Worthington Enterprises Inc (WOR) 2003 Q2 法說會逐字稿

Good afternoon and welcome to the Worthington Industries second-quarter earnings results conference call. All participants will be able to listen only until the question-and-answer section. 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, Nola. Good afternoon, everyone. Thanks for all of you for joining us today. With me is 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 detail 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 and welcome everybody to the conference call. We appreciate you joining us today. If you were a first-time caller, we typically follow this format where you will hear from John Baldwin, our Chief Financial Officer who will give a review of the quarter from a financial perspective and John Christie our President and Chief Operating Officer who will go through the operations. Both will do so in, I think, more than adequate detail to make sure we get you all the information that we think is pertinent and the information you want to hear. If there is any -- any concern or confusion or questions that are generated out of that, we take time after their two reports and take your questions.

So jot them down and we will be happy to answer them when we get there. This is our third straight quarter on a year-over-year 80%-plus improvement. Obviously we are very pleased with that performance and as I think you will hear from both John and John's report and you go through the details of it, I think you will agree that it is just evidence of the growing strength of the management team here that we are building, and, again, feel very good about where we are today and the results we have generated here. So John Baldwin, do you want to get us started on the financial side, please?

Sure, John, thanks. Good afternoon, everybody. Hope everybody is having a good holiday season so far.

For the second quarter of fiscal 2003, which ended on November 30, we earned 24 cents per share, which as John said was up 85% from the 13 cents per share that we earned in the second quarter of last year. But down from our record first-quarter performance of 32 cents. This quarter had two one-time charges. The first was a $5.6 million favorable adjustment to the restructuring charge we recorded during the third quarter of last year. As we have progressed in liquidating redundant assets, we have made changes to our estimates and added three facilities to the original consolidation plan: one in pressure cylinders and two in metal framing. The most significant impact on the restructuring reserve resulted from the sale of real estate at our former Malvern, Pennsylvania steel processing facility which we were able to sell at a gain. Offsetting the restructuring credit was a $5.4 million charge for potential workers compensation liability which has been indemnified by Buckeye Steel Castings, one of the businesses that we sold back in our fiscal 1999. Due to severe economic conditions, that business has ceased operations and the new owner's indemnification may be worthless. For the most part, my additional remarks exclude these offsetting one-time items. For the quarter, our sales were $568 million, which was a Worthington quarterly record. Compared to last year's second quarter, sales were up $158 million or 38%. About half of the sales increase came from improved pricing, with the remainder from higher volumes including $54 million of sales from the Unimast acquisition. Strong demand continued in our cylinder business due to the new valve mandate in the United States and to improved international activity and in our steel processing business due to the robust automotive market. Increasing raw material costs squeezed our gross margin to 14.2%, down from last year's second-quarter margin of 14.9% and the prior quarter 17%.

However, our operating margin, excluding the restructuring credit, actually rose relative to the year-ago period although not relative to last quarter because SG&A expense declined as a percentage of sales versus the second quarter of last year. SG&A was up $5 million almost entirely due to the addition of the Unimast SG&A. Operating income, excluding the restructuring credit was up 69% to $34 million from $20 million last year, and increased as percentage of sales from 4.9% to 6%. The two major components of miscellaneous income are the fees related to our receivables securitization program which have been running at about $1 million per quarter and the income or expense attributable to the elimination of the minority partners share of the operating income of our two consolidated joint ventures. The modest increase in this expense is actually due to improved profitability at these consolidated JVs. Interest expense was up slightly reflecting higher debt balances during the quarter. Income from each of our five unconsolidated joint ventures was also up significantly and our tax rate remained the same, 36.5%. During the quarter, we also converted a portion of our 364-day bank facility into an additional five-year commitment expiring in May 2007, which now brings to $235 million our total five-year revolving credit. This facility is in addition to our $190 million accounts receivable securitization facility of which we had an outstanding balance of $170 million at the end of November, which is up slightly from $169.5 million we had at the end of the last quarter and $100 million we had at the end of our fiscal year in May.

You may recall that we used the receivables securitization facility to finance our acquisitions of Unimast back at the end of July. As we concentrate on integrating the acquisition, we plan to restrain capital spending, as we have done this quarter, against full year amortization which I expect to be $75 million this year. I anticipate we will spend quite a lot less than $40 million on capital projects. Six months into the year, we are easily on pace for that target at just $14 million in capital spending. Funds from operations will be used to reduce debt, strengthening our balance sheet, and allowing us to retain our investment grade credit rating. Looking more closely at our business segments for the second quarter, and starting with our largest business segment, the processed steel segment, sales there rose 28% to $353 million which is an increase of $77 million from last year's second fiscal quarter.

Every Worthington Steel facility, except those being consolidated, enjoyed increasing revenue on a year-over-year basis. On a volume basis, the year-over-year increase was 12%. Increased selling prices accounted for over $40 million of the sales increase year-over-year although selling prices were not quite enough to completely offset the increased cost of steel. Processed steel's operating income of $23 million was up $8 million from last year, and as a result, its operating margin improved from 5.4% to 6.6%, the steel processing segment will benefit most from the consolidation plan we announced last January. Approximately 1.5 million of the improvement in earnings this quarter was a result of these actions. As the plan is completed later this fiscal year, the run rate for operating income improvement should grow to at least $2.5 million per quarter.

Turning now to our Metal Framing segment, which now represents 25% of total company sales, second-quarter revenues of $144 million were up 90% or $68 million from last year's November quarter. Most of the increase is due to the acquisition of Unimast. The remaining $14 million of revenue increase is essentially due to increased selling prices implemented in response to rising raw material costs. Operating income for Metal Framing of just over $3 million is just slightly up from last year despite the additional sales from Unimast, resulting in an operating margin deterioration to 2.4% compared to 4.3% last year and down significantly from the unusually strong 13.5% margin recorded last quarter. Unimast contributed approximately $2 million of the operating income while Dietrich was hit with material cost increases of over 65% versus selling price increases of approximately 40%. Volume declines of 13% due to the commercial construction market slowdowns and integration costs. All before realization of any of the synergies of the transaction. Despite these initial challenges which weren't totally unexpected, the integration process is going very well and the combined entity should be highly successful for us.

Finally in our Pressure Cylinder Segment, which is now less than 15% of the total company, sales for the quarter were up 20% or $11 million to $67 million. Most of the increase was in our European operations and reflected a significant turnaround from a year-ago period. LPG or propane cylinder sales were up 37% from the prior year, and also contributed to the quarterly improvement; however, this the off-season for propane sales and thus the record demand we have experienced in recent quarters have lessened. As a result of increased volumes versus the prior year quarter, operating income rose to $8 million and the operating margin improved to 11.9% from an unusually low 4.5% last year. As John McConnell said, we now plan to have John Christie take you through the operational details behind these numbers.

Thank you, John. Good afternoon, everyone. On a consolidated basis, our second quarter was quite good, although the continued strength of the Processed Steel Products and Pressured Cylinders was tempered by weakness in the Metal Framing business segment. This quarter continued the recent record-setting trend with record quarterly revenues on a consolidated basis and numerous operating and financial records on an individual plant basis. Auto demand as evidenced by production numbers have remained strong, but our results are due to much more than that. Increasing market penetration, improved efficiencies, and just better blocking and tackling on many mundane fronts. Let me go through our results in a little more detail for each of the big business segments starting with Processed Steel Products. As you heard from John Baldwin, sales for the quarter were up 28% and volume up 12% from the one year-ago quarter. All of the volume increase was improved direct sales as tolling remained relatively flat with the prior year when we benefited from a one-time mill out-sourcing due to plant outages.

The overall direct to tolling mix is 58% direct and 42% tolling. Although additional demand from the automotive sector continues to be a major contributor to the results, it is not the only one. Smaller customer segments such as appliance, furniture, and office equipment are also up. In addition to increased demands from existing customers, we believe we are adding significantly to our customers base, as, for example, our sales to automotive continue top grow at double-digit type rates while automotive production growth is only in the single digits. Volume increases mask further downward pressure on the selling price material cost spreads in this business segment. Passing on price increases due to rising prices receive priority one attention for months, and fortunately, we had ample lead time. While we had considerable success, it is never possible to win 100% of the battles, and we have seen consistent deterioration and spreads as a result. With the recent decline in raw material prices, and selling price increases going into effect this January, the pressure should ease particularly in our majority automotive plants.

In contrast, widening spreads of a different sort, the spread between hot and cold rolled steel has been very beneficial to our newer cold mill facility in Decatur, Alabama. Although these spreads have come back a little bit from the August highs, they are significantly better than the historical lows that plagued Decatur's initial years and, consequently, the facility is slightly profitable on an operating income basis. Our direct tons volume for the second quarter was up 32% in Decatur on a year-over-year base as we continue to establish a southern presence. We at any time talk about performance and processed steel without mentioning our other newer Greenfield galvanizing facility in Delta, Ohio which continues to be a blockbuster success story for Worthington. Despite operating at capacity and generating record earnings, it continues to surpass these barriers with new records on a regular basis. Not surprisingly, it has become our model facility, and as many as possible of its operating successes that are not processed unique are being replicated throughout Worthington Steel. Current capacity utilization at all Worthington Steel facilities reached 80%, compared to 63% in the year-ago quarter and 75% last quarter. In a few processes, such as anealing and galvanizing are running well over 80. As for inventory, in the steel division, at the end of November, 2002, we were at 61 days. Up from 54 days last November. In November 2000, two years ago, we were at 58 days. Our 90-day and over inventory today is down 25% from a year ago.

We feel our forecasting and centralized purchasing is making us more efficient in managing our inventory. We are higher than we would like to be but during the last two months, we have accepted late deliveries from our suppliers and taken advantage of some foreign offers. Turning now to our Metal Framing business, the commercial construction market has been slowed for some months now. But the most recent downturn that we mentioned in our last conference call turned out to be even more severe than we expected. While our sales numbers in this segment are up dramatically, due in large part to our acquisition of Unimast, volumes and pounds sold in the old Dietrich operation are actually down 13% from a year ago and hit all product lines, including the core building products and the proprietary roof and floor systems. The sales decline is not entirely unexpected as we anticipated some initial loss in sales as the logical consequence of combining the number one and number two Metal Framing suppliers and moving orders to more efficient plants during the consolidation.

As John Baldwin relayed, we saw margins shrink as a result of increased competitiveness due to the downturn, higher raw material costs, and integration merger-related expenses. As of last week, all of Unimast locations have been successfully converted to the Dietrich system three weeks ahead of schedule and are now shipping at preconversion levels. During the latter part of the quarter, we closed two of Dietrich's facilities by merging business into nearby Unimast locations. We will recognize savings from the elimination of overhead costs such as these gradually over the next several quarters. We remain convinced that the long-term attractiveness of this business from a growth perspective both in the short and long runs due to the opportunities to penetrate commercial and residential markets with a superior products, Metal Framing rather than wood.

In our last segment, Pressure Cylinders, the continuing story is the considerable demand that has resulted from the new overflow protection device as required in 26 states on most propane cylinders in order to be refilled. LPG or propane tank sales continue to be up 37% even in this off-season. Some of that increase is due to seasonal promotions of newer propane consumer products that are expanding the reach of propane cylinders beyond the traditional barbecue grill market. The new story this quarter, above and beyond the ongoing increase and demand for the domestic propane cylinders, is the increased volumes and improved profitability at our international locations in Austria, Portugal, and the Czech Republic. Two-thirds of the volume increase in pressure cylinder this is quarter is due to nearly double the volume in the European locations where our new refrigerant line in Portugal reached full production levels. Our expanded air tank product line in the Czech Republic is becoming established, and international refrigerant and propane sales greatly improved. In addition to the increased business, new management at our Portugal and Czech facilities have been successful in reducing manufacturing and overhead costs as a percentage of sales and ongoing refinements in our Austrian facility, made it the most profitable of all cylinder operations during this quarter.

Before closing, I would like to update you on the progress of our consolidation plan. All six of the facilities that we identified for closure in January have been closed. We have good interest in the land and fixed assets and completed the sale of the Malvern, Pennsylvania real estate during the quarter. Another three facilities which were not a part of our original consolidation announcement have also been closed including the Citronelle, Alabama Cylinders Facility, which we talked about last quarter, and two Metal Framing facilities, one in east Brunswick, New Jersey, and another in Atlanta, Georgia. Both of these facilities were in close proximity to recently-acquired Unimast facilities and will be permanently closed at the end of this month through the integration process. In addition to the $12 million in cash we received from the sale of the Malvern real estate, we are seeing financial benefits from the liquidation of working capital and the elimination of ongoing losses at our unprofitable operations in Brazil and Malvern.

In summary, second quarter was a good quarter despite challenges in Metal Framing. While our third quarter usually represents the seasonal low point of the year as all three of our business segments are impacted by reduced demand due to weather and holiday slowdowns. We expect results to surpass the prior year. Our emphasis as we have said for several quarters now is to continue improving efficiencies, pruning unprofitable and redundant assets, penetrating new markets and increasing capacity utilization. As a company, we are well-positioned to operate in whatever economic climate we are going to see coming forward. John.

Well, John and John. Thank you. Again, that was, as you have in the past, given a very complete picture of our second quarter. A lot of good information. One thing I want to throw out real quickly. I know we have said this before on the call, but for anybody again who is new, when John Christie talks about our capacity utilization numbers, we are measuring those on a 7 by 24 basis not on a 5 by 24. Some place in the low 70% range is -- is a full facility on a 5 by 24 basis. So just a reminder for anybody as you listen to those numbers. We have done good job of really filling up our facilities. At this point, again, that was a lot of information. We will be happy to take any clarification questions or any questions you might have at all.

Thank you, at this time are ready to begin the question-and-answer section. If you would like to ask a question, press Star 1. You will be announced prior to asking your question. To withdraw your question, press Star 2. Once again, to ask a question press Star 1. One moment please. Mr. Leader from Burn, you may ask your question.

Yeah, Happy Holidays, everybody. Richard Leader from Burm Securities. I have not worked out a earnings model myself, but apparently there was of the average analyst earnings model for the quarter of a little bit higher expectations. Did business trail off at the end of the quarter? Did you see any sign of a reduction in strong trends as the quarter progressed?

I really did not other than what both Johns talked about with Metal Framing probably coming in somewhat weaker than we had anticipated. Everything else is going very strong. And, again, Metal Framing did a nice job on the sales penetration side which will show up later. I think, also, when you look at the range of analysts' estimates, you saw there, kind of pulled the number up beyond from where most people had us. And that affects the consensus estimate as well, which I think is probably more to the point than where our earnings came in and trailed off.

Okay. The volumes for automobile remain very strong, and I think probably the way for that to continue is to add new customers. There was a hint that maybe you would be -- begin to do business with Honda at some point in time as your next big opportunity. Any developments that you could share with us on that?

Well, I think we have done a very good job with domestics -- well, we ought to start dropping words like domestics but the traditional big three and increasing our penetration there and have great working relationships and as John alluded to, new arrivals manufacturing automobiles here is very important to us. Honda has been here in Columbus for a long time, and we do have some ongoing conversations. I don't know, John, if you want to talk or expand on that at all.

We are expanding our business with Honda. I think the other key thing here is we don't have -- we don't have one customer in Worthington that represents more than 5% of our total sales. So from a customer diversification standpoint, we are very well-positioned.

One last thing for clarification. On your operating capacity, you mentioned it's based on 24-7, and that's clear. What wasn't quite clear to me is last year's 63%, was that including the plants that have been closed since that time?

John threw out the comparisons so I will look at the answer of which way he used the number.

Partially. They have been readjusted. For this quarter we have taken those out that we have consolidated.

Okay. Good, thanks.

David Taylor from David P. Taylor & Associates. You may ask your question.

Thank you. I realize the charge for workers comp at Buckeye represents your best estimates at this point in time. How confident are you that this estimate represents a conservative number that won't have additional charges put to it at some future point?

I think -- I am certainly going to have John jump in on the back side because he did most of this work, but I know for one thing, we are looking at a fairly well-defined space in time that we are responsible for. And we have had a known number of claims that were generated during that period of time. The question is -- I suppose on the guessing side, that it's -- of people who are no longer collecting that workman's comp and may find themselves unemployed, does it drive them to regenerate a claim.

Or are there health claims that haven't surfaced yet from -- that may have the genesis from the point in which you operate?

I believe -- and again, I will let John comment on this, my understanding is they would have to generated an accepted claim during the time period for which we are responsible for. I don't think they can go back and claim a claim and reopen -- initiate a new claim for that time period. So I don't think that's going to be an issue. John, do you have anything to fill in for Dave?

David, on that last point. Buckeye Steel Castings is the primary party responsible for these claims. What happened is in order to be self-insured in the state of Ohio, Worthington Industries had guaranteed Buckeye's obligations prior to the sale which happened back in February 1999. So it's the guarantee that may give rise to the liability. In the first sense, they have to look at the assets of Buckeye. Under no circumstances would we be liable as John said for anything after February 1999. And so, there is pretty much a defined group of people who are looking to. As to how conservative the estimate is, we had our -- our third-party provider, who is Marsh McClenan basically look at these numbers and sort of vet where we thought with he would come out in addition we had our auditors of KPMG take a look at these numbers. We feel pretty confident. Obviously there are medical had-related issues that can change but we feel pretty confident with this conservative number.

Thank you.

David, I may add I mentioned before when we had the questions of our earnings trailing off because we are a penny under consensus. You know we're -- the exercise we are going through with Buckeye isn't any difference different than the exercise you go through with us which is evaluating what we think the potential situation is going to be, relying on outside resources, and coming up with our best shot at it. We give no guidance on earnings and, overall, I mentioned -- I do want to come back and say overall, I think you guys did remarkable job of coming up where we ended up this quarter. So -- but that's the same situation we are in. And I only hope that our -- and I am confident actually that our ability to come up with that number was as good as most of yours to come up with a number for this quarter.

Okay.

-- [ INAUDIBLE ] of Addage Captial, you may ask your question.

I think so you alluded during the conference call with the inventories being higher than they normally are and you gave reasons. About how much too far are they? You are going into a seasonally slow period so I am a little confused as to what you were doing there.

Okay. We had several late deliveries from our suppliers. We found steel in other places to be able to make the commitment to our customers. Because of some supplier relationships, we took some of the late deliveries in the middle part of November, which caused our inventories to go up. The last time that this slowed, so to speak, would have been November and December of 1999 when prices had, quote, supposedly peaked. At that point, before we instituted our inventory control systems, et cetera, we got to 103 days of inventory in December of 1999. If we had peaked today, we are at 61. A lot of that is in the raw material that just came in recently at lower prices than -- we feel good about the average cost of our raw material inventory to answer your question.

Okay. And just on the pressure cylinder thing. I mean, how -- about how far are we through this whole process of all the people like me being forced to buy a new cylinder before the guy will fill it up again?

About 26 states have been mandated. There are still other states to enforce it. The average population of those states, I have a breakdown. I don't have it in front of me. We feel there's another 12-month run. That's what other people in the industry will tell us and our customers.

Okay. That's it. Thanks.

And we are through majority of the benefit, I think, with that question, even in the states that are not mandated, I think we are pretty comfortable that people in the gas business, the major distributors of these cylinders all are using OPD devices. There is going to be, as John said, a continued benefit from this in the future, but it maybe a third of where we are right now. Very difficult to say, its everybody that runs out of gas in their tank, when. And that's just a hard thing to get a handle on.

Destroy my entire plan of having two tanks when I found out one wasn't good anymore.

One the things that indicates this is last year we were building inventory for the peak selling season of cylinders. We are doing that again this year because we have a belief that there still is volume out there, but the inventory peak that we are building to in March will be 200 to 250,000 less tanks than we did last year.

Okay, thanks.

And Daniel Roling from Merrill Lynch, you may ask your question.

Thank you. Going back to the auto segment, you had such very good sales. Just help me understand if any of this benefited your pickup in business from auto was due to the demise of LTD, Bethlehem or business you were developing that is more blank slash parts related than it was capture a market share from integrated.

All of the above.

Can you break it down?

Not really. I couldn't break it down between what we got over from LTV. A lot of it is material substitution where we formed several quarters ago an auto group that focuses nothing on automotive business in our steel sales group. They are very professional group, and they have done a great job in penetrating new markets and doing material substitution, substituting hot roll for cold roll products, et cetera. So, it's a combination of a lot of things.

Getting our Delta galvanizing facility qualified with hot rolled substrate was a big thing as well. A combination of all those things. Great relationships, a sales group that is all over, which let's you be in position to pick up anything that has failed.

Okay. Is there much growth still there with the -- let's say we don't get any more -- let's say North America auto production is flat at 15 and a half to 16 million units. How much more market share do you think you can gain?

Well, the first thing I would say is we are not going to gain a lot between here and the close of this fiscal year simply because the cycle of acquiring the business. There might be some pickup business out there. But I think we will continue to penetrate this further. I don't know if I can give you an end number, but we really are in also the new manufacturers and Honda you wouldn't call new, but certainly Toyota and --

Right.

-- that group of people stronger than we have been in the past.

Our automotive sales group is very confident. You know, you never know how long these sales cycle in this pipeline is because the model changeovers, et cetera, but we are focusing in on 2004 total model rollouts as we speak.

One last question along that line. What percentage of all your sales today or this quarter have been to auto, and is there a limit that would you put the company at risk to automotive on a percent-to-sales basis?

If you took our steel division, our steel group, we would be about 50% auto-related. Now that would be direct or that would be first tier or that would be second tier. That would be a combination of several. Overall for Worthington Industries it will probably come in about 30%, a little less.

And you would be comfortable with how much of steel being exposed to auto, 70, 60, 100%?

It really depends on the type of business you have in that sector and in what platform or what model or what part you are seeking the business. But we feel comfortable with 50, and we would feel comfortable increasing that.

Thank you very much.

We will just add to that, you know, for the company as a whole, obviously, Dan, we've basically diversified away from automotive firstly with the acquisition of Dietrich back in 1996 and secondly the acquisition of Unimast which has increased the construction side of that business to 25% in addition to the construction we have in the Worthington Steel company.

I think just to add to it, if you want to be in the steel business, and have a growing concern in the steel business and a viable future concern, you can't ignore the automotive markets, you have to embrace it and that's really the position we are going to be in and John Baldwin made a very good point. The way we want to manage the company's exposure is to grow in other areas, but not ever ignore automotive. We have great relationship there and want to continue to build on them.

Thank you.

Michael Morris-Rowe from Bear Stearns, you may ask your question.

Thank you. I just wanted to ask you, as we look in valuing your stock, under, I guess, relative-to-normalized condition and a lot of moving parts given your different segments, could you kind of tell us or give us some color on where you feel certainly the processed steel appears to be closer to the peek and Metal Framing closer to a trough and the cylinder also has something that -- a moving part in it that is not sustainable. Can you kind of tell us where the growth is going to come from and how you view normalized conditions for Worthington?

Well, I think you gave a nice overview, and I don't know that I would call any of them quite at a peak, the steel business, I think, is a good position to continue to grow, particularly on the earnings side. We are doing a good job of continuing to generate top-line growth. But I think more importantly, we are continuing to find ways to get more earnings out of every dollar of sales that we generate and also I expect to see us do that going forward. Pricing in the steel raw material is definitely -- at this point it appears to have softened somewhat and John mentioned more recent inventory coming this is a lower price. Again, that gives us some future ability to grow the earnings in that business. Where the commercial construction cycle is and when it will turn around, I think trough probably is a good word there. May be a year, year and a half until it generates additional growth opportunities as far as commercial construction goes which is why we put an awful lot of emphasis on our residential side and the things wer are doing there. An area that I am not sure that John talked about in his comments but the light commercial building in the Dietrich construction management group that I think has the opportunity to make great inroads in the next 12 months to help offset some of that commercial shortfall. John and John, any comments as to where that is going.

As far as additional capacity to grow, we have additional capacity as you know in our consolidation efforts. We have excess equipment. In fact, we have moved some into more efficient operating facilities. We have some positioned to move. And then we feel strongly that to position this company with the excess capacity that's out there in the system, our outside processing relationships need to improve. So we are -- we are the customer -- we are the producer, but we may not be using our assets to produce the whole thing if we are running at capacity at a facility we would transfer to other ones of our existing facilities or to a nearby facility outside our system and use other people's assets to generate income for Worthington until we build the market to the point where we need to invest our own capital. So that's a whole different strategy than we would have had two years ago.

The only thing I would add to what both John and John have said is, you know, we also have continued to make niche investments in our facilities. One of the reasons in Delta is doing so well and John Christie alluded to this earlier, for just a couple million dollar investment we were able to put a [INAUDIBLE] line out there and get product substitution in the automotive market. A couple of years ago we put a dry lube line in Monroe. Investments of $2 million, $3 million that drive additional growth into, you know, into something like a Worthington Steel. In the case of cylinders, new product and development. But clearly, as we said, numerous times, we still think our near-term and long-term growth will come out of out Dietrich, our Metal Framing segment because further penetration of metal into commercial markets and then, ultimately, penetration of metal into residential markets as John McConnell said

Chuck Harris from Solomon Brothers. You may ask your questions.

Good afternoon. Let me make sure I understood. Talking about the growth margin this quarter, there was sort of a negative variable of increasing raw material prices against your selling prices. Can you talk about sort of trends in both of those as you look forward to the remainder of the fiscal year because gut feeling is that should start to reverse, but I wanted to hear what you had to say.

Well, this is John Christie. I will start out. As far as our raw material in the steel industry, we have seen prices peak probably in September-October. Prices are coming down in November and December, and looking forward into January. We have some thinking that contract negotiations that have taken place in the last two or three months. They took place at a higher price than they would have a year ago before markets started to rise. So, I think from that standpoint, our spreads will be at least stable, probably improve. On the Metal Framing division, we had a question asked about inventory before. I just commented really on the steel inventory. You'll have the Dietrich inventory up. The reason for that was the acquisition of Unimast, and we honored some of the steel purchases that Unimast has agreed to prior to the acquisition. So the inventory in the next couple of months will be a little high in the Dietrich division.

So we should see -- when you say "stable" the spread stable, on a sequential basis spreads should be roughly stable going forward and pricing will more or less marry - - match whatever the costs are plus or minus a little bit?

That's why inventory control is so important because there is so much going on in the American steel industry as to production capacity and what will happen to it and the financial viability of some companies. So it's very hard for us to predict going forward what will take place there. We just have to run the business the way we think it is best run and make sure we are managing our inventory.

Okey doke. Thanks very much.

Michael Clarifeld from Goldman Sachs. You may ask your question.

Hi, thanks. I was just wondering with the three additional facilities you ended up closing - - What was the head count associated with those facilities and if you can give a head count -- and an overall head count of the closure of all nine of those facilities until now. Thanks.

When we closed the original six facilities, the head count was around 500 people associated with -- with those. So far, we -- about 450 of those people have left. The two -- I think there is -- on the order of 100 people associated with the other three facilities. They were much -- much smaller facilities, and I think about 25 of those people have -- have exited at this stage.

Thanks.

Michelle Applebaum from Salomon Smith Barney, you may ask your question.

Hi. I am -- I am a little confused. I added back the unusual items, and I thought you laid it out pretty clearly. But I still get Dietrich margins running two and a half percent on an EBITDA basis. Is that right?

That's exactly right, 2.4%.

Okay. We talked about, like the business being between 6% and 12%. But when you are saying that your same store sales will be down 13% before Unimast, I am guessing that you would like to keep us subdued in terms of the margin performance at Dietrich in our outlook. Is that correct?

Say that again? We want to keep you subdued in --

Our thinking -- subdued. Because you did 13.5% in August and 2.5 in November, but you are telling me that same store sales were down 13%, right? So --

For the quarter, yes.

We shouldn't expect -- you are saying we are at the trough, but it could be a year and a half or so. So we should just keep our thinking for Dietrich, not that it will go back up to 13.5 margin it is what I am saying.

It is not going to be a rapid rebound, but I think we are at a point where margins will probably improve a little bit and part of that, again, goes back to steel pricing. They are tempered, and you are right, I don't think we are purposely trying to do one thing or the other but to give you information. They are, as John said, a little heavy on the inventory side at the moment and will take a little while for them to work through but steel prices are coming down. That generally helps their margin some, and I think we are probably at a trough, but you are also -- jumped right on there. No, we are not going back to a 13% margin in the next couple of quarters.

Okay.

There won't be enough strength in the market probably to do that.

Michelle, we have absorbed, of course -- we just -- we made -- we finally closed on that in August, so we are in the consolidation stage. We have several people. In fact, we are ahead of schedule in the consolidation, which we are very proud of, but we have had extra overhead burden in this consolidation phase as we try to speed up and get more efficient by combining facilities. So there obviously is a little extra burden on Dietrich this quarter from a cost standpoint based on the integration.

That will continue through next quarter though diminishing somewhat.

Okay. And you have given pretty good guidance on the trend of the steel companies' margins. And you anticipated margin pressure in the August quarter and March -- EBIT margins dropped from 8.2 to 7 and then from 7 to 6.6. At the trough of the market, your EBIT margins got to 4% in steel, which is still pretty impressive. Would we expect margins to kind of go to -- back down to those levels, or do you think you are in a point of stability in your steel processing business?

Well, I -- I don't think they are going to go any lower at the present time. Stability implies they are going to remain the same, and I am not -- I think in the short term, obviously some slow movement upwards than where we are in the steel margins. John and John, is that -- are we holding that view?

And this goes back to the gross margin question as well as this. Margins in our business as a percentage, you know, have a lot of issues related to them. I mean, a 4.4% margin when steel prices are $400 is the same as, you know, an 8.8% margin when steel prices are $200. A lot of the decline in margin it is related to steel prices going up and we are still making, you know, pretty much the same amount, you know, give or take 10%, 15%, or pretty close to the same amount on a dollars-per-ton-type basis. You know, so this starts with spread and then it also goes into things that we can deal with, with are filling out the plants and then trying to add higher value added services, you know, to the steel and that is what is going to drive the margins forward. I mean, clearly as you alluded to, Michelle, four is pretty much a historical low for us.

Okay. Great. Can I ask a second question or --

Sure.

Various points in time, we've talked to you guys about the marginal inclination to produce steel. And for the most part, this team has had pretty much zero marginal inclination to produce steel. And I was wondering, with production assets in such disarray as they are right now, what would -- would there be opportunities that you would be looking at to perhaps put in some equity and put your name on something or agree to be a customer for something the way you guys did in '89 with Rouge where you made a fortune -- made a real-nice gain on that purchase. Is there a possibility we could be thinking about some kind of strategic supply situation?

We aren't thinking real hard about it. I'll never say -- It is certainly not high on our list. There are a number of assets out there, and about as much as we ever go down that road, Michelle, to say if its valuable from a supply contract basis, which is pretty much was the impetus for the Rouge arrangement we made, that we took off a little bigger stake than I would anticipate on any other kind of deal. A small equity position for supply contract is something that if it fell the right way, we might consider it, but it is certainly not something -- we would much rather go down the road supplying a struggling new mill or turned-over asset and a lot of tonnage in exchange to help them along for a good stable price environment for this company. That's the road we are going to continue to go down on that side. But I'll never say never. But it 'not high on our list.

Okay, great, thank you.

Once again, to ask a question, press Star 1. David Taylor from David P. Taylor and Associates, you may ask your question.

Yeah, thank you. This is a longer-term question both backwards and forwards. In the 1990s, there was a lot of capacity added in steel processing. Not just you, guys like Huntco came and went, and a number of other companies added a lot of rolling mills and other related assets of the kind that you operate. To what extent is the improvement that we have seen in the last year or two in steel processing. A function of a contraction of this excess supply. And can we expect that going forward?

I think there has been -- this is John Christie. I think there has been a contraction of some capacity, but not a lot. Seems like it slips back into the system somewhere, somehow. But in the processing business, it is a lot more than just having machinery and equipment today. It's your ability to communicate with the customer, the ability to just in time deliver the ability to process order in a very short period of time and yet maximize your equipment and -- I mean, and really be able to hold the right inventory and get the inventory through you as quick as possible and all those things combined, I think now, are letting the premiere processors rise to the top, and the expectations from the customer in this business are getting more and more every day and I think that is, number one, helped us grow market share and helped us fill our capacity, even though other capacity is still out there.

Yeah, a lot of times -- I think that is exactly right. That was well said. There is a lot of people out there that have slitters, and there are more than we can possibly begin to count, but there is always a human tendency when people demand more of you to worry about that a little bit but we have been very clear over the last several years and maybe clear to ourselves sales guys and everybody else, the more demanding the environment, the better it is for us. That's what we want. We welcome it. Embrace it and I think John is right. That has helped us and helped others as well. Because you not only need capital, you need a strong performance and dedication to getting it just darn near perfect.

Thank you.

Richard Anderson from Pershing, you may ask your question.

Yes, good afternoon. Question on processed steel. Ex the auto market, could you comment on the trends in the -- in the other industries you serve. I mean, you look at the industrial production number that came out if you excluded auto. There wasn't much happening at least in the companies I talked to, it just seems like the markets stalled, and there is kind of little hope other than for sluggish growth going forward. Can you kind of comment.

Well, I am sure that the other guy would say have a little comment in is John McConnell. Again, across the board, there is a lot of pressure on people that bend metal and comes in a lot of different forms. Most of it -- there is really two critical pressure points that have been going on recently. One is foreign competition, and the second is the rise of steel prices that we just went through in the last 12 months and how -- more importantly how quickly they occur. So you have seen a lot of people buying parts and components that were produced here, shifting their focus on purchasing them abroad which is forcing people who produce here to look abroad. There are certainly a lot of that going on. I think a lot of that we'll get through. Steel prices have seen a peak at the moment, starting to come down a bit, but still its peak is down below historical averages. So pricing overall for steel is really not too bad once you get through how quickly it went up and that's why I think those other markets will start to stabilize a little bit, and start returning to a more productive state in the U.S. And John, you handle the sales quite a bit. I don't know --

As we indicated this quarter, this quarter appliance and furniture and office equipment has seen an uptick. The casket business seems to be a pretty steady environment, year after year, quarter after quarter. One area that's down would be the culvert business. Galvanized culvert. We have seen a little drop in that. Auto is up. I go back again to our ability to have throughout Worthington Industries, and no customer is more than 5% of our business, and as people grab market share, hopefully our Customer base is very diversified. We have some up some down, but the one that's down the most probably is the galvanized and the construction market.

Okay. Question on -- speaking of construction, in the -- in your Metal Framing business, if the commercial construction market doesn't improve, is there much opportunity that you can further reduce costs?

Oh, yes.

Yes.

Absolutely. We continue to reduce cost -- I mean, I know this core doesn't look like it because of the integration, but our processing through put at Dietrich continues to improve quarter-over-quarter and we track as our ability to produce at the lowest cost in the industry. We are still taking costs out.

Remember, we just combined these two companies and John pointed out that definitely adds a healthy burden in the initial stages of this when you are integrating two companies to carry, and as we go forward it is planned and cost will come out in probably -- I am confident in saying on a imperative basis, Dietrich alone prior to Dietrich after the integration is complete will be a more cost effective operation.

Last question -- you mentioned that your capex issue would probably be around $40 million versus depreciation of 75 million. Is it fair to say that - - that would probably be the number for the following year, ex any opportunities or something that would require spending in '04.

We don't have anything of significance on the plate right now. We, you know, have managed the balance sheet very well over the past couple of years and will continue to stay focused on that, and, you know, we are going to digest the Unimast acquisition and move -- move forward and like I said, keep tight reins on the balance sheet and the cash position. So probably be the same levels, if not a little less.

The money you see us spending to today with our major Greenfields behind us are really upgrading our existing equipment for process controls, improved very much. Our preventive maintenance program, because down time when you are running at these capacities gets expensive. That's where we are really concentrating, preventive maintenance and control upgrades, et cetera.

Thank you.

Marco Pensack from Credit Suisse First Boston, you can ask your question.

Good afternoon, it's Marco Pensack. I was curious to see what near-term impact on your business you might expect from New Corps presence in Decatur and what your strategy might be from that regard.

Well, I think as New Corps continues to bring up that facility we see it as a positive influence on what we do down there and get back to some original concepts with them producing down there, hopefully producing a higher quality steel than actually -- let me say it another way, they are going produce a higher quality steel than was produced there before so the original concept of getting steel with very little freight costs in it is going to be a benefit to us. They have a ways to go to really get from here to there as far as bringing it up to a facility running and producing a lot of tons. But they are getting there. We look forward to continuing to work with them and develop a very positive relationship that's beneficial to both of us.

Have you actually discussed specific supply agreement that would obviously be contingent upon you qualifying their quality? Or is that still premature at this point in time.

We have met with them on several bases. We will continue to meet it on an ongoing basis and John has been at most of those meetings, and anything you want to add or where we stand with them at the moment on a supply agreement.

It makes sense for the two companies to have a very good relationship. Their management at their mill down there came over and watched their first run run on our mill. We are in ongoing conversations and think it could be a great relationship going forward, but you know they are starting up, and we have that cold mill down there running very well right now. So I think there are advantages for both of us one they get that thing up and running.

Great. Thanks very much.

Jason Capella from [INAUDIBLE]- you may ask your question.

Hi, can you comment on how big energy is as a percentage of your total costs and then can you sort of allocate energy amongst gas, net gas, oil and electricity for me.

I am sure Mr. Baldwin can do that in just a minute. I know I can't.

Energy is not a very big component of our total costs. I think we spend about -- on the order of 20-something million dollars a year, about a third of which is natural gas and two-thirds of which is electricity.

Okay. That's total for everything? Heating the plants and anything in the raw material side?

Yeah, I mean, we are not -- because we are not melting --

Right.

-- it doesn't require, you know, as much energy as other operations. So that's total company.

Okay. Thanks.

At this time, there are no further questions.

Well, thank you everybody for joining us today. Again, we are very pleased with our results. The third quarter in a row with over 80% gain year-over-year, quarter-by-quarter in our earnings per share. I feel a little silly saying this, but I am going to throw it out there anyway. I do want to remind everybody as we approach the fourth quarter, that there is yet to go -- as you approach the fourth and looking at what you are going to do, please keep in mind that the fourth quarter was our -- fourth quarter of '02 was our first quarter with a 80% gain in it. When we are doing our comparisons, we will be comparing against a much different number as we started that 80% gain cycle. And I know you are well aware of that, so, again, I apologize if -- don't be offended I wanted to bring that up. We do continue to see our markets strong in the performance inside strong and just continue to gain momentum here. So we look forward to talking to you next quarter. And we hope that you enjoy your Christmas and holidays, and have a good and safe time. We will see you soon.