Q2 2023 TriMas Corporation Earnings Call
Greetings and welcome to the try not second quarter 2000 twenty-three earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will solve a formal presentation if anyone to require operator assistance. During the conference. Please press star's there on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Sherri ladder back Investor Relations and communications. Thank you Sherry you may begin.
Thank you and welcome to try Math Corporation second quarter 2023 earnings call participating on the call today or Thomas a motto try massive president and C E O and Scott <unk>, our Chief Financial Officer, We will provide our prepared remarks on our second quarter results and outlook and then we will open up the call for your question.
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In order to assist with the review of a result, we have included today's press release and Powerpoint presentation on our company's website at <unk> Dot com under the investors section. In addition, a replay of the call will be available later today by calling 8776606853 with a meeting I.
D of 13739841.
Before we get started I would like to remind everyone that are common today may contain forward looking statements that are inherently subject to a number of risks and uncertainty.
Please refer to our Form 10-Q that will be filed later today for a list of factors that could cause a 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 or a presentation for the reconciliation between gap and non-GAAP financial measures used during the call. Today. This is this discussion on the call regarding our financial results will be on and adjusted basis, which is excluding the impact of special items.
With that I will turn the call over to Tom a motto try not this president and CEO huh.
Thank you Sherri good morning, and welcome to our second quarter earnings call.
As we reflect on the quarter I Wanna first link or try me S team for their increased efforts. This year as we continue to navigate a very dynamic and changing global market environment.
And certain product lines, we are adding capacity <unk>.
Ramping up production volumes, enhancing skilled labor and alleviating supply bottlenecks all to support robust customer demand.
At the same time and other product lines, we are rebuilding our manufacturing footprint in securing procurement savings to prepare certain businesses for approved conversion is edna and markets recover.
Overall irrespective of markets being strong or soft each trying to a local team is working diligently to satisfy market demand or offset market disruptions, while while remaining focused on gaining momentum against our longer term strategies.
In relation to this quarter I would like to personally thank our specialty products team for delivering strong results are especially products performance as a result of making investment decisions and our businesses when market demand was challenged on the premise that demand would rebound.
Market improvement did occur as we are witnessing today and we were prepared to satisfy higher customer demand all while also converting world.
So in summary, we decided to invest in and take advantage of prior disruption or especially products and markets, which has been benefited investors today.
We're also leveraging our current momentum to position our specialty products group to capture a future growth through new innovations such as ultra high purity cylinders per package gas applications and E. P. A certified remote power generation units.
So again I would like to thank our specialty products team for their strong performance issue.
I would also like to highlight that while our performance within <unk> its aerospace as well below our internal standards and potential we are starting to make some significant progress in bringing the supply of super alloy raw materials skilled labor and production.
And capacity into better balance.
As we make strides to achieve improved synchronization with our production planning and customer requirements, we anticipate achieving financial results much improved from current levels. In fact, our second quarter results were sequentially better than our first quarter results.
And I would like to note that in Q2, we had a settlement charge unique to the quarter that otherwise would have had our operating margin percent ahead of the prior year quarter as well.
So while we're still below or overall potential we're starting to achieve momentum in this group.
Finally, or try Miss packaging and try minutes life Sciences teams are working diligently to to prepare for approved market conditions as we move forward <unk>.
Within try mass packaging, while we have seen some sequential monthly increases in our order backlog there at a more moderated rate than we had hoped to achieve at this point in the year.
As we move into the second half, we now believe a market recovery and certain consumer products and packaging industrial Submarkets will be more gradual then we assumed to start the year.
As such we made the decision to take advantage of this lower demand period to reposition productive assets and streamline our manufacturing footprint.
And we are taking other procurement savings actions, which we anticipate will generate more than $10 million or 200 basis points of annual run rate savings once implemented.
Additionally, or try mass packaging commercial team is gaining momentum leveraging our global supply model to expand by expanding our business. It's a new geographic markets with new customers, particularly in South America.
