TriMas Corp (TRS) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TriMas third quarter 2006 earnings call.

[OPERATOR INSTRUCTIONS]

As a reminder, today's call is being recorded. I would now like to introduce your host for today's conference, Mr. Skip Autry, CFO of TriMas.

Thank you, Matthew and welcome to our third quarter 2006 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 power point 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 Vice President of Finance and Treasurer, and David Mostell, our Director of Finance for Operations.

A replay of this call will be available later today by calling 866-837-8032 with reservation number 999008. Please note that certain information on this call may be forward-looking and contain 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 and described in our filings with the SEC. As you know, we are in the registration process and are unable to comment on our progress or any related matters.

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

Thank you, Skip.

Welcome to the TriMas third quarter earnings call. Today we will profile our company's performance within the quarter and then open the forum up to questions. For those following our deck, please turn to the slide titled 2006 third quarter highlights.

Our company TriMas is a manufacturer of highly engineered products. Our defining attributes include leading market shares, strong brand names, and diversity of end markets, customers, and products. Our third quarter earnings performance improved in four of our five segments with RV and trailer products being the only segment that declined compared to the same period of a year ago.

TriMas sales of $244.6 million in the third quarter of '06. This was essentially flat when compared to the third quarter of '05. Our packaging systems group revenue increased 9.9% as compared to the third quarter of '05.

This was due to strong market demand, overall economic expansion, and new products. Our engines--our energy products group revenue increased 26.6% driven by strong market demand from existing customers, expanded product offerings, and increased international sales within the oil and gas industry.

The industrial specialties group revenue increased 10.4% during the quarter as compared to the third quarter of '05. While demand has moderated somewhat within this group, we still experienced year-over-year sales increases of 17.1% in our industrial cylinder business, 34.2% in our defense business, and 2.4% in our precision tool business.

Sales within our aerospace fastener business were essentially flat compared to the year ago period due to the impact of an 8-day labor strike that occurred in July in connection with signing of our new 3-year collective bargaining agreement. Within the quarter, revenue declined 18.3% and 12.1% within our RV trailer products and recreational accessory groups respectively compared to the third quarter of '05.

Both these segments experienced soft demand across substantially all market channels due to record high fuel prices, a continued uncertain interest rate environment, and the resulting weakening of consumer demand. We believe our market leadership positions within these two groups have held with no loss in share, but have simply been impacted by end market unit volumes.

The Company reported third quarter operating profit of $26.4 million for an increase of $5.3 million or 25.1% as compared to the third quarter of '05. Our adjusted EBITDA during the quarter was $34.2 million representing an increase of $5.3 million or 18.3% again as compared to the third quarter of '05.

The increase in operating profit and adjusted EBITDA between years was due to the following. Continued earning expansion within our packaging systems, energy products, and industrial specialties groups and better conversion within our recreational accessory group driven by improved material margins due to sourcing initiatives and lower variable and fixed overhead spending as a result of cost initiatives implemented in the second half of 2005.

The third quarter loss from continuing operations was $1.9 million or $0.09 a share on a fully diluted basis versus income from continuing operations of 2.1 million or $0.10 a share on a fully diluted basis in the year ago period. The reported loss from continuing operations for the quarter included an after tax charge of $5.4 million or $0.26 per share related to the successful refinancing of the Company's senior credit facilities in August.

TriMas finished the quarter with $168.1 million of net operating working capital or 21.1% of sales. The Company's debt and funding under our AR securitization facility at the end of the quarter was $754.3 million a decrease of approximately $10.7 million when compared to year-end levels and was approximately flat as compared to the third quarter of 2005.

Under our amended and restated credit agreement, the Company's bank LTM EBITDA at the end of the quarter was $147.5 million, which supported our lending ratios as such. Leverage ratio was 5.11 versus the leverage covenant of 5.75 and our interest coverage ratio was 1.87 versus a covenant of 1.5.

TriMas at the end of the quarter had $3.9 million in cash and approximately $94 million in available liquidity. Within our industrial fastener business, which is reported as a discontinued operation, we recorded a $10.9 million loss net of related tax benefits of $7.2 million.

The loss reported was impacted by an additional impairment charge of $9.7 million, net related income tax benefits of $6.2 million. This related to the further write down of net assets within the industrial fastener basis based on revised estimates of fair value.

