TriMas Corp (TRS) 2011 Q1 法說會逐字稿

Welcome, ladies and gentlemen, to the TriMas Corporation first-quarter 2011 earnings 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 call is being recorded.

I would now like to turn the conference over to your speaker, Sherry Lauderback. Please go ahead.

Thank you and welcome to the TriMas Corporation first-quarter 2011 earnings call. Participating on the call today are Dave Wathen, TriMas's President and CEO, and Mark Zeffiro, our Chief Financial Officer. Dave and Mark will review TriMas's first-quarter results as well as provide some additional details on our 2011 outlook. After our prepared remarks, we will then open the call 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 1526333.

Before we get started I would 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 a number of risks and uncertainties. Please refer to our Form 10-K 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's President and CEO.

Thanks, Sherry. Thanks to all of you listening for your interest in TriMas. All of us here at TriMas are happy to report another quarter of strong results. We pursue continuous improvement of our operations, our market reach, our competitiveness, and our work environment; and strong business results reinforce that we are making good progress.

That said, we intend to improve even more going forward. Our agenda is that I will provide my overview of the first quarter; then Mark will discuss financial metrics and some details by segment; and then I will finish by discussing our improved outlook. Then we will gladly take your questions.

Let's move on to slide 4, our overview. First-quarter sales are up 22.5% versus a year ago. This was above our internal forecast going into the quarter.

Market demand increased for most of our products, but the bulk of the growth was due to our ramped-up efforts to deliver new and improved products, our geographic growth actions, and our focus on some targeted share gains. The revenue generated by the two acquisitions we made in 2010 was better than we had planned as well.

We expect strong revenue growth for the remainder of the year, but not at the 20-plus-% level, as comparisons get tougher through the quarters. With that said, we are definitely encouraged by the results of our increased investments in growth programs.

EPS doubled versus fourth-quarter 2010 on high-quality earnings growth. Our overall operating profit margin for the quarter was down 30 basis points due to a faster growth of a couple of our lower-margin businesses, our investment in growth initiatives for the future, as well as our decision to delay some price increases to go after market share where we see some competitor weaknesses.

We are certainly seeing commodity and freight inflation and have raised selling prices accordingly. But I am also willing to work the timing of a price increase in exchange for share gains where we see that opportunity.

We continued our focus on the basics of productivity, cash, and debt reduction. The next slide lists some of our going-forward activities.

But first a reminder. TriMas now has a whole new set of tools for profitable growth.

During 2009 and 2010 the team here has implemented actions resulting in a permanently lower cost structure, higher capital turns, improved liquidity, better geographic coverage, greater capacity for new product development, and overall faster cycle times. First-quarter 2011 sales and EPS results show what we have gained, with the potential for even more.

Some current highlights are listed on slide 5. Our TriMas businesses have good pricing power. We focus on hard-to-design, hard-to-produce products that our customers need.

We've needed to utilize our pricing power to offset commodity inflation, freight cost increases, and higher costs both in our own plants in China and from our plants in China where a few of our businesses source products. As I mentioned, we are also capable of using pricing to gain share where that is [use] for us.

Earlier in the quarter, several of us across the management team were in Brazil for a week, pursuing new business opportunities, and kicked off several initiatives to grow TriMas sales there, similar to the Asia business development work we did last year. We are definitely encouraged by these recent trips.

Our Global Sourcing Organization continues to contribute well. Our timing with this addition last year was favorable, since we now have more horsepower to put to bear on controlling input costs.

On productivity, I have recognized since I have been here at TriMas that we were a little behind the premiere industrial companies on such tools as Lean initiatives, kaizen events, attacking cost of quality, and similar tactics. We have recently added some key operating people with deep experience in several businesses and established some multi-business initiatives to pump up our future productivity.

We are also keeping after the basics. Mark and I have just finished our quarter travels to meet with each business's leadership teams to review operations and strategic plans for the future. I also held skip-level meetings, saw plant floor Lean initiatives, and was able to participate in a celebration of 1 million hours worked without a lost time accident at our Norris facility in Texas, which I am proud to say is the third TriMas facility to achieve this in the past year.

