Q2 2020 TriMas Corp Earnings Call

Good day and welcome to the try mid second quarter 2020 earnings Conference call. Today's conference is being recorded at this time I like to the conference ever give me Sherry Lauderback. Please go ahead.

Thank you and welcome to try not operation second quarter 2020 earnings call participating on the holiday airtime on out trying to president and CEO, Bob Filipski or Chief Financial Officer.

After our prepared remarks on a result, we will open the call. It for your question.

In order to assist with review of our results. We've included a press release and Powerpoint presentation on our company website Www Dot China core Dot com under the Investor section. In addition, a replay of this call will be available later today I, calling he or she was 0311 once you.

With a replay code on nine 760 871 time.

Before we get started I would like to remind everyone that our comments today, which are intended to supplement your understanding of traina may contain forward looking statements that are inherently subject to a number of risks and uncertainties, including impacts from Cowen 19.

Please refer to our form 10-K, and our second quarter 10-Q that will be filed today for listed factors that could cause results to differ from those anticipating any forward looking statement.

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 were considerably more information may be found.

In addition, we would like to refer you to the appendix in our press release issued. This morning are 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, especially.

With that I'll turn the call over the time my motto [laughter] CEO huh.

Good morning, and walking towards second quarter earnings call I would like to begin today's discussion by first taking all of our employees for their commitment dedication during these challenging an uncertain time.

To put a finer point on our gratitude to try me a separate 37 facilities in 11 countries on four continents.

Hi, adjusting to a new work leads across seas, which promotes social distancing and improved by minus one hygiene.

Virtually all of our facilities have operated through this unprecedented period experiencing only temporary disruption.

As a reminder.

All of our production locations have been deemed essential.

This is because the products we manufacture go into applications that helped twice the spread of germs.

Our used in medical military defense food and beverage for industrial applications.

Although we experienced a wide range of performance outcomes due to end market disruption.

Our second quarter results were better than we anticipated when depends ethic was declare.

Let's turn to slide three.

As a reminder, nearly 60% of try messes revenues earned packaging, where we provide dispensers closures and jar into a wide variety and market was primarily into the consumer package 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 folks emotions and product 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 in bookings across various packaging product line given what we believe has emerged as a positive secular trend, resulting from the heightened awareness of the importance of hand washing and improved personal hygiene.

Try masses aerospace segment represents about 26% of our sales and we supply into commercial and business jet and military defense applications.

You have been reduced production rates not surprisingly our businesses in this segment had been severely impacted by the pandemic as sales began to significantly decline late in second quarter.

With that said, it's important to no. We have an outstanding leadership team headed by John Shaffer, 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 probably gave from solid operating leverage.

The balance of our businesses in our specialty product segment, where we predominantly supplies steel cylinders under the Norris cylinder brand name the only manufacturer of high pressure steel cylinders in the USA.

Nor supplies into a wide variety of end markets, including welding and H. back medical and military and defense.

The keep tended to try masses 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 there for enabling our ability to create long term.

Value for our shareholders.

Second quarter exemplified this try me ask characteristic.

Before I review, our financial performance I want to update our investors on some key developments in the quarter.

[laughter] as reported a couple of weeks ago I'm excited to announce the appointment of Fabio say like as the president of Ricky.

Fabio comes to try mass with a significant amount of leadership experience of the packaging market having work most recently at local class the Carlyle Group company.

Additionally, Fabio was held leadership positions that Wrexham in their beauty and personal care business, which later merged into Albania and prior to Albania, Fabio was president of a Brazilian based beauty and skincare products company called ball Mary.

We look forward to five you are helping us transition Ricky into a substantially larger business for Trimesta as we remain committed to building out trying to ask this packaging platform through organic growth in M&A welcome Fabio.

In connection with Bobby's appointment, we also announced the planned retirement of David Bridget David joined briefly Ricky nearly 25 years ago and had increasing levels of responsibility until being named its president 2014.

I personally think David for his many years and business development significant significant contributions and I know, we will remain close with David given his long history with Ricky and his interest to see our continued success. Thank you David.

During the quarter, we decided to repay hundred 50 million, which we drew on our line of credit for cautionary measure in March. This was a prudent steps we've taken the time and we're pleased to not have add to rely on fun and that the credit market have remained robust.

Driven by strong growth and packaging and also acquisitions.

Organic sales were off about 1% versus a prior year quarter is the very strong sales and certain packaging and markets, where offset by the weaker sales and our aerospace and specialty products segments.

