TriMas Corporation (TRS) Q3 2015 Earnings Report, Transcript and Summary

Good day and welcome to the TriMas Third Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Sherry Lauderback. Please go ahead, ma'am. Sherry Lauderback - Vice President-Investor Relations & Communications: Thank you and welcome to the TriMas Corporation's third quarter 2015 earnings call. Participating on the call today are, Dave Wathen, TriMas' President and CEO; and Bob Zalupski, our Chief Financial Officer. Dave and Bob will review TriMas' third quarter 2015 results, as well as provide details on our outlook. After our prepared remarks, we'll open the call up to your questions. In order to assist with the review of our results, we have included the press release and PowerPoint presentation on our company website www.trimascorp.com under the Investors section. In addition, a replay of this call will be available later today by calling 888-203-1112 with a replay code of 284954. Before we get started, I would like to remind everyone that our comments today, which are intended to supplement your understanding of TriMas, may contain forward-looking statements that are inherently subject to a number of risks and uncertainties. Please refer to our Form 10-K for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statements. Also, we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. We would also direct your attention to our website where considerably more information may be found. I would also like to refer you to the Appendix in our press release issued this morning or included as a part of this presentation which is available on our website for the reconciliations between GAAP and non-GAAP financial measures used during the conference call. Today, the discussion on the call regarding our financial results will be on excluded special items basis. At this point, I would like to turn the call over to Dave Wathen, TriMas' President and CEO. Dave? David M. Wathen - President, Chief Executive Officer & Director: Thanks, Sherry. Good morning and thanks to everyone on this call for your interest and attention to TriMas. I'm sure you've heard and read plenty of reports describing softening industrial markets and a potential global shut down – slow down. I concur that some of this is underway. But our job at TriMas is to navigate around these issues, keep our cost structures right, invest in the bright spots that do exist and deliver improving value to shareholders of TriMas. I believe we have made encouraging progress on a number of our key initiatives this quarter, particularly with regard to market improvement. While our third quarter sales were flat year-over-year, we achieved 300 basis points of operating margin improvement and increased our earnings per share by nearly 35% to $0.39. We realized margin improvement in three out of our four segments, restructured our oil related engine business to breakeven and reduced corporate expenses. Our aerospace and energy segments led these year-over-year margin improvements. Good progress, although, we still have more to do to achieve our targeted margin levels. As reflected in the flat sales level in the quarter, overall top line growth continues to be challenging as the sales increase in aerospace was offset by the impact of very low oil related activity and the strong U.S. dollar. Bob will provide you with more details by business in a few minutes. During September, we also launched our Financial Improvement Plan, which we have implemented across the board. This set of actions began with a hard look at all of our businesses and corporate spend post-spin. It involves permanently reducing fixed costs, right-sizing ongoing costs and variablizing all we can of discretionary activities. Bob will also update you on this plan, but I can assure you that we will continue to implement the necessary actions to drive improved performance, mitigate external headwinds and achieve our longer-term financial targets. Turning to the external headwinds and tailwinds on slide five. The majority of these are consistent with my comments in second quarter with a few updates. Concerning oil related activity, I believe that within our effective businesses, we have flexed our cost structure down, consistent with current order rates, so that we won't experience profit deterioration going forward. While lower resin and specialty steel prices have help reduce material input costs, some of these reductions pass through in pricing to our customers, such that while we hold margin percentages, revenues are slightly lower. The businesses most affected are packaging and Norris Cylinder. Our aerospace business is seeing a continuation of inventory reductions by large distributors and military aircraft build rates are down as much as 20%. But commercial aircraft build rates remained steady and they should more than offset the distributor in military top line softness. The relatively strong U.S. dollar continues to be a headwind in revenue translation and makes exports more challenging for our U.S. based businesses. And in addition to the continued macroeconomic uncertainty, we're also seeing some basic industrial softness in areas like gas cylinders and packaging closures, which is a more recent headwind. We all see the same news reports, limiting the slow global economies, so this softness is no surprise. Our job at TriMas is to quickly adapt to these external factors, find or create the tailwinds and concentrate on the blind spots. Many positive trends continues, including: Asia is still growing, including middle-class consumers in china; the rate of change in commodities and currency has slowed; the positive trend towards denser materials requiring higher-spec pumps and packaging; refineries continue to convert to higher-spec seals and fasteners and more carbon fiber construction in aircraft is good for us. Internally, even though we have implemented many costs cut actions, we have also continued to invest in new products, more marketing and technical resources and have accelerated our manufacturing footprint improvement actions for ongoing competitiveness. On slide six, I'll highlight some specific initiatives in each business, targeting our strategic initiatives of profitable growth and margin improvement. Our key business initiatives remain consistent, although we have accelerated some of the actions to drive more immediate results and mitigate some of the headwinds that we see. In packaging, we are well underway in reorganizing our sales and marketing teams to maximize sales on our target customers and our new product pipeline is robust, as our three regional technology centers ramp-up. Our packaging customers continue to migrate towards more viscous materials, more formal applications, recyclable products and global supply agreements, all positive trends that we can leverage to grow this business. And even though we are already operating at targeted margin levels, we keep after both fixed and variable cost with maximizing production in low cost countries, automation, upgrades of molding technology for higher yields and configuring our factories closer to customers to reduce working capital and transit times. In aerospace, we continue to share and implement best practices across all plants for increased efficiency. We have launched a consolidated customer-facing engineering, research and technology group for better focus and speed. And we continue to invest in new products that aid our customers' assembly processes. Our customers certainly appreciate these efforts. One confirmation is that our Allfast division has recently been named Embraer Supplier of the Year amongst all hardware suppliers, reflecting our efforts to provide quality products that solve our customers' needs. Energy is showing improved margin performance as a result of our restructuring program. We have added resources and are accelerating plant consolidations, process improvement, Mexico manufacturing plant ramp-up and overall cost-out (9:22). We brought in an external team of people who specialize in restructuring and business improvement two months ago, who have already accelerated this program. There's still much to do, but the progress is encouraging. In engineered components, our Norris Cylinder business is running near full capacity. So, we are installing the presses and fabricating equipment we acquired during the Taylor-Wharton bankruptcy, which we had mothballed at that time. We have several new product programs for higher-spec cylinders that will differentiate us going forward. In regard to our Arrow Engine business, you have heard us describe the dramatic down-sizing we've done in our oil field engines and equipment business to breakeven. They were using this slow period to develop and commercialize a broader range of engines and natural gas compressors to fulfill some new needs by our customers. And at corporate, we have taken a hard look at corporate functions and costs and downsized by a third, making sure we are right-sized for 2016. Before I turn the call over to Bob, I wanted to comment on Jerry Van Auken's retirement as President of Norris Cylinder and the appointment of Chuck Manz as President. We have been working on this planned transition for quite some time and believe that Chuck is well positioned to lead Norris into the future. Chuck joined Norris in 2010 as the Vice President of Operations and has assumed increasing responsibilities since that time. I also want to thank Jerry for his expertise and leadership during the last eight years. And we are fortunate he's staying with the company in an advisory role. During Jerry's tenure, Norris has achieved sales growth that well outpaced general industrial growth, as a result of both organic initiatives and bolt-on acquisitions. By leveraging these assets and driving continued productivity, Norris has also very successfully raised its margin and return on capital levels during this period of time. So, thank you Jerry and best of luck in retirement. You've earned this. At this point, I will turn the call over to Bob to provide financial and segment information and then I'll return with some forward-looking comments.

