TriMas Corporation (TRS) Q2 2021 Earnings Call Transcript

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TriMas Corporation (TRS -0.75%)
Q2 2021 Earnings Call
Jul 29, 2021, 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 2021 Earnings Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Sherry Lauderback. Please go ahead, ma'am.

Sherry Lauderback -- Vice President, Investor Relations and Communications

Thank you, and welcome to TriMas Corporation's Second Quarter 2021 Earnings Call. Participating on the call today are Tom Amato, TriMas' President and CEO; and Scott Mell, our Chief Financial Officer. We will provide our prepared remarks on our results and our outlook, and then 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 TriMas website 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 seven three 0 two three 0 8. 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 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'll turn the call over to Tom Amato, TriMas' President and CEO. Tom?

Thomas Amato -- President and Chief Executive Officer

Good morning, and welcome to TriMas's Second quarter earnings call. We are pleased to report that TriMas' positive momentum has continued through the second quarter. While there were indeed challenges that affected our ability to accurately forecast demand at the start of the year, we are reporting solid second quarter results today. Let's turn to slide three.

As a reminder, in the second quarter of 2021, we are comparing results to a pandemic related demand surge in TriMas' Packaging group, which began in the second quarter of 2020. The however, we are also comparing against the effects of an abrupt demand slowdown in our Aerospace and Specialty Products businesses, which also began in the second quarter of last year.

With that said, our consolidated sales were at the top end of our expectations, driving better-than-anticipated earnings. Our TriMas Packaging segment continues to outperform expectations as the pullback from the record 2020 pandemic related sales rate was less than expected. We remain optimistic that the results in our TriMas Packaging group are aligned with our thesis of a positive secular demand change given that many of our products are used in applications for cleaning or that help fight the spread of germs.

We are also pleased to announce some significant investments for our future, which include commercializing innovative dispensing products, which foster our commitment to sustainability and adding capacity in North America. I will cover this more in the next slide. In addition, within our Specialty Products Group, specifically our Norris cylinder business, we successfully achieved our made in the U.S.A. designation.

We have often discussed the unique position of Norris cylinder as the only high-pressure forged steel cylinder manufacturer in the United States, and we think it is only fitting that we lean into this enviable position. We believe our most discerning customers, which already rely on Norris cylinder for high-quality products will now add the made in U.S.A. criteria to their decision-making process.

As we close out the first half of 2021, we are also very pleased to sustain our positive momentum in LTM adjusted EBITDA, which we attribute to our focus on operational excellence and operating under the TriMas business model. Finally, we repurchased approximately 358,000 TriMas shares during the quarter, thereby reducing our net shares outstanding from our December 2020 level by approximately 0.5%.

We are pleased to be in a position where we can provide this added benefit to our shareholders, and we'll continue to assess repurchasing shares as a means to return value or take advantage of any market dislocations generally. Let's turn to slide four. Last week, we announced that we further advanced our commitment to sustainability and the commercialization of the patented, Mono 2e pump, a unique dispenser that is fully recyclable.

This was the first pump in the market made from a single polymer grade resin, which makes the pump more easily recyclable at end of use. For example, by eliminating the metal spring and making several parts out of one polymer, this pump can more easily feed the post-consumer resin stream, which reduces process steps, investment and the overall carbon footprint. Our single polymer pump is commercially available and ready for advanced design applications for customers serving the beauty, personal care and other end markets.

It is already being used by one of our major consumer packaging customers for a newly launched personal care product. We are also working on developing additional dispensing products made from a single polymer without compromising quality, aesthetics or performance. We look forward to launching our newest pump that is currently in advanced stages of testing under the Singolo brand name.

As I mentioned on the last slide, we are continuing to invest in capacity for TriMas Packaging and have recently broke ground on a new 230,000 square foot facility in New Albany, Ohio. This new facility will enable TriMas Packaging to localize the production of a variety of products, including foaming and traditional dispensers, currently produced overseas for a large customer, while providing incremental capacity for new business growth.

With a focus on advanced manufacturing technology, this facility is expected to ensure continued excellent lead times, high-quality performance and collaborative product development with our customers. Production is expected to start in the second quarter of 2022. If we turn to slide five, I will now review TriMas's second quarter results. Consolidated sales were $219 million, up 9.7% as compared to the prior year quarter, driven by acquisitions, organic sales increases and favorable currency exchange. Organic sales were up 2.4%, driven largely by TriMas' Specialty Products and Aerospace groups.