Overall, you can tell that I am encouraged by our operating results and our potential going forward. Now I will ask Mark to share some additional financial and segment information. Mark?

Thank you, Dave, and good morning. Before we move to the financial results I would like to reflect on our start to the year. Q1 represents our fifth quarter in a row of sales and earnings growth and another quarter in which we outperformed our internal expectations here at TriMas, making for a good start to 2011.

Our structured operating model is working, and we continue to capitalize on the opportunities in front of us and mitigate the risks we face. Let's start with the summary of our first-quarter financial results on slide 7.

Our first-quarter sales were $270 million, an increase of over 22% compared to the first quarter of 2010, with double-digit percentage sales increases in several of our segments. This growth was the result of new products, new markets, the successful integration of our 2010 acquisitions, gains of additional market share, and continued demand improvement across our businesses, but especially in our industrial products businesses.

Our gross profit and operating profit increased 18% and 20%, respectively, compared to Q1 2010. During the quarter, our productivity savings continued to fund growth, and in this case also offset commodity inflation.

We still experienced a slight margin decline primarily as a result of sales mix of our segments, as the lower margin segments experienced significant sales growth during the quarter. Continuous productivity remains a priority, and we are convinced that our lower cost structure will leverage well as our growth initiatives continue to accelerate. I will comment a little more on our margins in a few slides.

Our Q1 2011 income from continuing operations and EPS both improved approximately 100%. First-quarter 2011 income from continuing operations increased to $11.8 million, and diluted EPS increased to $0.34 per diluted share compared to $0.17 per share in first-quarter 2010. While the increased sales volumes contributed to this increase, our interest expense reduction of approximately $2 million also contributed during the quarter.

We used $34 million in cash during the first quarter to support our 22% sales growth and the future growth we expect. This was in line with our expectations, driven by our top-line growth and the seasonality we experienced.

We believe we have strong cash flow businesses even in periods of significant growth. We still expect to generate $50 million to $60 million in free cash flow for the year. In addition, we reduced our debt levels compared to a year ago and managed a stable debt level compared to year-end.

In an effort to provide you additional clarity on the quarterly financial results, we have added a couple pages to our discussion this quarter. I would like now to spend the few moments discussing our Q1 growth on slide 8.

As you can see, the majority of our growth this quarter came from Cequent North America and Engineered Components, which are our lower gross profit segments. We saw the benefits of our growth initiatives, some competitors stumbling, as well as additional market recovery in several of our businesses. The acquisitions completed during 2010 also contributed $9.4 million to this growth.

Packaging and the Aerospace & Defense segments did not show their full growth potential. For example, Packaging would have increased 10% if you were to exclude the $3.7 million of H1N1-related sales and Q1 2010. If you remember, that was in reaction to the swine flu virus that did not recur in Q1 of this year.

And the trends we are seeing in the Aerospace & Defense segment, which is our latest cycle business, are all positive. Overall, we believe our businesses have the right plans in place to achieve growth and there is plenty of upside for the higher-margin businesses from these growth efforts.

On slide 9, it is just a reminder of our key growth initiatives for 2011 across all of our major businesses. We have seen some of the positive results this quarter, but many of these initiatives are just starting to bear fruit.

Moving on to slide 10, a discussion of our operating profit margins. As I have already mentioned, our sales growth and mix of those sales during the quarter impacted margin rates. As for commodity pressures, like many of our peers we have faced rapidly rising commodity inflation, especially in steel and resin. We have taken price actions in all of our businesses to offset these increases, but the full run rate effect is not yet in effect in the financials.

Our businesses are executing on their productivity and Lean initiatives, generating savings to fund our investments in future growth and productivity and also helping mitigate the commodity cost pressures. We remain committed to expanding our margin levels this year as well as in the future.

Moving on to slide 11. Our focus to improve our turns and working capital as a percentage of sales continues to be realized. As you may recall, we ended 2010 with record low levels of working capital, and we have continued on this path in 2011.