Thank you, Dave. With regard to the third quarter, I'll begin my comments by providing a brief summary of our total company performance beginning on slide eight. As Dave mentioned, third quarter was a solid quarter with margin expansion despite macroeconomic weakness. We reported third quarter sales of $222 million, flat as compared to third quarter 2014. Our 2014 acquisitions contributed $16 million in sales, which was largely offset by the decline of sales related to continued low levels of oil related activity and the impact of unfavorable currency exchange of nearly $4 million in our packaging and energy segment. Operating profit for the quarter increased to $30 million, or 13.4% of sales, representing a 300 basis points improvement compared to Q3 2014. Year-over-year improvements in our packaging, aerospace and energy businesses led the way, as well as a reduction in corporate expense driving this increase. Our income and diluted EPS both increased more than 30%, as compared to 2014, with EPS in the quarter of $0.39. While third quarter 2015 free cash flow was lower than the prior year due primarily to the timing of working capital and tax payments, we still expect to achieve our full year 2015 free cash flow goal of $50 million to $60 million. On a year-to-date basis, financial results were fairly consistent with the quarter, with revenue slightly higher compared to the prior-year period, operating profit margin up 60 basis points and a Q3 year-to-date 2015 diluted EPS of $1, as compared to $0.95 in the year-ago period. We ended the quarter with approximately $459 million in total debt, compared to $639 million as of December 31, 2014 and $338 million as of September 30, 2014. The increase from a year ago was due to the acquisition of Allfast in October 2014, while debt was reduced during 2015 primarily as a result of the cash dividend received from Horizon Global. Our leverage ratio was 2.85 times at September 30 and we had $130 million of cash and aggregate availability under our credit facilities. Moving on to slide nine, which provides an EPS bridge from Q3 2014 to Q3 2015. As illustrated, the decrease resulting from the impact of low oil prices has been more than offset by the results of our acquisitions, operational improvements in the businesses and lower corporate expense, as we continue to right-size our corporate office spend post-spin. Our tax rate was lower year-over-year as expected, and we expect the full year tax rate to approximate 32%. Before I move on to our results by segment, I would like to provide a brief update on our Financial Improvement Plan. As we announced in September, we accelerated restructuring initiatives in energy, added cost actions across the rest of the company and committed to improve free cash flow conversion, all in light of expected further top line pressures to ensure we remain on track toward our longer term financial goals. The three principal elements of the plan relates to head count, reductions in manufacturing and SG&A spend, and facility consolidations and/or closures. The majority of the head count actions are now complete, while cost reduction and facility related actions are on schedule and in various stages of completion. Given the timing of the September announcement, we expect only modest savings in 2015, with the majority of benefits expected to be realized in 2016. We continue to evaluate further cost actions, while at the same time continuing to invest in initiatives that will drive future profitable growth. At this point, I would like to shift gears and share a few highlights on our segments, beginning with packaging on slide 12. Packaging sales declined slightly, as growth from our Lion Holdings acquisition was more than offset by the impact of unfavorable currency exchange. Packaging attained a Q3 operating margin of 25.2%, which benefited from a reduction of certain acquired liabilities of approximately $2 million and continues to generate operating profit margins at or above our targeted levels of 22% to 24%. We believe packaging will continue achieving its targeted margin range, while funding ongoing initiatives such as the new customer innovation center in India and the ramp-up of lower cost manufacturing capacity in Asia. Turning to slide 13, aerospace sales increased primarily due to the acquisition of Allfast, partially offset by lower demand from our largest distribution customers. Compared to the prior year, Q3 operating profit margin expanded 400 basis points due to the higher sales and more favorable product mix, increased operating leverage and the impact of ongoing productivity initiatives. Aerospace continues to perform at higher sales and margin rates in 2014 and is focused on additional integration activities to operate as a single combined aerospace platform in order to better serve customers and to continue to realize synergies. Moving on to slide 14, energy. Sales increased 2.6% in Q3, as increases in North America sales, primarily related to higher margin engineering and construction activity, more than offset weaker upstream customer demand and lower international sales as a result of restructuring activities and unfavorable currency exchange. Operating profit margin improved 260 basis points as a result of volume leverage, a more favorable sales mix and operational improvements beginning to be realized from our restructuring efforts. We are committee to further reducing the fixed and variable cost structure of this business in order to achieve our targeted margin levels within the three year timeframe. Not unlike many other energy related businesses, the lower-than-historical levels of profitability in 2015 are indicators of a potential reduction in business value, which we are required to evaluate at least annually. We are in process of completing this evaluation and accessing whether this process may result in a non-cash goodwill and intangible asset impairment charge in the fourth quarter, more to come. Moving on to slide 15, engineered components. As already discussed, we are facing significant headwinds as a result of lower oil prices, which dramatically impact the results of Arrow Engine. With a Q3 year-over-year sales decline of more than $13 million, Arrow's management team has aligned Arrow's cost structure with the current level of business activity to remain breakeven during the quarter. The other business in this segment, Norris Cylinder, was down approximately $5 million in sales due to weakness in industrial end markets and lower export sales. Operating profit margin declined slightly due to the lower sales level and fixed costs absorption. Our focus in this segment remains on aggressively managing the cost structure in each of these businesses in response to end market demand. Moving on to slide 16, which provides a summary of our segment performance, it compares current