Logo of jester cap with thought bubble.

Image source: The Motley Fool.

TriMas Corp (NASDAQ:TRS)
Q2 2020 Earnings Call
Jul 30, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the TriMas Second Quarter 2020 Earnings Conference Call. [Operator Instructions] At this time, I'd now 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 TriMas Corporation's Second Quarter 2020 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 results, 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 a replay code of 9768715. 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, including impacts from COVID-19.

Please refer to our Form 10-K and our second quarter 10-Q that will be filed today for a list of factors that could cause our results to differ from those anticipated in any forward-looking statements. Also, we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. We would also direct your attention to our website where considerably more information may be found. In addition, we would like to refer you to the appendix in our press release issued this morning, or included as part of this presentation, for the reconciliations between GAAP and non-GAAP financial measures used during this conference call today. The discussion on the call regarding our financial results will be on an adjusted basis, excluding the impact of special items. With that, I will turn the call over to Tom Amato, TriMas' President and CEO. Tom?

Thomas A. Amato -- President And Chief Executive Officer

Good morning, and welcome to our Second Quarter Earnings Call. I would like to begin today's discussion by first thanking all of our employees for their commitment and dedication during these challenging and uncertain times. To put a finer point on our gratitude, TriMas operates 37 facilities in 11 countries on four continents. By adjusting to new work rules and processes, which promote social distancing and improve cleanliness and hygiene, virtually all of our facilities have operated through this unprecedented period experiencing only temporary disruptions. As a reminder, all of our production locations have been deemed essential. This is because the products we manufacture go into applications that help fight the spread of germs or are used in medical, military and defense, food and beverage or industrial applications. Although we experienced a wide range of performance outcomes due to end market disruptions, our second quarter results were better than we anticipated when the pandemic was declared.

Let's turn to slide three. As a reminder, nearly 60% of TriMas' revenues are in packaging, where we provide dispensers, closures and jars into a wide variety of end markets but primarily into the consumer packaged goods and industrial markets. As I mentioned earlier, several of our product lines are used in applications that fight against the spread of germs, such as hand sanitizers, soaps and lotions and products for household cleaning. Sales within our beauty and personal care, home care and food and beverage end markets were all nicely higher this quarter as compared to the same period last year. Sales into the industrial end markets were also up slightly. We continue to see strong end bookings across various packaging product lines, given what we believe has emerged as a positive secular trend resulting from the heightened awareness of the importance of handwashing and improved personal hygiene. TriMas' Aerospace segment represents about 26% of our sales, and we supply into commercial and business jet and military and defense applications.

Given reduced production rates, not surprisingly, our businesses in this segment have been severely impacted by the pandemic as sales began to significantly decline late in second quarter. With that said, it's important to note we have an outstanding leadership team, headed by John Schaefer, who turned this business around over the past few years, well known in the aerospace supply network brand names, and innovative products. While we could not have predicted the pandemic and resulting impact to the aerospace sector, John and the team have responded incredibly well to balance cost containment while preserving the innovative spirit of our Aerospace businesses. Ultimately, when the aerospace market does start to recover, we will be positioned well to properly gain from solid operating leverage.

The balance of our business is in our Specialty Products segment, where we predominantly supply steel cylinders under the Norris Cylinder brand name, the only manufacturer of high-pressure steel cylinders in the USA. Norris supplies into a wide variety of end markets, including welding and HVAC, medical and military and defense. A key tenet to TriMas' model is our presence in a diverse set of end markets, coupled with a disciplined capitalization structure which, in turn, provides us with the ability to generate solid cash flow even when there are challenged markets, therefore, enabling our ability to create long-term value for our shareholders. The second quarter exemplified this TriMas characteristic.

