TriMas Corp (TRS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TriMas second-quarter 2010 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 turn the conference over to your host today, Sherry Lauderback, Vice President Investor Relations. Please begin.

Thank you. Thank you, and welcome to the TriMas Corporation's second-quarter 2010 earnings call. Participating on the call today are Dave Wathen, TriMas President and CEO, and Mark Zeffiro, our Chief Financial Officer. Dave and Mark will review TriMas' second-quarter operating and financial results in addition to providing an update on our 2010 outlook. After our prepared remarks, we will then open the call up to your questions.

In order to assist with your review of our results, we have included the press release and PowerPoint presentation on our Company website, www.trimascorp.com, under the Investors section. In addition, a replay of this call will be available later today by calling 866-837-8032 with an access code of 1461148.

Before we get started, I would like to remind you that our comments today, which are intended to supplement your understanding of TriMas, may contain forward-looking statements that are inherently subject to a number of risks and uncertainties. Please refer to our Form 10-K and Form 10-Q 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 would like to turn the call over to Dave Wathen, TriMas President and CEO.

Thanks, Sherry, and good morning. We appreciate all of you making some time for TriMas this morning. We have some positive results we look forward to sharing with you today. Regarding the agenda for the call, I'll provide my overview of the quarter and what we see going on internally and externally. Mark will then provide more detailed financial and segment information, and then I'll close with our view of the remainder of 2010. Then we'll do our best to answer your questions.

First off on slide four, we had great results in second quarter with strengthening markets, successful growth programs, and strong productivity results. TriMas' total sales finished up 21% versus the second quarter of 2009, although these levels are still down 10% compared to the second quarter of 2008.

Four out of our five segments achieved double digit percentage sales increases. While Aerospace & Defense's revenues are headed in the right direction, they lagged as expected. Mark will comment on the details by segment shortly.

During the first half of the year, we were able to respond quickly to the many short cycle changes in the supply chain. Our new products and geographic growth efforts are progressing well, and month one of our integration of our bolt-on acquisition to expand lower cylinder scope is on plan.

Excluding special items, Q2 income from continued operations was nearly four times the Q2 2009 level driven by revenue, leverage, and productivity. The difficult cost-out action to 2009 established a new cost base line for our businesses, and our continuous productivity efforts have continued to improve our margins. Due to these cost-out initiatives, we have been able to more than replace the $27 million in bond gains that we had during the first half of 2009 with real operational earnings during the first half of this year. So we have significantly improved our earnings level and the quality of those earnings.

You also know that we are focused on generating cash with a balance between reinvestment in our higher return businesses and debt reduction. Free cash flow in the second quarter exceeded $50 million driven by operating income and our intense efforts to improve working capital efficiency. We are definitely pleased with these results.

TriMas' results were stronger than our plan and stronger than most external predictions. Let me comment on why on slide five. Compared to most economic forecasts from earlier this year, several external risks have not materialized to the extent previously predicted. Commodities like steel spiked up but then moderated. Production costs in our Chinese facilities have increased some, but currency has not been as much of a cost driver as many predicted. Demand has been good and potentially even better than expected in our industrial end markets. And as you well know, inventories have been replenished throughout industrial supply chains during the first half.

While it's not fair to brag about getting help from all these external factors, I do claim that our cycle time improvements within TriMas have allowed us to respond more quickly and to capitalize on these changing external factors.

Internally at TriMas, my message has been, and still is, about speed. We are getting faster implementation, and it shows in our revenue, productivity, and our ability to adjust and mitigate potential risks, all combining for improved top and bottom lines.

I've described this industrial recovery as bumpy with expedites, push-outs, and weaker competitors stumbling or dropping out of the market, all resulting in many opportunities to gain revenue by responding quickly. I know that every plant manager and customer service person at TriMas has many examples of how we are finding smart, creative ways to help our customers with everything from modified lock sizes, temporary overtime to substituting slow-moving inventory to fill short-term demands.

During Mark's and my quarterly operating reviews of each business, we see the status of all of the growth programs we are investing in. Some are ahead, some behind, some modified, as you'd expect, but in total, our new product programs are achieving our growth projections and have been exceeding our margin expectations.

To give you a few examples of our commercial successes this quarter, at Rieke, what we call [kappa], business, we've had the opportunity to bid on specialty dispensing businesses from some potentially large customers that we had never done business with before. At Arrow and Energy, we have now sold almost $1 million worth of product for application and refueling systems at refueling stations for compressed natural gas market and other high-pressure CNG applications. This business did not exist a year ago.

And Norris Cylinder has been building cylinders for new applications like hydrogen cylinders for backup fuel cells at cell towers. We have many growth opportunities like these across our businesses, and we keep making progress on these.

