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TriMas Corporation (NASDAQ:TRS)
Q2 2019 Earnings Call
Jul. 30, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the TriMas second quarter 2019 earnings conference call. Today's conference is being recorded. And at this time, I would now like to turn the conference over to Ms. Sherry Lauderback. Please go ahead, ma'am.

Sherry Lauderback -- Vice President of Investor Relations and Communications

Thank you. And welcome to the TriMas Corporation's second quarter 2019 earnings call. Participating on the call today are Tom Amato, TriMas' president and CEO, and Bob Zalupski, our chief financial officer. After our prepared remarks on our second quarter result, we will open the call up for your question. In order to assist with the review of our results, we have included the press release and power point presentation on our company website, www.trimascorp.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 5451030.

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 uncertainty. Please refer to our Form 10-K 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 publically 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. I would also like to refer you to the appendix in our press release issued this morning or included as part of this presentation, which is available on our website, for the reconciliations between GAAP and non-GAAP financial measures used during this conference call.

Today, the discussion on the call regarding our financial results will be on an adjusted basis, excluding the impact of special items. At this point, I would like to turn the call over to Tom Amato, TriMas' president and CEO. Tom?

Thomas Amato -- President and Chief Executive Officer

Good morning and thank you for joining us on our second quarter earnings call. If we turn to slide three, as a brief reminder, TriMas operates businesses with strong brand names in the specific end markets we serve. On an LTM basis, we achieved $895 million in net sales, a 19%-adjusted EBITDA margin, and we are capitalized with a strong balance sheet and with leverage nicely below our overarching target of under 2 times.

We operate our businesses in three segments, packaging, aerospace, and specialty products. And we seek to provide solutions to our customers in the health, beauty, and homecare, food and beverage, aerospace, general industrial, petrochemical, and oil and gas end markets. While in any period we may experience cyclical effects in any of our end markets, by design, our end-market diversity coupled with our sound capital structure provides a platform for TriMas to generate reliable cash flows, which we in turn reallocate in a disciplined way for our investors.

For example, in this quarter, we've closed on the transaction to Taplast, a dispenser and closure company with a strong brand name, particularly in Europe. We have known this company for many years, and we're pleased to add Taplast to our packaging group. In addition to broadening our offering of lotion -- of liquid and lotion dispensers and closures, Taplast expands our design and engineering capabilities, provides us with additional production capacity in Europe, and adds TriMas' first production facility in Eastern Europe, which we hope to build upon in the future. In addition to this acquisition, we acquired about 1% of our total shares outstanding. We are pleased to return capital to our investors through this type of treasury action, which we believe in the long run, will help drive shareholder value. Let's turn our attention now to our second quarter results on slide four.

We are pleased to report another solid quarter of performance. Net sales for the quarter were up 6.4% overall, 3% of which was organic, net of currency translation, and 4.3% from acquisitions. Operating profit was $32.1 million, flat as compared to the prior year quarter as the positive impact from higher sales was offset primarily by less favorable sales mix and higher input and freight costs. Earnings per share for the quarter was up 4.2% to $0.50 per share with timing of foreign currency dominated gains providing a benefit in the quarter. For 2019, TriMas continues to remain on plan financially while executing well against our longer-term strategic initiatives. Let's now turn to our segment results in slide six beginning with our packaging segment.

Net sales were up for the quarter 9.4%, driven largely by acquisitions, with organic sales up 1.1% net of currency translation. Sales to our industrial end market, where we provide closure and dispensing products for our 55-gallon drum and 5-gallon pail applications, has remained soft since the beginning of the year due to lower global trading activity. Sales into the food and beverage end market were also lower year-over-year partly driven by shifts in ordering patterns of certain of our customers, some of which we anticipate will pick up in the second half. Sales to our health, beauty, and homecare end market, which represents about 50% of our segment sales, were up as demand was robust in these products lines.

Operating profit was up 0.4% to $22.9 million, where the impact of the incremental sales of acquisitions and growth in products for the HBHC end market was offset by less favorable product mix, higher depreciation and amortization expense, and unfavorable currency. As a side note, excluding sales from acquisitions, operating margin was approximately 23% for the quarter. In connection with the acquisitions made to date, we expect improving performance as we continue to integrate these operations and capture synergies in the future.

With respect to the outlook for the balance of the year for packaging, we anticipate higher organic growth in the back half of 2019 driven by ramping up of new dispenser products and increased ordering patterns in certain consumer product lines. Therefore, we are maintaining our outlook of 3% to 5% organic sales growth, as provided in February; although, sales may trend to lower end of the range given launch and related volume timing. We anticipate operating profit margin to range from 21% to 22%, which we've updated to reflect the mix effect of recently acquired businesses. Turning to slide seven, we'll go through our Aerospace segment.

