TriMas Corp (TRS) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to today's TriMas Corporation Third Quarter Earnings Conference Call. Please note this conference is being recorded. I would now like to turn the Conference over to Ms. Sherry Lauderback. Please go ahead ma'am.

Thank you. Thank you and welcome to the TriMas Corporation Third Quarter 2011 Earnings Call. Participating on the call today are Dave Wathen, TriMas' President and CEO, and Mark Zeffiro, our Chief Financial Officer.

Dave and Mark will review TriMas' third-quarter results as well as provide some additional details on our 2011 outlook. After our prepared remarks, we will then open the call up to your questions.

In order to assist with your review of our results, we've included press release and PowerPoint presentation on our Company website www.TriMasCorp.com under the Investor section. In addition, a replay of this call will be available later today by calling 888-203-1112 with a replay passcode of 499-5221.

Before we get started, I would like to remind everyone that our comments today which are intended to supplement your understanding of TriMas may contain forward-looking statements that are inherently subject to a number of risks and uncertainties. Please refer to our Form 10-K for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statements.

Also, we undertake no obligation to publicly update or revise any forward-looking statements except as required by law. We would also direct your attention to our website where considerably more information can be found.

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

Thanks, Sherry. And thanks to all of you who have joined us on this call. We appreciate your ongoing support.

Our agenda today is that I will provide my overview of our third quarter. Then Mark will discuss our financial metrics and details by segment. We will finish the presentation by discussing our outlook for the remainder of 2011 and then we will gladly take your questions. I will start on slide four.

Our messages today are simple and consistent, starting with a reminder of our playbook. Number one, our TriMas operating processes are in place and working well to help us produce the results that all of you expect and deserve from us. We react fast to the changing environment and take actions to keep our businesses on track and serving our customers well.

Number two, we continue to fund and implement programs that drive continuous improvement. We have a combination of new product and new geography programs to keep driving revenue growth. We have ongoing and new cost out projects to keep reducing our costs, and we continue our focus on cash generation.

Number three, we continue to make the strategic moves to rebalance our portfolio of businesses and improve TriMas for the long-term. This includes acquisitions like Innovative Molding, completed in August, which expanded our packaging product portfolio, and just recently a ring joint gasket manufacturer in India to lower our costs and expand our footprint in our energy segment. We've also just completed an acquisition of a small towing products company in South Africa to serve as a foundation to generate more sales in that region.

I am convinced the key to continuous improvement of TriMas value requires our constant attention and proper balancing of these three activities -- strong fundamental operating processes, strong program execution and strategic balance in our portfolio of businesses. All of us at TriMas stay focused on these drivers of our success. Third quarter adds another quarter that I believe reinforces the message that TriMas businesses and people can perform well despite a difficult, uncertain economy as evidenced by our results.

We have achieved our seventh consecutive quarter of sales growth delivered via our continued attention to new product innovation, marketshare gains, geographic expansion and leveraging of our bolt-on acquisitions. We've also achieved operating profit margin expansion in Energy, Engineered Components and Cequent Asia Pacific through our continued attention to productivity and lean initiatives throughout TriMas factories and offices.

You will note that we have moved two businesses within our Engineered Components segment into discontinued operations. This reflects our rebalancing of our business portfolio, in line with our TriMas strategic imperatives.

Hi-Vol Products and precision tool companies are solid, well run, well-performing businesses but are not in markets where we have chosen to spend our growth capital. Proceeds will be targeted acquisitions for our growth platform businesses, for debt reduction and our ongoing restructurings as appropriate.

I remain upbeat about TriMas' ability to perform well despite weak economies and markets. We saw some softness in packaging in Q3 and we responded quickly to it. We see strength in the aircraft and energy markets. Our previous acquisitions are performing well, and productivity and cash flow this quarter remain strong.

Now, Mark will provide more information on third quarter results and each reporting segment of TriMas, and then I will close with a discussion of our outlook.

Thank you, Dave, and good morning. Let's start with a summary of our third-quarter results on slide six.

Our third-quarter sales were $278 million, a record sales level for the third quarter and our sixth consecutive quarter of double-digit sales growth. Net sales increased 17% compared to the third quarter of 2010. All six segments grew year over year.

