Worthington Enterprises Inc (WOR) 2004 Q2 法說會逐字稿

Good afternoon and welcome to the Worthington Industries second-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.

Thank you, Tanya. 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 Reform Act of 1995. These statements are subject -- (technical difficulty) -- 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 homepage of our Web site at www.WorthingtonIndustries.com.

With me in the room are John McConnell, Chairman and CEO, John Christie, President and Chief Operating Officer and acting CFO, Richard Welch, Controller, and Randal Rombeiro, 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 open to questions from the audience.

John McConnell will begin our presentation with introductory remarks. John?

Thank you and good afternoon, everyone. Our second-quarter results were indicative of an improving economic environment. (indiscernible) last year's result, we were encouraged as we saw the quarter developed. While November was the weakest of the three months, primarily due to the load number of shipping days, we saw each of our businesses gain strength throughout the period. The current economic trend is positive and so were our results.

First today, you will be hearing from John Christie, our President, Chief Operating Officer and acting Chief Financial Officer. Mr. Christie will provide an overview of our second-quarter performance and then we will be happy to answer any questions you have following my concluding remarks. Mr. Christie?

Good afternoon, everyone. For our second quarter, which ended on November 30th, we reported earnings per share of 20 cents, down 18 percent from last year's solid second quarter of 24 cents per share but nearly triple the previous quarter's 7 cents per share.

Today, I will review the income statement and then the balance sheet, followed by a more in-depth look at each one of our business segments. In my comparisons to the year-ago quarter, I will be excluding the impact of two offsetting, one-time charges that occurred in the second quarter of last year. Although the 5.6 million restructuring credit and the 5.4 million non-recurring loss associated with potential workers' compensation liability offset each other, certain line items, particularly segment operating income, were affected. We have provided supplemental data in the press release financials -- that's on the bottom of the last sheet -- to reconcile these items for you. Please refer to the press release for that information.

We believe the comparisons we are about to share, which exclude those charges, are more meaningful and are similar to those management uses internally.

Now, turning to the income statement, for the quarter, sales were 540 million, down 5 percent from the 568 million, which was the second-best quarterly sales number in Worthington's history last year. Virtually all of the sales decline was due to pricing. Continued soft demand but especially tighter spreads between selling prices and raw material costs in our two largest business segments depressed our gross margin, which fell to 12.5 percent from 14.2 percent in the year-ago quarter.

SG&A expenses were down modestly in dollar terms but include a $1 million asset write-down. Excluding that write-down, SG&A expenses as a percentage of sales would have decreased from 8.2 percent to 8.1 percent.

Operating income, excluding last year's restructuring credit, was down 35 percent to 22 million from 34 million and declined as a percentage of sales from 6 percent to 4.1 percent.

The $2 million positive variance in miscellaneous expense from last year is due to reduced usage of the Accounts Receivable securitization facility and to proceeds received from the de-mutualization of one of our insurance providers.

Interest expense was reduced for the quarter by nearly $1 million, or 12 percent, because of a combination of lower debt levels in general and further interest rate cuts compared to last year. Equity income from our six unconsolidated joint ventures, representing our ownership portion of each joint venture's net income, was up 17 percent from 7 million last year to $8 million. Joint venture income is a consistent and significant contributor to our profitability.

The improvement in year-over-year results was due to WAVE, our largest joint venture, which continues to grow revenues and profitability in a very difficult market, to our increased ownership in TWB, our laser (indiscernible) venture and the better results in our Aegis Metal Framing venture.

Income tax expense was down for the quarter as a result of lower income and a 1.4 million favorable adjustment resulting from a change in the estimate of deferred taxes.

We should note that our estimated effective tax rate for fiscal 2004 increased to 37 percent from the 36.5 percent rate that we have used for the last three years due to increases in state and local taxes and to changes in our mix of income.

Now to the balance sheet -- total debt, including $70 million outstanding on our Accounts Receivable securitization facility, was down 123 million compared to a year-ago quarter and down 71 million compared to our may year end. Our debt to capitalization ratio was 31.4 at the end of the quarter; it was 36.2 if the securitization facility of $70 million is included in the calculation. In just the last 12 months, we have reduced total debt, including securitization, roughly equal to the total cost of our August, 2002 acquisition of Unimast.

