Worthington Enterprises Inc (WOR) 2002 Q4 法說會逐字稿

Good afternoon. Welcome to Worthington Industries fourth quarter and year end earnings results conference call. All participants will be able to listen only until the question and answer session. This conference is being recorded at the request of Worthington Industries. I would like to introduce your first speaker for today's call, Allison Sanders, Director of Investor Relations. Miss Sanders, you may begin.

Thank you, Janet. Good afternoon, everyone. We want to thank all of you for joining us today. With me in the room are John McConnell, Chairman and CEO, John Christie, President and Chief Operating Officer, and John Baldwin, our Chief Financial Officer. Before we begin our presentation, I want to remind everyone that certain statements made in this conference call are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ from those suggested. Please refer to the press release for more details on factors that could cause actual results to differ materially. John McConnell, do you have any opening remarks?

I do, Allison. Thank you. And thank you all for joining us. Good afternoon. As you saw from our press release this morning, we had a very good fourth quarter and a very good end of the year as a result. I think the numbers are strong enough that they speak for themselves in many ways. But as is our practice, we will spend some time and go through the quarter in detail, both from a financial and operating standpoint, so why don't we get right to that. John Baldwin, would you start on the financial side.

Sure, John. Good afternoon, everybody. As John said, the fourth quarter was a very good quarter for us to end our fiscal year on. Earnings per share for the fourth quarter were 31 cents, and for the year just ended were 71 cents, not including the impact of the one-time charges that we took back in our third quarter. Those charges just to remind you included $64.6 million pre-tax, for plant consolidations , as well $21.2 million pre-tax for asset impairment, which were related to our previously discontinued operations. Excluding those one-time charges, the results for the fourth quarter and year are up significantly from last year's, 17-cent fourth quarter and 46-cent year. 82% and 54% respectively. The 46 cents for fiscal 2001 also excluded a smaller $6.5 million pre-tax charge for the partial closure of our Malvern, Pennsylvania plant.

Certainly while a 71 cent year is below our ultimate expectations for the businesses we operate, the fourth quarter did continue our improving trend that we've seen since the December low point. Throughout this difficult year, we've noted consistently better year over year quarterly results and are pleased at the most recent quarter was the best yet. In addition to our improved operating performance, we also continued to actively manage working capital, which allowed us to repay debt while continuing to pay our dividends.

Fourth quarter sales of $519 million represent an increase of 12% from the year-ago quarter, and reflect higher revenues in our processed steel and pressure cylinders business segment. Metal framing revenues were down modestly. Volumes were up in all business segments. Our gross margin in the fourth quarter was a solid 17.8%. Up from last year's 15.2%. In fact, this is the best gross margin we've achieved since the first half of fiscal 2000. More than two and a half years ago. SG&A expense increased $3.1 million year over year but fell to 9.7% of sales, compared to 10.2% in the year-ago quarter, due to the higher sales level. The increase in dollars is attributable mainly to higher bad debt expense and insurance costs.

Operating income improved 80% from 23 million dollars last year to $42 million this year. Primarily due to increased volumes in processed steel as well as cylinders, and better margins in our metal framing segment. As a percentage of sales, overall operating income increased on a year over year basis from 5% to 8.1%. Interest expense was down $1.5 million due to lower debt levels and lower interest rates. Full-year sales of $1.7 billion were down from last year by $81 million or about 4%, only pressure cylinders were up modestly in sales, and that improvement came late in the year.

SG&A expenses down $7 million, but flat as a percentage of sales at 9.5% for the year. Operating income excluding the restructuring charges in each year increased by 38% to $99 million, from $72 million in the previous year, and from 3.9% of sales to 5.7%. The ongoing gradual improvement in operating profitability, which we have seen throughout the year, became much more pronounced in the fourth quarter. Reduced interest expense of $11 million for the year due again to generally lower debt levels and lower interest rates also contributed to the improvement and net income.

John Christie plans to address our operating results in more detail. But I'll touch on some of the financial highlights for the three business segments, beginning with processed steel, which as you know, represents approximately two-thirds of our sales. For the quarter, steel sales rose 12% to $329 million. An increase of $35 million from last year's fourth quarter. All of our facilities had better sales relative to last year, except for Malvern and Jackson, which are winding down operations prior to their scheduled close later during the current fiscal year. This is part of the consolidation plan that we announced back in January.

