TriMas Corp (TRS) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TriMas Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ms. Sherry Lauderback. Please go ahead.

Thank you, and welcome to the TriMas Corporation Second Quarter 2018 Earnings Call. Participating on the call today are Tom Amato, TriMas' President and CEO; and Bob Zalupski, our Chief Financial Officer. After our prepared remarks on our second quarter results and 2018 outlook, we will open the call up for your questions.

In order to assist with the 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 (888) 203-1112 with a replay code of 4497064.

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.

I would also like to refer you to the appendix in our press release issued this morning or included as part of this presentation, which is available on our website, for the reconciliations between GAAP and non-GAAP financial measures used during this conference call. Today, the discussion on the call regarding our financial results will be on an adjusted basis, excluding for the impact of special items.

At this point, I would like to turn the call over to Tom Amato, TriMas' President and CEO. Tom?

Good morning, and thank you, Sherry. Let me start the call by taking a few minutes to cover how we have reshaped TriMas over the past few years.

Turning to Slide 3. TriMas operates businesses with leading brand names in niche market, each of which uses product and process innovation, a deep commitment to our customers as key differentiators for long-term growth. Our businesses are united by the TriMas Business Model, which provides a common framework to engage in a fast-paced, data-driven culture to yield better outcomes and results.

On an LTM basis, TriMas revenues were up -- we're about $850 million; adjusted EBITDA was about 19%; EBITDA less CapEx over sales, a key measure of cash flow conversion, was over 15%; net leverage is currently 1.7x; and we have a market capitalization of just over $1.3 billion, with all these metrics trending favorably given our recent commercial and operating performance.

With this background, I'm pleased to report our second quarter results. As you can see on Slide 4, TriMas delivered another strong quarter. Second quarter net sales were up 5.4% to $225 million, which is a record quarterly sales level for the current TriMas family of businesses. Operating profit increased 5.3% to $32.1 million, and we posted an operating profit margin of 14.3%. Our overall performance improvements, prior realignment actions and certain commercial actions, mitigated the impact of higher material cost in the quarter, which I will cover later. Earnings per share was up 20% to $0.48 compared to $0.40 in the prior year quarter.

Moving to Slide 5. Our mantra of operating TriMas to provide personal cash flow conversion is evident here. For the quarter, free cash flow was up 21.3% and year-to-date, it was up 4.3%. We further deleveraged TriMas but just over 0.5 turn compared to last year. Our free cash flow conversion is the fuel that drives TriMas, so we are pleased with our progress, and Bob will discuss additional actions we have taken as a result.

At this point, I would like to transition to our second quarter segment performance beginning on Slide 7 with our Packaging segment. Second quarter sales were up 7% to $95 million, with sales increases to the health, beauty and home care and industrial-end markets, with growth in both North America and Asia. Excluding the impact of currency, organic sales growth was nearly 6%. Quoting activity remains robust. And through innovation, customer responsiveness and quality, we continue to work, add and win new programs in our end markets.

For example, this quarter, we landed closure and dispensing programs in home care applications as well as new dispensing programs for personal care applications. With respect to innovation, we recently introduced a new e-commerce trigger sprayer that was developed to solve issues related to e-commerce shipping presented by Amazon. Our engineers partnered with Amazon team members and developed the Rieke Ultimate-E trigger sprayer, which passed the rigorous ISTA 6-Amazon test criteria and which we are now in the process of sampling with consumer products goods customers. This is an excellent example of working closely with customers to understand their needs and developing [visible] products.

Operating profit increased to $22.8 million or 24% of sales. These are solid results despite higher material and freight costs, less favorable product mix and additional investments in commercial and technical resources to secure future growth. As a result of our first half performance, we are increasing our full year Packaging guidance with organic sales to now be about 5%, an increase from about 3%, with an operating profit margin remaining in the 22% to 24% range. This improved performance expectation takes into consideration continued growth in the health, beauty and home care end market and headwinds from higher commodity and tariff cost, which I will discuss later.

