Image source: The Motley Fool.
TriMas Corp (TRS 2.12%)
Q3Â 2020 Earnings Call
Oct 29, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Thank you and welcome to the TriMas Third Quarter 2020 Earnings Call. Participating on the call today are Tom Amato, TriMas's 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 the replay code of 3061032. 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 third 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 a part of the 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 & Chief Executive Officer
Good morning and welcome to TriMas's third-quarter earnings call. This year we have all learned to endure modifications to our daily routines to protect the health and safety of individuals in the communities where we live and work. At TriMas we have taken steps in each of our facilities to enhance social distancing and increase awareness of cleaning and personal hygiene. Compounding the impact of these physical changes certain of our facilities are operating at full capacity, while other facilities are operating at market reduce capacities. Both cases result in our teams having to adapt to our operating patterns to protect supply for our customers.
Again as I've said on earlier calls, I extend my deepest appreciation to our employees around the world for their commitment and dedication during these challenging times. Let's turn to Slide 3. TriMas operates businesses with strong brand names in a diverse set of end markets and applications. At the end of 2019, we successfully completed a strategic divestiture, which resulted in concentrating our family of businesses in this segment shown and this slide. We believe this strategic step reduced TriMas's overall systemic risk, which will benefit our shareholders in the long run, especially for a company of our moderate size. TriMas's presence in a diverse set of end markets further diversifies our risk and has proven to be beneficial for our investors again, in this third quarter.
As a reminder, just over 60% of TriMas's revenues are reported in our Packaging segment where we provide dispensers, closures, and jars into a wide variety of consumer packaged goods and industrial applications. Several of our product lines are used in applications that help fight against the spread of germs such as hand sanitizers, soaps, and lotions, and products for household and janitorial cleaning. Sales within our Packaging segment again outperformed our expectations given what we believe has emerged as a secular global trend resulting from a heightened awareness of hand-washing, improved personal hygiene, and overall cleanliness. Expanding TriMas's packaging platform is foundational to our overall growth strategy.
Therefore, I am excited to report that we have signed a purchase agreement with Affaba & Ferrari; a niche supplier in the Euro-CPG and industrial markets which specializes in design, development, and manufacturer of caps and closures, further enhancing the breadth and scope of TriMas's packaging group. Upon completion of this acquisition, which I will cover in more detail shortly, we will have acquired our fourth packaging company since early 2019. TriMas's Aerospace segment represents 24% of our sales. We supply engineered fasteners and fabricated products in assemblies into commercial, business jet, and military defense applications.
As previous -- as discussed previously, our businesses in this segment have been severely impacted by the effects of the pandemic, given the reduced aircraft production build rates. Sales began to significantly decline in the second quarter and we are currently running at about 35% below prior-year revenue on an organic basis. As noted on prior calls, we have taken significant actions to better realign our cost structures with lower demand in this segment. Given what we anticipate being a prolonged recovery period we continue to take cost realignment actions, including more significant manufacturing footprint rationalization steps to better position TriMas to gain operating leverage when the aerospace market ultimately recovers.
The balance of TriMas's business is in our Specialty Product segment where we predominantly supply steel cylinders under the Norris Cylinder brand name. The only remaining manufacturer of high-pressure steel cylinders in the United States as well as natural gas engines and compressors under the Arrow Engine brand name. Our Norris Cylinder business, which represents nearly 90% of the segment's revenue supplies into a wide variety of end markets including welding and HVAC, medical and military, and defense. While volume in our Specialty Product segment has been off due to the pandemic through swift realignment efforts.
This segment is also positively contributing to TriMas's overall earnings and cash flow. Moreover, we anticipate our Specialty Product segment, particularly our Norris Cylinder business will begin to recover first when the effects from the pandemic begin to subside. Let's now turn to Slide 4. Despite priority shifts resulting from the effects of the pandemic, we remain committed to TriMas's overall growth strategy. Executing against our strategy begins with our strong commitment to the TriMas business model. In fact, the TriMas Business Model process facilitated our swift response to the rapidly changing environments to drive or in some cases protect performance.
Another top priority of our strategy is our commitment to reinvest in each of our businesses to accelerate their long-term organic growth benefiting TriMas overall and therefore our investors. To managing our business as well. investing in our products and processes and maintaining an appropriate capital structure we also remain committed to building out TriMas's key platforms through bolt-on M&A. As noted, we continue to execute against our strategy with today's announced acquisition. Our ability to execute our strategy is predicated on our commitment to generate exceptional free cash flow. Our cash flow characteristics even in challenging period is our strategies oxygen.