Processed steel volumes were up 17%, reflecting a 15% increase in direct tons and a 20% increase in toll times. Processed steel's quarterly operating income of $27 million was up $12 million or 78% from last year, and as a result it's operating margin improved from 5% to 8.2%. This is still somewhat below the historical norm of 10% in operating margins for this business segment. For the year, steel sales fell 4% to $1.1 billion, a decrease of $52 million from last year. Sales at all facilities, except Delta, were flat to down for the year. Overall operating income of $66 million was up 84% from last year's $36 million, excluding the restructuring charges in both periods. And the operating margin rose from 3% to 5.8%.

Turning now to the metal framing segment, which represents approximately one-sixth of Worthington's sole revenues, fourth quarter sales of $82 million were down 2% or $1 million from the last May quarter. However, operating income of $10 million was up 172% or $6 million, resulting in a much improved operating margin of 11.9%, compared to 4.3% last year. The weaker margin recorded last year, as you recall, reflected the effects of the $2 million bad debt reserve. This quarter reflects partial benefits from the implementation of two price increases that are beginning to restore pricing in a business which has suffered significant price erosion over the past two years. For the full year, sales were down 12% in metal framing, due entirely to depressed pricing levels, which more than offset volume increases and favorable material costs. As a result, operating income decreased $4 million from $24 million to $20 million this fiscal year, and the full-year operating margin for metal framing was 6.6%, down from 6.9% last year.

Finally, in our pressure cylinder segment, which also represents about one-sixth of total company revenues, sales from the quarter were up 21%, rising $18 million to $104 million from $87 million last year. Record propane or LPG sales drove the results. We talked for several quarters about the regulatory change that would require overfill protection devices on propane tanks. That mandate was effective April 1st for about half the states. And we anticipate -- we anticipated increased demand and we did stockpile inventory to meet this demand and are domestic LPG facilities have been running 24-7 and at maximum capacity. As a result of these increasing volumes, operating income rose $5 million or 59%, and the operating margin improved to 11.9% from 9.1%. For the full year, pressure cylinder sales were up only 1% or $4 million, growing to $293 million from $289 million last year, as the increased demand for LPG tank came late in the year. Operating income increased $2.4 million, or 13% for the year, rising from $19 million to $22 million. The margin also increased from 6.7% to 7.4%.

Our other business segments, ones which we don't normally devote much discussion, and includes our smaller businesses, Steelpac, and [INAUDIBLE] Worthington Machine Technology. In the fourth quarter, the operating loss there increased by nearly $4 million, mostly due to the significant -- mostly due to the write downs in investment, which was unrelated to our primary business segments. Joint ventures contributed significantly to our profitability again this year, with equity income of $8 million for the quarter and $23 million for the year. Although down a bit for the year from $25 million last year, we've begun to see year over year quarterly improvements in the last half of this year. WAVE, which is our largest joint venture, had a stronger fourth quarter that made up the modest downturn they had been experiencing earlier this fiscal year, and our newest joint venture, Aegis (ph) Metal Framing, is already contributing positively to equity income after just four months of operations.

During the year, we also reduced debt by $29 million to $296 million on May 31st. Our accounts receivable securitization facility also declined by another $10 million, resulting in total debt reduction for the Company of $39 million for during the year. Debt to capitalization was approximately 40%, including the receivable securitization. Capital spending excluding acquisitions was scaled back during the year to $39 million. Which is well below the prior year $63 million, and appreciation of $69 million. However, investments, particularly in the metal framing business segment, including product development and joint ventures, such as the Aegis (ph) Metal Framing joint venture, point to our commitment to future growth. John Christie now plans to elaborate on the segment results.

Thank you, John. Good afternoon, everyone. The fourth quarter is consistently our best quarter, as all three business segments processed steel, pressure cylinders and metal framing are at seasonal peaks. This year was no exception, and in fact the contrast with prior quarters was more dramatic than we normally see because of a variety of factors unique to each business segment.

Looking at each of these business segments, starting with processed steel, we had a great fourth quarter, with dollar sales up 12%, tons shipped up 17%, operating income up 78%, and operating margins rising to 8.2. These are good numbers, but we still have plenty of room to improve based on historic norms. Performance was primarily driven by the additional demand from the automotive sector. While calendar 2002 big-3 automotive sales figures show a 5.6% year-to-date decline from the prior year, automotive production numbers were up 8%. And that is the more meaningful driver of the two for our processed steel segment. Sales to other smaller customer sectors like appliance manufacturing were up significantly also.

