TriMas Corporation

At this time, it is my pleasure to turn the conference over to Ms. Sherry Lauterbach. Ma'am, please begin.

Thank you, and welcome to Trimus Corporation's third quarter 2021 earnings call. Participating on the call today are Thomas Amato, Trimus' president and CEO, and Scott Mell, our chief financial officer. We'll provide our prepared remarks on our results and our outlook, and then we'll 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 at www.trimaskorp.com under the investor section. In addition, a replay of this call will be available later today by calling 888-203-1112 with a replay code of 5060586. 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 and our Third Quarter 10-Q that will be filed today 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 issued this morning or included as part of this presentation 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 the impact of special items. With that, I'll turn the call over to Tom Amato, TriMass' president and CEO. Tom?

Thank you, Sherry. Good morning, and welcome to TriMass' third quarter earnings call. We're pleased to report another solid quarter of performance, continuing the positive momentum we've been building over the past several quarters. Let's turn to slide three. This is a very exciting time of year. The TriMass Global Leadership Team is busy refreshing our forward plans while also working diligently to close out 2021 on strong footing. It's interesting to reflect on the same period last year. When we set our 2021 plan, we knew there were remaining uncertainties related to the global pandemic, with many countries and various states still imposing tight restrictions. The potential for new M&A opportunities was also limited, given that targets were continuing to focus on navigating through the various market dislocations occurring at the time. So we in turn focused on the factors we could control and did the best we could to plan for 2021. As the current year unfolded, we adjusted to market changes along the way and leveraged our strong brand names, diverse end markets, and innovative product solutions all to drive strong cash conversion. As we fast forward to today, we did not come close to imagining that our largest input cost, resin, would be on average more than 50% higher than our 2021 planning level. In fact, there were periods throughout this year where we expected cost stabilization only to face further resin cost increases and even tighter supply. In addition, our second largest input cost, steel, was also up significantly against 2021 planning levels, and even freight cost increases crept into 2021, impacting a number of our businesses. Despite these challenges, our strategic repositioning and our diversified end market model have allowed us to deliver another strong quarter for TriMass' investors and continue our momentum. Additionally, on the M&A front, we are seeing a robust set of opportunities which allows us to reignite our commitment to build out our business platforms, augmenting our long-term organic growth. Finally, we are pleased to have initiated a dividend to benefit TriMas' shareholders. This rounds out our Folsom capital allocation strategy of investing in our businesses, programmatic M&A, share buybacks, and dividends, all while maintaining a strong balance sheet. With that, as noted, we are reporting a solid third quarter for TriMass. Let's turn to slide four. Consolidated sales were $220.4 million, up 11.5% as compared to the prior year quarter, driven by acquisitions, organic sales increases, and favorable currency exchange. Adjusted operating profit was $31.6 million, or 14.2% of sales, up $2 million as compared to the prior year quarter. Adjusted net income was 20.5 million, up 1.9 million as compared to the prior year quarter, primarily driven by higher consolidated sales, more than offsetting higher input costs and a higher effective tax rate. Adjusted diluted EPS was 57 cents per share, up 9.6% as compared to the prior year quarter, and which was in line with our internal expectations. Finally, Adjusted EBITDA was 46 million, or 20.7% of sales, up 4.4 million from the prior year quarter. We also continue to seek to drive increasing LTM EBITDA, a strong indicator of our cash earnings power, which was 168.5 million as compared to 164.1 million at the end of the second quarter. Let's turn to slide five. On a year-to-date basis, consolidated sales were $648.1 million, up 11.4% as compared to the prior year quarter, again, driven by acquisitions, organic sales increases, and currency. Year-to-date operating profit was $88.2 million, or 13.6% of sales, up $9.1 million as compared to the prior year period. And adjusted net income was $60.5 million, up $8.1 million as compared to last year for the same period. Through nine months, our adjusted diluted EPS was $1.68 per share, up 15.9% as compared to $1.45 per share during the same period last year. And finally, adjusted EBITDA was $131.9 million, or 20.3% of sales, up $11.8 million as compared to the same period last year. So overall, for the quarter and on a year-to-date basis, We are extremely pleased with our performance level and positioning for the future, particularly given some of the challenges we have been navigating through the year. I will now turn the call over to Scott, who will take us through our balance sheet and trimester segment results. Scott?