Now, let's look at the operating highlights of each of our groups. Starting first with packaging systems. For the quarter, sales of specialty dispensing products increased 21.8 % between years while sales of industrial closures and laminate products improved 7.8% and 8.4% respectively.

Overall order intake, while somewhat softer due to year-end customer inventory adjustments remains solid within both [reecky] and compact businesses. Raw material costs have stabilized, and the conversion to our new Vice Grip II industrial closures was completed in the United States within the quarter and our conversion of this product in Mexico will begin in the late fourth quarter and is expected to take approximately 6 weeks.

Turning to our energy products group. Order intake and backlogs remain strong within this segment. Arrow Engine's compressor project is underway with the first VR330 compressor having been sold. We recently opened a 30,000 square foot facility in Tulsa to house the compressor product line and our new ASME code welding operation.

Our laymens China gasket manufacturing facility is now fully operational. Plans are underway to establish an in-country distribution and service network to serve our existing multi-national customers in Southeast Asia.

Now turning to our industrial specialties group. Net sales within this group of companies improved 10.4% compared to the same period of a year ago driven by economic expansion, new product introductions, and market share gains.

Most notably, our Norris cylinder sales increased 17.1% between years given a continued strong industrial economy, market share gains, and an increase in international sales of our isocylinders. Our NI industries business had its sales improve some 34.2% during the quarter due to the timing of shell casing deliveries to the U.S. military.

Our precision tool company sales increased 2.4% as their market demand has begun to moderate. Within our Monogram aerospace company, sales were flat compared to a year ago period due to impact of a brief labor strike in July in connection with the signing of a new 3-year labor contract. And finally within our group, our High Vol company sales of specialty hydrolic fittings were also flat as a result of reduced market demand.

Turning to our RV and trailer products group, third quarter sales and profits showed year-over-year weakness as compared to the third quarter of '05. And markets continue to show discipline by lowering inventory levels. Our sourcing initiatives are beginning to deliver results and are being viewed as a strategic advantage by our customers.

Our new Thailand facility is proceeding as planned. Start-up quality of the product has been excellent. We are currently awaiting supply approvals from both Nisan and Toyota. These products will be sold into the after mark dealership channels of the Japanese OEMs in Southeast Asia, the Middle East and Australia.

Our focus within this group is to accelerate sourcing initiatives and to continue to provide our customers with superior engineered product solutions, order fill, and delivery performance. And within our last group, recreational accessories, excuse me, within the third quarter consumer demand was again negatively impacted by record high fuel prices and a continued uncertain interest rate environment.

And although net sales declined 12% between years, our operating profit increased $2.8 million due to the following factors, improved material margins and reduced variable and fixed costs due to reduction in--due to our cost reduction initiatives that we implemented at the back half of 2005. Also the competitive pricing pressures that impacted margins within our consumer products business in 2005 continue to be addressed via our sourcing initiatives and other market actions.

New products will focus on high-end specialty and RV towing related products with a shifting emphasis on new to market products. We continue to see growth opportunities in the big box and specialty retail sector due to repositioned planograms, updated packaging and improved lead times and fill rates.

Now Skip will profile our financial performance within the quarter.

Turning to page 13, starting with sales, packaging systems sales increased nearly 10% as our closure business was up almost 11% on stronger demand for industrial closures in the continued penetration of recently introduced consumer based products. Energy product sales increased almost 27% as our engine and gasket companies continue to benefit from strong markets along with expanding product lines, customers, and geographies.

Industrial specialty sales increased a little over 10%, inside of industrial specialty, sales of our industrial cylinder business were up over 17% and sales of our defense business improved 34% due to the timing of shipping shell casings to the U.S. military. Our tooling company sales were up 2% and our specialty hydrolic fittings business was flat with the prior year.

Our aerospace fastener business was also flat, which was due to the impact of the labor strike that Grant described. Our RV and trailer products and recreational accessories businesses were off 18 and 12% respectively due to soft demand across all market channels resulting from high fuel prices and an unstable interest rate environment.

Now turning to adjusted EBITDA, packaging systems increased EBITDA comes from higher sales levels, improving material margins and other variable cost improvements. Within our energy products segment, improvement was primarily sales driven and material margin improvement.

