Good day and welcome to the TriMas Third Quarter 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Sherry Lauderback. Please go ahead.

Thank you and welcome to TriMas Corporation’s third quarter 2022 earnings call. Participating on the call today are Thomas Amato, TriMas’ President and CEO; and Scott Mell, our Chief Financial Officer. We will provide our prepared remarks on our third quarter results and outlook and then we will open up the call for your questions. In order to assist with the results in review, we have included today’s press release and PowerPoint presentation on our company website at 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 390-6527. Before we get started, I would like to remind everyone that our comments today 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 later 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 or our presentation for the reconciliations between GAAP and non-GAAP financial measures used during this call. Today, the discussion in 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?

Thank you, Sherry. Good morning, and welcome to our third quarter earnings call. On our prior earnings call, we spoke about some of the challenges we were facing in certain of our submarkets as well as our expectation that we would see improvements begin to take hold as we move through the third quarter and into the fourth quarter, particularly within TriMas Packaging. Since that period, increasing inflationary and energy costs quickly spread to weakening consumer confidence. This turned into an abrupt impact in demand in some of our key consumer goods and end markets as several of our top packaging customers decided to bring their inventories into better balance for an uncertain period. This had compounding effect as it began to emerge at the beginning of our normal holiday season pipeline fill period, which starts in late August and ramps up through November. While we believe the demand impact we’re experiencing within TriMas packaging in the second half of 2022 is largely related to our customers deferring demand due to overstock inventories, TriMas is well positioned to navigate through this or any uncertain period. Moreover, we have several submarkets that are showing signs of strengthening, which we believe will translate to longer-term growth. Let’s turn to Slide 3, where I’ll take a few extra minutes to better describe some of the changes we are seeing in our geographic regions and primary markets. As a reminder, TriMas’ primary markets served include consumer products, which represent nearly 49% of our year-to-date sales; aerospace and defense, representing 20% of our year-to-date sales; and general industrial representing 31% of our year-to-date sales. All of our sales into the consumer products market and a portion of our sales into the general industrial markets are captured within our Packaging segment, which represents approximately 60% of…

Thanks, Tom. Let’s turn to Slide 5. TriMas continues to maintain a strong balance sheet and liquidity profile, which we believe positions us well to successfully navigate any short-term or even long-term market disruption while continuing to invest in our business for long-term growth. As of September 30, we maintained $378 million of unrestricted cash and availability under our credit facilities and had net leverage of 1.9x, even after investing $131 million of cash year-to-date for acquisitions, capital expenditures, dividends and share repurchases. During the quarter, we generated $15.4 million of free cash flow below prior year, primarily due to continued investment in search and critical inventories as we continue to ensure continuity of supply for our customers and manage through a volatile global supply chain. In addition, while not considered as free cash flow as we and most others define it, we did generate an additional $26 million of pre-tax cash proceeds during the quarter from the exit of our existing cross-currency swaps. Given the historical strength of the U.S. dollar versus the euro in the current macroeconomic environment, we made the strategic decision to monetize these instruments to further bolster our liquidity position. The exit of these swaps did not impact our net income or EPS. Finally, we are actively taking additional steps to further bolster our balance sheet. As Tom mentioned previously, the TriMas Aerospace team completed an earnings and cash generating real estate divestiture project during the quarter, and we have recently completed an additional property divestiture which through the use of Kaizen and rebalancing of our manufacturing footprint resulted in the monetization of another real estate asset. Together, these transactions should yield approximately $20 million of after-tax cash proceeds and earnings. We will continue to assess additional opportunities to strengthen our balance sheet as they…

Thank you, Scott. Let’s turn to Slide 9. As we look to the balance of the year and given the now persistent impact from the situation in Eastern Europe, derivative energy costs and global inflationary and consumer sentiment effects, we are anticipating a softer fourth quarter. We expect TriMas Specialty Products will continue to convert well on robust demand and TriMas Aerospace will make meaningful strides against balancing increasing demand to get into a much better conversion position in the first quarter of 2023. With respect to TriMas Packaging, we are taking a cautious approach to balancing our support infrastructure against what we believe is a temporal demand effect within certain of our product lines. We will continue to assess regional actions as necessary when we gain more visibility into first quarter 2023 demand. Additionally, we expect to benefit from an approximate $17 million after-tax gain due to a corporate-led property divestiture project in the fourth quarter, providing both cash and earnings benefit and which will help offset some of the temporary market disruptions we are continuing to navigate. Given our results today and what we anticipate for the fourth quarter, we are now expecting to achieve an EPS range for the year in the $2.10 to $2.18 range, which is a center point up of about 7% from our prior estimate. We also are updating our free cash flow outlook to be greater than 80% of net income as a result of the inflationary and other margin pressures, further investment in key inventory items given supply chain constraints as well as maintaining our planned CapEx spending to allow for future growth. In addition to free cash flow, as we define it, it is important to note that we also expect to generate approximately $55 million in gross cash proceeds…

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

[Operator Instructions] I’ll take our first question from Ken Newman of KeyBanc Capital Markets. Please go ahead.

