Trimas Corp Q3 FY2023 Earnings Call

Greetings, and welcome to the TriMas Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sherry Lauderback, Investor Relations and Communications. Thank you, ma'am. You may begin.

Thank you, and welcome to TriMas Corporation's third quarter 2023 earnings call. Participating on the call today are Thomas Amato, TriMas' President and CEO; and Scott Mell, our Chief Financial Officer. We will provide our prepared remarks on our third quarter results and our outlook, and then we will open the call up for your questions. In order to assist with the review of our results, we have included today's press release and presentation on our company website at trimas.com under the Investors section. In addition, a replay of this call will be available later today by calling (877) 660-6853 with a meeting ID of 137-41-938. Before we get started, I would like to remind everyone that our comments today may contain forward-looking statements that are inherently subject to a number of risks and uncertainties. Please refer to our Form 10-K and our third quarter Form 10-Q for a list of factors that could cause our results to differ from those anticipated in any 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. In addition, we would like to refer you to the appendix in our press release or our presentation for the reconciliations between GAAP and non-GAAP financial measures used during this call. Today, the discussion on the call regarding our financial results will be on an adjusted basis, excluding the impact of special items. With that, I will turn the call over to Tom Amato, TriMas' President and CEO. Tom?

Thank you, Sherry. Good morning and welcome to our third quarter earnings call. Before we begin with our business update, I want to express our genuine concern regarding the ongoing conflict in the Middle East. While TriMas does not have direct sales or operations in that area, we do rely on raw material suppliers and energy partners affected by the trading activities in the region. As of now, we have not experienced any economic impact due to this conflict. Now, let's focus on our TriMas Aerospace Group. Recently, we announced that Vitaliy Rusakov will be joining TriMas as the new President of TriMas Aerospace. Vitaliy brings years of successful operational experience in the aerospace industry, having held various positions at Howmet Aerospace and its predecessor companies. Most recently, he was the President of Howmet's Aerospace Fastener Group, a leading supplier in the aerospace and defense sectors. We welcome him to the TriMas team and look forward to his contributions. In conjunction with this announcement, Bill Dickey, who has been leading the TriMas Aerospace Group on an interim basis, will start transitioning leadership to Vitaliy. Bill has done an outstanding job in a short time, improving performance, committing to operational excellence, and integrating the recent Weldmac acquisition. His operational expertise and dedication to enhancing operations have contributed significantly to our recent performance improvements within the group. I thank Bill for his efforts in this vital project. He will continue with TriMas to support Vitaliy, ensuring a smooth transition and helping to boost our performance as we approach 2024. Now, let's move to Slide 3. I want to remind our investors that in late September, we participated in the William Blair, What's Next for Industrials Virtual Conference. The full presentation is available on our website in the Investor Events and Presentations section, and this slide was central to what we discussed. We showcased several examples and case studies highlighting the growth opportunities for TriMas, from launching new innovative products to expanding into new regions and applications, as well as benefiting from recovery in key markets. Although I won't detail each of these growth avenues here, we are particularly excited about our progress in the masstige beauty applications in Western Europe and Brazil since acquiring Aarts Packaging. Additionally, we are gaining traction in our Life Sciences products, especially in surgical and orthopedic areas. While current program wins in life sciences tend to be lower in volume, we are expanding our reach with high qualification programs and key customers, which we believe will benefit us in the future. Now, moving to Slide 4. While Scott will detail each segment's performance, I want to address the overall quarter. We believe the third quarter marks the start of better comparisons to the previous year, as we began to see a decline in demand in the consumer products segment within our TriMas Packaging Group towards the end of Q3 2022. Therefore, Q3 performed largely as we anticipated, and we are pleased with our ongoing performance momentum this quarter. The TriMas Aerospace group shows significant improvement compared to the same quarter last year as we continue to balance supply and production constraints with strong demand. We acknowledge there is still work ahead, but we expect to see further gains in 2024. In our Specialty Products Group, we are successfully converting increased sales compared to previous years. While demand in TriMas Packaging is lower than our annual planning model, our cost-saving initiatives have significantly boosted our margin performance compared to the same quarter last year. We are committed to returning capital to our shareholders through share buybacks and dividends, with a goal to return over 1% this year. TriMas has $92 million remaining under our share repurchase authorization and we continue to purchase shares at favorable valuations. Looking at Slide 5, I will now share our third quarter results. We reported sales of $235 million, an increase of 7.7% compared to the same quarter last year, with our TriMas Aerospace and Specialty Products groups offsetting the weaker demand in the consumer and industrial end markets in our TriMas Packaging Group. Our operating profit rose by $6.3 million to $27.9 million, or 11.8% of sales. While this is still below our long-term target, we are making progress through higher sales and previous operational improvements. Our earnings per share was $0.57, up 42.5% compared to the prior year quarter due to better performance across our business groups and a tax project that lowered our quarter's tax expense. Our EBITDA stood at $45.2 million, or 19.2% of sales, an increase of 200 basis points from the prior year. It’s worth noting that we had a property sale gain in the prior year quarter that added $4.8 million to Q3 2022. Normalizing for that, our EBITDA for Q3 2023 improved by over 400 basis points. Although we recognize that we have not reached our full potential compared to a stronger TriMas Packaging demand environment, we are encouraged by our gains across all business areas. At this point, I will turn the call over to Scott, who will discuss TriMas' balance sheet and segment results.

