Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Sherry Lauderback - Vice President of Investor Relations & Global Communications

David M. Wathen - Chief Executive Officer, President, Director and Chairman of Executive Committee

A. Mark Zeffiro - Chief Financial Officer and Executive Vice President

Analysts

Joseph Bess - Roth Capital Partners, LLC, Research Division

Robert A. Kosowsky - Sidoti & Company, LLC

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

R. Scott Graham - Jefferies LLC, Research Division

Rudolf A. Hokanson - Barrington Research Associates, Inc., Research Division

Paul Karos

DeForest R. Hinman - Walthausen & Co., LLC

TriMas (TRS) Q3 2013 Earnings Call October 28, 2013 10:00 AM ET

Operator

Good day and welcome to the Third Quarter 2013 TriMas Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Sherry Lauderback. Please go ahead, ma'am.

Sherry Lauderback

Thank you and welcome to the TriMas Corporation Third Quarter 2013 Earnings Call. Participating on the call today are Dave Wathen, TriMas' President and CEO; and Mark Zeffiro, our Executive Vice President and Chief Financial Officer. Dave and Mark will review TriMas' third quarter 2013 results, as well as provide details on our outlook. After our prepared remarks, we'll then open the call up to your questions.

In order to assist you with your 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 8271871.

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 for a list of factors that could cause our results to differ from those anticipated in any such 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.

At this point, I would like to turn the call over to Dave Wathen, TriMas' President and CEO. Dave?

David M. Wathen

Thanks, Sherry. Good morning. Thanks for your attention and interest, and in particular, thanks to all of you who supported TriMas as we issued new equity in September. We take our responsibility seriously to invest this money well and to achieve the gains you expect. I will comment later on our upcoming actions and views.

Third quarter was another good quarter for TriMas, with revenue up 6% and an EPS of $0.64 per share, excluding special items, an increase of more than 25% compared to third quarter of 2012. Within these results, we had many moving pieces with actions focused on fine-tuning our business portfolio, the acquisitions and divestiture, improving the balance sheet, reducing interest cost and tax rates, multiple plant moves, integration of past acquisitions and spending on several potential acquisitions. As usual, Mark will lay out the pluses and minuses of these actions.

Now on Slide 5, I'll share a snapshot of our current activities and the environment we see in our diversified markets. Mark and I just completed operating reviews with each business, and I'm quite encouraged by the continuous improvements that our businesses are achieving. Our high-margin businesses are growing fast, and we have multiple activities underway to improve our lower-margin businesses.

We have all become used to the current market environment, 1% to 2% overall growth, industrial markets flat, energy markets still soft and many short cycle changes, so we continue to pursue the bright spots for growth.

Rieke sales in China continue to ramp up, and we now have a second dispensing plant in China nearing production for in-country sales. Eastern U.S. sales of food closures have achieved the level to justify installment capacity for this product in our Hamilton, Indiana facility. At Monogram, September revenue was an all-time record; new higher-capacity equipment is improving on-time deliveries nicely. Tempe is now producing 2 sizes of colors for Boeing, and faster shipments to China have evolved from occasional events to ongoing flow.

Productivity is occurring on 2 tracks, one is our capital investments in new plants and new equipment. The Cequent Reynosa and Juarez plants continue to ramp up according to plan, and the Melbourne Cequent plant is in full production with a higher capacity paint line. So we now have freed up the former plant for sale.

Rieke's #1 dispenser plant is achieving productivity for automating formerly manual processes, such that the workforce has decreased 20%. Monogram has installed 3 banks of new twin-spindle machining centers, and throughput and yield metrics show positive results.

We are also seeing productivity from our people's efforts in marine, sourcing activities and redesigns. I just saw our Greenbelt team in Huntsville, Alabama, who changed a process -- our press setup process that took machine uptime from 60% to 85%. Our Longview, Texas facility is using 2 newly approved steel suppliers with lower prices and consigned inventory. Our global services organization is successfully consolidating our freight lanes and vendors for both speed and cost improvements. We are actively working on other productivity projects to continue to both fund our growth activities and improve profit margins.

The combination of our equity raise and debt refinancing gives TriMas the opportunity to continue to grow -- pursue its growth activities. We've just announced our acquisition of Mac Fasteners, which is in line with our goal of growing our aircraft content in products we understand. We are pursuing some other equally strategic opportunities.

And our interest on training, career opportunities, clear communication and making TriMas a desirable place to work continues. A company's success comes from its people, and we are dedicated to attracting, retaining, motivating and rewarding the people who choose to work here.

I'm going to turn the call over to Mark, but first, a snapshot on Mac Fasteners on Slide 6 to help you see what a great strategic fit this is for us. Mac Fasteners is a leader in the manufacture and distribution of stainless steel aerospace fasteners and is globally utilized by OEMs, aftermarket repair companies and commercial and military aircraft producers.

This acquisition will enhance our product offering and add content for the growing aerospace industry. It complements our growth strategies for this market, diversifies our distribution channels and provides a more flexible manufacturing footprint with its additional production locations. In addition, Lamons recently acquired Basrur, a manufacturer of high-quality sheet jointing located in Bangalore, India. We are excited to further expand our footprint in this region with an experienced team and state-of-the-art equipment.

Now, Mark will discuss our financial and segment results. Mark?