prior year and sequential quarter results by segment. Although some of the expected improvements sequentially is being offset by the external headwinds we are facing, initiatives that we control are gaining traction as evidenced by three or four segments' improving margins year-over-year. Now I will conclude my comments with our updated 2015 segment assumptions on slide 18. Exiting Q3, we expect to continue to experience top line pressure in each of our businesses as a result of slowing or weakening market demand and anticipate that Q4 will be our lowest revenue quarter of the year likely 3% to 5% below Q3. We slightly updated our full-year guidance by segment for revenue and margin and provided some commentary regarding expectations for fourth quarter. While we expect to continue to gain traction and to benefit from execution of our cost action and operational improvement, which went through well at the Q3 sales level, we don't believe these benefits will be able to fully offset the impact of lower sales in Q4. One final item of note, as indicated in our recently filed 8-K, we reported diluted EPS of $0.44 per share for Q4, 2014. Included in that number was approximately $0.13 of favorability due to acquisition related and tax provision adjustments, which are not expected to repeat in fourth quarter 2015. While our Q4 2015 sales are expected to be lower than the sales of $223 million reported in the prior-year period, the favorable impact of our cost and restructuring actions, including the Financial Improvement Plan, is expected to substantially offset the anticipated margin impact resulting from lower sales. So, the good news, if 2015 comes to a close, is that we have permanent reductions in our cost structure, while improving our operational processes, which will serve to benefit us in future periods. That concludes my remarks. Now Dave will summarize our updated 2015 outlook. Dave? David M. Wathen - President, Chief Executive Officer & Director: Thank you, on slide 19, following up on Bobs comments, I'll summarize our total TriMas 2015 guidance updated to reflect our third quarter performance and the current trends we are experiencing. We reduced the top line forecast slightly in light of Bob's comments on Q4, but we increased both our EPS and free cash flow guidance. We are raising full year EPS outlook to $1.25 to $1.30, an increase from $1.15 to $1.25, given the positive impact of our cost actions and operating improvements. As we communicated a few weeks ago in our Financial Improvement Plan announcement, we have also increased our 2015 free cash flow guidance to $50 million to $60 million, which is consistent with our historical achievement near 100% of net income over the past few years. On slide 20, I'd like to share our preliminary thoughts on 2016. Overall, we see very little macroeconomic change. We've adapted, resized and reprioritized to address the strong dollar, expected low commodity prices, continued low levels of oil related activity and relatively slow global market growth. And like many companies are communicating, we also expect weaker industrial end-market demand. So, we find the bright spots, we concentrate on profitable growth opportunities, we take actions to right-size our costs and drive productivity for margin improvement. A few comments by segment. In packaging, our focus is new products, customer solutions and geographic expansion to continue our track record of growth. Our product pipeline is good and our reorganization of sales and marketing is finding many opportunities. So, we expect to grow at low to mid-single-digit in 2016, while operating at margins within our targeted band. Aerospace will grow to similar rate with growth on large commercial aircraft somewhat offset by ongoing softness of smaller aircraft, military spend and continued inventory reductions and distribution. We expect that our recent track record of strong productivity will continue such that margins will grow in 2016 as we continue toward our longer term goal. We expect a flat market in energy where we will also likely exit some lower margin business and our full-bore restructuring program will continue to reduce fixed and variable costs such that we expect a notable increase in margins towards our longer term targets. In engineered components, we expect our cylinder business to perform well on potentially lower revenue due to softening industrial demand and challenging exports, and we have our oil and gas equipment business configured for no growth at current run rate levels. We have already downsized our corporate spending significantly and we always continue to look for additional opportunities for efficiency. We are still looking diligently on our 2016 annual operating plan but, as you can see, we have significant number of initiatives in every business to drive profitable growth and maintain or enhance margins. We are planning on the existing external headwinds to persist with continued macroeconomic uncertainty. As a result of all the efforts, including our cost cuts, we should see better earnings regardless of whether we'd see a better top line. As usual, we will provide specific guidance for 2016 on our fourth quarter earnings call but, for now, I'll forecast solid earnings growth on a relatively flat total revenue with free cash flow similar to net income. Slide 21 is a reminder of our longer term financial targets that we keep in front of ourselves here at TriMas. We use these targets as we make shorter term decisions, and I feel confident we are on track towards achieving these targets with ongoing progress. I will close with overall summary of our post-spin playbook on slide 22. Those of you that know us will see no surprises, but it's worth an ongoing reminder of our long-term financial targets. Our most important improvement metric is margins. Our first look at 2016 includes all these tactics, including growing our higher margin businesses. We've added a Financial Improvement Plan to accelerate improvement. We've added resources in energy to accelerate cost-out, and our overall productivity programs help drive continuous improvement. We keep after mitigating risks and capturing opportunities. We're focused on accretive capital allocation and our incentives reward success in all this activities. In closing, I believe third quarter 2015 shows improved operating performance in TriMas and good overall progress. And while we have accomplished much, we still have much more opportunity and work to do on many fronts. Across all levels of the business, we are committed and focused on execution. We will continue to make progress towards our strategic aspiration of being high margin, highly engineered product and solutions company. I'm optimistic about our ability to perform well and increase shareholder value going forward. Now, we'll gladly take your questions.

