TriMas Corporation (TRS) Earnings Call Transcript & Summary

Good afternoon. I'm Scott Mell, CFO of TriMas. I think I'm probably the last person standing between you and a cocktail. So we're going to try and go through this rather quickly and then we can open it up to any questions. So -- we'll talk a little bit about who we are. We're about a $900 million annual revenue, diversified manufacturer of a diverse set of highly engineered products that serve 3 core end markets: consumer products, industrial, aerospace. We're organized across 3 distinct groups: TriMas Packaging, TriMas Aerospace and then Specialty Products. They operate independently of each other; 3,500 employees, 13 countries, more than 40 manufacturing locations. And we have about 17 independent, unique well-regarded brand names that we go to market with. So talk a little bit about our 3 segments or 3 groups, TriMas Packaging is the largest. It's about 60% of our annual revenue. They develop a broad line of highly engineered polymetric and steel closures and dispensing applications for both the consumer product and the industrial end markets. We've recently expanded our presence into the life sciences. We did a couple of acquisitions in the last, let's call it, 18 months, Intertech and Omega, who manufacture disposable or consumable plastic components used in the medical device. So think testing kits or vascular delivery or other types of plastic material that you would see in an operating room. TriMas Aerospace, it's about a $250 million and growing business. 2 product lines there. One is what we call fasteners, which are highly engineered components that hold the plane together, whether it be the fuselage or the wings, blind bolts, solid and blind rivets. And then we have another product line, which is highly engineered machine components. Think about steel bending, welding, parts that go into air conveyance and fluid conveyance within the aircraft structure itself. China's aerospace obviously was impacted by COVID, but like many other suppliers in the supply chain, it had a very strong 2023 with production rates increasing and we expect to see more of that in 2024. Specialty Products, it's 2 businesses, the largest of the 2 is Norris Cylinder, which is the only U.S.-based manufacturer of steel cylinders, both small, high and low pressure basically for storing and transporting packaged gases. So you see them in hospitals, you'll see them at work sites, where welders are using those for acetylene. And then we have a small engine and compressing manufacturer in Tulsa, Oklahoma that primarily serves the oil field service industry. Just quickly on our transformation journey. Going back to '17/'18, TriMas was spun out of Masco back in the early 2000s. We had new leadership come in and decided that we wanted to really focus on more stable, less volatile end markets that still had an opportunity for long-term growth. We had a major sale of an asset in 2019, which was Lamons, which was all related to the oil and gas market, just was too cyclical and too volatile for us. And since that time, you can see we've done 10 transactions. Really bolt-on programmatic M&A into both our packaging business and to our aerospace business. As I mentioned earlier, we have, I think, that 17 brand names that we go to market. And it's really bifurcated between packaging businesses and then aerospace and industrials. Just talk a little bit about our strategic value drivers, both near term and longer term. On the packaging side, obviously, has been a very dynamic macro environment over the last 3 to 4 years with the COVID surge and then experiencing a destocking event last year where we had many of our large CPG customers in an overstock position. And so you saw an abrupt downsizing of demand, and that's leaked into this year. And so we've taken significant actions to streamline our cost structure. We've consolidated one facility in the U.S. We've closed and consolidated 2 facilities in China into one, but we remain very bullish on the Packaging segment. We continue to really invest in innovation, both focused on sustainability as well as other sustainable solutions across both our closures and dispensing product lines. And then longer term for packaging, and I talked about this ad nauseam today in our one-on-ones, but we're looking to grow in a couple of distinct ways really from an end market perspective. Beauty and Life Sciences are 2 areas that we don't have as much exposure to as we would like, and we're looking to balance our portfolio out. We did an acquisition in the Netherlands earlier in the year to acquire a company called Aarts Packaging, which does highly innovative solutions for the beauty segment, primarily focused on the large CPGs out of Paris. And then I mentioned our life sciences focus as well. Specialty Products, really focusing on Norris Cylinder. Again, very strong business, low capital intensity, high cash flow, very