Worthington Enterprises Inc (WOR) 2004 Q1 法說會逐字稿

Good afternoon, welcome to Worthington Industries first quarter 2004 earnings results conference call. All participants will be able to listen only until the question-and-answer session. This conference is being recorded. If there are any objections you may disconnect at this time. 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 and good afternoon everyone and welcome to our quarterly earnings conference call. 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 and 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 of 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 homepage of our web site at www.Worthingtonindustry's.com.

With me in the room are John McConnell, Chairman and CEO, John Christie, President and Chief Operating Officer and interim CFO, Richard Welch, Controller and Randal Rum (ph) Beraud, Treasurer.

The format for today's call includes introductory remarks from CEO John McConnell followed by a review of financial and operating performance from John Christie. After their prepared remarks the session will be opened to questions from the audience. John McConnell will begin our presentation with introductory remarks. John.

Allison, thank you and to all those who joined us thank you. We appreciate your being on the call with us today. First-quarter results of seven cents per share were in and of themselves very disappointing. They were disappointing to us and giving your estimates for the quarter disappointing to you. But given the state of U.S. manufacturing sector in the primary markets we currently serve, our results may be surprising to be certain but they shouldn't be shocking. Of 15 companies reporting earnings during the past 2 1/2 months in our sector and those of our customers and suppliers with which we work, the average decrease in year-over-year earnings per share was 100 percent. The decrease moves to 150 percent if you exclude various one time charges that were taken.

That is not meant to make anyone feel good -- ourselves included. I mention it as a noteworthy fact, reflective of a known economic environment in which were operating. One of the features of the economic environment is that it is volatile and it's difficult to predict. That's one of the reasons that we stopped providing EPS guidance in the year 2000. Now given the economy I am looking under the hood at our results as John Christie will walk you through momentarily, combined with where we're moving, I continue to have great confidence in two things I told you in our last conference call.

First, that in the short-term we're very well positioned to benefit immediately from any improvement in the economy. Industry volume data and ours provide clear indication that we have maintained or grown our relative market share in the markets we serve. And, as I believe everyone on this call would agree, inventories throughout the system are low and increased volumes will appear in our results very quickly.

Secondly, as our growth initiatives particularly those in our iron metal framing segment continue to take hold, robbing our customer base, our abilities to grow in any economic environment will be measurably stronger.

Before turning to John Christie for a couple of additional -- let me make a couple of additional points. As you are aware John Baldwin resigned his position as our CFO last month to become the senior vice president and CFO of Graphic Packaging. John performed very well for us, I enjoyed watching him grow into the role of the Chief Financial Officer. We certainly do wish him well.

As you know, I appointed our President John Christie to assume the role of interim CFO until we select a permanent replacement. We have excellent people in our accounting and finance departments. We and both sets of our auditors are very comfortable in the talent and leadership of our controller Richard Welch and our Treasurer Randal Rombereau (ph). As Allison mentioned earlier both are present on the call with us today.

We will move forward very methodically in selecting our next CFO. We have several internal candidates as well as quite a few resumes that have been submitted. Several of which were referred by some of you on the phone with us today and I appreciate your help. If none of the self generating candidates prove to be a good fit for us we will engage a search firm and continue with our effort.

Let me turn to our dividend for a moment. The quarter in which we don't earn the dividend is needless to say not where we want to be. However, it is important to note that we handled this payment easily and to reduce our overall debt level to the quarter. We do not envision any circumstance which would put the payment of our current dividend in jeopardy -- period. At this point I'm going to the call over to John Christie for combined finance and operating review. John.

Thank you John. What I'm going to do is go through some brief comparisons of this quarter with previous years' first-quarter and we will touch items on the income statement, touch line items on the balance sheet and then we will go into a presentation of each one of our business segments. For our first quarter which ended August 31st, we reported earnings per share of seven cents. These results were down 78 percent from last year's record first quarter of 32 cents.

Last year's first quarter was the only time in Worthington history that first-quarter results had exceeded our seasonally strong prior fourth quarter. Why was last year's first quarter so strong? It comes down to demand and pricing. On the demand side we benefited last year from strong Big 3 summertime automotive production and record propane cylinder sales due to the new OPD (ph) regulations. On the pricing side, we benefited from lower priced inventory during a period of rapidly rising prices and expanded hot roll, cold roll spreads.

