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TriMas Corp (NASDAQ:TRS)
Q3 2019 Earnings Call
Nov 4, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the TriMas Third Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Sherry Lauderback. Please go ahead.

Sherry Lauderback -- Vice President, Investor Relations and Communications

Thank you. And welcome to the TriMas Corporation's third 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 third quarter results and outlook, we will 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, www.trimascorp.com under the Investors section. In addition, a replay of this call will be available later today by calling 888-203-1112, with the replay code of 6138233.

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 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. 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 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 our third quarter earnings call. During this quarter, we have taken some meaningful strategic steps to better position TriMas for long-term value creation. Despite experiencing some end market choppiness impacting certain of our product lines, we are strategically staying the course to increase TriMas' concentration in the packaging and aerospace segments.

If we turn to slide 3, this morning, we announced that we have entered into an agreement to sell our Lamons business for $135 million. I'll cover more on this important transaction, and what it means to TriMas shortly. We also announced that we increased our share repurchase authorization to $150 million. Since May of 2018, we have retired about 2.6% of our shares outstanding. And with this increased authorization level and our strong balance sheet, we are able to continue our momentum in returning capital to our shareholders through reducing shares outstanding.

Additionally, we have a robust pipeline of bolt-on in packaging and aerospace acquisitions, certain of which we would anticipate adding to our businesses in 2020, subject to our normal due diligence and transactional negotiations. With that strategic backdrop, our overall performance this quarter was not as planned. Like other companies, we have experienced both direct and indirect tariff related pressures. While we have managed tariff recovery well, the indirect impacts include general economic slowing in certain of our end markets such as in our North American industrial packaging and steel cylinder markets, and increased competition on applications where we have yet to install domestic capacity.

Additionally, sales in resulting operating profits remain significantly challenged with one of our businesses that serves the North American oil and natural gas extraction end market. And finally, where we've had steady end market activity, we've had delays in bringing additional capacity online and have experienced higher logistics costs to meet customer commitments. Some of these matters are anticipated to carry into the fourth quarter.

On a positive note, we had an excellent quarter in our Aerospace segment, as we continue to invest in new production equipment and accelerate the use of Kaizen to improve overall production throughput. As part of our normal operating process, we rely on the TriMas business model to properly escalate challenges, identify the root causes, and install corrective actions all to mitigate repeat occurrences. Where we expect to have a prolonged challenge end market, we are actively addressing both our variable and fixed cost structures to flex accordingly.

So with that let's turn to slide 4, and I will cover the Lamons transaction. Lamons is a provider of sealing and fastener products into the petrochemical and refining end markets. TriMas had most recently reported Lamons as part of our Specialty Products segment, prior to which it was reported in our Energy segment.

Lamons had LTM sales and operating profit of approximately $186 million and $18 million, or 9.7% of sales respectively. Although, we don't report EBITDA for our divisions, Lamon had LTM EBITDA of approximately $21.5 million before consideration of any stand-alone or corporate support costs. We marketed Lamons through a robust auction process, ultimately entering into transaction and ancillary agreements with First Reserve, a private equity firm focused on the energy related end markets.

Closing remains subject to customary conditions and is expected to occur by the end of the first quarter of 2020. We anticipate using the net proceeds to continue to invest in our businesses and for bolt-on M&A. Shortly after joining TriMas and having the opportunity to meet with many of our top shareholders, I listened carefully to the views related to TriMas' presence in the more cyclical oil and gas sector. While taking investor feedback into deep consideration, it was also clear that we had some work to do at Lamons to embark on a new course to grow and improve its performance.

The Lamons team led by Marc Roberts has done a fantastic job over the past few years in repositioning the business, and we look forward to Lamons' continued success under the ownership of First Reserve. So I personally thank Marc, and the broader Lamons team for their commitment and dedication throughout the sale process, and their continued support as we work through closing and a smooth transition of ownership.

If we turn to slide 5, the strategic rationale for this transaction is clear. First, it greatly simplifies and streamlines TriMas. If we look at the pro forma data on slide 5, which shows what TriMas would have looked like at the end of the third quarter if the transaction was completed. Approximately, 76% of our revenue and nearly 85% of our segment operating profit would have been from the Packaging and Aerospace segments. This is a significant step to enable increased management focus and investment activity in these areas, while de-emphasizing TriMas' exposure to the sometimes more cyclical energy related sector.

As we continue to invest in organic growth through both product and process innovation, while utilizing our free cash flow and strong balance sheet to invest in M&A, we anticipate further focusing TriMas in the Packaging and Aerospace segments over time.