The growth was led by 35% sales growth in Energy, 51% sales growth in Engineered Components and 42% sales growth in Cequent Asia Pacific. This growth was a result of marketshare gains, new product sales, geographic expansion and the successful integration of our recent acquisitions. Across the Company, our strategies are working and our investments in growth projects are paying off.

Our gross profit and operating profit improved around 13% compared to Q3 2010. Our productivity savings continue to fund our growth initiatives and helped offset commodity inflation. We continue to experience a slight margin decline, primarily as a result of sales mix of our segments, as two of our lower margin segments experienced significant sales growth during the quarter.

In addition, our Q3 margins were negatively impacted by the impact of purchase accounting adjustments and additional costs related to our Innovative Molding acquisition completed in August. Overall, we continue to manage SG&A as a percentage of sales, down 30 basis points for the quarter. Third-quarter 2011 income from continuing operations was $17 million or $0.49 per diluted share as compared to $12 million and $0.35 in Q3 2010.

As Dave mentioned, during the quarter we classified a precision cutting tool and specialty fitting line of businesses, both previously in Engineered Components segment, as discontinued operations and assets held for sale. Therefore, to be consistent with our expectations and previous results, I would like to point out that the Company net income per diluted share was $0.52, an increase of more than 40% as compared to the $0.37 in the third quarter of 2010.

Our capital structure improvements helped lower interest expense by $1.8 million compared to third quarter 2010.

We generated nearly $31 million of free cash flow during the third quarter compared to $24 million during Q3 2010, while funding new cap that CapEx and working capital leads to support our current and future growth. We plan to generate approximately $50 million in free cash flow for the full year.

Moving on to slide seven, during the quarter we continued to increase inventory in a couple of our businesses to support share gains and enhance fill rates, as well as serve our customers and new markets. As you can see by our growth figures, we were successful in securing this additional business. As a result of these decisions, we did see a temporary increase in working capital as a percentage of sales with Q3 2011 ratio of 16.4% compared to 15% in Q3 2010.

Our long-term working capital target remains at approximately 13% of sales, although we do recognize significant growth in global expansion does add complexity to our supply chain. Improvement here continues to be a focus across the Company.

On slide eight, we ended the quarter with approximately $476 million in total debt, a decrease of more than $23 million compared to one year ago, while funding more than $28 million in acquisitions year to date. During the third quarter, our continued strong financial performance afforded us the opportunity to amend our accounts receivable facility with improved pricing of LIBOR plus 150 basis points versus LIBOR plus 300 basis points as of September 30, 2010, while also extending the maturity to 2015 and increasing our capacity by $15 million.

These amendments, in conjunction with our recent refinance of our US credit facilities, have significantly reduced our interest costs and extended our maturities. We will continue to proactively manage our capital structure and look for opportunities to reduce our interest costs. These recent activities provide us with the operational and financial flexibility to continue executing on our long-term growth objectives and strategies.

As a result of our increased profitability and lower debt levels, we ended the quarter with a leverage ratio of 2.65 times, the lowest level we have experienced here at TriMas. In addition, TriMas ended the quarter with $163 million of cash and aggregate availability under its revolving credit and accounts receivable facilities.

At this point I would like to shift gears and review our business performance by reportable segment, beginning with our packaging segment on slide 10. Packaging sales grew 3.6 compared to the third quarter 2010 as a result of the Innovative Molding acquisition completed in August, which added a little more than $6 million in sales in the quarter. We remain optimistic about the future growth prospects in packaging, but we did see some end market demand softening during the quarter.

Our customers took action to actively manage their inventory levels in industrial closures and specialty systems in Q3 in response to the economic uncertainty. Q4 order rates have shown improvement versus the Q3 levels.

We're gaining share abroad with several of our large customers, and we have been pleased with the opportunities that exist as a result of adding Innovative Molding to our Company.

During the quarter our packaging margins were impacted by the acquisition of Innovative. While it contributed to the topline, operational earnings did not flow through to the bottom-line due to the effect of purchase accounting adjustments, additional acquisition-related costs and inefficiencies related to Innovative's move to a more efficient manufacturing facility. In total, Innovative's results negatively impacted gross margins by 480 basis points.

