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Mark Zeffiro – Executive Vice President and Chief Financial Officer

TriMas Corporation (TRS) Deutsche Bank Securities Global Industrials and Basic Materials Conference Call June 12, 2013 4:40 PM ET

Unidentified Speaker

Good afternoon. We are delighted to have TriMas with us today. CFO Mark Zeffiro is going to present. They have an interesting story to tell. So with that let me pass it over to Mark.

Mark Zeffiro

Great. Thanks for everybody's attention and we are actually [sobering] something today. Yesterday we closed at an all time high for TriMas stock, since the original IPO in 2007, we closed at a record level for us a company. That just means what's ahead of us and where we are headed from here because the opportunities in our view, is the opportunities are real and ahead of us as well. I am going to spend a little time today in terms of an overview of financial highlights and outlook summary for us and then just it over to questions, and I am hopeful we will have a fruitful dialog around questions.

For those of you that are new to the TriMas story, over the last four years it's been basically a turnaround activity associated with the new CEO and CFO that the board brought in. And the strategies we have put in place have been nothing but stable through that entire period. So we are a diversified industrial company ranging through five verticals. Those verticals have one cycle and short cycle dynamics associated with it, ranging from our packaging business which is largely a specialty dispensing business with exposure to customers that we will go through here shortly. And energy business that’s largely MRO, downstream related activities. Everything from a technical bolts and gaskets that’s required to support customers in that market space.

Aerospace is largely in air-framing OE related support business with exposure obviously to both our friends at Boeing and Airbus. Engineering components is both upstream related oil and gas as well as industrial gas cylinders business. And then lastly our largest segment, and frankly our most improvement student, is the Cequent business with towing and trailering exposure. Not actually making the towables but actually making those activities safer. Now when you think about at such a diverse set of businesses, you obviously have to question as to how do you get synergy out of a company like that and the realities of it are, there is some commonalities within these businesses.

We are obviously very focused around proprietary products. Those markets are very focused markets, very defined known markets to us. And each one of these businesses compete larger than who they are individually in those particular market space through significant market share, with strong brand names and well established customer relationships. But we have also got an operating discipline and operating process that we run the company by either new and having tried and improved there over the last five years within the company through common operating processes that have driven, if you will, outstanding results. The opportunity for growth as well as productivity are consistent across those businesses and are expected out of the businesses and the foundation of good, strong cash flow generation.

Our customers are ones -- and I will focus here on the right hand side of the page first, blue chip oriented customers. Now there isn’t one there that I could point out and say I would like to fire that customer. They are very strong, very supportive with very long relationships. Our segment breakdown, you can see on the left hand side of the page with the geography. And the geography is still too down the south, too U.S. centric. And you'd notice in the first few months of the year we bought, actually shifted our tilt towards international acquisitions here as part and parcel of TriMas, by focusing in developing emerging countries as well as in countries whereby establishment or presence would actually advance us in terms of our strategic aspirations.

So what are those strategic aspirations? These haven’t changed in four years. They were established when Dave and I first took the helm of the company. We are generating high single-digit top line growth. Investing in growing markets through new products, geographic expansion as well as acquisitions that we have been very successful across the board. But the foundation for us as a company is 3% to 5% productivity. That 3% to 5% productivity is what we do to protect margins but also to fund our growth investments. When you do that, we expect earnings to grow significant faster than top line.

We have improved the leverage ratio over the last five years down to 2.x, whatever number you want to pick within our current period, ranging down from the 7 times lever when Dave and I first came on board. The reality is, we are focused on growth, productivity, people development, which has been core to us as an investment here most recently as well as the asset efficiency that we have been able to drive through cash flow dynamics for as a company. The growth prospects that we have as a company aren’t just about acquisitions though. We have clearly focused on bright spots within, if you will, beleaguered markets. If you want to call the U.S. market of 1% to 2% growth a growth engine, that’s clearly not good enough for us.

So we have spent time in terms of new products, new markets, as well as market share gains within our existing footprints, as well as bolt-on acquisitions. But the Rieke business for us as an example, and I won't read the entire page to you, it's available to you in our presentation, is all about really new specialty dispensing and closure systems for consumer related applications. That means we are dispensing metered [amounts matter] to us and ultimately technology and intellectual property matter to us as a company.

