TriMas Corp (TRS) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to TriMas third-quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. Later we will have a question-and-answer session, and instructions will follow at that time. As a reminder, this conference is being recorded. (Operator Instructions)

I would now like to introduce your host for today's conference, Ms. Sherry Lauderback. Ms. Lauderback, you may begin.

Thank you. Thank you and welcome to the TriMas Corporation third-quarter 2010 earnings call. Participating on the call today are Dave Wathen, TriMas's President and CEO, and Mark Zeffiro, our Chief Financial Officer.

Dave and Mark will review TriMas's third-quarter operating and financial results, as well as provide an update on our outlook. After our prepared remarks we will then open the call up for 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 at www.TriMasCorp.com under the investor section. In addition, a replay of the call will be available later today by calling 866-837-8032 with an access code of 1489834.

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 and Form 10-Q 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.

Thanks, Sherry, and good morning. All of us here at TriMas appreciate your interest and attention as we continue to transform TriMas into the high-performance company that it can be. Our third-quarter results show that we are making good progress.

Our agenda is that I will provide an overview of what we accomplished in third quarter, both in results and in setting up for the future. Mark will then expand on these results and financial highlights for TriMas and our reporting segments. Then I will provide our improved 2010 outlook and comment on our strategic aspirations going forward. Then we will gladly take your questions.

On slide 4 our third-quarter results again show that our TriMas business processes are working to improve each of our key metrics. Our business process helps us achieve the correct balance of resources deployed for revenue, growth, earnings improvement, ongoing productivity, and cash generation in each of our operating units. As we have discussed, this balance is weighted differently in each operating unit to help us maximize overall performance and value for TriMas.

All five of our reporting segments achieved double-digit percentage sales increases in the third quarter. We believe that this growth demonstrates market-share gains in several of our businesses.

We saw positive results from many of our new product introductions in the quarter and also good results on our geographic growth projects.

Operating margins were improved by our reset to a lower cost structure done last year and our processes for ongoing performance improvement via continuous productivity. All this shows in our margins in comparison to previous periods. Mark will expand on this for you.

The key metrics for capital employed are turns and percentage of working capital to sales. We continue to take the actions needed to improve these metrics and therefore free up cash and reduce our debt. I believe that good, sustainable momentum is being demonstrated across all of our businesses.

Turning to the chart on slide 5, in Q3 we also made progress on several fronts to improve TriMas's future. The slow domestic economy means that strong revenue growth has to come from wins, and we had several multimillion-dollar successes.

Packaging has gained a global order including shipments into several Asian countries for a product that grew out of a small product acquisition two years ago. Cequent has an upswing in fifth-wheel towing systems for dealer installation on heavy pickup trucks in the US.

Cequent Australia has expanded its dealer network in Australia and also now has product approval for pickup truck accessories in Thailand. Cequent Consumer has received orders for a new product launch at a large US retailer.

In Aerospace & Defense we received a long-awaited product approval from a large airframe manufacturer for high-volume titanium fasteners. And while not a new success, Boeing 787 production appears to be ramping up.

In our Energy segment, we have several natural gas compression system orders, just in sync with the capacity expansion nearing completion in Tulsa.

I could list more, but the message is that I am very encouraged by the successes of our growth programs. We all know that US and European markets are relatively slow, so growth requires extra emphasis on investing in the right programs and successful execution of these programs.

We are also continuing to work hard to grow our sales presence in faster growing markets. To that end, TriMas management and many of our division Presidents traveled through Japan, China, Vietnam, and India in September working on business development for the future.

We reviewed current efforts; met with current potential customers; conducted interviews for some new people; and made decisions on where to double up our efforts. We are now focused on how to accelerate this growth and where we need new capacity, and we have kicked off a few market studies where needed to identify more opportunities.

Overall, we have taken our efforts up a notch, and we came away convinced that we have some real opportunities so that growth in Asia and other faster growing market will be a revenue accelerator for several of our businesses. Our new global sourcing organization is off to a great start and is contributing to both productivity and helping identify new opportunities through the global coverage that we have added.

