TriMas Corporation

and welcome to TriMAS first quarter 2024 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Sherry Lauterbach. VP Investor Relations and Communications. Thank you, Ms. Lauterbach. You may begin.

Thank you, and welcome to Trimath Corporation's first quarter earnings call. Participating on the call today are Thomas Amato, Trimath's President and CEO, and Scott Mell, our Chief Financial Officer. We will provide a prepared remark on our first quarter results, 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 presentation on our company website at Trimouse.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 1374-5821. 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 first quarter Form 10-Q to 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 statement 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'll turn the call over to Tom Amato, Trimouse's President and CEO. Tom?

Thank you, Sherry. Good morning and welcome to our first quarter earnings call. Let's turn to slide three. First, let me say that we're off to a great start. The positive momentum we began to observe at the end of 2023 in certain of our end markets and performance in TriMass' two largest segments has continued as we begin the year. Within our TriMass packaging group, Virtually all of the end markets that were depressed in a cyclical demand trough in 2023 are now up organically and displaying signs of strengthening. Additionally, on a year-to-date basis, only products used in certain beverage applications softened as compared to the prior year quarter, driven primarily by lower sales into certain dairy applications and delays in orders related to European-based customers converting to tethered caps. For our TriMAS Packaging Group overall, organic sales were up 6.1%, with total sales for the group up 9.3%. Sales and order intake within TriMAS Packaging are important foundational indicators reinforcing our confidence that we are executing the right strategies to deliver our 2024 financial targets. Within our TriMAS Aerospace Group, Organic sales were up 11.8%, with total sales up 34.7%, driven by higher aerospace fastener throughput and our acquisition of well-backed manufacturing. Our backlog and order intake within TriMAS Aerospace remains robust, which we believe supports our continued recovery efforts given the dislocation in market demand and sub-supply and labor availability for which we had been working on through most of the prior year. While our packaging and aerospace segments represent over 80% of our sales in the quarter, sales in our specialty product segment weakened significantly in the first quarter as compared to an exceptional sales rate in the first quarter of last year. Two main factors drove this rate of change, which Scott will cover in more detail later. First, while lower cylinder sales were anticipated, the rate of change was higher than planned due to overstocking of cylinders in 2023 as customers sought to mitigate logistics and lead time challenges from prior years. Additionally, we had no meaningful sales of compressors to one of our customers in the oil and gas market. Our specialty products businesses continue to flex costs and right size where practical to current demand levels while also preserving the ability to meet anticipated higher demand in the second half of 2024. We have experienced demand volatility within our specialty products businesses in the past, and we remain confident that volumes will begin to recover as we move through the year. On a consolidated basis, TriMass sales for the first quarter were up 5.4%, slightly ahead of expectations. I would also like to turn our attention to share repurchases to start the year. We repurchased approximately 540,000 shares for a net reduction of shares outstanding of approximately 1%. And as of today's call, we have increased this total to just over 600,000 shares on a year-to-date basis, further adding to our return of capital metrics. This rate of share repurchase is higher than the first quarter of last year as reducing shares outstanding is a tax-efficient way to provide long-term value to our shareholders, particularly when we believe there are valuation dislocating events in the market. Finally, as noted in today's press release, we achieved adjusted earnings per share of $0.37, an increase of 5.7% as compared to the prior year quarter. In light of a solid start to the year, trends we are seeing in certain of our end markets, and even when considering, in some cases, continued demand volatility, we are reaffirming our sales and adjusted EPS guidance for the year. Let's turn to slide four, and I will briefly go through our first quarter results in more detail. We are reporting sales of 227 million, up 5.4% as compared to the prior year quarter, due to the factors previously discussed. Adjusted operating profit was 16.2 million, and was up by 4.7% as compared to the prior year quarter last year. This performance was driven by improved conversion rates within TriMass Aerospace and the beginning of operating leverage gains in TriMass Packaging, more than offsetting lower earnings in specialty products and the treatment of non-cash stock compensation, which slightly burdened the quarter. As previously noted, adjusted EPS was 37 cents as compared to the prior year quarter of 35 cents. And finally, adjusted EBITDA for the quarter was $35 million, up by 10.2% as compared to the prior year quarter. We are continuing to make gains in our LTM EBITDA, which is now at approximately $160 million, as compared to the last quarter of $156.4 million. This is an important performance trend we like to see as it demonstrates momentum in recovering end markets. In turning to slide five, we continue to manage a strong balance sheet. And as a reminder, the vast majority of our debt is at a low interest rate and not terming out until 2029. We finished the quarter with net debt of $394.5 million and a leverage ratio of 2.5 times. We did spend just over $13 million in the quarter on share repurchases, which, as discussed, we believe was an appropriate tradeoff given dislocation in our share price. Additionally, we did have a use of cash in the quarter driven by seasonal timing, higher sales activity, and strategic inventory builds. While not the same rate as last year, this use of cash rate is historically the norm for TriMAS as we move from Q4 to Q1. At this point, I will now turn the call over to Scott, who will take us through TriMAS' segment results. Scott?