It's important to know gross profit margins on the legacy business actually increased 100 basis points despite the sales reduction as a result of our productivity initiatives.

Significant end market growth prospects with large end market spaces for this segment continue to support our launches of new dispensing products serving the medical, pharmaceutical, food and beverage, and personal care markets. Our initiatives focused on geographic expansion continue to gain momentum, and the acquisition of Innovative Molding with its proprietary products and customer base will complement Rieke growth strategies.

Moving onto slide 11, Energy. Energy sales increased nearly 35% for the third quarter compared to the year-ago period. According to the largest sales quarter in Lamons history, the sales growth was a result of a multiple growth initiatives including geographic expansion, the fourth quarter 2010 acquisition of South Texas Bolt and Fitting, and increased demand.

The acquisition contributed $5.7 million in sales to the third quarter. Its performance continues to exceed our expectations and sales related to South Texas Bolt and Fitting are on track to double the preacquisition level.

Lamons is also continuing to benefit from newer branches opened in Rotterdam, Salt Lake City, Edmonton, and the United Kingdom, as well as newer branches open in Midland, Michigan and Singapore. In September we also expanded the sales and manufacturing footprint of this business into India with a small purchase of X-Cel India which specializes in the manufacturing of ring joint gaskets.

Operating profit increased 47% as a result of higher sales volume, with margins improving 90 basis points despite a less favorable sales mix related to increasing sales at newer branches which have initially lower margins and increased SG&A costs in support of that branch expansion. We will continue to expand our footprint in support of our global customers and new markets.

On slide 12, Aerospace and Defense sales increased 6% in Q3 2011 compared to Q3 2010 due to improved demand for our blind bolts and temporary fasteners from aerospace distribution customers, marking the fifth quarter in a row of higher order activity and increased backlogs.

Monogram, our aerospace business, continues to show positive sales momentum with a $5 million sales increase compared to Q3 2010. On the other hand, our small defense business continues to be negatively impacted by the decreased activity associated with managing the relocation and establishment of the U.S. Army's new defense facility. We're in the process of bidding on future production of ammunition casings and we will keep you posted as to the results.

Third-quarter gross profit increased more than 20% compared to the prior-year quarter. And related margin improved 570 basis points, primarily due to the higher sales levels in aerospace and more favorable product sales mix in Q3 2011. Operating profit increased slightly as the increase in gross profit was significantly offset by higher SG&A levels in support of growth.

We're well-positioned to take advantage of the trend to build composite structure aircraft and our plans support increases in our content per aircraft. We expect this business to share revenue growth and margin expansion as aircraft build rates increase and our expanded geographic coverage generates results.

Moving on to slide 13, Engineered Components, third quarter 2011 sales increased 51% compared to a year ago period, primarily due to improved demand for industrial cylinders, engines, compressors and other well side products. We continue to gain market share in these businesses as well as experience additional sales from new product introductions. Third-quarter operating profit more than doubled and operating profit margin improved 630 basis points compared to the prior-year period due to higher sales levels, increased absorption of fixed costs and productivity savings. The Company continues to develop new products and expand its international sales efforts in this segment.

On slide 14, we showed the performance of Cequent split into two segments. Cequent North America sales increased 3% for the quarter as a result of increased demand from the retail and industrial channels, primarily due to marketshare gains and new customers. Cequent North America's operating profit decreased due to temporary manufacturing inefficiencies which we're in the process of addressing, the sale of higher cost inventory, and higher SG&A expenses primarily for advertising and promotional items which are aiding our new customer sales.

Cequent Asia Pacific sales increased 42% when compared to Q3 2010 due to new customer program awards in Thailand and Australia, and the impact of favorable currency exchange. Cequent Asia Pacific's operating profit increased with an operating profit margin of 20%, a significant rebound from previous quarter due to the increase sales levels and continued productivity efforts, as well as an agreement to reimburse start-up cost expense during the prior quarter associated with a new customer award. We will continue to focus on productivity, product leverage and regional expansion in the Cequent segments.