Hi, everyone. This is Katie Fleischer on for Ken. He was unable to join today.

Hi, Katie.

Hi. So I wanted to start off on the Packaging segment. How much visibility do you have on the customer inventories here? And do you have any idea of when you’re expecting these conditions to stabilize if the demand continues at the current state?

Yes. Great question. It really is something that we’ve had to campaign all of our top customers to get a better handle on. So it varies by customer and actually by region and product line. The key point to understand is the period of high volume supply for us occurs during the 4-month period we’re in right now, and that’s not occurring. That being said, we do expect that the inventory that’s in the pipeline probably bleeds out through Q1, possibly a bit into Q2 of next year, and we’re back at a stabilized level. That’s the best we can tell. Probably on the conservative end, it bleeds into Q2 a bit. On the more optimistic end, it is towards the mid to late part of Q1. That’s the best we can tell, and it does vary by customer.

Okay. And then, just going off of that, if demand were to continue in this weak state that you’re seeing now, what are some of the things that you would adjust to account for that?

Yes, and another very good question, and that’s an area where we’re making assessments right now by geographic region and in some cases, by facility and by product line. So, we have not taken any flexing actions that we normally would and should if we felt that the period that we’re in with the temporary demand falloff would be more prolonged. So we’re not flexing any structural costs and to some extent, even on the variable side, this was such an abrupt change in demand that occurred to us that we’ve only taken minimal variable flexing actions.

Okay. Got it. And then one more from me, and then I’ll jump back in the queue. What was lower volumes versus price mix impact within that packaging segment? Do you have any visibility into that?

Mostly volume.

Mostly volume. Okay.

We had some slight uptick with price. But to Tom’s point, mostly volume degradation.

Got it. Okay, I will get back in the queue in case there anyone else.

[Operator Instructions] We will take a follow-up question from Ken Newman of KeyBanc Capital Markets.

Okay, thanks. So we’ve seen a bit of a pullback in both steel and resin prices lately. So I know we talked about this on the last call, but how should we think about the near-term impacts to margins across the 3 segments from a price-cost perspective?

So let me address generally steel. If we define steel as both steel and other metals, it’s a little bit mixed. You’re right. On the steel side, we’re seeing current market trends that are a bit lower versus where we started the year and exited 2021. It’s not really rolling through our numbers yet and I’m not sure how material it really will be, but it just has to do with the inventory that we have in our system and our forward buying contracts with our suppliers. That’s on the steel front. On the metal front, so we use a number of other metals ranging from exotic to aluminum, stainless steel, etcetera, different trends there. Those prices tend to be between stable and increasing. And that impacts mostly our Aerospace business. On the resin side, you’re right as well. There’s been a very modest pullback almost, I would say, stable to flat, which is great news. We could use an additional pullback certainly as we go into next year, that would be helpful. But it’s in our numbers today, and it’s giving us a minor benefit.

Okay, thanks. I think that pretty much covers everything I was interested in there. In terms of the Aerospace segment, can you talk about the supply chain visibility? I know you’ve been having some difficulties there. And any sense of what the inventory looks like going forward?

So when you talk about – is your question related to supply inventories to us or our customer inventories?

I guess if you could touch on both, that would probably be helpful.

Okay. So on the customer inventory side, depending on the product line, I would say that the inventory levels when we were in the pandemic that we knew were building are, in some cases, depleted now because the production rates have come back up, we’re seeing our order book is up 30% from where it was the last prior year quarter. We’re booking business out now almost into mid-2023. So there is really a surge in demand, which is, like I said, great news because from a long-term effect, that’s really what we wanted to see. I expected to see that, by the way, in 2023, and we’re seeing it in the second half. The challenging side is the supply base, because it was so stressed during the pandemic and predominantly on the labor front, was not ready for the snapback. So we have our sub-suppliers in certain of our important input materials are tight. And I know other companies in the aerospace world are seeing the same thing as we sort of check around. So where we have tighter constraints, we’re seeing what we can in-source or what we can source from other vendors that we might be able to quickly qualify. In some cases, as I mentioned, we have pulled in production of certain previously sub-sourced material because we wanted to stabilize our supply. So I would say on the sub-supplier market to us, it’s constrained and there’s not a lot of material that’s in the market available for us.

Okay, thanks. And then I guess going off of that, any visibility into the margins for the Aero segment? In the out year, do you see opportunities to expand those a bit, maybe back to like 2021, 2020 levels?