Thanks, Tom. Let's turn to slide six, and I will begin my review of our segment results, starting with TriMAS Packaging. Net sales in the quarter were 127 million as compared to 116 million for the prior year quarter, an increase of more than 9 percent. Acquisitions contributed 2.8 million of sales, while the favorable impact of foreign currency translation contributed another 900,000 of sales during the quarter. Operating profit for the quarter was 18 million, an increase of more than 18% on a year-over-year basis, primarily on account of higher sales and the benefits of our previous structural cost savings actions. Adjusted EBITDA was 26.2 million, or 20.7% of net sales, a 130 basis point improvement year-over-year. I do want to highlight an item that impacted the year-over-year comparison for TriMass Packaging. As highlighted during our fourth quarter 2023 earnings call, now that we have completed the centralization of our global IT function into a shared service model, we are allocating certain IT costs to our businesses in 2024, which was not the case in 2023. These costs for tri-mass packaging in the first quarter were approximately 1.1 million, or about 90 basis points. Additionally, as global CPG customers' order rates picked up to start the year, we did incur some off-standard input and expedited freight costs to meet higher demand rates. While this was an undercurrent in the quarter, which approximated another 80 basis points of margin erosion, Much of the off-standard costs are now behind us, and we view the overall order dynamic as a positive. So overall, TriMAS Packaging is off to a great start in 2024, which supports our confidence in achieving our full-year sales and earnings guidance for the segment. Turning to slide seven, I will now provide an update on our TriMAS Aerospace segment. Net sales for the quarter increased by more than 17 million, or 34.7%, compared to the same period a year ago, as we continue to see strong order intake and general aerospace volumes continue to recover. Acquisitions contributed 11.4 million of sales during the quarter, while organic sales increased by 5.9 million, or 11.8%, when compared to the previous year period. Operating profit for the quarter was $7.1 million, or 10.6% of net sales, which represents a 770 basis point improvement when compared to the previous year period. Adjusted EBITDA for the quarter was $11.8 million, or 17.4% of net sales. We've now experienced seven consecutive quarters of increasing LTM sales for Trimass Aerospace and LTM sales for this quarter are approximately 40% higher than the rate we were at in the second half of 2022. Likewise, our LTM adjusted EBITDA margin of 17% is approximately 400 basis points higher in the same period a year ago, and we remain confident that our full year operating margin will be at or exceed the high end of our guidance. Now on slide eight, let's review our specialty product segment. Net sales were 32.7 million as compared to 49.3 million for the prior year quarter, as general industrial cylinder demand continues to be soft due to a very high sales rate and subsequent overstocking in 2023, and to a lesser extent, no compressor sales in the quarter to one of our larger oil and gas customers. We anticipate that this soft demand environment for industrial cylinders will continue through the second quarter, and as a result, specialty products will likely be challenged to meet our previously provided four-year sales guidance. While we believe our primary customers for steel cylinders will continue to see business growth in 2024, have started to see some recent improvements in our order book, and have already received compressor orders for deliveries in the second half, At this point, we now expect year-over-year sales declines of 5% to 10% for specialty products. Of course, we continue to closely monitor our order intake, and we'll continue taking appropriate flexing actions as necessary. Operating profit in the quarter was 2.6 million, or 8% of net sales, while adjusted EBITDA for the quarter was 3.6 million, or 11% of net sales. Despite the lower than expected sales performance for the specialty products business, at this point we believe the progress being made in our two largest segments, TriMass Packaging and TriMass Aerospace, will allow us to achieve our full year sales and earnings guidance. In addition, we expect Q2 year-over-year sales improvements to be in line with Q1 performance, while Q2 adjusted EPS is expected to be comparable to the prior year as higher interest and tax expenses offset incremental operating profit. At this point, I'd like to turn the call back to Tom for some closing remarks. Tom?