Thank you. I'll take a first question from Andy Casey with Wells Fargo Securities.

Thanks. Good morning everybody. David M. Wathen - President, Chief Executive Officer & Director: Good morning Andy.

Good morning Andy.

It looks like the anticipated Q4 revenue decline is related to energy and engineered components. First, is that correct?

That is a substantial portion of the expected weakness, yes.

Okay. Thanks Bob. And tying that to the 2016 view you gave, are you kind of right, as we sit here today, anticipating a continuation of that sort of weakness in the first half followed by kind of flattening out in maybe Q2, Q3? Is that what's embedded in the guide?

From a sales perspective, certainly I don't think we're planning out any increases as it relates to the Arrow Engine portion of the business. I mean, there's no factors that we can see, at least near-term, that seemingly would change the level of oil-related activity, which is what drives that business. From a Norris Cylinder perspective, clearly the industrial end-markets have weakened. It will be interesting to see as we move into 2016 whether the trend we've seen here in Q4 continues or it flattens out, as you mentioned, and perhaps recovers a bit in the back half. Obviously, too soon to call on that front but we're not planning for any significant change across 2016.

Okay, thanks. And then one additional kind of short-term question. In Q4, given the new structure of the company, is there any range that you can give us for corporate expense as a percent of sales?

We continue to target the 3% level. I think we'll probably be slightly higher than that given the relative decline in – or flattish sales. So, somewhere around 3% to 3.5% is probably a reasonable target at this point.

