TriMas Corp (TRS) 2005 Q3 法說會逐字稿

Welcome to the TriMas Corporation third quarter 2005 earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Monday November 14, 2005. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Skip Autry, Chief Financial Officer for the TriMas Corporation. Please go ahead sir.

Thank you and welcome to our third quarter 2005 conference call. Our President and CEO, Grant Beard, and I will review TriMas' third-quarter results. To facilitate the review, we have provided a press release and PowerPoint presentation on our company Website, TriMascorp.com. After our prepared remarks, we will have a Q&A session for the audience.

Also present with us today from TriMas is Bob Zalupski, our Vice President of Finance and Treasurer, and David Mosteller (ph), our Director of Finance for Operations.

A replay of this call will be available later today by calling 800-633-8284, with reservation number 21268580.

Please note that certain information on this call may be forward-looking and contains statements based on our current plans, expectations, assumptions and environmental trends, which may affect the Company's future operating results and financial position. Such statements involve risks and uncertainties which cannot be predicted or quantified and may cause future activities and operating results to differ materially from those discussed. These risks are more fully discussed in our filings with the SEC.

At this point I would like to turn the call over to Grant Beard, our President and CEO.

Thank you, Skip. Good morning to those participating in TriMas' third-quarter earnings call. Today we will look at our third-quarter financial and operating highlights; then we will have Skip profile the financial performance and capitalization of the Company at third quarter end; then we will look at the priorities of the quarter that we're in as we conclude 2005 and look at the focuses for TriMas as we enter 2006; and then we will open up the forum for Q&A. For those following along with our deck, I would ask you to please turn to our first slide titled 2005 third-quarter financial highlights.

TriMas had sales of $270.9 million in the quarter, representing an increase of 13.8 million, or a 5.4 increase over the same period of 2004. Steel surcharges recovered from customers had a negligible impact in the third quarter of 2005 versus the third quarter of a year ago. With the exception of our Fastening Systems Group, which was flat, each of our other business segments had year-over-year revenue growth in the quarter, primarily reflecting the benefit of our new product introductions and market share gains.

In the second half of 2004, our Fastening Systems Lake Erie Products Group business was working through a significant backlog of orders driven by demand spikes at Caterpillar and John Deere, which do distort the comparisons between reporting quarters. Order and inventory levels at these customers have normalized in the quarter versus any market or share deterioration.

That said, sales within our Rieke Packaging Systems, Cequent Transportation Accessories and our Industrial Specialty Groups have increased 3.8, 1.2 and 18.6%, respectively. TriMas had adjusted EBITDA within the quarter of 26.8 million. This, however, represented a decrease of 4.2 million as compared to the third quarter of 2004. The reduction in adjusted EBITDA is attributed to lower material margins, primarily within Cequent. This impact was partially offset by the variable and fixed cost reductions related to our Road to Recovery initiatives which we have previously profiled.

In addition, higher material costs at Rieke Packaging Systems were partially offset by better conversion and product mix within our Fastening Systems Group and across-the-board earnings expansion within the Industrial Specialty Group of companies.

Turning to the next slide, TriMas reported third-quarter operating profit of 18 million, or a decrease of 2.9 million when compared to operating profit of 20.9 in the third quarter of 2004. The impact of reduced sales volumes and increased material costs, again, principally within Cequent's Towing and Consumer Products business units, more than offset the continued strong earnings performance in our Industrial Specialties and Fastening Systems business segments.

Lower margins of approximately -- excuse me. Lower material margins of approximately 12.7 million were partially offset by reductions in virtually all variable and fixed cost categories of approximately 6.9 million. Expenses related to plant consolidation and restructuring activities decreased some 2.9 million to 600,000 in the quarter, compared to 3.5 million in the same period a year ago. The Company also provided a $1.5 million reserve for accounts receivable within the quarter for two customers who filed Chapter 11 bankruptcy -- Collins & Aikman and Delphi.