And of course, we continue to make progress marketing the characteristics of benefits to our CPG customers of our patented and commercial ready single polymer dispenser for personal care beauty and other applications.
We anticipate highlighting these advancements as we move into 2024.
Within try mass life Sciences, we're ramping up and launching new programs for polymerase chain reaction for moral test kits and Electrosurgery component applications, while some of our life science applications are currently lowered value. We remain excited about the new channels and new.
Customers for growth in areas that once qualified have a strong Moore.
Again, I think our prime minister packaging and try minutes life Sciences teams for taking actions today to position us for improved performance in the future.
With that background, we delivered adjusted earnings per share for the quarter of 50 cents, which compared to the first quarter of 2023 of 20, I'm sorry, I'm 30 cents represents sequential improvement and was in line with our internal planning models with that said, while we continue to assume <unk>.
Recovery and certain of our packaging and markets in the back half of 2023, we anticipate that these will be at a more gradual rate that originally modeled and I will discuss this further in a few slides at this point I would like to turn the call over to Scott, who will take us through our consolidated segment resolve Scott.
Thanks, John .
Let's now turn to slide for where I'll summarize our financial results for the corner.
Sales for the corner, where $233.2 million as compared to 237 $7 million for the prior year quarter.
As organic growth and the Tri mass specialty products and try mass aerospace groups and acquisition related sales.
More than offset by lower market demand <unk> packaging dispenser enclosure products used in personal care food and industrial applications.
We continue to believe the packaging market softness primarily relates to continuing overstock physicians at certain large CPG customers more conservative purchasing patterns and lingering inflationary concerns.
Operating profit for the quarter was $27.3 million as compared to $15.5 million for the first quarter of this year and $32.1 million for the prior year quarter.
EBITDA for the quarter was $45.5 million and 19.5% of sales as compared to $31.7 million or 14.7% of sales for the first quarter of this year and 23% of sales for the prior year quarter.
As Tom mentioned in his opening remarks, the performance for the quarter was in line with our planning models and we continue to expect our performance to sequentially improve over the second half of the year, albeit at a more gradual rate than originally expected.
Finally, adjusted earnings per share for the quarter were.
For 50 cents, which was a 67% increase when compared to the first quarter of this year.
Now, let's turn to slide five and I will briefly review our balance sheet and credit statistics.
Net debt after funding the acquisition of well Mac paying a dividend and completing share repurchases was 375 million with a net leverage ratio of 2.3 times.
As previously discussed we drove approximately $40 million on a revolving line of credit the funding April acquisition of wellness.
Of which 22 Mary remains outstanding at the end of the quarter.
We expect to repay the remaining outstanding balance by the end of the year with cash flow generated from operating activities.
Free cash flow of 11 million for the quarter was in line with expectations and we continue to have ample liquidity to continue to invest in our businesses take streamlining actions were appropriate.
Buyback shares pay dividends and complete future strategic bolt on acquisitions as opportunities present themselves.
Now, let's turn to slide six and.
And I will begin my review of our segment results starting with <unk> packaging.
First quarter net sales were $117 million as compared to $148 million for the prior year quarter.
And up slightly when compared to the first quarter of this year.
Acquisitions contributed seven $5 million of sales during the quarter, while the impact of foreign currency was immaterial.
As expected organic sales were lowered during the quarter down 26% when compared to the previous year period.
This decline is primarily attributable to lower demand, most notably for consumer goods with applications and the personal care food and certain industrial submarkets.
We continue to closely monitor the commercial environment and will take as necessary additional streamlining action as a hedge against any potential further market demand softening.
Operating profit in the quarter increased by $6 70 million to $21.9 million when compared to the first quarter of this year.
What was lower on a year over year basis, primarily on account of the impact of lower sales.
