TriMas Corporation (TRS) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us for the TriMas presentation. I'm Ross Sparenblek, the analyst here at William Blair, focused on diversified industrials. I'm required to inform you that for a full list of research disclosures and potential conflicts of interest, you can visit our website at www.williamblair.com. Today from TriMas, we have Tom Amato, President and Chief Executive Officer; and Scott Mell, Chief Financial Officer. TriMas is a manufacturer of engineered products, focused on the consumer, aerospace and industrial end markets. The company is benefiting from strong demand with this industrial -- or specialty group, building support from the aircraft production ramp and stabilizing conditions that are anticipated to improve packaging as we move through the year. So with that, I'll turn it over to Tom for an introductory presentation, and then we'll have some time for Q&A. Thank you.

Thank you, Ross, and thanks again to William Blair for inviting TriMas to its investor conference this year. Let me start first by reminding attendees who TriMas is. We are a diversified end market company. We're active in over 10 distinct end markets, and we go to market with over 17 leading brand names. We report our performance in 3 segments: packaging, our largest segment, Specialty Products and Aerospace. We have excellent cash flow characteristics, which we utilized to invest in our manufacturing facilities, fund bolt-on size acquisitions, buyback shares and pay a dividend, all while maintaining low leverage. And Scott will cover that in a few minutes. Our current sales rate is just under $1 billion with 3,500 dedicated employees in 13 countries. We manage our diverse end market businesses under our proprietary, TriMas business model. I'll now cover additional specifics on what we do in each of our segments. First, in Packaging. We design, engineer, manufacture polymeric dispensers, screw caps, closures, push-pull and flip-top dispensers, bag-in-box products, drum and pail spouts as well as metallic drum closures. Additionally, through recent Life Science acquisitions, we design and manufacture polymerase chain reaction test kits, vascular delivery components, orthopedic-related components, auto-injector devices and other wellness and healthcare products. And we do this all in Class 8 or Class 7 manufacturing clean rooms. We also have commercialized a number of high-growth innovations that are still in the infancy stage of our launching such as child-resistance closures, tethered caps for push-pull dispensers and a full range of mono-polymer ready-to-recycle dispensers, which we brand under our Singolo brand. Moving to Aerospace. We design, engineer, qualify and I'll emphasize the word qualify, and manufacture specialty and standard fasteners and collars, ducting and expansion joints and a variety of machine components all for commercial, business and military jets and helicopter and defense applications. Within Specialty Products, we predominantly design, engineer and manufacture metallic cylinders of varying sizes for packaged gas applications. We are the only remaining high-pressure steel cylinder manufacturer in the U.S.A., and we go to market under our Made in USA, Norris Cylinder brand name. We also have a power generation and compressor business, which is TriMas' only remaining presence in the oil and gas end market. So now let me pivot to the transformation journey for TriMas, which began just before the onset of COVID which is everyone in this room knows perhaps the most dislocating event in modern history. So we took all of this on even though COVID was underway as we executed against our plan. So since 2019, we've acquired 10 bolt-on size acquisitions, again funding all of the acquisitions with our current capital structure. Most have been in the packaging and packaging-related end markets but also in Life Sciences and Aerospace and Defense. I'd like to note that given the pandemic and its lingering effects, along with inflationary challenges more recently that TriMas has not yet captured the full benefit of the several of our more recent acquisitions. So we view as we integrate these acquisitions into TriMas, benefit in the near term as we move forward. Additionally, we divested the largest part of our oil and gas presence just over 3 years ago, which was the first key step in our portfolio reshaping strategy. So you can see that in addition to divesting out of oil and gas, repositioning the business with bolt-on acquisitions, we've been methodically building out the platform, again, as a smaller cap company, doing it within our current cap structure. So today, approximately 60% of TriMas is focused in packaging, more specifically in the Beauty and Personal care, Food and Beverage, Home Care, Life Science and Wellness and also Industrial end markets. But if you were to add into the industrial view of the end markets, our packaged gas business, about 3/4 of TriMas would be in those packaging end markets including our packaged gas business. So now let me take a few minutes and present some of the near-term actions we are taking given this dynamic market in 2023, which we believe will position TriMas well for future gains. And I'm sure that's why many of the folks are in this room and certainly, we heard in a lot of our one-on-ones questions about what we're doing today and what it will mean in the future. So within our Packaging segment, certainly given certain lingering demand softness that we're experiencing due to some overstocking and some of the inflationary matters, we're streamlining certain of our manufacturing cost structures. We did discuss on our last earnings call that we were consolidating 2 plants we had in China, and we're consolidating those operations into 1 plant, so that will reduce some cost structure there. And we're also executing a China for China strategy as our main focus for that region of the world. We're exploring our current manufacturing footprint with an eye towards some of the higher manufacturing cost areas that we're in to see if there's other operations that we can consolidate into lower cost and preferably owned properties to take some existing cost structure out of our operation. This is in addition to continuing to invest in, in innovation to drive future growth, penetrating new geographic regions through distribution where we can and further integrating, as I mentioned, existing acquisitions. I would like to note that in terms of growing in new regions, we've been making significant progress in Latin America, specifically Brazil, in penetrating that market through a distribution location and it's a bit of a bright spot for us within TriMas packaging. So we're -- given our global presence with our operations, we're able to support customers around the world in any geography. So we do believe when markets recover, not if, we will return TriMas packaging to a GDP plus organic growth company at conversion rates closer to pre-COVID levels, adjusted, of course, for noncash expenses and product mix. Within our Specialty Products segment, we are continuing to take actions to benefit from long overdue demand recovery by investing in our factory floor to improve efficiencies. We've seen a lot of hard work over the prior few years to invest in our factory floor, and we're starting to enjoy those conversion rates now as demand has picked up. In addition, within our packaged gas application business, we're commercializing new cylinders to participate in the onshoring of microprocessor chip manufacturing in the U.S. I will talk a little bit about this further. Everyone is well aware of the government support and some of the issues with importing microprocessor chips that occurred over the past few years. In that chip manufacturing process, there are a number of operating stations that require cylinders to provide inert gases to the manufacturing that takes place in various operating cells. The cylinders that are used are ultrahigh precision cylinders and TriMas invested in the ability to manufacture these cylinders. We have commercialized applications, and we expect a nice amount of growth with our cylinder business as we go forward. It's actually a new end market for us. It's opened up, and we're quite excited about it. Within our TriMas Aerospace segment, our near-term focus is simple. It's secure and bring into better balance our input materials and to some extent skilled labor to match the high demand pull we are experiencing with our aerospace customers. We've got the order book, the recovery is on its way but there are some strains within our sub-supply sector that have just been a challenge for us and other companies in the metal processing area. It will take some time for us to revert in terms of financial performance to catch up to the operating performance that we're enjoying today but we are confident that as we get into the end of the year and into next year, we'll start to see much better conversion rates in our Aerospace business. And we're seeing, as I mentioned, the non-financial metrics come into line but it's going to take some time for our financial metrics to catch up. So for TriMas overall, we'll continue to leverage the TriMas business model we manage through uncertainty, both related to higher and softer demand issues. We'll continue to assess our portfolio of businesses to better focus TriMas as we move forward, continuing on our journey to transform and focus our business. And we'll continue to execute against our -- as I mentioned, our transformational journey over the coming years. So finally, before turning the podium over to Scott for some comments, I'd be remiss if I did not talk about our progress in sustainability. Specifically, our focus on innovative products that contribute to reducing waste and improving the environment is substantial. I've covered this several times, and they're all listed here as well. Additionally, we are investing in machinery and equipment and infrastructure to reduce energy consumption, to improve the places where we live and work, in almost every plant around the world. And we go into significant detail in our annual sustainability report. We have published 2 to date, and we'll be publishing 1 by the -- our third one by the end of the month. And every year, we put in more details on our progress but our progress in sustainability has been substantial. So with that, I'll invite Scott up to say a few words on TriMas as well. Thank you.