We improved operating working capital as a percentage of sales with a Q1 2011 ratio of 17.3%, compared to 17.5% in Q1 2010 and 18.1% in Q1 2009. We are pleased with these results and believe our long-term target remains at approximately 13% of sales at year-end, although we do recognize that significant growth and global expansion does add complexity to our supply chain. Improvement here continues to be a focus across the Company.

On slide 12, we ended the quarter with approximately $496 million in total debt, a decrease of almost $23 million compared to a year ago. In addition, TriMas ended the quarter with $156 million of cash and aggregate availability under our credit and revolving facilities. We are also pleased to have ended the quarter with a leverage ratio of 3.01.

At this point I would like to shift gears and review our business performance by reportable segment, beginning with the Packaging segment on slide 14. Packaging sales grew 1% compared to the first quarter of 2010 as the growth in industrial closures was substantially offset by the lower sales of specialty dispensing products. Cumulative sales would have been up 10% year-over-year excluding the $3.7 million in H1N1-related sales in Q1 that did not recur in Q1 2011.

Gross profit margin increased 250 basis points as a result of productivity and Lean initiatives and despite the rising commodity costs. Operating profit dollars and margin were flat.

We continued our investment efforts in Packaging, demonstrated by increases in SG&A in support of their growth initiatives. We're excited about the growth prospects for the segment as we continue to launch new dispensing products into growing endmarkets such as medical, pharmaceutical, and personal care. Our key initiatives for the segment also include products extension and geographic expansion.

Moving on to slide 5, Energy. Energy's sales increased 27% for the first quarter compared to the year-ago period, resulting from multiple initiatives including increased demand for gaskets and bolts and our fourth-quarter 2010 acquisition of South Texas Bolt. This acquisition contributed $4.7 million in sales for the quarter, and both the integration and its performance are exceeding our expectations.

This segment also benefited from our newer branches opened in Rotterdam, Salt Lake City, Edmonton, and the United Kingdom. Operating profits increased 27%, with margins relatively flat when compared to Q1 2010.

Our productivity and volume leverage have been partially offset by a decision, our decision, to add SG&A in support of opening new branches. We will continue to expand our footprint at a faster pace as we remain committed to supporting our global customers and new markets.

On slide 16, Aerospace & Defense sales increased 8% in Q1 2011 compared to Q1 2010 due to improved demand for our blind bolts and temporary fasteners from aerospace distribution customers, marking the third quarter in a row of higher order activity and increasing backlogs.

Our Defense business continues to be impacted by the unfavorable shift from a maintenance contract to a lower-margin facility closure and relocation contract. Our operating profit was negatively impacted by a less profitable sales mix, largely offset by lower levels of SG&A.

As we move forward we feel we are uniquely positioned to take advantage of the trend to build composite structure aircraft, and our plans support increases in our content per aircraft. We firmly expect this business to show revenue growth, margin expansion, as aircraft build rates increase and our expanded geographic coverage bear results.

Moving on to slide 17, Engineered Components. First-quarter 2011 sales increased 58% compared to year-ago period, primarily due to improved demand for industrial cylinders in international markets; engines and other well site products; and compressors.

Of the sales increase $4.7 million was due to the cylinder asset acquisition completed during second quarter of 2010. The specialty fittings and precision-cutting tools businesses also experienced improved demand, primarily resulting from the upturn in the domestic economy and new product offerings.

First-quarter operating profit increased 126%, and the operating profit margin improved 400 basis points compared to the year-ago period due to higher sales levels, increased absorption of fixed costs, and productivity, partially offset by higher SG&A supporting the increased sales levels experienced. The Company continues to develop new products and expand its international sales efforts in this segment.

On slide 18, we show the performance of our Cequent segments. Cequent North America sales improved 29% for the quarter as a result of increased demand from the retail, OEM, aftermarket, and industrial channels. Market share gains, new product launches, and improved endmarkets all drove the sales increase. Cequent North America's operating profit increased almost 50%, with margins up 100 basis points when compared to Q1 2010.

On the other hand, Cequent Asia Pacific's sales declined when compared to Q1 2010, a quarter which benefited from Australian government incentive programs. In addition, the recent Australian natural disasters had a negative effect in terms of timing; but they were also partially offset by favorable impact of currency exchange.