Industrial specialties was up as a result of increasing sales. RV and trailer products EBITDA decline was primarily in line with the decline in sales, and recreational accessories improved EBITDA against the decline in revenue resulting from improved material margins from sourcing initiatives and an improved fixed cost base as a result of last year's cost reduction initiatives. That leaves us with an improved adjusted EBITDA of over $5 million on flat sales or roughly a 230 basis point improvement in EBITDA margin.

Turning to page 14, during the first three quarters we lowered debt levels approximately $11 million as we continued to focus on debt reduction. Our availability at quarter end stood at approximately $94 million under our new credit agreement.

For a quick summary of our new credit agreement, let's turn to page 15. The new deal was essentially the same--the new deal size is essentially the same as our previous arrangement. We extended our maturities, we improved our borrowing cost, we established a new covenant strip which provides us with adequate flexibility and as an aside we've received ratings upgrades from Moodies and S&P.

Before I hand it back over to Grant for a summary, I'd like to point out that in connection with the refinancing we recorded an $8.6 million charge, for debt extinguishment costs of which $7.9 million was non-cash related to the write-off of previous debt issue costs. The after tax impact of this item reduced income from continuing operations by $5.4 million or approximately $0.26 a share, and in the quarter, we took an additional impairment charge of $9.7 million net of tax to reduce the carrying value of our industrial fastener business to our current estimate of its fair value.

Now I'd like to turn it back over to Grant for a wrap-up prior to our Q&A session.

Thank you, Skip.

In summary, TriMas had a solid quarter. We improved our operating earnings, the Company and our team are focussed on expanding sales growth initiatives, continued earnings improvement, and debt reduction.

Strengthening our balance sheet remains a critical, tactical objective. TriMas continues to see great growth opportunities across our entire portfolio. The economic outlook appears positive for the majority of our companies, but we are watching closely the short-term demand in the end markets of our recreational accessories in RV and trailer products businesses.

TriMas goals remain very simple. Drive credibility via performance, lower our debt, and continue to build our company with discipline.

Thank you, that concludes our formal remarks, and I would now ask our operator to open up the forum for Q&A.

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from Tom Klamka .

Good afternoon.

Hi, Tom.

Hi, Tom.

Can you talk about in the RV and trailer segment, what's your time frame for getting that business turned around, and I'm assuming it's mainly a cost turn around because revenue pictures still uncertain at this point?

Well, Tom, I think if you look at our recreational accessories business and you look at the margin improvement that's occurred this year resulting from sourcing initiatives, the same folks that have implemented that improvement are the fellows that are working on improving the cost base and earnings performance in our recreational vehicle and trailering business. While we can't commit to any specific time frame, the projects are well underway and I would expect that we would start to see the earnings improvement sometime next year.

Yes, the model, Tom, is very similar and the implementation is exactly the same. We are simply migrating our more standard or higher volume products via sourcing predominantly to Southeast Asia, in some cases into our own Mexican base facilities.

And we are remaining in place in North America, our manufacturing of high-end, low-volume time to delivery quick service type product. And as you have seen in recreational accessories, that has provided the opportunity for a return to margins growth. We think over time that we have the opportunity to do the same thing in RV trailer.

When you look at the percentage of the business that you can outsource in RV, is it similar to what's in recreational accessories?

I think on a percentage basis, yes. And from my perspective, we are just driving the operational leverage of our business up. We're making our businesses much more variable, and as you know because you've lived with us a while, we have gone through, really a reasonable amount of restructuring and now we're just really starting to live through the benefits of that and while our end markets might be showing some softness, we are really on offense.

And these great market leadership positions we have in these great brands that we have, we think will position ourselves through cross selling, through bundling, through some of our international initiatives to drive growth across a set of assets that we have now variablized and added more operational leverage to.

Right.

We think we're in pretty good fighting shape, Tom.

And what's the inventory picture like at the distributors?

Well, I think the market clearly was softer coming out of--out of the second quarter into the third quarter than the end market, the dealer bodies and the wholesale distributors had anticipated.

The inventory levels that we've walked across the third quarter have been being drawn down. We have simply gone into a build to order mode, so we are not investing ourselves in inventory, nor is the market, and the market has taken a lot of production out and let those inventory levels bleed down. So the market is showing some discipline.

Okay. And then as you look across the other businesses, which--energy, ST packaging, they all did very well. What's sort of the momentum you have so far in the fourth quarter?