Let's turn our attention now to our third quarter results on slide 6. Net sales for the quarter were up 5.8% to $236.8 million, 1.4% of which was organic, net of currency translation, and 5.1% from acquisitions. Our two recent packaging acquisitions completed earlier this year remain on track opposite our integration plans, and we anticipate even more progress in 2020. Operating profit was $29.8 million, slightly lower than the prior year quarter. As mentioned earlier, despite some of the challenges we were seeing in certain of our end markets, we should have overcome the shortfall and perform better through improved planning. And speaking for the wider team, we are not satisfied with this result, and we'll continue to leverage our TriMas business model to solve problems and implement corrective actions more quickly as we go forward.

EPS for the quarter was $0.44 per share. The year-over-year decline was predominantly driven by a tax benefit in Q3 of 2018, which resulted in a net $0.05 per share impact that did not recur in Q3 of 2019, and the lower operating profit. If we turn to slide 7, and review our year-to-date results, sales were up 4.8% overall, to $697.5 million, with organic sales, net of currency up 2%, and acquisitions contributing 3.6%.

Operating profit was flat at $90.3 million. EPS was up 2.2% to $1.40 per share versus $1.37 per share on a year-to-date basis in 2018. For I've noted, despite some challenges, we are pleased with the strategic direction we have taken to continue our momentum, and better position TriMas for the long-term value creation.

So with that, I will now turn the call over to Bob, who will take us through our cash flow and segment financial performance. Bob?

Robert Zalupski -- Chief Financial Officer

Thank you, Tom. I will begin my remarks today on slide 9, and briefly comment on free cash flow for the quarter, and the strength of our balance sheet. We generated $25.7 million of free cash flow in the third quarter, just slightly below the prior year's quarterly amount of $27.4 million. Free cash flow conversion approximated 129% of net income for the quarter, and 70% on a year-to-date basis.

As expected, year-to-date free cash flow of approximately $45 million was lower than the comparable period a year ago, due primarily to the timing of cash tax payments and a higher investment in working capital. We expect to monetize working capital over the remainder of 2019 as higher inventories, which help manage the impact of tariffs and planned factory floor improvements continue to normalize. 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 $58 million of cash on book after funding $5.7 million within the quarter to repurchase 196,000 shares of our stock. Year-to-date, we've invested $67 million in two acquisitions, and spent $21 million to repurchase almost 725,000 shares or approximately 1.6% of our outstanding common stock.

In addition, as Tom noted earlier, we are doubling the level of our existing share repurchase authorization from $75 million to $150 million, given cumulative share repurchases of $33 million under the program since May 2018, we now have approximately $117 million remaining under the revised authorization.

We ended the quarter with net debt of $236.5 million, and a leverage ratio of 1.5 times, significantly below our stated target of 2 times. LTM adjusted EBITDA for the period ended September 30, 2019 improved to $170.1 million, an increase of slightly more than 4% versus the comparable period a year ago.

TriMas' strong balance sheet, which includes approximately $340 million of cash and 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.

Now let's review our segment results, beginning with the Packaging segment on slide 10. For third quarter, we reported net sales of $105.5 million, an increase of $10.2 million, net of a $1.4 million drag due to currency translation. This represented a 10.7% increase versus the prior year quarter, and was driven principally by acquisitions as organic sales overall were essentially flat with the year-ago period.

Sales to the health, beauty and home care end markets, which represent more than half of this segment sales increased compared to the year-ago period, as solid demand for these product lines continued. The HBHC organic sales increase was largely offset by sales declines in the industrial and food and beverage end markets, primarily in North America.

Sales of our industrial closure and dispensing products for 55-gallon drum and 5-gallon pail applications continued to lag against the prior year due to lower global trading activity as a result of trade and macro uncertainties. Sales into the food and beverage end market were also lower year-over-year, driven in part by shifts in ordering patterns of certain customers, as well as delayed capacity installations, which also resulted in production inefficiencies.

Operating profit of $20.1 million, declined 8.9% compared to the prior year quarter. The favorable impacts of incremental sales from acquisitions and the increase in product sales to the HBHC end market were more than offset by a less favorable sales mix due to lower sales into the industrial and food and beverage end markets. Operating profit was further impacted by the production inefficiencies noted earlier, as well as by significantly higher freight costs for which approximately half was as a result of expediting product shipments to fulfill customer order commitments.

Overall, these operational challenges impacted operating margins approximately 150 basis points in the quarter, we have initiated corrective actions to address each of these matters and anticipate the financial impacts will be substantially mitigated by end of year. As a side note, to-date our acquired operations continued to perform as expected, consistent with our planned sales and operating profit targets, although as noted earlier, they do mix down the overall operating margin by more than 100 basis points. We expect to improve operating and financial performance as we continue the integration of these operations and further capture available synergies on a go-forward basis.

