Q3 2021 TriMas Corp Earnings Call
Good day and welcome to the quarter 2021 earnings Conference call.
Today's conference is being recorded.
At this time it is my pleasure to turn the conference over to MS. Sherry Lauderback.
Please begin.
Thank you and welcome to try not to corporations third quarter 2021 earnings call participating on the call today are Thomas Amato, Trimas, as President and CEO and Scott now our Chief Financial Officer will provide our prepared remarks on our results and our outlook and then we'll 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 at Www Dot China Corp, Dot com under the investors section.
In addition, a replay of this call will be available later today by calling 88820.
031112, with a replay code of 5060586.
Before we get started I would like to remind everyone that our comments today, which are intended to supplement your understanding of China 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 third 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.
I 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.
The special items with that I'll turn the call over to Tom Amato, <unk>, President and C. L. Huh. Thank you Sherry good morning, and welcome to try a massive third quarter earnings call. We're pleased to report another solid quarter performance continuing the positive momentum we've been building over the past several quarters.
Let's turn to slide three.
This is a very exciting time of year. The primary its global leadership team is busy refreshing our forward plans. While also working diligently to close out 2021 on strong footing. It's.
It's interesting to reflect in the same period last year. When we set our 2021 plan. We knew there were remaining uncertainties related to the global pandemic with many countries in various states still imposing tight restrictions.
The potential for new M&A opportunities was also limited given that targets, we're continuing to focus on navigating through the various market dislocation occurring at the time.
So we in turn are focused on the factors, we can control and did the best we could to plan for 2021.
As the current year unfolded, we adjusted to market changes, along the way and leveraged our strong brand names diverse end markets and innovative product solutions all to drive strong cash conversion.
As we fast forward to today, we did not come close to imagining that our largest input cost resin would be on average more than 50% higher than our 2021 planning level. In fact, there were periods throughout this year, we expected cost stabilization only to face further resin.
Cost increases and even tighter supply.
In addition, our second largest input costs steel was also up significantly against 2021 planning levels and even freight cost increases crept into 2021 impacting a number of our businesses.
Despite these challenges our strategic repositioning and our diversified end market model have allowed us to deliver another strong quarter for <unk> investors investors and continue our momentum.
Additionally, on the M&A front, we are seeing a robust set of opportunities, which allows us to reignite our commitment to build out our business platforms augmenting our long term organic growth.
Finally, we are pleased to have initiated a dividend to benefit as the shareholders. This rounds out our fulsome capital allocation strategy of investing in our business is programmatic M&A share buybacks and dividends all while maintaining a strong balance sheet.
With that as noted were reporting a solid third quarter for <unk>.
Let's turn to slide four.
Consolidated sales were $220 4 million up 11, 5% as compared to the prior year quarter, driven by acquisitions organic sales increases and favorable currency exchange.
Adjusted operating profit was $31 6 million or 14, 2% of sales up $2 million as compared to the prior year quarter.
Adjusted net income was $20 5 million up $1 9 million as compared to the prior year quarter, primarily driven by higher consolidated sales more than offsetting higher input costs and a higher effective tax rate.
Adjusted diluted EPS was <unk> 57 per share up nine 6% as compared to the prior year quarter, and which was in line with our internal expectations.
Finally, adjusted EBITDA was $46 million or 27% of sales up $4 4 million from the prior year quarter.
We also continue to seek to drive increasing LTM EBITDA, a strong indicator of our cash earnings power, which was $168 5 million as compared to $104 1 million at the end of the second quarter.
Let's turn to slide five.
On a year to date basis consolidated sales were $648 1 million up 11, 4% as compared to the prior year quarter again, driven by acquisitions organic sales increases in currency.
Year to date operating profit was $88 2 million or 13, 6% of sales up $9 1 million as compared to the prior year period and adjusted net income was $60 5 million up $8 1 million as compared to last year for the same period.
Through nine months, our adjusted diluted EPS was $1 68 per share up 15, 9% as compared to $1 45 per share during the same period last year.
Finally, adjusted EBITDA was $131 9 million or 23% of sales up 11 8 million as compared to the same period last year.
