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spk05: Thank you and welcome to Trimouse Corporation's second quarter 2023 earnings call. Participating on the call today are Thomas Amato, Trimouse's President and CEO, and Scott Mell, our Chief Financial Officer. We will provide our prepared remarks on our second quarter results and outlook, and then we will open up the call for your questions. In order to assist with the review of our results, we have included today's press release and PowerPoint presentation on our company's website at trimouthcorp.com under the investor section. In addition, a replay of this call will be available later today by calling 877-660-6853 with a meeting ID of 1373-9841. 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-Q that will be filed later today for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. 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 the call. Today, this discussion on the call regarding our financial results will be on an adjusted basis, which is excluding the impact of special items. With that, I will turn the call over to Tom Amato, TriMass' president and CEO. Tom?
spk02: Thank you, Sheri. Good morning, and welcome to our second quarter earnings call. As we reflect on the quarter, I want to first thank our TriMass team for their increased efforts this year as we continue to navigate a very dynamic and changing global market environment. In certain product lines, we are adding capacity, ramping up production volumes, enhancing skilled labor, and alleviating supply bottlenecks, all to support robust customer demand. At the same time, in other product lines, We are rebalancing our manufacturing footprint and securing procurement savings to prepare certain businesses for improved conversion as end markets recover. Overall, irrespective of markets being strong or soft, each TriMass local team is working diligently to satisfy market demand or offset market disruptions while remaining focused on gaining momentum against our longer-term strategies. In relation to this quarter, I would like to personally thank our specialty products team for delivering strong results. Our specialty products performance is the result of making investment decisions in our businesses when market demand was challenged on the premise that demand would rebound. Market improvement did occur, as we are witnessing today, and we were prepared to satisfy higher customer demand while also converting wealth. So in summary, we decided to invest in and take advantage of prior disruption in our specialty products and markets, which has benefited investors today. We are also leveraging our current momentum to position our specialty products group to capture future growth through new innovations, such as ultra-high purity cylinders for packaged gas applications and EPA-certified remote power generation units. So again, I would like to thank our specialty products team for their strong performance this year. I would also like to highlight that while our performance within TriMet's aerospace is well below our internal standards and potential, we are starting to make some significant progress in bringing the supply of super alloy raw materials, skilled labor, and production capacity into better balance. As we make strides to achieve improved synchronization with our production planning and customer requirements, we anticipate achieving financial results much improved from current levels. In fact, our second quarter results were sequentially better than our first quarter results. And I would like to note that in Q2, we had a settlement charge unique to the quarter that otherwise would have had our operating margin percent ahead of the prior year quarter as well. So while we are still below our overall potential, we are starting to achieve momentum in this group. Finally, our TriMAS Packaging and TriMAS Life Sciences teams are working diligently to prepare for improved market conditions as we move forward. Within TriMAS Packaging, while we have seen some sequential monthly increases in our order backlog, they are at a more moderated rate than we had hoped to achieve at this point in the year. As we move into the second half, we now believe a market recovery in certain consumer products and packaging industrial submarkets will be more gradual than we assumed to start the year. As such, we made the decision to take advantage of this lower demand period to reposition productive assets and streamline our manufacturing footprint. And we are taking other procurement savings actions, which we anticipate will generate more than 10 million or 200 basis points of annual run rate savings once implemented. Additionally, our TriMass packaging commercial team is gaining momentum, leveraging our global supply model by expanding our business into new geographic markets with new customers, particularly in South America. And of course, we continue to make progress marketing the characteristics and benefits to our CPG customers of our patented and commercial-ready single-polymer dispenser for personal care, beauty, and other applications. We anticipate highlighting these advancements as we move into 2024. Within TriMass Life Sciences, we are ramping up and launching new programs for polymerase chain reaction, femoral test kits, and electrosurgery component applications. While some of our life sciences applications are currently lower in volume, we remain excited about the new channels and newer customers for growth in areas that, once qualified, have a strong moat. Again, I thank our TriMAS Packaging and TriMAS Life Sciences teams for taking actions today to position us for improved performance in the future. With that background, we delivered adjusted earnings per share for the quarter of 50 cents, which, compared to the first quarter of 2023, of 30 cents represents a sequential improvement and was in line with our internal planning models. With that said, while we continue to assume recovery in certain of our packaging end markets in the back half of 2023, we anticipate that these will be at a more gradual rate than originally modeled. And I'll discuss this further in a few slides. At this point, I would like to turn the call over to Scott, who will take us through our consolidated and segment results. Scott?