Before I review our financial performance, I want to update our investors on some key developments in the quarter. As reported a couple of weeks ago, I'm excited to announce the appointment of Fabio Salik as the President of Rieke. Fabio comes to TriMas with a significant amount of leadership experience in the packaging market having worked most recently at Logoplaste, a Carlyle group company. Additionally, Fabio has held leadership positions at Rexam in their beauty and personal care business, which later merged into Albea. And prior to Albea, Fabio was President of a Brazilian-based beauty and skin care products company called Valmari. We look forward to Fabio helping us transition Rieke into a substantially larger business for TriMas as we remain committed to building out TriMas' packaging platform through organic growth and M&A. Welcome Fabio.

In connection with Fabio's appointment, we also announced the planned retirement of David Pritchett, David joined Rieke nearly 25 years ago and had increasing levels of responsibility until being named as President in 2014. I personally thank David for his many years of business development significant contributions, and I know we will remain close with David, given his long history with Rieke and his interest to see our continued success. Thank you, David. During the quarter, we decided to repay $150 million, which we drew on our line of credit as a precautionary measure in March. This was a prudent step to take at the time, and we are pleased to not have had to rely on these funds and that the credit market have remained robust. Finally, we continue to take cost containment actions during the quarter in some of our more challenged product lines. Bob will discuss this in more detail in the segment review.

Let's now turn to slide four, and I'll cover our financial performance. Sales were $199.6 million, up versus the prior year quarter by 4.6%, largely driven by strong growth in packaging and also acquisitions. Organic sales were up about 1% versus the prior year quarter as the very strong sales in certain packaging end markets were offset by the weaker sales in our Aerospace and Specialty Products segments. Operating profit was $27.5 million or 13.8% of sales for the quarter, just slightly below the prior year quarter of $28 million as the impact of higher sales was offset by product mix, continued production inefficiencies related to operating under the unprecedented period we are in and higher depreciation. Despite the softer operating profit, EBITDA for the quarter was $43.3 million or 21.7% of sales, up from the prior year quarter of $41.9 million, driven largely by higher sales. EPS for the quarter was $0.43 per share, in line with the prior year quarter, which was also $0.43. Turning to the next slide.

On a year-to-date basis, sales were $382.3 million, up from the prior year first half by 5%. On an organic basis, sales were relatively flat as the higher sales in our Packaging segment nearly offset the slowing sales in our Aerospace and Specialty Products segments. Operating profit for the first half was $49.5 million, slightly lower than prior year, which was at $50.4 million. EBITDA for the first half was $78.6 million or 20.6% of sales, up by $3.3 million as compared to $75.3 million for the same period last year. First half EPS totaled $0.77 as compared to $0.79 per share for the first half of last year. Let's now turn to slide six. Despite operating in this period of such dislocation, the actions we took to strengthen our balance sheet in prior years position TriMas to gain traction with solid cash flow during this quarter. We generated free cash flow of $25.2 million and finished the quarter with net debt of $230 million, down from the prior quarter of $238.9 million.

We did not repurchase any TriMas shares during the quarter, as we stated this intent on our last call, given this unprecedented period. However, we do have $169.5 million remaining under our share repurchase authorization. Given the quarter the current quarter's higher EBITDA versus the prior year quarter, our LTM EBITDA increased to approximately $149.8 million as compared to $148.4 million at the end of the first quarter. We finished the quarter with net leverage of 1.5 times, a slight reduction from the end of the first quarter. Finally, we continue to have an adequate amount of cash and available liquidity for acquisitions, share repurchases and general operating purposes. So as noted, we are pleased with these results for the quarter and the first half, particularly given the uncertainty we faced during the past several months. Now I will turn the call over to Bob, who will take us through segment results and certain accounting matters. Bob?

Robert J. Zalupski -- Chief Financial Officer

Thank you, Tom. If we turn to slide eight, I would like to begin my comments with a discussion of certain business realignment actions we completed in the second quarter in response to the operational and financial impacts resulting from the COVID-19 pandemic. As Tom highlighted in his remarks, entering second quarter, we were already seeing signs of slowing sales in much weaker end markets in our Specialty Products and Aerospace segments. We implemented realignment actions that would not only help mitigate financial impact of declining sales in the near term but also better position each of these divisions to enhance operating leverage as the global economy and specific end markets ultimately begin to recover.