Thanks, Tom. Let's turn to page six for a review of our capital structure and strong balance sheet. We ended the quarter with net debt of $256.6 million, an improvement of more than $15 million from our December 2020 year-end level. Strong cash generation from operations has more than offset payment of refinancing fees, stepped-up capital spending supporting our long-term growth, and additional share purchases during the first nine months of 2021. Given our continuing positive momentum and adjusted EBITDA, And by managing our net debt, our net leverage was 1.5 times at the end of the quarter, well below our long-term range target of two times, and providing ample room for bolt-on acquisitions. Free cash flow for the quarter was $24.7 million and $55.7 million years-to-date. And we have more than $400 million of unrestricted cash and liquidity at the end of the quarter. As we look forward to the remainder of 2021 and beyond, we believe we continue to have sufficient liquidity to execute on our capital allocation priorities of reinvestment in our businesses, programmatic M&A, and return of capital to our investors through both additional share repurchases and dividend payments. Now let's turn to slide eight, and I will review our segment results starting with TriMass' packaging segment. I will start by highlighting that our packaging segment results for the third quarter included another record-setting sales performance with the highest sales ever for a third quarter. Net sales of 138 million increased approximately 2.9 million, or 2.1%, as compared to the year-ago period. Our Afaba and Ferrari acquisition, completed in December of 2020, contributed $11.4 million of incremental sales, while the impact of favorable currency translation added another $1.9 million. On an organic basis, and as anticipated, sales decreased by 7.7%, or approximately $10.5 million. Please remember that within our packaging segment, we are comparing current results to a pandemic-related demand surge, which began in the second quarter of 2020 and peaked during the fourth quarter of 2020, as many of our customers accelerated purchases in advance of anticipated demand increases during the 2020 holiday season and then ahead of the Chinese New Year. During this quarter, we continue to experience year-over-year organic growth in both our food and beverage and industrial end markets. Specifically, sales for our caps and closures products used in food and beverage applications and pumps used in quick service restaurants experienced double digit percentage growth during the quarter. Likewise, sales for our caps and closures products used in industrial end markets experienced similar double digit percentage growth during the period as we continue to see robust demand for our products serving rebounding sectors of the economy, including shipping, janitorial, paints and coatings, and petrochemicals. Finally, we are very pleased with the sales growth in our flexible packaging business, which was acquired in April 2020. At sales in the quarter, we're close to double the sales in the third quarter of 2020. And as expected, given the demand surge in the second half of 2020, Sales of our dispensing products for the beauty and personal care end markets declined in the quarter by approximately $20 million. Again, this pandemic-related sales abatement was planned given the COVID-19-related demand surge in Q3 2020. While our packaging segment continues to experience strong demand for both caps and closures and dispensing products, we do expect that some of our customers will continue to actively manage their inventory levels on certain product lines for the remainder of 2021. Operating profit when compared to Q3 2020 decreased by $0.7 million to $27.3 million as higher sales levels and a more favorable product sales mix were more than offset by higher input costs. operating margin was 19.8% compared to 20.7% a year ago. With regard to resin costs, and as mentioned during our Q2 earnings call, we have experienced cost increases of more than 50% since the beginning of the year. With costs continuing to rise to the end of the quarter, our contractual price recovery mechanisms, which in many cases allow for commercial adjustments only at quarter end, have not allowed for the full recovery of the resin cost increases we've experienced. We estimate these cost increases, net of price recovery, unfavorably impacted profitability this quarter by approximately $3 million. While we have experienced some recent stabilization and even reduction of resin costs, our expectation is that resin costs will remain relatively stable in Q4 As otherwise, operating margins may be further impacted if resin prices resume an upward trajectory. Adjusted EBITDA increased $0.4 million to $34.6 million versus the prior year quarter of $34.2 million. Turning to slide 9, I will now provide an update on our TriMAS Aerospace Group. Net sales for the quarter improved by 7.4 million, or 18.8 percent, to 46.5 million. Sales of our fastener product lines increased by approximately 5.6 million compared to the year-ago period as a result of approximately 7 million of stocking orders of specialized fasteners from one end customer. Sales of our engineered products increased by approximately 1.8 million on account of modest volume improvements and commercial actions completed during the quarter with one of our strategic customers. Operating profits for the quarter was 4.6 million, or 9.8% of sales, as compared to 3.7 million, or 9.5%, in the prior year. This year-over-year improvement is primarily attributable to favorable sales mix, commercial actions initiated during the quarter, and savings from realignment actions which more than offset lower fixed cost absorption. Adjusted EBITDA for the quarter was $9 million, or 19.4%, compared to $8.2 million for the prior year period. While we are very pleased with this quarter's performance, and as mentioned on previous earnings calls, our TriMass Aerospace Leadership Team continues to evaluate practical steps to further optimize our manufacturing cost structure with current and expected 2022 demand levels. while balancing its priority of continuing to invest in new and innovative products to support its global customers and positioning itself for future business opportunities. Now on page 10, let's review our specialty product segment. Net sales in the third quarter increased $12.7 million to $37.9 million, or approximately 50% when compared to the same period a year ago. This is now two straight quarters of 20% plus growth for our specialty product segment. Consistent with Q2 performance, demand for both steel cylinders and wellhead products, each for the North American region, were significantly higher in the quarter when compared to the same period in 2020. We continue to see strong demand for our products serving the construction, HVAC, general, industrial, and upstream oil and gas end markets during the quarter. Operating profit in the quarter was $6.7 million, or 17.6% of sales, as compared to $3.4 million, or 13.4% in the previous year. Operating margin improved significantly in the current quarter, primarily as a result of incremental volume, commercial actions during the quarter, and the impact of leveraging factory floor improvements implemented during 2020. Adjusted EBITDA of $7.6 million, or 19.9% of sales, was also significantly better than the prior year's quarter of $4.3 million, or 16.9% of sales, a 300 basis point improvement on a year-over-year basis. While we are extremely pleased with our third quarter performance within specialty products, these are short cycle businesses for TriMAS, and accordingly, we will continue to closely monitor potential in-market demand changes and the potential impact of further increases in the cost of steel used to manufacture all products. And finally, at the end of the quarter, our specialty product segments order book remains high when compared to historical periods, which we believe is indicative of our customers' confidence in a continued market recovery. Now I'd like to hand it back over to Tom to provide our full year outlook and his concluding remarks. Tom?