Hi. Good afternoon. Great. Thanks, Tom. Let me start with giving a bit of a highlight around our capital structure, some key credit statistics and our liquidity profile. We continue to maintain a very conservative leverage profile with 2x net leverage at the end of the first quarter. We did, in April, borrow under our revolving line of credit to fund the acquisition of Weldmac, which is an aerospace business. Q1 tends to be the lowest quarter of cash flow for us. And so we borrowed under that facility. We expect to fully pay down that revolver by the end of the year. Even giving consideration to that transaction, our net leverage at the end of the quarter on a pro forma basis was 2.25x. We have $400 million of senior notes outstanding with a long tenure of maturity in 2029 and a relatively low cost of debt compared to current credit markets at 4.125%, $300 million revolving line of credit. While it's a variable rate, the spread is only 1.625%, so again, relatively low cost of debt for that facility as well. I guess, yes, that's kind of the highlights on Slide 8. Slide 9, I wanted to talk a little bit about something that we believe makes TriMas unique relative to some of our industrial manufacturing competitors, which is our TriMas business model. Essentially, it's an enterprise-wide approach to driving operational performance and cash flow throughout our organizations. A couple of the key tenets there, environmental health and safety, flawless launches and continuous improvement. We believe those are some of the key components that allow our businesses to continue to provide the cash flow generation that they do. And that cash flow in turn allows us to focus on our capital allocation priorities. First and foremost, is continuing to invest in our businesses for long-term growth, both revenue and earnings growth. Next, augmenting that capital investment in the businesses with programmatic M&A, including bolt-ons. We've done 5 transactions in the last 2 years since I've been here, both in the Packaging segment and in the Aerospace segment. We obviously look for strategic acquisitions that we believe are aligned with our long-term strategy of both revenue and earnings growth. And then lastly, continue to provide returns to shareholders through both dividend and share repurchases. We've now announced 7 consecutive quarters of a quarterly dividend for our shareholders. And we've purchased more than $150 million of shares since 2018 when our share repurchase program was authorized. Wrapping on the last slide here, and then we'll turn it over to questions. Just a graphical representation of our current brands. We have 17 unique brands that go to market in both the packaging and aerospace end markets. We believe these are all unique and highly innovative brands that really are part of the value proposition for TriMas. You'll notice we did not go to market as TriMas, but we do go to market with these unique and well-known brands. So with that, I will hand it back over to William Blair to take us through questions.

