Worthington Enterprises Inc (WOR) 2003 Q1 法說會逐字稿

Good afternoon. Welcome to the Worthington Industries first-quarter earnings 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, Kathy. Good afternoon, everyone. We want to thank you all of you for joining us today. With me in room is John McConnell, Chairman and CEO. John Christie, President and Chief Operating Officers, and John Baldwin, our Chief Financial Officer. Before we begin our presentation, I want to remind everyone that certain statements made this in this conference call are forward-looking statements within the meaning of the private security 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 introductory remarks?

I do, Allison. Thank you very much. Really I just want to welcome everyone who is with us directly on-line and certainly all those listening via the webcast. We appreciate you joining us today. We'll follow the same format that we have in the past with John Baldwin and John Christie both reviewing respectively the financial performance an operating performance of the company and go through all the measurements that we always put out there for you. For those that saw the press release this morning, obviously we are very pleased with this quarter's result and very proud of all the people here that helped produce them. Why don't we get started.

John Baldwin, if you'll lead us off.

Sure, John. As John said, we have a great quarters. Earnings per share for the first quarter as you probably saw were 32 cents, up significantly from last year's 17 cents in the first quarter of last year and favorably compared to the fourth quarter's 31 cents. Compared to last year's first quarter, sales were up $116 million or 28%. There were three main drivers underlying the sales increase. Our recent acquisition of Unimast $22 million for the one month we owned that business. Improved pricing boosted revenues by about $30 million, about half of that came from each of our steel processing and our metal framing segments. Improved volume, however, was the biggest contributor, resulting in $61 million of the sales increase from last year's first quarter. Strong demand continued in our cylinders business due to the new valve mandate and in our steel processing building due to the robust automobile market. Improved capacity utilization due to increasing demands allowed our gross margin to improve to 17%, up significantly from last year's first-quarter gross margin of 14.6%.

Compared to our seasonally strong fourth quarter, volumes were down somewhat across all of our business segments, causing a decline from the fourth-quarter 17.8% gross margin. Our operating margins were flat to the fourth quarter, however, as SG&A declined due principally to lower bad debt expenses. Versus the first quarter of last year, SG&A was up $10 million due to increased compensation, which moves in line with our earnings, as well as last year's $2 million gain from the sale of a plane. Operating income was up 87% up to $42.3 million from $26.6 million last year, an increase of percentage of sales from 5.5% to 8.1%. The $4 million variance in other operating income resulted from the $2 million gain I had previously mentioned on the sale of the plane, as well as the $2 million of reserves we set up this quarter for impairment of certain assets in the other business segment.

The two major components of miscellaneous income are the fees related to our receivables securitization program, which had been running at about $1 million per quarter and the income or expense attributable to the elimination of the partner share of the operating income in our two consolidated joint ventures. The $2 million variance in miscellaneous income from last year is due to the shift to profitability of these two businesses, which lost money during last year's quarter.

As you may recall, large bad debt write-off by our cylinders joint venture was the principal cause of these losses. Interest expense was off slightly, reflecting higher debt balance during the quarter. Income from each of our five unconsolidated joint ventures were up significantly and our tax rate remained the same at 36.5%.

As we previously announced, we have completed the acquisition of Unimast during the first quarter. With capitalized deal cost, the purchase price for this acquisition was $122 million. Of this account, we assumed $9 million of debt and paid $113.7 million of cash, including the cash used in closing to retire the reminder of Unimast debt. $6 million of the assumed debt is long-term and $3 million is short-term debt. The cash portion of he purchase price was mainly funded by very good operating cash flow during our first quarter, in with the additional sale of receivables under our receivable securitization facility which had an outstanding balance at the end of August of $169.5 million up from $100 million at the end of May. As we concentrate on integrating the acquisition, we plan to restrain capital spending as we have done this quarter against full-year depreciation and amortization expected to be almost $75 million this year. I anticipate that we will spend less than $40 million on capital projects. Funds from operations will be used to reduce debt, strengthening our balance sheet, and allowing us to retain our investment grade credit rating.