Net sales for the quarter, were up 8% to $42.2 million, which is a record sales quarter for these product lines. While we continue to enjoy secular growth in the aerospace market, sales were higher than industry growth rates given additional factory floor productivity steps we have executed over the prior year. Operating profit was up 8.7% to $7 million as we converted in line with our plan on higher sales. We remain focused on improving factory floor efficiency, given demand for our full range or products, and anticipate continuing to make strides in our standard fastener production plan.

We continue to experience robust end bookings across all of our brands. In fact, we recently announced adding two new major tier one customers, Sonaca and Safran. Our global, technical, commercial, and production teams worked incredibly hard over the past year plus to qualify TriMas Aerospace's products. And I thanked them for their hard work and look forward to our supplying these important customers going forward.

With respect to Aerospace's outlook for the balance of the year, we now anticipate sales growth to be in the 4% to 5% range, slightly higher than the 3% to 4% outlook provided in February. We are maintaining our outlook of operating profit in the 16% to 17% range. As noted on our last earnings call, we have approximately 25,000 of faster content on each 737 Max. Currently, we are forecasting no changes to our current supply rate through the balance of the year. On slide eight, we'll go through our specialty products segment. Specialty product sales were up 2.7% to $93.1 million, driven largely by higher sales in our petrochemical end market under the Lamons brand. These higher sales were offset by softer sales in the upstream oil and gas market with lower wellhead investment activity in Canada and US and lower steel cylinder sales for HVAC application, which we believe was due to an unusually rainy spring.

Operating profit was $10.2 million, down about 4.8%, largely driven by product mix and higher input and freight costs. Overall, as we consider the outlook for the balance of the year for specialty products, we are maintaining our 4% to 6% sales growth range as well as maintaining our operating profit in the 11% to 13% range; although, each may trend to the lower end if market challenges persist.

With that, I will now turn the call over to Bob, who will take us through the year-to-date financial performance. Bob?

Robert Zalupski -- Chief Financial Officer

Thank you, Tom. I will begin my remarks today on slide 10 with comments on our second quarter year-to-date results. Overall, net sales increased approximately $18.7 million, or 4.2%, to $460.7 million, as compared to the six months ended June 30, 2018. Consistent with the quarter, each segment achieved organic growth resulting in higher sales of approximately $10.4 million, or an organic growth rate of 2.4% for the company overall during the first half of the year. In addition, the acquisitions of Taplast in April and Plastic in January contributed approximately $12.5 million of sales during the period. However, on a year-to-date basis, our sales were negatively impacted by $4.2 million of net unfavorable currency exchange.

Operating profit increased slightly to $60.5 million from $60.2 million in the prior year period. However, operating margin declined 50 basis points to 13.1% as the impact of higher sales levels was offset by a less favorable product mix across much of our business and the incremental sales of our acquisitions, which have lower margins. We also experience increased input and freight costs, primarily in our specialty products segment. Notably, volume-adjusted freight spend increased approximately 8% compared to the prior year period, which impacted operating margins approximately 20 basis points on a year-to-date basis compared to the year ago period.

Earnings per share for the first half of the year was $0.96, an increase of 7.9% compared to EPS of $0.89 for the same period a year ago, as net income was positively impacted by a lower effective tax rate, reduced interest expense, and an increase in gains on foreign currency dominated transactions. As Tom noted, we are pleased with our consolidated results for the first half of the year overall, which were largely consistent with our plan. Turning to slide 11, I would now like to shift gears and briefly comment and free cash flow and ending balance sheet for the first half period ended June 30, 2019.

We generated $16.6 million of free cash flow in the second quarter and $19.2 million on a year-to-date basis. As expected, year-to-date free cash flow was lower than the prior year, primarily due to timing of cash tax payments and a higher investment in working capital. We expect to monetize working capital back to plan levels in the back half of the year, as higher than normal inventory purchases, which help manage the impacts of tariffs and planned factory floor improvement initiatives, begin to work through our plant. And we expect our free cash flow conversion for the year to be greater than 100% of net income, consistent with our previously provided guidance.

We ended the quarter with $40 million of cash on book after consideration of funding $45 million for the acquisition of Taplast and expending $14.7 million in the quarter for the repurchase of 502,500 of our shares or more than 1% of our outstanding common stock. I would also like to note that at the end of second quarter we have $47.4 million remaining under our existing share repurchase authorization. We ended the quarter with net debt of $253.9 million and leverage ratio of 1.6 times, well below our stated target of 2 times. TriMas' strong balance sheet, which includes approximately $325 million of cash, an aggregate availability under our revolving credit facility, low leverage, and a solid track record of free cash flow generation, positions us with ample capacity and flexibility to continue to fund our balanced capital allocation priorities.