Thanks, Tom. Let's now turn to Slide 6 for an overview of our key credit statistics. We ended the quarter with $361 million of net debt, a net leverage ratio of 2.1 times and more than $300 million of available liquidity. As of September 30, we had repaid all of the outstanding borrowings under our revolving line of credit, which we used earlier in the year to help fund the acquisition of our TriMas Aerospace business, Weldmac manufacturing. We had another strong quarter of cash generation, with more than $25 million in free cash flow in Q3, and our free cash flow for the 9 months ending September 30 increased by 15% when compared to the same period last year. We have ample liquidity to continue to invest in our businesses, take streamlining actions where appropriate, buy back shares, pay dividends, and complete future strategic bolt-on acquisitions as opportunities present themselves. Now let's turn to Slide 7 and I will begin my review of our segment results, starting with TriMas Packaging. Net sales were $117 million as compared to $130 million for the prior year quarter. Acquisitions contributed $6 million of sales, while the favorable impact of foreign currency translation contributed another $2.2 million of sales during the quarter. As expected, organic sales were lower during the quarter, down 16.5% when compared to the previous year period. As Tom mentioned earlier, we believe the third quarter represents the last quarter where we will experience a challenging comparison to the prior year, given the abrupt softening in demand which started late in Q3 of last year, with many of our packaging customers deciding to bring their overstocked inventories into better balance given the uncertainty of future consumer demand. We do remain encouraged by the increased commercial activity underway within this segment, which we believe will yield benefits as we move into 2024. Operating profit for the quarter was $19.5 million, an increase of more than 7.5% on a year-over-year basis. Operating margin was 16.7% of net sales, a 280 basis point improvement when compared to Q3 of last year, as we are beginning to realize the benefits of our previous cost savings actions, including initiatives to reduce key input costs, such as raw materials and energy. I will also highlight that as of the end of the quarter, we had shuttered all production activity at our Rohnert Park in Hangzhou, China facilities, and have relocated certain of our key operating assets from those locations to other TriMas packaging locations in China and the U.S. Adjusted EBITDA was $28.5 million or 24.5% of net sales, a 440 basis point improvement year-over-year. Turning to Slide 8, I will now provide an update on our TriMas Aerospace segment. Net sales for the quarter increased by more than $22 million or 49% when compared to the same period a year ago. As we continue to see strong order intake for many of our aerospace products, general aerospace volumes continue to recover ahead of market expectations. Acquisitions contributed $9.7 million of sales during the quarter, while organic sales increased by $12.5 million or 27.5% when compared to the previous year period. Operating profit for the quarter was $8.3 million or 12.3% of net sales. This represents a 180 basis point improvement. And as Tom mentioned earlier, excluding the impact of a $4.8 million gain from a property sale in Q3 of 2022, operating margin for the quarter improved by more than 1,200 basis points. As important, sequential quarterly operating margin improved by more than 600 basis points, as we are starting to see improved conversion rates on higher sales. Adjusted EBITDA for the quarter was $13 million, or 19.3% of net sales. Now on Slide 9, let's review our Specialty Products segment. Net sales were $51 million as compared to $43 million for the prior year quarter, as demand for steel cylinders for industrial applications and remote power generation units remained strong during the quarter. Operating profit in the quarter was $10.7 million or 20.9% of net sales as compared to $6.8 million in the previous year period, as specialty products continued to positively benefit from significantly improved conversion on robust demand. Adjusted EBITDA for the quarter was $11.7 million or 22.8% of net sales. While we are very pleased with the performance of Specialty Products during the third quarter, we are starting to see more moderation in our order book as compared to the high rate we've experienced throughout the year. We believe customers are seeking to bring their capital spending and inventories into better balance as they close out the year. Of course, we continue to closely monitor our order changes, and will take appropriate flexing actions as necessary. At this point, I'd like to turn the call back over to Tom to review our 2023 outlook and for some closing remarks.