In our business segments for the quarter, processed steel sales rose 20% to $319 million, which is an increase of $53 million from last year's first fiscal quarter. Every facility except Malvern and Jackson which are in the process of closing experienced increasing revenue on a year-over-year basis. On a volume basis, the year over year increase was 14%. Increase selling prices accounted for $19 million of the sales increase year over year. Although selling prices were not quite enough to completely offset the cost of steel. Process operating income of $22.3 million was up $9 million from last year and as a result, its operating margin improved from 5.1% to 7%. The processing -- the steel processing segment will benefit most from the consolidation plan we announced in January, approximately $1 million of the improvement in earnings this quarter was a result of these actions. As the plan is completed later this year, the run rates for operating income improvement should grow to at least $2.5 million per quarter.

Turning now to our metal framing segment which represented 23% of total company sales, first-quarter sales of $121 million were up 52% or $41 million from last year's August quarter. Approximately half of the increase or $22 million is due to the aquisition of Unimast as I mentioned earlier included for the one month of August during the August quarter. The remainder of the revenue increase is due to increased selling prices implemented in response to rising raw material costs. Operating income of $16 million was up $10 million or nearly 150%, resulting in operating margin improvement to an unusually strong 13.5% compared to 8.3% last year. A portion of this increase, $2.5 million is due to Unimast although most was in the Dietrich metal framing business. The $2.5 million of Unimast more than covers the financing cost making it immediately accretive. Excluding impact of Unimast, core product units were unchanged and total building products were up slightly more than 1%.

In our pressure cylinder segment, 15% of the total company, sales for the quarter were up 33% or $20 million to $82 million. All the increase, almost, was in propane or LPG cylinder sales. We've slowed from our 4th quarter seasonal peak but is still experiencing record demand for tanks. As a result of these increased volumes, more than double the number of LPG cylinders normally sold in the first quarter, operating income rose to $7 million and the operating margin improved to 8.8% from an unusually low 2.9% last year.

As John said, John Christie is now going to take us through the operational details behind these numbers. John.

Thank you, John. Good afternoon, everyone. Typically, our first quarter slows somewhat, particularly in comparison to the fourth quarter when all three of our business segments process steel products, metal framing and pressure cylinders are at seasonal peaks. This year was definitely an exception as first quarter exceeded the fourth quarter of last year which was a very good quarter in both revenues and net income, something that hasn't happened in the last 25 years. Production as you all heard remained fairly strong during the normally slow summer months. LPG propane cylinder sales which normally slow during the summer as seasonal gas growth sales fell off did, but not by much and a major acquisition of pricing improvements in metal framings significantly boosted the top and bottom line.

Let me go through into a little more detail for each of the business segments starting with processed steel products. Exactly one year ago, I opened my remarks by saying market conditions, particularly automotive continue to be difficult. Today I would change only one word -- market conditions particularly automotive continue to be good. As you heard from John Baldwin, sales for the quarter were up 20% and volume is up 14%. Both direct and tolling volumes contributed to the increase with direct tons up 17% and tolling tons up 11%. The overall direct to tolling to mix is a very typical 56% direct, 44% tolling. This strong performance was primarily driven by additional demand from our automotive sector which was higher in volume from last summer, with you did drop from our strong fourth quarter and most of our other customer segments were also better.

Despite increased demand and much tighter supply compared to one year ago, we have not gone without steel. Thanks to excellent supplier relationships. We are better positioned 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 our vendors and customers. Obtaining steel has been one challenge, and pricing it profitability has been the other. Passing along price increases to our customers receive priority one attention for months and fortunately, we had ample lead time. While we have had considerable success, it is never possible to win 100% of the battles. And we are seeing consistent downward pressure on the selling material cost spreads in this business segment.