Operating margin was 18.7% of net sales well adjusted EBITDA was $33 million or 25.8% of net sales Ah 90 basis point improvement year over year and are more than 600 basis point improvement when compared to the first quarter of this year.
Trying to slide seven I will now provide an update on a <unk> <expletive> aerospace segment.
Net sales for the court increased by $12.4 million or 26% when compared to the same period a year ago. As we continue to see strong order intake for many of our aerospace products as general Aerospace volumes continue to recover ahead of market expectations.
Acquisitions contributed seven $3 million of sales during the quarter.
Organic sales increased by more than 5 million or 11% when compared to the previous year period.
Operating profit for the quarter was $3.7 million or $6, 2% of net sales as compared to $3.3 million or $6, 9% in the prior year.
As Tom mentioned earlier absent a one time settlement charge unique to the quarter operating margin for the corner, where they've been higher on a year over year basis.
More importantly, sequential quarterly operating margin improved by more than 300 basis points as we're starting to see improved conversion rates on higher sales.
Adjusted EBITDA for the quarter was $8.6 million or 14.4% of net sales.
Now on slide eight let's review our specialty products segment.
Net sales in the second quarter increased by more than 14 million $256 million, a 34% increase when compared to the same period a year ago.
This is now nine consecutive quarters of double digit percentage growth for a specialty product segment.
Demand for steel cylinders for package gassed, app applications and remote power generation units and related spare parts. Each for the North America region remains robust with moderately high levels of backlog for both business businesses excuse me.
Operating profit in the quarter was $12.1 million or 21.6% of net sales as compared to $6.8 million in the previous year period.
This record setting margin level for specialty products as a result of continuing robust demand and the impact of previous factory floor improvement actions.
Adjusted EBITDA for the quarter was $13.2 million or 23.5% of net sales.
While our specialty products businesses.
Order books remained strong, which we believe is indicative of continuing resilience and certain and markets for which they sell into we will continue to closely monitor order changes in input costs and take appropriate actions if necessary.
At this point I would like to turn the call back over to Tom to review, our 2023 outlook and for some closing remarks Tom.
Thank you Scott, let's now turn to slide ninth.
We continued to model potential scenarios for 2000, twenty-three, especially given some of the uncertainty and a few of our markets.
As noted in our earnings release, we are modifying our full year outlook.
There are a few important considerations I'd like to know.
The most significant driver is our view of the recovery and certain packaging and markets.
Specifically.
While we have estimated continued sequential demand recovery is customers work through inventories.
We now believe that that recovery rate will be more moderated than originally forecast it.
Therefore.
We are modifying our consolidated sales growth range to a new rate of 5% to 10% compared to 2022, and an adjusted EPS range of $1.80 to $1.95.
It is worth noting that on a comparison basis.
When normalizing 2022 for two discrete special projects that we completed last year or.
Base adjusted EPS for 2022 would have been $1.73.
Therefore, even at the revised adjusted EPS midpoint, we are forecasting sequential momentum and our performance.
Our revised outlook also assumes continued strong demand within our specialty products group continued progress against bringing supply and production into better balance within our time with that our time is aerospace group and continued moderated sequential demand increases within trying mass packaging.
We also continue to forecast our full year free cash flow to be greater than 100% of that income.
So, let's turn to slide 10.
I would like to think I would like to again, thank our investors for their continued support as we navigate through what we believe is a prolonged but temporary softer demand period with that said I will conclude our prepared remarks by providing just a few examples of why we remain excited about the long term prospects for try mass.
First we continue to believe there are attractive longterm characteristics within our try mass packaging and try mass life Sciences group through our multiple and markets diverse geographic presence and improving demand <unk>.
We also have many sustainable product solution solutions, such as Monopolylogue <unk> tethered caps.
And child resistant closures in the pipeline and coming to market in the future and we are gaining traction with some new to try mass medical applications.
We also have growing confidence of the sustained recovery within the commercial aerospace and defense and markets and anticipate future increases increased spending in defense will benefit <unk>.