Cash on hand at quarter end was 2 million and we had no outstandings under our $235 million revolving credit. We continue to be very disciplined in regard to capital spending. We expect depreciation and amortization to be almost $70 million for fiscal 2004 and capital spending to be significantly less than that, probably around $40 million. This spending discipline preserves cash flow and provides additional support for our dividend.

Our financial priorities for the year include using funds generated from operations to reduce debt, to pay a dividend and to retain our investment grade credit rating.

Now, to talk more specifically about the financial and operating performance at each of our three business segments, beginning with Processed Steel, which represents nearly 60 percent of our revenue. Processed Steel sales declined 9 percent to 320 million, which is a decrease of 31 million from last year's second quarter. The sales decline was due almost entirely to reduced pricing. Compared to our first quarter of this year, however, sales are up 34 million, or 12 percent, due to much stronger volumes. Within this segment, changes in volume are highly correlated with Big 3 production numbers, which were down 6 percent from the year-ago quarter but up 19 percent compared to our first quarter.

Overall, volumes for the Processed Steel segment were comprised of both direct and tolling (ph) sales. Direct business was actually quite good, comparable to last year's strong second-quarter numbers and up significantly from our prior quarter, while tolling (ph) business was also up from the prior quarter, it declined 10 percent from the year-ago quarter. In our tolling business, where you know we process for a fee and do not own the product or deal directly with the end customer, our customers include steel mills who tend to take tolling work back in-house when capacity permits.

I would like to add a comment here to correct a common misperception that tolling business is more profitable than direct business. Because tolling revenues are just processing fees and do not include raw material costs, sales are substantially lower than from a comparable volume of direct business and gross profit as a percentage of sales is therefore much higher. This does not mean that tolling business is more profitable. In fact, direct business is usually more profitable because it typically entails multiple processes rather than a single process, which is more typical of our tolling business.

Because of the drop in tolling compared to a year-ago quarter, our direct-to-tolling mix was 61 percent and 39 percent this quarter, rather than the historical 55 percent and 45 percent. Our plant utilization in steel fell eight percentage points from last November but climbed ten percentage points compared to last quarter.

Inventories were well controlled at 50 days at the end of November, versus 61 days for the year-ago quarter. While Processed Steel's operating income of 14 million was up almost 70 percent compared to the previous quarter, it fell 10 million from last year and as a result, our operating margin has also fallen to 4.3 from 6.6 percent. The decline was primarily due to a lower spread between average selling prices and material costs, combined with lower tolling volumes.

The more than $35 per-ton average year-over-year spread compression between hot and cold-rolled steel was particularly detrimental to our Decatur, Alabama facility. The spread compression and volume weakness at Decatur was responsible for more than 3 million, or about one-third, of the decline in operating income within this segment from prior year. Although we believe the performance of our Decatur operation will improve, we don't believe it can produce acceptable returns in its current configuration. Consequently, we are exploring all options for this facility.

Turning now to Metal Framing segment, which represents over 25 percent of our revenues, second-quarter sales of 142 million were down 1 percent, or 2 million, from last year's November quarter. Volumes were up 9 percent -- much better than the overall 12 percent year-over-year decline in office -- that office construction would indicate.

Operating income of 1 million represented a $3 million decline from nearly 4 million for the comparable quarter of fiscal 2003. The operating margin of less than 1 percent remained weak, even when compared to last year's 2.4 percent.

Compared to the prior quarter, however, there has been improvement. Sales are up 1 percent on a modest volume decline of 3 percent, indicating improved pricing. As a result, operating income rose nearly $5 million from prior quarter.

Since August, 2002, we have experienced deteriorating spreads between selling price and material costs in this business segment. Excess inventory acquired at the market peak, via the Unimast acquisition, significantly raised our material costs at the same time that demand and market pricing power became increasingly challenged. With a reduction in material costs due to the elimination of higher priced inventory and the initiation of selling price increases, we have reversed that trend. Days in inventory peaked at nearly 90 days in February of this year but are now 61, down from 79 days a year ago.

Although commercial construction demand remains weak and the seasonal slowness may prove challenging next quarter, we expect to see continued improvement in the selling price material cost spread, as we normally do in a rising price environment.

Since September 1st, we have had three price increases, the most recent of which was implemented this week. The positive impact of these increases is realized gradually, usually taking at least 30 to 60 days.