We have also been very successful in that particular vertical with bolt-on acquisitions in the last two years with acquisition and synergies from Arminak and Innovative molding. Our footprint on a global scale continues to advance. Lots of new dots, if you will, if you were to look at the map. And lots of new dots in places where we are expanding our commercial as well as manufacturing presence. If you were to fast-forward or fast-forward to see where these dots have been established in the last three years, it's more stuff in the U.S., significantly more in Europe and largely our entire footprint in Asia.

The productivity initiatives that I mentioned of are really fundamental to us. This is what we require in each and every business, each and every year, of 3% to 5% gross productivity. And this ranged, as we took the activity as an organization from 2010 forward, we started with a simple thing. Things that have been centralized or common across the industry for quite for a few years. That being ranging from low cost sourcing, low cost country sourcing, as well as buying things in aggregation. We have moved our way up the value curve in the last few years. And 2013 represents a bit of a different investment focused for us with respect to productivity. And that’s a lean culture. People engagement, six sigma, these are things that have been in place in broader industry for the last decade. And that just tells you the catch up that we continue to play and the growth that we have seen in our own productivity efforts.

We have clearly made great strides towards productivity in the company in terms of the natural process and the momentum that we have as a company. But there is still a lot of work for us to do here. So the financial highlights, and this is representative of the first quarter in 2013. But I would tell you that 2012 was a similar kind of story with 13.5% top line growth, which represents a record for us as a company with income up 27.7%, which again represents a record for us as a company. And then ultimately $0.44 a share within the quarter or a 12.5% increase which is on the back of actually 10% more shares outstanding, having essentially 12% more share outstanding.

So we have got good momentum not only from a top line perspective but also from an earnings perspective. And along the way, we are expected to be in terms of our cash flow usage within the year. We are very seasonal in that respect. But ultimately, the right position in terms of how much we spent in terms of acquisitions in the first quarter, right where we expected to be in terms of our total debt. Leverage as a company continues to be a good story for us. Obviously, dating back to when the company first went public and bottoming out in 2012 at the end of the year that is our year-end and is typically our lowest borrowing point as a company. And what you were able to see is a continued focus on reducing interest expense, our leverage ratio basically is static year-on-year, that’s really even in consideration of all the acquisitions and capital that we spent during that year.

$177 million worth of cash and the aggregate availability as made available to us by our supportive bankers. And, quite frankly, it's enough for us to do what we need to do on an operational strategic basis. So our outlook as a company is really focused around top line as well as obviously delivery of the bottom line. 6% to 8% top line growth. Recent acquisitions will add to this overtime. We are not here to upgrade our outlook at this point in time. Earnings per share of $2.15 to $2.25 which really represents more than a 19% increase versus 2012. And free cash flow between $40 million to $50 million, which we are clearly on track for the year. Our outlook, if those of you that have followed us more closely, you have seen that we typically update this chart each and every earnings period with and update here obviously coming at the end of June.

And what drives that for us as a company are really two major initiatives, not fast globalization. For us, you have to think about it across the five verticals for us as a company. The middle class utilizes or makes use of our product set or makes demand of our product set. So expansion in emerging markets where things are happening is much more [crucial] here for us, is obviously a long-term investment for us. North America obviously being relatively flat, so we have to find other places to grow. And that comes from the bright spots within our home markets.

Energy efficiency, in this context -- and Dave and I think about it in terms of not that we are environmentally green, but we are helping our customers and there pursuits of being more energy and otherwise environmentally friendly. Now what I mean by that, is by making their carbon footprint smaller, by making products that we make more environmentally safe and otherwise recyclable. As well as our ability to actually participate in, for example, aircraft fuel usage, and our efforts there to make those airplanes more efficient and effective. So we are not green, we are enabling people to be green.

So every year we compete a strategic plan and this is leading towards where we think we go the longest term, our strategic aspirations remain the same. But our 2014 and '16 plan really talks about our strategic aspirations for growth. Each business is identified clearly achievable growth plans, both by our product as well geographic expansion, with clearly the first three verticals packaging, energy and aerospace leading the way. We have a multi-year capacity ramp up necessary for those businesses to be able to support our customer at the longest-term, and we are prepared to do so and have the financing capabilities in our house to be able to do so.