It allows us to reinvest in our businesses, both organic and acquisition growth, and to take treasury steps to benefit our shareholders, which we have successfully done over the past few years through both debt reduction and share buybacks. Let's turn to Slide 5. As noted earlier, we were excited to announce that we entered into an agreement to acquire Affaba & Ferrari, a company that specializes in the design, development, and manufacture of plastic caps and closures for the Euro-CPG and industrial markets. Affaba & Ferrari is a single manufacturing plant operation located in Borgo San Giovanni, Italy, which is highly automated and equipped with appropriate certifications for supply into aseptic and other beverage applications.
Approximately 75% of Affaba & Ferrari sales are sold into energetic juice or dairy applications with the balance of sales sold into agricultural and industrial applications. We expect there 2020 sales to be approximately EUR32 million with an EBITDA margin of around 30% and we paid a total enterprise value at a rate of about 8.75 times EBITDA. Affaba & Ferrari will ultimately report into our Rieke division, which is included as part of TriMas's Packaging segment. We are also very pleased that both Silvia Ferrari and Guglielmo Ferrari siblings and the daughter and son of the original founder have both agreed to stay on with the Affaba & Ferrari under the -- under TriMas's ownership where they will continue to execute against the overall growth strategy.
We look forward to closing the transaction, which is expected to occur by the end of the year and we welcome the Affaba & Ferrari team to TriMas's family of businesses. Let's now turn to Slide six and I will cover our financial performance. Driven by the exceptional performance of our Rieke division, our consolidated third-quarter results were strong despite uncertainty in many of our end markets. Net sales for the quarter were $199.5 million, up 5.9% as compared to the prior-year period and up 0.4%, net of currency and acquisitions. Consolidated operating profit for the quarter was $29.6 million or 14.8% of sales, $5 million higher than the prior-year period, which was $24.6 million or 13.1% of sales.
Net income was $18.6 million or $0.43 per share, up nearly 20% as compared to $0.36 per share in the prior-year period. At TriMas we like to track our adjusted EBITDA momentum to assess how much ground we are gaining particularly when in challenging periods. In this regard, on a segment basis, our September 2020 LTM adjusted EBITDA was a $173.9 million or 23.1% of sales and up $3.8 million versus June 2020 LTM, and on a consolidated basis was $154 million or 20.5% sales, and up $4.3 million, again versus to June 2020 LTM. So despite challenges in certain end markets, we were able to gain ground on EBITDA momentum under our TriMas business model. Further, given that we reduced net debt from $230 million at the end of June to just under $200 million at the end of September, it becomes evident, while we remain comfortable with executing both our share repurchase and acquisition strategies to augment organic growth. Let's now turn to Slide 7.
On a year-to-date basis, net sales were $581.8 million, up 5.3% as compared to the prior-year period and essentially flat, net of currency and acquisitions. Year-to-date consolidated operating profit was $79.1 million or 13.6% of sales, higher than the prior-year period, which was $75 million. Net income was $52.4 million or $1.19 per share, up 4,4% versus $1.14 per share on a year-to-date prior-year comparison. I'll now turn the call over to Bob, who will take us through our cash flow, balance sheet, and segment results. Bob?
Robert J. Zalupski -- Chief Financial Officer
Thank you, Tom. If we turn to Slide 8, I would like to begin my comments with the review of our continued strong financial position, despite operating in a period of unprecedented dislocation exiting second quarter we remain confident that prior actions taken to strengthen our balance sheet will continue to benefit us over the second half of the year. Capitalizing on our strong operating performance and solid working capital management we generated free cash flow of $41.6 million in the quarter as compared to $19.3 million in Q3 2019, a year-over-year improvement of 116%. As a result we resumed our share buyback program in Q3 repurchasing approximately 188,000 shares during the quarter for $4.5 million.
And a year-to-date basis, it is a similar story. We generated free cash flow of $68.5 million as compared to $42.7 million in the same period a year ago and repurchased 1.4 million shares for approximately $36 million in a return of capital to our shareholders. We ended the quarter with net debt of $196 million as compared to $236 million a year ago and increased LTM adjusted EBITDA to $154 million, resulting in net leverage of 1.3 times, well below our targeted level of two times. Pro forma for the acquisition of Affaba & Ferrari announced earlier this morning, we anticipate our net leverage will remain below two times.