I've also previously described our 150 productivity projects where no cost escapes scrutiny in the pursuit of our ongoing goal of 3% to 5% total cost productivity. The good news here is that we are implementing these initiatives faster and earlier than planned, which is showing in our margin levels. Some of this speed in productivity improvement is being driven by the additional people we added in December to establish our global sourcing reorganization with experts on the ground in Asia and the US to help find better ways to source our incoming materials and to implement leverages across the multiple businesses in TriMas. This was an area where we previously had lots of good ideas, but needed more resources to drive the implementation and these resources are more than earning their keep.

I remain convinced that our TriMas operating model is working as our results confirm. At this point, I will turn the call over to Mark to provide more details on our financial and segment results.

Thank you, Dave, and good morning. Let's start with a summary of our second-quarter results on slide seven. As Dave mentioned, our second-quarter sales were $252 million, up approximately 21% compared to the second quarter of 2009. This increase was supported by growth in new products, our ability to capture additional market share, and signs of increased demand across most of our businesses. Foreign exchange did have a positive effect of $2.4 million on the sales results.

Our Q2 results were much improved across TriMas and better than anticipated. Gross margin in the quarter was 31%, up 700 basis points compared to Q2 2009 and up 240 basis points compared to Q1 2010. Adjusted EBITDA was $46 million, up 67% compared to Q2 2009 excluding those special items. Operating profit and adjusted EBITDA margins improved 560 and 500 basis points, respectively, compared to the second quarter of 2009.

We are pleased with the conversion rate achieved during the quarter, which was aided by top line improvement. We're convinced that the lower cost structure achieved will continue to leverage well as end market demand improves and our growth initiatives continue to accelerate.

Income from continuing operations for the second quarter of 2010 increased 55% year over year to $15.2 million. Our second-quarter 2010 income from continuing operations improved 295% excluding the Q2 impact of $12 million in gains resulting from the retirement of bonds and other special items. Excluding these special items, our Q2 2010 EPS of $0.44 per share increased from $0.11 per share in Q2 2009. This trend is notable as it demonstrates the underlying operating improvements in our businesses, and therefore the quality of our earnings continues to improve.

We are also pleased with our Q2 free cash flow of $51.9 million, a 120% increase from Q2 2009 and equivalent to about $1.50 a share. Our ability to generate strong free cash flow has allowed us to continue to reduce our debt and deleverage the Company. We've also remained focused on the better utilization of assets.

While the results of discontinued operations are not included on this slide seven, I will provide a few brief comments since they're significant during the quarter. In April, we sold our noncore real estate property management business in California for $13 million in cash proceeds, which resulted in a pre-tax gain on sale of approximately $10 million during the quarter.

In addition, we sold a medical product line in May for cash proceeds of $2 million. We remain committed to the medical end market and have added product capabilities and content in both the Packaging and Engineered Component segments to serve this customer base.

I would now like to spend a few moments discussing our margin improvements on slide eight. As you know, 2009 was a year of significant fixed cost reduction and business restructuring at TriMas. We believe that these actions have permanently lowered our cost of doing business and provide sustainable margin improvement opportunities for 2010 and beyond. As I mentioned on the previous slide, our cost reduction and productivity initiatives drove enhanced margins in Q2 2010 compared to the prior year with margins improving over 500 basis points.

When you compare our Q2 2010 margin levels back to Q2 2008, you will note a margin improvement of approximately 300 basis points as we generated almost $4 million more in operating profit in Q2 2010 on $30 million less in sales. Our margin expansion is not a story of easy comparison, but a fundamental shift in our operating model and our relentless efforts to make the enterprise yet more efficient.

Our margin expansion has been supported by our productivity efforts which are embraced by the organization, and even the newest addition to TriMas, the global sourcing organization, is contributing. We are quickly determining what makes sense to centralize and coordinate. Two real examples of recent successes. We have recently signed a PAN-enterprise MRO purchase contract, which will result in an annual savings of approximately 10% and provide better service requirements and terms.

On the same note, we pooled the purchase of industrial laser cutters for our businesses and saved $1 million by jointly purchasing. As we aggregate the total spend on all cost categories our businesses face, we can achieve volume discounts which otherwise could not be achieved at the local level. We are also working with each business to source more efficiently. This effort continues to expand and the list of opportunities are being executed.

Moving on to slide nine. In addition to profitability improvements, we're also improving working capital to maximize cash flow. In Q2, we improved working capital as a percentage of sales by 250 basis points compared to Q2 2009. All of our segments improved as compared to our prior year and four out of five segments improved compared to Q1 2010. Overall, despite the significant increase in sales, we were able to hold inventories relatively flat with Q1 2010 levels. We are pleased with these results, but we believe there is more work yet to be done.

On slide ten, we ended the quarter with approximately $500 million in total debt, a decrease of $14 million compared to year end 2009 and a decrease of $47 million compared to a year ago. As of June 30, we have $190 million of cash and aggregate availability under our revolving credit and accounts receivables facilities. As a result of our successful debt refinancing in Q4 2009, we do not have any meaningful maturity payments for three years. We are pleased to have ended the quarter with leverage ratio of 3.4 times, the lowest level we've experienced at TriMas.