Thank you, Scott. Let's turn to slide 12. As noted, we are working diligently on our forward planning while seeking to close out 2021 strong. While we continue to operate in the pandemic period and navigate its related uncertainties, specifically changing demand levels, input costs, and labor deficiencies, we are increasing our expected cash conversion outlook and narrowing and updating our sales and EPS outlook for the year. We anticipate full year consolidated sales to be up between 10 to 13% as compared to 2020. We expect to achieve this overall growth as a result of acquisition related sales and a strong increase in organic sales, primarily within specialty products. These increases are expected to more than offset our planned pandemic related sales sales abatement from the demand surge that we experienced predominantly in the third and fourth quarters of 2020 within our TriMass packaging group. As we discussed throughout the year, TriMass Aerospace has been benefiting from stocking orders of specialized fasteners for certain customers. On a year-to-date basis, these orders, which totaled approximately $21 million in sales, have more than offset the decline in organic sales within TriMass' aerospace group due to the lower aircraft build rate. we expect to fulfill most of the remainder of the stocking order in the fourth quarter. As a result of the previously mentioned increased input costs, as well as slightly higher tax rate and less currency benefit than originally expected, we now anticipate full-year EPS to be in the 218 to 227 range as compared to $1.92 per share in 2020, which is 16% higher than it was for the midpoint last year. We are also forecasting free cashflow to be greater than 110% of net income, despite CapEx investment rate higher than our historical average of approximately 4%. As we start to look to 2022, we expect to continue our positive momentum, growing sales organically and with opportunities to enhance organic growth through bolt-on acquisitions. We anticipate moving past some of the challenging comparisons within TriMAS packaging, particularly as we get later into the first half of 2022 with overall GDP plus organic growth for the year. Again, this would be before opportunities to enhance our sales through bolt-on acquisitions. We do anticipate and will plan for some of the challenges of completing the one-time stocking orders, which benefited TriMet Aerospace in 2020, sorry, in 2021. as we work through the upcoming year and bridge to a period of increased demand in the aerospace industry, which we hope to see in the coming years as more people resume to traveling by air. We expect continued expansion within TriMass's specialty products group as we benefit from the factory floor improvements, factory floor investments, and higher demand from an economic recovery spanning into 2022. Overall, We expect TriMass's diversified end market model to continue to benefit our shareholders through strong cash flow conversion in the upcoming year. Let's turn to slide 13. I will close out our prepared remarks by showing just a few examples of why we remain excited about the long-term prospects for TriMass. Through repositioning TriMass, nearly two-thirds of our revenues are generated from TriMass's packaging group. As discussed in prior calls, we believe there are long-term growth characteristics of TriMAS packaging through our many sub-markets and our robust pipeline of innovative product solutions. Next, we expect to have further long-term performance gains in specialty products and eventually in aerospace as markets recover, especially given previous realignment actions. Also, we have excellent cash flow and capacity to continue to augment our organic growth by building out our most desirable platforms with strategic acquisitions. While we continue to reinvest in our businesses for long-term growth and maintaining a strong balance sheet, we also anticipate continuing to return capital to our shareholders, both through share buybacks and now dividends. In addition to our financial progress, our leadership team remains committed to operating TriMAS in a responsible way to positively contribute to society. particularly in the communities where we live and work. As we have discussed on prior calls, we posted our inaugural sustainability report to our website in December of 2020. Since then, we have continued to take steps to add to the transparency of our ESG commitment and have plans to refresh our sustainability report in the coming months. Additionally, we are proud to recognize one of our recent acquisitions of Faba and Ferrari, for achieving a gold status in the corporate social responsibility ranking of EcoVadis, an independent environmental and social assessment firm. This is in addition to our recently announced innovative, recycle-ready dispenser for our Reiki business, which has been commercialized. So again, we are excited with our commitment and progress against our ESG and sustainability initiatives and look forward to continuing our improvement and updates going forward. 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.