In summary, on slide 15, we're pleased with our year-to-date results driven by our ongoing strategic initiatives. Year to date sales grew 19%, driven by significant organic growth and the successful integration of bolt-on acquisitions. We also had strong earnings levels while continuing commitment to future growth.

Our performance affords us the opportunities to lower our cost of borrowing with interest savings based upon our new rates of approximately $4 million to $5 million a year. We enhanced our long-term capital position and structure, and our leverage ratio is at a TriMas low. And we plan on continuing to lower it.

Continuous productivity in every functional area, every year will remain a focus priority including working capital. Our operating model is in place and allows us to see trends, react quickly and take advantage of market conditions.

We're pursuing opportunities to drive long-term earnings growth and enhance value to our shareholders in the future across the TriMas enterprise. That concludes my comments. Now Dave will discuss our expectations for the remainder of 2011.

Thanks, Mark. Now, I will look forward and discuss our outlook for the full year of 2011. Slide 17 shows the progression of our full-year outlook through each quarter in 2011.

Our growth programs are achieving the results we're after. Programs ranging from adding sales engineers in Asia for Monogram and Rieke, new compressor assembly and gas product offerings at Arrow for use in shale fields, our acquisition of the Huntsville plant and product line for Norris, expanded heavy duty [fifth wheel] products in our (inaudible) brand, and expanding our branch network at Lamons are all contributing factors to our revenue growth. We expect sales growth for the year at 16% to 17% above 2010.

Our outlook for EPS from continuing operations is now $1.52 to $1.57 per share. Or you can do the math to get $1.65 to $1.70 if the discontinued operations were included on an apples-to-apples comparison.

We expect free cash flow of approximately $50 million for 2011. We're looking to carry some safety stock inventories for our customers with particularly choppy demand, so we can capture opportunistic sales upsides during the next couple of quarters.

Now turning to our strategic aspirations on slide 18, these of course remain consistent, although we do shift our emphasis given the external environment. Our own [businesses rolling] forecast and our identified risks and opportunities. Our 2012 playbook aligns with our strategic aspirations.

We're modeling our plans assuming no economic tailwinds, so that we have to earn every bit of growth we achieve and earnings improvement comes from productivity, a situation with which we have all become familiar.

The cost position of our businesses must allow us to compete globally, so you will see us continue to engage in restructurings as warranted. We will invest in growth partners for new products and geographic expansion and continue to seek attractive bolt-on acquisitions.

I remain upbeat about TriMas' ability to perform well despite weak economies and soft markets. We're well-positioned to execute on our strategic imperatives throughout the remainder of 2011 and achieve double-digit EPS growth in 2012.

Now, we welcome your questions.

(Operator Instructions) Robert Kosowsky, Sidoti & Co.

I was wondering, Mark, if you could give us maybe the revenue and earnings numbers for Q1 and Q2 from continuing operations?

Yes, I think I can do that for you. It's also obviously going to be released with our K later on today. You know, Rob?

Yes?

I don't have that immediately in front of me.

Well, if it's in the Q, I can just look it up then.

Exactly.

Okay. And I guess could you maybe talk a little bit more about the trends you have been seeing I guess by month or so in the closures business in North America and Europe? Just trying to get a sense of what you guys think this leading indicator is telling us.

What I'm going to tell you is kind of confirmation of what [they're hearing] (inaudible) (technical difficulty). During third quarter we saw quite a bit of drop-off in industrial closures in Europe, first, early in the quarter; some drop-off in the US. And of course, that kind of tracks industrial shipments of paint and chemicals and all of that, so more in Europe, a little less but still a drop-off in the US.

It would certainly -- we see it as a leading indicator and we started looking across all of TriMas. And all of us got together and talked through that. Now looking back on it, still down some in Europe, but -- I'm talking industrial closures. And in the US kind of come back up to a little bit lower than it was in the first half, but feels okay.

The specialty dispenser business also dropped off. And Mark used the word inventory correction. Ultimately, that's what it looked like, was a drop-off early in the quarter that has come back. And it winds up looking flat. And that is what we are presuming the markets are going to look like is flat.

Okay. That's helpful.