So overall for the quarter and on a year to date basis. We are extremely pleased with our performance level and positioning for the future, particularly given some of the challenges we have been navigating through the year I.
I will now turn the call over to Scott, who will take us through our balance sheet and <unk> segment results Scott.
Thanks, Tom.
Let's turn to page six for a review of our capital structure and strong balance sheet.
We ended the quarter with net debt of $256 6 million an improvement of more than $15 million from our December 2020 year end level.
Strong cash generation from operations is more than offset payment of refinancing fees stepped up capital spending supporting our long term growth and additional share purchases during the first nine months of 2021.
Given our continuing positive momentum in adjusted EBITDA and by managing our net debt. Our net leverage was one five times at the end of the quarter well below our long term range target of two times and providing ample room for bolt on acquisitions.
Free cash flow for the quarter was $24 7 million and $55 7 million year to date.
And we had more than 400 million of unrestricted cash and liquidity at the end of the quarter.
As we look forward to the remainder of 2021 and beyond.
We believe we have we believe we continue to have sufficient liquidity to execute on our capital allocation priorities of reinvestment in our businesses programmatic M&A and return of capital to our investors through both additional share repurchases and dividend payments.
Now, let's turn to slide eight and I will review our segment results starting with <unk> packaging segment.
I will start by highlighting that our packaging segment results for the third quarter included another record setting sales performance with the highest sales ever for a third quarter.
Net sales of $138 million increased approximately $2 9 million or two 1% as compared to the year ago period.
Our father and Ferrari acquisition completed in December of 2020 contributed $11 4 million of incremental sales, while the impact of favorable foreign currency translation.
Added another one 9 million.
On an organic basis and as anticipated sales decreased by seven 7%.
Or approximately $10 5 million.
Yeah.
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 and peaked during the fourth quarter of 2020 as many of our customers accelerated purchases in advance of anticipated demand increases during the 2020 holiday.
A season, and then ahead of the Chinese new year.
During this quarter, we continued to experience year over year organic growth in both our food and beverage and industrial end markets.
Specifically sales for our caps and closures products used in food and beverage applications.
And pumps used in quick service restaurants.
Experienced double digit percentage growth during the quarter.
Likewise sales for our caps and closures products used in industrial end markets experienced similar double digit percentage growth during the period as we continued to see robust demand for our products serving rebounding sectors of the economy.
Including shipping janitorial paints and coatings and petrochemicals.
Finally, we are very pleased with the sales growth in our flexible packaging business, which was acquired in April 2020.
Sales in the quarter were close to double the sales in the third quarter of 2020.
And as expected given the demand surge in the second half of 2020 sales of our dispensing products for the beauty and personal care end markets declined in the quarter by approximately $20 million.
Get this pandemic related sales abatement was planned given the COVID-19 related to demand surge in Q3 2020.
While our packaging segment continues to experience strong demand for both caps and closures and dispensing products. We do expect that some of our customers will continue to actively manage their inventory levels on certain product lines for the remainder of 2021.
Operating profit when compared to Q3 2020 decreased by <unk> 7 million to $27 3 million as higher sales levels and a more favorable product sales mix were more than offset by higher input costs.
Operating margin was 19, 8% compared to 27% a year ago.
With regard to resin cost and as mentioned during our Q2 earnings call. We have experienced cost increases of more than 50% since the beginning of the year.
With cost continuing to rise at the end of the quarter, our contractual price recovery mechanisms, which in many cases allow for commercial adjustments only at quarter end.
<unk> allows for the full recovery of the resin cost increases we've experienced.
We estimate these cost increases net of price recovery.
Unfavorably impacted profitability this quarter by approximately $3 million.
While we have experienced some recent stabilization and even reduction of resin costs. Our expectation is that resin costs will remain relatively stable in Q4.
As otherwise operating margins may be further impacted if resin prices resume an upward trajectory.
Adjusted EBITDA increased <unk> 4 million to $34 $6 million versus the prior year quarter of $34 2 million.
Turning to slide nine I will now provide an update on our Tri mass Aerospace group.
Net sales for the quarter improved by $7 4 million or 18, 8% to $46 5 million.