Thank you, Scott. Let's now turn to Slide 10. As noted in our press release issued this morning, we are reaffirming our outlook for the year. While we continue to model various scenarios, this outlook assumes no impact from the escalation of the conflict in the Middle East. We are anticipating that the gains on conversion within each of our groups will continue through Q4 and as we enter 2024. Given reduced market lead times within our TriMas Packaging and Specialty Products groups, we are also taking a more measured view on near-term growth in these segments. Let's turn to Slide 11. I would like to, again, thank our investors for their continued support. I will conclude our prepared remarks by providing just a few examples of why we remain excited about the long-term shareholder value creation prospects for TriMas. First, we continue to believe there are attractive long-term characteristics within our TriMas Packaging and TriMas Life Sciences group through our multiple end markets, diverse geographic presence, and improving demand. We also have many sustainable and innovative product solutions, such as mono-polymer dispensers and tether caps in the pipeline and coming to market in the future. And as noted earlier, we are gaining traction with some of the new TriMas medical applications. We also have growing confidence in a sustained recovery within the commercial aerospace and defense end markets, and anticipate future increased spending in defense will benefit certain of TriMas Aerospace businesses, specifically RSA Engineered Products, Weldmac, and Martinic. We continue to work through supply and remaining skilled labor constraints, and expect to take advantage of long-term operating leverage gains as we bring our production planning into better synchronization with customer demand into 2024. Within TriMas Specialty Products Group, we expect to continue to convert well on sales and assess new market and product adjacencies to drive future growth within our Norris Cylinder and Aero Engine businesses. Given our relentless commitment to cash flow generation, we will continue to reinvest in our businesses for long-term growth, while also returning capital to our shareholders, both through dividends and share buybacks. In addition, our leadership team remains committed to operating TriMas in a responsible way to contribute to society, particularly in the communities where we live and work. Again, we continue to believe TriMas is an exciting company to invest in. And with that, I'll turn the call back to Sherry.

Thanks, Tom. At this point, we'd like to open the call up to your questions.

We'll now be conducting a question-and-answer session. Our first question comes from Hamed Khorsand with BWS Financial. Please go ahead.

Could you just talk about the timing of these new products that you're talking about in packaging, especially in the life sciences part? Is it, when you're saying '24, is it going to ramp materially for you at the time? Or is there a larger detail?

Hamed, that's a great question. I'm glad you asked it. Overall, we have several exciting new packaging awards that we plan to launch in the second half of next year, and we are currently investing in them. These include innovative tether caps for one of our major clients, Coca-Cola, new dispenser wins with P&G, increased volume in Brazil, and additional applications with Henkel for a new jar award. If our sales remain flat or experience slow growth next year, we should still be able to sustain ourselves during this slow growth period by implementing these new wins that are already in our pipeline but haven't been launched yet. In terms of Life Sciences, the situation is somewhat different. The volume is not as high yet, but we are ramping those up now, and they are expected to contribute to our Q4 results. What’s encouraging about these new wins is that they represent deeper engagement with significant medical customers. We are seeing new opportunities for further penetration with these clients, which may take longer to fully realize, possibly extending into 2025 and 2026. However, these programs are very reliable, and we are excited about them. As we secure these programs, I will include them in our discussions.