Thank you, Scott. Let's turn to slide nine. I will conclude our prepared remarks by providing just a few examples of why we remain excited about the near and long-term shareholder value creation prospects for TriMAS. First, after a demand challenge 2023, we are beginning to see order intake increases within TriMAS packaging. While we are cautiously optimistic about 2024 revenue growth, we are positioned to make even further operating leverage gains in 2024 should we experience higher than planned growth. We would also expect to enhance conversion rates into 2025. Finally, We continue to invest in innovation in 2023 despite the challenges in the year to allow for sustained long-term growth. We are also confident in the actions we have taken to improve supply and skilled labor constraints within our TriMass Aerospace Group. We have top-graded our leadership talent and expect to take advantage of further operating leverage gains as we continue to bring our production planning into better synchronization with customer demands. Additionally, we continue to take steps to focus and improve our portfolio of businesses. First, we place a priority on building out our TriMAS packaging platform through M&A with a focus on the life sciences, beauty, and food and beverage end markets. Next, we continue to take steps to shift certain of our industrial businesses in a better position to make operating leverage gains from anticipated demand recovery in the midterm. And finally, we have already announced a planned divestiture of our aero engine business, which would facilitate Trimass' exit of our presence in the oil and gas end market. 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 share buybacks and dividends. In addition, our leadership team remains committed to operating Trimass in a responsible and sustainable way, to contribute to society, particularly in the communities where we live and work. As I mentioned at the beginning of the call, we are off to a great start, and we are reaffirming our 2024 outlook at this time. I would like to again thank our investors for their support. We continue to believe TriMass is an exciting company to invest in. And with that, I'll turn the call back to Sherry. Sherry?

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

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 keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. One moment, please, while we poll for questions. The first question comes from the line of Ken Newman with KeyBank Capital Markets. Please go ahead.

Hey, good morning, guys. Morning, Ken.

Morning. Scott, I just wanted to clarify on the reaffirmed guide for this year. It sounds like there are some minor changes to the segment sales and margin guides that you provided from last quarter. If I caught it all correctly, you're at or above the high end of the margin guide for aerospace this year. Now you're expecting specialty sales down 5% to 10%. Is there anything else within that segment guidance that we should kind of be aware of? No.

You picked up on the two key items there. Everything else is the same as we got it to in the last earnings call. Okay.

And then I appreciate the help on maybe the consolidated sequential expectations for 2Q on revenue and earnings. Just curious if there's any help on how to think about the sequential moves in revenue across the three segments as it relates to the first quarter.

Well, look, I think I – I spoke to the expected growth year over year for Q2. It's going to be very similar to what we saw for Q1 on a year over year basis. I think we continue to expect aerospace to continue to grow at a nice rate. I think packaging Again, I think I would point you toward last year's Q2, you know, and we expect to see a very similar growth rate in Q2 of this year as we experienced with Q1.

Okay.

Got it. Maybe just a couple more for me, and then I'll jump back in line, but You know, I didn't hear whether or not there was an update on your expectations of Fold and North in the packaging segment. Is there a timing update there that you'd like to provide?

Yeah, thanks, Ken, for the question. Yeah, we mentioned on our last call that this is something that we're interested in moving TriMass to two segments. I think at this point we're tracking against our – with our aero engine business, which is underway, and sort of update further as we get into the second half on what we might do there with Norris. Got it.

Maybe one more from me, and then I'll jump back. In aerospace, you know, we are obviously seeing some headlines about maybe some production cuts out of Boeing on the 737 MAX. As it relates to the visibility in your business, are you seeing or expecting any impact from that this year or just any color there?

So not expecting any impact from that this year. Actually, within aerospace, our bookings are, at this point in the year, almost going into 2025 anyway. So we're pretty much fully booked. So we're not seeing any near-term impact. 2024 impact from that at all.

Understood. I'll jump back in line. Thanks. Thanks.

Thank you.

Next question comes from the line of Hamid Khorsand with BWS Financials. Please go ahead.