This morning, we filed a Form 3 -- excuse me, Form S-3 shelf registration statement for the registration of up to 5 million shares of common stock. The filing remains subject to SEC review, and, as you know, companies can't talk in detail about these filings. What I will comment on is the fact that we do not have any commitments or current intention to issue equity at this time. Filing this shelf registration is intended to give us greater flexibility to respond to capital markets and strategic opportunities as they may arise and is another example in our efforts to enhance our corporate preparedness and response times.

At this point, I would like to shift gears and review our performance by operating segment beginning with packaging segment on Slide 12. All of my segment discussion will be excluding special items to provide you with a better understanding of the underlying business trends.

Packaging sales for the second quarter increased over 25% compared to Q2 2009. This is driven by continued growth in new specialty dispensing products and improved demand in our industrial closures. We continue to get good traction launching new dispensing products into growing end markets such as medical, pharmaceutical, and personal care, an area where we have demonstrated a 35% CAGR over the last ten years.

Operating profit increased 53% compared to a year ago resulting from higher sales and cost reductions. Margins improved substantially with operating margin improving 520 basis points to 29.7% compared to 2009. Our key initiatives for this segment remain product extension and geographic expansion.

Moving on to slide 13. Energy sales increased 25% with significant margin enhancement in Q2 with both business units contributing. Operating profit margins improved 460 basis points. During Q2, Arrow saw growth resulting from the return in demand, as well as continued product expansion into [well-site] content and the launch of natural gas compressors for the vehicle fueling market. As demand returns, we feel we are well positioned to take advantage and gain additional market share with some of our newer products such as meter runs, compressors, and engineered solutions. Our technologies and products are also well positioned to capitalize on shale and natural gas opportunities.

At Lamons, we continue to experience an increase in sales during the quarter as the refinery turnarounds and maintenance activities were more at normalized levels. We are seeing the positive contribution of our new Lamons branches opened in Rotterdam and Salt Lake City. We will continue to expand our customer regional footprint at a faster pace as we remain committed to expanding the gasket business in support of our global customers and grow with them in new markets.

On slide 14, Aerospace & Defense sales declined 6% in Q2 2010 compared to Q2 2009 representing the Lean inventory levels currently held at Aerospace distributors. During the quarter, we did see some stabilization of demand and backlog levels. While our profitability was impacted by lower sales volumes and lower absorption of fixed costs, it was also affected by the mix of increased sales from the defense business at lower margin level related to the BRAC contract.

While we will continue to focus on improving this segment's results, we feel we are uniquely positioned to take advantage of the trend to build aircraft out of composite structures and our plan to support increases in our content per aircraft.

Our improved cycle times, service levels -- excuse me, service level commitments, and product innovations are aligned to support our customers when demand improves. We firmly expect that this business will rebound to its historical return levels.

Moving on to Engineered Components, which is slide 15. This segment was most affected by the industrial recession in 2009, and we experienced significant signs of improvement during the second quarter. Our sales increased 56% compared to Q2 due to stronger demand in all of our businesses within this segment.

Operating profit for the quarter improved with margins increasing 1,460 basis points compared to the second quarter of 2009, illustrating our strong conversion and effect of our productivity initiatives. Longer term, we will support customer needs by developing new applications of our products and focused regional expansion.

During the quarter, we opportunistically purchased assets to complement our cylinder business from a competitor whose parent company was in bankruptcy. This acquisition has significantly improved Norris' market position by expanding its product portfolio and capabilities to support their customers. We are in the early days of integration, and we are pleased with the initial results.

On slide 16, Cequent sales were up 18% for the quarter versus Q2 2009 resulting primarily from sales improvements in our North American performance products and Australian-based businesses. We've seen continued momentum and demand remains robust. Cequent was the most positively affected by the profit improvement program in 2009 and as such has seen significant changes in its profitability levels. Cequent experienced significant improvement in margins during the quarter with operating profit more than triple its Q2 2009 level. As noted, we were able to improve operating profit margin by 830 basis points. Their efforts to strengthen the business and leverage our strong brands have made this business a stronger market competitor. Their focus on productivity and brand and product leverage will continue.

I'll close my comments with a reminder of our 2010 playbook on slide 17. While our playbook remains consistent, we added a self assessment on how we feel TriMas is performing. In summary, we're ahead of our expectations in a vast majority of areas, yet there are always room -- there is always room for improvement.

Our operating model is working, and our team is executing well. Our first half 2010 results demonstrate that we have many different levers to generate EPS growth. Our focus on speed will allow us to capture incremental sales as demand returns and the economy improves. We have more than 200 projects underway, which will support our product and regional growth efforts and are all funded by the productivity initiatives. We are excited about the future of TriMas and our ability to deliver on these plans.

That concludes my comments. Now Dave will discuss our expectations for the remainder of 2010. Dave?