We are glad to announce that a great group of people in a great business called South Texas Bolt & Fitting will be joining our Lamons team. They are masters at producing and selling fast-turnaround, complex, high-margin industrial fasteners for the same types of customers that Lamons already serves. STBF's skills and products plugged into Lamons' growing global footprint will yield incremental sales and should be accretive in 2011 for TriMas.

I am sure that you can tell that I am encouraged by TriMas's third-quarter operating results and our recent activities that will yield ongoing growth and performance. At this point I would like to turn the call over to Mark for his comments on third quarter.

Thank you, Dave, and good morning. Let's start with a summary of our third-quarter results on slide 7. As Dave mentioned our third-quarter sales were $248 million, an increase of approximately 22% compared to the third quarter of 2009, with all five segments posting double-digit sales growth.

This increase was supported by growth in new products, our ability to capture additional market share, and continued demand improvement across the businesses. Foreign exchange did not have a material impact on the sales for the quarter.

Our Q3 results continued to improve across TriMas. Gross profit improved 28% during the quarter, with gross profit margin up 140 basis points compared to Q3 2009. Adjusted EBITDA was $42 million, up 25% compared to Q3 2009 excluding special items.

Our operating profit margin improved as expected, up 150 basis points compared to the third quarter of 2009. We are very pleased with the margin improvements achieved during the quarter. And we are convinced that our cost structure, which was lowered in 2009, will continue to leverage well as our end markets strengthen and growth initiatives continue to accelerate.

In addition, our third-quarter 2010 income from continuing operations and EPS both improved over 50%, excluding the impact of special items in Q3 2009 which were largely business restructuring costs. For third-quarter 2010 diluted EPS increased from $0.24 per diluted share in Q3 2009 to $0.37 per diluted share.

We are pleased with our ability to generate strong cash flow from our businesses even in periods of rapid growth. We generated over $18 million in free cash flow during the quarter by proactively managing inventory, despite the 22% increase in sales. We also continued to reduce our debt levels, ending the quarter with a total debt of $499 million and cash on the balance sheet of over $46 million.

Turning on to slide 8, I wanted to briefly touch on our year-to-date metrics. Year-to-date sales improved 17.5%, with four out of five segments generating double-digit percentage sales increases.

The significant reductions in fixed cost and productivity initiatives as well as top-line improvement has led to an improvement in adjusted EBITDA margin, excluding special items, of 360 basis points compared to the year to date 2009 results. Excluding those special items, we nearly tripled the income from continuing operations and EPS levels generated in year-to-date 2009.

To date we have recorded free cash flow of $67 million, equal to about $2 a share. Our strong free cash flow has enabled us to continue to reduce our debt and deleverage the Company. Compared to September 30 of 2009, we reduced debt by $26 million and increased our cash by approximately $22 million.

I would now like to spend a few moments discussing our margin improvements on slide 9. As you know, 2009 was a year of significant fixed cost and business restructuring at TriMas. We believe these actions have permanently lowered our cost of doing business and provide sustainable margin improvements for 2010 and beyond.

As I mentioned on the previous slides, our cost reduction and productivity initiative drove enhanced margins in Q3 2010 compared to the prior year, with margins improving. When you compare Q3 2010 margin levels back to Q3 2008, you will note a margin improvement of approximately 250 basis points, as we generated over $4 million more in operating profit in Q3 2010 on $11 million less in sales.

Our margin expansion is not a story about easy comparisons, but a fundamental shift in our operating model and our relentless efforts to make the enterprise yet more efficient.

Moving on to slide 10, our margin expansion has been supported by our productivity efforts embraced by the total organization, and our global sourcing organization is definitely adding value to the process. Through the organization of various productivity councils, led by subject-matter experts, the GSO is leading the charge to improve and diversify our sourcing, as well as leverage the total cost spend for many examples included on this slide, which will result in additional cost savings and better terms.