A. Mark Zeffiro

Thank you, Dave, and good morning. During the third quarter, we were active on many fronts. First, we continued to face a challenging macroeconomic environment, with industrial-focused businesses experiencing more pressure. While these pressures are temporary in nature, the impact focused on volume mix challenges across our energy end market. Despite these challenges, we remain focused on delivering on what we can control and capitalizing on our growth initiatives, as well as securing several new global customer wins, delivering enterprise-level growth.

Second, we continue to acquire bolt-on businesses that add revenue through our new products, geographies or customers. We continue to improve the acquired businesses and have a track record of targeting acquiring and integrating complementary businesses that add value over time. Value-creation opportunities remain available.

Third, we remain focused on productivity and lean initiatives, some big and some small, that will optimize our footprint and improve margins. These programs continue to gain momentum across the enterprise. We enhanced our capital structure, providing even more liquidity and flexibility for our future initiatives.

Let's continue with a brief summary on our third quarter results on Slide 8. Our record third quarter sales were $356 million, a 6% increase compared to third quarter 2012 and growth -- with growth in 5 of our 6 segments. Our bolt-on acquisitions contributed significantly and as expected, to the top line with the remainder of the sales increasing primarily due to expansion in international markets and new customer wins, partially offset by unfavorable currency exchange.

Operating profit for the quarter was $40 million, excluding special items, with the related margin percentage of 11.3%, a decrease of 20 basis points as compared to the prior year period.

The next slide, Slide 9, provides an operating profit bridge excluding special items and corporate expense. Our productivity savings continued to offset economics, investments in growth and short-term manufacturing inefficiencies within the businesses, resulting from rapid and continued growth. We see continued opportunities for our lean enterprise. The market downturn at Arrow Engine continues to have a negative effect on margins in the short term.

Third quarter margins were also tempered by our recent acquisitions. Some of these costs are temporary in nature. And as we integrate these businesses, we will see real margin rate improvement. We have plans in place to enhance these levels and are committed to driving synergies, including growth, productivity and lean initiatives.

Going back to the third quarter summary on Slide 8, third quarter 2013 income from continuing operations attributable to our -- to TriMas would've been $26 million, excluding special items related to the restructuring cost associated with the sequence manufacturing footprint optimization, tax restructuring and the release of historical translation related adjustments as a result of the sale of Rieke Italia. This represents an increase of almost 30% compared to Q3 2012. We achieved a GAAP quarterly diluted EPS of $0.70 and $0.64, excluding special items. This is an increase of 26% compared to the $0.51 in Q3 2012, while absorbing the effect from more shares resulting from our September 2013 equity offering. We also had a bargain purchase gain of approximately $3 million on the acquisition of AL-KO towing assets for Cequent APEA, demonstrating we continue to be selective with our acquisitions, negotiating deals to maximize future returns and minimize the cash paid relative to value.

We remain focused on cash flow, and our results today are in line with our expectations and ahead of 2012. During Q3, we generated $18.5 million in free cash flow compared to $10.5 million in Q3 2012. We plan to generate $40 million to $50 million in free cash flow for the year.

We ended the quarter with approximately $480 million in total debt. After consideration of $209 million in cash on the balance sheet as of September 30, 2013, net debt was $270 million as compared to $402 million as of December 31, 2012.

TriMas ended the third quarter with $416 million of cash and aggregate availability under its revolving credit and accounts receivable facilities with a leverage ratio of 2.47x. We continue to target a leverage ratio between 1.75 and 1.5x for the long term.

Moving on to Slide 10. We have enhanced our capital structure significantly over the past several years and continue to do so during the past couple of months, starting with the September issuance of equity to support our strategic initiatives. Due to the support of our existing and new shareholders, we upsized the transaction, issuing 5.175 million shares of common stock at a price of $35.40. Net proceeds of $175 million are to be used for general corporate purposes, including future acquisitions, capital expenditures and working capital requirements. This will provide some headwind for our full year 2013 EPS of approximately $0.08 and approximately 13% dilution for 2014 due to the incremental share count. Dave will address specific outlook in his closing comments.

Due to the attractive credit markets, the company's strong financial performance, we also refinanced our credit facilities with terms better than our existing facility. We expect TriMas to benefit from the extended credit facility maturities, enhanced liquidity and capital structure flexibility provided to best position the company for future growth. This refinance will generate approximately $4 million in annual cash interest savings on a pro forma basis. We thank both our existing and new stakeholders for their substantial support on these initiatives.

At this point, I would like to share a few highlights on our segments, beginning on -- beginning with Packaging on Slide 12. Q3 Packaging sales increased 6% compared to Q3 2012, driven primarily by increases in specialty system product sales in North America, Europe and Asia. Industrial closure sales decreased during the quarter, a portion of which is related to the divestiture of our rings and levers business in Italy. Europe overall appears to have stabilized, although we have yet to see any significant improvement.

Our Ohio Beauty Park facility and our efforts in Asia continue to ramp up. During the quarter, we decided to proceed with a second manufacturing facility in China to provide an additional low-cost facility and additional manufacturing flexibility across the packaging businesses and support local commercial expansion in this market. The business remains focused on sustainable operating profit margins in the mid-20% range. End market growth prospects remain positive for this segment, and we'll continue to support the launch of new dispensing and closure products.