Thanks, Mark. So now we'll turn toward the future starting on slide 19. Based on our second-quarter results and current outlook for the balance of 2010, we are substantially increasing our full year outlook for 2010. We now expect to achieve full year 2010 sales growth of at least 10% compared to 2009 with operating profit up 200 basis points to 250 basis points. We have also increased our free cash flow outlook from a range of $40 million to $45 million to a range of $65 million to $70 million.

As a result, we expect 2010 earnings per share from continuing operations to range from $0.90 to $1.00 per share, an increase from our previous guidance of $0.65 to $0.75 per share and as compared to $0.43 per share in 2009 excluding special items in all periods. We remain cautious about the economic outlook yet remain confident in our ability to navigate these uncertainties as demonstrated by our performance in the front half of 2010.

Moving on to slide 20, we've included some considerations to assist you with your understanding and analysis of our outlook. As a reminder, TriMas does traditionally experience some seasonality largely driven by the Cequent businesses resulting in less sales and profitability in the back half.

We expect to see this traditional seasonality in 2010 but did not see it in 2009 as our profitability was more heavily weighted to the back half due to the beginning of the economic recovery and increased demand in our earlier cycle businesses of Packaging & Cequent.

We also completed the majority of our large restructuring projects associated with our profit improvement plan in Q3 and Q4 2009 which drove large margin increases over the past several quarters. I have also shared that we are carefully increasing resources and investing in growth throughout the year, and our 2010 productivity is proving to be front-half loaded. And while external risks did not materialize to a large extent in the first half, they haven't gone away. We, of course, consider all of this as we develop our outlook for the year.

Slide 21 is a reminder of our long-term strategic aspirations that guide our many day-to-day decisions we face in our businesses. We believe that our long-term future is bright. Our focus on ongoing productivity and cost reductions will allow us to drive double-digit earnings growth as we grow the top line by a percentage in the high-single digits.

While our second quarter results feel good and confirm our ongoing progress I remain convinced that we are facing a period of slow growth from an overall economy and potentially an end market perspective. We, therefore, have to increase and reinforce our efforts to grow. As our baseline performance and productivity and return on capital shows, our TriMas operating model is achieving the results we need. We will carefully allocate more resources toward future growth. Underline "careful" because strong margins and cash flow remain vital to us. And in summary, these strategic aspirations are not just about 2010. These aspirations are forward looking into 2011 and beyond.

As I reflect on my 18 months as CEO of TriMas, I am amazed by the number of changes that our team of people have successfully implemented in a relatively short period of time. We have created a stronger operating model driven by structured repeatable processes, instilled a culture of ongoing productivity, and have increased our efforts on the execution of our growth plans making progress towards all of our strategic aspirations. We have a talented team across the businesses with increasing collaboration every day. TriMas is stronger than we have ever been, and we intend to deliver to long-term value to our stakeholders.

Now we'll gladly take your questions.

Thank you, ladies and gentlemen. (Operator instructions.) Our first question comes from Tom Klamka with Credit Suisse.

Good morning.

Good morning, Tom.

Good morning. A couple questions. The results were strong pretty much across the board, year over year and sequentially. The biggest difference sequentially from Q1 to Q2 is Cequent, I guess, because of seasonality. Can you talk about on the Cequent side -- obviously a lot of the earnings is probably out of cost control. But on the demand side, is this a typically, I guess, in Q2, a stocking quarter or is this more of a sales quarter? And what are you seeing as far as inventory flow-through off -- out of distributors and out of retailers?

Tom, of course, the answer is some of both. We are very attentive to trying to sort out is the increased demand an inventory restock or is it real pull-through? In the operating reviews and with talking with the folks on the front lines, it's substantially pull-through. This is a business where the end sellers don't want to have inventory and if we're fast enough filling orders, they count on us to be their order filler. And the outcome for me of all that is that it feels like end market demand pulling through.

Okay, and are you running the business differently now as far as the amount of Cequent stock that you maintain? And can you turn around orders quicker or are you (inaudible)?

Hey, Tom, this is Mark. The way in which this business is really integrated -- it's back room and it's front room and to a large extent has allowed them to be able to react more quickly to customer demand. The fact of the matter is we are on a continuous process here and I don't mean to use a buzzword, but this Lean effort is giving them better cycle times and their ability to serve customer needs in shorter cycle times. So, yes, that's exactly what we've done, and we've reduced the inventory, frankly, on a what our view would be a permanent basis with yet more productivity ahead of us from a working capital perspective.

Tom, we've spent money and spent time on the ordering systems on the front end. We have also in our stocking warehouses we've reconfigured how we ship. We've put new order processing systems and picking systems. I mean, all the things you do to get faster. And I -- this is -- I say this over and over, but I'd always rather compete on speed than price, and this business is taking that to heart, to be the fast order filler.