Why was this quarter so weak? Again -- demand and pricing. On the demand side, we were hurt by a double digit decline in Big 3 automotive production, a seven percent decline in overall commercial construction activities, especially the 15 percent decline in office building construction and reduced propane cylinder sales on a comparative basis.

On the pricing side we were hurt by higher raw material costs, a $25 to $30 per ton compression and hot roll cold roll spreads and a combination of reduced selling prices and higher material costs in metal framing.

That's the explanation in a nutshell. Now let's -- now we will go into more depth on the line item discussion, starting with the income statement.

Sales were down $27 million or five percent compared to last year's first quarter. The sales decline was driven almost equally by a combination of weaker volume and weaker pricing, excluding a combination -- a contribution of the Unimast acquisition (indiscernible) and units ships were down measurably in all three business segments. Decreased demand and a resulting decline in capacity utilization as well as narrowing spreads between selling price and raw mature costs in our two largest business segments depressed our gross margin to 9.8 percent, down significantly from last year's first-quarter gross margin of 17 percent. SG&A expenses came down both in absolute dollar terms and as a percentage of sales from 9 percent to 8.4 percent. The $5 million decline was principally due to reduced profit-sharing and benefits expense.

Going forward, we expect SG&A expense to continue to be controlled as we reap the benefits of the Unimast integration and the elimination of redundant overhead cost.

Operating income was down 83 percent to $7 million from 42 million last year and declined as a percentage of sales from 8.1 percent to 1.5 percent. The bulk of the 3 million favorable variants and other operating income resulted from a prior year reserve established for the impairment of certain assets. The two major components of miscellaneous income are the fees related to our receivable securitization facility and the elimination of minority interest related to the consolidation consolidation of two joint ventures. The securitization facilities fee tends to run around $1 million per quarter but was down moderately -- modestly due to their reduced usage of the facility. The $1 million positive variants in miscellaneous income from last year is due to lower earnings at Spartan, compared to a year ago quarter. Spartan -- the largest of our consolidated joint ventures -- has been badly impacted by a blast furnace outage at Rouge, our joint venture partner.

The income from our six unconsolidated joint ventures were down very modestly from excellent year ago results to a still strong $8 million. Joint venture income is a consistent and significant contributor to our profitability.

WAVE (ph) -- our largest joint venture -- continues to grow revenues and profitability in a very difficult market. Several of our other joint ventures though smaller have attractive long-term growth prospects, including our newest Viking Worthington Steel, a minority enterprise.

Interest expense is down slightly. Our effective tax rate remains at 36.5 percent -- the same as the prior year quarter.

Now to the balance sheet.

The bulk of the 124 million purchase price of Unimast was funded by the sale of receivables under our securitization facility, resulting in a balance on that facility of nearly $170 million at quarter end one year ago. At the end of this quarter the balance on that facility has been reduced by nearly $100 million to $70 million, most of which occurred this quarter primarily through working capital reductions. Our debt to capitalization ratio is 31.6 at the end of the quarter. The ratio becomes 36.5, if the securitization facility of $70 million is included in the calculation.

We continue to be very disciplined with regard to capital spending. Once again, we expect annual depreciation and amortization to be almost $70 million and capital spending to be significantly less than that -- probably less than $40 million. This discipline preserves free cash flow and provides additional support for our dividend.

Our financial goals for the year include using funds generated from operations to reduce debt and strengthen our balance sheet to pay a dividend and retain our investment-grade credit rating.

Now to talk more specifically about the financial and operating performance of each of our three business segments. Beginning with processed steel business segment which represents nearly 60 percent of our revenues. Process steel sales declined 10 percent to 287 million, which is a decrease of 32 million from last year's first quarter. Virtually all the sales declines -- the sales decline was due to reduced volumes which were down 13 percent for the quarter with almost half the decline coming in the month of August. As expected this is closely aligned with lower Big 3 automotive production.

Overall, volumes for the process steel segment are comprised of both direct and totalling sales. Direct business was down only about seven percent while tolling business was down 20 percent. In our tolling business we process for a fee and do not own the product or deal directly with the end customer. Our largest tolling customers of the integrated producers whose business has definitely slowed in recent quarters. When this happens they tend to take business back in-house.