Well, certainly, we hope to expand our margins above the 2020 and 2021 levels. The area that we have in the back of our mind is 2019. And it was our hope as we restructured that business through the pandemic to get back to that pre-COVID rate. That being said, what’s changed since then are inflation that has set in and some other constraints. But we’ll go into that, I think, on our next earnings call as we give guidance for the next year. But certainly, I do expect to get some operating leverage as we convert on our order book that is in our books now and free up capacity from some of the labor and supply constraints that we’re experiencing today.

Okay. Makes sense. And then just two more questions from me here. I wanted to pivot towards M&A. I know you discussed this a bit in the deck, but can you just talk about what your pipeline looks like going forward? Maybe what you’re targeting when you think about M&A in the future?

Yes. Let me address it in relation to our last earnings call and before that. As we went into our last earnings call, the pipeline was not full, and there were just a few companies out there. And if we sort of go back to that period of time, what was happening was interest rates were increasing significantly. So the M&A market just sort of took a pause. That being said, I mean, deals have to get done for a number of reasons, family succession planning and other factors. And as we sit here today, we’re seeing a high activity rate of some, what looks like to us, quality properties that are right in our strike zone. They’re smaller in size, bolt-on deals, not likely to compete much with private equity buyers because of their size. And we see a number of opportunities, not only in packaging, but also aerospace. So given our balance sheet, we’re looking carefully at a number of deals. Nothing to announce today, but certainly items that are deals that could be actionable. We are still not seeing though, as you would imagine larger deals in the market. And predominantly, that’s because the competition for them would be very limited because of higher interest rates right now.

Yes, that makes sense. Okay. And then just going off of that, so when you think about capital deployment, what are you prioritizing? Is it M&A? Is it share repurchases? And how do you kind of go about making that decision?

Well, Scott and I were just talking about that this morning. And we’re looking certainly at the $55 million of cash that we brought in and sort of said, geez, that could be like a free company, through some great work that our teams did to unlock and unleash cash value to monetize some various treasury and assets that we had in our book that were not earning for us and turned that into a deal. So I would say in the nearest term, you’re likely to see us shift a little bit of our focus to M&A.

Okay. And of those three segments, is it really the Packaging and the Aero where you’re seeing those opportunities for M&A?

Yes. Look, and not that we wouldn’t look at a deal within Specialty Products, but I want to just note a couple of things about the businesses that comprise that group. So our Norris Cylinder business has a strong order backlog right now and the investments that we’re making there, and we’ve been on this pace for a couple of years and we’re making good progress, is related to factory floor improvement. So if we can continue to find additional capacity, we can grow and expand our sales organically at that location without having to add some acquisitions on that front. And basically, the product that we sell is pretty all-inclusive. So unless we wanted to get into a completely new cylinder line, that’s a whole different strategy, it’s too long to go into on this call. We can talk about it at one of our other one-on-ones. With respect to Arrow Engine, which we haven’t talked about for some time, we’re seeing the order book there increase significantly because, as you can imagine, the products that that business makes goes into applications to extract oil and natural gas in North America. And when we look at our current rates of crude and natural gas, I mean, there are some government regulation attentions that are out there, but nonetheless, our customers for Arrow Engine are placing orders again and that book is strengthening so we can expand that revenue across the current assets without necessarily having to do an acquisition. So we are looking at our Specialty Products Group to give us some nice organic growth, assuming that any type of inflationary or potential recessionary effects don’t impact those segments.

Okay. Just one more quick one from me. On the Packaging side, when you think about M&A in that segment, how do you reconcile that with this softening demand that you’re seeing this quarter? Is that really not even a factor because you’re thinking more long-term or do you see opportunities to work around that by expanding maybe in different product lines within that packaging segment?

Katie, that’s a great question because if you take, for example, one of our largest submarkets is Beauty & Personal Care. Almost 90% of our sales in Beauty & Personal Care are Personal Care. And our Personal Care business is the consumer product lines that are most impacted by consumer sentiment and some of the issues that we’re faced with today. So we have the ability to expand significantly in the Beauty area, and it’s an area that is high on our priority list to grow. In addition to that, Food & Beverage has been relatively strong during this period in total, and that’s an area where we want to continue to grow. Life Sciences is an area that we penetrated earlier this year, and we see that as a vast opportunity for growth. In fact, I would like in 5 years’ time to see Life Sciences to be a much more material part of our TriMas Packaging business. So, we have a number of submarkets and product lines to add to TriMas packaging even in this current environment. Now we might take a look depending on the geographic region and risks associated with that. But overall, we see a number of opportunities that could be exciting for us.

Okay, great. That’s good to hear. That’s it for me. Thanks so much for taking all these questions.

Thank you.

[Operator Instructions] We have no further questions over the phone at this time. End of Q&A:

Okay. There being no further questions, thank you for joining us on our earnings call. We look forward to updating you again next quarter.

This concludes today’s call. Thank you for your participation. You may now disconnect.