Sales of our fastener product line increased by approximately $5 6 million compared to the year ago period.
As a result of approximately $7 million of stocking orders of specialized fasteners from one end customer.
Sales of our engineered products increased by approximately $1 8 million on account of modest volume improvements and commercial actions completed during the quarter with one of our strategic customers.
Operating profit for the quarter was $4 6 million or nine 8% of sales as compared to $3 7 million or nine 5% in the prior year. This year over year improvement is primarily attributable to favorable sales mix commercial actions initiated during the quarter and savings from.
Realignment actions, which more than offset lower fixed cost absorption.
Adjusted EBITDA for the quarter was $9 million or <unk> 19, 4% compared to $8 2 million for the prior year period.
While we are very pleased with this quarter's performance and as mentioned on previous earnings calls I'll try and ask the aerospace leadership team continues to evaluate practical steps to further optimize our manufacturing cost structure with current and expected 2022 demand levels.
Balancing its priority is continuing to invest in new and innovative products to support its global customers and positioning itself for future business opportunities.
Now on page 10, let's review our specialty products segment.
Net sales in the third quarter increased $4 7 million to $37 9 million or approximately 50% when compared to the same period a year ago.
This is now two straight quarters of 20% plus growth for our specialty products segment.
Consistent with Q2 performance demand for both steel cylinders and wellhead products each with the North American region were significantly higher in the quarter when compared to the same period in 2020.
We continue to see strong demand for our products, serving the construction HVAC general industrial and upstream oil and gas end markets during the quarter.
Operating profit in the quarter was $6 7 million or 17, 6% of sales as compared to $3 4 million or 13, 4% in the previous year.
Operating margin improved significantly in the current quarter.
Primarily as a result of incremental volume commercial actions during the quarter and the impact of leveraging factory floor improvements implemented during 2020.
Adjusted EBITDA of $7 6 million or 19, 9% of sales was also significantly better than the prior year's quarter of $4 3 million or 16, 9% of sales a 300 basis point improvement on a year over year basis.
While we are extremely pleased with our third quarter performance within specialty products. These are short cycle businesses for Tri mass and accordingly, we will continue to closely monitor potential end market demand changes and the potential.
<unk> impact of further increases in the cost of steel used to manufacture our products.
Our products.
And finally at the end of the quarter, our specialty product segments order book remains high when compared to historical periods.
Which we believe is indicative of our customers' confidence in the continued market recovery.
Now I'd like to hand, it back over to Tom to provide our full year outlook and his concluding remarks Tom.
Thank you Scott, let's turn to slide 12.
As noted we are working diligently on our forward planning, while seeking to close out 2021 strong.
While we continue to operate in the pandemic period and navigate its related uncertainties, specifically changing demand levels input costs and labor inefficiencies.
We are increasing our expected cash conversion outlook, and narrowing and updating our sales and EPS outlook for the year.
We anticipate full year consolidated sales to be up between 10% to 13% as compared to 2020, we expect.
To achieve this overall growth as a result of acquisition related sales and a strong increase in organic sales primarily within specialty products.
These increases are expected to more than offset our planned pandemic related sales sales abatement from the demand surge that we experienced predominantly in the third and fourth quarters of 2020 within our <unk> packaging group.
As we discussed throughout the year <unk> aerospace has been benefiting from stocking orders of specialized answers for certain customers on a year to date basis. These orders, which totaled approximately $21 million in sales have more than offset the decline in organic sales within <unk> Aerospace group due to lower aircraft build rates.
We expect to fulfill most of the remainder of the stocking order in the fourth quarter.
As a result of the previously mentioned increased input costs as well as slightly higher tax rate and less currency benefit than originally expected. We now anticipate full year EPS to be in the $2 18 to $2 27 range as compared to $1 92 per share in 2020, which is 16% higher.
Then it was for the mid point last year.
We are also forecasting free cash flow to be greater than 110% of net income despite capex investment rate higher than our historical average of approximately 4%.
As we start to look to 2022, we expect to continue our positive momentum growing sales organically and with opportunities to enhance organic growth through bolt on acquisitions.