Okay. And then as you look at the business as it stands now, and obviously, the environment's tough, but you guys have generated good cash. You're down below four times levered. Now you're looking at generating a big chunk of cash flow from the business and then you have this amount of equity filing out there which is roughly $60 million if and when you decide to execute on that. What's sort of the strategy now going forward? What are your leverage targets? And some companies get to this position where they kind of deleverage and say okay now it's time to go out and start making a lot of acquisitions. How do you balance that?

Hey, Tom. Our strategic aspirations are clear, and we remain committed to getting to a two times levered scenario. And for reference purposes, our leverage of 3.4 times is, indeed, the lowest we've ever seen at TriMas, and we are committed to driving that yet further down. The fact of the matter is we're going to continue to generate great cash flow simply because of the changes we made supply chain wise as well as the operating processes within the business units. And that free cash flow, of course, will be used for the best and the highest use. But one of our core strategic aspirations will get to a leading digit 2 on our relative leverage.

And would that include after any sort of acquisitions?

Sure. Absolutely.

Tom, the -- I remain the same on acquisitions. There are bolt-on opportunities that leverage up very nicely for us, and we will pursue those in the business segments that it makes sense in. It's not time for us to be doing something dramatic. There may come a time someday, but [I mean our] strategic aspirations are what we've got in sight and that is very high priority for us.

Excellent. Thank you very much.

Certainly.

Our next question comes from Rick Hoss with ROTH Capital.

Hi, good morning.

Good morning, Rick.

So, Mark, can you give me an appreciation for the permanent improvement in, I guess, just the whole organization operating margin? Are we 300 basis points above a comparable period? Four, five? What would be your estimated permanent improvement at this -- today?

What's interesting is that I'd refer to two things that we talked about there, Rick. Number one is our guidance is for a year on year improvement of 200 basis points to 250 basis points. But your question also relates to previous periods, and I'd reflect on 2008 being a watermark level for TriMas and in Q2 we were 300 basis points better than that. So, those, for me, are the kind of brackets that I think are real.

Okay. And then in the Cequent business, that was -- the biggest surprise to me is the profitability from this and the rate at which the profitability of it has been achieved at this point. And I think we've talked about that business being a 15% maybe to 18% operating margin. Does this go higher? Could we get to 20%?

Hey, Rick, what I would say is this, is that recognize the seasonality of this business and Q2 is the high watermark in terms of margin rates. So, long term I still think the 15% to 18" is something that we strive for, but, again, Q2 is, indeed, the high watermark for us. I'd also say thank you, because these business unit teams have been focused really hard on driving relative efficiency in the businesses and it's good to see people recognize that.

Right. Okay. Okay. Thank you.

Our next question comes from Joe Box with KeyBanc Capital.

Hey, good morning, everybody. Nice quarter.

Thanks, Joe.

Thanks.

At your analyst day back in May, you talked about operating margins expanding at 80 to 120 basis points per year kind of driven by your productivity programs. With your new guidance recognizing 200 to 250 basis points of expansion this year, how should we think about the pace of margin expansion next year relative to that 80 to 120 basis point target?

Joe, what I would say is this, is that it kind of relates to a little bit of what Rick Hoss from ROTH just asked. And I'd say it this way, is that the reality is I think we've achieved our productivity earlier in the year this year as Dave commented. But 200 to 250 is the guidance that we're looking at right now. And the ongoing improvements, we're still going to be focusing on 3% to 5% total cost of productivity which will be used to fund, of course, margin expansion, but also the needs to continue to fund our growth initiative, so 2010 is 200 to 250.

Okay. My next question's on the Aerospace business. If you go back to 2008, you posted top line of $95 million and an operating margin of 33.7%. Given some of the costs and productivity measures that you've taken over the last year or two, can you talk about the top line level that you might need to see in order to get back to that 33.7% operating margin?

Yes. The -- we can get there on lower sales than it took in 2008 exactly for the reasons you say, because of cost out. We are in a time of heavy development work for all the new composite aircraft coming and all that sort of thing, and I am not of a mind to cut that back. And so, you're seeing us right now being willing to invest for the future and tolerate a little lower operating profit at the business. And the rest of the businesses are stepping up so we can do it. I mean, the takeaway is yes, at lower sales rate we can hit the same kind of operating profit levels. I've said it before though, everybody loves businesses with these kinds of margins and this isn't a business that's about driving margins up. It's about getting the top line going, and we're on that track.

And Joe, if you're to look at EBITDA for the quarter still at 25 point -- (inaudible) 26% I think is the rounded number here -- the fact of the matter is it was more punished as a result of the mix of sales and the BRAC contract. So I tell you that the core fasteners business -- it still remains very healthy and what I would say is that it will rebound as it leverages up very nicely.

Okay. Final question for you here on your senior subs that you have outstanding. Do you have anything remaining outstanding on your 9.75 notes? And if not, what would it actually take to call the 9.875 notes?

Well, the 9.75 is our current structure, so that would be the entire, if you will, capital structure that we have in place right now with the senior subs. And the 9.875 are totally liquidated at this point.