In addition we have some tough comparisons because the year ago quarter was unusually strong as we benefited from additional tolling business due to temporary unplanned plant outages at some of the producers. Because of the drop in tolling, our direct tolling mix -- our direct to tolling mix was 61 percent to 39 percent rather than the normal 57 percent to 43 percent of last year.

Our plant utilization in steel fell 13 percentage points from last August to 62 percent. Inventories were at 53 days at the end of August vs. 63 for the year ago quarter. Process steel's operating income of $8 million was down 14 million from last year and as a result its operating margins deteriorated from seven percent to 2.8 percent. The decline was due to a lower spread between average selling prices and material cost combined with lower sales volumes. The $25 to $30 ton average spread compression between hot and cold roll steel was particularly detrimental to our Decatur, Alabama facility which processed over 100,000 tons during the quarter. The spread compression and volume weakness at Decatur were responsible for nearly half of the decline in operating income within our steel segment.

Benefits from plant consolidations that we've discussed in the past and reduced freight expense personally offset the overall decline in the operating income.

Turning now to our metal framing segment which represents over 25 percent of our revenue. First-quarter sales of 141 million were up 17 percent or $20 million from last year's August quarter, which included just one month of the Unimast acquisition. All the increase in sales is due to the addition of Unimast, offset (indiscernible) reduced selling prices for most metal framing products. On a pro forma basis the Unimast and (indiscernible) metal framing volumes were down 9 percent compared to a year-ago period.

Frames somewhat better than the overall pick (ph) and percent decline in the office construction markets. An operating loss of $4 million represented a $20 million decline in operating income from the 16 million or 13.5 percent of sales for the comparable quarter in 2003. The combination of much lower average selling prices and higher material cost eliminated operating income.

The construction market does appear to be firming. We expect spread improvement as a result of recent implemented sales price increases effective September 1st, which have been matched by the competition. In addition, we anticipate reduced raw material pricing and an improved purchasing mix of prime and secondary steel going forward.

Inventory levels were less of a problem this quarter as days in inventory were approximately 61 days just outside our desired range of 55 to 60 days for this segment. New product and market development costs have been a factor in reduced profitability for metal framing although not the major one. Continued investment in the residential TradeReady products in our midrise multi-family development concept and in several new business projects are offsetting the earlier cost savings generated by the Unimast integration. We are excited about the potential in progress we're seeing in these initiatives.

Finally in our pressure cylinder segment sales for the quarter were down 19 percent from last year's record first-quarter sales. The sales decline was driven entirely by reduced volumes. Lower steel portable -- or LPG propane cylinder sales -- contributed significantly to the decline especially in the United States where the positive impact of the new regulations requiring overfill protection devices on certain LPG cylinders has diminished.

Unit volumes though reduced from last year's record levels are still the second best first-quarter LPG unit sales in our history. To a lesser extent, our Europe results were negatively affected by temporary operational difficulties. Incidentally, the euro strength against the dollar contributed only $2 million in sales in this segment and had no impact on operating income.

As a result of reduced volumes, operating income and cylinders decline to $4 million from $7 million last year and the operating margin to 5.3 percent from 8.8 percent. Although we have experienced a nearly 40 percent reduction in LPG unit sales in the last few quarters, we believe that annual unit volumes will be down somewhat in the 20 percent range for the fiscal year.

This summer season has been a bit of a washout both literally and figuratively with the extremely rainy weather in the Midwest and East destroying the barbecue grilling season. A pick-up from these levels is expected. Even after the OPD created boom in LPG sales our pressure cylinder segment continues to be a great business for us with excellent profitability and return on capital.

In summary, our biggest disappointment this quarter was our metal framing business segment. It is important to note that this quarter's results reflect the fact that we have already absorbed significant upfront costs associated with Unimast integrations in several new product programs without yet feeling the benefit of those investments. When the commercial construction market recovers, operating margin improvement should be quick and significant.

In the meantime we are focused on the elimination of redundant cost and the development of new products to spur top-line growth in this key business segment.

John McConnell will now conclude with his assessment of the outlook for the company.