In addition to demand and spread issues, we've experienced higher-than-anticipated costs associated with the Unimast integration during the quarter. These costs primarily related to equipment and facility upgrades concluded during the quarter. Investment continues in several high-growth areas in this business segment, in the residential trade (indiscernible) product, in our midrise multifamily develop concept and in several new business projects. We are extremely excited by the potential and the progress we're seeing in these initiatives.

Finally, in our Pressure Cylinders segments, sales for the quarter were up 7 percent from last year. Much of the dollar sales increase was due to the relatively weakness of the dollar to foreign currencies, as overall unit volumes were actually down modestly. Strong North American unit sales of virtually all product lines were offset by a significant decline in refrigerant sales from our European facility, where the strong euro has made it unattractive for our customers to export the product.

Operating income, which nearly doubled from the prior quarter, declined to 7 million from 8 million last year when Pressure Cylinders had a record year. The operating margin fell accordingly to 9.5 from 11.9, due to operating efficiencies in the European market, where unit volumes were down 20 percent.

The weakness of the Europe market masked very strong domestic results. Unit sales of propane cylinders were up more than 20 percent, due both to new customers and increased business from existing customers. During the third quarter, we are rolling out our new flame-saver reserve tank (ph) product in anticipation of the spring selling season and have been encouraged by the initial reaction of our customers, the major big box retailers.

As a result of these positive developments, we now expect that propane cylinder unit sales for the year will be near the record fiscal 2003 levels, which were driven by the impact of the April, 2002 overfill protection/advice (ph) regulation. Our Pressure Cylinders segment continues to be great business for us with excellent profitability and returns on capital.

In summary, our biggest disappointment this quarter was with our Metal Framing business segment, which is still facing a challenging business environment. As the commercial construction market recovers and pricing improves, operating margin improvement will be meaningful. In the meantime, we are focused on the elimination of the redundant costs and the development of new products to spur the top line growth of this key business segment. Thank you.

Thank you, Mr. Christie. Now, as those of you who follow us know, we do not give specific earnings guidance.

In closing today, I'm going to cover several topics that, at minimum, I believe will and answer some anticipated questions. But also, I believe they are topics that will be helpful in preparing your forward earnings model.

First, items that kind of set the stage -- our third quarter is typically our slowest, owing largely to a very weak December. Current projections for the Big 3 auto producers for our third fiscal quarter of 04, the months of December, January and February, are showing a 9 percent decrease from this quarter and a 2 percent decrease from last year's third quarter.

Both nonresidential and office construction indexes have shown flat-to-improving trend over the last four quarters, which concurs with our belief that the commercial construction market has had its trough. However, it's worthwhile noting that commercial construction (indiscernible) typically slow down in the winter months.

Despite the seasonal weakness typically experienced in our third quarter, the overall outlook is bright. As you heard yesterday, the industrial production rose 0.9 percent, well in excess of the forecasted 0.5 percent, and it was the biggest jump in the past four years. In addition, the economy is forecasted to grow at a 4.4 percent rate next year, which is much higher than the 3.4 percent average of the ten-year expansion that ended in 2001.

Now, some items more specific to Worthington -- first, our efforts to permanently fill the position of Chief Financial Officer are well underway and involve an impressive list of candidates from both inside and outside the Company. We are well aware of the critical nature of this position and the time that we are taking should not be viewed in any other way but to support that statement. We have a very strong cast working with Mr. Christie during this interim period and we and our auditors are confident in the performance of this team. We expect the selection process to come to conclusion during our third quarter.

A quick comment about the removal of steel tariffs -- while one of our most frequently asked questions in the past six months has been about the effect of their potential removal, it's clear to us that the market reaction to their actual early removal was generally viewed as a non-event. As many of you who have asked us previously know, we have continually held that the removal of tariffs would not be impactful and we continue to hold that belief.

Currently, steel supply is very tight. We believe that the tightened availability of steel was initially and remains largely driven by a broad-based strengthening in demand. Now, as always the case, there is clearly some -- and I will just kind of call it slot in the system, as people scramble to cover orders. The current strong market will continue in our view for the next few months.

Now, towards end of February and end of March, I believe we'll get our first good sense of the success of the holiday selling season and to what degree there are excess orders in the system today.

A demand-driven, rising steel price environment is clearly good for the broad-based steel industry and is good for Worthington Industries.

As Mr. Christie said earlier, our Metal Framing segment has not performed up to expectations over the past -- the first six months of fiscal '04. Its primary market, commercial construction, is at a five-year low. We believe we're at the bottom of this cycle but improvements in this market will be modest over the next twelve months.