Turning to slide 11, I would now like to review the performance of our Aerospace segment. Net sales for the quarter increased 5.5% to $43.1 million, which is another record sales quarter for these product lines. While we continue to enjoy secular growth in the aerospace market, sales were higher than planned, given greater production throughput as a result of factory floor productivity initiatives that we continue to execute.

Operating profit increased 7.2% to $8.2 million, and operating margin improved to 19.1% as we experienced solid conversion on higher sales. We continue to experience robust order bookings across all of our brands, and customer order backlogs remain strong. Given solid demand for our full range of products, we remain focused on continuing to improve factory floor efficiency, and anticipate making further progress in the operational performance of our standard fastener production plant as well.

Turning to slide 12, and continuing with the review of the Specialty Products segment. Overall, sales in our Specialty Products segment increased less than 1% to $88.2 million. Sales of our Lamons brand in gasket and fastener products into the petrochemical and oil refinery end markets were strong, up approximately 16% compared to the prior year, as we capitalize on solid end market demand with improved delivery performance.

However, these higher sales were offset by continued soft demand in the upstream oil and gas end market as a result of lower oil and gas extraction activity in the US and Canada, and reduced demand for large high pressure steel cylinders due to the softer industrial end markets, and customer rebalancing of asset cylinder inventories.

Operating profit declined 2.3% to $8.4 million due to a less favorable sales mix, less absorption of overhead costs given lower production volumes in our wellhead engine and machine components facilities, and higher input and conversion costs in our industrial cylinder operations due to product mix and smaller lot sizes. While the challenges in these end markets persist, we will continue to closely manage our variable and fixed cost structures to optimize financial performance, while continuing to pursue market opportunities through product and process innovation.

At this point, I would like to turn the call back over to Tom to update our outlook and provide his concluding remarks. Tom?

Thomas Amato -- President and Chief Executive Officer

Thank you, Bob. Turning to slide 14. With respect to TriMas' full year outlook, given some of the specific items noted, we are tempering our organic sales growth to 1.5% to 2.5% from what we forecasted previously of the lower end of the 3% to 5% range. With respect to earnings per share, we are reducing our range to $1.75 to $1.80 per share for the year. When normalizing our updated outlook to remove the direct operating results of Lamons, which will be reported in discontinued operations in the fourth quarter, we are forecasting an EPS range of $1.40 to $1.45 per share. Core to TriMas' growth model is our focus on generating exceptional cash flow and as such, we are reaffirming our cash flow generation of greater than 100% of net income.

Turning to slide 15, while we have updated our outlook to reflect some of the macroeconomic items facing our businesses, we remain excited about the important strategic strides we are taking in 2019, and look forward to delivering long-term value creation for our shareholders. For example, we continue to leverage a TriMas business model and operate under a culture of Kaizen to drive continuous improvement. In a few weeks, we have our Annual TriMas-Kaizen Challenge, where almost every TriMas operating facility globally selected one of their top Kaizen projects and submitted it into a companywide competition, where we will in turn select the top project from a set of finalists.

This is our second formative year for the TriMas-Kaizen Challenge, and we had nearly 30 high-quality submissions. So we are excited with the level of engagement from all of our facilities, as we continue to operate TriMas in a culture of Kaizen. We also continue to invest in new product innovation. In fact, we are currently investing in molding capacity to validate a new dispenser design, which uses a single polymer, and which we believe may be of interest to certain customers that are seeking to promote ease of recyclability.

As noted previously, we have a robust pipeline of potential bolt-on transactions, as we use programmatic M&A as an approach to grow TriMas in the Packaging and Aerospace segments. Finally, we will continue to shape TriMas by investing in our highest return product lines of businesses to drive long-term value for our shareholders.

With that, I'll turn the call back over to Sherry.

Sherry Lauderback -- Vice President, 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. [Operator Instructions]

And we will take our first question, and that is from Andy Casey with Wells Fargo. Please go ahead.

Andy Casey -- Wells Fargo -- Analyst

Thanks a lot. Good morning.

Thomas Amato -- President and Chief Executive Officer

Good morning, Andy.

Robert Zalupski -- Chief Financial Officer

Good morning, Andy.

Andy Casey -- Wells Fargo -- Analyst

Hi, good morning. I think you said this, but Tom, but I just want to make sure, does the updated $1.75-$1.80 guidance exclude Lamons for the last two months?

Thomas Amato -- President and Chief Executive Officer

No.

Robert Zalupski -- Chief Financial Officer

No, that updated guidance Andy, would be reflective as if Lamons was still part of TriMas, because it won't move into discontinued operations until Q4. And so that's why we provided the, what I'll call the pro forma adjusted guidance of $1.40 --

Sherry Lauderback -- Vice President, Investor Relations and Communications

$1.40 to a dollar --

Robert Zalupski -- Chief Financial Officer

$1.40 to $1.45, separate of the direct operating impact to Lamons.