And then of course we also can keep track of new products and new customers and new activities in Asia and all that, we have got -- of course that all winds up being upside for us.

Yeah, sure (multiple speakers)

The underlying markets are flat.

Okay, that's helpful. Then could you talk about maybe some of the pace of the new product launches on the specialty dispensing side and kind of where those stand right now?

There is a substantial amount -- it happens to be both new products and new customers that we've been pursuing in Asia. They're new for us in Asia. We serve the same customers say in the US.

Those are going through the process. They -- well, I wish they went a little faster for us, but you have to respect their timelines for approvals and changeovers and tests and all that. So -- (multiple speakers)

Okay. So is it basically --

So they're still coming. We're not getting them yet.

Yes, because they just seem like they keep getting pushed out to the right a little bit.

It feels like that sometimes.

Okay. And then also just curious about the manufacturing issues in Cequent that you talked about. And also, do you see any impact of Thailand in the Asia-Pacific business?

We had in the Cequent North America business, particularly in the nonconsumer distribution channels, we had a lot of -- I was talking about order rate choppiness where there's orders and then drop offs and accelerates and all that. And that was hard on our facilities. Now, I always prefer that our facilities be able to respond fast. But realistically, it puts lot of stress on us.

The supply chain for some of that product is made in Asia that we sell in the US, and that supply chain is tough too; the timing coming through ports and all. So we're working on all of that pretty extensively. But it's forcing us to take on extra costs, and ultimately in business number one is serve your customers. And it has cost us some, but we have made those choices.

Thailand, we have had no direct effect because our operations are inland. The industrial parks that we're in are fine. Indirectly, though, we have had some customers take some time out because of other supply problems.

So, actually, the quarter would have been stronger without that. So, no direct issue on us, but we are seeing some customers be affected. And therefore it gets us indirectly.

Okay, so it would be fair to assume some negative impact in the fourth quarter too?

It will go on some. It's going to be -- you'd notice that we did an acquisition in South Africa that was partly for a staging area for the production we're shipping into those assembly plants now.

Okay.

So it will be -- I won't say masked; it'll be offset by some increases going on.

Okay. And then as far as the Cequent North America production issues, is it basically just you got the orders last-minute and it was just hard to change over your machinery, and you might have had some overtime to get the stuff out the door (multiple speakers)

Yes, (multiple speakers) overtime and extra costs and -- or you build something in a US plant that you might have chosen to build in a different plant. The costs are higher, but you do it for your customers (multiple speakers) because it's fixable.

To have a little context there, remember we started with obviously the forward-facing consolidation of that set of businesses and the restructuring back in early 2009, throughout 2009. And quite frankly we're still working on the backend of it as well. And these are things we know how to fix. We know how to fix year-on-year and the team is obviously very much focused on it, so we've got the pieces there.

Hey, Rob, what I can give you on the question around the discussion around disco and the effects associated with it, you will see obviously in the coming K in the second footnote. It will give you $34.7 million in sales and $3.4 million in income from discontinued operations net of tax expense, so you can start to back into your model numbers waiting for the quarter-by-quarter breakout. So that should help you.

And that's a comparison basis of $30.7 million in 2010 for the nine months ended, and $8.2 million in income from discontinued operations net of tax expense. So that is kind of where we are.

Okay. And it was $34.7 million, that was for 3Q -- like once every 3Q, right?

Exactly, year-to-date basis. That's correct.

Thank you very much.

(Operator Instructions) Alexander Walsh, KeyBanc Capital.

Good morning guys. I just had couple quick questions. First, you mentioned you got 100 basis points in margin expansion in packaging. I was wondering if you could just kind of go into a little detail on the breakout, where that was kind of coming from (inaudible) [weather] closures or specialty?

Actually when we saw the beginnings of some customer changes in terms of inventory levels, we take actions pretty quickly in that business. And I'd tell you it affected both the specialty dispensing and industrial side of the house, not disproportionate on one side or the other. Margin rates remained fairly consistent between those two segments.

I will add that the business has a long list of productivity programs -- everything from multiple machines per person, different kind of feeder systems, vision inspection systems, speeding up lines, so all of those kind of things that of course I enjoy. But there is also an ongoing improvement in the mix of regrind in the resins and things like that, kind of a recycling, and that goes across that business.