In summary, given unrestricted cash and available liquidity of roughly $390 million at quarter-end, we continue to have sufficient capacity to execute our capital allocation priorities of reinvestment in our businesses, programmatic M&A, and return of capital to our investors through share repurchases. Turning to Slide 10 and a review of our Packaging segment. I would first like to highlight that Q3 represented the second consecutive record quarter in terms of sales and operating profit for TriMas's Packaging Group. While demand in certain end markets has certainly been strong, this accomplishment is a testimony to the hard work and dedication of all of our packaging team members globally, despite the unprecedented nature of the pandemic and its many impacts.
Third-quarter net sales of $135 million increased approximately $29 million or 27.5% net of foreign currency, compared to the year-ago period. Organically, we achieved robust sales growth of $24.1 million, up 22.8% and acquisitions contributed an incremental $4.9 million in sales. The impact of foreign currency translation was negligible in the quarter. Sales of our dispensing products used in beauty and personal care and home care applications that help fight the spread of germs, led the way increasing approximately $23 million as Rieke continues to experience robust demand due to the COVID-19 pandemic. Sales of products the food and beverage applications were also higher increasing approximately $8.5 million primarily due to the aforementioned acquisition sales, but as well as higher sales of dispensers, caps, and closures used in traditional food and beverage applications.
Sales of products used in industrial markets declined approximately $2.4 million versus the prior-year quarter as the impact of COVID-related demand for our products used in industrial cleaning applications was more than offset by overall lower industrial activity in North America and Europe due to the pandemic. Operating profit increased $7.9 million to $28 million driven by the aforementioned sales increases while operating margin of 20.7% increased to 160 basis points versus the same period a year ago. Adjusted EBITDA also increased $7.4 million or more than 27% to $34.2 million versus the prior year's quarter of $26.8 million.
We continue to experience high demand for many of our beauty and personal care and home care products, more specifically foaming pumps, soap and lotion pumps, sanitizer pumps, and related closure products, and are actively working to increase our capacity in order to meet our customer requirements and increased market demand. Turning to Slide 11. I will now update you on our TriMas Aerospace Group. Net sales for the quarter declined approximately $11.5 million or 22.6% to $39.1 million. Sales of core fastener products and machine components declined $16.1 million or approximately 32% compared to the year-ago period as a result of continued low travel demand and related reductions in aircraft build rates due to the global pandemic.
Sales of fasteners were also lower as compared to Q3 2019 due to the 737 MAX grounding which was expected. RSA Engineered Products acquired in February 2020 contributed $4.7 million of sales, which helped offset a portion of the organic sales decline noted above. Operating profit declined $4.1 million to $3.7 million for Q3 due to significantly lower sales volumes and a less favorable sales mix. Operating profit margin was also lower at 9.5% down from 15.4% in Q3 year ago as a result of lower absorption of fixed costs on the sales on decline and production inefficiencies associated with impacts of the global pandemic. However, TriMas Aerospace was still able to achieve adjusted EBITDA for the quarter of 20.9% as we do carry a significant amount of non-cash depreciation and intangible amortization in this segment.
At this point, I also wanted to comment on the non-cash, goodwill and intangible asset impairment charge we reported in this morning's earnings release. Like many companies in the aerospace supply chain since late second quarter, we have been challenged by significant reductions in end-market demand. The fall-off in sales has also resulted in a significant decline in our Aerospace Group's financial results, which when combined with the uncertainty around the duration and magnitude of the pandemic's impact on future air travel and new aircraft demand required reassess for potential asset impairment. As a result of this review, we recorded a non-cash pre-tax goodwill and intangible asset impairment charges totaling $134.6 million related to the Aerospace segment.
Please refer to our third-quarter financial statements filed on Form 10-Q for further details regarding the timing, rationale, and valuation approaches utilized in determining the amount of these charges. The TriMas Aerospace leadership team continues to evaluate further practical steps to align our manufacturing footprint and related cost structure with the lower demand being experienced in end markets impacted by the pandemic while balancing its priority of investing in new and innovative products to support its global customers. Moving to Slide 12. I will now review our Specialty Products segment. Net sales in the third quarter declined $7.2 million or approximately 22% compared to the same period a year ago.