John, thank you very much. In the near-term as I said earlier, we're very well positioned to benefit from any upturn in manufacturing activity. Though we don't see any significant increase in activity visible to us yet there are modest indications that things are improving. Our shipment rate over the opening 10 days in September were up 9 percent over last year and, anecdotally, just before I came into this call I walked outside and all of our former shipping docks were full -- that was a sight we did not see much last quarter.

We've also implemented a September 1st price increase in metal framing which is taking hold. Steel prices have started up and (indiscernible) initial round of increases will be sustained. Big 3 automotive production is projected to increase over this quarter though it will still be down from the same quarter last year. And reading the forward view of several of you on this call and the opinions of many others, it's generally believe that manufacturing has begun a modest upturn, it is supported by a very fragile underpinning that could swing either way but we see in the near term as a line with a modest increase in demand going forward.

Our second quarter will be better than our first and sticking to our decision not to provide forward guidance on EPS and that combined with the information we've already given is as much as I will say to qualify next quarter.

Over the long-term looking out over twelve months I remain very confident in our path. We have been successfully working to broaden our market opportunities and enhance our future earnings. At our cylinder operation we're working with major retailers in kicking up our helium marketing efforts a level and sustaining our product offerings. We're also introducing a terrific product this spring called Flamesaber.

This is a unique cylinder that solves the outdoor griller's No. 1 concern -- that's running out of fuel while they're cooking. We're continuing to develop other value-enhancing approaches with our cylinder division. Our metal framing division has done an excellent job with its product and market expansion work.

In the areas of residential and multi-family construction, midrise buildings of three to eight stories for any use, kit buildings and the emergency structures of mixed-use, we have moved or are about to move from development projects that require funding to selling products that produce earnings. I'm not going to quantify or timeframe them for you today and I know that they won't really be real to you until we do, but I do want to keep them on your radar screen even if it's on the outside edge of your scope.

They are center screen opportunities and they're coming and we will quantify them for you more at a future date. At this point we will be happy to take any questions you may have.

[Operator Instructions] Michelle Appelbaum (ph) of MPG (ph) Advisers.

I wanted to ask you a question. You were saying, I think, with Detrick (ph) that your raw material costs are going down and you'll have an improved purchase mix of prime and secondary? Is that what...

That's correct.

You guys go fast when you do this and it's good information. So how do you reconcile reduced raw material costs at Detrick's and raising steel prices? In your commentary just now?

Michelle, one, they're reducing from a high level both from a high level of inventory and second this underlying mix question that John addressed and want him to expand on if he feels the need to after this, but with the acquisition of Unimast we ended up in a very different mix between what we buy [indiscernible] and what we do in secondary [indiscernible] with applications which is a much cheaper product for us -- we ended at a much higher degree [indiscernible] since been working that ratio back to where we want it. John, you want to? So that is where the higher cost lies. Even though were bringing it down it's still a high-cost inventory from where it was and remains a little higher cost even though it's coming in line and coming down than we would like it to be.

So the raw material at Detrick apprised (indiscernible) because you're able to buy or secondary?

Yes that's right our mix will be different even though the new products that were coming out before Joyce's [indiscernible] primed steel at the time in the acquisition for period of maybe two or three weeks after the acquisition with Unimast we added about 62 new product lines. In fact, that's why we felt comfortable with 55 to 60 day inventory because of the cost large number of product lines. The Unimast have loaded up very much on the prime and we have worked that out through our cost of materials over this time. So our cost material because of that higher price has been in there in our cost of goods, it has been worked out and our mix will change right now even at a higher pricing environment.

So everything else equal, Unimast was buying more prime than they should have been, not because their business was different than Detrick's?

[indiscernible]

They did no conversion.

How much secondary is Unimast going to be able to buy now?

Well one thing we talk about Michelle is not keeping second businesses. We continue to bring the amount of secondary into the system we're able to bring and we will continue to do that and integrate it into the Detrick facilities including those that we retained from Unimast acquisition. Just one point of clarification. I know you understand [indiscernible] so you're able to buy more secondary, it's not because there was a constrained market or are any thing out simply because they were so loaded in the primed inventory we had no room to [indiscernible] from our own internal standpoint. So as John said it is just a question of working that out of the system.

