Good day, and welcome to the TriMas Third Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, it is my pleasure to turn the conference over to Ms. Sherry Lauderback. Ma'am, please begin.

Thank you, and welcome to TriMas Corporation's Third Quarter 2021 Earnings Call. Participating on the call today are Thomas Amato, TriMas' President and CEO; and Scott Mell, our Chief Financial Officer. We'll provide prepared remarks on our results and our outlook, and then we'll 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 at 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 506-0586. 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. Please refer to our Form 10-K and our third 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'll turn the call over to Tom Amato, TriMas' President and CEO. Tom?

Thank you, Sherry. Good morning, and welcome to TriMas' third quarter earnings call. We're pleased to report another solid quarter of performance, continuing the positive momentum we've been building over the past several quarters. Let's turn to Slide 3. This is a very exciting time of year. The TriMas global leadership team is busy refreshing our forward plans, while also working diligently to close out 2021 on strong footing. It's interesting to reflect on the same period last year. When we set our 2021 plan, we knew there were remaining uncertainties related to the global pandemic with many countries and various states still imposing tight restrictions. The potential for new M&A opportunities was also limited given that targets were continuing to focus on navigating through the various market dislocations occurring at the time. So, we, in turn, focused on the factors we could control and did the best we could to plan for 2021. As the current year unfolded, we adjusted to market changes along the way and leveraged our strong brand names, diverse end markets and innovative product solutions, all to drive strong cash conversion. As we fast forward to today, we did not come close to imagining that our largest input cost, resin, would be, on average, more than 50% higher than our 2021 planning level. In fact, there were periods throughout this year where we expected cost stabilization only to face further resin cost increases and even tighter supply. In addition, our second largest input cost, steel, was also up significantly against 2021 planning levels and even freight cost increases crept into 2021, impacting a number of our businesses. Despite these challenges, our strategic repositioning and our diversified end-market model have allowed us to deliver another strong quarter for TriMas' investors and continue our momentum. Additionally, on…

Thanks, Tom. Let's turn to Page 6 for a review of our capital structure and strong balance sheet. We ended the quarter with net debt of $256.6 million, an improvement of more than $15 million from our December 2020 year-end level. Strong cash generation from operations has more than offset payment of refinancing fees, stepped up capital spending supporting our long-term growth and additional share purchases during the first 9 months of 2021. Given our continuing positive momentum and adjusted EBITDA and by managing our net debt, our net leverage was 1.5x at the end of the quarter, well below our long-term range target of 2x and providing ample room for bolt-on acquisitions. Free cash flow for the quarter was 24.7 and $55.7 million year-to-date. And we have more than $400 million of unrestricted cash and liquidity at the end of the quarter. As we look forward to the remainder of 2021 and beyond, we believe we continue to have sufficient liquidity to execute on our capital allocation priorities of reinvestment in our businesses, programmatic M&A, and return of capital to our investors through both additional share repurchases and dividend payments. Now let's turn to Slide 8, and I will review our segment results starting with TriMas' Packaging segment. I will start by highlighting that our Packaging segment results for the third quarter included another record-setting sales performance with the highest sales ever for a third quarter. Net sales of $138 million increased approximately $2.9 million or 2.1% as compared to the year ago period. Our Affaba and Ferrari acquisition completed in December of 2020, contributed $11.4 million of incremental sales, while the impact of favorable foreign currency translation added another $1.9 million. On an organic basis, and as anticipated, sales decreased by 7.7% or approximately $10.5 million. Please remember…

Thank you, Scott. Let's turn to Slide 12. As noted, we are working diligently on our forward planning while seeking to close out 2021 strong. While we continue to operate in the pandemic period and navigate its related uncertainties, specifically changing demand levels, input costs and labor efficiencies, we are increasing our expected cash conversion outlook and narrowing and updating our sales and EPS outlook for the year. We anticipate full year consolidated sales to be up between 10% to 13% as compared to 2020. We expect to achieve this overall growth as a result of acquisition-related sales and a strong increase in organic sales, primarily within specialty products. These increases are expected to more than offset our planned pandemic-related sales abatement from the demand surge that we experienced predominantly in the third and fourth quarters of 2020 within our TriMas Packaging group. As we discussed throughout the year, TriMas Aerospace has been benefiting from stocking orders of specialized fasteners for certain customers. On a year-to-date basis, these orders, which totaled approximately $21 million in sales, have more than offset the decline in organic sales within TriMas' Aerospace group due to lower aircraft build rates. We expect to fulfill most of the remainder of the stacking order in the fourth quarter. As a result of the previously-mentioned increased input costs as well as slightly higher tax rate and less currency benefit than originally expected, we now anticipate full year EPS to be in the $2.18 to $2.27 range as compared to $1.92 per share in 2020, which is 16% higher than it was for the midpoint last year. We are also forecasting free cash flow to be greater than 110% of net income despite CapEx investment rate higher than our historical average of approximately 4%. As we start to look…

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

At this time, we will open the floor for questions. [Operator Instructions]. Our first question will come from Brendan Popson with CJS Securities.