What we have done very well during this market is to protect the expected marketshare from the combined companies of Unimast and Dietrich. Protecting market share in a soft market means price and margins suffer. This in itself is a business decision with results that are understood and acceptable.

However, the effects were compounded by greater than anticipated expenses associated with bringing equipment and facilities acquired from Unimast up to speed. An additional $4 million of repair and maintenance items, particularly at three facilities, hit the income statement largely in the quarter just completed. These one-time expenses are completed and will not be a further burden in the remaining six months.

Going forward, Metal Framing will benefit from the rising costs of steel by providing the industry-wide support to improve pricing.

Overall, the outlook for the upcoming quarter is good. Demand improved throughout our second quarter. We believe it will remain strong through the third quarter. Obtaining steel will be our biggest challenge but we are confident that with our market position and the strong relationships we have with our suppliers, that we will be kept in a relatively better position than our competitors.

At this point, we will be happy to answer any questions that should have.

Thank you. At this time, we are ready to begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Our first question comes from Mr. David Taylor (ph) of (indiscernible) Taylor and Company.

Thank you. Could you flush out your comments a little bit about Decatur? What specifically is the problem there?

What specifically is the problem? I think we were pretty clear that it is, David, the spread between the purchase price of the hot roll (ph) we buy and the general market selling price of the (indiscernible). That has been contracting over the last two years and continues to be an issue.

You said you would consider all options. What are those options?

Well, I think you can think of them as well as anybody. They would range from anything that could involve -- even up to additional investment in Decatur if it changes its configuration a way we believe would support the material going through, giving us an added profit margin, making it more acceptable returns. Of course, it includes other options on the other end of that.

Okay, thank you.

Mr. Charles Bradford of Bradford Research.

Good afternoon. You've got a joint venture with Rouge called Spartan. I understand today the Russians have to verify, or whatever, their purchase contract, which I think required you all to come to some kind of an agreement with them. Could you describe what's going on? Do you have rights of first refusal? What's the situation?

Well, we, of course, are not involved in the process, so I can't really give you any kind of inside view as to actually what's going on with Rouge in the bankruptcy proceedings and their dealings with Severstal and U.S. steel.

We certainly had a meeting with Severstal, which was a good opportunity for us to get to know a new supplier and someone that could be supportive to us in other areas outside of steel and certainly outside of this country. But there were no agreements signed, or we don't have any other formal involvement in the process.

Do you still have rights of first refusal on the 48 percent that you don't own?

We do have that option, yes.

Okay. That's all for me.

John Tumazos with Prudential.

Congratulations on the results. My recollection is that Decatur cost around 100 million to build and it's probably been depreciated some but then you probably put some inventories and receivables in operating it, so would the carrying value be in the neighborhood of that original construction cost?

It would be above that at the present time.

Is my 100 million recollection right?

It would be low, fairly significantly low.

So, it might be more like 150?

It might be more like that.

Our working capital down there really runs between 35 and $40 million.

In mid '02, partly because of Unimast, partly because of just purchasing unit, you had more inventory than maybe you wished you had as prices peaked. Could you describe the controls you're going to undertake in '04, given the potential that the steel companies might realize some of the hikes they are attempting?

I'm thinking of something called dollar-cost averaging, where an investor buys $100 worth of stock every month and they buy more when stock is lower and less shares when it's higher. Would you cap your inventory in dollars to prevent your operators from getting too much at the top?

The controls -- you know, we have been talking about inventory control for probably 2.5 years as a major focal point. I will throw in quickly before someone (indiscernible) slip away from us at this time last year but other than that, I think we have pretty good controls in place. (indiscernible) through the acquisition through actions that Unimast took prior to the acquisition. We've done a pretty good job of working that through the system, as John talked about. We do not use that cost-averaging method to control the inventories; we use more of days of inventory (indiscernible) that we try to achieve.

Those mechanics don't make you own less at the top!

Well, one thing that we -- while we, certainly, John, do some -- try to anticipate what the market is doing to some degree, we don't want to be completely ignorant of it -- we also try not to play the market; I think that's how people get in trouble, by trying to load up when they are at the bottom and be buying light at the top. We try to keep a pretty consistent track of the inventory going through, and we want to stay in Dietrich between 55 and 60 days, and we are about at that number.