Again, it is important to remember that the prior year comparison quarter had an unusually high pandemic related demand surge within TriMas Packaging, while we also started to see an abrupt slowdown in demand in Aerospace and Specialty Products segments. Adjusted operating profit was $30 million or 13.7% for the quarter, up $2.5 million as compared to the prior year quarter.

And adjusted net income was $22.7 million, up $4 million as compared to the prior year quarter, primarily driven by higher-than-expected sales and related conversion and further boosted by a lower tax rate. Adjusted diluted EPS was $0.62 per share for the quarter. This exceeded the top end of our outlook of $0.50 to $0.57 and compares to $0.52 for the prior year quarter. Finally, adjusted EBITDA was $45.3 million or 20.7% of sales, up $2 million from the prior year quarter.

Let's turn to slide six. On a year-to-date basis through the first half, consolidated sales were $425.7 million, up 11.3% as compared to the prior year, driven again by acquisitions, organic sales increases and currency. Organic sales were up 2.2%, driven largely by TriMas' Packaging & Specialty Products groups, more than offsetting lower demand in TriMas' Aerospace group, which started to occur in the second quarter of 2020.

Adjusted year-to-date operating profit was $56.6 million or 13.3% of sales, up $7.1 million as compared to the prior year, and adjusted net income was $40.1 million, up $6.3 million. Adjusted diluted EPS was $1.11 per share, up 18% as compared to $0.94 per share for the prior year first half. Finally, adjusted EBITDA was $85.9 million or 20.2% of sales, up $7.3 million.

I will now turn the call over to Scott, who will take us through our balance sheet and segment results. Scott?

Scott Mell -- Chief Financial Officer

Thanks, Tom. Good morning, and I'm pleased to be with you today on my first earnings call as TriMas' CFO. I'd like to begin my comments with a review of our capital structure and strong balance sheet on slide seven. We ended the quarter with net debt of $276 million, in line with our December 2020 year-end level despite payment of refinancing fees, stepped up capital spending for our long-term growth and additional share repurchases.

Given our positive momentum in adjusted EBITDA and by managing our net debt, our net leverage was 1.7 times, below our long-range target of 2.0 times. Year-to-date free cash flow was $30.9 million, a 14.4% year-over-year increase, and we have ample unrestricted cash and liquidity. As we look forward to the remainder of 2021 and beyond, we believe we have sufficient capacity to execute on our capital allocation priorities of reinvestment in our business, programmatic M&A and return of capital to our investors.

Now let's turn to slide nine, and I will take us through our segment results, starting with our packaging segment. Let me start by highlighting that our packaging segment results for the second quarter included another record-setting sales performance. This is a testament to the diversification of our packaging product lines and end markets, our global footprint and the extraordinary efforts of our team members' commitment to meeting our customers' ever-changing needs during these unparalleled time.

Second quarter net sales of $139.6 million increased approximately $10.8 million or 8.4% as compared to the year ago period. The Affaba & Ferrara acquisition completed in December of 2020, contributed $10 million of incremental sales, while the impact of favorable foreign currency translation added another $4.6 million. On an organic basis, as anticipated, sales decreased by 2.9% or $3.7 million.

As Tom mentioned earlier in this call, please remember that within our packaging segment, we are comparing current results to a pandemic related demand surge, which began in the second quarter of 2020. During this quarter, we experienced year-over-year growth in parts of both our food and beverage and home care end markets. Specifically, sales for closure systems used in food and beverage applications and sales for dispensing products used in home care applications, both experienced double-digit percentage growth during the quarter.

As gymnasiums, fitness centers and hospitality sectors start reopening in all geographies, we have started to see an increase in demand for nutrition powders, beverages and health drinks, all of which use our closure systems. Likewise, our Home care segment has seen a surge in demand for projects, which go into cleaning applications due to what we believe are secular shifts in hygiene around the globe.

As expected, given the demand surge in the second quarter of 2020, sales of our dispensing products in our Beauty & Personal Care segment, which are used in finding of the spread of germs, declined in the quarter when compared year-over-year by approximately $5 million. While our packaging segment continues to experience strong demand for dispensing products, we do expect that some of our customers will continue to actively manage their inventory levels on certain product lines.

Operating profit when compared to Q2 2020 increased $1 million to $28.2 million, driven by higher overall sales levels. Operating margin was 20.2% compared to 21.1% a year ago, with the change primarily due to less favorable product mix and higher input costs, specifically resin and freight. With regard to resin prices, we have experienced cost increases of almost 50% since the beginning of the year, spiking more quickly than most of our contractual price recovery mechanisms are able to offset.