Cequent, as I mentioned, is clearly the most improved citizen within the TriMas family. It becomes a global competitor. It becomes a global competitor with return on capital that is actually accretive to our shareholders as well as -- therefore to the company. And energy substantially completed its global footprint and actually starts to deliver on it. Its margin expectations of mid-teens in terms of operating profits. This would represent a sizable increase in value to anybody that participates in the TriMas shares and we are actually pretty proud of the fact that we have delivered on those strategic aspirations to date.

So for us the TriMas proposition really is a balanced portfolio whereby we have both short and long-cycle businesses ranging in different kind of industrial exposures, representing stability and forecastabiilty for us a company. Since Dave and I have been aboard, we are proud to deliver the results that our shareholders have expected and have benefitted from. That, combined with our focus on productivity as a company, not only through rationalization but also supply chain optimization, has allowed us to be able to fund our growth and expand margins in legacy businesses. We have seen some compression in margins, mostly near-term. But that’s largely a mix of the business and as a result of some of our acquired companies. Legacy businesses continue to perform quite well.

That combined with our growth opportunities, which I made mention of in terms of multiple projects in the businesses, whether or not they be geographic, or product or technology, or acquisitions in nature, clearly provide us with growth opportunities as a company. We have delivered that on a consistent basis since Dave and I have been in place. All this represents a sizable increase in enterprise value as a company. When you look back on the darkest of days, we are now a $1.3 billion plus market cap company, with aspirations to be significantly more than that through not only our growth around our core platforms, but also the earnings expansion that we expect out of that.

We have got clear goals that are highlighted -- that I have highlighted for you in terms of the focus areas around our businesses, that being investment thesis around our packaging energy as well as aerospace with cash flow being generated from our engineered components as well as Cequent [line] of business that have streamlined those processes where they will deliver on our proposition of increased enterprise value. So with that, I figured the best bit, to spend our time focused around questions, and I will take those at your leisure.

Question-and-Answer Session

Unidentified Speaker

Maybe I will start. Mark, maybe you could start by giving us a sense of what you are seeing in terms of your end-markets, packaging in Europe. What's happening in energy, aerospace, for instance?

Mark Zeffiro

Yeah, for certain. End market exposure and what's been happening. Now in terms of that, packaging energy, the European exposure wasn’t the drag for us in 2012. I think we have hit bottom. I think we have actually started to see and we have seen improvements in the dispensing side of the house and stabilization out of the industrial side of the house. North American packaging markets, especially the industrial side of the house, actually saw a good Q4. We have continuation of those markets here in Q1. So to that end, packaging is in a good place, very good place.

Energy, which is largely driven by capital expenditures, in terms of MRO activity as well as new installation, continues to do very well. The upstream exposure has been a little bit slower in Q4 and Q1, but in the grand scheme of things that we something that we anticipated and planned for accordingly. Aerospace, double-digit top line growth in terms of the legacy business. And most notably, the highest backlog we have ever had as a company in terms of the aerospace exposure. And then Cequent continues to surprise us. Continues to surprise us in Asia with high single-digit top line growth with obviously a large customer [blend]. But North America continues to perform very well. And that’s through share take as well as our own product expansion efforts. So in whole, things look pretty good.

Unidentified Speaker

Well, maybe give us, for those of us -- there is a question over there.

Unidentified Speaker

Thank you. With regard to the portfolio at times of acquisition or potential divestitures you have got the five broad platforms. Could you talk a little bit about possible use of adding or subtracting for that and whether or not you would consider using bonds to go back into, to grow that. Being a bond analyst, we miss you guys from the bond market so we would like that you come back.

Mark Zeffiro

Well, I am sorry you miss us, but quite frankly in [three] quarters, a lot of people miss us in terms of those bonds. So for us the acquisitions and divestitures, let's talk about the acquisition side of it first. We are low-risk taker when it comes to acquisition. We focus within the verticals we know and the businesses we know. And acquired business we know how to grow and or materially change. We have also taken a low-risk strategy in terms of relative size. When people are thirsty for growth, which I think many industries are very thirsty for growth, they tend to want to upsize the size of their acquisitions. We have been very disciplined in terms of not only the value but also your efforts to actually bring into the house quite a few acquisitions.

