing in the world of personal care, food, specialty, beverage, medical, and the like.

As you know, launching new products can sort of be more of an art around timing than a science, and I wouldn't read too much into the third quarter's performance as a statement about the direction of the company.

Okay. And you mentioned that the fourth quarter is actually -- we should see an increase, if I caught it right --

Those would --

-- in the packaging.

Those would be our expectations, yes.

Okay. And then in terms of the raw material hits in packaging, the resin side and on the steel side, is that going to continue to be a drag or is there any near-term pricing actions that you can take to recover some of those costs?

Yes, Al. I would think that, you know, we've talked about pricing at TriMas a lot over a fair amount of time. And, as you look back at TriMas, because of our market strength positions, we've traditionally had the ability to pass along cost increases in the form of price pass-throughs. But we have traditionally not been able to do it immediately. There's been about a quarter lag. And I think that's what you're seeing right now in packaging. I think that there were underlying cost increases in resin. There were some cost increases emanating from China relative to labor costs that we noticed in the quarter. And we expect to pass those along in Q4.

Okay. And then if we could switch a little bit over to Energy. Just given the high overall energy prices, just a little bit surprised by the magnitude of the decline in Lamons. And just wondering what natural gas prices do you think we need to get that business up again.

Well, I think, Al, that the Lamons Gasket story, which is the company that sells the MRO products, is the one that's up 20% year-over-year. And we just don't see really any slowing down because of the utilization rates at petrochemical and oil refineries.

Okay. I'm sorry. I meant -- I meant Arrow, the Arrow Engines business.

That's okay. And I think you know that we started to initiate our global footprint to service refineries globally with our major customers, people like Exxon and Dow and the like. So we see a great runway for that product line for us.

I think we were a little surprised coming into the back half of this year that the capital spend out in the gas fields didn't stabilize, but it's all around commodity prices of gas. And we think that they really need to stabilize one and then stabilize sort of in that $7-ish range or up to drive spend. And again, I -- our view is, is that the long-term attributes are very positive. There was a lot of gas brought into the country over the last 12 to 18 months, which has depressed commodity prices, as those inventories pull down and production needs to go back up. Those pressures in those wells continue to go down, you're going to use a lot more engines and you're going to use a lot more of our type of product.

So we're very bullish about the longer term view, although the short term has been a little bit softer than we anticipated. But every glass half empty has a half-full view, Al. And, as you know, we've been introducing our new compression and accumulation product lines, and we're finding that with a little bit of softness out in the market, it's allowed us to be aggressive in our marketing and aggressive in our positioning of our new product. And we see a great deal of acceptance through our early test phases in the third and fourth quarter and really expect to more broadly commercialize these products as we move across '08.

Okay. And any target for near-term level of sales next year on these new products?

Not at this time, Al, no.

Okay.

But I think you do know that over time we sell about $25,000 of average content to a well, and we're trying to double that.

Right. Okay. I'll jump back in the queue.

Okay. Thanks, Al.

Thank you. Our next question comes from Steve Barger of KeyBanc Capital. Your question, please.

Good morning.

Hi, Steve.

Hi, Steve.

I'd like to go back to that packaging question from maybe another angle. Of the 360 basis points decline in operating margins, can you kind of divide it up into segments in terms of how much was from declining sales, how much from un-recovered increases in commodity prices, and how much from the new product growth initiatives?

Yes.

Yes.

Steve, I would, you know me, I kind of like to round things off. But it's about a third, a third, a third --

Okay.

-- relative to what you just mentioned.

Okay. So a third comes back next quarter, basically. And then you expect -- and that's from the commodity cost as you get pass through. And then you expect sales to recover in fourth quarter, based on what you can see so far; is that right?

Right. Right. And I think a point worth making is, a year ago's fourth quarter in this business was pretty soft, so --

Right.

-- it's not that tough.

Okay. Margin pull through in Industrial Specialties is pretty weak, despite of that nice top line growth. What's the incremental growth initiatives that you mentioned in your comments that might have tempered that?

We're working very hard to expand our aerospace product line. So we're in the process of going through testing and validation for new product lines within that company. We're working in our precision tool business to expand our medical product lines, so we're doing the same things, qualifications, whatnot, putting more investment into product development.

We are working very hard to expand our containment cylinder business and have had some success internationally selling and we're working on developing a broader base of products there. So it's the right kind of investments. We are trying to augment our skill sets and draw our products into new markets, so. And I think that the balance between conversion and the balance between our growth initiatives, we're quite satisfied with.