Fortunately, increased volumes have more than offset this pressure to the margin. In contrast, widening spreads have been very beneficial to us at our newer coal mill facility in Decatur, Alabama, very vulnerable to the spread of hot and cold steel. Spreads have widened from the historical lows that had plagued Decatur's initial years and consequently the facility has improved positively operating income. Our direct tons volume first quarter over first quarter last year was up 31% as we continue to establish a southern presence. Another major success story is our other Greenfield facility, a galvanizing operation in Ohio. It is operating at capacity and recording record earnings, almost doubling operating income from record levels last year. It is our most profitable location and was recently included in "Industry Week" magazine's top 25 plants. This honor took into account a comprehensive set of metrics including manufacturing and management best practices and operational efficiencies. This facility, which is managed by teams, not supervisors, is our model facility that hopefully will be replicated throughout Worthington Steel. With the increased volumes, it is no surprise that capacity utilization is also improved. But even with the current 75% level up from 59% first quarter last year, there is still plenty of opportunity to grow this business.

Turning now to our metal framing business segment. As you probably read elsewhere, the commercial construction market has been weak since September 11th of last year, and it appears to be weakening further. Despite the slower building pace, volume was flat in our core building product lines but much stronger in our proprietary products including the TradeReady floor and roof systems, which nearly tripled in volumes. Together, unit sales on all products were up 1% in the down market. The good news in this segment is that pricing has improved significantly from the multi year low hit in February of this year. We have instituted six price increases since March of this year, and margins have been restored. No additional price increases are planned and higher priced raw material cost will slightly reduce margins from this level in coming months.

You've heard us talk repeatedly about the growth opportunities we see in this business and recent -- recent investments bear this out. An advertising and marketing campaign for TradeReady products, our alliance with Centex Homes in central Ohio, our newly formed joint venture, Aegis Metal Framing accretive since the first month of operations and generates additional business for Dietrich and our newest aquisition of Unimast also immediately accretive. We are excited about the opportunities that the combination of Dietrich and Unimast offer. The number one and number two competitors in medal framing, the two companies offer complimentary products. The aquisition of Unimast broaden our product line, vinyl finishing products and plaster accessories. In addition, we gain much-needed personnel and resources to further the use of steel in residential and light commercial construction applications.

In our last segment, pressure cylinders, the continuing story here is the considerable demand that has resulted from the new overfill prevention device that is required in 26 states on most propane cylinders in order to be refilled. We have seen LPG or propane tank sales increase from 50% in our fourth quarter to 100% this quarter and still can't meet replacement demand. These levels are unsustainable over the long term, but we expect elevated demand to continue for some time. It's important to note that LPG cylinders are a good portion of our pressure cylinders business. They are not the only product line. Typically, LPG represents about 30% of product mix. Slightly less in the offseason which is our first and second quarters and slightly more in the seasonal build-up during our third and fourth quarters. This year, the mix was distorted in this first quarter as LPG was 43% of our product mix. We continue to focus on increase efficiencies in this business and have decided to close a smaller industrial gas facility in Citronelle, Alabama, which has been a drag on earnings for some time. The closure of that leased facility will occur at the end of this month. This plant was not a part of our larger consolidation plan we announced in January.

To update you on the progress of our larger consolidation plan. All of the six facilities, except the one in Jackson, Michigan, are closed. We have had good interest in the land and the fixed assets and are considering several possible offers. Although we haven't seen any cash yet from the sale of those fixed assets, excuse me, we are seeing financial benefits from the liquidation of working capital and the elimination of ongoing losses at our unprofitable operations in Brazil and Melbourne.

In summary, first quarter reflected positives in each of our business segments that will be tough dupe plicate going forward, shrinking margins and processed steel and framing and possible demand declines in metal framing and pressure cylinder and even processed steel are the challenge going forward. Our emphasis will be to continue on improving efficiencies, printing inprofitable assets, penetrating new markets and increasing capacity utilization. As a company, we are well positioned to operate in whatever economic climate we meet going forward. John.

John, thank you. Both Johns, that was a very good review and background of the quarter. Hopefully we have got all the kind of information out there that you would like to hear about our performance. As John said, we have certainly benefited from a very solid environment that's favorable to us in many ways. While it is difficult to predict what's going to happen in the future, we will stay focused on running this business and make sure we are positioned on an improving basis every month as we go forward here. Happy to take any questions that you have at this point.

