TriMas Corporation (TRS) Earnings Call Transcript & Summary

[Audio Gap] 2022 Leveraged Finance Conference. I am Alan Bland, the high-yield research analyst covering industrials and metals and mining for Bank of America. Today, we are joined by TriMas Corporation. And with them are CFO, Scott Mell; and Sherry Lauderback, VP of Investor Relations and Communications. TriMas is an industrial company that operates under 3 segments: Packaging, Aerospace and Specialty. And just to start us off, Scott, can you please provide a brief overview of TriMas.

Yes. Thanks. Good morning still, yes, to everybody. I have just a few slides here just to give everybody a bit of a background on us for those that may be unfamiliar, but -- as pointed out, we operate within 3 segments: Packaging, Aerospace and what we call Specialty products. We're essentially a $900 million annual revenue business, 60% of that is within Packaging, which manufactures highly-engineered polymeric and steel closures in dispensing systems for a number of end markets, including consumer products, industrial, same thing for dispensing. And we go to market under a number of different brand names, the largest one being Rieke Packaging. Aerospace, 20% of the revenue. Again, manufacture a wide range of products for the aerospace segment, a vast majority of those being highly engineered fasteners and collars, in bolts, which hold the fuselage, hold the wing and the structural component together. We also have a subset of that business that manufactures air and fluid conveyance products within the airplane itself. And again, we go to market under a number of different brand names that are Monogram Aerospace, RSA Engineered Products being an example of 2 of those. And then Specialty Products, about 18% of our sales, 2 businesses there. Norris Cylinder, which is the only U.S. manufacturer of steel cylinders in the United States, so used for transportation and dispensing of gases. And then we have Aeroengine which manufactures, assembles natural gas and diesel engines and compressors for the oilfield space as well as the general industrial space. From a capital structure standpoint, we levered about 2x today. We've got $400 million of notes that mature in 2029. They bear interest at [ 4 1/8% ] and then we have a $300 million revolving line of credit, which is unused at this point. Close to $400 million of liquidity between the cash on the balance sheet and availability under our revolving line of credit. So let me move forward here to the next slide, just to talk a little bit about how we've gotten here. I don't want to go back too far in time, but TriMas was spun out of Masco years ago and had a variety of different businesses within it. And since our current CEO has come in, to run the business essentially 6 years ago, we've really transitioned the portfolio of the business in 2 ways. The first one is we exited what we consider to be highly cyclical and to some extent, risky end markets. Specifically, we spun out our Sequent business, which is an automotive and aftermarket business. And then we sold Lamons, which was a business that manufactured components for the oil and gas space. So we really wanted to focus on derisking the business kind of focusing on where we have core competencies, where we have subject matter of expertise, and that was in the Packaging business and in the Aerospace business secondarily. So in the last 6 years we've done 7 or 8 acquisitions, all focused on growing our footprint in the Packaging segment as well as the Aerospace segment. So that's really where we see our business growing as we get into next year in the following 5 or 6 years. And I'll talk about what that looks like here in just a minute. So looking forward, we see an opportunity to continue to leverage what we describe as a TriMas business model, which is essentially a set of tools, KPI mechanisms, all based in traditional Kaizen approach to manufacturing that we used to manage the business across the portfolio, across the entirety of our 45 facilities in the world. But in the near term, we see a couple of key strategic value drivers for TriMas. One being the Aerospace recovery, think everybody is aware of what's happened in the last 2 to 3 years with Aerospace demand given the COVID impact. And what we've seen in the last 6 to 9 months is a tremendous rebound in demand from our customers. We're seeing higher production rates. And so that will continue. We have a -- close to a 12-month backlog in Aerospace right now. The biggest challenge is just getting parts out the door to meet our customer demands, continues to be challenged by labor and supply chain continuity. We're not unique to that, the entirety of the Aerospace. I've been seeing that. Secondarily is continuing to leverage the demand within Specialty products. Both of those businesses, both Norris and Aero are seeing very strong demand, strong backlog even in the face of some of the economic uncertainty that we're seeing today. So we're going to continue to leverage those businesses, very strong cash flow-generating businesses. Next, Packaging is where we want to focus this business going forward. We have a target of -- by 2026, having 75% of our business focused in Packaging. And the way we're going to grow that is twofold, one through innovation and secondarily through programmatic M&A. So on the innovation side, the buzzword and where we're really focused is on sustainability on environmental friendly products. We've already launched some sustainable solutions for our customers, which are single polymer closures and dispensing products that are fully recyclable. We expect to take those to market in 2023 and have a meaningful ramp-up of those as we get into 2024. I guess the other key component within our Packaging segment, we've recently acquired a couple of businesses that are focused in what we call life sciences. To be more precise, it's in medical devices highly consumable plastic-based products that are used. You think about blood -- withdrawing blood or testing equipment again, highly consumable, high growth rate projections and that's an area where we have an opportunity to further expand our capabilities within Packaging. Kind of segues well into the next point here around continuing to focus our portfolio. That's really going to be in packaging in the secondary extent within Aerospace. We really see the current economic environment as being advantageous to TriMas given where the credit markets are today, and the fact that we are well capitalized with primarily fixed rate debt, and we're seeing the opportunities to acquire primarily family held first-time institutional money businesses and our M&A backlog is pretty robust right now. So we're very optimistic and bullish on moving that forward. This is the last slide, so I don't need the clicker. And then finally, our treasury actions. We are reasonably levered. We'll continue to maintain that leverage. Obviously, if there's an opportunity to do a sizable transaction that we see having a runway to deleveraging back to our target of 2x, we will do that. We've been returning capital to shareholders consistently through both share buybacks and dividends, which we initiated last year for the first time. And so we will continue both of those programs as we go forward. Just on the left side of the page is the targets we've set for us for 2026. Again, $1.5 billion of sales. So that's a pretty meaningful growth from today, 75% within Packaging. We expect to maintain our strong EBITDA margins north of 20%. Cash flow of 12-plus percent. Leverage again around 2x and continue to provide value to our shareholders through those 2 programs I mentioned. So those are the comments I had. I hand it back to you.