We estimate these cost increases, net of price recovery, impacted the quarter by approximately $4 million. While our expectation is that resin prices will stabilize during the second half of 2021, our second half 2021 operating margins may be impacted if resin prices continue their upward trajectory. As we noted during our last earnings call, we have now completed the consolidation of our flexible packaging manufacturing footprint at Rapak and anticipate operating margins will continue to improve as a result as we progress through the remainder of 2021.

Adjusted EBITDA increased $0.9 million or approximately 2.5% to $36.2 million versus the prior year quarter of $35.3 million. Turning to slide 10. I will now update you on our TriMas Aerospace group. Net sales for the quarter improved by $2 million or 4.6% to $44.6 million. Sales of our fastener product lines increased by approximately $1 million compared to the year ago period, primarily as a result of approximately $8 million of stocking orders of specialized fasteners.

Sales of our engineered projects increased by approximately $1 million on account of modest volume improvements. Please note that Q2 2020 was the first quarter where we began to see meaningful reductions in travel demand and aircraft build rates and the corresponding impact on our business. Operating profit for the quarter was $2.7 million or 6.1% of sales as compared to $4.3 million or 10.1% in the prior year.

This year-over-year decline is primarily attributable to the impact of the COVID-19 pandemic, specifically lower absorption of fixed costs in our fastener product lines and ongoing labor efficiency challenges in certain of our California facilities. Adjusted EBITDA for the quarter was $7.4 million or 16.5% compared to $8.9 million for the prior year period.

Looking forward for the rest of 2021, we anticipate sales in the second half will be meaningfully higher when compared to 2020 driven by one, fulfillment of additional stocking orders of specialized fasteners that began in Q1 of 2021, and which we anticipate will continue for the remainder of the year. Two, the ramp-up of new business awards and, three, modest volume improvements when compared to a highly depressed second half 2020.

As mentioned on previous earnings calls, our TriMas Aerospace leadership team continues to evaluate practical steps to further align our manufacturing footprint and related cost structure with current and expected 2020 22 -- pardon me, 2022 demand levels, while also balancing its priority of continuing to invest in new and innovative products to support its global customers and positioning itself for future business opportunities. Moving to slide 11.

I will now review our Specialty Products segment. Net sales in the quarter increased $6.7 to $34.8 million or approximately 24% when compared to the same period a year ago. Order intake for both steel cylinders and engines and compressors used in upstream oil and gas applications, each for the North American market were significantly higher in the quarter when compared to the same period in 2020. Sales of products serving the construction, HVAC, general industrial and upstream oil and gas end markets began to show signs of meaningful recovery during the quarter.

Operating profit in the quarter was $6 million or 17.3% of sales as compared to $3.8 million or 13.4% in the previous year. Operating margin improvement significantly in the current quarter, primarily as a result of incremental sales and the impact of cost realignment actions and factory floor improvements implemented during 2020. Adjusted EBITDA of $7.2 million or 20.7% of sales was also significantly better than the prior year's quarter of $4.7 million or 16.9% of sales, a 380 basis point improvement on a year-over-year comparison.

While we are extremely pleased with our second quarter performance within Specialty Products, these are short-cycle businesses for TriMas. And accordingly, we will continue to closely monitor potential end market demand changes related to any further widespread COVID-19 outbreaks or other factors. At the end of the quarter, our Specialty Product segment's backlog remains high when compared to historical periods, which we believe is indicative of our customers' confidence in a continued market recovery.

Now I'd like to hand it back over to Tom to provide our full year outlook in his concluding remarks. Tom?

Thomas Amato -- President and Chief Executive Officer

Thank you, Scott. Let's turn to slide 13. Although we continue to operate this pandemic period with a fair amount of uncertainty surrounding future demand, with the benefit of the first half completed, we are providing our full year outlook at this time. We anticipate full year consolidated sales to be up between 9% and 14% as compared to 2020. We expect to achieve this overall growth as a result of acquisition-related sales and a pickup in sales largely within Specialty Products.

These increases are expected to more than offset any pullback from the pandemic related demand surge that we experienced in 2020 within our TriMas packaging group. As Scott noted, TriMas Aerospace has been benefiting from a stocking order of specialized fasteners by certain customers. On a year-to-date basis, these orders, which totaled approximately $14 million in sales have almost offset the decline in organic sales within Aerospace.