We see the effects of these events as temporary in nature and expect the business to rebound as the distribution chain normalizes. In these segments we will continue to focus on productivity, product leverage, and regional expansion.

Overall, we are pleased with the results of our growth and productivity initiatives and expect ongoing improvements, driven by our structured operating processes. That concludes my comments, Dave; now you are going to discuss the 2011 expectations.

Thanks, Mark. I will start with our slide which reminds you of TriMas's strategic aspiration and lays out our ongoing priorities. Every successful company balances its priorities to maximize value for customers, employees, and owners. We utilize a structured process at TriMas of strategic planning, quarterly rolling forecasts, operating and people reviews, and incentive rewards to achieve this balance.

The next slide updates our full-year 2011 expectations based on first-quarter results and our current outlook. So, versus two months ago, we now see 2011 revenues up 8% to 11% compared to 2010, and an EPS range increase to $1.45 to $1.60 per share, a $0.05 increase on the bottom end of the range compared to our previous guidance of $1.40 to $1.50 per share.

We have also broadened our range to include more upside as we feel there are more opportunities for us to potentially execute on as the year progresses. As a reminder, this outlook compares to $1.21 in 2010 or $1.11 in 2010, if you exclude the benefits of a one-time tax adjustment we had then.

We expect free cash flow of $50 million to $60 million in 2011. I will tell you that we are still a little cautious about the second half given current events in the world. We will obviously know more a quarter from now.

In summary, we are seeing encouraging results from our growth initiatives and in emerging markets. We have a good start with sales engineers on the ground and we are gaining new orders, particularly in Asia. We are utilizing the leverage provided by our lower cost structure to produce earnings and to gain share.

In spite of commodity inflation, we expect to improve margins through 2011. Our quality of earnings is good, with robust cash generation expected on an ongoing basis.

We are relentless in taking actions to implement ongoing productivity, and we are willing to invest capital in our businesses so long as it drives value.

My closing comment is that we are fully committed to continuous improvement. The first quarter had strong results, but ongoing continuous improvement is what we owe and intend to deliver to our investors.

Now we will gladly take questions.

(Operator Instructions) Rick Hoss, ROTH Capital Partners.

Hi, good morning. If I could just focus on raw material inflation again, it is obviously I think the primary focus of conference calls and earnings results and certainly the outlook.

Can you give us an appreciation for how much of the raw material inflation has been captured through price in the first-quarter results? And at what point you expected to capture 100% of the cost increase?

I would submit that there is probably the better part of 50% of the commodity inflation that has already been covered through our price increases, and that other half clearly will end up being effective in the second quarter and beyond.

Okay, so first-quarter results, not necessarily thinking of it as the end of March, but more so looking at the results, looking at the margin profile, this is fully reflective of half of the cost capture?

Correct.

Okay, perfect. Then on a segment basis, is there one segment that is hit harder than the others? I would imagine that the Packaging would be hit from the resin derived from oil. But how much is, say, Cequent hit from steel, etc.?

Two businesses really stand out in terms of the effects of steel, and that is the Cequent set of businesses as well as Norris Cylinders. That is obviously a specialty alloy that is used in the manufacture of those industrial gas cylinders.

You're right, Rick; in the Packaging segment the largest effect in terms of the commodity effect has indeed been the resin costs.

Okay. And then if I could get down to the segment level, the Cequent -- North America Cequent growth was very, very impressive. It was much higher than I think people were expecting.

Can you just give additional detail on what drove that? I know you said new product introductions and market share gains etc., but maybe just additional detail on that.

Yes, I will remind you, you have heard me say that this is the kind of business that it is good to be the big full-line trustworthy supplier. And there is no doubt we have seen some competitors stumbling. We [didn't] do a Web search of the segment and figure out that there are some people that have not come through as strongly as we have.

You also have the general characteristic that a big installer that would be buying these products, more and more likes to deal with one supplier. I think that is the overreaching theme of this. You know we have worked a lot on the front end of the business in customer service and Web ordering and all of that kind of thing, which has also helped.