As we look at packaging and expectations for destocking to improve in the second quarter [indiscernible] in the second half. How should we think about slower consumer spending [indiscernible] kind of mitigate some of that...

So the good news is I get to repeat the question because we have to talk in the mic. So I can modify the question to my liking. I'll try not to do that too much. But the question was given some of the historical trends in overstocking, how is TriMas thinking about some of the more recent trends and consumer spending that might impact the second half? Did that capture? Okay. Look, this is something that is very real. And we -- I had talked earlier in the year, as we set our expectations for the year about a second half recovery and that I would be looking for the right level of green shoots as we went through the year opposite the planned expectation on recovery. And what's happened since that time is inflation has been incredibly persistent. We've started to see with some of our larger CPG customers, some impacts to their demand levels because of the pricing that they've pushed through into the market, which they've had to do given some of the cost factors that have been imposed upon them. So it's a real effect. I would like to have seen more signs and a stronger recovery in the second half. At this point, we're seeing some indications but it tends to be very regional specific. For example, there are aspects in beverage in Europe that are performing quite well. It's not the same in the states. I talked a little bit about Brazil, which has been a phenomenal bright spot for us, particularly in the Beauty area. We announced most recently that we acquired a company in the Beauty Packaging space in the Netherlands and that's allowed us to get some new business award with some new customers in the Beauty area. All products that fit very well with our capabilities. So we're still monitoring the situation. I think what you'll start to see from TriMas, and particularly in our Packaging business, we will take some deeper restructuring, cost streamlining and restructuring actions. But I look at that as an opportunity that will pay future dividends to our investors in 2024 and beyond because some of the actions that we're looking at taking, we could never take in a high-demand market. So we want to just take advantage of this period of time to benefit the company in the future. So a great question. Thank you.

Moving to Aerospace [indiscernible] can you just help bring for us some of the operational challenges you have had over the last year and [indiscernible].