One of our unexpected benefits of this team has been their positive impact on the emerging market development. The cultural and geographic diversity they bring to TriMas has provided additional support to these endeavors.

A recent example would be our efforts to reach into India across multiple relationships with potential suppliers and customers, to determine where we can extract benefit. GSO's efforts continue to expand, as well as the list of opportunities that are being executed.

Moving on to slide 11. In addition to the profitability improvements we are also improving working capital as a percent of sales, with a Q3 ratio of 15.2% compared to 15.9% in Q3 2009 and 17.5% in Q3 2008. Most of our segments improved as compared to the prior year.

Overall, despite the significant increase in sales, we were able to lower inventories relative to sales. We are pleased with these results, but believe there is more work to do.

On slide 12, we ended the quarter with approximately $499 million in total debt, a decrease of $15 million compared to year-end 2009. After consideration of $46 million in cash on the balance sheet as of September 30, 2010, total indebtedness net of that cash was $453 million as compared to $505 million as of December 31, 2009.

In addition, TriMas ended the third-quarter 2010 with $196 million of cash and aggregate availability under its revolving credit and accounts receivable facilities. We will continue to focus on lowering our debt level and interest expense, as we did in the quarter by electing to reduce our supplemental revolving credit facility by $20 million. This reduction alone equates to approximately $1.2 million of lower gross interest expense on an annualized basis relative to this facility, and we will continue to proactively manage this area.

We're also pleased to have ended the quarter with a leverage ratio of 3.2 times, the lowest level we have experienced at TriMas. We intend to continue to drive this leverage ratio through the combination of higher earnings and lower debt levels.

At this point I would like to shift gears and review our business performance by operating segment, beginning with the Packaging segment on slide 14. All of my segment discussion will be excluding special items, to provide you with a better understanding of the underlying business trends.

On to Packaging. For the fourth consecutive quarter, Packaging grew its sales at double-digit percentage levels, with Q3 representing an increase of 12% compared to Q3 2009.

This was driven by improved demand of our industrial closures and continued growth in new specialty dispensing products. We continue to get good execution launching new dispensing products into growing end markets such as medical, pharmaceutical, and personal care, an area where we have demonstrated a 35% CAGR over the past 10 years.

Operating profit increased 36% compared to a year ago, resulting from higher sales and productivity initiatives. Margins improved substantially, with operating profit margin improved 520 basis points to a 29.5% compared to Q3 2009. Our key initiatives for this segment remain as product extension and geographic expansion.

Moving on to slide 15, Energy sales increased 32% with a significant margin enhancement in Q3, with both businesses contributing. Operating profit margins improved 130 basis points.

During Q3, Arrow saw growth resulting from the return in demand as well as continued product expansion into well-site content and the launch of natural gas compressors for the vehicle fueling market. Our products and engineered solutions are also well positioned to capitalize on shale and natural gas opportunities.

At Lamons, we continued to expand an increase in sales during the quarter as refinery turnarounds and maintenance activities remained at more normalized levels. We continue to see the positive contribution of our newer Lamons branches opened in Rotterdam and Salt Lake City, and recently announced new locations in Edmonton and the United Kingdom. We will continue to expand our customer regional footprint at a faster pace, as we remain committed to expanding the gasket and bolt business in support of our global customers and grow them in new markets.

As Dave mentioned, we also announced today the purchase of South Texas Bolt & Fittings, a diversified manufacturer and distributor of various types of stud bolts, industrial fasteners, and specialty products for the oilfield and industrial markets. STBF has advanced machining capabilities that enable the manufacture of custom bolts in various sizes and made-to-order configurations using specialty steels and other exotic materials.

This acquisition expands the product portfolio to better serve the needs of both company's customers. And by incorporating this business into Lamons, we will leverage our extensive sales and service center network to drive incremental specialized bolt revenue.