Operating profit was 27 5 million or 13th 8% of sales for the quarter just slightly below the prior year quarter of $28 million is 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.

<unk> for the quarter was 43 per share in line with the prior year quarter, which was also 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 and our packaging segment, nearly offset the slowing sales and our aerospace and specialty products segments.

Operating profit for the first half was 49 5 million slightly lower than prior year, which is at $54 million.

EBITDA for the first half was 78 6 million or 26% of sales up by three $3 million as compared to 75 $3 million for the same period last year.

First half EPS totaled 77 as compared to 79 per sure for the first half of last year.

Let's now turn to slide six.

Despite operating in this period is such dislocation the actions, we took to strengthen our balance sheet and 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 <unk>.

We did not repurchase any <unk> 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 given the current quarters higher EBITDA versus the prior year quarter are LTM EBITDA increase 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 one five times, a slight reduction from the end of the first quarter.

Finally, we continue to have an adequate amount of cash in available liquidity for acquisition acquisitions share repurchases in general operating purposes.

Okay. I have noted we are pleased with these results for the quarter and the first half, particularly given the uncertainty we face during the past several months.

Now I will turn the call over to Bob who will take us through segment results in certain accounting matters. Bob. Thank you Tom if we turn to slide eight I would like to begin my comments with the discussion of certain business realignment actions, we completed and the second quarter in response to the operational and financial impacts, resulting from the coven 19 pandemic.

And is Tom highlighted in his remarks entering second quarter, we we're already seeing signs of slowing sales and much weaker and markets and our specialty products and aerospace segments.

So 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 and markets ultimately begin to recover.

In total we recorded non-cash charges of $15 $4 million, the largest portion of which related to liquidating product line inventories, we exited and our Arrow engine division following our decision to streamline its product offering to certain core engine lines and related products. We also disposed of certain narrows.

Space and industrial cylinder inventories not expected to be saleable in the foreseeable future under current market conditions as well as retired certain machinery and equipment from us give an existing capacity available and reduced and market demand.

We also incurred cash severance costs and the quarter of three $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 timeframe of expected future recovery.

In addition to the realignment actions noted we also recorded a non-cash pretax charge of 23 $4 million for an accounting policy change related to accounting firm legacy Asperse disclaims. This change effective in the second quarter results in a balance sheet accrual for all estimated future.

<unk> and defense costs associated with known an 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 two $5 million annually.

Please refer to our second quarter financial statements filed on form 10-Q for further details regarding reasons timing and preferably city of this change.

Turning to slide nine and a review of our packaging settlement.

Overall second quarter performance was strong with net sales of 128 $8 million up almost $25 million or 23, 9% in at a foreign currency compared to the year ago period organically, we achieved robust sales growth of $21 million up 19, 4% overall and <unk>.

Acquisitions contributed an incremental seven $1 million in sales, while foreign currency translation was a headwind of two $4 million.

Sales of our dispensing products used in beauty and personal care and home care applications increased approximately eight $6 million as demand increase do that Covid 19 pandemic sales of products used in food and beverage applications. We're also up nicely increasing approximately five $7 million primed.

<unk> related to higher sales of dispensers for beverage products.

Sales of products used an 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 Bolton sanitizer and industrial cleaning solutions.

Operating profit increased for three to $27 $2 million driven by the aforementioned sales increases while operating margin of 21, 1% was slightly lower than year ago period, due to a less favorable sales mix and production inefficiencies related to the global pandemic that Sir.

Given this quarters higher sales level.

Just did EBITDA also increased $5 million to 35 $3 million versus the prior year quarter of $33 million.

We continue to experience high demand for many of our beauty and personal care and home care products.

Specifically following pumps, so pumps lotion pumps sanitizer pumps enclosure products and are actively working to increase our capacity in order to meet our customer requirements.

Turning to slide 10, I will know update you on our try mass Aerospace group.

That sales for the quarter declined approximately six $9 million or 14% to 42 $6 million.

Sales of quarter fastener products and machine components declined 12 $8 million compared to the year ago period as a result of reductions an aircraft build rates due to the global pandemic.

Sales are fasteners, we're also lower as compared to second quarter of 2019 due to the 737, Max grounding, which.

Was expected.

RSA engineered products acquired in February 2020 contributed five $9 million, a sale, which helped offset the organic decline noted above.

Operating profit declined three 4 million $243 million for cue to do primarily to lower sales and the less favorable sales mix operating profit margin was also lower at 10, 1% down from 15, 5% in Q2, a year ago as a result of lower absorption of <unk>.