Moving on to Slide 13, Energy. Energy sales increased 5% for Q3 2013 compared to a year ago. This growth was the result of multiple initiatives, including our recent acquisitions in Brazil, United Kingdom and Thailand and incremental sales from our European locations as we gain new customer orders and share in these markets. These increases were partially offset by a reduction in normal customer shutdown activity at refineries and petrochemical plants. This week, our shutdown activity resulted in a less favorable product mix towards standard gaskets and bolts, which have lower margins than the highly engineered products. We continue to focus on margins in this segment and are pleased that our foreign startup locations are improving in profitability.

On Slide 14, Aerospace & Defense sales increased 27% in the third quarter, as we expanded our content on aircraft with the January acquisition of Martinic Engineering. We continue to experience higher order activity as aircraft build rates remain strong, backlogs remain at record levels, and we are proceeding with the ramp-up of our new facility in Tempe, Arizona. We've also been installing new, more efficient equipment for plant productivity and capacity gains. We expect this business to continue to grow as a result of good end market dynamics and our efforts to obtain new product qualifications, as well as expanded geographic coverage.

Our acquisition of Mac Fasteners announced today will expand aerospace product offering to provide content for the MRO in this market. In addition, commercial synergies and future product expansion make this an excellent addition to TriMas.

Moving on to Slide 15, Engineered Components. Q3 sales decreased 8%, primarily due to lower demand for engines, compressors and other well-site products as a result of reduced levels of drilling and well completions. This temporary volume stretch -- stress pressured margins in the quarter. Sales in our industrial cylinders business increased in the quarter, primarily due to market share gains both domestically and internationally, as well as new product successes.

On Slide 16, we show the performance of Cequent split into 2 segments. Overall, Cequent Americas sales increased approximately 8% in the third quarter as a result of higher sales level from the auto OE and retail channels. We continue to outperform the economy as a result of market share gains in new products. Our production move to Reynosa in Mexico is on track, and we expect it to be substantially complete as we enter 2014. As evidenced by our continued footprint optimization, we remain focused on making these businesses more efficient and are pleased with our results to date.

Cequent APEA, representing our businesses in Asia Pacific, Europe and Africa, sales increased 9% when compared to Q3 2012, due to the recent acquisitions. Our acquisition of Witter Towbars in the U.K. and AL-KO towing businesses in Germany and Finland allowed Cequent to leverage its full product line, commercial relationships and strong brands around the world.

At this point, I'll summarize our year-to-date progress on Slide 17.

We're continuing to invest in growth and productivity and we're realizing positive momentum. In addition to our organic growth, we have included 7 bolt-on acquisitions through September to expand our geographic footprint, product lines and customers. While these acquisitions come with incremental cost in the beginning, we have consistently proven that we will drive value from -- over time from these acquisitions. As of quarter end, TriMas had over $400 million in cash and available liquidity, as we are well equipped to achieve our strategic aspirations.

We are focused on continuous improvements on all fronts. Lean [ph] is the enabler to target and achieve productivity programs ranging from margin improvements to working capital efficiencies to capital structure enhancements to tax initiatives. We continue to make TriMas better and more efficient.

That concludes my remarks. Now Dave will provide some comments on the outlook. Dave?

David M. Wathen

Thanks, Mark. Now I'll share our updated 2013 outlook on Slide 19. In summary, we are still on track for a record year. As a reminder, we've consistently held outlook on our last 3 earnings calls. Now as we issued additional shares and are closer to the end of 2013, we are increasing our sales outlook by 2% to an increase of 8% to 10% versus 2012, based on strength in several businesses and continued success of our bolt-on acquisitions.

On EPS, we bridged the effect of the increased shares and the divestiture of Rieke Italia, combined to reduce 2013 annual EPS about $0.10, then tighten the range and increase the midpoint so that our updated full year EPS outlook is $2.10 to $2.15 per share. Free cash flow remains at $40 million to $50 million. This is all in sync with our ongoing consistent strategic aspirations.

Turning to Slide 20, our current look at TriMas in 2014 is positive, certainly meeting or exceeding our strategic aspirations. Our 2014 outlook will depend on our potential acquisitions in the next few months. We have solid tailwinds going into 2014 with most markets improving, attractive product programs, several high-value plant and manufacturing cost improvements, a little push on margin improvement from acquisition integrations and productivity projects and process improvements, being enhanced SIOP or sales inventory operations planning, information technology and dozens of Six Sigma projects. There are always some headwinds, but it's a shorter list for sure.

In summary, another good quarter, and we intend to keep improving and delivering results to justify the trust you put in us. Thanks. And now we will gladly take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Joe Bess with Roth Capital Partners.

Joseph Bess - Roth Capital Partners, LLC, Research Division

First, on Rieke Italia. Can you give us a bit of the rationale behind the divestiture? And what do you think -- how do you feel about the business in Europe at this point in time?

A. Mark Zeffiro

Joe, this is a strategic call in the sense of product that didn't initially match the long-term strategic aspirations of the packaging company at large. It was a non-intellectual-property-driven product line. We had already extracted benefits of this acquisition that was made more than 15 years ago at this point and otherwise potted it in the business. So this was something that was an improvement of the long-term aspirations for the packaging business.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Okay, great. And then switching over to the Mac Fasteners acquisition. Can you talk a little about the margins that it has and whether it will have a positive or negative effect on the Aerospace & Defense margins?

David M. Wathen

This is Dave. Its margins are similar to Monogram's, maybe a little lower. Also significantly, it's substantially a distribution business, whereas Monogram's -- it is substantially an OEM business. That's never pure, but substantially, that's its channel. So there are some advantages for us in, call it, cross-selling. But you'll see, you won't feel any margin damage in that segment. We wouldn't do it if we weren't -- if it wasn't real clear to us.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Okay. And when you say cross-selling opportunities, can you give some examples of which aircraft you could see this benefiting you?