Yes. Thank you. That was a great overview. And please, if anyone in the audience has a question, please raise your hand and -- on to that, let's move on to some questions just to start us off. You did mention kind of the portfolio transformation that you've -- that has gone on here. Maybe a little bit more on kind of what drove those decisions? And how would we compare what you look like in 2019 versus today, especially by end market margin, capital intensity, cyclicality. Anything along those lines just that difference between these 2 periods?

Well, I think I'll just fall back to the comment I made is we exited through the spin-off of and the sale of Lamons, 2 businesses that are highly cyclical and fairly capital-intensive. And neither one of those risk profiles were attractive to TriMas at the time. We want to be -- a lower capital-intensive business, lower risk, less cyclicality. And so that was really the strategy of the Board and the leadership team to divest those 2 businesses, so we can really focus and have our subject matter expertise really leverage what we do well, which is injection molding within the Packaging space, and then CNC milling and manufacturing within the Aerospace segment. So we wanted to get simpler. We wanted to get more focused. And I think the other -- one other point is we've driven a very decentralized P&L structure within TriMas. So each of our plants has a P&L, which has ownership accountability at the plant level. Each of the segments have P&L accountability. And so that was a big change to the TriMas culture subsequent to when Tom Amato, the CEO, came in. And so we believe that structure, combined with our TriMas business model allows us to generate historically returns in excess of what we see some of our competitors returning.

Very interesting. Maybe something else you touched on was currently, you have, call it, 60% of your business is focused on Packaging, and you want to get that to 75%. Maybe what's behind that target and why the focus there versus the other 2 segments?

Well, I think, again, we have subject matter expertise within the Packaging segment, we've got a very good footprint globally. We're in Asia. We're in Europe. We're in the Americas. And we just see plenty of growth opportunities within Packaging. And then once you double-click into Packaging, we have great presence in a number of different sub-end markets, including food and beverage, beauty and personal care, home care and the industrial end market, which -- the dynamics within those end markets are somewhat different between industrial and the consumer. So we're very happy with that portfolio structure. But just given the overall growth projections for Packaging globally, we think that's a high-growth opportunity, not necessarily. We don't have a short-term view in terms of 2023, it's more of a 5- to 7-year view. And we look around the space, and we see the number of smaller packaging businesses with great innovation, great technology products that are new and innovative to the market. Many of it focused on sustainability and recyclability, and we're very comfortable with our ability to integrate those types of businesses into TriMas as well as continue to expand through organic growth. We have great brands, great relationships with our large global CPG customers. And honestly, given our size compared to our competitors, we have the ability to be a bit more entrepreneurial and be a little more aggressive in winning wallet share.