Well, Tom we're in a registration process, and we have typically not given a lot of guidance relative to the future. But I think if you sit back and think about, how is the energy end markets doing right now, I think you could probably reach the conclusion that they're doing well.

We've seen in our industrial specialties businesses through the third quarter continued strong end market demand. And in our packaging businesses our sales improvement is related to two things. It's related to kind of a constant or growing industrial demand for fastener or for closures, and the continued introduction of new products in that segment.

Okay. Thank you.

Okay, thanks, Tom.

Thank you. Our next question comes from Sandy Burns.

Hi, Sandy. Hello?

Your line is open. Okay, we will move on to the next person. Our next question comes from Yilma Abebe.

Thank you. On the materials margins improvements, that was a theme this quarter across most of your businesses. Do you expect to continue to benefit for material margin improvements in the current quarter?

Well, again, we can't speak to the current quarter that we're in because of the process that we are engaged in, but I think the benefit in the third quarter was a result of our initiatives in sourcing and in some cases the benefit of pricing that was initiated as we came through the year. So we're seeing the combination of both of those initiatives in our margin expansions in the third quarter.

But again, Yilma, if you think about the environment that we're in related to commodities, steel, plastic, and you project that across TriMas' businesses, you could make your own conclusions as to the environment we're in.

Okay. That's helpful. One last question from a--in terms of, I guess anecdotally what you're hearing the end markets for RV trailers and recreational accessories, are you hearing that things may be continuing to improve or going down or staying about the same this quarter versus looking out the next couple of quarters?

I think you get a very different answer when you break down our end market exposure. So in the world of accessories and smaller point of purchase items, lighting, locks, connectors, ball mounts, those things that you were more normally find at a specialty retail or in a big box we see continued growth and the market is expecting growth at the aggregate levels it looks forward.

I think in the commercial exposure offroad, agriculture, live stock, our view at the aggregate is probably pretty flat volumes for the end markets year-over-year. I think when you look at sort of high-end discretionary spend consumer oriented towable or drivable RVs and in the boat sector, I think from our perspective that we are going to see the market be flat to perhaps down a little bit from a unit volume perspective.

So I'm speaking to end market views. I mean, my view of the market's no better than anybody else's, but I think that's sort of a collective view if you look at trade associations and what not.

Great. That's helpful. Thank you.

Thank you, Yilma.

Thank you, our next question comes from Philip Volpicelli.

Thank you very much.

Hi, Phil.

Hi guys, how are you? I was hoping you could walk us through maybe price versus volume in each of your different segments, and just give us a sense of how the pricing dynamics are holding up as you go through the different businesses?

Price -- you mean --

On the top line in four of the five segments you had growth and I wanted to get a sense of how much of that was raising prices versus higher volumes.

Well, traditionally, Phil, TriMas because of our market positions has been able to raise prices as the underlying cost base has increased. And as you look at the amount of--the amount of improvement across the businesses and you start with packaging systems up 10%, energy up 26%, industrial up over 10%, I would say that those businesses in the main are unit volume driven.

Because the underlying raw material costs haven't been changing much in those businesses. So when we see those kinds of sales increases across those businesses, it's primarily, the underlying demand pull from customers along with the--the execution of our sales growth initiatives, which we expand geographies, we expand products, and we expand customers.

In the RV&T and recreational accessories businesses, we haven't done anything but increase prices in those businesses. So what I would say is that the decline in sales is almost exclusively unify related.

Great. Can you give us a sense as how much on average you've raised prices in both RV and recreational? Or how much, I guess has actually gone through in terms of what you have planned and what has stuck?

Yes, Phil, I would say that to the extent we're in the retail channel, the benefit really isn't just in price, it's in providing appropriate level of content. So an example would be before we were providing a hitch that maybe cost us $100, now we're providing a hitch that cost us much less than that at the same price.

It's really not pricing as much as it is providing the appropriate level of content. And that's--that's one of the reasons you see the recreational accessories business margin improve.

But I would say that just to give you a percentage across the board through both of these segments, it's not going to be a lot because the underlying raw material pricing hasn't really been moving that much this year.

Got you. So going back to Tom's point at the beginning, it's more of a cost to fix recreation--I'm sorry RV than it is a top line store?