Okay, and can you talk about that and what it would take to actually call the 9.75 notes then?

Yes. The 9.75 notes we have two alternatives here and they're both, obviously, part and parcel of the credit agreement. Firstly, we do have the traditional equity claw for -- I think it's 30% of that amount that we could do. And we have a limited -- to a limited level here we could actually buy things on the open market. Not material in the grand scheme of things. The broader issue is that this structure has -- it's a make-whole provision for four years, which has about 2.5 years left on it before we would be able to aggressively get after it.

Great. Thanks for your time, guys.

Certainly.

(Operator instructions.) Our next question comes from Steve Barger with KeyBanc Capital.

Hey, good morning, guys.

Good morning, Steve.

Good morning.

I'm going to try the consolidated margin question from a different angle. When you think about your operating margin sensitivity to the top line, if you can continue to grow revenue in a double digit rate over the next few years and you continue to successfully execute on productivity and share initiatives, does this become a consolidated annual operating margin in the mid- to high-teen range two or three or four years out?

Steve, the strategic aspirations that we've got would lead you to that conclusion, is we expect our EPS levels to show better growth rates than that of our top line. So you're not -- I mean, you're within a row of apple trees if I were to run the math.

Yes, okay. That's great.

Let me remind you. I mean, we take -- we put strategic aspirations in front of ourselves for a reason and we like to think in terms of high-single-digit top line growth is what we can generate. I'd love it to be double digits, but I like to plan the business around that kind of a rate, and we'll see what goes on in the economy.

Yes, fair enough. And I hear what you're saying about some of the risk of the near term recovery. And I guess in that context if revenue stayed flat in 2011 and you didn't do a secondary, is there any reason to assume you shouldn't be able to meet or beat the current free cash flow guidance of $65 million to $70 million?

That's a great question. What I would say is this, is that our free cash flow is $65 million to $70 million right now. It should be a repeatable basis for us.

In a flat revenue environment?

In a flat revenue environment.

Okay. That's great. And last question, as you talk to your operational people, which of the listed external risks that you have there on the slide are the most real to you? And what area should we watch for the most positive upside if the reality is actually more benign as we think about this in retrospect?

Well, the thing that hits the fastest is inflation in commodities. We use a lot of steel. We use copper, all those kind of things. And they tend to hit pretty fast. And we're pretty decent at pricing, but that could probably hit us the most. We are -- we have been concerned for a while about the cost position, the total cost position, of some of our facilities in China. We are making sure we've got mitigation for that, the trigger to pull to work on it, but that would also take a while, too. So, I think top of mind it's commodity inflation and it's some big currency swing that really hits us out of Asia. I don't call those -- those aren't killer kind of things. They're just what do we have to keep our mitigation on the front burner to make sure they don't hurt us too bad.

Right. Well, and to the commodity question, you've got a decent amount of cash right now. I think steel prices have been fluctuating a little bit with some downward volatility. Are you using any cash to lock in a forward buy or what's your relationship with the vendors right now? Are they allowing that or is that tough to do?

Well, you know. You know the answer. They resist it for all the same reasons. We -- our global sourcing organization added a lot of horsepower in that whole area and we're working on what can we do to temper how far it can go.

Yes, I would add to Dave's comment there that our businesses range from buy contracts that are 90 days to more on a 30-day lead basis just simply because of the types of specialty goods that some of those business units buy. So, I'd add that in terms of your perspective there, Steve. And to answer your question precisely on how we use cash to lock in forward, the answer is no.

Okay. All right. I'll get back in line. Thanks very much.

You bet.

Our next question comes from Walt Liptak with Barrington Research.

Hi, thanks. Good morning, everyone, and great quarter, guys.

Hi Walt. Thanks, Walt.

Thanks, Walt.

A lot of my questions have been asked and answered, so I've got a couple of nits. I thought it was a great quarter, so I don't want you to take it the wrong way. But I guess the first is a follow-up. In the Aerospace segment, it looks like it's going to be down for the year. Are you expecting any sort of a turn in the back half? Or when do you think either the comps or the demand levels are going to turn more positive?

It feels like back half, and the -- we're all watching the composite aircraft build rates and Boeing and all that. And while they seem to be delaying, it is starting to pick up. And that will cross the line for us we think in the back half.

Yes, the -- I mean, we, obviously, have the similar kinds of external input that, Walt, you have access to. The (inaudible) fair was a very positive outcome, but then again it was a fair -- not necessarily orders and demand this month. So, I tell you that the back half is where we expect to see -- to build on the stability and the backlog that we saw in Q2.

Okay. Where do you think you'll end up for the year? Are you going to be flat year over year or up year over year for the full year?

We haven't gotten there in terms of talking about specific segments in terms of our expectations, but I will tell you that it's the toughest business that we're in right now, and I'd leave it at that.