Our third quarter 2005 net income was $200,000, or $0.01 per share, versus net income of 2.2 million, or $0.11 per share in the year-ago period. Aside from the reduction in operational income, our net income was also impacted by increased borrowing costs, 1.4 million, due to higher interest rates even with lower averaging borrowing levels within the Company and increased other expenses, $600,000, due to greater use of our receivable securitization facility, and incremental costs -- again, $600,000 -- related to the renewal of this securitization facility in July of 2005. That said, our third quarter 2005 tax provision does reflect the benefit of adjusting our full year effective tax rate for revised estimates of reported pre-tax income for the year.

Turning to the next slide, the Company's total debt including AR securitization at September 30, 2005 was 753.9 million, a decrease of approximately 30 million compared to the levels at June 30, 2005. This reduction reflects in a sense our conclusion of our investment in restructuring initiatives and our focus on working capital reductions, especially within our Cequent aftermarket businesses. TriMas finished the quarter with 162.5 million of net operating working capital, or 15% of sales. This compares to 181.1 million, or 17.6% of sales for the comparable period a year ago.

The Company's LTM EBITDA, bank EBITDA, was 145.6 million, which supported our lending ratios. Our leverage ratio at quarter-end was 5.18 versus a covenant of 5.65, and our interest coverage ratio was 2.04 versus a covenant of 2. TriMas had 2.2 million in cash at the end of the quarter and the Company had some $68 million in available liquidity under our revolving credit agreement.

Turning to the next slide -- within our Cequent Transportation Accessories Group of companies, our third quarter 2005 sales increased 1.5 million to 126.7 million, or 1.2% from the 125.1 million level reported third quarter of '04. Cequent did experience lower demand for its towing products in its wholesale distributor and installer markets than a year ago. That said, these channels do have cautious optimism coming into the 2006 tree buy (ph) season. We as a company, however, are being conservative in our outlook due to the potential impact of rising interest rates and uncertain as prices.

Within Cequent, our Trailer, Electrical and Australian businesses reported both increased revenues and earnings in the third quarter of '05 as compared to the same reporting period a year ago. Adjusted EBITDA for the Group decreased 5.3 million to 12.2 million for the quarter, from levels of 17.5 in the third quarter of a year ago. Our operating profit was 8 million, or 6.3% of sales, compared to 12.7 million, or 10% of sales in the year ago period. As we stated, our earnings deterioration is a direct result of the modest volume decline in the deterioration of material margins driven by prior period steel costs, partially offset by reductions in variable and fixed costs as we implement our Road to Recovery initiatives. The competitive pricing pressures that we have talked about previously impacting margins within our consumer or retail business are being addressed via line pricing reviews with customers and sourcing directives. Margin expansion is expected in this business coming into the 2006 fiscal year.

The working capital levels improved as inventory levels were reduced approximately 20.6 million and receivable balances were reduced approximately $12 million across the quarter. And Cequent does expect continued improvement in performance as we come through the fourth quarter of 2005.

Turning to the next slide -- within our Rieke Packaging Systems Group, net sales for the quarter were 34.3 million, or up 3.8% as compared to third quarter of '04. In the quarter of '05, our core products sales decreased about 2.6%, while sales of our new specialty dispensing products increased $2 million in the quarter up to 7.2 million as compared to 5.2 million in last year's third quarter.

Our adjusted EBITDA in the quarter decreased 1.3 million to 9.3 million, from 10.6 in Q3 of '04. Our operating profit in the quarter declined 1.7 million to 7.1; this from 8.8 million in the third quarter of '04. The decrease in operating profit and EBITDA between years is due to lower material margins and higher operating costs in such areas as freight, energy and employee benefits.

Our resin costs increased approximately 15% within the third quarter, and we do expect continued resin cost increases in the future. We, however, do believe we can partially offset these increases via negotiated pricing. Rieke does expect positive earnings momentum for the remainder of 2005.

Turning to the next slide -- within our Fastening Systems Group we had third quarter sales of 39.1 million, which were flat compared to the year ago period. Excluding steel price increases recovered from customers, sales were up 3.5% when compared to the same period. Sales within our aerospace fastener business during the quarter continued to be strong compared to last year's level, due to the overall increase in commercial and business jet build rates coming through 2005. And as a result, manufacturers and distributors are buying to replenish inventory levels. Our backlog for aerospace fasteners at quarter-end was approximately 17 million. This compares to a $12 million level at the end of the quarter at the end of the same period in 2004.