We anticipate moving past some of the challenging comparisons within <unk> packaging particular, particularly as we get later into the first half of 2022 with overall GDP plus organic growth for the year.
This would be for opportunities to enhance our sales through bolt on acquisitions.
We do anticipate and we will plan for some of the challenges of completing the onetime stocking orders, which benefited <unk> aerospace in 2020, sorry in 2021, as we work through the upcoming year and bridge to a period of increased demand in the aerospace industry, which we hope to see in the coming years as more people resumed.
Traveling by Air.
We expect continued expansion within <unk> specialty products group as we benefit from the factory floor improvement Bedford for investments and higher demand from an economic recovery spanning into 2022.
Overall, we expect <unk> diversified end market model to continue to benefit our shareholders through strong cash flow conversion in the upcoming year.
Let's turn to slide 13.
I will close out our prepared remarks by showing just a few examples of why we remain excited about the long term prospects for <unk>.
Through repositioning training as nearly two thirds of our revenues are generated from <unk> packaging group.
As discussed in prior calls we believe there are long term growth characteristics of <unk> packaging through our many sub markets and a robust pipeline of innovative product solutions.
Next we expect to have further long term performance gains in specialty products and eventually in aerospace as 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 and maintaining a strong balance sheet. We also anticipate continuing to return capital to our shareholders both through share buybacks and now dividends.
In addition to our financial progress our leadership team remains committed to operating try mass in a responsible way to positively contribute to society, particularly in the communities, where we live and work as.
As we've discussed on prior calls we posted our inaugural sustainability report to our web site in December of 2020.
Since then we have continued to take steps to add to the transparency of our ESG commitment and have plans to refresh our sustainability report in the coming months.
Additionally, we are proud to recognize one of our recent acquisition of Fob and Ferrari for achieving a gold status and the corporate social responsibility ranking of equal about it.
An independent environmental and social assessment firm. This is in addition to our recently announced innovative recycle ready dispenser for our <unk> business, which has been commercialized.
So again, we're excited with our commitment and progress against our ESG and sustainability initiatives and look forward to continuing our improvement in updates going forward.
Again, we could continue to believe <unk> is an exciting company to invest in and with that I'll turn the call back to Sheri.
Thanks, Tom at this point, we'd like to open the call up to your questions.
Okay. Thank you.
At this time, we will open the floor for questions.
Like to ask a question you may do so by pressing star one on your telephone keypad.
Thank you Sir.
Please make sure that you're on mute function is turned off so that your signal can reach our equipment again that is star one to ask a question.
And our first question will come from Brendan Thompson with CJS Securities.
Good morning.
Tom I wanted to ask you.
Could discuss the choice to start paying a dividend and capital allocation priorities.
And then with the acquisition part of that is it sounds like you guys are seeing seemed more opportunities and it sounds like it's it's in packaging could you just discuss what what exactly you're seeing that that's exciting and then is it going to follow the recent trend of Europe or or is there are there things that are.
<unk> two that that Youre looking at.
Okay, Thanks, Brent and Hello.
First of all on the dividend first part of your question.
This is something we've been talking about for.
Frankly, a number of years and.
With the onset of the pandemic sort of went on hold but as we saw and continue to see the cash flow characteristics of Tri mass.
We can do as a company all of the above we've got a great balance sheet.
We can continue share buybacks, we can pay a dividend we hope.
That brings additional demand and investors.
Previously may have looked at trying to ask and.
Like to put in their portfolio companies that are dividend paying companies, we hope that that.
They'll give us a closer look now of course, but also wanted to reward our shareholders current shareholders.
Certainly given the cash flow characteristics of the balance sheet our capacity we continue to have.
A significant amount of room to execute our plan for bolt on acquisitions in and I can say on that front.
Our primary focus continues to be to build out our <unk> packaging platform.
However, we also will focus on opportunities, particularly during this period and the aerospace area, where we might see some opportunities given.
What we see a recovery over the next few years and build out that platform as well.
I can report that we are.
This year on the M&A front, then certainly my time with the company currently and there is a lot of exciting opportunities all sort of bolt on size and nature, which are great deals for <unk>.