That business gets good, solid productivity. And sometimes, as it works out, when you see a little bit of slow down you can jump on something to get them done faster. The [Linbrooks] and the crew that runs that business, I can't give them enough credit. They don't need me to tell them what to do. They do it. And the results speak for themselves.

Okay. And obviously there's going to be a lot of noise with Innovative, but how are you thinking about the margin run rates going forward in that segment? I mean on these productive -- are productivity initiatives going to be enough to offset the impact of Innovative? Just any color you could provide would be helpful.

Let me say this. When we bought Innovative we indicated that the margin rates were less than the legacy business. So we're going to see some headwind there, at least initially as we integrate that business.

The first step obviously was getting them into a new and professional and efficient new facility, which was in the 30 to 60 days with effort. So initially we'll have some headwind in margin rates, but it will continue to improve over time.

What we haven't done and we didn't offer up was the margin rates in the actual acquisition. So that's not something I can talk to directly here.

Okay. And then just kind of taking the same frame of thought to the Monogram business, you were talking about improving salesman sales mix and terms of the product lines. I was wondering if you could go into some detail around the margin differential between some your products in that segment, whether it be blind bolts or other (inaudible).

Well, the blind bolts versus the historical may be what I would consider more commodity-esque kind of products that have different kind of shelf life in the sense of they are part of the assembly process. Probably about 15% less profitable, but still very profitable business for us between those two segments. So that should give you a sense as to -- Q2 to Q3 we saw significantly more blind bolts in Q3 than we did in Q2, as permanent fasteners were required for the assembly and the ultimate assembly of new aircraft in terms of the mix of the business.

Okay. So as we go into '12, am I hearing you that the mix is going to improve or --?

It should continue to improve. Q2 was probably yet an improvement over Q1, and Q3 was probably more consistent with the historical run rates and 2008 levels.

Okay.

Which were kind of backed out with what I would call "peak" levels. Obviously with productivity efforts that we put forth in that business, we expect more leverage out of the facility yet ahead of us.

Okay, that's helpful.

And I know this will be broken out in the K, but did you have the topline discontinued ops in this quarter and maybe what you were including or expecting for next quarter, just to kind to get to your topline guidance?

In the footnote you will see in the Q that is coming out yet later today, you will see in the quarter $11.9 million in sales, and on a year-to-date basis $34.7 million in sales.

Okay, that's helpful. I appreciate the time.

(Operator Instructions) Robert Kosowsky.

Just another question on the tax rate in the quarter. It was a little bit lower than the 38% I was modeling. And I'm wondering if this is kind of sustainable going forward in this kind of 33%, 34% range. And what have you done to lower it, if it is permanently lowered?

Well, part of the growth -- it comes the through where we're growing and it comes through obviously tax initiatives that we have put in place in terms of how we structure the Company.

I would tell you that, Rob, it is sustainable at the 34%. And our goals are continuing to obviously, within the confines of what is appropriate and allowable, continue to press down further on that rate. But I'd tell you the 34% is kind of our planning levels at this point in time.

Okay, definitely good to hear. Also as far as the balance sheet, what are your thoughts on it? Because I imagine the fourth quarter will be a big cash flow quarter. What do you -- do you want to start to pay down some more debt now that you have a lot of the capital structure refinancing in place? Or kind of what are your thoughts on leverage going forward?

Well, you know, our long-term aspirations are obviously to break well into the twos, and we're already there at 2.65. There is still more deleveraging that we have ahead of us.

Now the question becomes [is] obviously best (inaudible) use for that cash, Rob. And obviously we will assess what to do with it as it becomes available to us.

All right, thank you very much.

(Operator Instructions) (inaudible), Jefferies & Co.

Hey, good morning guys. How are you?

Good morning.

Just a question on -- you know you guys have been talking about (inaudible) activity initiatives, especially on your legacy business. Could you give some like flavor on packaging and which the particular segments you're focusing, especially on the productivity side? You know, with like the macro headwinds you guys talked about, like customers actually pulling back and all those kinds of things?