Increased volumes are a combination of both direct and tolling sales, both of which were up for the quarter. Tolling increased significantly again this quarter by 20%, and for the second consecutive quarter direct sales were also up by 15%. Our direct to tolling mix is now 55% direct, 45% tolling. Very similar to last year's 56% versus 44%. Probably the biggest issue facing our processed steel business segment in recent and coming months is obtaining steel. Although supply is tight, we're positioned better than most steel consumers because of our size and the quantity of steel that we buy, as well as our long-term relationship approach with vendors and customers.

Of equal importance is our ability to pass along the significant price increases that we're experiencing to our customers. This is a major and ongoing effort and one that is receiving greater attention than ever before. Despite our success on this front, we expect to see some pressure on selling price, margin cost spreads that will negatively impact gross margins in the coming months, but this should be largely offset by increased volumes.

Overall capacity utilization for Worthington Steel reached the high 70s, compared to the low 60s last year. This excludes Gerstenslager, where the production at its new Clyde facility reached 40%. From a production standpoint, there were a number of records broken during the May quarter. Our dry lube blind at Monroe, our kneeling at Decatur, and the tandem mill at Columbus all set production records. Decatur continues to improve in virtually all categories. Capacity utilization on the tandem mill, which is the major equipment investment we have at Decatur, was 65% during the quarter, compared to 57% the year-ago quarter.

During the fourth quarter, increased tons and margins helped to produce a record operating profit, while the facility isn't yet consistently generating operating profits it's improved dramatically.

Now let's turn to the metal framing business. The commercial construction market is relatively stable now, although down about 13% from the pre-September 11th levels. Despite the slower building pace, volume was flat in our core building line products, but much stronger in our proprietary products the trade-ready floor and roof systems and the new spacer bar which collectively were up 111% over last year. Together, unit sales of all products were up 1% in a down market. The good news in this segment is that the pricing has improved significantly. The recent price increases implemented March 15th, April 15th, and another June 15th, are sticking, and thus the severe price pressure has eased. We believe this business has the best growth opportunities and we continue to make investments in it through advertising and marketing, joint venture alliances such as Aegis Metal Framing, and Centex Homes and product and systems development.

In our last segment, pressure cylinders, the fourth quarter is poised strong as approximately 40% of annual propane cylinder sales normally occur then. For fourth quarter 2002, total unit sales were up 25% from the previous fourth quarter. The largest product category, steel portables or propane cylinders for the gas grill market were up 43% from 1.8 million units to 2.6 million units. This represents record sales volumes, due, of course, to the overfill protection device, which is required in 26 states on most propane cylinders in order to be refilled. Much of the increased unit sales represent cylinders that we manufactured in advance preparation of this additional demand. The inventory build that peaked at $20 million in December 2001 has been completely depleted. These sales levels are unsustainable over the long-term, but we expect somewhat elevated demands to continue next season.

In closing, I want to give a progress report on our consolidation plan. The entire project is on schedule, and in some cases ahead of schedule. We have had good interest in the land and the fixed assets we are selling, and are considering a number of possible offers. We are already seeing financial benefits from the closing and/or winding down of our unprofitable operations, particularly Brazil and Malvern. In summary, the fourth quarter reflected positives in each of our business segments. Earnings of this quality in a less than robust economy is very encouraging for us. Thank you.

John and John, thank you very much. As I said at the outset, I think the strength of the numbers say a lot in themselves. But I'm sure after what you've heard, you conclude these are quality earnings with a significant percent gain on, certainly in relative terms to our industry, on a good base last year. As we look forward, we believe the economy is on very solid ground to continue with slow recovery. Given that belief, we're comfortable saying that we expect fiscal '03 to show improvement on a quarter by quarter, year over year basis. And certainly, as I'm sure here where there's some potential for volatility in the economy, and if you keep that in mind, I want to add that under any economic circumstances, we're going to continue to outperform with those who we compete with. Beyond that, we're going to continue our policy not to provide any specific guidance on future performance. At this time, we'll take any questions you might have.

Thank you. If you would like to ask a question, please press star-1 on your touch tone phone. You will be announced prior to asking your question. To withdraw your question, press star-2. Once again, to ask a question, please press star 1. Our first question comes from Miss Michelle Applebaum with Salomon Smith Barney. Ma'am, you may ask your question

Hi. Nice looking quarter. And I want to ask you if you -- you kind of went through the metal framing change quickly. And I didn't fully -- you know, get everything. Can you go back to that and talk about the proprietary products are up 100%, the other piece of your business is not up. And pricing is better. Can we get a little bit more elaboration on why the change -- such dramatic change?