So we really don't try to market time too much our purchasing as much as work with our suppliers to have a clear flow-through, reduced time from the time they ship it that it gets out our door. That's our goal and that's what we try to work on.

They always are going to give it to you when they can't sell it, and they are not real good at helping the customers' inventory.

Well, I think the last time that we had a severe peaking, we had probably -- December of 2000, we had 97 days of inventory in our steel division and a declining price market. It took us over a quarter, so to speak, to work that through. Our target is 45 days for inventory in steel. We've done a lot of things with purchasing on the front end with our mill suppliers. We have concentrated mill suppliers. We have inventory systems inside that are connected with our supply base; that has been much better. We are about a 50 percent contracted purchaser, so right now, we're sitting on at least half of our contracted purchases from January through next December. That is matched off against contract work that we have sold.

Thank you.

Evan Stien (ph) of EOS (ph).

Again, back on the Processed Steel division, it's difficult for me to separate the tonnage and pricing and sort of maybe profitability of the material that is not being shipped to the Big 3. Maybe you can give me a flavor on that piece of the business and the profitability there.

Then also, maybe you can speak a little bit more generally with regard to that segment of -- if you believe margins in that area, given today's environment and the outlook for next year, can start to head back towards you're more historical margins in that division (sic).

I'm not sure what you mean by the nonautomotive.

For instance, the automotive -- if I look at another Processed Steel competitor other than Steel Technologies, you have a disproportionate amount of your volume going to the Big 3, compared to most of your competitors, so that number sort of skews -- if I looked at the total shipments, I'd don't know specifically how much, for instance, of this quarter's shipments went to the Big 3 and what the profit margins are on those guys. I assume that that piece of the business, the profitability of that year in and year out, is not going to be -- or maybe it is -- as volatile as sort of the regular, day-to-day type of steel processing that you're doing that is not involving the Big 3.

My impression has been, in the industry, there has been too much capacity over the last three years and there's not been very much demand and what we are beginning to see here over the last three, four, five months is a change in that piece of the business. That means demand is picking up, the economy is picking up, manufacturing is picking up and your business in that area is picking up as well.

So, when I look at your segment in that area, I look at it almost two different ways; I looked at it as the Big 3 piece of it, and then the non-Big 3. What I'm try to get a sense of is what the non Big 3 sort of volume outlook is, maybe profitability, so on and so forth, given where it was, say, (indiscernible) I'm more asking for trend. (multiple speakers) -- a little bit it in the beginning of the Q&A.

When I first started to ask for clarification, I was going to say between more contract and spot kind of tonnage because automotive is largely comprised of contract commitments.

Right -- (multiple speakers) -- exactly. That's exactly my point. It's the other 50 percent that was a slowly rising trend environment, rising price environment here plus increased demand, you should start to be able to make some pretty good profit.

I believe what you are saying is, on the rising pricing environment, did we do well in noncontractual businesses as the transaction price changes. The answer to that is yes.

Any sense of the sort of overcapacity that people have talked about? If I look at (indiscernible) you guys are slightly different. Their volumes are down tremendously, if I look at this year versus, I don't know, four years ago. That's similar for many of your other competitors, which implies that there is potentially a lot of pent-up demand out there that is out there for the taking.

I guess what I'm asking is, do you have the capacity to do that? You didn't give the specific numbers but I think last quarter, it was in the low 60s, so that would make you in the low 70s, which would imply you do. But do you have the capacity and is there sort of -- I guess what I'm asking -- a hidden potential here that we're not quite seeing yet but if your volumes start to increase 15 percent on a year-over-year basis, ex-the contract market, you're able to handle that?

Yes. I'm going to let John expand on this a little bit but we have some plants that are really quite full right now and we have other plants that we can definitely put some work into, so it depends on what the capabilities of those facilities are, which would center around -- we have some (indiscernible) capacity, (indiscernible) capacity open in areas.

John, do you want to expand on where we are from a capacity utilization standpoint and our ability to take on additional business?

A year ago, at the end of this quarter, we were running in the low 80s. Today, we are running, as you properly calculated, we're running in the low 70s. A year ago, we had some processes that we were running literally overcapacity like (indiscernible) and some higher value added. Those capacities have also come down. So, from an organic growth standpoint, without spending a lot of capital, we probably have 20 to 25 percent volume growth in our system that we could handle over what we're doing today in the Processed Steel division.