Okay, thank you very much.

We will now take our next question from Bhupender Bohra with Jefferies.

Hey, good morning guys. David M. Wathen - President, Chief Executive Officer & Director: Good morning.

Hey. So, Dave, if you can talk about I believe on your release you mentioned about launching the TriMas Aerospace Engineering Research and Technology team. What is that focusing on, on the OE side, as well as the distribution side of the business? David M. Wathen - President, Chief Executive Officer & Director: Yes, we of course had separate labs and separate engineering teams and separate product programs. This – you would have expected this but we made a – we did more than just merge the organization. We built new lab capability, we've added testing capacity, that kind of thing. We've taken the opportunity to kind of put the strongest people, certainly put the strongest people in charge, and it's all about being one bigger more important fastener and hardware company for our customers. So, it coordinates all the development programs. You get some leverage by being a bigger development organization. And we're getting that. It is targeted at both OE and distribution, because there are distribution products that are enough different there is a reason to develop a focused product that maybe meets multiple specs or whatever. And so, I mean, all in – I'd remind you, I'm an engineer. I enjoy that – live to see benefits of that kind of thing. People that are starting to see that facility and the people involved get pretty enthused by it. So, it's a big message to our customers and to the industry that we are bigger and better than ever in this industry.

The other point I would add is this ER&T function, it really mirrors what our major customers also have in place in terms of Boeing and Airbus. It is not only focused on incremental product applications that might be available to us in, let's say, the next one to three year timeframe. It's really focused on working with customers, engineers on the next generation of product so that as those products move along the development cycle, we're spec-ed in and ultimately are critical to them in terms of supplier capability.

Okay. And how big is this team? And if you can – I don't know if you can give us – you mentioned next gen – like any particular programs this team is focusing on? David M. Wathen - President, Chief Executive Officer & Director: I would rather not put specific numbers on it.

Okay. David M. Wathen - President, Chief Executive Officer & Director: But, it's – and you'll get a chance to walk through it sometime. It's pretty clear that we're committed to it. I would even add we've got – more and more our customers are doing more and more automated assembly. So, we have to do – we do a lot of work on how to aid them with feeders and piping devices and that kind of thing. So, part of it is addressed at that.

Okay. Just to follow-on, in the energy business, you said 2016 your thoughts are initially like flat in energy. I don't know – what's the comfort level? How do you actually arrive at flat in energy, especially with the sales weakness? David M. Wathen - President, Chief Executive Officer & Director: We think flat market because our energy – now that the upstream part of the business has shrunk and we've taken that, now it's more to do with how much is flowing through refineries and petrochem and all that. So, it's more demand and flow based than oil price based. All indications – the optimist in me would say you could even see some more investments. We had more E&C sales in third quarter than normal. There are some positive signs, but it's still a brutally difficult marketplace. And CapEx spending levels are down, so you kind of got to put that all together and balance it. I did try to say flat market. We may shed some business if we can't hit our margin targets in pieces of the business. And while that's a normal ongoing thing in all business, we're being pretty aggressive right now, because of the margin problem in that business to get it fixed. And so, you may see our actual numbers decline a little as we get out of some of our margin. But we're after the margins and we're going to get it.

Okay, got it. Thank you.

We will now take our next question from Karen Lau with Deutsche Bank.

Thanks, good morning. David M. Wathen - President, Chief Executive Officer & Director: Hi, Karen.

Good morning, Karen.

Hi. Just a question on packaging. Dave, could you provide more color on what you're seeing, both on the industrial side and I guess, more importantly, on the consumer-facing side, are you seeing the customer-facing customers may be witnessing some broader weakness in the market and a swing down in investment of (35:49) product launches, things like that. Are you seeing any of that? David M. Wathen - President, Chief Executive Officer & Director: On the industrial side, we're seeing what everybody is talking about, a little bit of softness in industrial. And of course, we get to see it in industrial closures. We see it in things like acetylene tanks coming out of Norris. And it's just plain softened and – by a few percent, by 20% I think, but by a few percent. But it's softer. On our consumer programs, we can look at – this is Christmas season coming up. This is the one part of the company we see a little bit of that. There are a lot of programs underway. And so we have yet to see any specific consumer softness. There is – we would say a fewer customers have, versus what they originally said have the slowed some programs, I'd call that all that normal. So, I'm not ready to say we're seeing any kind of a consumer slow down.

Okay. And how should we think about... David M. Wathen - President, Chief Executive Officer & Director: And despite of all the gloom and doom in China, you still got the middle class growing like crazy compared to any place else. And so, we're not an indicator of the total market. It's more which programs we're on.