Well, there's a couple things. I think you're you can talking about something John Baldwin said and I'll let him elaborate -- I think it was John Baldwin had that in his comments. But really, on the base of business, which is commercial construction, we're dealing with a fairly flat market out there. There wasn't a huge -- there was almost -- there was an increase in volume in that market from our standpoint, but negligible, about 1% as I recall.

The new products, Michelle, are all just being launched, and therefore the base from which you look at a percent growth basis is very small. But the launch is going very well [INAUDIBLE] in the marketplace. They're almost all residential market oriented, and we're very pleased with the growth and reception of these new products as we've launched them over the last 24 months. Which one of you had that? In your --

You discovered it.

I think --.

Just add to that, Michelle, it's kind of confusing, obviously, comparing quarter over quarter. You know, the volumes were roughly flat. And the primary products that we sell out of metal framing. What really benefited us in that business segment was the increased material margin, which had to do with getting our prices back up somewhat, but also having much lower raw material prices than we had in the fourth quarter last year. So raw material price declines exceeded the price declines that we had to pay to our customers. Volume was about flat, and therefore also without the bad debt expense we had -- $6 million improvement in operating income.

Okay. Raw materials for that division are what? Again? Galvanized steel?

Raw materials are galvanized steel, yes.

So your steel price - your steel costs, year to year, were down?

Yes. And all of our businesses, as you know, have a little bit of a lag, so they're working off in this May quarter inventory that was purchased in the first calendar quarter of this year, and that inventory was a good deal less than the inventory that they were working on in the first calendar quarter of last year.

Okay. And then you've talked about benefiting from price increases. You're talking about for the finished product in the framing side, right?

Correct.

Okay. So are we talking about an environment where you've had visible headline galvanized steel price increase every five minutes? And you may not have all of those into your P&L so that there's some opportunity, you're more able to pass on the framing price increases right now?

Yeah, we started experiencing galvanized price increases like everybody, in April and then again in May, and we started passing along price increases to our customers in March and April. But I'd say it takes a little bit of time after the announced price increases for that to occur. And so we certainly have some benefit of the price increases, you know, during the quarter, but most of it is going to be impact in the quarter yet to come and kind of in anticipation of flowing through that higher price inventory.

Michelle, in that, we only buy about between 15 and 20% prime material.

Yeah, I remember that.

The rest would be secondary, and then we also have our own processing facilities, which feed our roll forming facilities directly within Dietrich.

But you don't have any secondary in any of your facilities, do you? That was a joke. Okay. Can I just finish this, I'm not fully plugged into what is going on here. In the past, I've heard for so many years that have you not had pricing capability in the Dietrich business for a long time, right? More than just what has been going on recently? Is that correct?

Pricing capability -- Dietrich is probably the most volatile of our businesses, michelle, in terms of prices tend to go down significantly when the raw material prices go down, prices tend to recover when the raw material prices go up. But there's leads and lags in there that cause those operating margins to be between say 8 and 12%.

O.K. I just remembered this thing in the back of my mind about Dietrich buying pop coils and having this advantage and we know that secondary availability ebbs and flows as a function of tightness of the market and I would say we're in as tight a market as I've ever seen. So trying to figure out if the Dietrich margins are vulnerable, because from what I recollect, and maybe things have changed, you know, this is kind of maybe the last cycle of improving steel prices, so that might have been awhile ago, but there was potential for margin degradation as prices improved for the raw material because you would typically get less prices for secondary rise faster than prime. Is there any of that potentially going on?

Well, I think you have to back up and get on a little bit of a different footing, because actually while the advantage we have through the process of using more secondary than anybody else and being able to convert that into material to make steel studs with, actually deteriorated relative to our competition because prime galvanizing prices fell so fast and so far also.

True.

So where we are now, you're right, there's going to be a secondary very difficult to get, but I think because the commercial construction market got more stable, its fall is kind of complete and on stable ground, it hasn't returned yet, is less competitive in the marketplace, and that let prices stability start do come back in a little more than it was. It's a very competitive marketplace out there. We have a number of competitors, and we saw some stability return. Part of it is driven, as you said, by galvanized prices announced all the time, that gives us a little ammunition, but also the environment got a little more stable in the markets we sell to, and the reason we broke off back to the original question, the strength of those other products, is because we're very pleased with our penetration and reference on the residential side, which we've also talked about over the years.