Michelle as you probably know even though there has been maybe a small uptick in hot roll products or announced galvanized products really have stayed pretty steady through that and so we are also experiencing that.

You're talking around something that I want to put on the table. Unimast was owned by a company that owns a steel company and are you finding that Unimast was so loaded with prime material and now can buy cheaper secondary because there was some transfer potentially maybe their purchasing wasn't as good for a reason?

Without a doubt their cost of materials between our cost of materials and the way we operated they were totally different. Their cost of material was much higher as a percentage of sales than ours [indiscernible] they were higher because of our ability to convert so, yes, they did a different buying pattern that we have had.

Just before the acquisition I think it's also clear to keep in mind the timeframe this all occurred in. Steel was fairly tight at that time. There were a number of additional orders put on just prior to the closing of the acquisition. That was aberrational even to their buying pattern, some of which was from abroad, not just next door so I don't want to imply that anybody was misusing anything or doing anything wrong in their company because much of that material was coming from abroad.

That was the question I was asking. But that's often not a purposeful issue when you have these downstream been but actually sometimes it's personality of people in purchasing department -- I am not saying anyone did anything wrong but you see those things all the time and why downstream integration never worked for the industry. So any way so you're able to reduce the cost by changing the purchase. That's terrific -- thanks.

Thank you.

Chuck Harris of Salomon Brothers Asset Management.

Following up on that a little bit. If you look at the metal framing business, Q4 to Q1 we look at it sequentially, overall sales [indiscernible] number was roughly equivalent actually up a little. Did this sort of represent this quarter -- represent sort of a last push some of this higher price inventory out of the system and so we're really starting off at a much better cost stasis? Otherwise why would the business be down as much as it was -- in relatively flat volumes I don't think there was a huge change in pricing Q4 to Q1, was there?

Actually there has been a decline in price so that part is true. Price has been under a lot of pressure over the last six to nine months in this business.

But has it accelerated over the past [indiscernible]

Accelerated over the past three? Just it's actually starting to stablize and as we said we announced an increase for September 1st. Now the other thing that is very misleading, in what you are looking at there is the sales number.

Keep in mind that we just combine two companies than we're comparing it to the acquisition time that was a little less than a year ago meaning the sales of Unimast was not fully in our first quarter last year. They were only in there for one month.

All right but I'm looking at the fourth-quarter, (indiscernible) in the fourth-quarter $139.5 million.

In The fourth-quarter Chuck if you take this fourth-quarter, compare it to last year's fourth-quarter our average selling price, in metal framing, dropped over 13 percent.

What about -- what I am trying to figure out is can we do this sequential analysis, Q4 to Q1. Q4 to Q1 sales are flat and operating income is down materially [indiscernible] breakeven to a loss position. And all I am trying to do is just figure out is that just flushing out remainder of the high-priced inventory? Was there a mix issue? Was there an incremental pricing that we didn't really hear about? Because you went from maybe breakeven to losing 3 1/2 -- a little over $3.5 million.

Our pricing continued to fall, during this quarter compared to fourth-quarter. We did have a slight uptick in materials cost and our volume was down very much like steel. August with weather-related material etc. of weather relation we did not ship as much in August as we anticipated.

Okay, now, but you would say for all practical purposes going back to Michelle's question, the -- you're at about the right balance of prices cost of inventory at this point that you want to be at. Is that about correct sorta?

I don't know if we're exactly right but our problem is more on the topline than on the inventory side. Our selling prices have dropped substantially more than our material costs have gone up and so the combination of those two, it's hurting us. Our material cost are flattening out but our selling price has continued to drop. Like we indicated we put a price increase in [indiscernible] will.

Okay. Thanks.

Alec Blitzer (ph) of Merrill Lynch.

Question -- did you quantify how much perhaps a new product initiatives added to the cost over the first quarter?

On the first quarter I do not have all of them in the Corporation. I anticipated this question from the metal framing standpoint. It's about $5 million.

OK so 5 million just for metal framing and did you look at that corporatewide would you need to double that or is it less [indiscernible] bulk of it been in your -- been in your metal framing? If you had to take some in -- if you're comfortable making a rough estimate?