Last year, I believe it was seven acquisitions, this year we have already closed five. And they are more and more becoming focused around emerging markets and expanding our footprint into markets that are helping us grow along this turn. In terms of divestitures side of the house, of course, we never talk about divestitures in advance of it happening. And quite frankly, we have turned things around the edge of the portfolio in terms of things that we are most aligned with, automotive related products or things where we didn’t have a strategically compelling advantage. But I think that we are pleased with the product set and the portfolio set, and I am going to put this page up, which is the verticals. As a reference for us as we are thinking about this, if you look left or right, the first three businesses, packaging energy and aerospace, get their first bite at the apple in terms of the strategic acquisition capital. Now that’s not code for something that doesn’t financial sense, it just means that what we have prioritized in terms where capital goes.

And the last two businesses are largely focused around long-term cash creation and that’s how we actually support that long-term investment.

Unidentified Speaker

A couple of questions. First on packaging. How should we think about the margins, I think this point going forward, because there has been a lot of noise in the numbers due to acquisitions and like. And then secondarily on the energy, is the platform complete now, or -- I now you had got into Brazil, I believe there are other geographies you need to improve before we get on that runway to mid-teens margins.

Mark Zeffiro

For certain, packaging first. If you look at the legacy business and the relative margins on legacy businesses, they have been stable. In fact, in Europe, expanded. So it's healthy there. The two businesses we bought in the last two years obviously weren’t as healthy in margin rate as that of this sorts of businesses. Let's talk a little bit about those to add clarity there. Innovative molding was a, let's call it $24 million $25 million top line company, that is more than $40 million today. It was a 14%, plus or minus EBITDA company when we bought it, it's more than 20% today. But that’s still dilutive to the overall legacy business.

So we have improved the company 600 basis points in terms of its relative profitability and closed in on doubling the size of the company in two years. Arminak, the second acquisition, was 20% EBITDA business and it was about $60 million in top line volume. We expect that to see about $20 million worth of growth out of the business, if not more, in the first year of ownership. On top of it, they have improved margin rates from 20% to a little more than 20% at this point in time. So a little dilutive to that overall margin rate.

So margins are still very important to us as a company and we are still showing improvement. And for those that have participated in our analyst day, the 25% operating profit goal for that enterprise is still on track. It's three years out but it's still on track with what we expect to achieve. On the energy side of the house, for those that are new to this story, we have made investments in different places around the world. Europe has been the hardest [place] for us in terms of the investments that we have made there, in terms of the energy footprint. Why is it we choose to go in that direction? Quite simply, we are not going to leave a competitor unfettered. So we picked the fight. We picked the fight to that market to makes sure that we had a good footprint there.

Brazil, we have bought two companies, both a gasket company and a bolting company. And the outcome there is that we have actually given notice that we are a global provider of product. And we bought most recently, a company here in Asia, and also established ourselves in Singapore on a real scale basis. So I would tell you we are two-thirds, maybe three quarters of the way through the build-out. And over the next two-three years, we will be done with that build-out, and I expect to see margins to continue to improve as we get the operational efficiencies of the businesses we have already put in place.

Unidentified Speaker

Mark, on the TriMas operating system. You guys started in 2012 from, obviously, it takes a very long time to develop an operation excellence culture in a company. So maybe give us a sense of what steps are you taking to cultivate that within the organization.

Mark Zeffiro

For those that are newest to the story, TriMas operating system was basically the foundational discussion around lean and Six Sigma for us as an enterprise. We rolled that out and now have coaches in place in every one of the businesses. The implication here for us is that we expect this to be a feeder for our productivity engine for the many years to come. Having lived through the GE launch of Six Sigma as an enterprise and grown up in that culture, I would tell you that we are in the early days. But those early days are prosperous for us. As you see people, the light bulb is going off, going off in terms of lighting. And the importance here is that, for example, I took the entire finance leadership team and trained them on what's called [A3] problem solving techniques. It drives data base decisions, it drives metrics and measures, and it's a different way in which we solve problems. And I know that everyone of the teams already have projects in place.