Thank you. At this time, are ready to begin the question and answer session. If you would like to ask a question, please press Star 1. You will be announced prior to asking your question. If would like to withdraw your question, press Star 2. Once again to ask a question, please press Star 1. One moment, please. At this time, there are no questions. One moment please -- our first question comes from Bob Stecth from Lord Abbott.

Good afternoon. In regard to the pressure cylinder business, approximately -- if you looked at the last two, three years, on an annualized basis, how many units had you been selling?

Well, again, we had a lot of different product lines. Grown we have an exact unit count. Are you speaking mainly of the propane tanks?

Yes.

20-pound propane tanks?

Yeah.

Oh, boy. Nobody will have that right off the top of their head. We might be able to get it in just a minute.

I am trying to get a sense of obviously the rates of growth in units and/or sales, 50 to 100%, and you expect it to continue for some time but not forever. Is a run rate at least double what it had been or likely to remain there for a number of quarters?

Bob, we -- we set up until last December that we were building inventory in that line of product, starting really in March. We had built an inventory level in excess of daily production or weekly production of 1.2 million tanks. Those tanks we thought would last us through these conversions; however, probably those tanks were depleted in about three and a half months starting through the first part of our fourth quarter and the first couple of months of our second quarter. We are running full out on average we probably produce, I think, around 18,000 tanks a day. Of the 20-pound propane. And we are running full out right now.

Okay. And in order to build up that inventory, were you producing more than you typically would on a seasonal basis?

Well, two things helped us. One was last year, one of our major customers in the grill business had lower demand last season than they had this year which allowed us to build up inventory. And demand really in this product line was much lower last year than it's been. So we were able to build up production, able to keep production but build inventory at the same time.

If you were to talk about, say, competitive share in the 20-pound propane market, where do you believe it is?

Well, we probably don't want to go there. It's hard to -- there is only -- on that product in the United States, there is only one other producer. Our share is significant. Yeah, seasonally, with 20-pound tanks, in particular, we are always building inventory in the winter getting ready for the spring and summer. We did build excess inventory as John was saying getting ready for the OPD switchover. And blew through the additional cylinders we had set aside very quickly. I guess I'm -- I'm struggling to understand -- if you help me understand the essence of your question what you are trying to get to because we are not going to give you an exact production number per year on that particular tank.

Right. I am just trying to get a sense, well, first of all, what kind of normalized run rate is and clearly to the degree that you are benefiting here for a period of time, it is going to be very northern terms of how you manage that back down and how you make use of the -- let me call it incremental capital that you are generating here in excess of what otherwise would have been the case.

There is a couple of different things. They are not solely related to the fact this is a -- you know a temporary bubble created by legislation, but we have been working on and continue to work on different ways to make this product more valuable to the consumer -- consuming base out there. Different ways to comototize it almost at completion stage and some in market testing right now. And we think we can really distinguish this product, a straight commodity product in the marketplace and may help generate additional sales. All the time, you know, you switch the discussion over to steel and auto production. It always cycles. Sooner or later it will turn down some and what we are always trying to do is find new things to be adding all along and hopefully you can get them to match up or exceed on the plus side but lose on the downside. We are doing the same things with the cylinder companies. We are taking advantage of this additional generation of cash and trying to apply it back in research and doing a lot of focus groups and working with different ideas coming down here to move this product out in the future.

Yes. Just one last question on this point is, if you have some sense in terms of what the -- I may call it the "installed base" of products that don't meet the new regulation and based on the number of units sold to date, you know, if we are really just talking 10% or 20%, say, penetration relative to where we might ultimately need to go or is it much higher already?

The exchange programs which probably have a better track on that are saying that this demand should run out over an 18- to 24-month period. As far as the percentage of penetration made to date, exchange programs are now only handling about 30% of the tanks in what they call the "refill manner." So there are 70% of the tanks that aren't going back to the exchange that are being filled someplace else. So since this just started April 1st, everybody is trying to track it, but we just can't be exact right now.

Okay. And then next, on the operating margin front, clearly you've had a nice rebound that's occurring here in recent periods. Do you see yourselves getting back to a double-digit level there where you have been historically?