Continuing on Slide 8 with our Packaging (sic) [Aerospace] segment. Net sales for the quarter were $45.6 million, down about 4% from the prior year. It's important to note that much of the reduction this quarter was planned as a result from our decision to exit less profitable components and the benefit realized in the prior year quarter of shipments against past due orders. It's also worth noting that we are experiencing solid order intake in bookings as compared to 2017 levels, although the delivery from orders today will stretch into the fourth quarter and even into 2019. We have also been seeing some pick up in the military and defense area, particularly through our distribution channels, and we continue to make progress against qualification projects to facilitate expanding our product offering across our wider customer base.

Second quarter operating profit was up 4.6% to $7.3 million, and the margin percentage increased to 16% from 14.7%. This performance is largely due to more favorable product mix as noted from exiting less profitable components. Although we achieved progress in our operations over the past year, we continue to have more work to do, particularly in our standard fastener facility, which is a high-volume production plant and which operates in a less-than-efficient environment due to challenging commercial forces. We expect to continue to improve the performance of this operation over the balance of the year and into 2019.

Regarding the full year guidance for our Aerospace segment, we are maintaining our segment guidance and continue to expect to achieve full year sales growth of about 2% with operating profit margins in the 15% to 17% range. Over the past year few weeks, local management and labor representatives have been in negotiations at one of our facilities in California. We remain optimistic to reach a mutually agreeable amended collective bargaining agreement within the coming week or so. As is typical for these processes, we may experience some performance drag due to natural distractions to both prepare and negotiate towards a desired outcome.

Turning to Slide 9. Our Specialty Products segment had net sales up by more than $7 million to $84 million or just over 9%. We operate in 2 end markets in Specialty Products: general industrial and oil and gas. Sales were up about $5 million in the general industrial market and $2 million in oil and gas. We have benefited from prior realignment actions in Specialty Products, which allowed us to gain operating leverage and convert nicely as higher sales rolled in.

Operating profit increased to $9.8 million or approximately 11.7% of sales despite higher commodity costs. Our focus remains on managing cost profiles while seeking to capitalize on share gain opportunities in response to end market demand. For example, during the second quarter, we continue to streamline our Lamons business by exiting our Bangalore, India soft sealant facility, which on a local level was not profitable. While this resulted in a onetime charge, we believe that focusing our now streamlined Lamons business in the Gulf Coast region and only the highest performing locations in North America, Europe and Asia is an improved strategy. The steps we have taken to streamline Lamons will now -- will allow for swifter scaling adjustments given the short cycle nature of the petrochemical and refinery MRO sector. Going forward, we don't anticipate further regional site closures within Lamons as our realignment actions have been completed.

With respect to updating our guidance for Specialty Products segment, we are now expecting full year results growth to be about 9%, an increase from about 5%, while maintaining operating profit margin guidance at 10% to 12%.

I also wanted to mention that in July, the U.S. Department of Commerce issued a preliminary finding to increase countervailing duties to combat China's supply high-pressure steel cylinders. The preliminary finding increases duties on high-pressure steel cylinders imported from China from the current 15.81% to a new level of 37.77%, if confirmed in a final determination scheduled for later this year. These duties are necessary to help provide a leveled playing field against subsidies of input steel produced in China and provided to local China cylinder manufacturers. We are pleased with these preliminary findings which, if implemented, should continue to provide an indirect benefit to our Norris Cylinder operation.

Before turning the call over to Bob, who will go through additional financial results and consolidated guidance, I wanted to provide more color on commodity cost and tariffs. This year, like most of diversified industrial companies, we have been faced with rising commodity costs, particularly steel, aluminum and oil-based commodities. In addition, we are now facing increased tariffs on our imported goods. We engaged early with our wider operating team on these unplanned matters, identifying ways to mitigate these costs as much as practical. For example, in certain cases with rising commodity costs where we do not have in place auto material escalator or de-escalator contracts, we have had to seek to reprice certain products depending on competitive forces. For the first half, we estimated about $2 million or just over $0.03 per share of unmitigated or net exposure, much of which was within our Packaging and Specialty Products segments.