David M. Wathen

Both businesses are on every platform you can name. But again the titanium fasteners out of Monogram tend to be used by OE. Stainless steel tends to be used in the rebuild industry and that sort of thing or on the less-technically intense aircraft. But I think what really matters to us is we are not -- we do -- we haven't traditionally pursued distribution per se. We use distribution when that's what the customer specifies, the end customer. This opens up an opportunity for us to pursue some of that. And the folks in Mac Fasteners understand it inside out. They'll bring a lot of horsepower to TriMas.

A. Mark Zeffiro

The other reality -- Joe, the other reality here is that the margins will report at a lower level as compared to our highest margin products within Monogram. But most importantly, this actually diversifies us just from just being just OE-related framing to MRO activities. So it expands our participation in the overall cycle for an offsite.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Okay, that's helpful. And then on the acquisition front, you mentioned you continue to see a robust pipeline. Can you give us an update on what you're strategically seeing as most imperative, whether it be geographic expansion, product scope expansion or distribution and channel support?

David M. Wathen

Number one, we always pursue strategic acquisitions in packaging and aerospace. We would like -- as you know, we would like another, call it, leg in the packaging business. Innovative taught us how attractive food markets are, and they tend to be noncyclical and all that, so we keep after that kind of thing. We've had 2 in Monogram recently. And while I'd never say never, we need some digestion time in that segment for a while. So the top of the list has to be in packaging. That said, we've still have got some geographic work to do in the Energy segment, and there's a few product enhancements around the -- in Engineered Components that could be quite attractive to us. So it's -- strategically, packaging and aerospace, opportunistically when we find the right ones in the other segments.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Okay, great. And then are you able to break down revenue growth in the quarter by acquisitions and legacy businesses?

A. Mark Zeffiro

Yes. It was predominantly acquisitions, as we offset some of the end market pressures that we felt in energy in the energy end markets. So it's 80-plus percent related to acquisitions.

Operator

And we'll take our next question from Robert Kosowsky with Sidoti.

Robert A. Kosowsky - Sidoti & Company, LLC

Yes. And just a quick question about the adjustment to get to the adjusted operating income. So basically, to get to that $40.2 million, it looks like you're adding back, say, $2.5 million of the gain line item. Is that correct?

A. Mark Zeffiro

That's correct. There's 2 pieces there, Rob. For clarity, for everyone, is that they're -- basic currency translation adjustments that from a GAAP perspective, we have a special item to pull out as nearly $1 million, but there was an operational gain on the sale of the business as well, and that's $2.5 million.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. So that's $2.5 million on the op...

A. Mark Zeffiro

Correct. Exactly right. That stays in the results. Currency translation has been outboarded from a special item perspective.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. And did you mention that there was like another $3 million bargain gain in the numbers, too?

A. Mark Zeffiro

Yes, absolutely. In the acquisition of AL-KO, and you'll see that in other expense, AL-KO, it was a bargain purchase. If you remember, those are pretty hard to come by, but we did a great job in terms of the negotiation and identification of the asset. And that's about $2.9 million offset in the other expense line by about $600,000 worth of currency pressure.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay, that makes sense. And then although as you mentioned, as far as Mac, you mentioned a flexible manufacturing footprint, I was wondering what that means because you bring some other products that you're making into their plants. Is that kind of something you're seeing?

David M. Wathen

Well, we could. I mean we are landlocked and building-locked in Monogram. We keep doing things to try to expand there, but we need more capacity footprint. We also have some ongoing pressure from the big OEMs who would prefer we have production in multiple sites, because of risk of, you call it, whatever, an earthquake in California or something. So this -- and we've had that as an issue for a while. This kind of conveniently closes that loop for us and gives us another footprint in an area of the country that's got quite a bit of this kind of manufacturing, so it's good for us from that standpoint.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. And I was wondering if you could drive a bit more onto the sequential weakness in Energy and on revenue and margins, and I know you mentioned product mix and weak turnaround times. And is that pretty much it, maybe kind of parcel out how some of the international markets are doing as well?

David M. Wathen

In the U.S., in particular, we would normally see a lot. We'd say we would normally see a lot of refineries go off-line and do major rebuilds, and those are good for us from a product domain and they tend to be a lot of the engineered product that's higher margins. A lot of those have been delayed, which is -- it's their own decisions but you have to believe it's probably because they're running pretty hard and they make choices of what can they delay at a certain amount of time, so you could call that, it just deferred something for us. International, there's really no soft spots. The expensive spot for us is Brazil, but we've known that, that's still a place that's building out and it's not maintenanced yet and of course, we make more money in maintenance, too, but we'll ride that for a while. Other than that, Europe is okay, where we're at, Spain and the North Sea and around the northern coast of Europe. And the places we continue to build out in Asia are good for us, too. So no danger spots there. There's a lot of acquisition integration going on, which we'd always rather get it done fast and spend the money up front, and so that will continue to put pressure on the margins in that business. But in the background, there's some good stuff going on. We've been doing some vertical integration. The Basrur acquisition is really about making something we used to have to buy, and we've got that going on in several places. We've got India versus China going on at cost. So in the background of all our costs, we've got some longer-term things that are good for that business. I've said it many times, I kind of grit my teeth with the short-term margins of that business as we build it out, but long term, that continues to be a business that I like a whole lot. And especially with now, we've got the work going on to improve the full supply-chain margins.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. And then, finally, when should we start to expect to see more kind of more pull in operating leverage from a consolidated basis? Is it kind of a 2014 event? What kind of -- what do we think...