In total, we recorded noncash charges of $15.4 million, the largest portion of which related to liquidating product line inventories we exited in our aero engine division, following our decision to streamline its product offering to certain core engine lines and related products. We also disposed of certain aerospace and industrial cylinder inventories not expected to be salable in the foreseeable future under current market conditions as well as retired certain machinery and equipment from use given existing capacity available and reduced end market demand. We also incurred cash severance costs in the quarter of $3.1 million related to the adjustment of employment levels, primarily in our Aerospace segment, in response to the significant disruption of the commercial aerospace market and uncertainties related to the time frame of expected future recovery. In addition to the realignment actions noted, we also recorded a noncash pre-tax charge of $23.4 million for an accounting policy change related to accounting for less legacy asbestos claims.

This change effective in the second quarter results in a balance sheet accrual for all estimated future indemnity and defense costs associated with known and unknown claims given we now believe these costs can be reasonably estimated. This change also results in the elimination of current period charges to the P&L of approximately $2.5 million annually. Please refer to our second quarter financial statements filed on Form 10-Q for further details regarding reasons, timing and preferability of this change. Turning to slide nine and a review of our Packaging segment. Overall, second quarter performance was strong with net sales of $128.8 million, up almost $25 million or 23.9% net of foreign currency compared to the year ago period. Organically, we achieved robust sales growth of $20.1 million, up 19.4% overall, and acquisitions contributed an incremental $7.1 million in sales while foreign currency translation was a headwind of $2.4 million. Sales of our dispensing products used in beauty and personal care and home care applications increased approximately $8.6 million as demand increased due to the COVID-19 pandemic.

Sales of products used in food and beverage applications were also up nicely, increasing approximately $5.7 million, primarily related to higher sales of dispensers for beverage products. Sales of products used in industrial markets also increased approximately $3 million due to increased demand within North America as a result of higher sales of products used in applications for transporting both sanitizer and industrial cleaning solutions. Operating profit increased $4.3 million to $27.2 million driven by the aforementioned sales increases, while operating margin of 21.1% was slightly lower than the year ago period due to a less favorable sales mix and production inefficiencies related to the global pandemic. That said, given this quarter's higher sales level, adjusted EBITDA also increased $5 million to $35.3 million versus the prior year quarter of $30.3 million.

We continue to experience high demand for many of our beauty and personal care and home care products, more specifically, foaming pumps, soap pumps, lotion pumps, sanitizer pumps and closure products, and are actively working to increase our capacity in order to meet our customer requirements. Turning to slide 10. I will now update you on our TriMas Aerospace Group. Net sales for the quarter declined approximately $6.9 million or 14% to $42.6 million. Sales of core fastener products and machine components declined $12.8 million compared to the year ago period as a result of reductions in aircraft build rates due to the global pandemic. Sales of fasteners were also lower as compared to second quarter 2019 due to the 737 MAX grounding, which was expected. RSA Engineered Products, acquired in February 2020, contributed $5.9 million of sales, which helped offset the organic decline noted above.

Operating profit declined $3.40 to $4.3 million for Q2, due primarily to lower sales and a less favorable sales mix. Operating profit margin was also lower at 10.1% and down from 15.5% in Q2 a year ago as a result of lower absorption of fixed costs on the sales volume decline and higher production inefficiencies due to the impacts of the pandemic. However, TriMas Aerospace was still able to achieve adjusted EBITDA margins for the quarter of 20.8% as we do carry a significant amount of noncash, depreciation and intangible amortization in this segment. As a result of the anticipated significant falloff in customer demand due to the global pandemic, as Tom mentioned earlier, the TriMas Aerospace leadership team implemented significant realignment actions in Q2 to mitigate the impact to operating margins as a result of lower sales.