That we're hoping to bring home I have nothing to announce on this call today, but hopefully in the future or maybe even in the near future.
We'll have some news on that front, but but.
Definitely.
Very active on that front very different than where we were a year ago.
Just folks weren't even interested in talking about.
Potential divestitures of their companies.
Today, it's a very different.
Environment.
Great I appreciate that that color is helpful and then just.
Portland here on on your free cash flow conversion.
In excess of 110% this year, which is great is that what exactly is driving that and then is that something where we can expect maybe the free cash flow conversion, but under 100% next year is kind of a trip or is it just.
Or is it.
Just something else.
Hey, Brendan.
Scott.
Look I think the cash flow conversion is indicative of the strength.
The underlying strength of our businesses from an operating perspective I mean, there is there is nothing unique relative to this year and the expectation is going forward given our cost structure that will continue to convert.
At a greater than 100% clip.
On a go forward basis.
Great. Thank you I appreciate it.
Okay. Thank you.
Our next question will come from Steve Barger with Keybanc capital markets.
Hey, good morning, guys, it's Ken Newman on for Steve.
Good morning, Ken.
Good morning.
Hi, Tom I appreciate the commentary on the $3 million.
On packaging margins from the higher rising costs, but I am curious if you guys can help us.
Quantified the other moving pieces in packaging margins in the quarter, including no how much mix contributed or just exactly what the pricing contribution in the quarter was.
Yes.
Think it was on a comp basis.
There were indeed, a lot of moving pieces, but the biggest driver too.
Perhaps.
Higher earnings would've been the recovery or the lag factor on resin, but definitely there were mixed factors.
In certain markets excuse me certain end markets up certain end markets down.
Just given the strange period frankly, Ken.
Ken of 2020.
Right.
And again I appreciate that Youre not I also I'm, sorry, Ken I just want to I just I just also.
Mentioned like like most.
Companies, particularly in North America, we're seeing a drag a drag on free with.
With freight lanes up being in some cases double than where they were a.
A year ago, and that's certainly impacted our packaging business.
Right now actually segue is pretty well into my next question here, which was.
Any incremental color that youre seeing within your supply chain, obviously, you've mentioned freight I'm curious.
How much has labor impacted the quarter if at all and if you have any comments on just lowered expectations for.
SG&A expenses in coming quarters that we should be aware of.
Yes, let me let me just mentioned a couple of things first of all.
On the supply and the supply.
I think one of the things that that is.
A benefit and unique about <unk> is we're.
For the most part we're basic in the products that we manufacture so were buying raw materials, and we're converting them as opposed to buying sub assemblies or.
Or other types of electronic components that go into the mix. So while this is very big news and understandably so for many companies.
And this may in some cases, even impact our customers, it's not necessarily a big impact for trying this.
We've got some great supplier partner and we did run into this year.
Some tightness of supply not even the economics, but the tightness of supply.
And Fortunately, we worked with them to make sure we got priority or where they couldnt give his priority. They helped us and we've helped ourselves and finding alternative supply. So these are things that we've been managing.
This year that is as I open my comments with just were completely not even conceivable last year.
And then on the Labor front, you are raising a good point in the overall scheme of things if we didn't have.
Material to discuss on this call or contend with.
Or tightness of supply I mean, the biggest driver would probably be labor and labor and efficiency and we have some of our operations are running at.
Full time to temp ratios that that pre pandemic.
Were unheard of and Thats, just a function of the current current economic state we're in and I just want to I want to.
In addition, like other companies, it's tough to hire so we're dealing with all of those factors as well.
But that sort of to me.
<unk> this quarter and this year.
So exciting and interesting for trying to ask that despite all of these various things that have been frankly thrown our way that we have largely through the <unk> business model being proactive in nature, when we can and where we can.
<unk> not just through commercial actions, but also through our own self help techniques, because we didn't wait to sort of see how things ended at the end of the quarter. We took actions early throughout the year continuously and I think that's why we were able to deliver the results. We did this year and that we're forecasting for the balance of the year.
Right.
When I think about the comment on the full time to temp ratios.