Okay. So, if you go back to 2008, 2009, that business actually saw some pretty significant organic sales decline, but I guess the mix was very different and it's also a very different recession. But given the current environment, if some of the weakness spread into the consumer side, how do you think about the cyclicality of that business and how should we think about the decremental margins? Because, as I understand, that business has pretty high fixed costs and there's, obviously, pricing pass-through concerns and things like that. David M. Wathen - President, Chief Executive Officer & Director: I think it's – if we saw a downturn in consumer volume, because we are different than we were five years ago. We have more low-cost plants. I mean, you count up India and Vietnam and we've got a plant in Mexico. We've got more – we've got the highly automated plant. First round of it you actually migrate more production to your low costs plants as a percent of sales. The other phenomena we've got is the more mix we've got in pharma and food and things like that, they don't drop off quite the same as pure discretionary stuff. And I will claim that we wouldn't get hit by a downturn, but we could take the first round of it and hang on to margin I think.

Yeah, I would mention Karen that that business is particularly adept at managing its cost structure directly in response to end market demand, be it up or down and in that sense are able to flex quite well. While there might be move towards the lower end of our targeted margin range, I think they do a pretty good job hanging on to it at that level.

Okay. Got it. Very helpful color. And then how should we think about the $15 million of annual savings? Is that the run rate you want to achieve by the end of next year, or is that the total incremental that you would expect to achieve? And how should we kind of split that by segment?

The $15 million is the annual run rate savings that we will see in 2016. And in terms of segment, I would say more of that margin improvement is in the energy business because of the restructuring effort we've taken there. So, if I had to size it, I'd say circa $5 million. And then as you look at the remaining $10 million of run rate saving, that's sort of spread pretty ratably across the other three segments and corporate.

Okay. So, in energy, if we think about topline being flat as the assumption, and then your underlying margins at the current run rate, 4% to 5%, and then you can add $5 million of savings on top of that, theoretically you could get to sort of maybe higher – the high single-digit margin range next year. Is that the way to think about it?

Yeah, so we think longer term that business could run at 10% to 12% operating profit. And I think step function in 2016 would take us kind of towards the mid-point of where we're exiting 2015 and that longer term goal.

Okay, got it, very helpful. Thank you. David M. Wathen - President, Chief Executive Officer & Director: Karen, I might have heard you say $15 million by the end of 2016; will be implemented at the end of 2015. So...

Yeah, (41:00)... David M. Wathen - President, Chief Executive Officer & Director: ...for the full year.

Okay. So, you expect to realize all $15 million of savings in 2016. David M. Wathen - President, Chief Executive Officer & Director: We will have it all implemented. There are, for example, some of it is – you go back to fixed variable costs kind of things, we managed to get ourselves out of some warehouse leases or some things like that that we also change. All that will be in place by the end of 2015.

Okay. David M. Wathen - President, Chief Executive Officer & Director: The only caution I give everybody is – I've been through enough of these. It's not like it's some step function that drops to the immediately. Some of it is savings that would have been in our productivity numbers. It displaces some and all. It's still for real but the world is – companies like us need a lot of ongoing productivity just to stay even. So, this only accelerates that. But it's well in place.

Got it, thanks.

Thank you. We will now move to our next question from Walter Liptak with Seaport Global.

Thanks. Good morning guys. I wanted to ask just a follow-on to the last one about the cost benefits. And so if we've got all of the financial improvement plans in by the end of the year, are there some – you mentioned step functions. Are there costs that come out starting in January so that we do get some of that step function? I wonder how it progresses through the year.

I think, Walt, that substantially the $15 million run rate is in place as we began the year. And so you can think about it as being somewhat ratable over the full year 2016.

Okay. Let me ask the question another way. So, if you put it on an EPS basis, it looks like it's about $0.20 of benefits in 2016. So, can we take the 2015 number and then add in $0.20 for these benefits?

No, it's not quite linear, and the reason is the restructuring effort in energy. So, part of the financial improvement – and I think we've sized the number at circa $5 million. That was sort of contemplated in what we already had established as sort of our longer term margin target for energy. So, it's not incremental to that improvement; it's just accelerating that improvement so we realize it in 2016.

Okay. Maybe just to drill down into one of these, in the Arrow business, I think you had losses through most of the year until it sounds like now. How much in EPS did you loose on year-to-date basis?

Actually the aero business is essentially breakeven for the entire year, Walt. So, while year-over-year, obviously, it's had a significant impact to EPS. On a competitive basis, in the current year, it hasn't been a negative drag on EPS.

Okay, great. So, your outlook for Arrow for 2016 is basically breakeven this year, breakeven next year. So, knowing that benefit? David M. Wathen - President, Chief Executive Officer & Director: You know as well, Walt.

Okay fair enough. David M. Wathen - President, Chief Executive Officer & Director: Maybe revenues could drop off next year. I mean don't – everybody is pretty pessimistic on what's going to go on in the oil and gas field. But yeah, we've got the business side to breakeven. What are the reasons we took guidance for earnings up in 2015 is we did have – we were chasing revenue down and taking costs out, but we looked like we're going to negative in fourth quarter. Now, we've managed to get – the team in Tulsa has managed to get it to where they're hanging on to breakeven. So, think of that business running at breakeven. And you can imagine, if you get any kind of uptick, we'd love it. But I just can't convince myself to count on any kind of uptick.