In Metal Framing, we probably have 50 to 60 percent more growth that we could handle without large capital expenditures.

Then cylinders -- we have, again, probably 50 percent capacity for growth. As you know, we have consolidated plants in the last two or three years. With that consolidation, we have taken (indiscernible) those capacity levels out, so when talking about then I'm talking about present capacity levels (sic). When we did that, we really maintained about 85 percent of the customer base we had in the plants that we closed; we moved them to other facilities. So we feel very good about the capacity we have to be able to handle the growth .

As far as working capital requirement, you know, we get the question about, do we have -- as I stated, we have nothing broad on our $235 million revolver and our receivables is only at 70 million, so we have -- and our working capacity -- our working capital, we used to run a little over 20 cents a dollar on working capital; we are less -- we're running around 15 to 16 cents so our costs to carry through efficiencies has come way down.

Thank you very much for that answer.

Before the next question, let me tack, generally, a couple of thoughts. Again, John, everybody here has done a great job on the working capital management. This quarter has been indicative of the beginning of a rising price environment and increased volumes. We came out the other end of this quarter without hitting any of our lines of credit; we kept debt exactly where we it started across the boards, so that, again, I think shows what a good job we've done on managing working capital.

The only other thing I would add on capacity is, while we do have a lot of organic growth where we are, if we have any capital needs from a facility standpoint, it will be geography-oriented.

Fair enough. Thank you very much.

Mark Parr of McDonald Investments.

Thank you very much. Good afternoon. I have a couple of questions. First of all, I'm curious -- J.P., you had mentioned the $4 million of repair and upgrade expenditures in the Unimast facilities. I had two questions. First of all, was that all expensed, as opposed to being capitalized?

Secondly, could you help us understand the need for the timing of those expenditures, given the availability of an additional 50 to 60 percent of capacity in those operations?

All of the amount of money that I gave you is income-statement-related; they were not capital.

Okay.

The timing is an excellent question. We were aware of, early on in the acquisition, the state of some of this. We had some pretty direct conversations about the need to upgrade equipment (indiscernible). There was a very strong feeling that it (indiscernible) upgraded. I'm a little disappointed that we did it all at once.

On the other hand, it is an investment in the facility that is now out of the way, but I much rather would have had a half cent to a penny impact in each of the next few quarters. But it is done and as far as the capacity goes, Mark, these were issues of -- to have that equipment run in sync with our selling systems and in some cases run in what they considered a safe manner, they felt the expenditures were absolutely necessary, so they weren't capacity oriented.

Many of them were specific types of lines. For instance, when we talk about our trade writing (ph) lines, when we talk about overcapacity, not all of our lines can run a trade-ready product; only certain lines can. Some of those we had to -- that removed into a facility and found out it didn't have the internal support mechanism for it that we thought was in place, whether it was electrical or (indiscernible) sources or things that are required to make that equipment run when we moved in there; that had to be done to hook up that equipment and it couldn't get absorbed in other capacity.

Thanks. Another question, just a follow-on related to Decatur -- could you talk a little bit about the run-rate or the utilization rate at Decatur right now?

I'll let John jump right in there.

Yes, Decatur is running. On average, we're probably running between -- right now, we're probably running around 75 percent in the second quarter; we've run everything from 60 to 75 down there, so if you took a year ago -- in fact, I mentioned it, Mark, but you know the pricing as well as I do. The spread has dropped from probably an average under 19 last second quarter, down to like 77 on market averages -- (multiple speakers).

We are getting input that spreads around $80, so yes, that would be consistent with what we're hearing.

Right, so we do approximately -- we've built good volume up down there; we're doing between 550 and 600,000 tons of volume through Decatur.

One quick clarification to John's earlier comments, because I heard it one way and I don't know if everybody else did. Decatur volume actually is up. We're doing a good job selling down there. There is a general weakness of volume in this area now and always has been, but we've done a great job of increasing our share of that market. So actually, volume has been increasing but again, with the spread compression and if it remains a problem (indiscernible) 90 to $95 level, our ability to get the kind of returns we feel we need will always be in question, so that's where we are now.

One other follow-up on Decatur -- you know, the original attractiveness, or one of the many attractive reasons to build that facility, was its close proximity to what was then called Trico, which is now Nucor. Nucor has restarted facility but they have been unable to produce much thin-gauge product, so I'm guessing that, at this point, there is probably not much input coming into your cold mill from that mini-mill. I'm just wondering how you view the potential for increasing the mix of supply from the Nucor facility into Decatur over the next three to six months.