Turning to slide 12, I would like to close my remarks by highlighting TriMas' continued, positive momentum and progress achieved over the past two years. In addition to capitalizing on sales growth opportunities through organic and market driven initiatives, we are also keenly focused on driving an increase in absolute EBITDA, all while maintaining a strong balance sheet. As noted on this slide, LTM-adjusted EBITDA for the period ended June 30, 2019, has increased almost $20 million over a 2-year period and has resulted in more than $185 million in free cash flow generation over that same time frame. We have deployed this cash flow consistent with our stated capital allocation priorities, which we believe, when considered collectively, are positively correlated with increasing shareholder value.

In the first half of 2019, we completed two bolt-on acquisitions in our packaging group, retired 1% of our shares outstanding, and continued to reinvest in our global businesses for long-term growth, all while maintaining leverage under 2 times. As we look forward to the second half of 2019 and beyond, we remain committed to executing against our plan of free cash flow generation and disciplined capital allocation to continue to create value for our shareholders. At this point, I will now turn the call back to Tom to discuss our outlook. Tom?

Thomas Amato -- President and Chief Executive Officer

Thank you, Bob. With respect to TriMas' full-year outlook, we are reaffirming organic sales growth of 3% to 5%; although, we believe it may trend toward the lower end of the range given segment items discussed. However, we are increasing our EPS outlook to $1.85 to $1.95 per share, up from $1.82 to $1.92 per share, and are reaffirming our cash flow generation of greater than 100% of net income.

Given the progress we have made strategically and financially and our momentum, as Bob just noted, we remain excited about the long-term prospects and many opportunities for TriMas and each of our businesses. With that I'll turn the call back over to Sherry.

Sherry Lauderback -- Vice President of Investor Relations and Communications

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

Questions and Answers:

Operator

Thank you. At this time, we'd like to open the floor for questions. If you would like to ask a question, please press the * key followed by the 1 key on your touchtone phone now. Questions will be taken in which the order they are received. If at any time you need to remove yourself from the question in queue, please press *2. Again, that is *1 to ask an audio question now. All right. Our first question will be from Steve Barger with KeyBanc Capital Markets.

Thomas Amato -- President and Chief Executive Officer

Morning, Steve.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Hey. Good morning, guys. Morning. It's actually -- it's Ken Newman on for Steve this morning.

Thomas Amato -- President and Chief Executive Officer

Hi, Ken.

Robert Zalupski -- Chief Financial Officer

Hi, Ken.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Just wanted -- Hi. Just wanted to touch up on the back half for packaging sales growth. Just curious if you could provide any more color on the visibility of that ramp up. Is that more just a function of timing? Or are there still orders that you need to secure to get to the top end of your guidance?

Thomas Amato -- President and Chief Executive Officer

Well, there's two drivers. The first driver, our launch of new products. And that is just timing. Clearly, we don't control when our customers launch. But our lines are in place. We're ready to go. So, it's just a function of filling the pipeline. And when that officially kicks off is -- at this point, we expect it to be in the second half, but we can't pick precisely the date. And then, we did see some orders in the first half that we expect -- were lower than normal that we expect to come in in the second half. So, those are the two drivers to the pick up in the second half.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Okay. It sounded like core margins in the packaging segment were decently strong. I think you said 23%. I'm just curious, can you remind us -- any color on how you expect the Taplast margin progression to progress over the rest of the year? And when do you think that gets more closer to the legacy profile for that segment?

Thomas Amato -- President and Chief Executive Officer

Well -- just to be clear, when we talked about the acquisition early on, we thought it might be a challenge to get it exactly to the types of margins we have in our base business. That being said, it was appropriately valued. We do expect it to capture some incredible synergies. I mentioned one in my script about the plant that came with the acquisition in Eastern Europe, specifically Slovakia. And we'd like that to be our flagship location for Eastern Europe and certainly increase its size significant over time. That's -- there's a lot of synergies that come with the deal. It is additive from a value point of view, but on an ROS point, it might be -- it's not large in relation to TriMas overall. But it would be on the lighter side of our average.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Got it. Any --

Robert Zalupski -- Chief Financial Officer

Well, the other comment I would make is based on the synergies we plan for, which are conservatively stated, our payback on the acquisition price is still within our three-year timeframe.

Thomas Amato -- President and Chief Executive Officer

Absolutely.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Got it. And, obviously, the balance sheet looks pretty strong here despite having a couple of acquisitions under belt and repurchasing shares in the market. As you think about the acquisition pipeline, any update as to how you think about targets and hurdle rates? Are there more opportunities within the packaging segment that provide a margin profile kinda closer to what TriMas' has kind of historically operated? Any margin accretive opportunities out there that you're seeing?

