Good day, and welcome to the TriMas Second Quarter 2020 Earnings Conference Call. [Operator Instructions] At this time, I'd now like to turn the conference over to Ms. Sherry Lauderback. Please go ahead.

Thank you, and welcome to TriMas Corporation's Second Quarter 2020 Earnings Call. Participating on the call today are Tom Amato, Trimas' President and CEO; and Bob Zalupski, our Chief Financial Officer. After our prepared remarks on our results, we will open the call up for your questions. In order to assist with the review of our results, we have included the press release and PowerPoint presentation on our company website, www.trimascorp.com, under the Investors section. In addition, a replay of this call will be available later today by calling 888 203-1112 with a replay code of 9768715. Before we get started, I would like to remind everyone that our comments today, which are intended to supplement your understanding of TriMas, may contain forward-looking statements that are inherently subject to a number of risks and uncertainties, including impacts from COVID-19. Please refer to our Form 10-K and our second quarter 10-Q that will be filed today for a list of factors that could cause our results to differ from those anticipated in any forward-looking statements. Also, we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. 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 issued this morning, or included as part of this presentation, for the reconciliations between GAAP and non-GAAP financial measures used during this conference call today. The discussion on the call regarding our financial results will be on an adjusted basis, excluding the impact of special items. With that, I will turn the call over to Tom Amato, TriMas' President and CEO. Tom?

Good morning, and welcome to our Second Quarter Earnings Call. I would like to begin today's discussion by first thanking all of our employees for their commitment and dedication during these challenging and uncertain times. To put a finer point on our gratitude, TriMas operates 37 facilities in 11 countries on four continents. By adjusting to new work rules and processes, which promote social distancing and improve cleanliness and hygiene, virtually all of our facilities have operated through this unprecedented period experiencing only temporary disruptions. As a reminder, all of our production locations have been deemed essential. This is because the products we manufacture go into applications that help fight the spread of germs or are used in medical, military and defense, food and beverage or industrial applications. Although we experienced a wide range of performance outcomes due to end market disruptions, our second quarter results were better than we anticipated when the pandemic was declared. Let's turn to slide three. As a reminder, nearly 60% of TriMas' revenues are in packaging, where we provide dispensers, closures and jars into a wide variety of end markets but primarily into the consumer packaged goods and industrial markets. As I mentioned earlier, several of our product lines are used in applications that fight against the spread of germs, such as hand sanitizers, soaps and lotions and products for household cleaning. Sales within our beauty and personal care, home care and food and beverage end markets were all nicely higher this quarter as compared to the same period last year. Sales into the industrial end markets were also up slightly. We continue to see strong end bookings across various packaging product lines, given what we believe has emerged as a positive secular trend resulting from the heightened awareness of the importance of handwashing…

Thank you, Tom. If we turn to slide eight, I would like to begin my comments with a discussion of certain business realignment actions we completed in the second quarter in response to the operational and financial impacts resulting from the COVID-19 pandemic. As Tom highlighted in his remarks, entering second quarter, we were already seeing signs of slowing sales in much weaker end markets in our Specialty Products and Aerospace segments. We implemented realignment actions that would not only help mitigate financial impact of declining sales in the near term but also better position each of these divisions to enhance operating leverage as the global economy and specific end markets ultimately begin to recover. In total, we recorded noncash charges of $15.4 million, the largest portion of which related to liquidating product line inventories we exited in our aero engine division, following our decision to streamline its product offering to certain core engine lines and related products. We also disposed of certain aerospace and industrial cylinder inventories not expected to be salable in the foreseeable future under current market conditions as well as retired certain machinery and equipment from use given existing capacity available and reduced end market demand. We also incurred cash severance costs in the quarter of $3.1 million related to the adjustment of employment levels, primarily in our Aerospace segment, in response to the significant disruption of the commercial aerospace market and uncertainties related to the time frame of expected future recovery. In addition to the realignment actions noted, we also recorded a noncash pre-tax charge of $23.4 million for an accounting policy change related to accounting for less legacy asbestos claims. This change effective in the second quarter results in a balance sheet accrual for all estimated future indemnity and defense costs associated with known…

Thank you, Bob. And turning to slide 13, when we reported our first quarter results, we felt it was prudent, based on the inability to forecast the impact of the pandemic, to withdraw our full year guidance. As we look toward the second half of the year, there remains much uncertainty in certain of our markets. We remain cautiously optimistic that the robust sales activity in our Packaging segment will continue through the end of the year, generally in line with the first half, however, slightly moderated given some reduced shipping days. We also anticipate the second half sales trend for our Specialty Products segment will continue to be lower as compared to the prior year's second half but generally in line with the first half rate. The most notable change, as should be expected, is that we anticipate a second half sharper sales decline in our Aerospace segment as compared to the second half of 2019 as the production order demand has started to line up with overall lower aerospace market demand. In light of this anticipated sales run rate, decremental margins may vary widely, and we are not in a position to reliably forecast earnings at this time. Netting this all together, we expect TriMas' overall sales for the second half of 2020 to be about flat with the second half of 2019. Finally, we anticipate continuing to generate solid free cash flow in excess of net income and maintain our strong balance sheet. As we see stability or if the global economy changes further impacting our markets, we will adjust our operations accordingly as well as revisit our decision on communicating earnings outlook. Of course, we will continue to rely on the TriMas business model, which provides us with a standardized platform for proactively managing our businesses…

Thanks, Tom. At this point, we'd like to open the call up to your questions.

[Operator Instructions] Our first question comes from Andy Casey with Wells Fargo Securities.