Yes, I could see it that way.

Okay.

But also keep in mind as Grant said we have been through the restructuring initiatives in the main and now we're essentially back on offense. We're more focussed on sales growth, expanding our product lines, expanding our customer base, and our geographies across all of our businesses.

In the shortest period, especially in RV and trailer products is we are migrating much of our Jack Cuppler and Wench production from North America to Southeast Asia, we are in a sense sort of in never never land for a while because you are drawing down facilities at a time where you're building up suppliers on the other side.

And it is my belief that as we did in recreational accessories, we will see the same benefit by implementing that same strategy. I think it's wrong to say that we have a cost structure problem because I think we have implemented the appropriate strategies around costs.

We're coming into '07 as variablized as we've ever been. And I think Skip's point of sort of being on the backside, frankly doing a tremendous amount of restructuring and now focussed on cross selling, bundling our product, driving more of our product international like our big initiative and the launching of our facility in Thailand and positioning ourselves to get into Southeast Asia.

And that's great. That's great. So we'll probably see some improvements in '07.

Can you just comment on the strike? Give us a little bit more detail what happened there, and then are any other labor agreements that are coming due any time soon?

That was actually our first work stoppage in our management tenure here at TriMas. That monogram aerospace was a business that frankly had a very soft prior agreement. And that is a business that was running 7 days a week. And in a sense, we came to the agreement that we just needed a little time off.

We regretfully did it from the negotiation table. We took a week off and we came back to work and signed an agreement. We haven't missed a beat since.

There isn't any irreparable damage, we didn't take any hit with our customers, we just really had people that wanted some time off and we sort of worked our way through it. We probably could have done it in a better way, but we chose to do it at the time we were at the table. We have a small UAW contract coming up in our fittings group and we anticipate no issues.

Can you, Skip maybe you can quantify maybe with the loss sales were from the stoppage?

Well, Phil, the--we really don't comment on the size of the individual businesses, we try not to. But the--what we were able to do--as Grant said, we were going to have some time off out there in almost any alternative.

So what I would say is that when the--that business was flat on a quarter-over-quarter business--quarter-over-quarter basis. And it has been up kind of double digits, high double--high single digits, low double digits pretty much all year.

The amount of sales--it's kind of hard to quantify because they went back on overtime, they regained a lot of the loss sales, they just didn't get it all. We're not talking about a significant amount of money here.

Great. And just last question.

Yes, Phil. I would say it's in the range of a couple of million dollars, $1 to $2 million.

That's great. Thank you. Where do we stand on the industrial fasteners business and that process?

That process is continuing forward and we have interested parties that we are working through agreements and I think we are moving forward as expected. So --

No timing?

We would hope to conclude that process sooner than later, but we are positive and optimistic that the parties that we're dealing with as you know, we broke that operation up into a couple different assets that we have for sale. So I really don't want to comment because I don't think it's appropriate. But we are in final stages with interested parties in both assets.

Thanks, guys. Good luck.

And Phil, I would just say that we did take an additional write down this quarter because we feel like we're getting closer to understanding what the fair value of those assets are. And that's as a result of the process that Grant described.

Okay. I'll take a look at the statements on that. Thanks a lot, guys.

Thanks.

Thank you, our next question comes from Joe Box.

Good afternoon, gentlemen.

Hi, Joe.

Could you, could you just tell us how we should think about organic growth rates as we look into '07 and '08?

Joe, it's real hard for us to be talking about future sales growth rates, but what perhaps we could do is we could talk about historically what kind of sales growth rates organic we've had in this business.

In the--in the 2000-2006 time frame, we--we've seen kind of what I would call mid-single digit sales growth pretty much across the Company. And that's really all I can comment on that other than if you look at the Company and you look at the restructuring that we've been through, we haven't been focussed on sales growth, we've been focussed on restructuring activities throughout the Company.

And now our focus has returned to sales growth. So I would -- while I can't tell you what our organic sales growth will be in the future, I can tell you what it's been in the past and in the past, in the recent past, that's been against a lot of restructuring initiatives. So that's about all I can say on it, Joe.

Great, thank you.

You're welcome.

With regards to your business that doesn't have a short book to bill relationship, could you just tell us where you see your backlog at? Maybe is it increasing directionally or is it decreasing? Maybe some color on that.