The Group's adjusted EBITDA in the quarter was 3.4 million. This compares to 300,000 in the third quarter of 2004. Operating profit improved 3.2 million to 1.7 million from an operating loss of 1.5 million in the third quarter of 2004. As stated earlier in the quarter, Lake Erie Products did provide a $1.5 million reserve for accounts receivable with two customers in bankruptcy proceedings. This, obviously, had a negative impact on the reporting performance for the Group. This segment does expect continued earnings momentum for the remainder of 2005.

Turning to the next slide -- within our Industrial Specialty Group of companies, we had net sales in the quarter of 70.9 million. This represented an increase of some 18.6% compared to the same period a year ago. And this revenue increase was driven by new product introductions, market share gains and economic expansion, especially within our energy sector businesses. Sales at Arrow Engines and replacement parts increased some 51.1% as compared to the year ago period, as it benefited from high levels of drilling activity in the U.S. and Canada due to the continued strength in oil and natural gas prices.

Our Norris Cylinder sales increased some 37.4% as adjusted for steel over the same period last year with a strong backlog coming into the fourth quarter. Sales within our layman (ph) specialty gasket business increased 16.3% compared to the third quarter of '04 as a result of significant oil refinery turnaround activity at several major customers.

At Compac, sales in the quarter increased 2.9% compared to the third quarter of '04 due to the strength in residential building and improved recovery from customers of material cost increases. And within our Precision Tool company, we are beginning to see real growth in its strategic initiative of selling in the specialty medical equipment. This was partially offset by weaker demand for standard products -- cutting tools -- particularly in the automotive sector where we sell into distribution.

The Group's adjusted EBITDA for the quarter was $9 million compared to 7.4 in the period a year ago. Operating profit for the quarter increased to 7.1 million from 5.6 as compared to the year-ago period. This group also expects continued earnings momentum for the remainder of 2005.

Turning to the next slide, I will ask Skip to further profile TriMas' financial performance within the quarter. Skip?

Thank you, Grant. Turning to page 13 titled 2005 third-quarter results -- total company adjusted EBITDA stood at 26.8 million for the quarter. However, included in the 26.8 million were a couple of items which should be highlighted.

In the quarter our Fasteners business fully reserved its receivables with two customers who filed Chapter 11 in the amount of $1.5 million. Additionally, included in corporate office expenses we had 1.2 million of incremental costs associated with our receivables securitization program which is classified below operating income in other income and expense. About half of the 1.2 million was associated with the July 2005 renewal of the program through December of 2007. The other half related to increased usage, which is in essence financing costs.

You should also note that restructuring costs also included in the 26.8 further reduced to approximately $600,000 in the quarter from approximately 3.5 million in the year-ago period. After considering these items as nonrecurring or interest costs, recurring EBITDA as most of you would refer to it approximated $30 million as compared to 34.5 million in 2004.

Cequent's adjusted EBITDA was down approximately $5 million in the quarter. We believe that in total, Cequent lost approximately $11 million due to material margins declines and a negative mix impact of selling less to wholesale distributors and installers and more to our retail customers. This loss was partially offset by a $6 million reduction in variable and fixed costs, with approximately 2 million related to Road to Recovery actions.

Rieke's EBITDA declined while sales increased roughly 4%. Root causes associated with the EBITDA decline include lower material margins of approximately $600,000 due to rising material costs, notably steel at this point, an additional 600,000 in variable costs due to rising energy, freight and benefit costs, and $300,000 of onetime costs to eliminate a senior European position.

Regarding resin price increases, by December 1, we expect to recover resin increases through the end of October. There has been about a two-month lag to pass along resin related pricing. November resin increase of about 8% should be priced by the end of the year.