I know some of those product testing programs can be pretty expensive. But as you transition to newer products, is that something that's going to be with us for a while or is there a slug of products that you're testing right now and will get past that?

I think that, you know, life can be a little bit lumpy, if you will. So I would expect -- you know, growth initiatives have a tendency of going in a step formation. So you get some success, you pull those products through. You'll probably see maybe a little higher conversion, and then you'll go back and reinvest into the next line of new initiatives. And we'll always have to fight that balance, but we are trying to grow and expand a long-term earnings string.

Okay. RV&T, sales up 6% against a weak market and great incremental margins. The electric product sales you mentioned in the release, is that a new product or are you taking share from someone? Or can you just give me a little background on that?

It really is a complimentary product in terms of harnessing and allowing the electrical intelligence from the trailer to the vehicle to happen. And it's just a off -- it's a great example, as we start to bundle our product and where we see gaps in our offering, our commercial customers are allowing us to fill in. So it's something that we have done in a small way before and it's something that our customers are willing, through our bundling, to provide us more share in, so. And most of that will be done either in our Mexican facilities or being drawn in from Southeast Asia.

And you said that you think we might be at a cyclical trough for RV&T, if I heard that correctly. What leads you to believe that?

Well, our end markets are hoping that that's a good statement. I think as housing stabilizes and the cost of money stabilizes, I think that you could argue that we are sort of at the cyclical bottom. The people that we sell to certainly are starting to vote that way with their inventory dollars and put a little bit more capacity and inventory into the system in the form of goods as we prepare for next season. So there's a little bit more optimism out there in the respective channels we sell to than we've seen in the last couple of years. But I can't make a cyc -- or a sort of data-driven comment. If you look at the industrial associations, people like the RVIA, they certainly are suggesting that the market is kind of at its bottom. But we'll see.

You go back and look at these end markets cyclically, they move in about a four to five year pattern. And the cyclical high for this -- for most of these end markets was in '04.

Okay. One last one and I'll jump back in line. In terms of Monogram, we know 787's been pushed out by maybe six months. Does that affect you at all? And can you talk about the aerospace supply chain a little bit?

Sure. The 787 will affect us, but it -- you won't be able to see it. It will be lost revenue opportunity, but it's not going to forestall or change the growth. The company has seen so many new applications for its new titanium products, you won't be able to see and our positive momentum in that company isn't going to be slowed down, it's just going to be changed. The supply line in that industry continues to be very sort of bound up and, frankly, that is creating some opportunities for us to take our goodwill in the area of line fasting and get sponsorship into new product lines. And we are trying to lever that fairly aggressively as we look forward. So we see that consternation in supplies working to our benefit.

Very good. Thanks.

Sure.

Thank you. Our next question comes from Yilma Abede of JP Morgan. Your question, please.

Thank you. Good morning.

Morning.

Question from me on the Packaging and Systems segment. Looking at the end markets where you saw some softness in the September quarter, what's the demand picture looking like, I guess so far this quarter and as you look out the next couple of quarters?

Well, Yilma, the -- we don't sell -- we sell these products kind of into the supply chain. So we don't get a lot of forward visibility on these products. But what we did notice during the quarter was a bit of a pull-back related to paint and industrial chemicals.

In terms of how that pans out, I think -- I think it's probably more related to kind of macroeconomic terms as we go forward. I don't -- I don't know that we have any future view right now of the end market demand for those products.

And if you look at sort of daily order activities and you sort of neutralize the benefit of last year when we reintroduced our new vice grip and it sort of pulled demand around a little bit quarter-to-quarter, and dailies have been very flat. So if you're asking do we see a deterioration, no. Do we see a big ramp-up driven by economic expansion in those industrial sectors, no. I mean, it's been the last several months have been sort of, you know, sort of very flat in their behavior. And what's going to drive this company is not that end segment, which is very profitable, but, nonetheless, will be our new product initiatives that are closure-sold into pharma, personal care, food, specialty, beverage, and the like.

Thanks. That's all for -- one more question on the credit side. Can you talk to, if you can, in terms of expectations for debt pay down over the next 12 months or is that too early at this point?

Well, Yilma, we haven't traditionally given that kind of guidance. But when we were out on the road, and, typically, we view our cash generation abilities as one of the very strongest points of the company. And I think if you look at the sell-side projections and the analysts' projections, they kind of come in around $50 million in cash generation.

Now, whether we deploy that cash to debt pay down or growth or acquisitions, I think Grant made the statement that we're looking at relative debt leverage improvement, which means, we may not deploy the cash to debt reduction. We may deploy the cash to growth and/or acquisition opportunities. But if we do that, obviously, our EBITDA will increase.