We expect to fulfill the remainder of the stocking order, which should run at similar sales level in the second half during 2021. We anticipate full year adjusted EPS to be in the $2.15 to $2.30 range, a year-over-year increase of about 16% at the midpoint. We are also forecasting free cash flow to be above 100% of net income. Despite what we believe is a capital spending rate higher than our historical average of about 4% of sales. Let's turn to slide 14. I will close out our comments by showing just a few examples of why we remain excited about the long-term prospects for TriMas.

First, through repositioning our company over the past 18 months, now nearly 2/3 of TriMas's revenues are generated from our packaging group. We believe there are long-term benefits to the overall stability and growth characteristics by focusing TriMas in the global CPG and industrial packaging markets. We also believe we have a robust and growing pipeline of innovative product solutions to augment our long-term growth.

Next, we expect to have further long-term performance gains in Specialty Products and eventually in Aerospace as those markets recover, especially given previous realignment actions. Also, we have excellent cash flow and capacity to continue to augment our organic growth by building out our most desirable platforms with strategic acquisitions. While we continue to reinvest in our businesses for long-term growth, we also anticipate continuing to return capital to our shareholders.

To date, we have made excellent progress in repurchasing shares, and we continue to assess our cadence of share repurchases along with other TriMas treasury actions. Finally, we work carefully to position TriMas with a strong balance sheet. As we look at our position today, we have a capital structure in place that will allow us to execute against our long-term investment and growth plan. Again, we continue to believe TriMas is 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 would like to open the call up to your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Brendan Popson, CGS Securities.

Brendan Popson -- CGS Securities -- Analyst

Good morning. Hi. Great quarter, great guide as well. I wanted to ask about, I guess, any indication, given that packaging has done better-than-expected on this -- on a year-over-year basis against the record levels. Is there any indication of normalized levels that in packaging? And anything you're hearing from customers that would indicate where normalized levels might be?

Thomas Amato -- President and Chief Executive Officer

Great. Well, thank you for your question. We're trying to assess that. I think we're sort of looking at the rate that we're at currently. And we sort of use that as a guide for -- along with our in bookings as we forecast the rest of the year. We sort of feel like we're getting close to that level. There might be some puts and takes as we go through any particular month or quarter on that.

But we sort of feel like we've achieved that. Part of the challenge we've had through the year so far is comparing to some quarters last year that were a little bit abnormal. I do think we'll start to normalize this as we get into next year and are comparing to the rates that we're at today.

Brendan Popson -- CGS Securities -- Analyst

Great. And then I wanted to ask about -- a little surprised to see the margin in Aerospace. Obviously, it's still a tough year, but you guys have called out some labor efficiency challenges in California. Could you just dive into that a little more and what exactly incremental costs you're facing there?

Thomas Amato -- President and Chief Executive Officer

Yes. I mean it's a couple of different factors. First of all, on a comp basis, compared to the first quarter of this year, as we noted on that call, that was a particularly good quarter, predominantly related to some mix matters. As we look at the performance this year so far, we're still seeing in some of our West Coast operations. Because of the pandemic absentee levels that -- before the pandemic would suggest there was a big problem at various locations.

Well, and that's not the case. That's just the current state of play in operating manufacturing operations in this current time. So with that, on a daily or weekly basis, when people are out, you have -- we call them manufacturing sort of bumping and grinding of roles and responsibilities in an operation that creates inefficiencies.

And we do expect that to, again, normalize in time as we get -- go forward and get into next year and hopefully get to a period where it's even more predictable to operate into pandemic and certainly hoping that this is behind us altogether. But the biggest driver to it has just been, what I would call, efficiencies related to operating in this current environment, not anything specific, we believe, to TriMas.

Brendan Popson -- CGS Securities -- Analyst

Okay. And is any of that just increase -- I've been hearing from a lot of companies about labor costs going up, is some of that as well, trying to attract people? Or is it simply just absentee?

Thomas Amato -- President and Chief Executive Officer

Yes. I think for us, it's probably more the latter than the former at this point. I do -- the point you're raising is one that we're certainly aware of and concerned with as we see some inflationary pressures set in. But that's not the driver to what we're seeing in our second quarter performance within Aerospace.

Brendan Popson -- CGS Securities -- Analyst

Great, thank you, Tom.