Tom, I just want to ask if you could discuss the choice to start paying a dividend and capital allocation priorities and with the acquisition part of that, it sounds like you guys are seeing more opportunities, and it sounds like it's in packaging. Could you just discuss what exactly you're seeing that's exciting? And then is it going to follow the recent trend of Europe? Or is there -- are there things domestically too that you're looking at?

Okay. Thanks, Brendan. Hello. First of all, on the dividend, first part of your question, this is something we've been talking about for frankly a number of years. And with the onset of pandemic, it sort of went on hold, but as we saw, we continue to see the cash flow characteristics of TriMas, we can do as a company, all of the above. We've got a great balance sheet. We can continue share buybacks, we can pay a dividend we hope, and that brings additional demand in investors that previously may have looked at TriMas and like to put in their portfolio of companies that are dividend-paying companies. We hope that they'll give us a closer look now, of course, but also wanted to reward our shareholders, our current shareholders. Certainly, given the cash flow characteristics, the balance sheet, our capacity, we continue to have a significant amount of room to execute our plan for bolt-on acquisitions. And I can say on that front, our primary focus continues to be to build out our TriMas Packaging platform. However, we also will focus on opportunities, particularly during this period in the Aerospace area where we might see some opportunities given what we see a recovery over the next few years and build out that platform as well. I can report that we are busier on the M&A front than certainly my time with the company currently. And there's a lot of exciting opportunities, all sort of bolt-on size in nature, which are great deals for TriMas that we're hoping to bring home. I have nothing to announce on this call today. But hopefully, in the future or maybe even in the near future, we'll have some news on that front. But definitely very active on that front, very different than where we were a year ago, where just folks weren't even interested in talking about potential divestitures of their companies and today, it's a very different environment.

Great. I appreciate that color. Helpful a lot. And then just a short one here on your free cash flow conversion in excess of 110% of this year, it's just great. What exactly is driving that? And then is that something where we can expect maybe the free cash flow conversion, but under 100% next year is kind of a true up or is it just something else?

Brendan, it's Scott Mell. Look, I think the cash flow conversion is indicative of the underlying strength of our businesses from an operating perspective. I mean there's nothing unique relative to this year. And the expectation is going forward, given our cost structure that we'll continue to convert at a greater than 100% clip on a go-forward basis.

Our next question will come from Steve Barger with KeyBanc Capital Markets.

It's Ken Newman on for Steve. Tom, I appreciate the commentary on the $3 million hit on packaging margins from the higher resin costs, but I am curious if you guys can help us quantify just the other moving pieces in packaging margins in the quarter, including how much mix contributed or just exactly what the pricing contribution in the core was?

I think, on a comp basis, there were indeed a lot of moving pieces, but the biggest driver to perhaps higher earnings would have been the recovery or the lag factor on resin. But definitely, there were mix factors and certain end markets up, certain end markets down just given the strange period, frankly, Ken, of 2020.

Right. And I appreciate that you're not…

I'm sorry, Ken. I just also mentioned, like most companies, particularly in North America, we're seeing a drag on freight with freight lanes up being, in some cases, double than where they were a year ago, and that's certainly impacted our packaging business.

Right. That actually segues pretty well into my next question here, which is any incremental color that you're seeing within your supply chain. Obviously, you've mentioned freight. I'm curious how much has labor impacted the quarter, if at all? And if you have any comments on just forward expectations for SG&A expenses in coming quarters that we should be aware of?