spk04: Thanks, Tom. Let's now turn to slide four where I'll summarize our financial results for the quarter. Sales for the quarter were $233.2 million as compared to $237.7 million for the prior year quarter. As organic growth in the TriMAS specialty products and TriMAS aerospace groups and acquisition-related sales, were more than offset by lower market demand for TriMAS packaging dispenser enclosure products used in personal care, food, and industrial applications. We continue to believe the packaging market softness primarily relates to continuing overstock positions at certain large CPG customers, more conservative purchasing patterns, and lingering inflationary concerns. Operating profits for the quarter was $27.3 million as compared to $15.5 million for the first quarter of this year and $32.1 million for the prior year quarter. EBITDA for the quarter was $45.5 million or 19.5% of sales as compared to $31.7 million or 14.7% of sales for the first quarter of this year and 20.3% of sales for the prior year quarter. As Tom mentioned in his opening remarks, the performance for the quarter was in line with our planning models, and we continue to expect our performance to sequentially improve over the second half of the year, albeit at a more gradual rate than originally expected. Finally, adjusted earnings per share for the quarter were 50 cents, which was a 67% increase when compared to the first quarter of this year. Now let's turn to slide five, and I will briefly review our balance sheet and credit statistics. Net debt after funding the acquisition of WellMAC, paying a dividend, and completing share repurchases was $375 million with a net leverage ratio of 2.3 times. As previously discussed, we drew approximately $40 million on our revolving line of credit to fund the April acquisition of WellMAC. of which 22 million remains outstanding at the end of the quarter. We expect to repay the remaining outstanding balance by the end of the year with cash flows generated from operating activities. Free cash flow of 11 million for the quarter was in line with expectations, and we continue to 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 six, and I will begin my review of our segment results, starting with TriMAS Packaging. First quarter net sales were $117 million, as compared to $148 million for the prior year quarter, and up slightly when compared to the first quarter of this year. Acquisitions contributed $7.5 million of sales during the quarter, while the impact of foreign currency was immaterial. As expected, organic sales were lower during the quarter, down 26% when compared to the previous year period. This decline is primarily attributable to lower demand, most notably for consumer goods with applications in the personal care, food, and certain industrial submarkets. We continue to closely monitor the commercial environment and will take, as necessary, additional streamlining action as a hedge against any potential further market demand softening. Operating profit in the quarter increased by $6.7 million to $21.9 million when compared to the first quarter of this year, but was lower on a year-over-year basis, primarily on account of the impact of lower sales. Operating margin was 18.7% of net sales, while adjusted EBITDA was 30.3 million, or 25.8% of net sales, a 90 basis point improvement year over year, and a more than 600 basis point improvement when compared to the first quarter of this year. Turning to slide seven, I will now provide an update on our TriMAS Aerospace segment. Net sales for the quarter increased by 12.4 million, or 26%, when compared to the same period a year ago, as we continue to see strong order intake for many of our aerospace products as general aerospace volumes continue to recover ahead of market expectations. Acquisitions contributed 7.3 million of sales during the quarter, while organic sales increased by more than 5 million, or 11%, when compared to the previous year period. operating profit for the quarter was 3.7 million, or 6.2% of net sales, as compared to 3.3 million, or 6.9% in the prior year. As Tom mentioned earlier, absent a one-time settlement charge unique to the quarter, operating margin for the quarter would have been higher on a year-over-year basis. More importantly, sequential quarterly operating margin improved by more than 300 basis points, as we are starting to see improved conversion rates on higher sales. Adjusted EBITDA for the quarter was 8.6 million or 14.4% of net sales. Now on slide eight, let's review our specialty product segment. Net sales in the second quarter increased by more than 14 million to 56 million, a 34% increase when compared to the same period a year ago. This is now nine consecutive quarters of double-digit percentage growth for our specialty product segment. Demand for steel cylinders for packaged gas applications and remote power generation units and related spare parts, each for the North America region, remains robust with moderately high levels of backlog for both businesses. Operating profit in the quarter was $12.1 million, or 21.6% of net sales, as compared to 6.8 million in the previous year period. This record-setting margin level for specialty products is a result of continuing robust demand and the impact of previous factory floor improvement actions. Adjusted EBITDA for the quarter was 13.2 million, or 23.5% of net sales. While our specialty products businesses Order books remain strong, which we believe is indicative of continuing resilience in certain end markets for which they sell into. We will continue to closely monitor order changes and input costs and take appropriate actions if necessary. At this point, I would like to turn the call back over to Tom to review our 2023 outlook and for some closing remarks.