Yes. I mean, really across the industrial portfolio in the third quarter, we saw backlogs hold. And in some cases grow, but we did not see economic activity wane.

Okay.

We're just not a business that has substantial defined backlog in any of our businesses, but order intake daily activity as we came across the third quarter remains stable and consistent with the remainder or excuse me with the prior part of the year.

Okay. Fair enough.

Also with respect to the cost structure, with regards to the variablization of the cost structure, what inning do you guys think you're in? Is it relatively early still or is it some of the later stages?

Well, Joe, I would say that it would depend on the segment. Recreational accessories I would say were late in the game. RV and trailer, and Grant can comment, as well. I would say we're early, earlier in the game.

Okay. Excellent, thank you. Thank you, gentlemen.

Thanks, Joe.

Thank you, our next question comes from Mark Rustowski.

Hi, Mark.

Yes, hi. My question's related to the industrial fasteners business. Basically if you look--I guess you have it in your appendix. Looks like before you were anticipating some cash coming in from that [inaudible] sale. Now it looks like it's probably going to cost you some money, is that kind of the right read here given your recent write-down?

No, I would say that we're expecting--while we can't really comment on exactly what we're going to get, we have--it's always been our position, Mark that when we sell our industrial fastener business that it will not be a significant cash source for use, and that continues to be our position.

When I just kind of do the math, the assets are booked at $24 million and the liabilities are 29. I kind of look at net realizable value kind of minus 5.

Yes.

Okay.

Yes, you just have to understand that when we receive the payment for those businesses, it's going to be pretty close to a push because we then have to buy back assets that have been sold and are under sale lease back.

Okay.

So at the end of the day --

It's pretty neutral.

It's pretty neutral, Mark. And we really haven't changed our position on that in sometime.

And I'm just kind of curious as to the performance of that business being so bad, is that just primarily out of motive? What else is kind of contributing to how it's been doing?

That is a business that is in a reasonably commodity-based business that has a fair amount of competition, pricing's been very difficult.

It is a business that is and did in the third quarter provide cash, but it is a business that is struggling to have a great deal of positive earnings. And I think it's the attributes of the business and you can look to other market participants that are in the low-end commodity side of the business and find similar performance.

Great. That's all I had. My other question's been answered.

Thank you.

Thank you, our next question comes from Sarah Thompson.

Hi, it's actually Lawrence on behalf of Sarah.

Doesn't sound like Sarah.

She's on the road today. Just wanted to drill down a bit more in the sequent business. It was really helpful, Grant when you walked through the end market exposures, you commented on accessories, commercial and then kind of the high-end discretionary consumer end markets.

Is it possible to give us a flavor for those exposures within both of the sequent segments, the RV and trailer and the recreational accessories? I know we along with other investors have a hard time rea;;u understanding what's driving both of those segments.

Is RV and trailer more heavily weighted to accessories, or can you kind of help us get a sense for what's driving?

Yes, I think at sort of at the macro level. If you look at RV and trailer, it's probably in the 40% range of commercial exposure. The 60% range is really a guesstimate because it's hard to track where our products go when they go through two-step distribution into a very fragmented supply base that build trailers.

So what's really driving our business is trailering behavior and trailering needs. So clearly the end consumer who is trailering a towable RV, a boat, a Seadoo, their purchases of those types of end items that then will require a trailer drive our pull for those products.

The commercial side, our exposure into Ag to the lawn maintenance guy, to construction, to farm implement, those types of things is frankly much more stable and doesn't have the big swings, and that end market's getting benefited by sort of Southwest--Southeast expansion and the oil field expansions in Texas and those types of markets.

Within this group is an Australian business that is investing in a new Thailand facility to allow us to provide products into the after market channels of Japanese OEs who sell accessories through their dealership bodies in places like Australia, the Middle East, and what not. Again, the application may be commercial, may be consumer, but that is going through I think what most people would call a more consumer oriented channel.

I don't know if that helps. On the recreational accessory, the accessorization side of the business, where we go to specialty retail and big box, again, I don't know if the end customer is a commercial painter or a consumer, I don't know what he's towing, I'm just selling products into his towing applications and towing needs.

Same sale--same store sales in footprint continue to expand in those channels, and we just don't see the behavior in those channels abating. On the towing side, it's probably that same 60/40 the consumer commercial use, somebody buys the vehicle, has a towing application and is putting some type of weight distribution or towing on the back of his vehicle.