Okay. All right. Great. On the balance sheet, there were some accounts that moved around and specifically the deferred income tax liability. What was that related to? And the tax rate was a little bit lower than I expected. What kind of tax rate should we use for the full year?

Tax rate full year basis 37 to 39%. What's interesting in the quarter, you'll see a bit of a different classification on the balance sheet there, Walt, in terms of current and long-term position with regards to our deferred tax asset. And that's driven predominantly by the fact that we're making more money sooner than we expected. So we're actually burning through this deferred tax asset at a better than anticipated rate simply because of the performance of the Company. Now, to put that in context, when do we burn through it? It's a 2011, 2012, early 2012 kind of time period.

Okay. All right. Got it. And the depreciation was up sequentially from the first quarter. What's the run rate that we should use for the full year?

In terms of depreciation, I'd look at it this way, is that the amount that we incur on a full year basis is circa, I think it's $18 million, about 7 -- yes, let's call it about $16 million in a full year basis.

Okay. For full D&A?

Yes.

Okay.

For D really, depreciation, not the amortization of goodwill or the intangibles.

Okay. Okay. Great. All right. Thanks, guys.

Certainly.

(Operator instructions.) Our next question comes from John Sykes with Nomura.

Yes, hi. Good morning. Quick question. I'm just trying to get a sense in terms of your historically, also prospectively -- can you break things down globally? I know in the past you count it as kind of export sales, but can you give me a sense globally where the -- or just in general where the growth is coming from as it relates to your business internationally?

Yes. Of course, we have a fairly large business headquartered in Australia that sells in the -- that area of the world. We've got a pickup going on there partly because the Australian economy has been strong, but also several big product programs that have -- that really affected what we produce in our Thailand plant and that's on a ramp up. So we're seeing growth there. I happen to have just gotten back from Europe and was in several different businesses. And Europe has -- in spite of the news, the folks in Europe feel pretty good. And so we're -- and that applies in our businesses. Our European revenues are staying -- have grown pretty well both with the economy being okay and product programs.

Past that, we've had a few pretty good sized export orders into Asia, into some refinery kind of applications out of the energy businesses that have been real strong for us. So I don't know if I'm giving you the answer you want, but we're -- I feel -- I mean, our non-US businesses have both held up well and are growing well.

Let me tell you what I'm driving at. Some of the numbers today, economic numbers, obviously, weren't that great, right? And I -- what I'm trying to really drive at here is if we are sluggish here to, say, down, okay, can your export sales and the growth in those respective countries sort of offset that? I'm not talking about a magnitude of double digits here. I'm talking more like the magnitude of, say, down single digits here. Could you still see overall growth because of the export business that you have?

My broad answer is yes. I mean, we're -- none of us are in control of what goes on in the economy. And we're operating, and I've said it before, we're operating like -- it feels like flat markets and even a percent or two up feels pretty flat. And so that's why we're opening new branches in the energy businesses outside the US. That's why we're adding -- in our engineered components businesses, we're adding more metric products than we had. So the answer to your question is we are concentrating on the markets that are growing faster, and those tend to be markets outside the US. And so like a lot of companies, we are concentrating on those and our -- if you ran through our growth programs, they -- those are tipping towards those marketplaces. So, I feel -- I mean, we've got to run the business to do well regardless of what goes on in the economy. And that's -- so, we are doing the things that give us a little bit of top line regardless. We'll keep getting productivity. We'll keep getting growth. We'll keep getting cash flow.

Okay. And just another question, you guys had mentioned that your targeted leverage long term is two times. What I -- can I extrapolate from that that the excess cash flow that you generate would go for debt reduction?

Well, part of our credit agreement requires an excess cash flow sweep, so you're going to see that happen as a natural outcome. But the fact of the matter is the best and highest use for the cash we generate will be the way in which we operate. And we're going to see a natural delever as a result of that because the -- there are much available to us right now in terms of variable borrowings that we have in place.

Okay. All right. The revolver, is that drawn or are you guys out of that now?

There was nothing drawn on the revolver at the end of Q2.

Okay. Great. Thank you very much. Appreciate it.

Certainly, John.

Our next question comes from Beth Lilly with GAMCO.

Good morning.

Hi, Beth.

Good morning, Beth.

I have a couple questions. I wanted to -- I apologize if you already answered this, but I got on the call a little bit late. I wanted to just drill down a little bit into Cequent. And as you look at the three different pieces within Cequent, where -- can you talk about how just how they were doing, Cequent performance products, Australia and retail, and I'm specifically interested in the retail piece. How did that do in the quarter?

We -- all three of the divisions as we run them did well in the quarter. The retail business, actually as you know, actually grew last year and has held on to that this year. And that was the place that -- because a lot of that product comes out of Asia, that was the place we were kind of concerned about what might happen with currencies and all that. Since that didn't happen, we wound up with a strong quarter in that business. The top line growth has come out of the performance products in the Australian business, though, in 2010 so far.