Yes. So, let me just mention a couple of things. First of all, on the supply. I think one of the things that is of benefit and unique about TriMas is, for the most part, we're basic in the products that we manufacture. So we're buying raw materials, and we're converting them as opposed to buying subassemblies or other types of electronic components that go into the mix. So while this is very big news and understandably so for many companies, and this may, in some cases, even impact our customers, it's not necessarily a big impact for TriMas. We've got some great supplier partners, and we did run into this year, some tightness of supply, not even the economics, but the tightness of supply. And fortunately, we worked with them to make sure we got priority or where they couldn't give us priority, they helped us, and we helped ourselves in finding alternative supply. So these are things that we have been managing this year that, as I opened my comments with, just we're completely not even conceivable last year. And then on the labor front, you're raising a good point. In the overall scheme of things, if we didn't have material to discuss on this call or contend with or tightness of supply. I mean, the biggest driver would probably be labor and labor and efficiency. And we have some of our operations running at full-time to temp ratios that pre-pandemic were unheard of. And that's just a function of the current economic state we're in. And in addition, like other companies, it's tough to hire, so we're dealing with all of those factors as well. But that sort of, to me, makes this quarter and this year, so exciting and interesting for TriMas, that despite all of these various things that have been frankly thrown our way that we have largely through the TriMas business model, being proactive in nature, when we can and where we can, overcome them, not just through commercial actions, but also through our own self-help techniques because we didn't wait to sort of see how things ended at the end of the quarter. We took actions early throughout the year continuously. And I think that's why we were able to deliver the results we did this year and that we're forecasting for the balance of the year.

Right. When I think about the comment on the full-time that temp ratios, how should I think about that? Is that pretty evenly spread across all the segments? And just any color on just where capacity utilization is across the various businesses?

Well, okay. So let me take that reverse order. On capacity utilization, there's a lot of available capacity in our Aerospace business, of course. And in our packaging business and our Specialty Products business, we're fairly full. There's going to be various locations globally where there might be some pluses and minus to that. And then the other part of your question, which was on the temp and full-time ratio, that's an example of a few locations, which we'll call hotspots, which we're monitoring. Frankly speaking, over time, we'll bring that into balance, but it does take time. It's not something that an operation can fix in a week. It takes many months and sometimes could take even longer. And it's not in all cases. It's not something that is a situation that's universal around our manufacturing operations. There are some hotspots in certain parts of the country and then there are other parts of the country where it's less of an issue than we're seeing. So, it's just something that as a management team, we're managing through. But again, the TriMas business model is sort of our secret sauce on how we manage and operate TriMas allows us to stay on top of these, work with our operators, ensure they have the resources and the forward planning to make sure that we can overcome these issues.

Right. I appreciate that you're not guiding or ready to guide to 2022 yet. But as I kind of think about the initial comments for growth across the businesses in 2022, can you help me just think about the cadence for packaging margins relative to the pricing actions that you've implemented? And just when you think the mix begins to normalize?

It's a tough question for us to address in this call because I can put some factors out there, for example, if material prices start to come down, that will help us in 2022. Depending on various end markets that we're in, if mix changes in a more favorable way, for example, we've talked about industrial and pharmaceutical and nutraceutical, if those pick up into next year versus where they are this year, those will be benefits. So I'm looking to 2022, frankly, for TriMas Packaging to be an exciting year, not just organically, but I'm certainly hoping that we can add to the business through acquisitions.

Right. Last one, if I could just squeeze it in here. It looks like the specialty incrementals are expected to be around that mid-20% range at the midpoint of the updated guide for the fourth quarter, which is pretty similar to what you did in 3Q. So I'm just curious if you think about, should we expect 25% kind of this new run rate for incremental margins through the upcycle within specialty?

Ken, it's Scott Mell. I missed the front end of that question. Could you just give it back to me one more time?

Yes. I'm just trying to get a better sense of where you think run rate incrementals for the specialty business is through the remainder of the upcycle? It looks like the fourth quarter is kind of being implied at like a 25% incremental margin in 4Q.

Yes. I think it's going to be a little lower than that estimate, Ken. I mean, we obviously have optimized the fixed cost in that business. But without looking at the specific figures, my guidance would be, it's going to be below that estimate.

Next, we have another question from Brendan Popson with CJS Securities.

Just a quick follow-up, piggybacking on the labor talk. With the vaccine mandate approaching, I guess, how are you guys thinking about the potential impact on your labor with that? And what your plan is there? And just give any thoughts on that.

Brendan, that's a great question. We are actually working through gaining statistics right now for our workforce to see what by location are vaccinated population versus unvaccinated. We still do not have guidance like most U.S. companies with more than 100 people on what the approach will be from OSHA, how they'll regulate it. Our communication to our employees to date has been around that will, of course, follow the applicable laws at the federal level and at the local level as the case may be. And there are 2 options. For those that are obviously vaccinated, they have to just make sure that we have on file proof of their vaccination. And for those that are unvaccinated, they have to get tested every week, and that's the current indication on what's coming out of the current White House. So, this is what we're working with at this point, but we still do not have the [determinating] approach from OSHA on how this will be regulated.

And speakers, at this time, there are no further questions in the queue.

Well, thank you again, everyone, for participating on this call, and we look forward to updating you again next quarter. Please, again, stay safe and healthy. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference, and you may now disconnect. Please enjoy the rest of your day.