spk02: Tom? Thank you, Scott. Let's now turn to slide nine. We continue to model potential scenarios for 2023, especially given some of the uncertainty in a few of our end markets. As noted in our earnings release, we are modifying our full year outlook. There are a few important considerations I'd like to note. The most significant driver is our view of the recovery in certain packaging end markets, specifically While we have estimated continued sequential demand recovery as customers work through inventories, we now believe that that recovery rate will be more moderated than originally forecasted. Therefore, we are modifying our consolidated sales growth range to a new rate of 5% to 10% compared to 2022 and an adjusted EPS range of $1.80 to $1.95. It is worth noting that on a comparison basis, when normalizing 2022 for two discrete special projects that we completed last year, our base adjusted EPS for 2022 would have been $1.73. Therefore, even at the revised adjusted EPS midpoint, we are forecasting sequential momentum in our performance. Our revised outlook also assumes continued strong demand within our specialty products group, continued progress against bringing supply and production into better balance within our TriMAS Aerospace group, and continued moderated sequential demand increases within TriMAS packaging. We also continue to forecast our full year free cash flow to be greater than 100% of that income. So let's turn to slide 10. I would like to again thank our investors for their continued support as we navigate through what we believe is a prolonged but temporary softer demand period. With that said, I will conclude our prepared remarks by providing just a few examples of why we remain excited about the long-term prospects for TriMass. First, we continue to believe there are attractive long-term characteristics within our TriMass packaging and TriMass life sciences group. through our multiple end markets, diverse geographic presence, and improving demand. We also have many sustainable product solutions, such as monopolymer, tethered caps, and child resistant closures in the pipeline and coming to market in the future. And we are gaining traction with some new to TriMAS medical applications. We also have growing confidence in the sustained recovery within the commercial aerospace and defense end markets. and anticipate future increases, increased spending in defense, will benefit TriMass Aerospace. We are working through supply and remaining skilled labor constraints and expect to take advantage of long-term operating leverage gains as we bring our supply and production planning into better synchronization with customer demand. Within our TriMass Specialty Products Group, we expect demand to remain robust given our strong order backlog. we will also continue to assess new market and product adjacencies to drive future growth within our specialty products 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 TriMass in a responsible way, to positively contribute to society, particularly in the communities where we live and work. Again, we continue to believe TriMass is an exciting company to invest in. And with that, I'll turn the call back to Sherry. Sherry?
spk05: Thanks, Tom. At this point, we would like to open the call up to your questions.
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone key. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Ken Newman with KeyBank Capital Markets. Please proceed with your question.
spk03: Hey, good morning, guys. Morning, Ken. Morning. Tom, maybe first to start off, can you just talk a little bit about the confidence that you have in the packaging guide and just where your visibility with customers in the end market is today?
spk02: Yeah, I mean, look, that's a great question. What's happening – the best way for me to explain what's happening in the market today where we've had overstocked positions that we've been – The best way for me to describe it is we've seen a number of our customers that have had overstocked positions, not all, but many, make progress as we've gone through the year burning down those inventory positions. What's happened, Ken, as a result, is given that we started the year with this position, given the capacity that's available in the market, we're seeing lead times significantly reduced in several of our product lines. So what that means is previously suppliers like our packaging group, as well as other suppliers we would compete with, would normally quote eight weeks to deliver certain products, six to eight weeks. That's down substantially. So customers are benefiting from available capacity, shorter lead times, which means the market has shifted to a shorter cycle supply scenario. That's a long way to say that our visibility is pretty short. So there still is uncertainty. We feel... a little bit comfortable because we saw our order book pick up in the second quarter on a month-over-month basis, but we're also in what I would call a shorter cycle period. So I think that's the best way for us to answer the question at this point. We are making outstanding progress on booking what I would call larger orders for our packaging group, but several of those don't hit until next year given that there were newer innovations or specific programs. So we really can't count on them for 2023. So we're really looking at our current order cadence, trying to make some predictions around that, and that's where we're coming up with our revised outlook for the top line for packaging. That being said, on a consolidated basis, we have the order book in TriMet Aerospace, and we have strong orders in TriMet specialty products. So for us, it's a matter of getting the product out the door. So we have a little mini hedge versus a pure packaging company. Right.