Fastening Systems' EBITDA increase of 3.7 million was reduced by the 1.5 million due to the reserves related to the aforementioned receivables. This 5 million improvement was due to three things -- the virtual elimination of restructuring costs related to the Lake Erie move; better sales mix -- that is more aerospace sales and less industrial sales -- and overall improvement in both our Lake Erie and Monogram fastening businesses.

Industrial Specialties continues to better prior-year results on the strength of better sales across the segment, with five of the six businesses experiencing year-over-year increases in the quarter.

Turning to page 14, debt decreased as expected in the quarter by about $30 million. This decrease was achieved principally through reduced working capital levels in Cequent. Bank LTM EBITDA stood at 145.6 million, yielding a 5.18 leverage ratio versus the 5.65 covenant, which was amended on September 29.

At this point I would like ask Grant to wrap up our prepared comments.

Thank you, Skip. Turning to page 15, as we finish out 2005, TriMas is forecasting year-over-year earnings improvement in the fourth quarter of the year. TriMas' earnings issues, as we've previously discussed, are primarily within two of our Cequent Transportation Accessory companies, towing and consumer products.

As a group, Cequent is focused on first lowering its fixed cost base via reducing selling, general and administrative expenses. To date we have eliminated approximately 100 salaried positions out of this group. We are shrinking the Group's manufacturing distribution footprint and we are fully moving to utilize our low-cost Mexican manufacturing operations.

Secondly, we're lowering our variable costs via reducing SKU complexity. This is especially true within our towing business. We have significant initiatives driving our offshore purchasing activity and we are working very diligently to reduce labor costs via efficiencies through the migration to lower-cost plants. We're also driving customer performance via focus on order fill to drive market share gains via service versus price, and we are introducing in a number of our channels what we call fighting brands to offer low-cost, low-service products to support our premium brands.

We believe these actions have positioned and will continue to position Cequent to be more flexible, more profitable, and more predictable. We have narrowed the performance gap in the third quarter and we expect the slope of this improvement to only increase as we move through the fourth quarter.

All the TriMas companies are focused on product launches and revenue expansion as we prepare to enter 2006. We are now positioned to drive future earnings growth via these initiatives and not from general economic expansion or restructuring initiatives.

Turning to the next slide, TriMas has implemented initiatives that will drive an estimated $15 million of annual costs from these businesses and $10 million of additional pricing. Working capital reductions and free cash flow will drive further debt reduction by the end of this year. Every TriMas portfolio company will drive free cash flow as we move forward. If it can't, it will be sold.

TriMas businesses in aggregate are in solid shape. The Cequent year-over-year improvement in working capital management has resulted in solid debt paydown. The towing products and consumer products businesses are executing lower-cost strategies that will make not only Cequent, but TriMas in aggregate only stronger. The focus within TriMas is now on product, market and profitable revenue expansion as the basis for further earnings growth.

I think we have discussed quite a bit, but we all believe TriMas has too much debt. Free cash flow is the focus of this business. TriMas took a big bite out of debt in the quarter. We know how to do it and we expect these trends to continue.

We expect solid performance from our portfolio of businesses as we move through the fourth quarter and into 2006. That said, we're being conservative in our view of general economic expansion, and frankly see our real opportunities in new products and market expansion.

Thank you for listening. That concludes our formal remarks and, Judith, we'd now like to open the forum up for question and answers.

(OPERATOR INSTRUCTIONS). Tom Klamka, Credit Suisse First Boston.

Can you talk about at Cequent, clearly, you brought inventories down nicely at the Company. What are inventory levels like in the field, both at distributors and at the retail channel?

I would say in general, Tom, that the inventory levels are in pretty good shape. You know, as we sort of worked our way through the year, there was a fair amount of discipline, both at the wholesale distributor and at the installer level, to work down inventory levels. We don't believe that we're coming into '06 with a market that has some unnatural level of inventory.

How do you work that into your build plan for next season, which I guess you sort of start in a couple of months, or in December, January or February? What kind of target level are you building towards? And what are you seeing as far as pricing now? Has all the pricing been earned, or is there additional price increases to come in that segment?