The first half impact did not have any costs related to Section 232 or Section 301 tariffs. With respect to tariffs, which start to take effect in the second half, the landscape is a bit more fluid. We continue to first expect to mitigate some of these exposures through repricing, again, depending on contracts and competitive forces. In addition, we will seek to mitigate exposures through managing supply opportunities; redirecting where practical sourcing location, including in sourcing; and of course, continuous improvement. Additionally, higher volume in some of our end markets has helped provide a nice offset to some of the higher costs we are experiencing, and we anticipate end market strength to continue in the second half. With that said, we anticipate about $3 million to $4 million or about $0.05 of unmitigated exposure in the second half, which is contemplated in our revised guidance.

With that, I'll turn the call over to Bob. Bob?

Thank you, Tom. Turning to Slide 11, as Tom noted a bit earlier, we registered another quarter of excellent cash generation as adjusted net cash provided by operations increased $7.1 million or 23.5% to $37 million for Q2 2018 when compared to the prior year quarter. This resulted in free cash flow in the quarter of $28.9 million or 130% conversion of net income as compared to $23.8 million in the year ago period, this despite a modest investment in net working capital to support higher sales levels. On a year-to-date basis, we generated free cash flow of $43.3 million or 105% conversion of net income versus $41.5 million in the year ago period.

During the second quarter, we used approximately $2.9 million of our free cash flow to repurchase more than 100,000 TriMas shares, which represented the first share repurchases under our $50 million share buyback authorization. We accomplished through a combination of open market purchases and execution against the 10b5-1 trading plans. In connection with our 10b5-1 plan, we will continue to assess opportunities to action upon open market purchases to return capital to shareholders by reducing our overall shares outstanding as well as review other capital allocation alternatives and plan for accordingly.

Our commitment to cash conversion and to strengthening our balance sheet provides benefits to TriMas shareholders in other ways as well. As an example, during second quarter, we settled a defined benefit obligation through the purchase of annuity contracts with an insurance company. This transaction allowed TriMas to eliminate in a nonrecourse way just over $5 million of gross pension obligation from our balance sheet. Although this resulted in a onetime noncash settlement charge of $2.5 million in the quarter, for a very slight premium, we also eliminated potential volatility in the P&L due to changes in actuarial assumptions and uncertainty with respect to the duration of payments in future years. We will continue to look for other opportunities to improve our balance sheet as we progress through the remainder of the year.

On a year-to-date basis, we reduced net debt by $35.9 million from December 31, 2017, and by more than $84 million from the June 30, 2017, period a year ago. LTM-adjusted EBITDA improved 7.5% or approximately $11.3 million to $161.4 million versus the comparable period a year ago. We reduced our leverage to 1.7x at quarter-end and as of June 30, 2018, reported cash and available liquidity of approximately $340 million.

In summary, our Q2 results were largely consistent with the trends and operating performance established in the first quarter and demonstrate continued improvement on the sequential quarterly and year-over-year basis.

Turning to Slide 12 and an update to our 2018 full year guidance. Given the stronger-than-expected volumetric growth in the front half of the year, we are increasing our 2018 full year guidance for sales growth from 3% to 5%. Although sale levels were up nicely in Q2 at plus 5%, we did see some moderation overall in both sales growth and order intake activity relative to Q1 and currently expect second half sales growth to be more in line with our updated full year expectations. We are tightening our fully diluted EPS guidance range to $1.65 to $1.75 from our previously provided range of $1.60 to $1.75, effectively raising the EPS midpoints. As Tom noted earlier, this updated EPS guidance contemplates our current estimate of unmitigated exposure with respect to increase in commodity cost as well as tariffs, both currently and in effect related to Section 232 and Section 301 List 1 and those more recently announced under Section 301 List 2 and 3.

Lastly, we are reaffirming our full year 2018 free cash flow guidance at 120% of net income as we continue to emphasize cash conversion of higher operating earnings while optimizing our investment in net working capital relative to higher levels of end market sales activity.