Good morning. So first off on the packaging side, Could you just talk about, you know, the conversations you're having now with customers and how that differs with what you were seeing last year?

Hamed, good morning and thank you for the question. If you could see me right now, I'd have a smile on my face because the conversations we had last year were very difficult, right? There was an overstock position. There wasn't a need. And as we sort of look back and we plot against order intakes and other KPIs that we look at throughout the year, we can conclude that we were in a very strange trough last year and we're certainly out of it today. Our conversations today in some cases are how can we get more product quicker? you know, what a change from the prior year. It's not all cases, but in some cases, in some product lines, we're seeing accelerated supply needs. And, you know, we have the capacity, we're working hard in some cases, you know, this works against optimal performance because we have overtime, or we might even have cases where we have to expedite ship to satisfy some of our most key customers. But it's a very different environment. One quarter does not make a year. We're not setting the flag and saying this is behind us forever, but certainly we feel much more pleased today with our outlook in our packaging group, not only for 2024, Hamid, but we see the ability to make sequential gains into 2025. as order rates start to pick up through the year.

Okay. And then my question on that is, if you're seeing that kind of activity, why are you hesitant as far as guidance and so forth? What's holding you back?

Great. Another great question. So the industry still is in a short cycle of business, a short cycle nature. So Unlike aerospace, where I mentioned with Ken's question that today if an order comes in, depending on the order, we could be quoting a 2025 delivery date. In packaging, that's not the case. We still are in a very short cycle nature in that business. And until I see the lead times elongate, then I don't have full confidence that you know, that we're at a point where we could say, okay, we know the book is going to be strong through date X. So, you know, we'll know a little bit more at the end of this quarter, and then we'll, you know, we'll update you further.

Okay. And then one question on aerospace is, you know, what gives you confidence in aerospace that you don't have some sort of hiccup, you know, that you had in especially packaging, right, or especially products, that all of a sudden you're seeing a sequential decline of 30%. What prevents that from happening in aerospace?

Okay, well, so first of all, we're sitting today with an order backlog that is historically strong. And that gives us confidence because we can look out more than through 2024 into revenue that will start to satisfy a foundation for 2025. That's one point. The second point is that we do see when we look at overall production build rates, for commercial airliners and military equipment, we still see an increase versus where we are today. I know there's some discussion around Boeing, but there still are increases forecast in the future, and Airbus continues to be strong, and then there's Embraer and others. The only thing that I would say is we had... certain instances in the past that were strange dislocating events, but we don't see anything like that now. Airline travel is up again. So it has all the metrics around it that has us with high confidence, not only for 2024, but as we go into 2025. Great. Thank you.

Thank you.

Thank you.

A reminder to all the participants that you may press star and one to ask a question. Next question comes from the line of Ken Newman with KeyBank Capital Markets. Please go ahead.

Yes, thanks for the follow-up here. Can you just give a little bit more color on what the softness and the beverage-related issues were? What were those driven by in the packaging segment? And is that just contained to a few specific customers?

It really is contained to a few specific customers and in a region. And it is, on a relative basis, a pretty low change. But it's the only end market that was slightly down from the first quarter of last year. And it was not a big number. But our sales to a particular dairy customer was off, we expect those volumes to come back later in the year, and that we are seeing some innovation cut over in the European beverage market. I mentioned there are customers of ours that are changing to our tethered cap line, so they're working through old inventory, which is our prior technology, which was not a tethered cap. So pretty discreet and not a big number. Okay.

And then, you know, just maybe one more for me. As I think about the eventual fold-in of Norris and some of the weakness out of the steel cylinder business this quarter, is there any way you could help us think about, you know, the margin profile of Norris relative to specialty and how we think about that business go forward, you know, combined with packaging?

Yeah. I mean, it's really a tough quarter to look at. And I would say that the margins comparably between Norris and Arrow are pretty close, but I think this quarter is not really a representative quarter given the low volume. I would look back over time to sort of a roughly 15% operating profit, maybe 18% EBITDA, and that's more normalized for Norris overall.

That's helpful. I appreciate that, Tom.

Thank you. A reminder to all the participants that you may press star and one to ask a question. There are no further questions at this time. I would now like to turn the floor over to Thomas Amato for closing comments.

Okay. Again, I would like to thank you for joining us on our earnings call. Appreciate the questions and commentary, 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.