I would add just a little bit more to Dave's comment there, Beth, that the retail business that we call consumer prod- -- the Cequent consumer business, is, indeed, to reflect a bit on what Dave just said was had a basically flat-ish year in 2009 despite market trends that were down double digits. And they've shown a propensity to hold that share gain that they had in place. And we've been augmenting through growth (inaudible) elsewhere.

And if you look at the margins on an operating basis, I mean, the improvement is phenomenal on a year-over-year basis. Is that 13% operating margin that you generated this quarter sustainable? And I think you talked about even getting it higher. Is that correct?

That's correct. Beth, when you think about this business, you need to think that it's very much front-half loaded versus back-half loaded just due to the natural seasonality of the product sales. Q2 is typically the highest margin rate for the year, and as such, our goal here is to get this to kind of a 15-ish kind of EBITDA level on a full-year basis. So, we've got more work to do, but clearly something that we're working on.

Okay. 15% EBITDA on a sustainable basis you said?

On a full-year basis. That's kind of where we're headed, yes.

Okay. For 2010?

For 2010, no. It'll be less than that, and it'll show sizable improvement across the year.

Okay. Okay. Great.

And, Beth, you didn't ask, but I've got -- I do have to tell you that the horse race we've got going on between the businesses internally is about return on capital. That consumer business is doing great.

They're winning the race right now?

Well, internally, because of their ability to hold margins and keep turning inventory fast, they're doing great.

Okay. Good. Okay, and then my other -- oh, one other question then. So, are there more costs then that you can take out on Cequent or are you done?

No. There are clearly more costs. We did -- we had the restructuring. The big catch-up stuff we did in '09. There aren't more of those kinds of things, but continuous productivity is about finding constant changes in design, our manufacturing footprint. It's new machines, new processes, lean techniques, etc., and we've got a nice, ongoing process. Plus, we just added a global sourcing organization to help us get leverage across all the businesses, and so, no, it'll continue.

Okay. Okay, my second question is on page nine, your graph of working capital as a percentage of revenues, you've driven it down to 15% and as you look out over the next three years, where do you think that number can go?

Beth, we've targeted to run this business at somewhere between 13% and 14% on a percent of sales basis, and that's -- I don't think we're done as to where we are right now, but we've gotten there a heck of a lot quicker than we expected.

Yes. Okay, so, we're not going to see the dramatic improvement in the next couple years that we've seen recently?

I'd say that it was a bit of a step down in terms of 2009. We did it -- we had that as a bit of a forcing function to get a bit healthier and now what we're trying to just do is make sure we stay on track.

Okay. Perfect. Great numbers, guys. Thanks.

It's continuous. I mean, we're keeping after every little tactic and detail.

Yes. Okay. Terrific. Thank you very much.

Our next -- I'm sorry?

Please go ahead.

Okay. Our next question comes from Yvonne Varano with Jefferies.

Thanks.

Good morning, Yvonne.

Good. Just on the Cequent business, I know you alluded to a few times that it steps down in the back half of the year typically. Do you have a percentage that it usually drops off in 3Q over 2Q and 4Q over 3Q?

I don't have those numbers immediately ahead of me, Yvonne. But you'd expect that the kind of liquidation that we saw in Q2 was more so a traditional kind of Q3 liquidation in terms of cash flow. So I wouldn't expect to see a margin -- a sizable downtick in Q3.

In this year from Q2?

Correct.

Okay. And then maybe some drop off in 4Q, though, again on a seasonal sector?

Exactly. Exactly. That's the way to think of it.

Okay. And then just on the Packaging business, I think in your comments you mentioned something about really being able to bid into some new customers you haven't seen before. Just help me understand, is that a competitive change in the environment or what's happening there that's allowing you to do that?

It's really two things. We did a -- we bought out of bankruptcy a set of assets that put us into another product line of some fairly technical small dispensers two years ago. That has ramped up very well, and it added a product line that got the attention -- we're fuller line now. So, that was maybe the entry point. And then there's been some stumbling by competitors. And it gives us an entry point and, believe me, we jump all over it when we get the chance to do that. So it was the -- it was adding the product line, which we happened to do through buying out a set of assets, and then a stumbling by somebody else. And you know how it is. You jump on that stuff as fast as you can, and so far so good.

Sure. Okay. Great. Thanks.

Certainly.

I'm not showing any other questions in the queue at this time.

Excellent. Hey, there is one comment that I did respond to in terms of depreciation for those that are on the call, and the number I used was 16 to 18. It's more appropriately stated in terms of low 20s in terms of depreciation.

I'll close with a comment. I am proud of the people at TriMas. These are tough times. We've gone through some difficult things. All the hard work, all the changes in process, the way we run, is coming through and showing in our results. and so, it's a -- a business is about its people, and like I say, I'm proud of the crew. We've done well, and we will keep getting better and faster. So, again, thanks for all your attention. We appreciate your support. That's all.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.