And my other question was just in Aerospace, given that you've seen improved labor and supply chain, does that create a linear kind of revenue growth for you given what Boeing and Aerospace are saying, Airbus?

I don't think we're quite there yet. Our backlog is still strong enough that we should be able to grow at a rate above the typical market growth for at least 2024. We're still finalizing our forecasts, but I expect that if commercial jet production is around 15% for next year, we should at least reach that level because we still have backlog that hasn't been fully addressed yet.

Thank you. Our next question comes from Katie Fleischer with KeyBanc Capital Markets. Please go ahead.

I wanted to dig in on the guide a little bit. It seems like Packaging, this quarter, was a little bit weaker than you had originally anticipated. Can you just talk about what gives you confidence in your ability to achieve the guide for the full year, because it implies a pretty big step-up within the Packaging segment for the fourth quarter? So just kind of wanted to understand some of the dynamics there and what you're seeing within your end markets?

Each end market varies slightly. Currently, we are experiencing the most weakness in personal care, dispensing, food closures, and to some extent in industrial closures. Our Q4 base for packaging was exceptionally low, which seems hard to believe given how long it's been since last year. However, we're beginning to see some improvements in our win rates. Even if we remain flat compared to that base, we anticipate a better outcome for Q4, which should lead to solid organic growth in our packaging group versus Q4 last year. The lead time in the market has significantly decreased due to lower volumes and available capacity. Typically, as customers deplete their inventory levels, we would expect to see a pipeline refill, but that isn't happening at the moment. We likely won't see that until the market starts to recover more significantly. While it's challenging to predict our revenue precisely, we're confident we'll perform better than we did in Q4 last year given our starting point.

And then switching to margins in Packaging, should we assume the cost savings and their impact on your margins will make the operating margin we saw this quarter a reasonable expectation going forward? Or do you believe there’s potential for additional leverage from those cost improvements for next year?

Well, I think for the nearest term, it's a pretty good assumption 'til Q4-ish. But as we go into 2024, I'm expecting that we'll start to see some operating leverage gains occur. We'll probably be pretty mindful about our assumptions when we give guidance there. But when I look back at Q3, I wasn't too surprised with our sales rate, but I was very pleased with our conversion. I've said this before in calls, we can see through non-financial indicators, things working. Typically, the numbers follow, and we started to see that because we started our cost savings efforts, I think, pretty early in the year. The benefits started to come through for us nicely in Q3. So we should experience a nice full-year run rate in 2024. Assuming some revenue comes back, which we hope happens and as we launch new programs later in the year, I'd expect to get some operating leverage gains.

What does the M&A pipeline look like right now? Have you had to adjust your strategy at all due to the high rate environment, and has it become more or less attractive?

I will address that in reverse order. We are modeling things a bit differently now, having increased our cost of capital due to the higher interest rates. That's a great question, and we have already made adjustments for that. Regarding the overall M&A market, we're not going to force anything. Strategically, we are evaluating several companies and can make clear decisions on those that align with our strategy versus those that are just interesting prospects. Generally, for our end markets and the products we are involved with, there are fewer opportunities compared to about three years ago when the market was quite active. However, we are considering some promising additions globally. If interest rates decrease slightly, it may stimulate more companies to enter the market, as many privately owned businesses are currently focused on managing their operations and capital structure rather than seeking to sell at this time.

Could you provide a bit more detail on the tax benefit this quarter and whether we should expect a lower level of taxes moving forward?

The tax aspect for this quarter was associated with a legacy entity in a foreign country. We managed to repurpose that entity and utilize some of the tax assets due to renewed activity in the area. It’s important to consider this as a one-time advantage, and it’s not something we expect to continue moving forward.

I see we have no further questions at this time. So I would like to turn the floor back to management for closing comments.

Well, thank you all again for joining us on our earnings call, and we look forward to updating you again next quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.