A couple of questions. Our early order activities and sort of the demand start of the 2006 season really sort of kicks into gear in December and starts to build its way through the first quarter. I think we will be a little bit more cautious and I think we will only build forward on inventory in our high moving items. As you remember, last year our market really came in -- or our customer base came into a market feeling very optimistic about the year in front of it, and it didn't work out that way. So, we want to be a little bit conservative. We're spending a lot of time interfacing with our different channel partners to get to try to get as much clarity on the market as possible.

From a pricing perspective, you know, we think we will see the benefits of steel probably if not staying stable, but actually retracting a little bit. And I think that will create probably an earnings opportunity for Cequent.

And at Rieke, Skip, you gave some numbers as far as the raw material impact. And I couldn't quite follow the November increase. Essentially you're saying that, obviously, resins have gone way up over the last three months. There is a two-month lag. That will have an impact on Q4 Rieke?

Yes, Tom. The most recent resin increase at Rieke was 8% and that happened in November. Typically we are able to price those increases in about a two-month period. And as a result, we'd expect to have that priced, to the extent we can price it, by the end of the year.

So, Q4 will have an earnings hit from that? Q1 should be okay?

That's right. To the extent we don't have further resin increases, Q1 should be okay.

Sarah Thompson, Lehman Brothers.

I guess it's kind of on that same question, maybe if you can just help me a little bit. I think you said your material margins were lower by 12.7 million in the quarter. If you just looked at that, how much of that is recoverable from price?

I would say, Sarah, to the extent that steel has gone up and caused the decline in our material margins, to the extent that it comes back down, it will be recoverable in price. We wouldn't expect to reduce prices as a result of steel coming down. So, if steel stays where it's at, that's kind of the normal profitability level of the Company right now. But as it comes down, we would expect to hold on to that.

I'm sorry. I thought a portion of that 12.7 was also from resin.

That's right.

I realize there's timing differences, but just from a big picture standpoint.

The resin piece was relatively small in the quarter.

And the vast majority, our biggest material buy in our company is steel. And while resin will impact our packaging group, their material margins are some of the highest in our business anyway. So, while resins are going up, its impact on TriMas is nowhere near the impact that we have with steel. And that gap that you're seeing year-over-year is a result predominantly in our consumer and towing businesses where we couldn't get price. And now steel has started to stabilize and in some cases fall. I think that will create an earnings opportunity for those businesses.

And too, Sarah, in the quarter we are still participating in line reviews with our retail customers. And we have a fairly aggressive program for sourcing initiatives into next year. So, we will recover some of that loss profit not by pricing, but by re-sourcing some of those products as well.

Great. On your -- I think you said $15 million of savings plan, how much of that did you recognize in the quarter?

I think we mentioned a couple of million dollars at Cequent. So, I would say in the quarter we'd probably have 3 to $4 million of savings recognized.

Terrific. Last two questions. You had given what you realized in terms of an inventory and accounts receivable reduction at Cequent. Can you just tell us what the corresponding accounts payables was? Was there a drop in accounts payable to that offset portion of that working capital benefit?

Cequent's accounts payable went down a little bit.

Can you give us a magnitude? Was it 5 million?

Actually it was $7 million.

Do you want to put a number in terms of you said you expected further working capital reductions in the fourth quarter?

As you all know, at the end of the second quarter we put out a $35 million target the by the end of the year. 30 of it has been accomplished. Does it look like we can do more? Perhaps. But I don't think we are at a position to come off that $35 million target that we set at the end of the second quarter.

Phillip Volpicelli, CIBC.

If you could talk a little bit about other possibilities you guys have in terms of asset divestitures or anything along those lines that you've referenced in the past. Where do we stand on that process?

I would just simply say that the industrial fastener business within our Fastening Systems Group is being reviewed currently for strategic alternatives. And we're not in a position to give you any more detail than that.

When we look at the cost savings -- I'm kind of following on the last question -- when do you expect all of that 15 million to be recognized? Is that something we should expect by the second quarter, by the third quarter, or by the end of next year?