How should I think about that is that is that pretty evenly spread across all the segments and.
And just any color on just where capacity utilization is across the various businesses.
Well.
Okay. So let me take that in reverse order on capacity utilization it is.
There's a lot of available capacity in our aerospace business of course.
In our packaging business and our specialty products business were.
Fairly full.
That's there is going to be various locations globally.
There might be some pluses and minus to that.
And then the other part of your question, which was on.
The temp and full time ratio. That's an example of a few locations, which will call hotspots of which we're monitoring frankly speaking over time.
We'll bring that into balance, but it does take time, it's not something that debt and operating.
In operation can fix.
In a week it takes many months and sometimes could take even longer.
And it's not in all cases, it's not.
Something that is a.
Situations its universal around our manufacturing operations are some hotspots in certain parts of the country and then there are other parts of the country where.
It's less of an issue than we're seeing so it's just something that as a management team, we're managing through but again, the <unk> business model sort of our secret sauce, and how we manage and operate <unk> allows us to stay on top of these work with our operators ensure they have the resources.
<unk> and the four we're planning to make sure that we can overcome these issues.
Right.
I appreciate that youre, not guiding or ready to guide to 2022, yet, but as I kind of think about the the the.
Initial comments for growth across the businesses in 'twenty two.
Can you help me just think about the cadence for packaging margins relative to the pricing actions that you've implemented and just when you think the mix begins to normalize.
Okay.
It's a tough question for us to address on this call because I can put some.
Factors out there for example, if if material prices start to come down.
That will help us in 2022.
Depending on various end markets that we're in at mix mix change changes in a more favorable way for example, we've talked about industrial and pharmaceutical and nutraceutical, if those pick up into next year versus where they are this year those will be benefit so.
I'm looking I'm looking to 2022, frankly for <unk> packaging to be an exciting year, not just organically, but I'm certainly hoping that we can add to the business through acquisition.
Right.
Last one if I could just squeeze it in here and it looks like the specialty incrementals are expected to be around that mid 20% range at the midpoint of the updated guidance.
For the fourth quarter.
Which is pretty similar with what you did thank you. So I'm just curious if you think about.
Should we expect 25% kind of is this new run rate for incremental margins through the up cycle.
Within specialty.
It's Scott.
Amidst the front ended up that question could you just.
Given back to me one more time.
Yeah, I'm, just trying to get a better sense of.
Where are you seeing run rate incrementals for the specialty business is.
For through the remainder of the up cycle it.
It looks like the fourth quarter as kind of being in Florida, 25% incremental margin in <unk>.
Yeah, I think it's going to be a little lower than that estimate can I mean, we obviously have.
Optimize the fixed costs in that business.
Without looking at the specific figures my guidance would be it's going to be below that estimate.
Understood. Thanks for all the time.
Thanks, Ken.
Thank you.
Next we have another question from Brian Thompson with CJS Securities.
Yes.
Hey, just a quick follow up piggybacking on the labor talk with the vaccine mandate approaching I guess, how are you guys thinking about the potential impact on on your labor with that and what your plan is there.
Can you just give any thoughts on that.
Brendan that's a great question.
We are actually working through gaining statistics right now for.
Our workforce to see.
What by location.
Our.
Vaccine population vaccinated population versus an vaccinated.
We still do not have guidance like most U S companies.
With more than 100 people on what the.
Approach will be from Osha, how the regulated.
Our communication to.
Our employees to date has been around that will of course follow the applicable laws.
At the federal level or at the local level as the case may be.
And there are two options for those that are.
Obviously.
<unk>.
You have to just make sure that we have on file proof of their vaccination and for those that are unvaccinated. They have to get tested every week and that's the current indication of what's coming out of the.
The current White house. So this is what we're working with at this point.
But we still do not have the determinate determinate approach from Osha on how this would be regulated.
Okay. Thank you.
Yes.
And speakers at this time there are no further questions.
Well. Thank you again, everyone for participating on this call and we look forward to updating you again next quarter.
<unk> again stay safe and healthy thank you.
Thank you ladies and gentlemen.
Today's teleconference, and you may now disconnect.
The rest of your day.
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