Yes. [We need] (inaudible) [when you go] clear up to a level of our strategic imperatives. We need over -- 3% or above of productivity on an ongoing basis to produce enough income to turn around and either bring it to the bottom-line or invest it in growth programs. That is our long-term business model. And so, the only way to run at those kinds of levels, 3% to 5%, is productivity from every area of the business.

So that is my professor view of productivity [and I think] wear everybody else out around here about getting into the offices and getting it [every day]. That said, you of course go after the opportunities.

In packaging, we continue to work the -- there are separate kind of effort. The specialty -- the closures business is more a (inaudible) based business. And therefore the productivity is about yield, higher -- less scrap coming out of a die, machines that can run on their own. And it's a global business and we find operations that have more opportunity.

We've had a great run, for example, in Italy in that manufacturing plant improving the productivity. And part of it is [kind of at your] points for copying -- copying processes that have been developed in other facilities. So, it is a yield and machine-based productivity and getting every plant up to the best practices.

In the specialties business, that is a plastics driven business and there's a lot more design effort involved in that. Yes, there is activities in the machines, but you have seen molding machines. Molding machines sit and run. And as long as your uptime is high, it goes back -- I would call it the fundamental driver is design related.

A dispenser that has 14 parts, figuring out a way to do it with 12 parts; and a dispenser that uses a more expensive mix of resin in one of those parts, finding a way to do it with a lower cost one -- so I would call it design and engineering-driven. I don't know if that helps you, but I would say that is the way they go at it.

The team is very good at those things. And, again, it shows in the numbers. (multiple speakers) It's a (inaudible) kind of results though. (multiple speakers) It is the 3% plus kind of results.

What's interesting is that, when you start to look at it, obviously material is a big spend for us. Labor is a good spend for us and overhead is a good spend for us. And the teams are incentivized to look across every single spend area.

We give them credit whether it is back-office spend in terms of either A, reducing or automating their financial processes, or whether or not it is the things that Dave pointed to -- that being engineering, and/or material driven. So it's every area of spend.

Okay. So I guess like what you said about materials, labor and overhead -- those are some of the big buckets where you can (multiple speakers)

Absolutely, absolutely.

Absolutely.

Tom Klamka, Credit Suisse.

Good morning.

Good morning.

Good morning, Tom. How are you?

Good. I may have missed the answer here, but in the packaging segment, the negative impact on margin -- you talk about a few things. But as far as the actual purchase accounting adjustments and the acquisition cost, just those, have you quantified those? Or is that the $3.5 million that is in the appendix?

We haven't quantified those. When you think about the effects, what we do talk is the margin rate in the segment which was affected by more than 400 basis points down in that period. But the legacy business was up 100 bips. So you can kind of back into the overall effectiveness or the mathematics associated with that amount.

So that 480 isn't just because Innovative is a lower margin business. That includes the purchase accounting adjustments and all that?

Exactly right.

And we took the business on knowing -- it was starting to move from an old facility to a new facility. And we could have chosen to let them do all the work and sort of thing, but we wound up realizing we were better off getting involved. So we have had had a crew of TriMas Rieke people involved initiative finishing that move off. Great new facility, great new facility; you will see a video floating around with that on it.

Okay. And as far as the inefficiencies at Cequent, you see those going away in the quarter coming up? Or is it going to take a little longer?

It's probably over the next couple quarters. And the reason why I say that is that you've got obviously the normal ramp down of volume here and going to Q4. So you will start to see some of those changes here in Q4 and Q1 as it starts to ramp the cycle again for next season. That is the way I think it will recover over time.

Thank you.

Certainly.

(Operator Instructions). At this time, we have no further questions in the queue. I will turn the conference back over to our speakers for any additional or closing remarks.

Thanks again. We sure appreciate your attention and interest. You know we are -- every one of us at TriMas is fully dedicated to continuing to drive the value of the Company. And we think we have a playbook and a set of plans to keep ourselves moving.

There is always 1000 things to work on and many things that can get better. But we know how to do it, and we appreciate your support as we keep at it. Thanks again.

Thank you. That does conclude our conference for today. We thank you for your participation. You may now disconnect.