<unk> aerospace.
We are working through supply and remaining skilled skilled labor constraints and expect to take advantage of long term operating leverage gains as we bring our supply and production planning into better synchronization with customer demand.
Within our <unk> specialty products group.
We expect demand to remain robust given our strong order backlog.
We will also continue to assess new market and product adjacencies to drive future growth within our specialty products businesses.
Given our relentless commitment to cash flow generation, we will continue to reinvest in our businesses for long term growth. While also returning capital to our shareholders both through dividends and share buybacks.
In addition, 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.
Again, we continue to believe try mass is an exciting company to invest in and with that I'll turn the call back to Sherri Sherri. Thanks, Tom at this point and then like tell them to call up to your question.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your television.
A confirmation total indicate your line is in the question Kim.
Two if you would like to remove your question from the cube.
Participants using speaker equipment.
Sorry to pick up your handset before precedents Darkies one moment please.
For questions.
Our first question comes from the line of Ken Newman was Keybanc capital markets. Please proceed with your question.
And can one of you guys.
Morning, Ken.
Good morning.
Oh, maybe first need to start off can you just talk a little bit about the confidence that you have in the packaging Guy and just where you visibility with customers and market is today.
Yeah, that's it.
That's a great question.
What's happening.
Best way for me to explain what's happening in the market today, where we've had.
Overstock positions that we've been you know our customers that are working through the best way for me to describe it is.
We've seen a number of our customers that have had overstock physicians not all but many.
Make progress as we've gone through the year burning downloads inventory positions.
What's happened Ken is a resolve is given that we started the year with this position given the capacity that's available in the market.
We're seeing lead times significantly reduced in in several of our product lines. So what that means is previously <unk>.
Suppliers like our packaging group as well as other suppliers, we would compete with would normally quote eight weeks to deliver certain products.
Six to eight weeks, that's down substantially so customers are benefiting from available capacity shorter lead times, which means the market has shifted to a shorter cycle supply scenario.
That's a long way to say that our visibility is pretty sure.
So.
There still is uncertainty.
Where we feel.
A little bit comfortable because we saw our order book pick up in the second quarter on a on a.
On a month over month basis.
But we're also what I would call a short recycled period.
So I think that's the best way for Us to answer the question at this point.
It's.
We are making outstanding progress on booking.
What I would call a larger orders for our packaging group, but several of those don't hit until next year given that there there were newer innovations or specific programs. So we really can't count on them for 2023. So we're really looking at our current order cadence trying to make some predictions around that.
And that's where we're coming up with our revised.
Outlook for the top line for packaging.
That being said that being said on the consolidated basis, we have the order book and traumas Aerospace and we have strong orders and <unk> specialty products. So for us, it's a matter of getting the product out the door. So.
So we have a little mini hedge versus a pure packaging company.
Right.
I guess, the the things that we're trying to get comfortable with is you.
The lower end of that of that packaging revenue Guy.
How much conservatism is kind of built in there <unk>.
You should we expect that sales are up you have a year in the third quarter or is truly a fourth quarter type of.
Heavy.
Revenue growth kind of get you to that midpoint. Yeah. Good question. We're we're expecting Q3 sales to be moderately up.
Last <unk> the last quarter sales were very low.
Fourth quarter was very low and then we would expect a bit of a pick up in fourth quarter. We do expect to have a seasonal selling period occur this year, which didn't occur last year. If you remember some of our conversations.
Orders were dropped that were in our system and they did not.
Orders just over took place in years. So we do expect there will be some reversion to somewhat of a seasonal selling period not yet it normalize rates, but certainly not what we saw last year.
Right. Okay can I also wanted you to slide 13 of earnings presentation, where we highlight the revised sales go for packaging.
For the year.
Which is from a bow in mind.
Minus 8% year over year on the high end minus 2%.