Phil, if we are -- and it's hard to measure because we, obviously, have -- costs are increasing across the Company. But if we are in the 3 to 4 million in a quarter, the run rate is pretty much there already.

I've got you. That's fine. When we just look back at Rieke, are you able as you go forward -- what kind of contracts do you have with your suppliers? Is it a spot buy? Do you have a negotiation that comes up for your purchases? How does that mechanism work?

In most cases, we will have a negotiated -- in our plastics product a negotiated price. Now, over time we have had pretty good luck with passthroughs, but that's not to say that we will be able to guarantee 100% passthrough. It really is a much more complicated question because we sell to so many end people. In some cases we're selling a product that we set the price to and it goes through distribution. Obviously, moving price there is a lot easier when you've got a fixed contract with a fixed price and now you've got to just sit down with a buyer. Most of our contracts in Rieke are fairly short term in nature, which from our perspective is probably beneficial.

On Cequent, could you just give us a little color on how you're feeling with regard to foreign imports from Asia coming into the marketplace? Has that accelerated? Has that slowed? And how has your response been to that?

Clearly, in the last couple of years it has accelerated really at unprecedented levels. And where it has accelerated the fastest is in sort of point of purchase accessories that are a little bit more commodities that are not engineered or sort of standard in their application. Where we found that biggest impact was in those products that we have sold into the specialty retail and big box, many of which where formerly manufactured here in North America. Our reaction to that has been to drive sourcing initiatives ourselves into China. And we're participating in that. And we're finding in some cases the margins to be fairly acceptable.

Going back to the industrial fasteners business. How long -- are you willing to put a time on that review process?

Not at this point.

Manish Somaiya, Banc of America Securities.

A couple of questions. Skip, I think you had mentioned both Cequent and Rieke have pretty good momentum going into the fourth quarter. Does that mean that we should be looking for year-over-year EBITDA improvements in both of those segments in the fourth quarter?

You know, Manish, we're not real good at giving guidance in advance. But I would tell you that as a company we are expecting year-over-year improvement.

And I guess that holds true for the consolidated entity as well?

That's right.

Secondly, looking at Cequent, and specifically looking beyond the fourth quarter and into '06, I was hoping that you could give us a sense as to how should we be thinking about the towing products, the consumer products, the electrical and the trailer -- the four big segments that you have within Cequent from a top-line perspective, which would be, obviously, demand related, and I guess also from a margin perspective. I mean, I guess what I'm trying to get at is are we possibly looking at a trough in Cequent at the end of '05 from a margin perspective?

I would say, Manish, that the sort of macro view coming into '06 in most of the channels, or frankly in all of the channels we serve, there really is a fair amount of optimism. Now, we're trying to be conservative in our view. We're less concerned about gas prices and more concerned about the rising cost of interest, because most people finance an RV or a boat and the like. Now, as you recall, our exposure directly to the RV market -- that is a growth initiative for us, but that's not where we have a tremendous amount of exposure. So, if it slows down a little bit, I'm not so sure how much impact it will have on our business.

So, from our view we're looking at probably modest single-digit growth. And we think the opportunities for some market share gains exist, but we believe that our earnings expansion year-over-year are going to come through managed costs, not by top-line gains. And if we are wrong and the market is a little bit stronger, that should be upside for us.

Lastly, on the industrial fastening business -- I guess when the sale does go through, should we expect this transaction to be a deleveraging event for the Company?

Yes, but it won't be significantly delevering.

Chris Doherty (ph) Jefferies & Co.

Just a couple of cleanup questions. I know you had spoke about the adjusted EBITDA versus sort of just the quick add-back. I was wondering if you could just bridge between either the operating profit of 18 and the EBITDA of 10.4, or then just go into a little bit more detail on the other expenses of 20.4. I'm just trying to bridge the 28.4 and the --

The other expenses are principally interest. And then I believe it's a little over 1 million -- 1.2 million of other other, which is principally the cost related to our securitization program, which about half of it was renewal cost and about the other half of it was usage cost.

So, the difference just between the 28.4 and the 26.8 is probably the AR costs?