Thomas Amato -- President and Chief Executive Officer

Okay. Well, first of all, I wanna thank you for acknowledging that because we think that's a key point on the quarter and the year-to-date in that we were -- we closed on two deals. We acquired a sizable amount of shares. And our leverage is still in check, which we think is one of the great powers of TriMas in our capitalization profile, and expect that to be the thesis going forward. With respect to the pipeline, we're actively looking at a number of deals in the packaging sector. As I've mentioned on previous calls, an ideal deal for us would be one that is more in the characterization of being bolt-on. We're certainly not pounding the pavement looking for transformative type deals. We do see them come every now and then. But we sort of like the ability to bring in a more manageable deal size, drive the synergies we expect and grow the company through this more disciplined approach.

We're also looking at some deals in the -- on the Aerospace side, but particularly focused in the fastener area, how we restructured the segment. With respect to sort of margin profile, as I said, it's been I think three years I've been with the company. When I came to the company, I said it was tough -- it would be tough to find deals with the margin profile that we have. They're out there, extremely expensive, tend to be a little bit larger. But they're -- we're looking more toward deals that help round out our product line, expand us geographically, add some technical capability, innovation capability. And we would not be hesitant if the margin profile's a little bit lower than where we're at today to take that on.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Right. That makes sense here. And I just wanted to make sure we -- you can help us bridge the guidance you provided this morning. Obviously, it seems like you're being a little bit cautious with regard to the organic growth range. You maintained it, but you are kind of maintaining that there are potential macro disruptions that could lead you toward the lower end of that range, but the EPS number's coming up. So, help me kind of bridge that gap. Is this really just acquisition revenue? Or do you see potential opportunities from the ramp ups in packaging new product sales? Or is there something else here that I'm missing?

Thomas Amato -- President and Chief Executive Officer

So, we don't have acquisition revenue in our top-line growth. We do expect some pick up in certain of our product lines and certain of our end markets. If there was any cautious expression of outlook -- as I said in my script, there are some of the end markets that we're in that are a bit challenged. Fortunately, we're in a lot of different end markets, so we can overcome that. But there are some end markets that we're in that are a little bit softer. Particularly, I mentioned oil and gas extraction in Canada, which is off double digits. And the industrial sector is off low double digits. And you're hearing that from folks that are closer to the front lines on the drum and pail supply position.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Right. Okay. And just one last question from me. With regard to the free cash flow bridge, Bob, I think you had mentioned getting working capital back into -- more in line with traditional, I guess, positioning within the cash flow statement. Is it -- is there anything else there in terms of getting the free cashback up to 100% on an adjusted basis that you guide to that we're not really thinking of, as you think about any forward capital expenditures that we should kind of be weary of as the year progresses?

Robert Zalupski -- Chief Financial Officer

No. From a capital standpoint, both our -- our guidance contemplated all the necessary projects that we identified early on in the process in terms of both growth and productivity initiatives, which clearly are the focus along with, to a lessor degree, the maintenance side of things. But I think, really, the big driver is going to be monetization of working capital and, in particular, inventory.

In terms of our metrics relative to day sales, and AR, and related to AP, pretty much in line with where we've been historically, it's really just a matter of liquidating inventory levels which, as I commented in my remarks, were really a planned build that dealt with getting ahead of tariffs, which at the time, it was unclear whether there was a much larger bucket going from 10% to 25%. And then, also, we had some planned upgrades to equipment and production processes, which, again, we built a inventory buffer that we expect to burn down as we move through the second half of the year. So, at this point plans are in place to achieve that burn down. And if we do that, we'll be able to execute on our plan of 100% conversion of net income as free cash flow.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Any help with the cadence and how we think about free cash flow coming in between the third and fourth quarter?

Robert Zalupski -- Chief Financial Officer

Well, you'll see it accelerate in the third quarter. And then, certainly, we generally speaking generate a lot of cash in the fourth quarter just because of the natural cycle of our businesses. And they wind down a little bit in Q4, which does lead to some additional working capital liquidation.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Helpful, thanks.

Thomas Amato -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And once again, that is *1 to ask an audio question now. All right. I'm showing no further questions in the queue at this time.

Thomas Amato -- President and Chief Executive Officer

Okay. Thank you for joining us on our earnings call. And we look forward to updating you again next quarter. Have a great day.

Robert Zalupski -- Chief Financial Officer

Thank you.

Sherry Lauderback -- Vice President of Investor Relations and Communications

Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

Duration: 28 minutes

Call participants:

Sherry Lauderback -- Vice President of Investor Relations and Communications

Thomas Amato -- President and Chief Executive Officer

Robert Zalupski -- Chief Financial Officer

Ken Newman -- KeyBanc Capital Markets -- Analyst

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