Right No I I get that I think it's still apply you know up double digit in the back half year over year right for forget that segment and so I I guess it kind of leads into the next question because that the the margins profile also implies a pretty sizeable random operating leverage for the back half.
It probably makes sense just giving the comments you made time on.
You know the easier camps from last year, and the selling P read it.
Any way that we can kind of think about the cadence of incremental margin three two to four to you.
Yeah look I I mean that that I think that.
I don't want to write the story, but in terms of the value proposition for try me is right now.
As aerospace as we bring into synchrony synchronization, and we're making progress every day it'll come through the numbers based on the non financials that we're seeing as we're making progress in aerospace and as revenue comes back and packaging the conversion rates should.
Come up nicely so.
I I think that that are at our current.
Run rate for packaging, it's abnormally low we're keeping infrastructure in place to some extent right. We're doing some footprint rationalization were taking some costs out, but we're not positioning the business as if this is the new run rate for sales we are positioning the business for recovery.
So I'm confident as I as I sit here today that as we get incremental sales within packaging will convert very well.
Right.
Maybe just one more packaging I'm, sorry, if I missed it might be did you say how much these <unk>.
Validations are expected to cost within packaging and is there a sense of the timing of realizing those benefits I think you mentioned $10 million in benefits are expected any teller there.
Yeah, I I Dunno, Scott, we do have we do have some restructuring charges in the quarter that largely relate to anticipated cough to make those moves.
So the payback on that I think is pretty swift.
But also will help us with our with our conversion rates.
Okay, and then vs existing facilities do they need to be retooled in any way to kind of move that capacity over or what what's involved from an operational logistics perspective <unk>.
And and consolidating that capacity and.
Is there a risk that you've given the visibility.
<unk>, it's so low right now yeah is there a risk that you can kind of get.
Caught flat footed as he tried to consolidate.
The the manufacturing space.
You know I don't I don't think so.
I think I understand what you're saying, but the one point I'd like to make here having in my career.
Repositioned more manufacturing operations and I can even recount at this moment.
The move that we're making within the U S, which is exiting a California operation, we're moving existing production assets into.
Into existing plants, where we we.
So we actually we don't even have to build a bank in many ways. So we're able to just move tools over put them into.
Presses at her existing and then the presses will follow so if if there's a further prolong softness in the market.
Will still get some savings because we're taking the infrastructure costs out of one one plant in California.
Right and then and then it's a little more I just want to say, it's a little more complex in what we're doing in China in terms of bringing two plants into one because that involves the new facility.
But where are our estimates are based on their current demand levels. So we're not relieve in forecasting a pick up in demand there were moving some assets to other parts of the world. So I I look at both both of those.
Both of those restructuring steps is.
Safer safer launches as compared to like launching a brand new plan.
Right.
Maybe just switching over to the specialty segment, obviously very strong margins here.
Longer term I mean, how sustainable or with our margins. This level I mean is this.
Just a new baseline could add business you the cycle you think.
Well I think it sort of depends on an overall market demand and what cylinders, we sell there's a there's a big mix characteristic here. So I I've been talking for the past few quarters and ultra.
Ultra high purity cylinders process.
A good product line it goes into a specialized application specifically.
With the movement of localizing microchips into the U S. Those types of cylinders would go into those types of applications and we can typically command.
Higher.
That better pricing and therefore better margin. So you know look where we do recognize we're getting into some historical high ranges for margin here and that's both the good thing and it also has us looking behind us and making sure we're doing what we can to protect that.
Lot of the driver, though has been are improving our cost structure.
So we take a lot of actions over like I said I mean, the time, sometimes it's difficult when times are tough to invest in a business. You know those are you're taking a risk and we did that here and we did it on the best that the market would come back and it did and it's paid off.
So it's a <unk>, it's a fair point I, certainly don't want to conclude that.
There's there's risk here, but we're cognizant of what you are saying.
Okay.