So where we started with is operations back, finance forward, so actually meet in the middle towards how we are actually going to solve problems as a company. And it's early days. We are a year into it. It took GE many a year to actually get it ingrained into their operation. But I see real positive light for this for us, for many years to come.

Unidentified Speaker

On the acquisition front you guys are becoming more active internationally. You did it in Brazil. Obviously, it might be challenging to do overseas transaction, if you don’t have like a lot of infrastructure in place locally. So maybe help us understand what's your process? How do you mitigate the risk in terms of acquisitions overseas?

Mark Zeffiro

Yeah, that’s a great question, Karen. Basically when you think about acquisitions and something other than your home market, the question is, are you taking bigger risk. And the answer is, of course, yes. But I would tell you that we know the customers. The first thing we get to know is the market space, the second thing we get to know is the customers. We spend time with that customer set and making sure we understand what it feels like to penetrate in that market. And then thirdly, we started talking to a different possible target candidate. The most important thing is for cultural fit. And I am not talking about Thai culture versus American culture versus Chinese culture. I am talking about cultural fit in terms of how we run the business and how we run the enterprise.

And if you don’t make it through those basic, if you will, filters, being focused around operational excellence, being focused on long-term growth, being focused on delivering cash flow and have evidence associated with how you demonstrated that , you are not going to be a candidate for acquisition. And so far so good. But it starts with know your market, knowing the customers and knowing what those customers expectations are and then working the local market. The business unit presidents are obviously the funnel for that and they spend in a lot of time in end markets trying to understand what those targets might look like and what ones would be best fits for TriMas.

Unidentified Speaker

How about overall geographic footprint? So you are still pretty U.S. centric these days but increasing your presence in Thailand, for instance, with Cequent. Where do you see your international makeover time and what type of investments do you foresee yourself making over the next few years.

Mark Zeffiro

That’s a great foreign leading question. For us, the emerging markets, if you look at any person where GDP is ultimately aggregated as a total world, half of it is going to be in what we define as emerging or developing markets today and the future. Our footprint is going to mirror that for our customers. So hence we embarked on an effort to really reemphasize and emphasize our investment in those markets. So that’s where we are headed. We are headed to participate in that global growth and participate in that local market development and bring technology to those markets, whereby we actually can differentiate ourselves as a competitor in that space.

Unidentified Speaker

Maybe give us an update on what's happening with Goshen, and I know you guys have been investing in more efficient machinery in aerospace or maybe give us an update on the progress there.

Mark Zeffiro

How we are going productivity wise, that margin of the company. There is a couple of major things in the enterprise that are important to us here in the next 12 to 24 months and the first is the resourcing of a U.S. based manufacturing facility in Goshen, Indiana, to Reynosa, Mexico. This represents easily a $20 plus per hour per person benefit to us as an enterprise. And as such, we are largely underway. We have broken the point at which it's now about 50:50 production in the U.S. for this particular plant and it's ramp up facility in Mexico and we are therefore very much on track with where we are expected to be. But the expectation is that we will be 100% or nearly 100% by end of the year.

But this is actually part and parcel of an effort towards, if you will reinvest your utilization of our manufacturing facilities for the things that are more efficient and more effective as an enterprise. That is witnessed by the efforts that we have finished in Australia as well as doubling of our facilities in Thailand, as well as our reinvestment in terms of manufacturing principles in three businesses we bought in Brazil. As well as helping our aerospace business actually reinvest in itself from any machinery and a capacity perspective. Now what that’s important to us is depending on who you believe. 2019 or 2020 could be the peak associated with the next peak associated with the airframing activity. That represents nearly a double-digit growth between now and then in terms of the most recent, if you will, publication.

That double-digit growth will require capacity, capacity efficiency for us as a company. And as such, we have found different ways. Ways that five years ago would have been $10 million investment to do more like a $250,000 investment for the same kind of capacities. So we are making an effort towards making ourselves more efficient, more material efficient, more labor efficient in that business to actually support those customers over that investment phase over the next five years.

Excellent. I want to thank everybody for their interest in TriMas. I will still be here for the next five minutes or so to be able to take any side (inaudible) that you may want to have. Thank you.

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