Hi, good morning guys. This is actually Patrick for Andy. This is actually Patrick standing in for Andy. Yes. Okay. Just I appreciate you guys calling out the gross dollar amounts for the Packaging business pretty much by business. Can you maybe help us parse out some of the rates, specifically the organic rates for the several businesses that you called out, home, personal care, pharma, food and bev. and industrial in the quarter, just so we can get a sense of what kind of rates we can maybe look into and expect into going into the third quarter and second half of the year?

Well, I think if you take a look at the range we provided, the sales growth range we provided on slide 13 of the presentation, the biggest drivers of the year-on-year change really will be in the beauty and personal care and home care product applications. For the most part, we'll see we expect to see some continued benefits in food and beverage as more QSR activity picks up and then some slight other pickups. But the material drivers to the year-over-year rate change are predominantly going to be in beauty and personal care, applications and home care applications.

Understood. Okay. And just moving on to Aerospace. I understand that given the current environment, it's a little bit difficult to sort of really hone in on decremental margins. But as you guys think about, maybe, perhaps further actions and whatnot that you guys are going to take, can you at least provide a band for us in terms of when you do your scenarios, what kind of band of margins are you guys looking in looking at, really? And then also what can you guys do or what needs to happen to get you to a certain band versus maybe a lower band?

Yes. I'll maybe give some color on it and ask Bob to also comment if he'd like. But as you probably are hearing from other companies, and it's no different at TriMas, when there's this much dislocation as we're seeing in any particular end market or demand level, the decremental margins are not linear, and we see that, of course, as well. So what we're balancing doing in terms of cost containment and protecting aspects of our overall margin is balancing those actions with the long-term preservation of the phenomenal businesses that we have and repositioning them for early wins when markets start to recover. So that's just the state of -- that we're in, in terms of the dislocation on the revenue and the decremental margin. Bob, if you want to talk further on that point, feel free, of course.

Yes. The only other thing I'd add is there's also a mix element here. Not only is there a significant disruption in the volumes of products being sold, but our traditional mix is being impacted as well. And being able to sort out that impact from a decremental margin, which is more volume-based, just further complicates it. But at the end of the day, given the kinds of declines we're seeing in sales volume and what we're anticipating may occur in the back half, the decremental margin impacts will be meaningful.

[Operator Instructions] Our next question comes from Steve Barger with KeyBanc Capital Markets. .

This is actually Ken Newman on for Steve. Yes. I totally get the expectation for sequentially weaker revenue into the back half for aero and specialty. But I was curious, if you could just kind of help us with thinking about the cadence of sales for those segments. Curious if you are expecting fourth quarter to be sequentially better than the third quarter. Or maybe is it a little more level loaded for the outlook in both of those segments?

Yes. I would say it's hard to handicap only from the standpoint that we're not convinced, particularly in Aerospace, that we have sort of hit the trough, if you will, of where we think we'll settle out. And so that makes it a little hard to talk about sequentially third quarter to fourth. What I would generally say is that fourth quarter has historically been our lowest sales quarter. And I would anticipate sort of that pattern of activity to continue, just it's now affected for however the pandemic hits us in Q3 in terms of sales in those two segments. It doesn't appear, at least based on what we're looking at today, that there's prospects for recovery yet this year from the pandemic. So I would not anticipate that sales in those end markets or demand in those end markets would pick up fourth quarter versus third. So I think the pattern will hold that fourth quarter is going to be sequentially lower than the third.

And the only thing that would change that, and we would view as, obviously, an opportunity is if there is meaningful progress made, obviously, on vaccine, or if changes occur in terms of the case rate cadence throughout the nation. Clearly, that would benefit us as well.

That's helpful. Moving on, it was good to see that Packaging margins returned back to the 20% range. Obviously, mix has -- was not favorable with the higher sanitation-based sales. So I am curious how think about margin cadence into the back half, if you would expect a 20%-plus type of margin into this back half despite maybe some of the negative mix impacts and the inefficiencies you saw this last quarter.

Yes. I think the current run rate that we achieved in terms of mix especially in the second quarter here is going to be relatively consistent with the run rate we anticipate in terms of product mix going through the second half. There's no indication sort of today, as I look at our end bookings, that anything is changing the types of products that are being demanded and pulled by our customers.

Yes. And from a production and efficiency standpoint, I think we're assuming, sort of, consistent level of activity in second half. Obviously, if there's a disruption due to a breakout or a plant having to be shut down for a week or two that could fundamentally change that, but we're not seeing anything like that at this point.

Got it. And then just one quick follow-up for me. On the asbestos accounting charges that you had this quarter, could you just make the clarification on that $2.5 million annual comment you made earlier in the prepared comments? Should I guess I'm trying to figure out if we should expect any further charges related to that for the remainder of the year.

Yes. So the $2.5 million under our former accounting policy was essentially the both the cash and the P&L impact that we had been experiencing on an annual basis related to defense costs associated with the litigation. Under the change in method, we basically have accrued an actuarial estimate of what we think the defense and indemnity cost will be over the many years into the future. And the only the cash charges will still probably approximate that $2.5 million not cash charges, but the cash outlays will probably still remain in that $2.5 million range. From a P&L standpoint, there will only be adjustments for if the annual actuarial studies or other levels of activity are such that it changes the actuarial outcome from where we're at today. So that would be something that would be done on a periodic basis annually or perhaps more frequently, if we see changes in the pattern of the case activity.

Thank you.

Thank you.

[Operator Instructions] We have no additional questions at this time.

Okay. Thank you for joining us on our earnings call, and we look forward to updating you again next quarter. Please, everyone, stay safe and healthy. Thank you.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.