As we move into the second half of the year, we are anticipating order intake and shipment activity to be down significantly compared to the second half of 2019 and are evaluating further practical steps to align our cost structure accordingly. While we are unable to predict with any precision the depth and duration of this downturn, we believe the commercial and business aviation end markets will continue to be under severe pressure for at least the next several quarters. That said, the aerospace market overall remains critically important to national economies. And as we work through this pandemic period, we anticipate TriMas Aerospace will ultimately rebound to prior performance levels in the future. Moving to slide 11. I will now review our Specialty Products segment. Net sales in the second quarter were down $9.2 million or almost 25% compared to the same period a year ago.

The sales decline was driven by lower sales of steel cylinders used in construction and HVAC end markets and lower sales of engines and compressors used in upstream oil and gas applications each for the North American market as industrial economic activity has been severely hampered by the effects of the pandemic. Operating profit was $3.8 million for the quarter, down $1.6 million versus the prior year, while adjusted EBITDA of $4.7 million or 16.9% of sales was also down a similar amount. As highlighted earlier, we executed significant realignment actions during the second quarter within Specialty Products. We narrowed the commercial and operational focus of our aero engine business by exiting a significant number of existing products and implemented a series of cost reduction and manufacturing process changes to flex the operating cost structure of our cylinder business to better align with changing customer demand.

Although Specialty Product sales declined approximately 25% in Q2 compared to the prior year, the change in adjusted EBITDA approximately flat as our Specialty Products team acted swiftly and the margin falloff was substantially mitigated. We will continue to monitor end market demand levels closely, and we'll be prepared to flex costs further to mitigate impacts of lower sales volumes.

With that, I will turn the call back over to Tom to discuss outlook in his concluding remarks. Tom?

Thomas A. Amato -- President And Chief Executive Officer

Thank you, Bob. And turning to slide 13, when we reported our first quarter results, we felt it was prudent, based on the inability to forecast the impact of the pandemic, to withdraw our full year guidance. As we look toward the second half of the year, there remains much uncertainty in certain of our markets. We remain cautiously optimistic that the robust sales activity in our Packaging segment will continue through the end of the year, generally in line with the first half, however, slightly moderated given some reduced shipping days. We also anticipate the second half sales trend for our Specialty Products segment will continue to be lower as compared to the prior year's second half but generally in line with the first half rate.

The most notable change, as should be expected, is that we anticipate a second half sharper sales decline in our Aerospace segment as compared to the second half of 2019 as the production order demand has started to line up with overall lower aerospace market demand. In light of this anticipated sales run rate, decremental margins may vary widely, and we are not in a position to reliably forecast earnings at this time. Netting this all together, we expect TriMas' overall sales for the second half of 2020 to be about flat with the second half of 2019. Finally, we anticipate continuing to generate solid free cash flow in excess of net income and maintain our strong balance sheet.

As we see stability or if the global economy changes further impacting our markets, we will adjust our operations accordingly as well as revisit our decision on communicating earnings outlook. Of course, we will continue to rely on the TriMas business model, which provides us with a standardized platform for proactively managing our businesses and escalating issues, which are then resolved with a high sense of urgency. As we look toward the upcoming year and even beyond, we remain excited about TriMas and our family of businesses. As markets have changed, some of our value drivers have evolved, which we believe will benefit our shareholders. Specifically, we believe investors will benefit from TriMas' meaningful presence in the supply of dispensers and closures used in handwashing and sanitizing, lotion, home care and food and beverage applications, which we believe will benefit from positive secular growth due to consumer behavioral changes.

Additionally, we have excellent businesses and brand names in our Aerospace and Specialty Products segments. When these markets start to recover in the future, and they will recover, we are positioned to gain from early wins and meaningful operating leverage. We will continue to operate TriMas with an overarching mantra of generating exceptional free cash flow and protecting our strong balance sheet, which, not only, provides us the ability to weather market shocks, but also to position us competitively to gain from new program wins. And we will enhance long-term value creation through bolt-on M&A with a primary focus on building out our Packaging and Aerospace platforms and also through share buybacks.