Great. That does it for me. Thank you.

Thank you.

Thank you. Our next question comes from Walt Liptak of Barrington. Your question, please.

Thanks. Walt Liptak with Barrington. Morning, guys.

Hi, Walt.

Good morning, Walt.

Most of my demand trend questions have been asked. So I wonder if we could just dig in a little bit to the corporate expense.

Yes.

What was -- could you break out the components of corporate expense, the normalized corporate, Sarbanes-Oxley?

Yes. I think, Walk, if you just looked at the number that we -- that we flashed, it -- compared to a prior year, the real change that we would have expected would have been about a million dollar decline associated with the elimination of the heartland fee, which was -- which occurred at the IPO. But we're in the final phases of our Sarbanes-Oxley implementation program. And it basically took up the difference. And we think that that's also going to happen in Q4. But as we enter next year, we think our Sarbanes Compliance costs will drop and return to kind of a more normalized level.

So, I mean, there really isn't a lot going on in that corporate expense number, other than you would have expected the million to go away and improve, which we also expect over the intermediate term.

Okay. Yes, we've seen a few years ago the Sarbanes-Oxley costs go up. So that can you give us some guidance for next quarter, what number we should use all in for expense?

Well, we -- I mean, I would just tell you that the only thing that changed really was the elimination of the heartland fee and the take-up of the Sarbanes cost. I don't expect that to change in the next quarter.

Yes. If I'm reading you right, I mean, you -- the corporate expense, according to my model's at 5.3 in the fourth quarter last year. If we take it at 5 million, then we're well below where we were in the third quarter of '07.

I think you'd be better to look at where it was in Q3 and step forward as opposed to where it was in Q4 last year and step up.

Okay. For the fourth quarter, what are you thinking about for the tax rate and depreciation and amortization?

Our full-year tax rate is right now 37%.

Okay.

Don't really expect to change that right now. And our Q4 D&A will be pretty much in line with Q3.

All right. And one more number question. The plant closure, the Huntsville, what do you expect that charge to look like.

We disclosed that a bit -- a while ago.

Yes, if you wouldn't mind refreshing my memory on it.

There really isn't -- there really isn't -- we don't expect that number to change much. I think what we said was around $10 million in Q4 with about $4 million of it being non-cash. I think -- I think that pretty much holds, and then we'll have a little -- we'll have a little overlap into the next quarter, into the first quarter of '08.

Okay. All right. Great. Thanks, guys.

So that's not changing, Walt. Thank you.

Thanks, Walt.

Next, we have a follow-up question from Al Cabeli of Goldman Sachs. Your question, please?

Great. Thanks, guys. In terms of the new initiatives, one, can you just talk about, in aggregate what you see that -- an update and what you see that potentially expanding your addressable market size, particularly in Energy, expanding internationally.

For our MRO products, Al, the available market in sort of the remainder of the world is at least the same size as the market that we're participating here in North America. The market in Western Europe represents, frankly, market share gains for us, and our service model is being held up as something that people like Exxon or companies like Exxon and Dow would like to -- like us to replicate for them in that market. In Southeast Asia, there's real capacity of being put in, in petrochemical and refining capacities, and it's why we're putting in -- that's why we built a factory to make our products last year and why we're putting up satellites in China, as we speak. And by the end of the, I think by the end of the first quarter, we'll have at least two, or by the end of the second quarter, at least two operational in China. So we see a great deal of growth opportunities for our MRO products in that area, if I'm getting to your question.

On the well site content, again, it's really being driven by service opportunities at our horsepower, horsepower levels. And remember, we sell engines that are driven in remote locations, non-diesel. They're driven off the gas that's pumped out of the ground, and the complementary accumulation and/or compression products that go along serve as a package. So we're not trying to make Arrow a packaging company in the oil definition of packaging, but we do want to provide the full complement of products to the packager or to our distribution customers. And we're seeing a great deal of interest at the size ranges that we're talking about. And we're really servicing the 150 horsepower engine application or under market.

Okay. And what I'm really just trying to get at is, how much is there near-term opportunity for a significant ramp in international expansion to kind of offset some of the weakness we're seeing in Western Canada?

Well, I think as we get sort of further into the fourth quarter, we'll be providing guidance and probably answer that question more specifically. But we think that there is reasonable upside, reasonable growth in the short term internationally for our company.

Okay. Thank you, guys.

Okay. Sure.

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

Okay. If that concludes the questions, we'd like to conclude the call. And we thank everybody for their time and attention and continued support. Thank you everybody.

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