Well, we are going to continue to focus in on costs as we said before and keep driving that side of our business so that we can drive margins to the highest levels we can under any circumstances we have in front of us. I think we are doing a good job, and part of what you've seen isn't just the volume, though that's a big part of it, it is significant progress on the operating side, particularly in a steel company, and inventory management, and a number of other things that help contribute. We are going to drive margins as high as we can get them.

Okay. And then last from you could just break down the following cost components in terms of the kinds of rate increases here. You are seeing in the areas of health care for this year and next, insurance premiums, security costs of any significant note and pension expense?

Health care is definitely up. Insurance is up, but a small component and I'll let John expand on all of that, but all these things are definitely costs coming up and, again, those are areas we talk about and looking for ways to attack.

I am glad Allison is writing this down because it is a long list. Insurance is not a huge component, although clearly insurance rates are going up, you know, 50% give or take. For us, our total costs of insurance of property and casuality insurance, I'm referring to is around $3 million. So it is not going to be significant amount, even if it was to go up 25% or so.

And up 50%. That was for '02?

No, those are the kind of rumors you are hearing. I think we will probably contain ours to around 25% or so. We have, you know, done -- taken some action in this area just as John is referring to in areas of operations to minimize the costs setting uppa captive and so forth.

But in that sense you are still assuming higher risks?

We are assuming a little bit higher risks than we have in the past, although the company has really taken pretty significant advantage of the soft insurance markets and, you know, had much lower deductibles than we really needed to have. So it's a good time to make that change.

On health care, I mean, your guess is as good as mine. Health care has been outstripping inflation, rising at 15%, give or take a year, for the past several years. So that is a -- that is something that we're concerned about, and at Worthington, we have a sort of insource, if you will, our pharmacy, a number years ago, over five years ago, and that helps us contain, you know, the drug costs, because we are basically getting those at wholesale, and that helps us internally contain our health care cost. Now pensions, we do not ave a defined benefit plan for most of the Company. There is a small defined benefit plan at Gerstenslager, but that is the only one that we have in the operations that we are going to be continuing. So pension costs are not -- not an issue for us. We put in a percentage of our profits into 401-K plans for our employees, and so that amounts will be tracked along with our labor expense and we will go up and down with the earnings of the Company.

And then the last thing was security. I -- we don't spend a significant amount of money on security. Obviously, each of our plants has a security service that looks over it, but we are not seeing any significant increases in that -- in that expense.

Thank you very much.

Our next question comes from Doug Christopher from Crowl Leaton. You may ask your question.

Thank you. I guess I would -- just a few more comments just on the working capital. Certainly, the receivables appear to be -- have that normalized reduction through the quarter as we come off the peak, but looks very -- at a very solid level. And then, you know, just with regards to inventories. I am sure a lot of that increase was due to the aquisition. But you had mentioned that you are seeing some working capital from the closure of the six facilities. Can you maybe add a little more detail to that or if you have new goals in the working capital area and what kind of progress you are making.

Yeah that's a good question. Obviously with the acquisition of Unimast as well the receivable program, it is a little difficult to follow, but essentially, the way I look at this, looking at operating working capital of accounts receivable plus inventories MINUS payables an increase of $46 million from the end of the previous quarter. $44 million of that was related to Unimast. Just to give you specific numbers, the receivables were 31 million dollars. The inventories were 43. So almost half of the increase in our inventory was due to Unimast and about half of the accounts payable was due to the Unimast -- of the accounts payable was due to the payables as well. So working capital was kept in line and the changes are mainly the changes resulting from the acquisition. Certainly inventories are up, and, you know, I'll let John Christie speak to that. But as you can see, for the most part, they were noticed by increased payables as well. The receivables, you know, we had good collections during the quarter, as well the sale of almost $70 million of receivables. Even with the Unimast receivables you see that number coming down quarter after quarter. John, do you want to say something about inventories.

The other thing of inventories other than Unimast would be in our steel area. All of it contained in our two plants, two greenfields, Decatur and Delta. All the rest of the plants are down in inventory. Most of that inventory is already designated for new programs that are going to start -- or are starting here in September. And that inventory because of the steel situation, we accumulated the inventory prior to starting the program. And those are under way right now.