On slide 16, Aerospace & Defense. Their sales increased by 19% in Q3 2010 compared to Q3 of 2009, with a slight increase in operating profit. Although demand for our Aerospace business customers remained at relatively low levels, with some underabsorption, we did see an improvement in sales compared to Q3 2009 in this business. We continue to see stabilization of the demand and backlog levels, although we have experienced some inconsistency in order patterns and short lead times, as well as increased competitive environment due to the lower demand levels.

On the Defense side of the business our segment results were also impacted by the mix of increased sales from the Defense business at lower margin level related to the BRAC contract. While we continue to focus on improving the segment's results, we feel we are uniquely positioned to take advantage of the trend to build aircraft out of composite structures and our plan is to support increases in the content per aircraft.

This segment remains very profitable with EBITDA percentages around 30%, and we firmly expect this business to show strong revenue growth and margin expansion as aircraft build rates increase.

Moving on to Engineered Components on slide 17. With sales up 65% compared to Q3 2009, we continue to see improved demand in the industrial cylinder, specialty fittings, and precision cutting tools businesses, as well as the positive impact from our cylinder business acquisition announced in Q2. Operating profit for the quarter increased 138% with margin levels increasing 330 basis points compared to the third-quarter 2009. This illustrates our strong conversion and the effects of our productivity initiatives.

Longer term, we will support customer needs by developing new applications for the products and focused regional expansion. In addition, the Taylor Wharton cylinder business acquired last quarter has improved Norris's position by expanding its product portfolio and capabilities to support their customers. We are pleased with the integration and its initial results.

On slide 18, Cequent sales were up 16% for the quarter versus Q3 2009, resulting from sales improvements in our North American performance products and retail businesses. Cequent experienced a 44% improvement in the operating profit number during the quarter, with margins improving 230 basis points to 12% compared to the Q3 2009 level.

As a reminder, this segment was most positively affected by the Profit Improvement Program in 2009 and as such has seen sustainable changes in its profitability levels. While we expect seasonality to have its normal impact on Q4, their resolve to strengthen the business and leverage our brands have made this business an even stronger market competitor. We will continue to focus on productivity and product leverage.

In summary, our operating model is working and our team continues to execute well. The sustainable positive momentum during 2010 will continue to yet further deliver improved results.

That concludes my comments. Now, Dave will discuss our expectations for the remainder of 2010. Dave?

Thanks, Mark. Now I will describe our improved outlook for 2010 on page 20. A reminder; at TriMas we of course budget and forecast each of our business metrics, plus we identify risks and opportunities against these performance metrics. Then on an ongoing basis we work to mitigate risks and capture opportunities.

And we had quite positive results in doing so in the third quarter. At this stage in October we can also see the pluses and minuses for Q4 such that we can show you a tighter band of how we see total 2010 results.

Overall sales growth outlook is 15% to 17% compared to the prior year, driven by improvements in core growth and program-driven growth. Fourth-quarter year-over-year comparisons are tougher for our largest segments, since Packaging and Cequent demonstrated sales growth in Q4 of last year, although our later cycle Energy and Aerospace & Defense businesses are showing more strength now.

Operating profit margin is now projected to increase 250 to 300 basis points compared to 2009 levels. Free cash flow is now expected to being $75 million to $80 million.

These positive updates should provide for an improved 2010 EPS in a band of $1.05 to $1.10 per share, which demonstrates significant improvement compared to the 2000 (sic - see Press Release) level of $0.43 excluding special items.

Looking forward to 2011, let's discuss slide 21, which lists our consistent set of strategic aspirations and therefore becomes the foundation for our 2011 playbook. Despite believing the domestic economies will see little growth next year, we believe we can outperform this level.

We currently see high single-digit percentages sales growth driven by recent commercial wins, our multiple product and geographic growth programs, and our completed bolt-on acquisitions. We believe that due to our productivity initiatives, increased sales levels and related operating leverage, and proactive management of our interest costs we will see a multiple of that in earnings growth.

I have just finished visiting each of our businesses for operating and budget reviews and am satisfied that we will continue to generate the productivity we need to both fund growth programs and continue margin expansion. We will continue to utilize tools and tactics to improve working capital, to drive continued decreases of working capital as a percentage of sales.