Thank you for your time and attention, and I will turn the call back to Sherry. Sherry?

Sherry Lauderback -- Vice President, Investor Relations and Communications

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Andy Casey with Wells Fargo Securities.

Patrick Murphy -- Wells Fargo Securities -- Analyst

Hi, good morning guys. This is actually Patrick for Andy. This is actually Patrick standing in for Andy. Yes. Okay. Just I appreciate you guys calling out the gross dollar amounts for the Packaging business pretty much by business. Can you maybe help us parse out some of the rates, specifically the organic rates for the several businesses that you called out, home, personal care, pharma, food and bev. and industrial in the quarter, just so we can get a sense of what kind of rates we can maybe look into and expect into going into the third quarter and second half of the year?

Thomas A. Amato -- President And Chief Executive Officer

Well, I think if you take a look at the range we provided, the sales growth range we provided on slide 13 of the presentation, the biggest drivers of the year-on-year change really will be in the beauty and personal care and home care product applications. For the most part, we'll see we expect to see some continued benefits in food and beverage as more QSR activity picks up and then some slight other pickups. But the material drivers to the year-over-year rate change are predominantly going to be in beauty and personal care, applications and home care applications.

Patrick Murphy -- Wells Fargo Securities -- Analyst

Understood. Okay. And just moving on to Aerospace. I understand that given the current environment, it's a little bit difficult to sort of really hone in on decremental margins. But as you guys think about, maybe, perhaps further actions and whatnot that you guys are going to take, can you at least provide a band for us in terms of when you do your scenarios, what kind of band of margins are you guys looking in looking at, really? And then also what can you guys do or what needs to happen to get you to a certain band versus maybe a lower band?

Thomas A. Amato -- President And Chief Executive Officer

Yes. I'll maybe give some color on it and ask Bob to also comment if he'd like. But as you probably are hearing from other companies, and it's no different at TriMas, when there's this much dislocation as we're seeing in any particular end market or demand level, the decremental margins are not linear, and we see that, of course, as well. So what we're balancing doing in terms of cost containment and protecting aspects of our overall margin is balancing those actions with the long-term preservation of the phenomenal businesses that we have and repositioning them for early wins when markets start to recover. So that's just the state of that we're in, in terms of the dislocation on the revenue and the decremental margin. Bob, if you want to talk further on that point, feel free, of course.

Robert J. Zalupski -- Chief Financial Officer

Yes. The only other thing I'd add is there's also a mix element here. Not only is there a significant disruption in the volumes of products being sold, but our traditional mix is being impacted as well. And being able to sort out that impact from a decremental margin, which is more volume-based, just further complicates it. But at the end of the day, given the kinds of declines we're seeing in sales volume and what we're anticipating may occur in the back half, the decremental margin impacts will be meaningful.

Patrick Murphy -- Wells Fargo Securities -- Analyst

I appreciate that. Thank you.

Robert J. Zalupski -- Chief Financial Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Steve Barger with KeyBanc Capital Markets.

Thomas A. Amato -- President And Chief Executive Officer

Good morning, Steve,

Ken Newman -- KeyBanc Capital Markets -- Analyst

Good morning, everyone. This is actually Ken Newman on for Steve. Thanks for taking the question.

Thomas A. Amato -- President And Chief Executive Officer

Yeah, good morning.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Good morning. Yes. I totally get the expectation for sequentially weaker revenue into the back half for aero and specialty. But I was curious, if you could just kind of help us with thinking about the cadence of sales for those segments. Curious if you are expecting fourth quarter to be sequentially better than the third quarter. Or maybe is it a little more level loaded for the outlook in both of those segments?