Thank you very much.

Our next question comes from Charles Bradford from Bradford Research. You may ask your question.

Good afternoon.

Good afternoon.

Could you talk a bit about what you are seeing in the way of steel prices, especially hot roll coils. There has been a lot of talk in the industry that make they peaked out a bit.

Certainly, it has been a flattening. We are not seeing any higher prices when that used to and probably starting to see some breaks in the pricing on the other side. Whether it's a plateau or a peak, I guess we have yet to see. John, I don't know if you want to add anything to that.

We have seen a small drop from October -- or August pricing coming into September and prices being quoted for October and November. So as far as we are right now, we saw the peak in late August.

How is the availability now that -- well, first of all, the old LTV facilities are coming up. I know Trico is not going yet but it should be going soon. Are lead times starting to pull in a bit?

I would say deliveries are getting better. Once you get behind in this kind of a game, it gets to be difficult to catch back up, but the deliveries are definitely getting better. You have pockets of things. High carbon materials are harder to get. As you know, there is really only one major producer left in the U.S. at the moment. But overall, they are improving.

What kind of benefit can we see when Trico comes up to Decatur. Because that has been, as I recall, designed to be fed by Trico.

That was certainly the original intention and did for a while. We should keep in mind when Trico quit and we sourced other supply in there, we actually did much better. So we definitely would like to purchase steel from Trico when they come up. The quality of the steel we believe will be better with new core as the operator and certainly talking to them though we have proven we can be very successful whether that works that way or not. But that would be ideal, freight goes away and both companies should win and both us and new corps are talking earnestly about the best configuration to go forward down there.

Thank you

Our next question comes from Mark Rossinger from Merrill Lynch. You may ask your question.

Good afternoon, gentlemen. To follow on on sort of the Decatur issue, I wonder if you can give us an order of magnitude of the impact of, say, a $10 increase or decrease in the spread between hot and cold ban will have on your operations.

Well, we are doing about $-- 600,000 tons there a year, so $6 million.

Okay. That's great. In terms of the -- in terms of the steel situation also, could you just walk me through what is potentially going -- how the differential between what is going to happen with your pricing if it comes down, with the high cost sort of inventory you've got now in terms of your margins going forward. Is that going to be an issue or ...

It shouldn't be. And even back to the Decatur question, even if spread compresses by 10, we have the impact that John mentioned, that would exclude any cost savings generated down there, any other way to compress the affect of the spread that will be working diligently when they do. But one of the things that we have done, and even though inventories have drifted up a bit as John said in the steel company, they are primarily dedicated to two specific large programs in the tightness of this market and getting material we did not want to stumble. We made sure we had plenty of steel on hand for those programs, but we have contracted the inventory for the most part and the flow-through is much more rapid than it used to be. We need to stay on top of that to reduce the impact that will occur as prices drop and you have higher-priced inventory inside. We do an awful lot of contractual business where prices are locked on both sides.

I guess the best way to explain, if you have been listening to us to the last two years, we have been concentrating on inventory control. The last time we would have peaked, probably I think May or June of 2000, we were about 103 days of inventory in our steel division. That will not happen again. We have been running around the mid-50s. And it is up right now, but only in the low 60s.

Okay. That's great. Thanks a lot. Can -- just maybe one final question about Unimast and Dietrich. Can you give us an idea of what sort of market share you got together now with the two companies, and is it a sort of fair assumption to say you did 1 cent in August, can you annualize that in terms of what can happen longer term? Is significant seasonality in this thing? And what about the synergies you may be able to extract from combining the two businesses?

That's the biggest piece that I was going to answer before I threw this over to John. The synergy part of what the rest of the year looks like on an earnings basis is the difficult part to tell you when it happens, exactly how much it is going to be, we have numbers in mind that we are driving toward. There are clear savings that will be involved in the collapse of a corporate headquarters into one instead of two. Those kind of things that are -- that are fairly obvious. And before I give this to John to throw out whatever else he wants on that, this is going to be a great acquisition for us overall. But as we don't give estimates for the company in total, we don't want to give a direct estimate on this, I don't think, John, but go ahead.