I will now turn the call back to Tom for his final remarks and wrap-up. Tom?

Thank you, Bob. In summary, I would like to leave you with a few key takeaways. First, we are pleased with our results this quarter and through the first half of 2018. In fact, if we didn't have the challenge from increased material costs and tariffs, we would have been in an excellent position today to raise the top end of our guidance. Second, we will continue to execute on all possible countermeasures to offset rising commodity cost and tariffs. Third, operating under the TriMas Business Model is working and allowing us to deliver results for our shareholders. And finally, we have a strong balance sheet and cash flow that creates multiple options, such as bolt-on M&A to accelerate growth and return or transfer capital, all to enhance shareholder value in the future. As you can see, we remain excited about the prospects for TriMas and are pleased to have delivered such a strong first half.

At this point, I would like to thank you for listening, and we will now turn the call over to the operator for the Q&A. Operator?

(Operator Instructions) We'll take our first question from Scott Graham with BMO Capital Markets.

So one thing that I think you mentioned, Tom, was -- actually, if I may, 2 things. If you could just maybe elaborate a little bit more on what you mean by this term unmitigated commodities exposure? I understand this -- it's where you don't have escalators and de-escalators. Is that it? Or is there more of a definition to that?

Well, it's more -- sorry, let me describe it this way. When we look at the net amount or unmitigated amount, it is the amount of drag that first looks at contractual and commercial action. So we would have -- if we have escalator or de-escalator that first addresses, in this case, material where we would have the ability to price change, modify prices on a product or possibly even resource and protect our cost position, that would be the first line of mitigating factors. Anything that is unmitigated after that, we would seek to have to offset through additional continuous improvement or additional volume. And in fact, that's what occurred in the first half.

Okay. So within your...

Did that -- I just want to make sure that's clear. Did that help?

Well, I'm not sure it's perfectly clear, but I'm sure that's me. When you say commercial, you include pricing within there, the first part.

Correct.

Okay, okay. So the second part is continuous improvement plus volume like leverage and then there would be a piece of price that you're not referring to in that sort of second piece?

Well, let me try again. So if we start with growth exposure, okay, that would first be -- we would seek to recover that commercially through either contracts that we have in place that provides for escalation or de-escalation clauses and recovery but also modifying prices in the open market where we have the right competitive dynamics. That would then reduce down to what we'll call net exposure or unmitigated exposure. From there, we would seek to offset that cost through continuous improvement, volume, operating efficiency, et cetera.

That's what I understood. So if we would to put maybe a finer point on that, what would -- can you tell us what the company got in price in the second quarter?

Well, most -- so I think -- let me comment on it this way. Our growth...

I'm sorry. I mean, the commercial piece. The escalator, de-escalator, forget that.

Right. So our growth -- Well, it's part of that actually. So part of our pricing recovery is through escalator, de-escalator clauses and open market pricing modification. So in the first half, not the first quarter, we got approximately in the 50% coverage range between growth and what was dragged on our otherwise performance. Now that's not an indication unfortunately because these are dynamic events, that's not representative of the full recovery level we believe we can get through commercial actions. It's just that there's a lag factor and things take time to recover. So as we go through the balance of the year, we expect to improve upon our commercial recovery, again, through price and through our pricing in the open market and our contracts, and then any net exposure would be recovered through other means.

I got it, understood. So my follow-up question is you have this really great chart where -- and I think Bob went through it on Page 11, and it really captures how much liquidity you have built in the last 12 months. So I guess, the next question is with the leverage ratio down to 1.7x, I know you've far along on a number of your productivity aspirations. I know that there's more to go as well. But are you closer to where, Tom, you're going to be out there much more actively and maybe we can see some M&A in the second half of the year?

Certainly, as compared to last year, we are much more active on the M&A front. I don't have the deals to announce on this call, but my hope is that we'll continue to make progress there. We are focusing predominantly in the Packaging area, both in companies that would be direct fits with our current product lines within Rieke as well as adjacencies.