Fixed cost on the sales volume decline and higher production inefficiencies due to the impacts of the pandemic.

However, try mass aerospace was still able to achieve adjusted EBITDA margins for the quarter of 28% as we do carry a significant mount of non-cash depreciation an intangible amortization in this segment.

As a result of the anticipated significant fall off from customer demand due to the global pandemic is Tom mentioned earlier, the <unk> Aerospace leadership teen implemented significant realignment actions in Q2 to mitigate the impact 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 and markets will continue to be under severe pressure for at least the next several quarter.

That set the aerospace market overall remains critically important to national economies and as we work through this pandemic period, we anticipate <unk> 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 and the second quarter were down nine $2 million are almost 25% compared to the same period a year ago. The sales decline was driven by lower set sales of steel cylinders used in construction and H back and markets and lower sales of engines and compressors used in upstream oil and gas applications each.

For the North American market.

Industrial economic activity has been severely hampered by the effects of the pandemic.

Operating profit was three $8 million for the quarter down one $6 million versus the prior year, while adjusted EBITDA of four 7 million or 16, 9% of sales was also down a similar amount.

Is highlighted earlier, we executed significant realignment actions during the second quarter within specialty products, we narrowed the commercial and operational focus of our Errol engine business by exiting a significant number of existing products and implemented a series of cost reduction in manufacturing process changed.

To flex the operating cost structure of our cylinder business to better online with changing customer demand.

Although specialty products sales declined approximately 25% in Q2 compared to the prior year the change and adjusted EBITDA was approximately flat is our specialty products team acted swiftly and the margin falloff was substantially mitigated.

We will continue to minor monitor and market demand levels closely and we'll we'll be prepared to flex costs further to mitigate impacts lower sales volumes.

With that I will turn the call back over to time to discuss outlook and is concluding remarks Tom.

Thank you, Bob and turning to slide 13, when we reported our first quarter results. We felt that was based on the inability to forecast the impact of the pandemic to withdraw are full year guidance.

As we look towards the second half of the year, there remains much uncertainty and 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 task 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 your second half, but generally in line with the first half right.

The most notable change it 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 as started to line up with overall lower aerospace market demand.

In light of this anticipated sales run right detrimental margins may vary widely and we're not in a position to reliably forecast earnings at this time.

Letting this all together, we expect <unk> 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 key solid free cash flow in excess of net income and maintain are strong balance sheet.

As we see stability or for global economy changes further impacting are Marcus 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 <unk> business model, which provides us with the standardized platform for proactively managing our businesses and escalating issues, which are them resolved with a high sense of urgency.

As we look towards the upcoming year and even beyond we remain excited about <unk> in our family of businesses.

Is markets have changed some of our valued drivers have evolved which we believe will benefit our shareholders specifically.

We believe investors will benefit from try masses meaningful presence and the supply of dispensers enclosures used in hand, washing and sanitizing lotion, homecare and food and beverage applications, which we believe will benefit from positive secular grow due to consumer behavioral.

Changes.

Additionally, we have excellent businesses in brand names and our aerospace specialty products segments.

These market start to recover in the future and they will recover we're positioned to gain from early wins and meaningful operating leverage.

We will continue to operate try mass with an overarching mantra of generating exceptional free cash flow and protecting our strong balance sheet, which not only provides us the ability to whether market shacks, but also to position is competitively to gain from new program wince.

And we will enhance long term value creation through bolt on M&A with a primary focus on building out our packaging in aerospace platforms and also through sure buybacks.

Thank you for your time and attention and I will turn the call back to Sherry Sherry. Thanks, Tom at this point and we'd like to open the call up to your questions.

Thank you if you'd like to ask a question. Please signal my pricing star wine on your telephone keypad.

Speaker phone. Please make sure you function as you're not allow yours signal to reach our appointment.

You May press star one to ask a question.

My first question comes from Andy Casey with Wells Fargo Securities.

Hi, Good morning, guys. This is actually Patrick morning, Andy and and this is actually Patrick.

Andy Thanks for taking my questions.

Good morning, looking him Patrick.

Okay.

Just.

I appreciate you guys calling out.

Growth dollar amounts for.

The packaging business give me much bye.

Can you maybe help us pumps awesome.

Right, specifically the organic rates for.

Several businesses that you called out home personal care.

Food and Babin industrial quarter, just totally didn't get a sense of.

What kind of all right. So we can let me look into and.

Into going into the.

And the second half of the year.

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.