Has there been fundamental changes in the competitive landscape in that business?

No, not really.

Okay. All right. That's terrific. So you see those margins as sustainable?

No. I think those margins clearly are going to come off a little bit.

Okay.

You know, they've done a great job getting out, you know, ahead of the galvanized price increases. But as I said, you know, the galvanized prices have gone up quite a bit, and they clearly have the pop coil advantage. But they still move up and down with galvanized prices and is sort of a relative framework.

What would you say normalized margin for that business? I don't think that's ever been stable before.

Well, it's hard to say. I mean, we've sort of seen that business in a 8 to 12% range in the six years that we've owned it and I would say 10% or slightly lower is probably normal but it's subject to the fluctuations. .

Okay. That's great. Thanks for clarifying everything.

Thank you.

Our next question comes from Mr. Scott Morrison with Credit Suisse First Boston. Sir, you may ask your question.

Good afternoon. Two questions, I think their both for probably for John Christie. But number one is, John, you mentioned managing the tightness on the raw materials side. Particularly in processed steel. Any visibility from where you sit as to when the peak and tightness may occur? Obviously, getting some capacity restarts and likely little better availability of imports as we move through the balance of the year, just wondering from your perspective, do you expect the worse of that tightness to be sort of a current fiscal quarter or is it likely to continue beyond that?

I would say that probably August, September, early October, in may get a little tighter. But may loosen up after that.

Okay. Anything specifically you can point to to drive that, getting tighter yet as we get late in the third quarter, early fourth quarter?

A lot of it depends on the demand and how the economy holds up. We do have ISG or the old LPV coming online. We have purchases in there, which is helping. And then I think if prices maintain themselves at this level, there will be probably some steel coming in, even through the tariffs that would alleviate the tightness of supply.

Right. Are you seeing much pickup in activity on offering side, et cetera, from your perspective? From foreign sources?

Not really.

Okay. Second question on the cylinders, the change in the overflow issue -- is it possible to quantify how much of the improvement in cylinders in the quarter was related to that, and then secondly, John Baldwin made some comments pertaining to this in his comments, but how do you expect that to sort of ramp down as you go through the year, the impact of that, if it's possible to quantify?

Well, the real quantification would be I guess we build up in anticipation of this about 1.1 million tanks, which I said really hit their peak in December 2001. And we have reported over the previous three-quarters up to that point that we were building that inventory in our system. I think we depleted that inventory at a more rapid pace than we thought. As John Baldwin said, we are running our cylinders plants 24-7, and not only is there a strong demand for the 20-pounders or what would be the typical barbecue tank, also the 30 and 40-pounders in the recreational vehicle side, et cetera, is also having increased demand. So we think this will hold for a while. And it's just not a peak. We always get asked how much float is out there in the 20-pound propane tanks, and that's very hard to know. And also only 26 states have followed this regulation. Others will follow, which will also cause a more -- a lot larger tank replacement. So how much of the float out there has been replaced to date or has been removed, I really can't answer that question.

Scott, this is John McConnell. Going back to the original question, I think it's almost impossible to say what additional cylinders were sold because of the regulation. Clearly, a number of them were. But what that number is is hard to say for two reasons, one of which is propane cylinder sales have been somewhat slower the last couple years.

We have been anticipating a pickup in that, because it does get a little cyclical,in how it goes through this product cycle, but you throw this in here and it's hard so say whether -- how much of this was just people needing a new tank at this point, people recycling their grills, grill sales were off a great deal last year, how much of that generated additional sales this year, versus this regulation which clearly added to it. There's no question about it. And absolutely, what John said, this is going to have some ramp-down that sustains an increased level from someplace for another year or so.

Okay. So you don't -- that basically answers it, you don't expect next quarter, two quarters from now quickly disappear where you got a big --

No, wait a minute --

It will ramp down over -- Well, extended period of time.

This is a normal seasonal business, which is about to ramp down under any circumstance.

Right. But I mean, just this effect, do you expect it -- its going to have longer lasting impacts?

I think it will be in play again next season. Once we ramp back up I think it will help us again next season.

Okay.

Keep in mind, cylinder sales are going to go down here as we go into fall.

Right.