So there are a couple of interesting things going on. The car part is evolving a little bit, that's helping us as big pickup trucks and SUVs are giving way to smaller crossover vehicles, those do not have factory installed towing packages, so our available after market car part is expanding a little bit.

But we think in the broadest sense, if you sort of look at RVIA data and in the like that the--the year in front of us is probably flat to down a little bit from an end unit production perspective.

So, I mean just given your background there, and I appreciate it. It seems like both RV and trailer and recreational accessories are really a mix of all the end markets?

Oh, yes, absolutely.

Okay. So there's--when you think those three drivers, the accessories, the commercial, and then kind of the high-end discretionary as you call it. I know those aren't the only three end markets, but those were the ones you kind of highlighted. Those are driving both of those segments to varying degrees?

Varying degrees. And I think flatter moderating gas prices--flat or moderating interest rates help this sector. I think volatility around those two expense items create in the consumer side probably some concern. Most of what we trailer is finance.

Okay. And--and you--last two quarters, excluding the third quarter, in the first and second quarters of the year, you saw the sequent business combine, the two segments combined top line flat to slightly down, which is kind of what you're talking about.

And in the third quarter, it was down 15% year-over-year and you talked about how you've been raising prices so it's really a decline on the volume level. Is this just the inventory--the channels, excuse me adjusting inventory levels. How do you reconcile kind of flat to down unit volumes with the 15% year-over-year decline you saw in the third quarter?

Well, what you saw in the third quarter is you had an industry that sort of builds up for a summer sale, the summer sale ultimately did not turn out to be as strong as the market predicted. And then you had the big manufacturers whether it's for as an RV manufacturer or Brunswick as a boat manufacturer or what not, really take considerable amount of production out of their schedule.

So they stopped pushing inventory down on their dealer bodies and their dealer bodies have started to relieve that inventory, and it is the belief by most third party people that we talked to that '07 in terms of its expected behavior would be very similar to '06. Now, our growth opportunities are not necessarily dependent on underlying unit volumes.

We think we can grow through bundling and cross-selling and new product introductions and a whole host of initiatives that we have going on in our business as we leave restructuring and get sort of back on to the commercial development side. But at the macro level, I don't know if I'm answering your question--

That's great. And two more quick questions.

I know part of the issue--I don't know, I think part of the issue in early '05 was that some of the automotive OEMs were installing some of the trailer hitches before they got to--they were installing them at manufacture rather than wholesalers or distributors, wholesaler distributors doing so.

We read a recent article in the Automotive News suggesting that GM is going to increase its accessories including hitches. Are you guys worried about that at all? Have you guys seen that?

I would tell you that over the last decade, we've probably had a 1 or 2% encroachment in our available after market car parts. So our car part clearly has shrunk a little bit because of the advent of factor installed towing apparatus. We've chosen not to participate there because we just don't like the profit attributes of that channel.

We think that while it's interesting that GM is thinking about putting more content on say a pickup truck, but the real interesting thing from our perspective is that those unit volumes are actually going down, the percentage of large SUVs and pickup trucks is going down and crossover vehicles are growing much much faster, and those do not come with factory installed towing or weight distribution products, and that actually is a good trend for us.

The other thing to note is that we sell mostly into a customized application where somebody purposely wants engineered weight distribution and we try to sell into sort of the custom fit high end of the market.

Okay, that's helpful, thank you. And then the last question, just on the restructuring, I just want to be clear.

Are you suggesting that the restructuring is largely completed for all of sequent or is it simply well along the way for the recreational accessories business and you're now gearing up to pull costs out of the RV and trailer business?

I would say that the large disruptive investments of taking facilities down, building new facilities and setting up infrastructure is behind us. And what really remains in RV is now we're just implementing what we did in recreational accessories.

We're migrating the standard products from a cost arbitrage perspective into places like Southeast Asia or into some cases into our own assets in Mexico. And that is--that is not disruptive, that is just a migration of activity that's underway.

Okay. Okay, and the head count reductions are largely--have largely been completed in all of the sequent business, is that correct?

Yes, obviously as you migrate activity you're going to take out variable costs, but yes, the structural removal has pretty much been completed.

Thanks for all of your time.

Thank you.

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