protected from a competition standpoint. We used to compete with Chinese and Indian suppliers and the cost arbitrage has really shrunken if it even exists today. And so we're focused on Norris cylinders expanding into new sectors, one of those being micro processing, manufacturing in the U.S. I think everybody has seen that there's a number of new facilities being built in the U.S. And they require compressors to keep the manufacturing facility clean, and we have the capability to serve those through our ultra-high purity packaged gas applications. So we're going to be riding the coattails of that innovation. Aerospace. Our biggest challenge in aerospace is getting product out the door. Demand is strong. Backlog is strong. We, like many others last year and earlier this year dealt with supply chain disruptions and labor continuity. If you look at our performance, we've made great strides in delivering margin accretion there. And so it's really -- 2024 is about maximizing the operating margin opportunity there with that business. We're primarily a commercial aircraft business today, probably 80% and the rest of it's business, defense and space. And so we've got a real growth opportunity to get into more of the defense market given those budgets as well as the space industry. And we've done a couple of recent acquisitions. Weldmac is the one that we acquired this year that is already in the space sector. So we're really bullish on aerospace going forward. Yes, I think that's it on that slide. Fortunately or unfortunately, depending on how you look at it, we've got a pretty strong capital structure. We've got a $300 million revolving line of credit that matures in 2026. We've got $400 million of 408 notes that mature in 2029. $300 million of availability, liquidity between cash and borrowing capacity and net leverage of just a tick over 2x, and that's sort of our long-term focus from a capital allocation standpoint is to maintain that 2x leverage ratio, while continuing to invest in our businesses and continuing to do our programmatic M&A and return value to shareholders through both the dividend program and share buybacks. Our credit rating is pretty stable. I've been in this chair for 2.5 years. They haven't changed. I don't expect them to change anytime soon, knock on wood. Quickly, third quarter results, very strong quarter, driven by our Aerospace segment, which had sales up 50% year-over-year. Aerospace operating margins were up almost 1,200 basis points. Packaging continued to be soft, but given the cost containment and footprint optimization projects we've taken, continues to maintain a healthy margin. Adjusted EBITDA margin of just below 20%. We typically expect to see that with a 2 handle on the front, and I think that's what we'll be looking to see as we get into next year. 20% EBITDA growth in the quarter and our adjusted EPS was up 40%. So a strong quarter all in all for us in Q3. Quickly, last slide, I promise, what's next for us? I mean we're kind of anchored in a few key areas here. I won't touch on all of them. But the first one is #5 down there, which is market recovery. We're going to ride the coattails over the aerospace recovery in terms of commercial production rates at Boeing and Airbus. And there's additional upside there, given that they haven't really ramped back up the wide-body production yet, which we have significant content on as well. Same thing in packaging. I mean we remain cautiously optimistic on 2024 demand. It's just a very challenging time to be looking forward in packaging, given some of the dynamics in the market, one big one being excess capacity has led to very short delivery times. And so we're not seeing the longer tenured ordering patterns from our customers, but we do believe that we'll see growth year-over-year within packaging. The second one is -- this is the #1 up there, which is new product innovation. Even though we make caps and closures and dispensing products, there's quite a bit of engineering and innovation that goes into it. And so I think that's an area that we have invested heavily in both people and capital, and that's going to be a core component of our strategy going forward. And then the last one was just on the M&A side. We haven't paused or pivoted our M&A strategy whatsoever, given where the capital markets are or the debt markets, I should say. We actually see it as advantageous to us when the cost of capital is going up for all of our private equity competition. It helps us -- we're very strategic in the deals that we get involved in. We don't like to get into overly competitive situations, and we tend to front run processes and get exclusivity really with privately held businesses where we can show our capabilities around closing deals, our abilities to integrate sellers into the TriMas organization and continue to grow the business. So I'll pause there. I'll go sit down, and we'll open it up to questions.