Scott, there's been another change in that market, and it's -- we've talked about this before, a lot of our supply went to the OEMs. That is starting to shift as things are sold tank-out and as new applications for propane fuel are coming on like the mosquito machine that you've read about, turkey friers, so there's a lot more demand out there other than just the old OEM supply base. So a lot of our product is shifting to the retail side of this business.

Okay. Thanks, guys.

Our next question comes from Mr. Mark Rossinger with Merrill Lynch. Sir, you may ask your question.

Thank you. Good afternoon. Maybe a couple of things. In terms of the restructuring program you mentioned that it's on schedule and benefits coming through. Are you still sticking that -- with that sort of -- 7 cents a share annual earnings contribution from that program, or are you seeing potentially more as you go on?

Yeah, we're still sticking -- I think we said about $10 million, where you got your 7 cents a share. And as you recall, that is really yet to come. Obviously, we've started, you know, the process. We have, for instance, closed all of our operations and therefore had a reduction in workforce in Brazil, which really accounted for about half of the people impacted by the restructuring plan. But we have yet to close the other operations. Those all have scheduled wind-down dates during this current fiscal year that we just started. So, you know, we wouldn't necessarily expect to get the whole $10 million benefit this year. We'd expect to get, you know, that benefit going forward, after this year, probably you know, half to three-quarters of that benefit will come through this year, then the full benefit in the next fiscal year and beyond.

Thanks John, that's great. In terms of the market out there and the product, in terms of demand, are you seeing demand from your customers pick up or is it pretty flat? And maybe have you any comments on what we are hearing around the press about some people forcing finished parts out of the U.S. because pricing is becoming competitive here? Have you got a couple thoughts on that?

I think on the latter point, that's something that -- the trend has been going on for really some time. We have not actually seen a large impact on our business as a result of our customer base moving offshore, really. Certainly, there's been some migration down to Mexico. We have a facility in Mexico as well through a joint venture. But not a lot otherwise that has directly impacted us. The demand is without question up in the steel business. It was a fair component of the increased sales dollars in the fourth quarter.

Yeah, I would say all categories, really, I just mentioned automotive and appliance, but if you took the other categories of hardware, office furniture, and office equipment, all of those categories have shown an increase over previous year during the quarter. The ones that would be a little off would be related to the construction industry, where our product would go into something either the culvert industry or other elements of the construction industry. That was down quarter over quarter, previous year.

Okay. Have you got any thoughts on whether that demand is sort of inventory-driven or is it sort of underlying fundamental at the moment?

Well, I guess the best way to answer that, as I was with 12 customers yesterday and asked a specific question about building inventory et cetera, they were pretty good cross section, and I would say that right now everyone is peddling to stay even because of some of the shortness of steel and allocation. So we really don't see a lot of inventory build in our customer base.

Thanks a lot.

Our next question comes from Mr. Doug Christopher with Crowl Leaton. Sir you may ask your question.

Hi, thank you very much. I might have missed this, but could you just do a little bit of -- little bit more expansion on the metal framing business? This last quarter you were back up over the 82, 83 million level, approximately even with last year, and would you expect the sales for the next 12 months and the next fiscal year to maybe get back up to that $345, $46 million level?

Well, I mean, we're not giving guidance on where the sales might come out. I think -- in all three of our businesses, but particularly the processed steel business and the metal framing business, the sales line is very much affected by what happens in the steel pricing environment. So steel prices in their case galvanized prices go up substantially, and clearly the revenues are going to go up. If they go down, the revenues may go down.

We're trying to manage the business on the basis of the volumes that we put through and the profitability on those volumes, and not so concerned about -- about the sales line. Over the next 12 months, you know, we would certainly expect volumes to go up. We've put in place over the last year a couple of new facilities. We've put in place some initiatives like our Aegis Metal Framing joint venture and other types of initiatives such as our alliance with Centex Homes here in Columbus, which should drive volumes up. But we really try and stay away from looking at what might happen on the sales line.

Okay. And within that, just at that business here in the -- in the 50 -- in the states, metal framing, any progress there? Any types of insight that you can add to -- developments as we move ahead? That the substitution, training of the contractors, anything you've learned over the last year as that market has been kind of pushing inward?

Well, we've done a number of things -- if you go back in Dietrich's history, they've done a very good job of getting this product ready to go. And John mentioned our alliance here in Columbus with centex homes and launching our steel four-doors product, we have technicians out on the site we've been working with the crews in a training mode. They find it very easy to work with, as long as we've had somebody there that helps them through the process. They come out of that feeling very good about it.