Well, I mean, Mark, the summer season is the -- clearly the building season. So that's one issue is seasonality. Two, we do -- you know, we will go over 50% market share between the combination of the two businesses and it is a little bit difficult to say exactly what kind of market share we will have because there are some complimentary products. It is not just our product and their product and divide it by the total market. But our estimate is that we would go over -- go over a 50% market share.

As a result of that, we are anticipating, and we certainly anticipated this when we did the acquisition that we would probably lose some business to customers who, you know, don't necessarily want to be a sole source. And that -- obviously we will try to prevent that, but that means their sales the first month out of the box, you know, are pretty good, and we don't necessarily expect to continue that.

At the same time, as John says, we are going to start taking advantage of some of the synergies that we have, with you -- but I would expect that will take us a little while so what you will see is the first few months of the acquisition will be very accretive to us and level off a little bit and then we will start to be, you know, even little more accretive in the future. I will tell you, however, that our intention is to combine these two businesses and we will soon not be able to tell you exactly what Unimast contributes because we are not going to run it as a separate business. To reap the synergies, we will combine it with Dietrich. That will become more and more difficult and you will start to see the improvement in the segment and we will just have to guess at how much of that is attributable to Unimast. Hopefully that answers your question.

That's great. Really a question about the estimates and if you can get a feel for how much Unimast will essentially add to what we had. Thanks a lot.

Let me just say that we have modestly accretive as we said earlier.

That's great. Thanks a lot.

Our next question comes from Mark Park from McDonald's Investments. You may ask your question.

Thank you very much. Hey, guys, congratulations on a great quarter.

Thank you.

I -- one thing that stood out for me. I was noticing you were talking about the -- the spreads and the basic steel processing business, you know, contracting a bit, and the spreads down at Decatur expanding a bit. Could you give us some sense of, you know, what direction in those spreads you might expect for the November quarter, you know, given for what you are seeing on the by side.

To clarify the confusion. We are talking about margin compression overall in the steel industry from where it was in our general business and the spread between hot coal and cold coal. And we are talking about two different things. I am sorry, what was the rest of the question?

I was just trying to get some sense of -- you know, if you were seeing pricing beginning to roll over here a bit, and I am assuming that that's, you know, maybe some of these 19-cent-plus kind of quotes you are going to roll them back a bit that we saw through the summer, you know, at the margin, but if some of these really high-priced numbers are beginning to soften a little bit in your overall buy might be a little bit lower for the November quarter than it was for the August quarter, I mean what -- what sort of implications does that have for the -- you know, for the underlying profitability for this steel business based on what you are seeing with selling prices?

Mark, I guess the best way -- our spread compression has really been going on for nine months. If you took month over previous year's month starting in January, we have had less of a spread in August of this year than we had August of last year. Less of a spread than, you know, July of this year than we had July of last year. So we have had continuous spread compression now for about nine months. But we have -- I mean, we've got to believe that we are doing a much better job on inventory control and matching buys on raw material with prices and programs that we have contracted with. So it's really hard to say. If it has peaked out right now. And we do a very good job buying, by the way, so it is very hard to give you an exact number we have in our raw materials inventory, but the way we blend it, it would be typically lower than would you find on the spot price being quoted today.

I certainly would believe that, yeah. Okay. All right. Is there -- okay. One other question I had. You know, you talked about, you know, the situation with Decatur being a lot better. Cold world imports are half year to date because of all the anti-dumping, I am guessing anyway, that's the major element, all the anti-dumping petitions that were filed. Those petitions have been overturned or at least they are beginning to be overturned at least for a portion of the -- of the countries that were involved in the investigation. Would you anticipate some of the spread widening between hot roll and cold roll to stabilize and start reversing over the next several months as a result of this ITC commerce department verdict?

I mean, it is anybody's guess. I would expect the spread between cold roll and hot roll is probably going to be as high as it is going to be and probably will decline a little bit in the future. The big driver is really demand. And demand, if its it slackens, it is going to compress. As long the demand is strong for cold roll, the spread will remain fairly high.