David M. Wathen

You'll see some in 2014. We've got a lot of activity underway about, margins in the lower-margin businesses. Again, it's never quite this simple, but our operating premise as we grow the high-margin businesses, is we work more on growth in them and we've been working the margins in the businesses that are a little lower margin. The special case is the engines business within Engineered Components, and that's just soft drilling and really well completions in the U.S. and in Mexico. The single customer, Pemex, even though we don't serve them directly, we go through equipment builders and provide components to them, has been soft. And again, that's -- that will come, but it's just not this year and it makes the margins look bad. I don't think of it as a cyclical issue right now. It's more of a timing thing.

Operator

We'll take our next question from Steve Barger with KeyBanc Capital Markets.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

One more or 2 more Mac questions. Are the products typically spec-ed in or are they sole sourced for any of the applications they serve?

David M. Wathen

They're not spec-ed in and sole sourced like Monogram is. It's more of a -- again, never say never, but it's more of a generic product that's about availability. It meets a spec, but it does have to compete.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

And what's the size of the market opportunity for that product set? Or is there anything you can do going into that business to help it grow faster than the market? Do you have a line of sight on that opportunity?

David M. Wathen

Yes. It's a very large market. I would say this is a business that has been somewhat constrained on its growth rate due to its investment levels and type of equipment it runs. It's got a lot of processes we use to -- bidding processes and machining processes. In fact, Tom Aepelbacher, my headquarters manufacturing guy, is there today. We will both add -- we will add capacity and some capability for some more precision parts to the business and too early to put numbers around it, but I'm pretty encouraged by what can happen there. And plus, it's a solid statement. It's a stainless steel business, and there's a case for putting some titanium machining into it.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Got it. And I know we'll get 2014 guidance on the next call, and I'm not trying to get there too much, but just a conceptual question. If 2014 revenue grows at your aspirational rate of 8% to 10%, and as you look forward to what you can control in terms of price mix, productivity, the integration that you're going through for some of the deals, is it reasonable to think that free cash flow can improve from the $40 million to $50 million rate this year?

A. Mark Zeffiro

Hey, Steve, the answer is yes. The ability that we have to generate additional cash in '14 should be pretty obvious. The one thing we're not going to do, though, is we're not going to slow down investments in more productive facilities, whereby capital opportunities are there to make our businesses more healthy for our customers in the long haul. So what I will say is operationally, you should see more cash coming out and additionally, better overall profits. And at this point, I think we're pretty happy with the investments behind CapEx right now, and I'll leave it at that.

David M. Wathen

But you are asking the right question. You're seeing heavy spending on the new plants in Mexico, the new plant in Australia and all that, heavier this year than we've currently planned for next year. So the numbers will -- that heavy spending will be displaced more by savings. It's what we're trying to do. That said, we are ramping our plant, trying to breakeven. That isn't cheap.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Right. And you're looking at deals -- I mean, you've got a lot of firepower obviously in terms of acquisitions. You've highlighted packaging, aerospace and energy as the growth areas. Is it reasonable to think that you can deploy that $200 million in cash at EBIT margins that are above the corporate run rate of 10% to 11%, just broadly speaking as you look at deals?

David M. Wathen

Sure, yes. The caveat being we'll have acquisition costs and integration cost in the first months, but yes.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Sure, but just run rate this will be accretive to corporate margin?

David M. Wathen

Very interested. Yes. I'm very interested in being accretive and driving our margins higher, but we [indiscernible].

Steve Barger - KeyBanc Capital Markets Inc., Research Division

So depending on just some basic assumptions that would suggest that you have maybe $0.35 to $0.50 of potential accretion or balance sheet optionality when that $200 million is deployed over whatever time frame that happens, is that how you think about it or is it reasonable for us to think about it that way?

A. Mark Zeffiro

Hey, Steve, that's a great modeling question. What I would tell you is that as we're buying better businesses, margin rates of those better businesses are initially available and initially available to us. We're not at a place whereby when you think about a multiple of EBIT or EBITDA, probably more importantly, in terms of what we paid it to give you a more specified guidance there. But your thought around should operating margins be accretive in the acquisitions in which we buy, the answer should be yes. And probably even more importantly in some respects, EBITDA levels should be definitely accretive. Obviously, you can't initially pick the intangible number that you'd otherwise have to amortize.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Got it. And one last question, and I think you've answered this to some degree already, but free cash flow in 2010 and 2011 was more than 100% of net income. Last year, that was around 40%. This year, maybe it will be at 65% or so. But is it reasonable to think that as you go into 2014 and beyond, you have good line of sight on getting that conversion rate back up to more historical levels?

A. Mark Zeffiro

Yes. As you remember, Steve, is we have an underinvested enterprise for the better part of a decade that Dave inherited here. So what we're doing is we're making our way through that additional CapEx money here, as well as growth in places in which we don't operate today that requires working capital that we haven't had historically. So the answer is we're going to continue to improve. I mean, 40% to 60%, the question becomes how good can we get and how quickly do we get back to that 100% conversion level?