[noise] will be in the beauty and personal care and home care.

Product applications for the most part we'll see we'll see we expect to see some continued.

Benefit and food and beverage as more <unk> activity picks up and then and then some slight other pickups, but with the material drivers to the year over year right change are predominantly going to be in beauty personal care applications and home care applications.

Understood Okay.

And just.

Moving onto aerospace I understand given current environment, it's a little bit difficult to sort of really hone in on detrimental margins, but actually you guys think about.

Maybe perhaps further actions and whatnot and let you guys got it but can you provide the band for us and tons of when you do your scenarios and what kind of band of Martin, but you guys looking and looking at really and then also what.

What can you guys do what needs to happen to get to a certain band versus maybe a lower band.

Yes.

Maybe get some covered.

Color on it and Bob to also come in if you'd like but.

As you probably are hearing from other companies and it's no different <unk> when when.

There's this much dislocation as we're seeing in any particular and 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 an an repositioning them for early wins when market start to recover so.

That's that's just the the the state of.

That were in in terms of the dislocation on the on the revenue in the detrimental margin Bob If you want to talk further on that point field.

Yeah. The only other thing I'd add is there's also a mixed element here.

Not only is there a significant disruption in the volumes of products being sold but.

Our traditional mixes being impacted as well and being able to sort out that impact from quoted detrimental margin, which is is more volume based.

Just further complicated but at the end of the day.

Given the kinds of declines we're seeing in sales volume and what we're we're anticipating may occur in the back half.

Detrimental margin impacts.

Will be meaningful.

Sure Okay.

Thank you.

Thank you again to any star one if you'd like to ask a question. Our next question comes from city furniture with Keybank capital markets.

Good morning, CA good morning.

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

Yes.

Good morning.

I totally get to be the expectation for sequentially weaker revenue into the back half for arrow 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 and both of those segments.

Yeah, I would say it out it's hard to handicap.

Only from the standpoint that.

Not convinced particularly in aerospace that we have sort of hit the trough. If you will of where we think will settle out.

And so that makes it a little hard to talk about sequentially third quarter before 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 <unk>.

[noise] activity to continue just it's now affected for however, the pandemic.

Hits Us in Q3.

In terms of sales and those two segments.

It doesn't appear at least based on what we're looking at today that.

Prospects for recovery, yet this year from from the pandemic, So I would not anticipate that sales and those and markets or demand and those and Marcus would pick up fourth quarter versus third. So I think the pattern will hold that fourthquarter is going to be sequentially lower than the third.

And the only thing that would that would change that and we would view is.

Obviously, an opportunity as if there is meaningful progress made obviously.

Vaccine.

Or if changes occur in terms of the case right cadence throughout the nation clearly that would.

That would benefit us as well.

That's helpful.

Moving on.

It was good to see that packaging margins return back to the 20% range. Obviously makes has was not favorable with the the higher sanitation based sales. So I I'm curious how you think about margin cadence into the back half if you would expect.

20% plush type of margin into this back cash.

Maybe some of the negative impacts and the inefficiencies you solve this last quarter.

Yeah, I think the current run right that.

We achieved.

In terms of mix.

Especially in.

And the second quarter here is going to be relatively consistent with the runway run right. We anticipate in terms of product mix going through the second the second half. There's there's no indication sort of today as I look at our in bookings that anything is changing.

The types of products that are being demand and pulled by our customers.

Production and efficiency standpoint, I think.

We're assuming sort of consistent.

Level of activity in second half of it obviously, if there's a disruption due to a breakout or a plant having to be shut down for a week or two.

Fundamentally change that but we're not seeing anything like that at this point.

Got it and then just one quick follow up for me on the especially this accounting charges that you had this quarter.

Could you just make the clarification on that too and a half million dollars 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.

Yeah, so the two and a half million under our former accounting policy was essentially the both the cash in 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 crude an actuarial S. And then of what we think a little defense in in depth.

<unk> the cost will be.

Over the.

Many years into the future and the only the only the cash charges will still probably approximate that two $5 million not cash charges, but the cash outlay will probably still remain in that two $5 million range.

From a P&L standpoint, there will only be.

I just meant for.

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 gone on a periodic basis annually or perhaps more frequently if we see changes in the pattern of.

Of the case activity.

Got it thanks, I'll jump back into your.

Thank you.

Thank you again that is star one if you'd like to ask a question.

Yeah, no additional questions at this time.

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.

Thank you ladies and gentlemen. This concludes today's presentation you may know disconnect.

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