Andy Casey -- Wells Fargo -- Analyst

Okay, OK thank you. And then on the divestiture strategy or rather the strategy to focus the business and grow the Packaging and Aerospace segments. Should we expect you to entertain further disposals from some of the other areas?

Thomas Amato -- President and Chief Executive Officer

At this time, we're not -- we don't have any sale processes pending.

Andy Casey -- Wells Fargo -- Analyst

Okay, that's it from me. Thank you.

Thomas Amato -- President and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions]

We'll take our next question. And that is from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Hey, good morning everybody.

Thomas Amato -- President and Chief Executive Officer

Good morning, Steve.

Steve Barger -- KeyBanc Capital Markets -- Analyst

For Packaging, can you tell us what the magnitude of the organic decline was for the industrial business in North America?

Thomas Amato -- President and Chief Executive Officer

It is pretty significant. We're seeing end customers down double digit in some cases through the year, and as we look at Q4. We had expected a rebound to occur, has not occurred and at this point, we're not expecting that it will occur in to -- you know before the end of the year. And largely, we believe it's driven by our end customers and in some cases their customers' global shipments of goods either in drums or pails even outside of the US.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. So when I think about that mix relative to beauty and home care, should we expect flat organic growth and lower margins, at least through the first half of next year, would you expect?

Thomas Amato -- President and Chief Executive Officer

We haven't looked at how we think sales will flow in the first half of next year, but certainly over the remainder of this year, we would expect the trend to continue.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yeah, OK. And just thinking about M&A going forward would you do acquisitions in Packaging that are margin dilutive or that would swing mix around because of growth rates? Or are you trying to do things that are margin accretive in general?

Thomas Amato -- President and Chief Executive Officer

Well, we are looking at acquisitions that would be below the historical run rate of the TriMas Packaging segment. With that being said, however, those acquisitions that we're looking at, we see a -- in many cases, a direct line for them to be contributors to not only overall absolute EBITDA of the Group, but also on a margin basis as well.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Understood.

Thomas Amato -- President and Chief Executive Officer

So long way to say, we might buy something below our run rate with the eye toward bringing it up.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yeah. I got it. And the reason I ask is, if I go back to slide 5, are you concerned at all about the amount of EBIT concentration in Packaging, given what the impact would be if we get into a situation like this, where demand or mix or an operational results lower margins?

Thomas Amato -- President and Chief Executive Officer

As we've studied the segments that we were in, and look at historically businesses that are more focused in Packaging, we have tended to see they've been less volatile, companies less swings in terms of performance and have commanded somewhat of a lower beta. So that's been an appeal to us. So even I don't want to say recession-proof, but there tends to be a mitigation or some type of mitigate against softer market. So we are comfortable being more concentrated in Packaging and even taking that up further going forward.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. Thank you for the time.

Thomas Amato -- President and Chief Executive Officer

Yeah. Thank you.

Operator

Thank you. [Operator Instructions] And we do have a follow-up question and that is from Steve Barger with KeyBanc Capital Markets.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yeah, just kind of a housekeeping issue. How do you expect that the Street is going to go on a basis level for the 4Q number? Do you expect that people are going to model this or put out a number that's based on the full year, including Lamons or -- and then exclude that for 2020? I'm just trying to get a sense for how you think the Street will react to this?

Thomas Amato -- President and Chief Executive Officer

Well I would say that -- I mean there is, look, we announced the acquisition this morning. There's obviously a lot of work that will go into fine tuning what I'll call the impacts ultimately to what our guidance range is for both the full year as well as 2020. That said, we've indicated what the direct impacts are subject to impacts of any potential corporate allocations as a way to hopefully help guide folks in terms of how to think about the company ex-Lamons.

Robert Zalupski -- Chief Financial Officer

Yeah. And I would just add to that that we try to be, what I would say is a little more transparent than not in terms of sharing the data on Lamons peeling it outside of the Specialty Products segment. And hopefully, we'll see the Street recognize that the segment EBITDA that we referenced on slide 5, I think it looks like about $172 million net of Lamons is largely driven by businesses that -- you know trade in, and some spaces it's a pretty fantastic multiple. So hopefully that will be recognized.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Understood. Thanks.

Thomas Amato -- President and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions]

At this time, there are no questions and I'll turn the conference back over to Tom.

Thomas Amato -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Sherry Lauderback -- Vice President, Investor Relations and Communications

Thomas Amato -- President and Chief Executive Officer

Robert Zalupski -- Chief Financial Officer

Andy Casey -- Wells Fargo -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

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