(Operator Instructions) We'll take our next question from Steve Barger with KeyBanc Capital Markets.

This is Ken on for Steve. I just have some questions on the sales guide cadence implied for the Aerospace segment. I think you noted that there was a little bit of a timing issue that impacted sales in the quarter. Just curious if you could give us some color on how much revenue split into the third quarter and how we should think about implied growth for the back half of the year.

Ken, in terms of overall guidance, we were up forecasting sales guidance 2% up for the full year. Obviously, with us paying down in the front half, the implied back half sales growth would kind of be in that 4% to 5% range in order to hit the full year guidance of 2% year-over-year given the start to the year.

Right. I guess my question is you did mention some impacts from timing. Was that highly material in terms of when you expect that to deliver? Or would you just expect normal seasonality, just given the easier comps?

No, that timing comment was, I think, in reference to what occurred in Q2 as part of the explanation for why sales were down compared to the year ago period. So as we look at our order intake in the front half of the year, which is up nicely compared to the same period a year ago, while not all of those orders fall into the second half of the year, we're going to continue to have order intake over the remainder of the year, some of which will hit in quarters 3 and 4. And those items are in combination, we believe, will get us back to our full year guidance of 2% growth over the prior year.

Understood. And then my follow-up question is just around maybe some updated thoughts on turnaround activity expectations in the back half as it relates to your Specialty Products segment. I know there was a little bit of caution due to a potential push on turnaround activity. What are you seeing now?

Good question. We're very closely monitoring the market. This is the slower period anyway, so we're looking at the fall turnaround season and trying to get a bead on what's happening there. It looks like crack spreads have descended a little bit, which interestingly you don't want to go down too much but if they do soften up a bit, that bodes well for folks wanting to do their turnaround. But we're very actively trying to monitor how robust that fall season will be at this moment.

And I think the wildcard in the equation is the recently announced tariffs under Section 301 for the List 2 and 3 have an impact to cost in a way that it might influence a decision around either trying to get the turnaround done pre-tariff or deferring into 2019, waiting to see where the tariff equation ultimately shakes out.

We'll take our next question from Andy Casey with Wells Fargo Securities.

First, on the segment revenue guidance increases for Packaging and Specialty Products, are those -- would you say those are 50-50 kind of price actions to offset the material cost and then underlying end market improvement? I mean, what are the factors that drove the revenue increases?

I would tell you, Andy, it's substantially volumetric-based. I mean, there is some price in there, obviously. But if have to think about the percentage of price of those overall guidance numbers, it's like probably 10%, 10% to 15% of that revenue increase as opposed to something more significant.

And then taking it down into the Specialty Products, the comment about the potential incremental Chinese duties, is any of that built into the guidance at this point?

Well, it's not. And where I think it can -- possibly could help us is we look through the balance of the year into '19, to the extent that we have additional metals cost impacting our business, the ability to get pricing relief in the open market at least in the products affected by this competitive threat. This will be a helpful factor, so the percentage of duty that's occurring is not paid to TriMas. That's paid to the government.

And then also within the Specialty segment, have you seen any improvement in the demand for your Arrow products?

Yes. I'm pleased to say little Arrow is doing quite well. Our thesis was maybe a year or so ago -- there were a lot of questions we were getting in calls on Arrow and I said, look, it's a small part of our business, under 5%, breakeven EBITDA. It's not hurting us. It's not helping us. But today, it's actually performing nicely. There has been some nice in-bookings of predominantly engine and compressor sets. The compressors are used to help assist getting gas out of the shale wells, and we've seen some pickup in that activity there. We're running the plant pretty well full now. We have some additional capacity available. But we've got a nice set of orders that are keeping that plant -- which we took down from a number of locations to one plant. It's keeping the plant pretty busy, so we're happy with where Arrow is today.

And then lastly, on the Aerospace, you mentioned an ongoing negotiation that could cause a little bit of turbulence. I would imagine you've included a little bit of a cushion in your guide to do your best to account for that potential turbulence. Is that about right?