Thomas A. Amato -- President And Chief Executive Officer

Yes. I would say it's hard to handicap only from the standpoint that we're not convinced, particularly in Aerospace, that we have sort of hit the trough, if you will, of where we think we'll settle out. And so that makes it a little hard to talk about sequentially third quarter to fourth. What I would generally say is that fourth quarter has historically been our lowest sales quarter. And I would anticipate sort of that pattern of activity to continue, just it's now affected for however the pandemic hits us in Q3 in terms of sales in those two segments. It doesn't appear, at least based on what we're looking at today, that there's prospects for recovery yet this year from the pandemic. So I would not anticipate that sales in those end markets or demand in those end markets would pick up fourth quarter versus third. So I think the pattern will hold that fourth quarter is going to be sequentially lower than the third.

Robert J. Zalupski -- Chief Financial Officer

And the only thing that would change that, and we would view as, obviously, an opportunity is if there is meaningful progress made, obviously, on vaccine, or if changes occur in terms of the case rate cadence throughout the nation. Clearly, that would benefit us as well.

Ken Newman -- KeyBanc Capital Markets -- Analyst

That's helpful. Moving on, it was good to see that Packaging margins returned back to the 20% range. Obviously, mix has was not favorable with the higher sanitation-based sales. So I am curious how you think about margin cadence into the back half, if you would expect a 20%-plus type of margin into this back half despite maybe some of the negative mix impacts and the inefficiencies you saw this last quarter.

Robert J. Zalupski -- Chief Financial Officer

Yes. I think the current run rate that we achieved in terms of mix especially in the second quarter here is going to be relatively consistent with the run rate we anticipate in terms of product mix going through the second half. There's no indication sort of today, as I look at our end bookings, that anything is changing the types of products that are being demanded and pulled by our customers.

Thomas A. Amato -- President And Chief Executive Officer

Yes. And from a production and efficiency standpoint, I think we're assuming, sort of, consistent level of activity in second half. Obviously, if there's a disruption due to a breakout or a plant having to be shut down for a week or two that could fundamentally change that, but we're not seeing anything like that at this point.

Paul Karos -- Whitebox Advisors -- Analyst

Got it. And then just one quick follow-up for me. On the asbestos accounting charges that you had this quarter, could you just make the clarification on that $2.5 million annual comment you made earlier in the prepared comments? Should I guess I'm trying to figure out if we should expect any further charges related to that for the remainder of the year.

Thomas A. Amato -- President And Chief Executive Officer

Yes. So the $2.5 million under our former accounting policy was essentially the both the cash and the P&L impact that we had been experiencing on an annual basis related to defense costs associated with the litigation. Under the change in method, we basically have accrued an actuarial estimate of what we think the defense and indemnity cost will be over the many years into the future. And the only the cash charges will still probably approximate that $2.5 million not cash charges, but the cash outlays will probably still remain in that $2.5 million range. From a P&L standpoint, there will only be adjustments for if the annual actuarial studies or other levels of activity are such that it changes the actuarial outcome from where we're at today. So that would be something that would be done on a periodic basis annually or perhaps more frequently, if we see changes in the pattern of the case activity.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Got it, thanks.

Paul Karos -- Whitebox Advisors -- Analyst

Thank you.

Thomas A. Amato -- President And Chief Executive Officer

Thank you.

Operator

[Operator Instructions] We have no additional questions at this time.

Thomas A. 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. Please, everyone, stay safe and healthy. Thank you.

Operator

[Operator Closing Remarks].

Duration: 36 minutes

Call participants:

Sherry Lauderback -- Vice President, Investor Relations and Communications

Thomas A. Amato -- President And Chief Executive Officer

Robert J. Zalupski -- Chief Financial Officer

Patrick Murphy -- Wells Fargo Securities -- Analyst

Ken Newman -- KeyBanc Capital Markets -- Analyst

Paul Karos -- Whitebox Advisors -- Analyst

More TRS analysis

All earnings call transcripts

AlphaStreet Logo