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Got it. And since you brought up working capital, I'll ask one more. Are there any of the businesses that are really out of line relative to where you think they should be right now? Or does any one segment have a lot of opportunity to unlock a lot of working capital going forward more so than the others?

David M. Wathen

Well, there's always -- yes, there's always some improvement opportunities. That's what guys like us do, right? Just the downturn in sales in Arrow has made the turns number look pretty bad. That said, it's got a big parts business. It's gotten a lot more complex. That business has quite a bit of opportunity. In the segment, though, you've got the opposite going on in Norris, where the turns are very high and unlikely to improve. So it gets a little disguised by that in the segment reports, but Arrow has some opportunity. Lamons' ones -- more working capital than I'd like. I understand exactly why. It has to do with supply chain, it has to do with the changing sales points, [indiscernible] inventory, the work underway in that business for modeling. I mentioned SIOP because it gets my attention. Sales, inventory, operations, planning, the techniques for that, how to run in a lean manner, we've got a lot of upside in that. We've a combination of -- part of it is aided by systems, but it's mostly the practices and the tools that you use in running. So yes, we've got working capital improvements to do, and they are in Arrow, and they're in Lamons are the bigger ones.

A. Mark Zeffiro

Yes. The only one I would add, Dave, would be Cequent at large.

David M. Wathen

Cequent at large could be better. Again, somewhat -- I mean, we are still running multiple warehouses in North America as the footprint changes. And that won't wash out until the middle of next year.

A. Mark Zeffiro

Yes, exactly right because if you think the changes that both the Asian businesses, as well as North America businesses are undergoing, Steve, you've got -- you probably have higher operating working capital right now than as is on a steady-state basis than they ultimately will need.

Operator

We'll take our next question from Walt Liptak from Global Hunter Securities.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Let me ask a couple of them. On the energy business, you mentioned that there's been some delayed downtime, which is putting off some of the maintenance. Is there an expectation that revenue would come through in the fourth quarter? Or is it 2014?

David M. Wathen

I'd say it's more next year. We can see a quarter ahead on the shutdowns. They have to schedule them. It will come. I mean, they have to do the rebuilds, but they have some flexibility when they do it.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Okay. And this is just delays? I mean, this has to come through at some point?

David M. Wathen

Yes, this is just -- yes. If you dive into one of those reports about refiners and petrochem plants and how many are online and how many changed hands and all that, you can kind of see it going on in the background, and it's making the ones that are running have to keep running.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Okay, got it. I wonder if we can get some color on the aero business. How much did it decline? Was there a loss during the quarter? And I guess I'm wondering about what the outlook for that business is for next year because some of the energy-related spending is down pretty good.

A. Mark Zeffiro

Yes, I will go down this path. Well, obviously, down within the businesses. You're down, let's call it, about $5 million or so in the Arrow business. In terms of whether or not it's making money or otherwise, it's not something that we typically talk about at that level of detail on an SBU, but it's still generating positive cash and it's going to generate positive cash for the remainder of the year.

David M. Wathen

Yes, there's a lot of change going on in that industry. You've got Luffkin [ph] being bought. You've got a lot of [indiscernible] on our customer list and it just changes things over the short-term. Then I've mentioned Pemex as going slow on their investments, and a lot of their fields use pump jet kind of pumps. And so again, that will come. So I, it's -- but the energy business is going through a lot of change. The industry is, and we're scrambling to get ourselves configured correctly for it.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Okay. So is there an expectation that this starts coming back 2014 or...

David M. Wathen

Sure. Yes, yes. I mean, but it's not a business that I'm in the mood to say all things are awful unless cut it in half. It's not that -- it's not a cyclical downturn as much as a set of changes that we've got to keep fine-tuning products and channel and all that for.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Okay. So you're not going to have to do a restructuring?

A. Mark Zeffiro

We've already...

David M. Wathen

We've done what we need. So that sized it for what we're seeing.

A. Mark Zeffiro

We already resized the overhead of the business to a large extent, including obviously, the effects associated with production levels. So that's already been done well. The broader issues, as Dave may have mentioned, is are we going to do something drastic with product lines or something like that, the answer is no.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Okay. Okay, good. And then just on the acquisition, I wonder if you could help us with -- I didn't hear any comment; maybe I missed it -- on accretion from the deal or what the EBITDA level is?

A. Mark Zeffiro

To that end, Walt, our typical process is that we expected to be EPS-accretive, as well as cash flow-accretive in the first year. So that kind of guidance and thought process around our strategies around acquisitions remains the same. In terms of the devaluation, in terms of what was paid, this is at the higher end of the multiples of what we have paid for things in the past, and that's kind of where we are.

Operator

We'll take our next question from Scott Graham with Jefferies.

R. Scott Graham - Jefferies LLC, Research Division

My only question is really about the -- most of my questions have been answered, about the dilution from the equity deal. I think you guys said $0.13 a share on a full year basis. What -- we just...

A. Mark Zeffiro

$0.08 a share. Let me just make sure we got the right numbers, $0.08 a share full year effect in '13, 13% dilution in 2014.

R. Scott Graham - Jefferies LLC, Research Division

13%. I'm sorry.

A. Mark Zeffiro

That's okay. I just want to make sure we got the right numbers.

R. Scott Graham - Jefferies LLC, Research Division

Yes. Why would it be $0.08 and before, because that's essentially fourth quarter. Why would it be that much?