That's right. And we classify those as non-operating from a traditional GAAP P&L, but we include those costs in adjusted EBITDA. That's why we talk about it and we suggest that perhaps it should be added back.

The reserves for Delphi and Collins & Aikman -- are those then in SG&A? Is that where you took those?

That's correct.

(OPERATOR INSTRUCTIONS). Andrew Hayne (ph), BNY Capital Markets.

Most of my questions have been answered, but I had a question about your CapEx numbers. They have come down, I think, if you look at the past three quarters, especially as a percentage of revenue. I think in the third quarter of this year it was around 2.1%. I think in the years past you've been more 3.5, 4%. Can you just give a little color around the reduction there, and do you expect that to continue, and maybe which divisions are -- can you -- which division is the benefit coming from, I guess?

I would say going forward that you would expect -- because our business now, as you know, has lived through a fairly significant investment cycle, we think our company has a lot of operational leverage within it. And we would expect sort of a natural investment level of about 3% going forward. And most of that is probably maintenance capital, two-thirds, and maybe a third being cost drive-out capital.

Great. So, most of that was from the Cequent? Most of the bring-down was from the Cequent business, or it was another division, I guess?

It's really aggregated across the Company as we had a number of initiatives as we moved through '03 and '04.

Tom Klamka, Credit Suisse.

Rieke top-line -- you note that the core products were down 2.6% and some of the new stuff was up. What is behind the decline in the core products and how much pricing was in the Rieke numbers versus last year?

Tom, the pricing year-over-year was not very significant, maybe 100,000 or so.

So, prices there have been stable?

Yes.

You know, Tom, we think our packaging group will drive performance going forward on the back of its new product initiatives. We are not really sure what is going on in our core product. I think it's -- usually it has been historically a pretty good bellwether or indicator of economic activity since we sell to so many end customers. It has been very erratic. We had the largest September on record, yet August was very -- was very low. And order activity in October in our core was strong. And now coming into November it has been very weak. So, I'm not so sure that a couple of months a trend does make, but that's sort of what is going on. My guess is it's end users trying to regulate inventory levels. And we do sell a fair amount of product into the Bayou Basin. And some of our big users down their had the refinery shutdown. So, that might have played into some of the volatility, but very hard to get math around that.

It sounds like the energy cost impact was just as important as the steel hit in the quarter. I think you put a $600,000 (indiscernible) both of those.

The second $600,000 was made up of energy, transportation and employee benefit costs. I would characterize that as more general cost increases as opposed to a material margin decline.

Outside of your cost increases, is there any pricing pressure there? I don't mean cost with resins and all, but as far as competitive pricing pressure. Are you still pretty much able to keep a reasonable margin?

Within packaging?

Right.

I think we're fine.

At the ISG side, the sales there has been pretty huge. What's a more sustainable kind of sales rate, or what are you looking for, say, looking out 12 months in that business, as far as sales growth?

I would say mid single-digit. We have gotten a lot of benefit from the energy world ramping up. I don't think that is going to slow down, but I think the slope may slow down, I guess. But I think from our perspective, mid single-digits.

Michael Kender, Citigroup.

I had a question on your bank covenants, and it looks like you are relatively tight on the interest coverage ratio in September. Can you talk about what your thoughts are regarding December? Are you going to need to get some relief on that covenant or do you think you are okay on it?

First of all, Michael, I think we're fine. And if you looked at the covenant package, we have really not had an issue with coverage coming up to this point. And so we kind of left interest -- we left the coverage covenant pretty flat. And it's going to stay flat through next year. So, it's really -- if you looked at leverage, leverage went up and it will come down. But in terms of the covenant package, the coverage ratio basically stays flat. If we didn't have a problem with it this quarter I don't expect we'll have a problem with it next quarter.

(OPERATOR INSTRUCTIONS). Dean Graves, Grandview Capital Management.

I wondered if you could give us some more color around your sourcing initiatives, I guess generally what kind of magnitude you're seeing now, how much progress you've made over the last six or nine months, how much more we might expect to come. That kind of stuff.