This decline -- sales decline was driven by lower sales of steel cylinders used in construction and HVAC end markets as well as lower sales of engines and compressors used in upstream oil and gas applications each for the North American market as industrial economic activity continues to be severely hampered by the effects of the global pandemic. Operating profit was $3.4 million for the quarter as compared to $3.6 million in Q3 2019 while adjusted EBITDA of $4.3 million was also down slightly versus the prior year's quarter of $4.5 million. However, adjusted EBITDA margin in the quarter of 16.9% was more than 300 basis points higher than the prior year's Q3 level of 13.8%.
As discussed on last quarter's call, we are seeing the benefits of significant realignment actions executed during the second quarter within the Specialty Products. We implemented a series of cost reductions and manufacturing process changes to flex the operating cost structure of our cylinder business to better align with changing customer demand and narrowed the commercial and operational focus of our aero engine business by exiting a significant number of non-core products, although Specialty Product sales declined approximately 22% in Q3 compared to the prior year.
The change in adjusted EBITDA was approximately flat in the margin fall off was substantially mitigated. We will closely monitor end-market demand challenged by the effects of the pandemic while continuing to position these businesses for early wins in an economic recovery with increased operating leverage as a result of the 2020 realignment actions. With that, I will turn the call back over to Tom to discuss our outlook and his concluding remarks. Tom?
Thomas A. Amato -- President & Chief Executive Officer
Thank you, Bob. Let's turn to Slide 14. As we near the end of the year we have a better sense of how our customers' activities are tracking, while we also recognize the consumer confidence remains fragile and ordering patterns can change swiftly. We also know that Q4 is historically our lowest sales quarter with less ship days as compared to earlier quarters in the year. We expect sales in our Packaging segment will remain strong versus the prior-year period, although we anticipate some slowing in the rate of growth, it has occurred over the past two quarters as customers evaluate year end inventory positions.
We also expect sales in our Aerospace segment to remain well off the prior year quarter given low travel rates and corresponding low production rates of commercial jets. And finally, we expect to continue with the current run rate of our Specialty Product segment through the balance of the year. Therefore, in light of these assumptions, we anticipate full year 2020 sales to be up 4% to 6% as compared to 2019. We anticipate full year EPS to be in the range of $1.45 to $1.50 with the higher end of the range achieved if order intake and deliveries in our TriMas Packaging Group remains strong. Full year cash flow was anticipated to be greater than $90 million again, proving that even in challenging times our commitment to cash conversion remains solid. We are also working on our 2021 outlook.
While I don't have any specific numbers to offer on this call, we do believe as with most companies that should a vaccine to the market come should a vaccine come to the market or the rate of COVID-19 cases significantly subsides that this will begin the benefit TriMas Aerospace and TriMas Specialty Product segments. On the other hand, we are also contemplating the action we would need to take should a significant second outbreak occur in the United States or globally. Let's now turn to Slide 15. We recently attended a William Blair Virtual Investor Conference where in a refreshing way they ask companies to discuss a post-pandemic environment focusing on well beyond the 2021 period. This slide shows what we believe are now the modified value drivers and rationale for investing in TriMas, specifically, we will continue to leverage our largest business Rieke positioning for long-term organic growth in what we believe is a new global secular trend for personal hygiene and cleaning products.
For some of our more challenged businesses, we expect the steps we have and are taking during this lower demand period will improve cost structures, so when markets recover, we will have an opportunity for future operating leverage gains. We will continue to enhance TriMas by leveraging growth through acquisitions in our largest platforms with the priority on packaging but also aerospace even during this challenging period. Of course, we will continue to return capital and shift value to our shareholders by managing our debt level and executing share buybacks. Finally, our ability to execute against our strategy is predicated on are maintaining a strong balance sheet having ample liquidity and generating solid cash flow. We continue to believe TriMas as an exciting company to invest in. And with that, I'll 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
Thank you.(Operator's instructions) All right. I'm showing no questions at this time.
Thomas A. Amato -- President & Chief Executive Officer
Thank you, operator. We have been alerted by a number of our analyst given how busy this day is in terms of earnings being reported that they would be circling up with us later. For those on the call, I want to thank you for your time. Please stay safe and healthy and we'll talk to you at the next earnings call next quarter. Thank you very much.
Operator
[Operator Closing Remarks]
Duration: 28 minutes
Call participants:
Thomas A. Amato -- President & Chief Executive Officer
Robert J. Zalupski -- Chief Financial Officer
Sherry Lauderback -- Vice President, Investor Relations and Communications