Maybe just switching over to air them really quick you know Boeing Synapte are ramping monthly production 737.
Just curious how you think about that impacted the visibility for faster production.
Yeah I looked at <unk>.
Ask a question on a triple seven.
I think the 737 been any glad 07737, okay. So so look I mean, where it's at.
All of that helps the order book for for US is there the <unk>.
The the aerospace industry has something very unique to it in terms of annual gathering.
That is everyone you could possibly want to meet meet with and talk to an air show just took place a few weeks ago very upbeat.
The types of the types of production issues that that that we're having we're not alone and not only in the Bachelor space, but in some of the hard part supply space. So the the the key theme for us with our customers with our suppliers is getting as the as the big Aerospace wheel starts to.
Turn again getting alignment in the supply base in the sub supply.
Production base skilled labor labor et cetera, So that's why I'm I'm pretty excited that as we go forward and certainly into 2024.
We will convert well I I I also think longer term I thought you ask the question about the triple seven but longer term as the Triple seven comes back online also maybe that's 2025 plus.
Yeah, there's very little to no activity in our numbers related to that and that's we've got a nice.
Presence on that as well.
Yep.
Maybe last one for me just on the free Castle guide greater than 100 per cent.
That's excluding some restructuring costs, so maybe not completely apples to apples, but you know even if you.
Through the first half even on and adjusted basis right around 60% conversion so.
Any any big one time seeing how much of that is seasonality or is there anything that we need to kind of be paying attention to in terms of how that free cash flow through here and the bad cat just given all the the issues with with packaging.
Yeah that I mean that that's our traditional cycle of of cash generation as we invest.
Invest typically in the first half of the year within.
To working capital and then we unwind it.
As we get into the third quarter and really into the fourth quarter. So there's nothing really unique there 10 other than just earn traditional expectations on unwinding of working capital.
Plus obviously, the the incremental earnings in the second half of the year versus the first half.
Right got it.
Okay. That's thanks for the time I appreciate it alright.
Alright, Thank you again.
Thank you. Our next question comes from the line.
Sandwich.
S Financial please proceed with your question.
Good morning. So the first question I had was on the packaging side do you think you might be.
Situation, where.
You don't have capacity orders come back quicker than your thinking on the consolidations lead.
No we actually have.
Have been studying that's a great question and.
It's something that we've explored intently, especially given what we've seen take place within aerospace right. So that certainly was a wake up call for us but.
We can add shifts too.
To several of our plants, where we would have pinch points.
We're we're not yet running I mean, we're not running all of our plans within packaging on a three shift basis or in many cases, not even a two shift basis. So we can scale up on our productive assets and get some incredible operating margin left are operating leverage.
Okay, and then as far as the customers are concerned.
Are they adjusting as far as.
You're making new products to attract a customer again or is this purely you know, they're just stuck with inventory and they're just waiting for it to.
Clear out through the channel.
Well I I I I I understand the question look I think within what's exciting about the packaging segment Forest generally is there's always innovation that is at the core of what our customers are doing what we're doing with them, especially when you. When you think about the the consumer product space and what.
Tracks.
What attracts at point of purchase point of sale.
Consumer to select one item versus another and there's a lot of a science that goes into that with our customers and we support that effort intently.
You're right, though to the extent that inventory was high.
Or overstock coming into this year and simple like a simple pump for example, like a simple to see see dispenser, yeah that would have to get burned through it probably wouldn't it wouldn't get disposed up because there's a significant significant amount.
Consumption of two C. C simple dispensers that are here today have been here for awhile and going forward will always be there, they're lower cost less fancy pumps that that frankly, do a fine job of getting liquid.
A container to a consumer's hands.
Alright, great. Thank you.
Thank you look forward to seeing you soon.
There are no further questions at this time I'd like to turn the floor back over at a time for our closing comments.
Okay. Thank you again for joining us on our earnings call and we look forward to updating you again next quarter.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.