We've done some advertising. We've driven a lot of customers who were interested in the product to those homes. Our marketing department here started two years ago doing a lot of focus groups with all those people trying to figure out how to get ready for this launch and penetration into residential because we felt the tools were there, the time was right, and again we've launched this with Centex and it's done extremely well, and continue look forward to it expanding, not just with Centex but with other builders as well. It's generated a number of phone calls, certainly here locally, in Columbus, from the other builders in this community who have increased their interest as a result, is a fair to put it.

Okay. Thank you very much.

Once again, to ask a question, please press star-1 on your touch tone phone. Our next question comes from Mr. Richard Henderson with Persing. Sir, you may ask your question.

Yes. Good afternoon. I had a couple of questions. If we could just drop back on the metal framing. You mentioned that it was the most volatile segment in the margins kind of bounced 8 to 12%. You also mentioned that the real thrust was in the new products and the new products were geared towards the new residential construction markets. Is there less volatility in that market, and are there higher margins?

Yes and yes. But recognize that that market is still very, very small percentage of the overall volumes that go into metal framing. Certainly less than 10% of the overall volumes there. What we're trying to illustrate is that it's a fast-growing segment of the market, not that it's driving the earnings or really the margins.

Right. No, I understand that. But I just wanted to --

Yeah, -- .

Get a feel on that. Okay. That's what I thought. The second question I had was, in the prepared remarks on Q4, with the SG&A, bouncing up as a percent of sales, you indicated that higher insurance -- bad debt. In an absolute sense, for this fiscal year, are those numbers going to be higher than the year you just completed?

Well, I think we've seen -- I hope we've seen pretty much the worst of the increases on the insurance side. And again, on the bad debt side, I mean, our reserve has gone up substantially over the last several years, and we've obviously had a number of customers that have gotten in trouble and ended up filing chapter 11. Hopefully, that situation with an improving economy goes away. If that happens, certainly the SG&A should start to go down. We've taken some costs out. Some of the restructuring plan involved taking costs out of you know, overhead operations, corporate type departments and so forth, that would cause SG&A to start to fall.

All right. Okay. Third question: On the -- your other businesses, you mentioned $4 million write-off, any guidance in terms of this year? Would we as to how that -- those businesses would turn out?

Well, those are all relatively small businesses, so no, I wouldn't see them --

But would you have that $4 million -- could we x out the 4 million? Or is it the you're always going to get a number of write-offs?

You can x out the 4 million. The other operations should plug along about the levels they were at

Okay. Very good. Last question: On the Cap-X came down, the projections for this year?

Well, we clearly, you know, have a number of projects on our plate from a total Cap-X, it going to just depend on what opportunities that we have. We can certainly get by on a level in the 30s, for a while, and maintain our operations quite well. If we have some acquisitions come along, we may sort of tilt our capital toward them. If we don't have acquisitions come along we'll probably, you know, start to pursue a little bit more of the wish list of projects that have been there and start to spend more. But I hesitate to give you a firm number on what we anticipate spending there.

Okay. One other thought, on the steel processing, there's been a build -- a pre-build on pre-buying on the changes on the emissions standards in the truck markets. Was that any effect on the quarter? And would you be getting it this quarter also, before we change in October?

There would be some effect.

But not much.

Not really a significant effect, no.

Okay. Thanks

Our next question comes from Mr. Mark Rogensinger with Merrill Lynch. Sir you may ask your question

Yeah, just a follow-up on the capital, really. With earnings actually improving going forward, the cash flow is going to improve also, I'm just wondering whether you can -- give a bit of color what you might do with the cash you're going to be generating and maybe specifically could we look forward to the dividend rate sort of increasing again, going forward?

I think our first order of business is going to be to continue pay down debt. And certainly, if we have any significant uses of cash, we'll be telling you about them as they may unfold. But I do not anticipate the dividend being increased anytime in the short-term.

Okay. Thanks a lot.

I should add, I certainly -- it's not going to decrease either.

At this time, we have no parties in queue with questions.

Okay. Well thank you very much for joining us today. It was a very good quarter that I think was reflective of the hard work of everyone here over the past few years. But I want to make sure you understand we're very mindful that it was a good quarter. We have a lot in front of us, and we're going to continue to drive this company forward. Thank you very much.