Okay. Fair enough. Just a couple of other quick ones. What kind of corporate expense are you expecting for the fourth quarter?

We were estimating a roughly 3.5% of revenue, Walt.

Okay. Are you expecting a similar number to the third quarter, or is there something that steps out from the third to the fourth?

Yeah. The corporate cash cost might be a little bit higher in Q4. It's not significantly different though.

Okay, fair enough. And then one last one on the free cash flow. And it sounds like the fourth quarter is going to be a big free cash flow period, and I wonder if you could just walk us through kind of the working capital. And especially accounts receivable looked a little bit high to me. Are you seeing any bad debts or any payable days stretching out that are concerning?

Nothing specifically. I mean, there is no question that working capital is a big higher than we would have liked at the end of Q3 due to some of the timing of certain payments. But at the same time, I think receivables, we've got pretty good line of sight on what we'll have in terms days sales outstanding by year-end. And I also think that in our energy business, in particular, where mid-year we had a fairly sizeable spike in inventory as a result of port delays. We're going to be focused on working through that and working that level down as we get to year-end.

Okay, great. Thank you.

Thank you. We will now move on to our next question from Steve Tusa with JP Morgan.

Hi, good morning. David M. Wathen - President, Chief Executive Officer & Director: Good morning, Steve.

Congrats on the execution this quarter. Can you just maybe just delve into a little bit more on what you're seeing on the distribution side in aerospace, a little bit more to the extent that you that can give a little more details around that? David M. Wathen - President, Chief Executive Officer & Director: It's – in a way, it's no change. Clearly working inventory is down you could say in reaction partly to Basin, but I would think it's really more their own decisions about how much capital they want to have employed and all that. Now that's the big distributors. We get to see total distribution when, of course, there are some smaller specialty distributors. And some of them see an opportunity to take on some upside but there is not enough volume there in the total to be – to offset this inventory take out. So, I think we're still looking at – we're still looking at, well into the next year, a declining inventory at the big distributors.

So, – and just remind us. In distribution, that's still into OE or is there some aftermarket stuff that's involved there? David M. Wathen - President, Chief Executive Officer & Director: It's mixed what they sell into. You've heard us say before there are OEs we don't sell directly to – helicopter makers, business jet makers, all that kind of thing. So, part of it is their sales to them. It winds up being a complex answer. Military build rates are really off – I think 20%. That's kind of what we get. You might get – you might be able to get a more refined number, but at least what we can watch on what the pull is, I mean it's a number like 20%. Partly that big freight plane has run its course, and no more of them are being built. But I would think in terms of – and we are thinking in terms of the big distributors continuing to run inventory down. There'll be a few upticks for us amongst some of the specialty distributors and smaller distributors, but not enough to offset it at all. So, it will moderate the total a little.

Right. And then one last one just on energy, specifically on kind of the potential for turnarounds coming into this season. Anything you're hearing from your customers there on that front specifically? David M. Wathen - President, Chief Executive Officer & Director: There are some. Some is better than we've had in the past. I think I specifically asked that question to the folks in Houston. And they would say it feels like heading back towards a normal turnaround season over the – call it over the end of the year when they do all of that kind of work. They've got some specific orders (50:35) in the branches that tend to serve that refineries that are scheduling turnaround. So, it's not just that they're talking about it; they're actually placing orders.

Great. Again, congratulations. It's been a very tough earnings season for a lot of people and you guys definitely executed very well. So, way to go. David M. Wathen - President, Chief Executive Officer & Director: Thank you.

We will now take our next question from Matt Koranda with ROTH Capital Markets.

Good morning, guys. David M. Wathen - President, Chief Executive Officer & Director: Hi, Matt.

Good morning, Matt.

A lot of mine have been answered, but just wanted to follow on with the aerospace line of questioning. It looks like your 2016 commentary has the split of OE versus distribution at about 45/55. Could you just put that in context for how it compares to historical levels for you guys maybe in 2014 when things were a bit different in that segment? And just maybe slot in what the implications are for margins in aerospace in 2016, just given that background.

I think if you go back, whether it's 2014 or even a few years earlier than that, you would have been seen that distribution – or that split more heavily weighted towards distribution. So, it clearly is changing slowly overtime to more OE than distribution. So, I think from our perspective that Dave has often talked about that being a good thing, as it gets us closest to our ultimate customer. And I think, again, over time we think that's a positive trend for margins. I think the variable is in the near-term or shorter term you don't control necessarily how the order patterns behave with respect to the distribution customers. And again, some of those distribution customers are fairly high-margin business. So, that might cause some fluctuations over that timeframe. But again, longer term, we think it's positive to margin trends. David M. Wathen - President, Chief Executive Officer & Director: For the same product margins are similar, whether it's OE or distribution. There are products that only sell through distribution that tend to be lower margin, like what we make and what the acquisition that was Mac Fasteners; they tend to be like titanium screws, special – but things that look more like bolts than fastener systems. And so while an overall distributor margin might be slightly lower than a OE margin, that's more the product mix than pricing by channel. Pricing is pretty consistent.