Maybe looking more into your Packaging segment. I believe during your third quarter call, you referenced some slowing of demand due to destocking. Maybe can you touch on what's driving that when do you believe that's going to be resolved? And what's the potential financial impact of that?

Yes. So -- as we have mentioned on our earnings calls, we did see what we would describe as a meaningfully abrupt slowdown in demand within our Beauty personal care and home care end markets, primarily from our 5 or 6 largest CPG customers and -- the factors there are twofold. Essentially, it was a strategic buy forward or early purchasing from those customers in the summer, as they dealt with supply chain disruptions as well as some of the global events that occurred over the summer, interest rate increases, some inflationary metrics that were released. And then obviously, the hostilities in Europe, our customers are telling us they built the inventory up early. And hence, you see softer demand in Q3 and Q4. I think for us, we take comfort in the fact that where we saw that demand softness, those are almost completely consumable products. So you think caps and closures for lotion and shampoo and other hair care type treatments. And so that stuff is going to get worked through as consumers continue to buy those. It's just going to take a little bit of time given the inventory in the channel. And so we see in the good case scenario, Q1 that bouncing back pretty meaningfully. And then if you take a more conservative view, it may slip into the second quarter of next year. But the impact we saw in Q3 and expect to see in Q4 is not unique to us. We've seen the same disclosures coming from our larger competitors. So it's a macro issue. And we believe it's temporal and systemically our view of the business or holistically, our view of the business has not changed.

That's good. Maybe moving on to one of your other segments, Aerospace. Current production today is about 30% -- 38% lower than in 2019. And I believe you're currently projecting 4% to 6% EBIT margins for this year. What do you believe are more normalized margins? And when is that achieved given the commercial jet production outlook?

Yes. So -- we have what we would describe as good challenges with our Aerospace segment. The good challenge being that the rebound in demand has happened very quickly and very meaningfully. We've got a full year of backlog almost in that business. And our biggest challenge is getting production out the door, getting parts out the door. We're being meaningfully impacted by continuing labor issues in Southern California. For most folks, unless you're from California, I think COVID is over, but in California is definitely not over. We're still being impacted by regulatory and legal challenges as it relates to COVID in California. And as those lessen, we believe that's going to be beneficial to us. Same thing on the supply chain, the entirety of the Aerospace supply chain is challenged to meet demand for their customers as you move through the supply chain. And so that's impacting the margins this year. And while we haven't given guidance for next year, I think we will be back to pre-pandemic sales levels in the very near future. And as that occurs, we expect to see those margins moving back toward pre-pandemic margin levels for the Aerospace business.

That's good to hear. M&A is a clear priority in your capital allocation strategy. Can we maybe discuss a little bit about your criteria. Are you looking at tuck-ins versus larger targets segments or capabilities of focus and any financial metrics that are important to you?

Yes. I mean, I think as we've given guidance before, TriMas Packaging is an area that we really want to invest meaningful capital in going forward. So that would be top of the list, followed very closely by Aerospace. We believe some of the demand challenges or the production challenges in Aerospace are going to give us opportunities to see product adjacencies or smaller businesses that may necessarily not have access to the capital they need to continue to grow. And so that will open up the aperture for us to acquire those businesses. Within the Packaging space, we're looking for geographical expansion. We're looking for expansion into new end markets. I talked about life sciences/medical devices. That's one area. We're also very interested in growing our presence in what we would describe as high-end beauty. We do have some presence in high-end beauty, but that's an area we would like to further grow. What we do well is buy primarily privately held, for the most part, first time, institutional money type businesses where the sellers get comfortable with our ability to manage those businesses, grow those businesses and as importantly, to maintain the management teams and integrate them into TriMas. Historically, we haven't been able to compete as effectively on larger deals because of private equity. We have had some success there. But generally speaking, those are more challenging for us to get done. I'd like to say that with the state of the equity markets and the state of the credit markets, we have a better chance today than we had, say, 12 months ago to get those deals done. From a metric standpoint, we obviously look at cash thrown as the key metric for our transactions. We look for that to exceed our weighted average cost of capital within 3 years of doing the transaction.

And as a follow-up, how would these acquisitions be funded? And how high could leverage get -- or how high would you be comfortable with leverage getting for the right acquisition?