A. Mark Zeffiro

It's largely fourth quarter, but it's obviously the weighted average number of shares outstanding that you end up having across the year.

R. Scott Graham - Jefferies LLC, Research Division

Right. Okay. Okay. I did actually have one other question. And it was about the energy business, which I know you guys have a very big focus on improving the margins in the business. Would you -- if we looked at the margin from a year ago of 8% versus the 3% that we saw this quarter, would you guys attribute all of that to the mix from the refinery pushback?

A. Mark Zeffiro

In large part, yes. What I would tell you is that a good significant contributor to that is that, and that's the effect on the margin that we had. There's clearly some effect that we have. The year-on-year equivalent of that in terms of our Brazilian operation is maybe a slight contributor as well, but that's really largely it.

R. Scott Graham - Jefferies LLC, Research Division

So we started to see this margin bottom out in the second quarter, and then we had this situation. That's kind of what I'm trying to isolate. Would you expect fourth quarter margin on a year-over-year basis to be then lower again versus last year? Or do some of the productivity start to really run through there and boost that margin?

A. Mark Zeffiro

Yes. I would tell you that in terms of thinking about that, in terms of margin rates year-on-year, you're going to see some continued pressure in Q4, but sequentially, you should start to see a turn.

Operator

We'll take our next question from Rudy Hokanson with Barrington Research.

Rudolf A. Hokanson - Barrington Research Associates, Inc., Research Division

Several questions. One, I just wanted to make sure that this is just sort of like a fact check. Is Mac Fasteners the #7 acquisition?

A. Mark Zeffiro

Yes. Yes, it is.

Rudolf A. Hokanson - Barrington Research Associates, Inc., Research Division

Okay. I just wanted to make sure since it closes in October. But okay, and then on acquisition...

A. Mark Zeffiro

It leads pretty -- I'm sorry, if you look at, including Basrur, it's actually the eighth acquisition for the year.

Rudolf A. Hokanson - Barrington Research Associates, Inc., Research Division

Okay. And on acquisitions, would you care to maybe -- I don't know if the word speculate is right, because that doesn't sound quite as guided as I'd like, but what size acquisitions do you see in the pipeline? I mean, how high up could they go? Because you make a lot of bolt-on acquisitions, but right now, with the strength in the balance sheet, I was wondering if it might make you braver or if -- and braver is I know a strange term as well, but could you maybe speak about the size of type of acquisitions in the pipeline that you're looking at?

David M. Wathen

Rudy, there are some larger ones. We left our board review, a board meeting ago with some request from the board to look at ones that are maybe twice as big, not 10x as big, a couple times bigger. A part of that driven by my premise that we have done a lot of acquisitions of semi-bolt-on [ph] companies and had to do a lot of fix-up and we eat the cost of that as we go through it. And while we could afford to continue to do that financially, we're kind of running out of what I would call management horsepower to work on those things. And it's time to shift more towards a little bit better businesses and a little bit bigger. So think of them as a couple 3x bigger, but not -- certainly not 10x bigger. Still bolt-on. All right, I don't see -- I didn't really foresee us getting out -- I don't see us adding new segment. I want us to fit in something we understand.

Rudolf A. Hokanson - Barrington Research Associates, Inc., Research Division

Okay. On the Engineered Component side, as we're looking at that, is -- are the sales there ever such that you would be getting maybe 3- to 6-month lead on like request for proposals in terms of the number of items that might be needed for a major job or planning for completions by a customer? Or are these much more -- pretty much you get the order and you ship it within the quarter?

David M. Wathen

It's more of the second. It's a fairly short-cycle business. I mean, we -- the folks who run that business read all the same drilling reports and all that, that all of us can get. But we tend to be -- our product is used at completion. And at the time they decide to turn it on, of course, we also watch the ratio of how many wells are completed and then not turned on because somebody's waiting for the price to change for natural gas or something like that. So yes, the answer is it's a short-cycle business. We see some longer-term strategy, but most of it is we have to respond quickly and build fast for an order or haven't started.

Rudolf A. Hokanson - Barrington Research Associates, Inc., Research Division

Okay, okay. And then a question on Lamons. And looking at the refineries, especially I'm thinking right now in the United States, I heard recently, and I'm not sure if it's been done or just under review, where because of antitrust laws, the refiners haven't been able to really talk to each other in the past about when they were going to go through shutdowns and maintenance work because everybody thought that would be manipulating the market, but what we found in the last couple of years is that they all might go down, not all of them, but a significant number of them might go down at the same time because they couldn't coordinate it, and then we get spikes in gasoline prices. And in the government now, there are people in the government who are looking at this as to how to allow the refiners to talk to each other in order for some kind of stability in the market, so that when one goes down, the other one can keep operating and we don't get these shortages. Have you heard anything about that? And if that were the case, would that help in some of your working capital issues there?

David M. Wathen

Yes. I mean, if we hadn't scheduled out, yes, it would help. A lot of us would schedule it out further and do a little more staging. I don't know -- I can't say that we're seeing any of that for real though. I think it's more of a we watch each other and they watch their demands and make their own short-term decisions and just keep us on the string for when it comes. Therefore, the business remains pretty short cycle, even though its own supply chain is long. I mean, that's the difficulty of that business.

Operator

We'll take our next question from Paul Karos with Whitebox Advisors.

Paul Karos

Just a quick question, do you have like an approximate organic, this will be at the corporatewide level, organic growth for the third quarter, maybe versus -- the year-over-year versus the second quarter year-over-year?