I will close with a takeaway that we all believe here at TriMas. Winning companies like TriMas have the ability to grow revenue and earnings despite flat markets. The recession may have a negative impact for maybe a year, but winners reset to a new baseline and get busy at growing revenue and earnings. We have done that and will continue on this path here at TriMas.

Now we will gladly take your questions.

(Operator Instructions) Rick Hoss, ROTH Capital Partners.

Hi, good morning. First, on the compression products, I am curious. What is the volume at this point? Is it anything significant? I know there are new products, but just want to get a feel for how significant they are to total Energy revenue.

There's really two pieces. We have been selling compressors as just mechanical devices for several years, and we continue to expand the line. The change is that we started putting them into systems, meaning compressor in the middle with an engine driving it; separators; plumbing; control valves; electronic control panels; etc. So that instead of being a compressor that sells for thousands of dollars, it becomes a system that sells for tens of thousands.

That is what is going on. That is continuing to ramp up to the point that we added a building in Tulsa dedicated to compression products.

So I mean in the scheme of the total TriMas it is not enough to move the top line much yet. But it certainly does in the Energy segment.

But if you were to look at those new product programs, Rick, you could say that -- if you look at the Energy sales which are up let's say circa $11 million in the quarter, about 10% of that was driven by these new compression products.

Okay, good. That's helpful. Then on South Texas that you announced this morning, how do those margins compare to -- I don't know if we compare it to Lamons, which I guess you don't really break out. But how does it compare in the overall Energy segment?

Rick, what I would say is, consistent with how Lamons has to real different margin profiles of its product, both being standard and high-turn or quick turnaround, this South Texas Bolt & Fittings really is more akin to the quick-turn kinds of margins.

Okay, so very favorable then compared to the other more standard run-rate business then.

Exactly right, Rick.

Okay. Then the implied 4Q guidance, not to take anything away from the great performance in the third quarter, I think it implies that margins really degrade a pretty substantial amount. Am I looking at this correctly?

There's a couple elements there. Firstly, we are pleased with taking the guidance up to $1.05 to $1.10. As you know, our consistent policy is that we call numbers that we can see and execute on.

But to address your question more specifically in the quarter, you would naturally see margin decreases between Q3 and 4 simply because of the seasonality.

Right. Is there anything in particular? In other words, say if we look at SG&A for example in the first quarter versus what you expect in the fourth quarter, how much is that variable and how much is fixed? We should still expect to see a level of SG&A above the first quarter?

SG&A for total Company will be higher in the fourth quarter than it is in the first, yes.

Okay, okay. Well, thanks again. Not to take anything away from the guidance improvement, but just trying (multiple speakers).

Rick, I know you hear this from me, but remember, my style is very much -- harks to what's line of sight; and then we put risk and opportunities against it. And we work on mitigating the risks and capturing the opportunities, but we don't count those till we have them in hand.

Okay, appreciate it. Thanks. Thank you, guys.

Joe Box, KeyBanc.

Hi, good morning, guys. I just have a quick question on the capital structure and uses of cash. You guys put up pretty good free cash flow in 3Q. There was limited debt paydown in the quarter.

I am just wondering if it is too restrictive to take out the 9 3/4% notes or if paying down the term loan isn't necessarily the best use of cash right now. Couple the limited debt paydown with the acquisition that you did this morning, I am just wondering if you are changing the way that you guys think about your best use of cash?

Joe, that is a good insight to the financials. Let me try to explain that a little bit.

We knew full well during the quarter that we had the circa $18 million acquisition of South Texas Bolt & Fittings. So as such, instead of paying down the term loan -- which will naturally amortize over time and also into the front half of 2011 will also have a nice step down -- we thought it most prudent to maintain the cash on balance sheet.

As we continue to look at uses of cash, of course we look at best and highest uses of cash. At this point in time we thought the certainty of having this cash on book was the best use.