Just to sort of put in a frame of reference, in 2003 we bought directionally about $15 million from Southeast Asia. I think directionally that number will approximate 75 million coming through this year and into next year. So, we have plotted buying offices both in Taiwan and in China. And I'm very pleased with our initiatives to be an effective buyer both of componentry, and in some cases in the aftermarket, fully packaged products that we resell. So, we are up, we're going, and the initiatives there are very defined and very clear. And I think we're on track.

Melinda Newman, Post Advisory Group.

I just wanted a couple of more details on a couple of items. First of all, on what you are going to bring in from Asia, the incremental difference. Can you give us any sense of the relative margin improvement that you expect to see there? And then the other items are -- you did some price increases into big box in Cequent. If you could give us a sense of the magnitude of the sales that are going to get a price increase and what kind of price increases you're expecting and when they will be effective. And then I have a couple of more items. If you have any kind of goals for what you're going to save from the SKU reductions in Cequent. And then layoffs -- exactly how many you have done in Cequent and what the effective date was, so people can get a sense of how to annualize. And that's it.

Where do you want to start, Skip?

In terms of the layoffs, Melinda, the principal cost reduction that we had in the second quarter -- or excuse me -- in the third quarter was related to layoffs. As you know, we reduced probably a 100 folks in what I would call salary and indirect at Cequent, and I think we have pretty much worked our way through that what I will call the severance phase of the reduction. Do you want to do margin improvement?

Sure. The margin improvements that we expect in our retail channel really are going to come from sourcing. We are getting some pricing in our line reviews. We are getting as much acceptance for us to repackage and resource products that it's allowing us to get margin impact. While we don't break these businesses out at the unit level, I think you know that we did over $100 million of business this year in specialty and big box, and it was single-digit margin at the EBITDA line-type business. We expect that to expand and expand dramatically coming through '06, mostly via the sourcing initiatives that we have worked with our partners to accomplish. We are getting some pricing, but it would be in the magnitude of a point here or 2 points there. It's just not an environment or channel that lends itself to effective price, at least in the products that we are selling.

I guess, Melinda, I know you're going to want to know a little bit proportionally what does that mean. It just means that we expect in our consumer business to improve profits more related to sourcing than to price.

You had 100 million and 15 million was being imported. And you are increasing that by 60 million. So, the 25 million remaining I can assume is going to be -- that's going to remain on shore is going to be at what kind of margins?

We're not in a position to give that detail and your math is not quite right, Melinda. The growth in our imports are not exclusively to the benefit of our retail channel. And many of our products that we continue to make in the States or in Mexico will find its way into specialty retail and big box. That's that we think we can significantly change the margins in this business. And you will see it at the aggregate form. And one of the things as we move into '06 -- and we've talked about this on a couple of conferences -- we are going to break the reporting up of Cequent that will allow you a little bit more visual clarity as we move through '06. So, you'll be able to see the benefit of these initiatives more clearly, but that will not be provided to you until the first quarter of '06.

(OPERATOR INSTRUCTIONS). Greg Hyde, Wachovia Securities.

Most of my questions have been answered, but just a little detailed follow-up on what Melinda was just asking about. And that is, when you talk about -- and this is just a clarification -- but when you talk about imported items from Southeast Asia rising from 15 million to 75 million, that excludes any sourcing you might do which would end up in your Australian business. Is that correct, or would that include Australia?

That would be outside of Australia.

Good. Separately, you said, I think, just a minute ago that on that element of the business, the imported part of it, that you would expect a significant increase in margin from that sourcing activity. Is significant -- is that a couple of points? Is that six points? Can you give just a sense for what significant means?

I think we have historically indicated that the retail business after steel doubled became essentially a breakeven business. I don't think that's a mystery to any of you. So, a significant increase over nothing could be in the single, low single-digits in terms of margin.

We have no further questions at this moment. I will turn the call back to you.

For those participating, we appreciate your interest and your questions. And as always, we appreciate your support and look forward to talking to you soon. Thank you. That concludes the call.

Ladies and gentlemen, we thank you for your participation and ask that you please disconnect your lines. Thank you. Have a good day.