spk03: I guess the things that we're trying to get comfortable with is the lower end of that packaging revenue guide How much conservatism is kind of built in there? Should we expect that sales are up year over year in the third quarter, or is this truly a fourth quarter type of heavy revenue growth to kind of get you to that midpoint?
spk02: Yeah, good question. We're expecting Q3 sales to be moderately up versus last quarter. Last quarter sales were very low, and fourth quarter was very low. And then we would expect a bit of a pickup in fourth quarter. We do expect to have a seasonal selling period occur this year, which didn't occur last year. If you remember some of our conversations, orders were dropped that were in our system and they did not, you know, the orders just never took place in the year. So we do expect there will be some reversion to somewhat of a seasonal selling period, not yet at normalized rates, but certainly not what we saw last year. Right.
spk04: Can I also point you to slide 13 of our earnings presentation where we highlight the revised sales growth for packaging for the year, which is on the low end, minus 8% year-over-year, and on the high end, minus 2%.
spk03: Right. No, I get that. I think it still implies, you know, up double digits in the back half year-over-year, right, for just that segment. And so I guess that kind of leads into the next question because the margin profile also implies a pretty sizable ramp in operating leverage for the back half. That probably makes sense, just given the comments here you made, Tom, on the easier comps from last year and the selling period. Any way that we can kind of think about the cadence of incremental margin, 3Q to 4Q?
spk02: Yeah, look, I mean, I think that's, you know, I don't want to write the story, but in terms of the value proposition for TriMass right now, As aerospace, as we bring into synchronization, and we're making progress every day, it'll come through the numbers based on the non-financials that we're seeing. As we're making progress in aerospace, and as revenue comes back in packaging, the conversion rates should come up nicely. So, you know, I think that our current business run rate for you know packaging it's abnormally low we're keeping infrastructure in place to some extent right we're doing some footprint rationalization we're taking some costs out but we're not positioning the business as if this is the new run rate for sales we are positioning the business for a recovery so I'm confident as I as I sit here today that as we get incremental sales within packaging will convert very well.
spk03: Right. Maybe just one more on packaging. Sorry if I missed this, but did you say how much these consolidations are expected to cost within packaging and just a sense of the timing of realizing those benefits? I think you mentioned $10 million in benefits are expected. Any color there?
spk02: Yeah, I don't know, Scott. We do have some restructuring charges in the quarter that largely relate to anticipated costs to make those moves. So, you know, the payback on that I think is pretty swift, but also will help us with our conversion rates.
spk03: Okay. And then these existing facilities, do they need to be retooled in any way to kind of move that capacity over? Or just what's involved from an operational or logistics perspective in consolidating that capacity? And, you know, is there a risk that just given since the visibility is so low right now, is there a risk that you can kind of get, you know, caught flat-footed as you try to consolidate the manufacturing space?
spk02: I don't think so. I think I understand what you're saying, but the one point I'd like to make here, having in my career repositioned more manufacturing operations than I can even recount at this moment, the move that we're making within the U.S., which is exiting a California operation, we're moving existing production assets into into existing plants where we, you know, so we actually, we don't even have to build a bank in many ways. So we're able to just move tools over, put them into presses that are existing, and then the presses will follow. So if there's a further prolonged softness in the market, we'll still get some savings because we're taking the infrastructure costs out of one plant in California. Right. And then I just want to say it's a little more complex in what we're doing in China in terms of bringing two plants into one because that involves a new facility. But our estimates are based on their current demand levels, so we're not really even forecasting a pickup in demand there, and we're moving some assets to other parts of the world. So I look at both of those restructuring steps as – you know, safer launches compared to, like, launching a brand-new plant.
spk03: Right. Maybe just switching over to the specialty segment. Obviously, very strong margins here. Longer term, I mean, how sustainable are margins at this level? I mean, is this the new baseline for that business through the cycle, you think?
spk02: Well, I think it sort of depends on overall market demand and what cylinders we sell. There is a big mix characteristic here. So I've been talking for the past few quarters on ultra-high purity cylinders. For us, that's a good product line. It goes into a specialized application, specifically with the movement of localizing microchips into the U.S., those types of cylinders would go into those types of applications, and we can typically command a higher, you know, better pricing and therefore better margin. So, you know, look, we do recognize we're getting into some historical, you know, high ranges for margin here, and that's, you know, both a good thing and it also has us, you know, looking behind us and making sure we're doing what we can to protect that. a lot of the driver though has been our improving our cost structure. Um, so we've, we've taken a lot of actions over, like I said, I mean, the time, sometimes it's difficult when times are tough to invest in a business, you know, those are, you're taking a risk and we did that here and we did it on the bet that the market would come back and it did and it's paid off. Um, so it's a fair, it's a fair point. I just certainly don't want to conclude that, um, You know, there's risk here, but we're cognizant of what you're saying.