I'm sorry, I'm a little confused because I said -- I want to back up just to make sure we're all clear here. I said about one million and I think you said back to me five.

(indiscernible) said 1, sorry.

I want to make sure we're square on that and as a result tried to (indiscernible) what you said back I didn't hear the second part of the question well.

Yeah, you said you couldn't quantify it corporatewide but that in metal framing it was one million.

Yes.

Rather small number but on the order magnitude are we looking for comparable or greater number [indiscernible] corporatewide? Is it one, is it 2 million corporatewide then or greater than two or is it very much inconsequential (indiscernible)

I would say it's an order magnitude of one times or less -- probably 1 1/2 times.

Okay and the other question I had is the consolidation we have been seeing in the steel industry among the integrated how is that do you that impact on your business and tolling business going forward certainly like you said with the volumes (indiscernible) forward they bring more of that work in-house. Are you getting indications of their behavior going forward now with some of the structural changes going underway?

Yes I believe that consolidation efforts are helpful to us all the way around and they make for a stronger steel pricing environment in the United States and worldwide and those in a stronger steel price environment is good for us. I believe that as they continue to look at the consolidation efforts as we've seen with the ones that have been made where we have strong relationships, one of the things that gets considered is as they look at how to blend these organizations together is how, what should they keep in-house what shall we keep out? We have a good partner (indiscernible) Worthington, can they take some of it, shall we look at doing something different so that ends up spending opportunities from us overall.

Okay. Thank you.

Just on the cost side of development I think one point out we try to be very clear [indiscernible] cost that has been winding down but one that we have been carrying I think the significance of what we see going forward is turning them from losses even though small last quarter into positive opportunities for us as we go forward which makes a bigger pendulum swing.

Tim Aquino (ph) of McDonald Investments.

Good afternoon, gentlemen. I have a few questions. I apologize if these had already been asked -- I am having some technical difficulty with my phone here.

No problem.

One, when do you see the growth spread widening or returning to a more normalized state?

That's a good question. I'm not sure we're going to give you a real good answer to that. I do think that steel prices will start to go up -- as we said earlier -- we know it's going up and how long -- if it continues to march forward certainly that is helpful to us. Clearly there is a lot of pricing pressure out there on our direct business. A big piece of when we look at our gross and material line is the decline we've seen in tolling. If that comes back the gross raw material line goes up really disproportionally per ton as it comes in there because we don't own the material.

Now with regard to tolling, you had run through some numbers earlier I didn't catch them -- a more normalized tolling mix vs. direct.

John gave those to you earlier and I'll let him give them to you again.

The numbers I said were more normal -- last year we were 57 direct 43 tolling. Typically in the past we've been 55 45 so direct was up higher than our average last quarter. For this quarter, it's even shifted more to being 61 percent direct and 39 percent tolling.

(indiscernible) sound like a big percentage change when you hear it that way, if you looked at this quarter quarter over quarter our direct business fell about 7 percent and our tolling business was down 20 so that gives you a different by slice of what it might sound like those [indiscernible] press release.

Okay, terrific now with regards to your August September order books are you seeing any restoration of that tolling business?

I have to turn to John [indiscernible] been with the steel [indiscernible] I think there has been some increased interest activity and quoting activity but I can't figure and tell you we have landed jobs that we know are in the order book and coming. John you got anything you want to add to that?

We think maybe the decline has flattened. We do have a lot of orders pending. I can't tell you exactly whether they're booked or not based on what our customers are seeing, but we do think that it has stopped its decline.

Terrific -- one last question. If you could. What would (indiscernible) of the volume mix of the Big 3 to transplants?

Good question. Of our total automotive business which is -- of our automotive business the transplant business is about 8.4 percent of our automotive business.

Okay.

It is an area I would say we have a heavy concentration on and are working one [indiscernible] of the transplants have one that we've got into our top 25 accounts in the past few months and are continuing to work and have active quotes going with all of them. That's one of the first periods we had to get through to do some direct quoting which we have I think successfully done in every case.

If you had asked that question a year ago fourth-quarter it would've been less than one percent. Had that up to 8.4.

Terrific. Thank you very much.

Of the auto business.

Eric Sell (ph) of Taza (ph) Capital.