Okay, thank you. At this time, we will open the floor for questions. If you would like to ask a question, you may do so by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off so that your signal can reach our equipment. Again that is star one to ask a question. And our first question will come from Brendan Popson with CJS Securities.

Good morning. Tom, I just want to ask if you could discuss the choice to start paying a dividend and capital allocation priorities. with the acquisition part of that, it sounds like you guys are seeing more opportunities, and it sounds like it's in packaging. Could you just discuss what exactly you're seeing that's exciting, and then is it going to follow the recent trend of Europe, or are there things domestically, too, that you're looking at?

Okay. Thanks, Brendan. Hello. First of all, on the dividend, first part of your question, Um, this is something we've been talking about for, um, you know, frankly, a number of years and, um, uh, with the onset of pandemic, it sort of went on hold, but as we saw and continue to see the cashflow characteristics of, of trimass, um, you know, we can do as a company, all of the above, we've got a great balance sheet. Um, we can continue share buybacks. We can pay a dividend. We hope. And, and, um, That brings additional demand in investors that previously may have looked at TriMass and, you know, like to put in their portfolio companies that are dividend-paying companies. We hope that they'll give us a closer look now, of course, but also wanted to reward our shareholders, our current shareholders. Certainly, given the cash flow characteristics, the balance sheet, our capacity, we continue to have... a significant amount of room to execute our plan for bolt-on acquisitions. And I can say on that front, our primary focus continues to be to build out our TriMAS packaging platform. However, we also will focus on opportunities, particularly during this period in the aerospace area, where we might see some opportunities given what we see of a recovery over the next few years and build out that platform as well. I can report that we are busier on the M&A front than certainly my time with the company currently. And there's a lot of exciting opportunities, all sort of bolt-on size in nature, which are great deals for TriMass. that we're hoping to bring home. I have nothing to announce on this call today, but hopefully in the future, or maybe even in the nearer future, we'll have some news on that front. But definitely very active on that front, very different than where we were a year ago, where just folks weren't even interested in talking about potential divestitures of their companies, and today it's a very different environment.