Well, as I mentioned, we have close to $400 million of capital today. I think we have pretty good confidence that we'd be able to access the credit markets if we such chose to do so, if we wanted to do a larger transaction, obviously, the cost of capital today is a little bit richer than we'd like to borrow at. But we believe fully that given our leverage profile, we'd be able to acquire the capital we would need. And we could also potentially get creative where we needed to. But -- what was the second part of the question? I'm sorry. There was a second part.

Leverage.

Oh, leverage. Yes, that.

This is a tech conference.

Yes, I get it. I mean, look, we're never going to be -- well, I probably shouldn't say never, but I think it's highly unlikely we get back to where we were 7, 8 years ago of 5x plus. We put 2x out there as a target because that's what we target. If we saw a large deal that we thought was structurally value accretive to us and made sense, would we leverage up to 3.5x. Potentially, if we felt strongly we had a short runway from a cash flow generation standpoint to get back down to 2x very quickly. So we've got some flex there, but we're not going to be -- again, we're not going to be doing a deal that gets us to 5 or 6x.

That's very good to hear. I believe this -- recession is also this year has been seen almost as a near foregone conclusion. I'm sure we all see it in the news. Maybe what is your playbook for a potential downturn? And a follow-up would be like what are your typical decremental margins?

Well, yes, I mean, look -- we've had 2 -- we have had 1 quarter and we expect this fourth quarter to be less than expected from us, primarily driven by the Packaging demand challenges I've discussed. We -- both Tom and myself and the broader management team have real experience in managing through what I would describe as downturn period. So we've already started to work on a playbook, what that would look like. We've got levers to pull if we needed to. We're just -- we want to see how the first quarter plays itself out. Obviously, when you take steps to optimize the cost structure, it has implications when and if demand picks up meaningfully. And so we're managing this on a weekly basis almost. And so there's the traditional cost savings that you would be able to execute on very quickly. And then there's some other potential strategies around manufacturing footprint, if that was an area that we thought there would be a prolonged depression and demand that we could execute on. But we're in the wait-and-see mode right now. We've already taken some steps within the Packaging business to reduce our production capacity to align it with demand right now, in terms of taking ships out and reducing the number of days we're producing in specific plans. But we've got plants that still have very strong demand and we've got other facilities that are being impacted. So we're taking a very pragmatic approach to those decisions.

And you certainly have some segments that are -- [ one can argue ] you already experienced a recession recently. Maybe you've also sold some noncore assets this year some swaps. Can you maybe just provide some details on what you did, the amount of proceeds and if there are any other potential noncore assets out there that could be sold?

Yes. So we -- we did 2 things this year. We had some cross-currency swaps that we used historically to arbitrage our interest rate. And because of the softening of the euro against the U.S. dollar to basically all-time lows, we were sitting in a $20 million plus, I think it was a $26 million position. And so we decided to exit those hedges, the swaps and realize the proceeds, which you have to keep me honest here, but it was close to $25 million of proceeds, if not more from those swaps and we subsequently reentered into new swaps at a lower nominal or notional dollar amount. But so we felt, look, we wanted to build the balance sheet. We wanted to build the cash position just looking at what we were looking at, at the time from a macro standpoint. So we did that transaction. And then we sold 1 piece of vacant land and 1 facility, which we weren't using for manufacturing. So the vacant land was in Arizona. We had -- we were holding it because we were potentially going to expand that facility, but we subsequently invested in a new facility in the same area. And so that was noncore real estate prices in Arizona are pretty good right now. So it was a great transaction for us from a cash and an earnings standpoint. And then the building in California was a facility that we used to manufacture in years ago and through the Kaizen effort, we were able to exit that facility. And had great interest over the years for that building and decided now is a good time to transact that facility and realize the cash from that sale, which was $17 million-ish.

So my final question today before we end, to give you the last word is what do you feel are like the biggest misconceptions from investors or aspects about TriMas that investors underappreciate?

I think the big one is our innovation and engineering capabilities. If you look at our value proposition compared or comparative to our larger competitors, where we are very strong is on the engineering in the innovation side. Not only product innovation and product engineering, but manufacturing innovation, manufacturing, engineering. We historically have had operating margins much stronger than our competitors. That goes to the engineering and innovative component of our products which generated a higher margin and higher value proposition for our customers. And then from the manufacturing and engineering side, again, you can see that in our operating results. The focus we've had over the last decade of really becoming a world-class manufacturing company.

And with that, I want to thank TriMas and everyone in the audience for joining us. Thank you.

Thank you.