One of my questions was just answered. The other one was you cite rising steel cost as one of the negative factors for the processed steel products segment. Would that relate, specifically, to the mill that you have in Decatur or -- otherwise can you explain that a little further what exactly you mean by rising steel costs because as I understood it rising steel prices generally was good for margins [indiscernible] [inaudible]

They are. And but they need to be we need to have time to cycle inventory through to get the benefit of that cost.

OK and is that typically a one quarter lag or longer?

Right now we're running 51 days in the steel company to give you an indication of we are inventory of course that's an average number, depends on all the products and everything else but that's what our average carried in inventory write-down [indiscernible] longer than that.

I don't know how long you've been following us but our inventory in the past it's been a lot higher than that in steel so we have a longer lead than lag times. We've done in our inventory last quarter ended about 48 days we're up to 52 or 53 days but at one time we were way up into the 70s and 80s. So we have really put a lot of emphasis on inventory control from the last year.

OK. Thank you.

John Tumazos of Prudential Financial.

The volume declines you saw in steel processing and framing and cylinders all have their own explanations, but I guess it doesn't feel exactly like GDP's rising 4 or 5 percent. John, how does the economy look to you and how much do you think steel consumption is contracting this year in the steel industry as a whole?

We gave some basic numbers on the auto industry earlier and I know you all (inaudible) those down in a kind of a low mid double-digit range 13, 14 percent depending on what you apply. I think general consumption across the board, John, is down but I can't quantify that to you. I do think when we look at the basic AutoData which is one of the things we look at and we look at, certainly, two different reports on the construction side that we've done a good job with our market share in those areas. In fact, I know in some cases we have gained share.

GDP does show, it's reported up 4.5 percent -- it's kind of a big jump from where it's been. We look at the industrial production indexes and while they have lift up a little bit they haven't the last two periods I think, they haven't gone that much and if you look at it on a relative basis I think going back to 2000 -- even with the increases they're up 1.6 percent from 2000 which isn't giving you any indication only that there's this push out here for the economy to turn around in the industrial sector. So I'm one of those guys that drives to work in the morning, listens to Wall Street Journal report on the radio and feels frustrated with all the good news because it doesn't show up in the order books. And I've talked to everybody else of my cohorts in the manufacturing sector and can't find anyone who's really seen a strong indication that it is about to show up in the order books.

Now Nucor (ph) in August per their web site had net orders for the 13 weeks of 4.55 million tons, up 102 percent with sheet and bar, up big and structure and plate not up and [indiscernible] up 9 percent deck down, cold finished bar down. It doesn't seem like looking at their data, which is not as closely tied to autos as your own, the things are coming up apart paired by these by these steel price hikes producers are announcing cover rising costs, are they sticking in substantial part?

I think that it is -- well, first of all remember it's pretty modest increase they announced and I believe that they have a good opportunity to stick certainly if I read most of the analyst report as many of you are probably on this phone you all believe they will stick close to a $300 level by the time year's end. We're working through that with everybody right now. It probably needs a little increased demand to make it work.

John probably talks more with Jim Daniels (ph) on a daily basis than I do. John, do you have anything you want to add to that?

I think your last statement about, it's going to take demand to make it work and hopefully there will be demand pickup across the board in steel production this quarter. We do see some pickup in the construction of course about half of Nucor's (ph) business is related to the construction market. [indiscernible] flatrolled market but as you know (indiscernible) have been production decreases announced by two of the three domestic auto producers for the fourth-quarter even though that is higher than the amount that was produced last quarter. So there will be pickup but it is not at the same pace it was a year ago.

Thank you.

Charles Bradford of Bradford Research.

I would like to talk a little bit about the spread compression you were talking about in regard to galvanized products. I think you said the galvanized price was steady but obviously there's been a little uptick in hot roll. How does that impact Delta Spartan?

Spartan it would be hard to compare Rouge had that furnace outage so that had an effect on Spartan but I can tell you on Delta, Delta continued to have a very good quarter but compared to a year ago quarter its operating income was down about 40 percent. Because of the spreads -- And volume. Volume was also down.

What it comes to Spartan, can you quantify all what the Rouge outage cost you?

That's a tolling facility. So.