Great. I appreciate that color. It helps a lot. And then just a short one here on your free cash flow conversion in excess of 110% of this year, which is great. What exactly is driving that? And then is that something where we can expect maybe the free cash flow conversions a bit under 100% next year as kind of a trip, or is it just something else?

Hey, Brendan. Hi, it's Scott and Al. You know, look, I think that the cash flow conversion is indicative of the strength, the underlying strength of our businesses from an operating perspective. I mean, there's nothing unique relative to this year, and the expectation is going forward, given our cost structure, that we'll continue to convert, you know, at a greater than 100% clip on a go-forward basis.

Great, thank you. I appreciate it.

Okay, thank you. Our next question will come from Steve Barger with KeyBank Capital Markets.

Hey, good morning, guys. It's Ken Newman on for Steve. Morning, Ken. Morning. Tom, I appreciate the commentary on the $3 million hit on packaging margins from the higher resin costs, but I am curious if you guys can help us Quantify just the other moving pieces and packaging margins in the quarter, including, you know, how much mix contributed or just exactly what the pricing contribution in the core was.

You know, I think it was on a cap basis, there were indeed a lot of moving pieces. But the biggest driver to... you know, perhaps higher earnings would have been the recovery or the lag factor on resin. But definitely there were mixed factors in certain end markets up, certain end markets down, just given the strange period, frankly, Ken, of 2020. Right. Right. And again, I appreciate that you're not... I also... Go ahead. I'm sorry, Ken. I just also want to mention, you know, like most companies, particularly in North America, we're seeing a drag on freight, you know, with freight lanes up being in some cases double than where they were a year ago. And that's certainly impacted our packaging business.

Right. Right. That actually segues pretty well into my next question here, which was, you know, any incremental color that you're seeing within your supply chain, obviously you've mentioned freight. I'm curious how much has labor impacted the quarter, if at all, and if you have any comments on just forward expectations for SG&A expenses in coming quarters that we should be aware of.

Yeah, so let me just mention a couple things. First of all, you know, on the supply and the supply side, I think one of the things that is a benefit and unique about TriMass is we're, for the most part, we're basic in the products that we manufacture. So we're buying raw materials and we're converting them, as opposed to buying sub-assemblies or other types of electronic components that go into the mix. So while this is very big news, and understandably so for many companies, and this may in some cases even impact our customers, it's not necessarily a big impact for TriMass. We've got some great supplier partners, and we did run into this year some tightness of supply, not even the economics, but the tightness of supply. Fortunately, we worked with them to make sure we got priority, or where they couldn't give us priority, they helped us, and we helped ourselves in finding alternative supply. So these are things that we have been managing this year that, as I opened my comments with, just were completely not even conceivable last year. And then on the labor front, you know, you're raising a good point. In the overall scheme of things, if we didn't have material to discuss on this call or contend with or tightness of supply, I mean, the biggest driver would probably be labor and labor inefficiency. And we have some of our operations are running at full-time to temp ratios that pre-pandemic were unheard of. And that's just a function of the current economic state we're in. And I just want to, in addition, like other companies, it's tough to hire, so we're dealing with all of those factors as well. But that sort of, to me, makes this quarter and this year so exciting and interesting for Trimask, that despite all of these various things that have been, frankly, thrown our way, that we have largely through the TriMass business model, being proactive in nature when we can and where we can, overcome them, not just through commercial actions, but also through our own self-help techniques, because we didn't wait to sort of see how things ended at the end of the quarter. We took actions early, throughout the year, continuously, and I think that's why we were able to deliver the results we did this year and that we're forecasting for the balance of the year.