Mark, I guess the best way to talk about Decatur is some of our other plants we have a mix of tolling and direct business. We have probably one of the best sales forces and knowledge in the market in the south than anybody in this business and of the tonage we are doing out at Decatur, almost 98% of it is direct customer business. Like I said that's up 31% in volume over a year ago, month over month. So -- I mean, the market penetration, I think, that -- before when we talked to you a couple of years ago, it was not only a spread, but a volume question.

Yeah, it is very nice to see the volume pick up at Decatur. Seems like it is a really good sign.

I just have one last question. I was just wondering, you know, what's your sense of automotive production schedules, you know, moving into the early part of next year. Do you think -- you know, based on what you are seeing, do you think the auto guys will -- will stay at a course where they are or move up or do you know bit on production? And also -- you also mentioned you saw construction markets looking like they were going to weaken further. I was wondering if you could put that in the context of -- from your perspective, how much of the market weakened year to date? How much more do you think it might weaken? Where do you think it might stabilize, again, based on what your intelligence is giving you out of -- you know, your -- your touch points with the marketplace?

We -- you know, it's difficult predict, as you know. What any of these markets are going to do. And our view would be, automotive is running awfully strong now and we have not seen anything from a market signal standpoint, order book, any -- backlog of automotive, anything like that that would say they are about to turn down. I think that you will probably see some isolated adjustments going forward. We -- you saw that Chrysler closed a couple of plants yesterday for two-week inventory adjustment period. On the other side of that, what we are doing is really out there trying to broaden our market, trying to get in with places we don't do business. We have a great opportunity at Honda, where we have had a long relationship, sell second-tier material from the steel side but for the first time have an opportunity to sell some direct. Really going after those automotive companies down in the south hard so that hopefully, again, we can keep expanding our presence with a variety of different people, expand our base so that as cyclicality appears in automotive, we are better covered with it. It spreads easier.

On the commercial side, it is already getting weak. And we will continue, I think, to weaken some. I think we have a great position there, and we are going to continue to get more than our share but again, without really trying to expand and create a product in like commercial construction that hasn't really existed before that offers developers more value on the same footprint of property we can give them two or three extra stories without going to a heavy red iron building. We have a building outline that is really being received extremely well, even though it is just beginning, but hopefully we can keep helping to compress those marketing opportunities if commercial construction gets too soft.

Mark, the construction side, the two companies that are down are hotel and retail. If you follow the "dodge report" or things, as far as light commercial, down, but not as much as the first two. Others are up, where we are pretty well in place. That would be educational institutions, schools, et cetera. If you looked at the report for last couple of months, there were several large public projects that affect the numbers quite a bit. Our focus is really on like commercial schools, residential, et cetera, and so far, it's down, but it is not getting clobbered like the hotel and the retail side.

Okay, terrific. Hey, again, congratulations on a great quarter. I look for more good news in three months.

Thank you.

Our next question comes from Michelle Applebaum from Solomon Smith Barney. You may ask your question.

Hello, Michelle. Are you there?

Miss Applebaum, your line is open.

Our next question comes from Michael Clarkfeld from Goldman Sachs. You may ask your question.

Yeah, thanks. I had a quick question about metal framing pricing. Do you think the metal frame increase that you guys have announced and put in place are sustainable in light of the fact that construction seems to weak and getting weaker?

Yeah, I do believe they are sustainable at the levels we are at. They can get more and more competitive out there but keep in mind they are driven by raw material cost as much as anything and everybody has to pay them. Steel prices weaken and those kind of things, then you will see it get more competitive and more pressure on the pricing. But I think in the short term, they are sustainable.

Thanks.

Once again, to ask a question, please press Star 1. One moment, please. At this time, there are no further questions.

Well, thank you. And thank all of you again for joining us. Again, we are very pleased with the quarter, and we've I think taken advantage of favorable market conditions that are out there for us, but we have also done a lot of things that have helped ourselves as well, not just things are going swimmingly and we are soaking it up here. And we are going to be continuing to press to make sure that we are in good position in the months and quarters ahead. So thank you again for joining us and we look forward to talking to you again next quarter.

Thank you.