[Operator Instructions] Obviously, a lot of packaging -- a lot of packaging companies out there have noted destocking that's been going on and you've been talking about it for a while, but maybe that destocking is end in sight. Are there any subcategories in that destocking story that seeing the end of destocking or ones that are starting? Or kind of how do you think about your subcategories with regards to destocking?

So, the short answer is, yes, it's somewhat dependent on the end market. I mean the early-stage destocking we saw in food and beverage, home care, personal care, the industrial end market destocking came a little bit later. My personal view is we're kind of on the tail end of the destocking, and now we're really into a new phase of tighter inventory management by our large CPG customers. They've got a more expensive cost to capital, but I think they're really managing their inventory and they're purchasing very closely. Life Sciences and beauty held up much better during this destocking phase, and I think that was really driven by consumer demand.

So you said Life Sciences, some strength, maybe weakness in the dispensers and the closure side, that's more tied to kind of consumer related, but you kind of expect maybe given the economic environment that we're going to kind of maintain these tighter levels. So we're at the tail end and then maybe going forward, sales and it's going to be tied closer to...

Yes. I mean, look, 99% of what we sell is consumable and disposable. So people aren't stopping using hand sanitizer or soap or creams. I think we'll see how 2024 plays itself out, but we're sort of back to 2000 -- pre-COVID levels from a demand perspective. And that business historically has grown at GDP plus. And so, while we're cautiously optimistic, I think that is sort of the current hypotheses around 2024. I would love to be wrong and say that there's pent-up demand and our customers are going to be coming looking to stock the shelves again. But we're sort of going to wait and see -- and we're very close to our customers. And I stay very close to our larger competitors and they're seeing and saying the same thing. So we'll see how the first half of '24 plays itself out.

A longer term, you're kind of expecting given your exposure kind of a GDP plus...

Yes. I mean like, yes, systemically and structurally, I haven't seen anything that would suggest anything has changed.

So -- it seems like you also had a recent -- you recently appointed a new president of your Aerospace business with quite a bit of experience in the space. How is that shifting your outlook or your strategy within the aerospace segment?

Yes. It's Vitaliy Rusakov, who came from Howmet. And I don't want to speak for him, obviously. So -- and he's very new into the role, but we're very excited to bring him on board. He has more depth and experience in aerospace than anybody else in the organization. I think he's going to bring a global and strategic view. Bill Dickey, who had been running Aerospace on an interim basis for the last 9 months, he was really tasked with driving step change improvement in the operations. And I think if you look at our financial performance, you can see he was very successful and now with Vitaliy has come on board to really help us grow that business exponentially, whether it would be through growing organically within fasteners vis-a-vis Airbus or expanding our Engineered Solutions businesses into further penetration in defense. So I'm just going to leave it there for him and let him get his feet under him. But he's hit the ground running, and we're very happy to have him on board.

Historically, you've kind of talked about within your capital allocation framework regarding M&A. It's been -- and I know you've recently done a transaction within the aerospace side, but you mostly have talked about on the packaging side. Does this appointment maybe kind of shift some of the focus? Or are you kind of keeping that same framework of maybe more focused on the packaging investing, et cetera, versus aerospace?

No. Our M&A strategy hasn't changed. I mean priority one is growing packaging. But at the same time, we've always said that we'll be opportunistic in aerospace, and we continue to be so. The pipeline of M&A activity on both the Packaging and Aerospace side has picked up quite a bit for us in the last quarter. And there's not a lot -- there has been many sort of large-scale deals come to market and close across either of those. But there's a lot of opportunity out there across both those sectors or both those verticals for us. And I would expect us to continue to deliver transaction activity similar to what we've done in the last 3 or 4 years. Again, like I mentioned in my remarks, quite frankly, I think we view the current equity and debt markets as advantageous to us. And so we're chasing down opportunities as we see them, and we've seen quite a bit more inbound activity, like I said in the last 60 days.

What's the competition look like given that maybe financial buyers are facing higher interest rates? What's the competition for these deals? Yes, maybe just let's start on the pipeline, et cetera.

I mean the competition is the same that we've seen from strategics, right. In packaging, it's Silgan, Aptar. On the aerospace side, it's Howmet, LISI, PCC. Those are really the names from a strategic standpoint that we see in our deals. We've got 9 minutes left. I don't think I could list all the private equity firms that we see trying to get into our transactions. But yes, again, like I said, we try to front run M&A activity. We try to find opportunities to get exclusivity early on, and we've had a pretty good track record of closing deals that way.

You mentioned earlier, you kind of have a 2x leverage target. Maybe how high would you be willing to make that go if there was an attractive growth target, especially one-off size?

Well, that depends on the cost of capital. No. I mean, look, we talk about this all the time. Our long-term objective from a leverage standpoint isn't going to change, but we obviously understand that. If we want to do a meaningfully sized deal, we're going to take our leverage multiple up into the -- just to say somewhere in the 3s. As long as we have confidence on our ability to cash flow our way out of that within short order, that would be something we'd be interested in doing. Again, it really depends on the quality of the asset that we'd be acquiring.