Fair enough. Question for you on the Packaging business. The top line was somewhat flattish sequentially and the growth rate ticked down a bit from where it was at over the past couple of quarters. It sounds like the growth opportunities are definitely intact. So I am just wondering if the top-line performance in the quarter was a function of you guys bumping up against where your production capacity is at.

Well, of course, remember the comparisons are getting tougher versus a year ago. Because we were -- revenues were starting to take off in third and fourth quarter last year.

We have a few capacity limitations that we are having to run flat. I wouldn't call it holding us down on revenue yet, but we are on the ragged edge a few places in that business. We have full capability to address it, and you will see us doing that.

But that is a perceptive comment. We are starting to bump up against it in a few places.

Okay. Last question for you and then I will turn it over. We are starting to see some raw materials tick up here. I am just wondering if you can comment on what your expectations are for raw material input costs in 2011, and how you are thinking about passing these on or leveraging your spend throughout the Company.

Well, let me start with the last part. We are, via GSO and a whole higher level of attention to the way we buy, leveraging and finding productivity in sourcing that helps pull that down. Raw prices, there is some pressure. Resin continues to be -- have some upward pressure. We tend to be very good at passing that on in the Packaging business.

Steel is the big question mark for us, because we expected steel prices to go up in third quarter. That was a risk. They didn't.

We still have expectations to see them go up. But you read the reports of what is going on in the steel industry and it says maybe not.

So this is the classic risk and opportunity management that we go through of we have got to identify it as a risk, and steel suppliers are sure trying to raise prices. But -- and that is what we are planning for. We will mitigate it of course any way we can.

We continue to have surprisingly good pricing capability. You know it has got to be tougher, but I give our people that run our businesses credit for being able to get price. It is just proof that we are in the kind of products that customers need a lot. We don't tend to sell discretionary products, and so we have a lot of pricing power.

Great. I appreciate the color. Thanks, guys.

Robert Kosowsky, Sidoti.

I was wondering on the Aerospace business, it seemed like the margins picked up in the third quarter versus the second quarter sequentially. What was the driver behind that?

Largely it was the uptick in activity in the Monogram business. As you know, the BRAC contract continues to winnow out over time as we complete that sourcing contract for the government. The real ongoing business is indeed the Monogram fastener business. So as such we have seen a bit of a shift between how much of the revenue was derived from Monogram versus that of BRAC.

We have also got a lot of productivity programs going. If you visited that plant and went through the list of productivity programs and the kind of -- faster setup of machines, learning to run smaller lot sizes, all of that kind of -- there is a whole lot of that kind of work going on within that business.

Some of that is shown in the numbers, too. I mean you know how it is; in spite of it being a high-margin business, that doesn't mean you forget about productivity. So we've really been bearing down on that.

Okay. Then I guess to what extent do you think the Aerospace & Defense, once NI is back up and running, you can exceed what you did in say 2008's operating profit number? Especially with the 787 starting to ramp up production.

Well, to build on Dave's thoughts there, 2008 was the high-water mark for this business. The productivity initiatives continue to generate a better cost infrastructure and a better efficiency in terms of manufacturing. I don't know that we need to get to the same sales dollar level to generate that kind of profit.

Clearly 787 as well as a couple of the other bigs, in terms of the A350 and some of the other military apps coming onboard, should be able to afford us a good step forward in 2011. But we are not at a point where we are providing specific guidance with regards to segment level profitability here for 2011 and beyond.

But I will tell you, you should see a nice improvement both in dollars and percentage into 2011.

Okay, that's helpful. What are you seeing right now within the Aerospace business? I mean you look at the regionals, you look at I guess production rates, you look at kind of the inventory situation of your customers. Kind of what's like a brief overview right now?

Yes, certainly. What I guess is the most important thing is in last quarter we described the fact that we had seen stability in the backlog for the first time in 18 months. That trend has continued and frankly even improved a little bit in Q3. So the natural trajectory of the business is improving.

In terms of where those sales and where those products are going, what I would say is this. That we are seeing better stability out of orders and the like count of the bigs, and not a lot of growth in other areas.