Now if you drop down a level from that, the product introductions have really been driven at what we all call heavy-duty product. Big, bigger -- not over-the-road trucks, but bigger pickup trucks that pull a big trailer for a farm or a construction firm, that kind of thing.

We have really concentrated on those kinds of products, and there has been a pretty decent recovery in those markets.

I will flavor it a little going forward, that of course everybody is concerned about -- anybody building automotive product -- what is going to happen because of troubles in Japan? We are seeing a few, not order cancellations, but slower production rates because of that. Again, not a big concern; but there is some of that in there.

I think the other -- it is also true that that is a business that has been -- anything that has to do with recreational product, like about half of Cequent is, has been pretty darn weak. While it is better, it has come off of a really weak, so the comparisons are easier too.

So I would say -- I mean partly it is just plain that we are a big full-line trustworthy and all that. And our order entry systems have gotten better. Our pricing practices have gotten faster and better and all that, and it is showing. And the product has been the heavy-duty product, which is where there has been recovery.

Hey, Rick, I would add one more thing for you there. Is that -- if you were to look at where the product ends up, about half of the growth came through our retail-oriented businesses and the share gains that you get in the front-end load of that. But the other half of the growth was really spread out across the industrial base products as well as aftermarket.

So it was really strength across the board. But I'd tell you that there is a good chunk there that was retail oriented.

Okay, but it sounds like the growth wasn't necessarily from some sort of aberration that we don't expect to repeat I guess in future periods. It sounds like these are trends that are stable, more permanent types of trends rather than one-time benefits.

Well, then that is the reason why I brought up the retail discussion, Rick, because I want to make sure that people understand that there is an aspect to which that is an initial store load going into the season. You will have natural run rate that gets pulled off shelf through normal point-of-sale activity. But there is some lumpiness in terms of Q1 in terms of that share gain.

Okay, okay. That makes sense. Okay. Then if we can focus on Aerospace quickly, it seems to be a pretty consistent theme that you are expecting Aerospace to ramp. I was hoping that you could provide a little bit more detail on how that -- what that pattern looks like. If it is a slow linear ramp or if it's more just waiting for some of these -- the production acceleration just say from the 787, waiting for those to happen and then it is a big bump. Is there anything that you can provide to us for modeling?

I would call it more closer to a slow linear ramp. 787 structures are being built at the latest planned rates; you know, they have changed them many times. But so it is not like there is something going to turn on there.

There's a few positive bumps that we will get because of some activities particularly at places other than Boeing and Airbus. But again in the totals they aren't big enough. So I'd think in terms of a decent ramp coming at us, but not some huge jump.

As you know, this is a business you don't dare miss a delivery. So we are very careful and we're making sure we got capacity ahead of it and all that. So we watch carefully what the ramps are going to be and we think we understand them.

Then last question. Coming back from Brazil, what do you think are the best opportunities down there on a segment basis?

First off, I will tell you Brazil is the most business-friendly place I have been in a while. I saw more than I would normally see of government officials. And the message is constant -- what can we do to help you do business here?

But to answer your question, Energy is the lead. I think what we all like about the Brazilian market is, number one, it is an economy that is building a big middle class pretty rapidly. That is good for us in products like Packaging.

And then all the new oil will drive the Energy-related businesses. Both the oil field pumping, that kind of thing; but also there's a lot of people with plans to build refineries and petrochem plants there because of the increased amounts of oil coming with the new offshore fields. So that will really drive fast.

We are currently sorting out specifics on what to do. But it is what to do, not if. And I am encouraged by Brazil as a market for the long haul.

So Energy, and Packaging; there are other opportunities. We were at Embraer; they are a very capable manufacturer. They have got some redesigns going on for all kinds of -- we have got our people there doing engineering seminars about our products. So you will see some of that too.

That is a long-cycle business, though. Shorter-term it will be Energy.

Appreciate it. Thanks for the insight.

(Operator Instructions) I am showing no additional questions in the queue.

Okay, well again, thank you, everybody. We appreciate your attention. Underline the word continuous improvement. We like what we saw in first quarter, but we intend to continue to improve this Company. So thank you.

Thank you, ladies and gentlemen, for joining today's conference. That concludes the program. You may now disconnect. Have a great day.