spk03: Okay. Maybe just switching over to Arrow really quick. You know, Boeing just announced they are ramping monthly production of the 737. Just curious how you think about that impact and the visibility for faster production.
spk02: Yeah, look, if you ask a question on 777? I think the 737, but any platform.
spk03: Oh, 737. Okay. So, look, I mean, we're –
spk02: All of that helps. The order book for us is there. The aerospace industry has something very unique to it in terms of annual gathering that is everyone you could possibly want to meet with and talk to, and that air show just took place a few weeks ago. Very upbeat. The types of production issues that we're having, we're not alone, not only in the faster space but in some of the hard part supply space. So the key theme for us with our customers, with our suppliers, is getting, as the big aerospace wheel starts to turn again, getting alignment in the supply base, in the subsupply space, production-based skilled labor, labor, et cetera. So that's why I'm, you know, pretty excited that as we go forward and certainly into 2024, you know, we'll convert well. I also think longer term, I thought you asked a question about the 777, but longer term, as the 777 comes back online, so maybe that's 2025 plus, you know, there's very little to no activity in our numbers related to that. And that's a, you know, we've got a nice presence on that as well.
spk03: Yep. Maybe last one for me. Just on the free cash flow, guys, greater than 100%. I know that's excluding some restructuring costs, so maybe not completely apples to apples. But, you know, even I think through the first half, even on an adjusted basis, we're at around 60% conversion. So any big one-time thing, how much of that is seasonality, or is there anything that we need to kind of be paying attention to in terms of how that free cash starts to flow through here in the back half, just given all the issues with packaging.
spk04: Yeah, I mean, that's our traditional cycle of cash generation as we, you know, invest typically in the first half of the year to working capital and then we unwind it. as we get into the third quarter and really into the fourth quarter. So there's nothing really unique there, Ken, other than just our traditional expectations on unwinding of working capital. Plus, obviously, the incremental earnings in the second half of the year versus the first half. Right.
spk03: Got it. Okay. Thanks for your time. I appreciate it. All right. Thank you, Ken.
spk00: Thank you. Our next question comes from the line of Hamed Korsan with BWS Financial. Please proceed with your question.
spk01: Good morning. So the first question I have is on the packaging side. Do you think you might be, you know, in a situation where you don't have capacity if orders come back, you know, quicker than you're thinking on the consolidation side?
spk02: No. We actually... have been studying that's a great question and it's something that we've explored intently, especially given what we have seen take place within aerospace, right? So it certainly was a wake-up call for us, but we can add shifts to several of our plants where we would have pinch points. You know, we're not yet running, I mean, we're not running all of our plants within packaging on a three-shift basis, or in many cases, not even a two-shift basis. So we can scale up on our productive assets and get some incredible operating leverage.
spk01: Okay. And then as far as the customers are concerned, are they adjusting as far as making new products to attract the customer again, or is this purely... They're just stuck with inventory, and they're just waiting for it to clear out through the channel.
spk02: Well, I understand the question. Look, I think what's exciting about the packaging segment for us generally is there's always innovation that is at the core of what our customers are doing, what we're doing with them, especially when you think about the consumer product space and what attracts customers. what attracts at point of purchase, point of sale, the consumer to select one item versus another. And there's a lot of science that goes into that with our customers, and we support that effort intently. You're right, though. To the extent that inventory was high or overstocked coming into this year, on a simple pump, for example, like a simple 2cc dispenser, yeah, that would have to get burned through. It probably wouldn't get disposed of because there's a significant amount of consumption of 2cc simple dispensers that are here today, have been here for a while, and going forward will always be there. They're lower cost less fancy pumps that, frankly, do a fine job of getting liquid out of a container to a consumer's hands.
spk01: All right. Great. Thank you.
spk02: Thank you. Look forward to seeing you soon.
spk00: There are no further questions at this time. I'd like to turn the floor back over to Tom for closing comments.
spk02: Okay, thank you again for joining us on our earnings call, and we look forward to updating you again next quarter.
spk00: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
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