A. Mark Zeffiro

Yes, Paul. In my comment, I made the reference to about 80% of the growth was related to acquisitions. Therefore, the remainder, obviously, would be organic.

David M. Wathen

And it was closer to half and half earlier in the year.

A. Mark Zeffiro

Yes.

Paul Karos

Okay, so second quarter is more half and half?

A. Mark Zeffiro

Exactly right.

David M. Wathen

That's not the dropoff, it might sound like. That has more to do with quarters in the past and comparisons. But yes, you can see the acquisitions having more impact now than sometimes for us.

Operator

[Operator Instructions] We'll take our next question from DeForest Hinman with Walthausen & Co.

DeForest R. Hinman - Walthausen & Co., LLC

Just to go a little further into the organic growth?. Could you break that down by the segments, some of the organic growth trends you're seeing within the different segments?

A. Mark Zeffiro

You can see sequential as well as continued growth that we've lapped the 1-year basis, and in packaging, that's probably more related to equal organic growth. Energy, you saw a compression in North America. Largely, the growth is coming through the acquisition activities that, that business has had. Aerospace & Defense is largely on the back of the Martinic acquisition. Engineered Components is a tale of 2 cities. It's all organic-related activities, and Cequent Americas is largely organic in nature and Cequent Asia Pacific, Europe and Africa is largely on the back of acquisitions. But I don't have -- it will obviously be in the Q that will be out -- later out today that will be available for you at that point.

David M. Wathen

Kind of on the other axis, we've got growth rates on aircraft build at Boeing and Airbus. That's helping that business organic. It actually helps the traditional business and it helps Martinic.

DeForest R. Hinman - Walthausen & Co., LLC

Okay. So the quarterly results for the packaging were quite good. so we had a organic number and we had some very good margin expansion building off a sequential number that was also very good, and I think on the last call, I was wondering how the results improved sequentially so much within the packaging business. I think you had said there were some one-time help in there.

A. Mark Zeffiro

Yes, if you look at it, the operational gain of the sale of Italy, $2.5 million is obviously in the operating profit that you would see in that relevant segment. If we were to just do a comparable quarter-to-quarter sequentially, the margins are largely the same.

DeForest R. Hinman - Walthausen & Co., LLC

Okay, can you just say that again then? Because I'm backing out that one-time item, I'm getting 28.5% operating profit. So there's something else in there as well?

A. Mark Zeffiro

Yes, there is. There's 2 pieces associated with the gain from an accounting perspective, one is a currency translation adjustment that we've special itemed and pulled out. That's $7.9 million plus/minus. There's also an operational gain on the sale of the business itself, namely the assets and the like, that actually reports through in terms of gain on sale of the asset of the business of $2.5 million. So one special item and the other one is not. But just to do a comparable quarter-on-quarter basis, the margin rates are largely the same.

David M. Wathen

About 25%.

A. Mark Zeffiro

Yes, about 25%.

David M. Wathen

About 25%, which we think of as the, I call it, optimum -- operating profit margin in that business. And I always say we'd like it to be there long haul and we'll hit it when it runs it next to that. That said -- don't count on it always being there because we've got a lot of activity in the business.

DeForest R. Hinman - Walthausen & Co., LLC

Okay. But I mean, just for projecting forward, there has been some volatility in that operating profit margin line in the past. Are we getting more towards where we can start thinking about some more consistency within that, that the business is kind of trending more upward over time?

A. Mark Zeffiro

Yes, what's interesting here is obviously we've digested 2 acquisitions and we're making clearly clear improvements in those businesses. So when you saw, obviously, some volatility as a result of those one-time effects associated with purchase accounting and all that kind of good stuff, and that was largely the volatility. The organic business or legacy business is consistently done pretty darn well. So the long-term view of this that we've disclosed externally is about a 25% operating profit. There's just -- that's what we like to see the year run at, and this actually represents 2 quarters in a row whereby the business has actually delivered on that. So we're continuing to make good improvements.

Operator

And we'll take a follow-up question from Robert Kosowsky with Sidoti.

Robert A. Kosowsky - Sidoti & Company, LLC

Yes, just one other question about the longer-term margin projection of your company. If I back out the gain that was in there, I can get -- this year, I'll probably be looking for like a 10% operating margin versus 12% in 2011. And is there any reason to think, given that revenue is now $300 million more 2013 versus '11, that you can't get back to that 12% operating margin because there's just been -- it seems like [indiscernible] investing and just we're not getting any of this operating leverage coming through?

David M. Wathen

No, you can -- I expect us to be able to run at that rate or a little higher. And we'll always try to explain what's gotten us off of that, but I know that's -- we are capable of that kind of an ongoing margin rate.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. And you think it's just basically the complexity of the business where something is always up and something is always down or something like that?

David M. Wathen

There's some of that, but we're also -- well, I'd mention. We have been doing acquisitions that needed a lot of work to pull them up. We are doing a lot of footprint changes, et cetera, et cetera. So the long-term margins and versus our peer group, that's important to me, and you will see us continue to improve.

Operator

And we have no further questions in the queue at this time.

David M. Wathen

Well, all right. We sure appreciate the attention. Thanks again for your support on our equity raise, and we will -- we -- you know we intend to invest that wisely and continue to improve TriMas. So again, thanks for all your support, and we'll talk to you another time. Thanks.

Operator

That concludes today's conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TriMas Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts