Worthington Enterprises Inc (WOR) 2003 Q4 法說會逐字稿

Good afternoon. Welcome to Worthington Industries fourth quarter and year-end earnings release 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. Ms. Sanders, you may begin.

Thank you. Good afternoon, everyone. Thanks to all of you for joining us today.

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.

For those who are interested in listening to this conference call again, a replay will be available on the home page of our web site at www.worthingtonindustries.com.

With me in the room are John McConnell, Chairman and C.E.O., John Christie, President and Chief Operating Officer, and John Baldwin, our Chief Financial Officer.

The format for the call includes introductory remarks from C.E.O., John McConnell, followed by a review of financial and operating performance from John Baldwin and John Christie, respectively. After their prepared remarks, the session will be open to questions from the audience.

John McConnell will begin the call with introductory remarks.

Thank you, Allison. Good afternoon, everyone. We certainly appreciate you joining us today.

This quarter was a particularly difficult period in time. The general economy softened further in March, leading to disappointing earnings in our historically strong fourth quarter. Though period results were weaker than we would have anticipated even five months ago, I don't want to overlook the fact that fiscal 2003 was a good year. One in which we accomplished much, including producing a significant year-over-year increase in earnings. An accomplishment which shouldn't be overlooked, given that it was accomplished during the third consecutive year of a struggling U.S. economy.

As you'll hear later, we have good reason to be optimistic as we look forward. We have a company that's well positioned, not only to benefit immediately from any improvement in the general economy, but to continue to make strides if it doesn't.

John Baldwin will now review the financials.

Good afternoon.

For our fourth quarter, which ended on May 31, we reported earnings per share of 18 cents, and for the year as a whole, 87 cents. Fourth-quarter results are down 42% from last year's 31-cent fourth quarter. The full year of 87 cents was up.

The press release reconciles for you the GAAP and the pro forma numbers, which exclude the impact of two sizable 2002 charges, both on a total company, as well as on a business segment basis.

The press release also contains some supplemental information on volumes, total revenues, and material costs for each of the three business segments. Our hope is that you'll find that this data will allow you to better understand our company's performance.

Record fourth-quarter sales of $590 million represent an increase of 14% from the year-ago quarter, and higher revenues in two of our three business segments. Most of that sales increase came from our Unimast acquisition, as well as improved pricing reflecting the generally higher steel prices in the marketplace.

Excluding the impact of the acquisition, volumes were down in all three of our business segments, compared to the robust activity levels of last year's fourth quarter. Further slowdowns in two of the primary markets we serve, automotive and commercial construction, negatively impacted both our processed steel and metal-framing business segments, and the tough comparison to an all-time record quarter impact in an otherwise strong pressure cylinder segment.

Increasing raw material costs relative to the year-ago period squeezed our gross margin to a 11.5%, compared to the unusually strong 17.8% earned in the year-ago quarter. Last year we benefited from lower priced inventory and a rising price environment, while the reverse was true for this quarter.

SG&A expense declined in absolute dollars, as well as relative to sales, falling to 7.3% of sales from 9.7%. Versus the fourth quarter of last year, SG&A expense was down $8 million or 15%. As a result, operating income was $25 million or 4.2% of sales. Better than last quarter, but down from the year-ago quarters $42 million or 8.1% of sales.

The remaining income statement line items in the quarter, miscellaneous expense, interest expense, joint venture income, were all relatively unchanged from the quarter a year ago.

Processed steel products, which is our largest business segment, saw fourth quarter sales rise 6% to $350 million, which is an increase of $21 million from last year's fourth quarter. Overall volumes were down just under 10% for the quarter, which is much the same as North American automotive production numbers, and reflect a modest increase in direct tons of 3% offset by a 25% decrease in tolling tons.

Processed steel's quarterly operating income of $18 million was down $9 million or 34% from last year. And as a result, its operating margin deteriorated from 8.2% to 5.1%. For the year, processed steel's sales rose 19% to $1.3 billion, an increase of $211 million from last year. Sales at all Worthington steel facilities, except, of course, those that have since closed, were up for the year.

In the metal framing segment, which represents about 1/4 of Worthington's total revenues, fourth quarter sales of $139 million were up 70% or $57 million from the last May quarter. Virtually all of which was due to the acquisition.

Operating income was only break even. However, due to the combination of reduced demand, combined volumes being off about 20%, and the shrinking spread between selling prices and material costs.

For the full year, sales were up 76% in metal framing, due again to the Unimast contribution, as well as higher pricing, which helped to offset some of the full year combined 15% volume decline, as well as unfavorable material cost.

Finally, in our pressure cylinders segment, which represents about 15% of total company revenues, sales for the quarter were down 8%, falling $8 million to $96 million from an all-time record last year of $104 million. Despite the difficult comparison, this was an excellent quarter. The second high highest on record for pressure cylinders, as growth in our domestic and in our European nonpropane products almost offset the softening in propane cylinder demands.

As a result of the decline in year-over-year fourth quarter unit volumes of 14%, operating income fell $1 million or 10%, while the operating margins deteriorated only slightly from 11.9 to 11.7%.

For the full year, pressure cylinders sales were up 10% or $29 million, growing to $322 million from $293 million last year, as a full year's benefit from elevated LPG demand combined with strong refrigerant, helium system, and heating tank seasons.

Our unconsolidated joint ventures contributed significantly to profitability again this year, with equity income of $30 million, up 30% from $23 million last year. WAVE continues to be the major contributor to our equity income.

Despite some recent softening in its end markets, WAVE has managed its business with remarkable consistency through all business cycles. During the year, we and our partner Thyssen, restored our ownership position in TWB back to the original 50/50 level by buying out minority positions of LTV, Bethlehem Steel, and Rouge at advantageous prices.

Cash flow during the quarter was strong, both for the quarter, as well as for the full year. Inventory levels were reduced in our fourth quarter by $61 million to 48 days, allowing us to pay down debt by $54 million, and to reduce the use of our receivable securitization facility by $30 million.

At the fiscal year end, debt was down $4 million from the previous year end to $292 million, and the outstanding balance under our securitization facility increased by only $40 million from last year's $100 million balance, despite the $123 million purchase of Unimast in July.

In addition to getting our working capital back in line, we held capital spending during the year to $25 million against full year depreciation and amortization of $69 million. I would anticipate capital expenditures in fiscal 2004 of less than $40 million, and depreciation of approximately $70 million.

We are committed to a strong balance sheet and will use funds from operations in the near term to reduce debt, as well as to continue paying dividends to our shareholders.

John?

Thank you, John Baldwin. This is John Christie. Good afternoon, everybody.

As most of you know, our fourth quarter, the months of March, April, and May, is typically our seasonably strong quarter in all three of our business segments. That was not the case this year. With North American automotive production down 9% in this quarter, and commercial construction down even more versus last year, it is not expected that our results were also down.

We are dealing with a combination of weakness in the U.S. economy and turbulence in the worldwide steel markets. Even so, there are a number of less obvious, positive things that are going on at Worthington that may prove to be an effective counter to the negatives. Let me highlight some of those.

Starting with processed steel. As you heard from John Baldwin, sales for the quarter were up 6%, but volumes were down 9% from a year ago. However, all the volume decrease was in tolling, as direct sales were actually up 3%.

So despite the sizable fourth quarter year-over-year declines in our two largest customer segments, automotive and commercial construction, which together account for 2/3 of our business in this business segment, we still were able to grow. For the year, our direct volume grew 12%. All plants but one experienced double-digit direct volume increases as we have continued our consolidation.

The quarterly volume decline occurred in our tolling business, where we process for a fee, and do not own the product or deal directly with the end customer. This business was down 25% in our fourth quarter for a number of reasons. Our largest customers for tolling business are the integrated producers, whose business is clearly down in recent months.

In addition, we had some tough comparisons in tolling, because last year was unusually strong as we benefited from outsourced business due to unplanned plant outages, and, of course, several of the producers, our customers in the tolling business, are involved in mergers and/or bankruptcies that have disrupted the normal flow of their business.

It's because of the drop in tolling, not because of the huge increase in direct business, that we saw our direct-to-tolling mix change rather significantly to 64% direct, 36% tolling.

We've talked frequently about the domestic or big-three automotive market, because that has historically been the most relevant customer base for us. For many reasons, the transplant automobile manufacturers have dealt primarily with the integrative producers.

One major accomplishment of this year has been the united effort between Worthington Steel Facilities, including a joint venture, that pulled together to present a compelling package to one of the foreign transplants. As a result of our combined efforts, this company recently became one of our top 15 customers companywide, compared to a year ago when they were only a prospect.

Another major accomplishment this quarter was working capital management. Within the process steel segment, days and inventory declined to just 40 days, below our target of 45 days as a result of concentrated focus and attention.

Another working capital success, reducing days and receivables, was accomplished with the assistance of an incentive plan that included our sales force. Working capital management has been elevated across the entire steel employee base, and their efforts are creating the desired results.

Capacity utilization within the processed steel remains at 70%, unchanged from last quarter, but down from 77% achieved in the year-ago quarter.

Now turning to our metal-framing business segment. Our sales numbers in this segment are up, due in large part to the acquisition of Unimast and thus, metal framing segment volume is up 34% from the comparable year ago quarter. However, if you combine the volumes of the two companies for the fourth quarter a year ago, prior to the acquisition, volumes are actually down 20%.

Although we expected a sales decline as these two businesses, formerly the number one and number two metal framing competitors, were combined, continued erosion in the commercial construction industry has resulted in a lower overall volume than was originally anticipated. In addition, the spread compression has been severe, given extremely competitive pricing environment and higher priced inventory levels.

Inventory levels were above target last quarter at 88 days, as a result of Unimast inventory levels at acquisition, as well as excessive forward orders and overly optimistic sales forecasts. Some of that excess has been reduced. But inventory levels are still above normal levels in metal framing, and represented 72 days at quarter end, down 16 days. This has contributed to the pressure on spreads.

Despite break even results, this segment remains our focus for future growth. Here's why we remain optimistic. Despite the poor market conditions during the quarter, resulting in the 20% volume decline, we are picking up market share. The integration of the Unimast acquisition continues on schedule. Three redundant facilities have closed, including the prior Unimast headquarters. We are in the midst of consolidating two facilities in Warren, Ohio.

Few of the expected annual cost savings have been realized yet from action taken already. At least $5 million annually will be forthcoming. Ample strategic investment continues in both the commercial and residential markets, and we are beginning to see some success.

Another homebuilder will soon be added to our residential promotion efforts here in Columbus, Ohio. The current collaboration with Centex Homes continues to drive new, residential interest.

Through our Worthington construction management entity, we are involved in a number of midrise, multiuse commercial developments in Columbus and Cleveland. The majority have been awarded in just the last few months, and will begin construction this summer and fall. All of these buildings would normally have used wood framing rather than steel. The reception has been very positive among the developers because the projects can incorporate more floors using light gauge framing, thus increasing rentable space and profitability.

We have hired George Harakal, formerly Executive Vice President and COO of the Dick Corporation, to lead Worthington Construction Management in our developing plans to introduce this product into other geographic areas. These efforts are important because they highlight the growth opportunities that we have talked about consistently for the metal framing segment.

First, there's the short-run opportunity for additional penetration of the commercial construction market, where light gauge steel framing is used in only 50%, or so, of the logical applications.

Secondly, there is the long run opportunity to penetrate the residential construction market, which is 10 times the size of the commercial market, and which currently uses wood framing almost exclusively, despite the compelling advantages of steel.

In our last segment, pressure cylinders, the favorable results are somewhat masked by the comparison to the best quarter in the history of this business in fourth quarter of 2002. Despite a 14% decline in volume, operating profitability declined only 9.5%. Almost all the volume decline is attributable to the reduced LPG, or propane cylinder sales, which was expected since the requirement of the overfilled protection device is now in its second season.

How much longer do we expect to see elevated demand for propane tanks due to the OPD valve change? We are forecasting a decline of approximately 20% in the 20-pound propane cylinder sales during fiscal 2004, as sales return to sustainable levels. Despite the decrease, which equates to about $20 million in annual revenue, the pressure cylinder segment expects to maintain its profitability levels by continued growth in other product lines, introduction of new products, and through improvements in the cost structure.

Propane cylinder sales represent approximately 1/3 of this segment, and our cylinders company comprises 15 percent of Worthington's total revenue. So a 20% propane cylinders decline represents a 1% impact to Worthington's revenues.

We recently recruited a new President for this business segment, George Stoe, who is aggressively working to improve what is already a well-run organization. Even so, he has identified a number of initiatives that will maximize revenue and minimize costs in the near future. As a result, we are confident that this business unit will continue to generate sufficient returns on capital.

In closing, for the company as a whole, this has been a year of significant change. We completed the closure of six facilities and reconfigured two others as part of a major consolidation plan announced last year. We completed our second largest acquisition and closed three facilities as a result. We addressed several other low return businesses through closures or downsizing.

We successfully implemented cost savings initiatives in freight, scrap, and purchasing, and instituted a companywide sales incentive program. We replicated our highly successful [INAUDIBLE] facilities team, space management system, throughout Worthington Steel, eliminating supervisors, and we centralized some staff functions and outsource studders. All of these actions are setting the stage for better quality products and improved profitability going forward.

John T.

John and John, thank you very much, and at this time we'll be happy to answer any questions you might have.

Thank you. At this time we are ready to begin the question-and-answer session. If you would like to ask a question, please press star one. You will be announced prior to asking your question. To withdraw your question, press star two. Once again, to ask a question, please press star one.

Our first question comes from Lloyd O'Carroll from BB&T Capital Markets.

The numbers overall look like pretty good, given some pretty lousy markets. Is the first interpretation. I do thank you for the supplemental data. I think it will help us understand a fairly complex business. And then to the questions.

First, what kind of visibility do you have in commercial construction, and that does appear where, you know, the biggest problem is right now? Do you see any signs of life and how far out do you think you can actually see the horizon?

And then a second question, and I'll hang up and listen is, what do you see in steel pricing in terms of hot roll? Has that given any margin squeeze in the quarter, and then, how can you deal with that?

Lloyd, first of all, thank you for your other observation. Because I do think, on a relative basis, given where we are today and the environment we're operating in, to a number of different things you might want to compare to the performance of the company was good. On an operating basis, people executed well this quarter. And that helped our numbers be as good as we could get them to be. For the point in time we are.

On the broad view with commercial construction, the forward view there, I'm not going to give you a timeframe. But it is, I think, beyond where anybody can accurately predict, and I think that's 12 months. You can get a pretty good feeling for what's going to happen in 12 months. And I don't think we're going to see a significant rebound in commercial construction activity until then. Until beyond then, let me put it that way.

I think what keeps us excited about that is, as John talked about, even though a large portion of Dietrich's business is in the commercial construction market, over 95+% of the market is there, we still have a lot of room to try to capture what is available and get more of that market. We're working very hard on that.

But particularly this light commercial, midrise application John mentioned. This is cheaper, better, produces better results for them. It is a patented construction system. It's difficult, really, to sit here and try to explain all the benefits to that so you can appreciate what value this is bringing. This is a very new product for us. A system, again, a patented system, integrated with a thin cement flooring that takes all the weight out of a traditional structure like this, and lets it go up a lot higher because of that. And again, giving them more value back out.

The other significant advantage that we haven't mentioned is, that product allows them to construct with a limited number of different trades involved. So again, it helps take out cost, not just in the structure by adding value, but actually the cost in going in and limiting the number of trades, and they can walk through a building pretty quickly.

On steel pricing, I think prices are going to get stable and begin to go upward. Obviously, you've read, as well as we have, and we've had other conversations with the mills directly, of course, they wish to really focus on bringing steel prices back to a level they find acceptable. And will do so by closing capacity.

This is something that they have not, historically, been successful at. But I think after the consolidation efforts that have taken place, that this market actually will strengthen by those kind of actions, because now there are fewer players that have to make those decisions, and three or four of them can control a big hunk of the market that way.

It's something that in our view needs to happen. And hope that they're successful. So, our short term view over the next six to nine months would be that steel prices will rise.

Okay. Thank you for that.

And follow-up, you forecast in the cylinders business, the decline in propane tanks. Can you quantify the other markets at all, in terms of how much you might be able to trim into that? And then I'll let someone else.

Did you say trim into that?

Yeah -- offset the decline. Yeah.

Okay. I'm going it let John Christie to follow this on.

But generally speaking, we are, and I think John said this in broad form in his opening remarks, that while we quantify the falloff in 20-pounders, we also are saying that we are projecting that earnings will be maintained in this business.

And so we feel that we can offset those in a variety of different ways, particularly out of Europe. That's one of the places George jumped on very quickly. And has done a very good job, both on the operating side working with the guys, but also strengthening the markets over there.

The high-pressure market for us in Australia has been strong, and he's really gotten the refrigerant and the Czech Republic operation, which is low-pressure propane, and really focused on air tank production, a product that we're going to be looking to grow significantly in Europe this year.

And that's really the reservoir that holds compressed air to help trucks brake, is the market I'm talking about when I say that. We're going to try to grow that significantly. We think we can in Europe, and will begin actually investigating entering that market here in the U.S.

John, you worked with George. Anything you want to expand on there?

I think you did a great job.

The helium product that we have talked about balloon time has been very successful since its introduction. And we continue to get double-digit growth as we get that into further penetration into the big boxes.

And that's been a change in our business going from gas manufacturers to the consumer through the big box, and we have promotions and merchandising programs going. So we expect that growth to continue, along with new product introduction that we'll be introducing, probably over the next three to six months.

Our next question comes from John Tumazos from Prudential Financial.

Two questions, if I may.

First, Newcorp reported a 13% rise in their past 13-weeks' joist orders as they've reported double digit rises for five straight months. That seems to paint a little different picture than the combined 20% drop in the year ago separate, now-merged framing businesses. If you could explain.

Secondly, could you explain the spreads in steel processing? Enough time has passed that the excess inventory the company might have bought last summer should have washed through the system, and not particularly penalized results in the current period.

John, on the commercial construction side, I think you can -- I won't speak to Newcorps's direct results. Certainly, anything you read on published data on the commercial construction industry tells you that this is a market that has been in decline, and is going to remain in decline. I don't know whether there will be any further deterioration. I don't expect it so.

Certainly here in Columbus, Ohio, I can look out my car windows as I drive around and tell you the commercial construction market is extremely weak. There are -- the product we talked about, again, with the midrise, is a place that that's about the place -- the only activity in Columbus that is going on at the moment. I think that's pretty indicative of the slowdown across the country.

So congratulations to Newcorps, if they're further penetrating what's out there in their long products. And that's a market, of course, that we're really trying to convert into something else. And John, I know specifically, wanted to comment on that. Before we go on to steal pricing, John Christie on the commercial construction.

John, you talk about joist orders being up, as you recall what we said is, our Dietrich business is 34% up in volume. That’s because of an acquisition. I think you know that Newcorp has picked up some structural and some bar facilities over the last year, compared to a year ago numbers. And I don't know whether --

They've built a joist plant. But they didn't make any acquisitions. The final acquisitions were in bar steel making, which is a different data series, where they're up 133%.

Okay. So, I mean, we're up 34%, and when we talk about being down 20, that was the combination of both companies.

But in volume, that's where we should have been if both companies were operating the same as they were last year. So I just wanted to make that clear.

And,of course, I think we said this before, too. We did not anticipate retaining 100% of each company's volume following the combination. But we did also expect it to be a smaller drop than was incurred. But clearly in the streams that we deal through at the moment, John, volumes and quoting activity fell off a little further even in early spring.

On the inventory side is, you know, when you listen to our numbers, and we brought the steel inventories down to 40 days, really below our target, that's the first time we've hit that. We've had a concentrated effort on it. And we, I think, have done a good job on that.

At the same time, market pricing continues to fall. It remains above levels of last year, which is why when we get into this last year-last quarter comparison, it sometimes sounds funny when we're talking about higher steel prices. But over the last six months, steel pricing has fallen fairly precipitously. And when we're in that market condition, we are generally going to experience compressing margins until it flattens or starts to turn again.

Has the recent pricing announcement of ISG signaled that hot roll prices are no longer falling? Are they stable? How would you characterize that near-term outlook?

I think, I tried to speak to that earlier to Lloyd's question. They, you know, ISG has put out an announcement. I think others may follow suit. That they'd like to see pricing go up. They have quoted pricing being up, on out from here.

And again, I think it's too early to say what's going to happen with that. I think they're in a position to actually succeed, if they will follow through with their curtailment of production, or demand rises a little bit. Either one of those thing is all they need to have happen. But that takes some discipline.

But there's enough control of the market by a small enough group of players that if they will invoke that discipline, steel prices will go up. But, you know, it has not happened yet. And we aren't to the timeframe that they're quoting higher prices. So, let's see what happens.

John Christie, anything you want to add, or John Baldwin?

No. The prices quoted were for August. Still on the spot market. We're seeing material below what they're trying to move the material up for in the August orders. So I think it's yet to be seen.

Thank you.

Eric Fell from Taza Capital. You may ask your question.

What prices are you seeing currently for August? Hot roll?

Well, we're not going to speak directly to what we are being quoted, one way or the other. And, you know, I think it's always a reasonable thing. I think, if you looked at published data consistently over a period of time, you'll find a fairly consistent reflective of what goes on in the markets.

Just directionally, is it stable or lower or higher? Rather than given a direct price?

Well, in what timeframe? If we're looking at maybe the last --

Last few weeks.

Yeah, the last few weeks, 30 days, 60, 45 days, in that range, I'd say it's fairly stable.

Okay. Then just trying to be conservative, even if the steel prices don't go higher but they just stabilize, you know, over the next couple of quarters, how -- where would you expect your margins to be, if, you know, if steel prices just sort of remain flat for the next couple of quarters?

Well, I would expect them in a stable environment to begin to show improvement. From where we are today.

What sort of range would you -- can you speak to that? Do you have a sense what have margins in that segment would be if prices were stable? Assuming volumes are stable, as well?

Well, one of the things we try to avoid on these calls is telling you what we're going to do in the future. And so I don't want to be ducking your questions here. But as things stabilize, we can catch up our market pricing, and you would see -- if you looked back, put it that way, to some of our historic data, you would probably see a point or two improvement, at minimum, in a stable environment, fairly quickly in our margins.

Okay. Thank you.

Mike Morrisroe of Bear Stearns. You may ask a question.

Thank you. I just wanted to go back to the metal framing segment for a moment. Obviously, the demand has fallen off quite precipitously over the past year. The Unimast transaction you eluded to would probably have not materialized as you'd thought it would have, and then there was also the instance of ordering too much inventory.

Why has visibility been so poor there on a couple of occasions? And, you know, obviously, you know, the market was -- had fallen off more severely. But why was visibility, I guess, such a problem, and how is that being remedied? Finally, when will this inventory situation be finally all washed out?

Yeah, and we don't mean to be, certainly don't want to give the impression of overstating the factors we just discussed. Starting with, you know, when we made this acquisition, I'll give you a view of it. It says if the markets weren't soft at the time, it was an acquisition that may not have been able to have happen. Had they been seeing a strong market out in front of them, I don't know that we could have gotten a deal going on the Unimast deal.

So the markets were soft. They knew they were soft. And then from there, when you go forward again, restating that we expected, just from a normal combination of these businesses, and some customers that may be uncomfortable, and those kind of things you take into account when you're combining the number one and number two players, we expected a fall off.

The -- going into the late year of calendar '02, they were making some of the same -- they were directionally right with our steel company. We had come out of very tight steel markets. It was very difficult to get steel.

So there was a -- from where we ended up, we certainly had a forward forecast that was a little, turned out to be, a little worse than what the market was. There was a gap there.

We also were overordering steel, mainly because in a six month period we had people who, in the trenches every day, who felt a little frenzied about making sure they were getting every order they could. Assuming that some wouldn't come in. Then all of a sudden that dam broke loose. And in both places, they didn't get on in time.

Our inventories, as we talked last quarter, going into -- out of December and into January, were way too high. We've been able to get them down in steel to the levels we want. In metal framing side, we have not done so yet.

Again, both John Christie and John Baldwin can comment on that. They work with these guys all of the time. We've got a different view of -- Any further comments you want to throw in on that?

Well, one of the corrections we have made is, that it really took us about two months to consolidate the steel buy for the acquisition. In those two months, those companies had a somewhat different attitude about the buy, and our new acquisition was really the one that really put some steel orders in to make sure they were getting steel, because they did not have the buying power at the time right before the Dietrich acquisition.

So they had a lot of steel on order, on the boats coming over from overseas. So, when it got here, we took it. And that's what we're, part of the Unimast acquisition, right after the acquisition, part of that steel is out.

We have washed quite a bit out the last, really, last six weeks. We were higher than 88 days. We were up in the 90s. We're down to 72. And we expect our target in that area would be around 50 to 55 days, to run the business this size. This type of business. And we hope to get there in the next three or four months. Depending on market demand.

Thank you. What -- can you give an estimate of what normalized conditions would result in, in terms of margins and operating or EBIT, at the metal framing side now?

I'm going to have John Baldwin jump in on that. But beforehand, I want to try one other thing that's just fundamental.

When you're putting two organizations like this together, you have two different sales departments, two different purchasing departments, that you're trying to meld together. And frankly, just for a period of time, you're going to have a little bit of a fuzzy vision.

And Ed Ponco (phonetic) and his team at Dietrich, and many of the people at Unimast, have done an outstanding job of bringing these organizations, I think, in a very quick pace, to the place we want them. We're just completing that process. We said it would take a year, and that's about where we are.

So I think part of the answer to your question is just the acquisition itself, and the normal process of bringing two organizations like that together.

John Baldwin, do you want to --

Sure, John.

Mike, over the last six, seven years since we've owned Dietrich, it certainly is our most cyclical business. But the margins have averaged about 7%, going anywhere from just under 4 to just over 12 during that period of time. So there is -- there's a lot of movement there.

Let me just pick up on your other question. I think that Unimast, over the course of the year, performed pretty much as we expected. Obviously, we've closed down some plants. So it's difficult to make assumptions on exactly what came from Unimast and what came from Dietrich.

But we feel like over the course of the year, the transaction was about four cents accretive. And I think we said that we expected it to be about, just under 5 cents accretive. So it really came in on plan.

They had a couple of million dollars worth of cost and capital related to the integration. Getting those plants that John Christie mentioned closed, but we are going to see cycles in that business, just like we've always seen in our Dietrich metal framing business. So, in addition to what John McConnell said, that you have to buy businesses when they're for sale, they also -- we also feel, in general, the acquisition has performed as we anticipated.

Thank you very much.

Our next question comes from Bob Schenosky of CIBC.

Thank you. Good afternoon, Johns. I have a couple of questions.

The first one in terms of tolling. Do you see the drop-off as a function of auto, or more structural changes at the mill? And if it's the mills, can you quantify at all?

I'm going to ask John Christie to answer that. He spoke to it quite a bit in his opening comments. And we wondered whether anybody would have a question. There it is.

It is mostly related to automotive production in the last, probably the last four or five months.

Okay. Is there any component of it at all related to the structural changes?

Absolutely. I mean, the majority would be the automotive production right now. But we have -- the other component of it is the structural change, with some production being shifted, moved, or the anticipation of certain areas being shut down if demand doesn't pick up, and they've moved some work back in.

So, yes. Both of what you've said is correct. But in the last four months, it's probably more related to lowered auto production.

Right. Is it fair to assume that some of the structural changes might be, say, call it 10% to 20% of the volumes?

That would be probably about right, I would say. Maybe -- maybe 20, 25.

Okay. Great.

And then the second question I had was, we're actually hearing that there's still some attractive hot roll tonnage out there on a short-term basis, if you're willing to buy volume, especially given the auto weakness. Is this consistent at all with what you're seeing over the next couple of months?

John, go ahead.

I -- the answer would be yes, there is stuff out there. But a lot it would be excess material. Prices have stabilized, literally, in the last two to three weeks in that market.

Great. And then, last one, if I could.

If you believe, in fact, that prices will start to move higher, say in calendar 2004, what type of approach will you take to inventory? Will you go to buying ahead of the curve and trying to get in some large orders before prices increase? Or will you move in '04 and try to match it up, and maybe take a little bit of margin squeeze, you know, early in the year, given your three-month lag normally relative to pricing?

Well, in general terms, one of the things that we would like to see our company move towards, and it takes a lot of work and effort working with mills, but as far as we're concerned, the longer term commitments that are made on both ends of the deal, the better off you are.

So you're always going to see us working that direction. Depending on what's going on in the market, we'll make some headway, and sometimes it will be more difficult slugging. We are not going to speculate on the market, period. And that is a terminatable offense here, as far as I'm concerned, if people start playing the market or wanting to without -- well, they just aren't going to.

Right.

So, if we thing the market's going up or down, we're not going to hedge by one way or the other. We believe that the primary issue for us is keeping inventories lean. So, those things that are not covered by contracts on both ends have a high velocity. So that they wash themselves through as quickly as possible.

And we want to continue to establish long-term relationships with our mills and our customers, so that we can enter into the longer-term supply and get everybody out of this mess of up and down.

Okay. Well, as it relates to that, it sounds like you're trying to match more and more business. Correct?

Correct.

So, where would you say that you are now in terms of matching that business, and where would you like to be, say, at the end of the next fiscal year? What's the goal?

That's a very good question. And I don't have a good answer for you.

We were, I would say, in the 40% range, maybe close to 50, on contracts beyond six months that were matched off going back about nine months to a year ago, as these markets changed a lot in the past year. And volatility got introduced, and particularly, downward. We went through a cycle of -- well, actually it started when prices went up a while, right after LTD went bankrupt, and before they came back and the [INAUDIBLE] went on.

We had to go out on some things and make some changes, and customers on the other side were reluctant to enter into longer term agreements. Even when we had, wanted to discuss how they could take advantage of some of the lower pricing.

So I would say that we are considerably lower than that at the moment. Probably more in the 35% range. We have actually been a little softer than I would like to see us, in gearing up on the long-term relationship side again. And in some cases, advising customers to stick with quarterly pricing. But we're about to gear that back up.

So -- and John Christie, maybe you have a more specific number than around 35% right now. But it is definitely softer, less than it was.

I think you're about right.

Kind of like 15 to 20%.

Okay, great. Thanks for your time, guys.

Once again, if you would like to ask a question, please press star one.

At this time, I show no further questions.

Well, again, thank everybody for joining us.

At this point in time, as I said, on a point-in-time basis, it was a disappointing quarter. Certainly relative to our historic performance in the fourth quarter, and as Lloyd O'Carroll pointed out in the beginning, I also point out, that relative to the market conditions that we were swimming in at the time, I think we performed very well.

On the broad basis, we have a lot of things that we have accomplished over the last four years here. And we're at a point now, particularly very confident in the continued presence, both of steel and cylinders, is to drive forward very specific operating improvements in both these companies, and marketing improvements that we -- part of a continuation of where we have been to where we want to go.

Both are very capable of getting that done for us, and both are in the process of really looking over the companies and what things we need to do to help us improve, as well as what we had already talked about before they came.

John talked about a number of different product innovations and design innovation that we have, that we think will add value to our current products. That's a place we're going to continue to concentrate. As well as, we'll continue to look at new markets for the company as we go forward, as we have in the past.

So point in time, very difficult. We think the company's operating very well at the moment. And has a lot of opportunity out in front of it, which we will continue to take advantage of.

Thank you again for joining us. And we'll talk to you next quarter.