Operator

Thank you. Our next question comes from Steve Barger, KeyBanc Capital Markets.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Hey, good morning everyone. It's Ken Newman on for Steve. Just going back to packaging for a minute. It looks like there's some decent margin improvement implied in the second half here. I'm curious if you can just help us parse out how much of that release is from material costs starting to normalize here versus the improving mix.

Scott Mell -- Chief Financial Officer

Yes. It's Scott Mell. Let me respond to that. I think as we look at the second half of 2021 in our Packaging segment, we do, as I mentioned, expect resin costs to continue to stabilize over the second half of the year. We're starting to see some of that occur now. I think the other factor in play there for the second half of the year is that some of the pricing recovery that we've already instituted under our contractual agreements, there's a lag factor there.

And we've seen price increasing within resins and packaging all the way through June -- last month and June. So obviously, some of that's going to kick in, and that pricing recovery is going to combine with what we believe to be stabilization on the resin side to provide some of that uptick in the operating profit that you're seeing in the second half of the year.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Okay. Can you just remind us what the typical lag from these price escalators are if resin costs continue to move against you?

Scott Mell -- Chief Financial Officer

Yes. I mean we think it's anywhere from 45 to 60 day lag time depending on the contractual agreement.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Got it. And then switching gear to Aero. I think we got some news in the production schedules from Boeing. I think there was some news for the 737 MAX or also subcuts to the 787 and the F-35. Just any sense of how we should think about how these changes kind of flow through to TriMas through next year as you think about some of the investments you're making to improve the operations in Aero?

Scott Mell -- Chief Financial Officer

Well, look, I mean, it's a little bit difficult and early for us to say on some of those changes, frankly, because as we talked about with the business overall, some goes direct, some of us are distribution. There's a little bit of inventory in the mix and a little bit of cushioning related to the demand pull versus more just-in-time related businesses. That being said, some of the pull that we expect will help. I mean, it just sort of helps in the overall outlook and when we can expect a recovery to start to occur in Aerospace.

I continue to be very excited about the businesses and the brands and the innovative products that we own in our Aerospace sector. Before the pandemic hit, we really had one of our, I think, better years in a long time since -- certainly since I've been at the company. And the demand change obviously disrupted that a bit, but we took advantage of that. And I expect to see margins as we get toward a new state within Aerospace, a recovered stay within Aerospace, I expect ultimately our margins to be above where we were in 2019.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Got it. So Tom, before the -- or when the pandemic it, I should say, you saw a little bit of a lag impact to the Aero fasteners business. As we kind of think about the recovery of some of these volumes as the economy continues to open up here, would you expect that similar kind of lag? Or do you think the inventory levels here have been correctly calibrated for this expected recovery?

Thomas Amato -- President and Chief Executive Officer

It's really a great question. This is something that we look at quite a bit as a management team. We do expect there will be a similar effect during the recovery period. But I look at that, frankly, Ken, as pretty temporal. I mean, we are clearly -- want to enjoy a recovery in Aerospace. And there might be a quarter where I explained why our rate is slightly below market or whatever, but it's going to be related to inventory. But we're talking about a quarter or months. I mean these are very temporary matters in the overall scheme of things.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Right. One more for me then I'll jump back in queue. I think the implied margins for Specialty in the back half are around the mid-teen range. Can you talk about the moving pieces driving that margin declining sequentially into the back half? And just how do we think about run rate margins for this segment exiting the year.

Thomas Amato -- President and Chief Executive Officer

Yes. So I think some of that is material-related material costs related. And we'll sort of -- as we go through the second half, we'll update in the second quarter where we stand. I think the pretty important takeaway from this call, I hope that you can see. And Scott mentioned this as well in his rollout of Specialty Products' performance as the order book within our Norris cylinder business, is one of the strongest books that we've had in a long time, and I'm even considering before the pandemic hit.

We're really excited about that. It means that we have -- it means that we have some work to do in terms of getting out the product to fulfill the orders. And we also have some summer months, and we have some holiday periods, things that work against that. But overall, sort of looking at our Specialty Products business, where we are today versus just six months ago. I'm really pleased that the demand has ticked up there, I think, quicker than I anticipated.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Okay. Thanks. I'll get back in line.

Operator

Okay, thank you. We have 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. Please stay safe and healthy, everyone. Take care.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Sherry Lauderback -- Vice President, Investor Relations and Communications

Thomas Amato -- President and Chief Executive Officer

Scott Mell -- Chief Financial Officer

Brendan Popson -- CGS Securities -- Analyst

Ken Newman -- KeyBanc Capital Markets -- Analyst

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