Yes. Look, I didn't use the word turbulence. I used the word distraction, and it's really that. Our management team is active in preparing, and there's meetings. And when folks are working on these types of matters, they're not focusing on continuous improvement and Kaizen and the things we like to drive every hour, every day at our business. But generally speaking, yes, we contemplated those natural factors into our outlook.

Okay. And then to follow up on that, outside of the distraction -- sorry about the incorrect use of the word, Tom. Outside of that, Arrow has been in transition to better performance over the last several years. Where are we in that process? Are we getting closer to the end of the big improvement? Or is there still more to go?

Yes, good question. It really has been an amazing turnaround, particularly in the last 4 to 5 quarters. I think that we have one more plan. We're going to keep driving performance at all of our locations, and we have generally a newer team, at least a newer organization in place. And it's very exciting, the activities that we are focused on, not only on the factory floor but also commercially and through innovation and doing work around the world with our global customers. But we have one plant that is in a product area that is a little more standardized or commodity-like that is under pressure. The plant is running well and working hard and well laid out and clean and nice (inaudible). But we have sort of tough commercial pressures because of the folks that are in that space and from legacy contracts that we're working through. But many of that, my hope is we can continue to chip away at that iceberg. And then hopefully, into '19, we're not even -- we're really not talking about the turnaround anymore. It's sort of behind us.

(Operator Instructions) We'll go next to Scott Graham with BMO Capital Markets.

A couple of follow-ups, if you guys don't mind, and this is a good segue from the previous question. You said that most of the decline in Aerospace sales related to the deemphasizing of some of the machine components lines, should we -- and these are my numbers, not yours. You're going to have -- if you want to confirm, great. But if we assume that that's, let's say, minus 2 to 3, is that a number that we should be thinking about for, let's say, the next 4 quarters within modeling?

Yes, I think the total number was 3 to 4, roughly, so we started to see the impact of that at the beginning of this year, Scott. So I think it's fair to say that we're probably running towards the higher end of that range.

Okay, great. And then as we move into 2019, I know you've cited here one Aerospace facility that might need to be consolidated in some way. What would be the remaining part of the business in the lower margins stuff? Or is the 3 to 4, does that take care of all of that?

Well, I'm going to let Bob answer the question on the amount. But I will say, I never said anything about consolidating that plant. The plant is actually a nice plant, and we want to improve the trading relationship with some of our key customers, being cognizant of the market space that it plays in. But it's really a pretty fantastic plant. So there's -- in no way did I mean to imply that that's a consolidation. And then Bob, do you...

Yes, I think the part of your question, Scott, that business that we're exiting related to machine components portion of our product set, the facility that Tom is referring to is a standard fastener plant. So there isn't anything that we walked away from at this point in terms of product set in standard fasteners.

Got it. This is my last one, although I said that before. Any change in the competitive dynamics in either Packaging or Aerospace? I thought I heard you said something about challenging competitive forces in Aerospace or maybe I misheard you on that, Tom.

Well, look, I mean, I think that we're in a time right now where competitive dynamics are changing, right, so this is very real time. Coming into sort of the natural end of the year, last year was a different landscape, and now all suppliers are faced with some of the form of cost pressure with changes the environment. So I don't know if I should really say much more than that at this point because I think like most companies, we're all looking at how things impact our cost structure and our cost, and then we're assessing market opportunities to offset and mitigate those items. So I think the dynamic at this point in time are very different because of the different competitive cost structures that are hitting all companies.

And maybe in the (inaudible) what the impact of tariffs, which heretofore we really haven't had to deal with.

Right. No, I certainly understand that. But you were not referring to some change in Aerospace dynamics again like we saw 2 years ago when we had that shift, nothing like that.

No, no, no.

(Operator Instructions) It appears we have no further questions at this time.

Okay. Thanks, everyone, for your time this morning. Again, we're very pleased with this quarter, and we look forward to updating you after the next quarter. Take care.

Thank you.

Ladies and gentlemen, this concludes today's discussion. We appreciate your participation.