Right. When I think about the comment on the full-time to temp ratios, how should I think about that? Is that pretty evenly spread across all the segments? And just any color on just where capacity utilization is across the various businesses?

Well, okay, so let me take that in reverse order. On capacity utilization, there's a lot of available capacity in our aerospace business, of course. And in our packaging business and our specialty products business, we're fairly full. There's going to be various locations globally where there might be some pluses and minuses to that. And then the other part of your question, which was on the temp and full-time ratio, that's an example of a few locations. which we'll call hot spots, which we're monitoring. Frankly speaking, over time, we'll bring that into balance, but it does take time. It's not something that an operation can fix in a week. It takes many months and sometimes could take even longer. And it's not in all cases. It's not something that is a situation that's universal around our manufacturing operations. There are some hotspots in certain parts of the country. And then there are other parts of the country where it's less of an issue. than we're seeing. So it's just something that as a management team, we're managing through. But again, the TriMAS business model is sort of our secret sauce in how we manage and operate TriMAS allows us to stay on top of these, work with our operators, ensure they have the resources and the forward planning to make sure that we can overcome these issues.

Right. You know, I appreciate that you're not guiding or ready to guide to 2022 yet, but as I kind of think about the initial comments for growth across the businesses in 22, can you help me just think about the cadence for packaging margins relative to the pricing actions that you've implemented and just when you think the mix begins to normalize?

It's a tough question for us to address in this call because I can put some, you know, Factors out there, for example, if material prices start to come down, that will help us in 2022. Depending on various end markets that we're in, if mixed changes in a more favorable way, for example, we've talked about industrial and pharmaceutical and nutraceutical. If those pick up into next year versus where they are this year, those will be benefits. I'm looking to 2022, frankly, for TriMAS Packaging to be an exciting year, not just organically, but I'm certainly hoping that we can add to the business through acquisitions.

Right. Last one, if I could just squeeze it in here. You know, it looks like the specialty incrementals are expected to be around that mid-20% range at the midpoint of the updated guide for the fourth quarter, which is pretty similar with what you did in 3Q. So I'm just curious if you think about Should we expect 25% as this new run rate for incremental margins through the upcycle within specialty?

It's Scott Mell. I missed the front end of that question. Could you just give it back to me one more time?

Yeah, I'm just trying to get a better sense of where you think run rate incrementals for the specialty business is through the remainder of the upcycle. It looks like the fourth quarter is kind of being implied at like a 25% incremental margin in 4Q.

Yeah, I think it's going to be a little lower than that estimate, Ken. I mean, we obviously have, you know, optimized the fixed cost in that business. But, you know, without looking at the specific figures, my guidance would be it's going to be below that estimate.

Understood. Thanks for all the time. Thanks again.

Thank you. Next, we have another question from Bernie Popsin with CJS Securities.

Hey, just a quick follow-up piggybacking on the labor talk. With the vaccine mandate approaching, I guess, how are you guys thinking about the potential impact on your labor with that and what your plan is there? And just give any thoughts on that.

Brendan, that's a great question. We are actually working through gaining statistics right now for our workforce to see what, by location, our vaccine population, vaccinated population versus unvaccinated. We still do not have guidance. Like most U.S. companies, with more than 100 people on what the approach will be from OSHA, how they'll regulate it. Our communication to our employees to date has been around that will, of course, follow the applicable laws at the federal level and at the local level, as the case may be. And there are two options for those that are obviously vaccinated. they have to just make sure that we have on file proof of their vaccination. And for those that are unvaccinated, they have to get tested every week, and that's the current indication on what's coming out of the current White House. So this is what we're working with at this point, but we still do not have the determining approach from OSHA on how this will be regulated.

Okay, thank you.

Thank you. And speakers, at this time, there are no further questions. Thank you.

Well, thank you again, everyone, for participating on this call, and we look forward to updating you again next quarter. Please, again, stay safe and healthy. Thank you.

Thank you, ladies and gentlemen. This concludes today's teleconference, and you may now disconnect. Please enjoy the rest of your day.