Okay. Got it. That's helpful. Just as a quick follow-up, it looks like margins in this segment are kind of holding steady in the 18% range. And you guys are looking at margin expansion next year. Could you just talk about the main drivers of margin expansion next year? David M. Wathen - President, Chief Executive Officer & Director: For us it's really productivity. It's efficiencies – continuing to fine tune efficiency in the facilities. While we are way better than we were at small lots and all the struggles we went through, there is still a lot more fine-tuning to do to – so it's cost-out. It's really nothing other than – it's not like a mix change or a combo or anything like that.

Got it, okay. Perfect. One more real quickly on aerospace as well, I think you guys had some notes on expansion into collars in the presentation. Could you just give us some details on the progress into your expansion into the collars business with Boeing and Airbus? David M. Wathen - President, Chief Executive Officer & Director: We continue to get approvals. It takes a long, long time. You've heard that from us before. But when we get an approval from say Boeing, the same collar that has a – is therefore approved to sell through distribution, for example. And so we do get – then we have the opportunity to go try to sell that. So, it's continuing to progress, but don't count on any kind of, I'll say step function increase in revenues there. It just a slow built over the course of the couple of years. We're fully configured in manufacturing capability. We'll have to add some capacity as time goes on but we're fully configured for it. So, it's more of a how fast can the customer sign-off and then how fast can we convert the whole channel to us being a viable supplier.

Got it. I'll jump back in queue guys. Thank you. David M. Wathen - President, Chief Executive Officer & Director: Of course, you know how it is. It's easier when you've got a broader range than we've got just a couple of approvals. So, overtime it tends to accelerate.

Okay, thanks. I'll jump back in queue, guys. Thanks.

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

Good morning, everyone. David M. Wathen - President, Chief Executive Officer & Director: Hi, Steve.

Good morning, Steve.

I missed the first part of the call, so sorry if this is redundant, but the first question on SG&A down 11% year-over-year or around $4 million. Is that a reasonable way to think about SG&A year-over-year in 4Q?

I would say, probably not quite that level of decline in the Q4.

Okay. Thanks. And looking at the 2016 slide, when you think about that framework and some of the restructuring work or the productivity initiative you just talked about, can you drive 100 basis points of consolidated operating margin expansion in a flat revenue environment? Or is that too aggressive and we should be thinking you can get 50 basis points or something from internal initiatives? David M. Wathen - President, Chief Executive Officer & Director: Steve, I've said this to you before. It's like you're sitting in my operating reviews. Yeah, I'm hesitating because well, I would like to say 100 basis points. That is a very, very large number to get in when you've got basically flat revenue. So, it's some place lower than that, and we're going to maximize it all we can. We're still in the middle of working that pretty hard.

Understood. That's good color regardless. And a similar question on free cash flow. You just updated the guidance $50 million to $60 million. On flat revenue, you would expect that same level of conversion whether it's on a dollar basis or a percentage basis? David M. Wathen - President, Chief Executive Officer & Director: Correct.

Okay. And last question, on the 2018 margin targets. Packaging target 22% to 24%, that's where you guys have been running for the last few years. So, is that built on the idea that you can drive leverage on organic growth but that's offset by lower margin acquisitions, or why no margin expansion despite mid-single-digit organic growth? David M. Wathen - President, Chief Executive Officer & Director: Because we were choosing to spend more on things like the tech centers and more on new product and new customer development. It's expensive to go into Asia. We will go into South America heavier at some time. So, we're tempered a little by thinking we'll have higher spending as we ramp-up.

So, the strategy is to spend money -- to maintain that margin level while spending money to put more top line through it? David M. Wathen - President, Chief Executive Officer & Director: Exactly. I mean, that's even how – if you talk to David or Judy or any of the folks in that business, they'd tell you that's exactly what I expect of them. And of course, the math works then for TriMas. Hang on to those high margins, grow the top line.

Right. Okay, that's great. Thanks for the time. David M. Wathen - President, Chief Executive Officer & Director: Anytime.

And there are no further questions on the queue at this time. I'd like to send the call back over to our speakers for any additional or closing remarks. David M. Wathen - President, Chief Executive Officer & Director: I sure appreciate the attention. I appreciate the questions. You know we are working hard at it, and I've decided not to complain about the global economy. I've decided that we have to deal with what's out there and find the bright spots, and there are some, and you can tell we're after them. So, I'll say our job is to keep at improving the company. Margin is very high on the list, as is return on capital and stay tuned. Thank you.