Okay. Then on the Energy side, as far as this recent acquisition, how do you -- how does it work to bring in those customized machined products to your other distribution locations? Because I guess it just probably has one location in South Texas, right? So how do you deploy that throughout the network?

We are heading for having this -- you could say we have three product lines in Lamons. Standard gaskets; specialty caskets and seals, that is where we do the fast turnaround and get paid for it; and then we have standard fasteners in Lamons that we added a couple years ago.

This feels in that other block of having specialty fasteners. It will work the same way.

I have gone on my way to visit several of the Lamons branch managers around the world in my travels, and they all fully understand that their current customers need specialty fasteners and have trouble getting them. We will over time make this just a, right, plugged into whole system, priced the same way as specialty gaskets. This is very complementary for both.

For South Texas Bolt, the folks there have been a great job in a region. And we'll just rather quickly take their footprint much larger.

So this is what I call a natural bolt-on. I take a lot of grief about it being a bolt-on that makes bolts, but so be it. This is a natural plug-in to the Lamons model.

Okay. How much have you guys invested in Lamons this year? Because it seems like it has been a pretty busy year between the four branch locations and this acquisition.

Remember the branches don't cost us much. Hundreds of thousands of dollars as far as capital.

The investment is training people and putting people in place. That is really the capacity limitation to going faster at building out our footprint.

I mean we have invested. We will continue with the same kind of investment level of training people and building branches for the next several years.

So it is kind of built in. It is kind of built into the business model now.

Okay. Thank you and good luck in the fourth quarter.

(Operator Instructions) Rick Hoss, ROTH Capital Partners.

Just a follow-up and really related to one of the comments you made in your prepared remarks. If I understand it correctly, you talked about part of the sourcing, the initiatives on sourcing, brought you over to some of the emerging markets and you are finding opportunity to increase your sales there. Did I hear that correctly?

That is exactly right. What is happening is -- you know, Rick, you understand; some of these businesses are pretty small in scope. What the GSO has really afforded us the opportunity of is not just to look at potential sources of supply for these businesses, but also business partnerships for, for example, the sale of machine tool cutting products as well as the distribution of for example the Richards Micro-Tool kind of business.

So what it does is it gives us the ability to open our eyes towards local consumption of the products that we already make in our network. So it has been a very positive development with regards to GSO. I know that the businesses are leveraging and working with them yet even closer than they were just months ago.

It's obviously enough of a change in your previous outlook when you think about '11, '12, and out years. Emerging markets didn't -- it was a part of the growth strategy, but it wasn't an overwhelming part of it. Is it -- it's absolutely improving now to actually be a significant part of where you expect future growth to come from?

Absolutely. I came away from this business development trip and lots of meetings and lots of folks in TriMas meeting me different places. And we all came away convinced that we have an upside and while we have got to be smart about how we put resources in place, we are already doing that.

It is almost an untapped area. We aren't total novices at it, but for TriMas there is a lot of upside.

Okay. Thanks for your insight.

Robert Kosowsky, Sidoti.

Yes, hi. Just a quick follow-up. It looked like the operating margin on the Engineered Components side was down sequentially. I was wondering what some of the drivers were and what is a more normalized margin level.

You know, Rob, in terms of the operating profit out of that business, you had some of the activities around integration costs that (technical difficulty) happen within the period on a sequential basis. So you saw some, if you will, some downward pressure in Q3. But in large part, I'd call Q2 as more of a more normalized running level for the business.

Okay, so it was just $0.5 million, $1 million just integrating that acquisition, the Taylor Wharton?

Exactly.

Something like that?

Exactly right.

All right. Thank you very much.

I am showing no further questions at this time.

Well, great. Thank you, everybody. We sure appreciate your continuing support. As you know, we are working hard here to continue to improve the value of TriMas, and I am quite optimistic that we have got the right things going on.

So again thank you and we will keep at it. Appreciate it.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference. You may now disconnect. Everyone have a wonderful day.