Yes. So Ross' question was, could we go into a little bit more detail on some of the aerospace challenges operationally that we've seen in our longer-term view for that segment. And thank you for asking that. The challenges that we have are very localized in how I would describe them. The biggest, if we were to do a Pareto chart on the challenges we're seeing operationally, the largest bar would be the availability of super alloys. There are very specialized metals that we use in the manufacture, particularly of our engineered fasteners. There are just a few suppliers in the nation. There are other metallic issues that are occurring in aerospace, some of them are not affecting us because of our products. But the wire drawing hubs that feed into our -- that make up our supply network and feed into our operations are highly constrained right now. What started out at the latter part of last year and early part of this year as issues related to nickel supply, I think everyone saw nickel pricing spike up, now it's pulled back a little bit, has become a skilled labor matter within these operations. The good news is that will revert, those types of issues tend to revert. We're already starting to see the gaps in our raw material get filled. That's when I talked during my presentation about the non-financial metrics are starting to come into balance. And the way that our operations work, we might start an operation and it could take us 5 months before we finish the product because it goes through a number of different operations, might have to go outside for plating or annealing, coming back in, run through more operations, could go outside again and come back in. So it will take us time financially for our financial performance to come back in the line. So that's the biggest issue. We have some issues in skilled labor like most companies. We found some new capacity constraints because product mix, demand is great. Our backlog is high as we've ever seen it. But unfortunately, the backlog in demand isn't exactly where we like it, and that's created some new constraints for us. But in relation to the availability of material supply, those are more minor items that we'll work through. As far as the longer-term outlook for Aerospace, I'm very optimistic. Not only because of our businesses and our brands, and I know that they'll ultimately perform better as we move forward but I'm optimistic about the travel that we're seeing in the United States, which is nearly at pre-COVID levels now. I think there still is another aspect of travel to increase internationally to Europe, between Europe and the States. And then I think the third opportunity set is for travel to Asia to pick up again, and that still has not picked up to pre-COVID levels. And what that means for the industry, I'm sure, as most folks know, is more wide body and bigger planes. And when there are bigger planes being made, we sell more fasteners. So we look to that as 2024 plus 2025, it continued, for example, the 777 when it starts to ramp up, that's a very positive for us. So we see a nice runway, if I can use that analogy with our Aerospace end market. We've completed some acquisitions that have gotten us more into defense. They're off to great starts. And I mentioned probably a few earnings calls ago about a large award that we received on the T-7 trainer for Boeing in the defense area, and that is just ramping up now. So we look to 2024, 2025 as -- in a very optimistic and favorable way for TriMas Aerospace.

[indiscernible] comfortability with capacity and specialty, does talk about [indiscernible] pretty firm as they're going through [indiscernible] investment to kind of drive share, to take advantage of [indiscernible].

So the question was within Specialty Products, specifically our cylinder business, is there room for additional investment to take advantage of some higher organic growth rates with that packaged gas business. Short answer is absolutely. What -- I just -- I do want to say that as we look at our packaged gas business, the journey for us started a few years ago when we started investing in the factory floor, started opening up capacity. The premise was the demand would come back. It's here, and we're converting very well. So now as we look at that business, we're saying, okay, what new areas can we participate in. I mentioned during my prepared remarks about our participation and excitement level that we have for ultra-high precision cylinders. So for us to participate in that new emerging end market in the U.S., we've had to invest -- we'll have to invest more, so we can make ultra-high-precision cylinders for our customers. Another area where we're monitoring closely. We have some presence in but we think the opportunity is going to be much larger is in the decarbonization play, specifically in the use of hydrogen. So some of our customers, and it's been widely discussed, are investing significantly in hydrogen packaged gas. We probably -- you probably won't see us as we sit today in the delivery end, front delivery end or in the mobility end but there's a lot of steps in the intermediary space where we could participate. We could put a 6-pack or a 12-pack of Norris steel cylinders into certain operations with hydrogen to feed, for example, mobility-type cylinders, which tend to be smaller type 4 cylinders. We make type 1 cylinders. So we are -- we generate a lot of cash flow within our cylinder business. Our #1 priority is to always invest in our factory floors, and we will continue to upgrade our equipment and relieve capacity and grow that business where we can organically.

Can you quickly just look at M&A. Can you just provide more color on what you're seeing in the pipeline, valuations [indiscernible] about Aerospace, Life sciences, [indiscernible] for TriMas?

Sure. The question Ross asked was on M&A where we're seeing activity and where our focus is. I'm going to take that reverse order. First of all, our focus is very clear. It's predominantly in the Packaging area. And within Packaging, we would put a high priority on any Life Science or Wellness type of business as well as a Beauty type of application. Not all businesses are pure plays, even smaller acquisitions that we look at. So sometimes they come with a portion of Beauty or a portion of Life Sciences. And for TriMas, we're situated perfectly as an acquirer for those types of businesses because of our breadth of end markets, and we use that as actually a selling point. It's an interesting M&A market right now because assets that are owned by private equity, for example, that might have a lot of leverage in this current market, there's not an appetite for them to take them to market at current multiples, which are a little bit softer right now. So they're holding on to those assets. So what we're seeing is a market where the quality of assets are something that we need to sort through carefully. We're not going to do a deal just to do a deal. We have clear strategies. We know the types of companies we like. We look at a lot of companies that we don't pursue and we never report on them. But the acquisitions that we've made, we're all very proud of, and we think they fit with our portfolio of businesses and our family of businesses nicely.

We are out of time but thank you for coming and hope to see you guys in the breakout session.

Thank you very much.