And you also have your -- you haven't talked about it too much yet, but your specialty business, which is really made up of 2 businesses. How important is it to the long-term story of TriMas? Is there maybe an opportunity to find or maybe to divest a bit? Or what's maybe the thought process of how that is part of the entire TriMas?

Yes. So our Specialty products business is a cash flow generating machine and we like that. It's a low capital-intensive business, both Norris and Arrow. We've invested already historically at Norris and we're starting to see the fruits of our labor. I think Tom Amato has mentioned previously and I've mentioned that we love the businesses, but we've obviously mentioned that Packaging and Aerospace are core to us going forward. So really what you made into that. I think if hypothetically we were to transact specialty products, it would be in support of a larger acquisition, primarily because one of the challenges we have is our small cap basis and a relative size. And so we want to keep delivering growth -- top line growth. And if we were to divest those businesses, we would want to be reallocate that capital rather quickly.

Is there a size that you think you have to be in order to kind of get more, I guess, credit from the market? Or like -- or how do you think about that?

Look, we target -- we want to be $1.5 billion in revenue by 2027 and at a 20% EBITDA margin, right, that's $300 million. So we think at $1.5 billion, $300 million EBITDA, market cap of $3 billion -- $2.7 billion, $3.2 billion, somewhere in that range. I think people will look at us and investors will look at us differently, but there's also just the operational improvements that come from scale, especially within our Packaging segment. We can compete globally today given our footprint, but being able to double the size of that business is going to put us in a better strategic position to compete against the larger global competitors that we have.

And thinking about 2024, I guess, what would you say are puts and takes within your various end markets, just given the current economic situation that we're seeing and the questions about recession?

Well, I mean, look, within Packaging, it's really a demand question, is when is it coming back and at what rate and at what level? We've still got opportunities, if we need to, to adjust or address the cost base. But really, in Packaging, it's what are we going to see from a growth standpoint and continue to invest in acquisitions within packaging. On the Aerospace side, it's continuing to be very close to supply chain, making sure that we have strategically sourced all of the raw materials that we need. And we spent quite a bit of time on that in 2023, and we're very comfortable where we stand as we go into 2024, but there could be some global macro event that disrupts the oil markets and puts us back to where we were. So we're going to stay very close there from a supply chain continuity perspective. Fortunately, for us, material prices, generally, the outlook for resin and for steel and other alloys is stable and beneficial to us. So we're hopeful that continues in 2024. And we've improved our sophistication and maturity around sourcing recently. And so we think we've got programs in place to mitigate as best we can if we do see some inflation around raw materials.

Maybe talking about the aerospace a little bit more. Obviously, we see a lot of backlog by the 2 large OEMs. What are they telling you? Is there one that you have more exposure to OE versus aftermarket? Little bit more color on that?

Yes. I mean we're, almost all OE, very insignificant amount of aftermarket business, and we have more content on Boeing than we do on Airbus. We would -- we're hopeful to continue to grow with Airbus. But at the moment, most of our content, at least from the large commercial airliners on Boeing. It's -- I think the supply chain is in a pretty good place relative to where it was this time last year. There's always going to be risk for disruption in the supply chain, but I feel like the OEs and their suppliers are kind of aligned on the environment we're operating in. And we've obviously prioritized our largest commercial customers to ensure that we're getting their material out to them as promised.

Maybe with the last minute or so, I know you've done some recent restructuring, where you moved some of your -- some production from California into Indiana/Arkansas. Are there any other future opportunities to kind of take some cost out of the business? Or how are you really looking at that strategically from cost perspective?

Yes. That action was opportunistic given the softness, but we had long wanted to try it and get out of a higher cost region in Northern California. We were able to do that. We also consolidated China, as I mentioned earlier. I mean we have excess capacity today like everybody else in the space. And we are always acutely aware of where we could take additional actions if need be. So we're kind of, again, cautiously optimistic on '24, but if it doesn't play itself out the way we hope it will. Again, we've got a pretty good track record of footprint rationalization. While nothing's -- nothing is on the table today, there are some opportunities across our portfolio to do so.

That's great to hear. And with that, we have about 20 seconds left. I want to thank everyone for coming out, and especially, Scott, thank you for discussing TriMas. Appreciate it.

Thanks for having us.