So they had less tons to you.

Right we get paid a processing fee for the number of tons going through there. The number of tons going through there, the less the processing fee.

You couldn't pick up the tons elsewhere?

It was an immediate stoppage when we have that kind of active [indiscernible] events that prevents the steel company and as you know going out to replace [indiscernible] is very difficult to do [indiscernible].

It's my understanding you own 52 percent of Spartan yet all of Delta?

Correct.

How do you decide where to load the plants?

Very different lines. The Spartan line is, again, we basically have a marketing agreement with Rouge that they can draw up to 80 percent of the capacity for their own use but [indiscernible] operator we can take any of their (indiscernible) they don't use but it is also a much lighter gauge line and related directly to automotive tonnage while Delta tends to be on the heavier gauge side relative to Spartan and geared while we're doing automotive work there which we worked hard to get it qualified to do is geared largely to other products.

What are you hearing from them in regard to auto demand for the next quarter? Because being in Michigan area they're not exactly the same as just the Big 3?

I'm not sure I understand your question.

My understanding -- Rouge, in particular, if they have 80 percent of Spartan would be more Ford related.

That would be correct.

What are they telling you about Ford's outlook?

John do you have any [indiscernible] for that.

Seems to have implications for Spartan.

I really -- obviously being their largest customer's Ford, but I think they got a pretty good mix coming through Spartan and I think they do probably about equal work with General Motors and Chrysler up there than as well as Ford so they have a pretty good mix with the Big 3 and still going to Spartan.

Thank you.

Follow-up question with Michelle Appelbaum of MGA Advisers.

Going back to the question on the trend of raw material costs you said that you were 51 days inventory and it would vary by product so I guess you'd infer from that it would take a quarter to flush through prices, but you've often got price commitments whether you own the material or not, right?

We have. We have -- we have price commitments on material (indiscernible) what do you mean [indiscernible]

Well if there's a change in price in the stock market even if you go through your inventory in two months or three months, you won't necessarily have impact from the change in the price of steel in the stock market because you may have committed to buy a completely different price.

That's correct. We also in those cases should have [indiscernible] commitment from a customer and there should be no volatility in that order at all if you assume everyone lives by the agreement.

And if you assume everyone lives by the agreement you're making a very egregious error, right?

Well it's something you should not rely on -- I will say it that way. In other words I don't think we can assume that that happens in all cases.

Okay if we were just to take a rule of thumb where there have been price decreases coming through for the recent past, and even though there's a price increase, won't it make sense for us to assume that while you may roll through inventory in three months your pricing your forward pricing trend for your commitments would most probably reflect the weighted average from the past nine months. So your prices for raw materials could still be declining, won't they be or no?

It's possible.

Okay.

I think one of the issues here and you followed this for a long time as you know our last three years of fluctuations of steel prices has been from peak to valley have been compressed a lot. You're now seeing with consolidation if you've noticed over the last six months there's been a flattening for the first time in a while of steel prices. And even though there is an announced increase for September it's not, as someone else discussed, it's not a big increase. So we're not seeing the violent swings that we've seen in the last three years.

Okay, great, thank you.

John Tumazos of Prudential Financial.

Thank you. As it relates to Rouge, it would seem like with the tough business conditions and their outages they're going to be pretty much out of equity by the end of the year. Should we expect Worthington either to deploy capital or increase its order commitments by prices much from Rouge for example in order to preserve the supplier?

You should absolute not expect those terms to happen.

Sorry, to expand purchases?

To expand purchases or to put in more capital. I don't -- Rouge is a supplier but it is unlikely you'll see us expanding our current scope of business with them for that reason. Nor will you see us put additional capital into this business.

Are there any other potential significant projects? Obviously, if there's a chance to buy the other half of Spartan you'd consider it. Are there any other large uses of funds out there?

Yes, you're right in the case of the demise we would be in a different situation but not to prevent one. There are different things we're looking at, John, all the time. I would -- it depends on -- quantify large for me.

100 million.

No.

Thank you very much.

Yes sir.

At this time, there are no further questions.

Thank you very much, again, for joining us today. Again, our results this quarter were disappointing. We expect them to be better next quarter and we will look forward to reporting them to you. Thank you very much.