I think the potential for doing that is very high and we are also correcting our current run-rate (indiscernible) not a huge portion of what we're doing but we are building and becoming an important part of their ramp-up down there. So as they get better, we're going to continue to buy more from them. We've worked very hard building that relationship from the beginning and I think that will pay dividends, going forward.

Could I just add one last question, if I could? If you looked at your entire supply pipeline on flat rolled products over the next six months, what's the mix between integrated mills versus mini-mills?

It would be heavily weighted to -- well, that's not true. I have forgotten about Northstar. I don't really know off top of my head. It would probably be just slightly weighted towards integrated. But between Northstar, which is one of our largest suppliers -- and we certainly buy some material from SDI (ph) -- and the growing presence with Nucor, that's certainly a growing segment of our purchase.

Let me go back. I think the one thing that's impressive about the volume we've built in Decatur is, you know, at a better spread of 120 (indiscernible) we can feed ourselves, our internally-manufactured cold roll to other plants; it spreads it 75 to 80 freight going north becomes a real detriment (sic). So in this last quarter, our intra-company sales have been down and yet our volume has maintained at the same level and, in fact, grown, so we've replaced internal sales with external sales down there.

Actually, that volume number is very impressive, so congratulations on that, especially given the fact you don't have a real near-term source of hot rolled supply. So congratulations on a great quarter. I hope you keep it up.

Thank you and we will!

Careful now, don't forecast! (LAUGHTER).

We will continue to improve our performance.

Mr. Charles Bradford of Bradford Research.

I'm having a bit of a problem reconciling some of the comments made. You talked about fuel supplies being tightened and being demand driven, yet you talked about automotive and commercial construction not being terribly strong. On Monday, the AISI said their average operating rate is only 77.7 percent, the lowest since December, '01. Do you think the mills are holding back, keeping their output down or not taking orders too far ahead, speculating about better pricing? Or how do you reconcile those comments?

There are two things working in conjunction we've got there, one of which is, of course, we're talking about where we have been. As the quarter -- one of the things we were trying to make clear is that as the quarter progressed, demand improved and steel also began to tighten. Orders that are coming in today aren't in jeopardy, or probably coming in December, but when you start looking out into February, March in particular, and April a little questionable at this point -- but when you get into the February/March timeframes, you can't find the steel; it's just not there. I mean, we can find it; we can look at foreign sources; we can find nooks and crannies with different sources around here, but steel is not readily available. They have really pretty well locked down those months. You can't get any more steel in those months. Does that help?

With a low operating rate, you'd think there would be plenty of steel available?

But again, I think the numbers you are hearing are also historic numbers and not the forward numbers.

Again, they are for last week.

Here's one of the things going on. We met with a major mill yesterday. There are fewer mills. There has been consolidation and more capacity is being managed by fewer people. The comment made to us yesterday was, we don't know whether this is false or not. If this thing holds through February or March, we may bring back some of the capacity that we have idled, but we have not decided to bring it back yet. So, when you talk about the capacity out there, I mean, it is out there. Some of them elected not to bring it back because this may be a false start in some of their minds.

Some of them are telling us they don't want to book beyond January because they see better prices in February and beyond. Then you've got the situation where Nucor announced yesterday a surcharge which they are not going to tell you, I guess, until the third Monday of the month what your price is going to be for the following month.

Right.

That seems like you are buying product without knowing the price and would seem to be pretty dangerous.

It is and several other mills are also following that suit. Everyone who's purchasing from them knows there's going to be a surcharge; they know generally where it's been and they can follow scrap prices and kind of get their own sense, but yes, there is certainly some danger to it but you know what's going to occur.

In our case, if we have Nucor (indiscernible) during those timeframes to which a surcharge apply, we will make sure our customers know that there is a surcharge involved; they will know our best guess at what it will be and they will have accepted paying for it.

Would this encourage you to buy foreign, where the price is fixed for a longer period of time?

There are some difficulties in some areas of the world, particularly (indiscernible) steel, we are exporting steel to China. So, steel over there is pretty tight as well. It is available. We have some orders coming in later, kind of early springtime. That's one of the issues is the generally long leadtime with foreign sources. With where we are trying to manage our inventories, we can't get too big a hunk of foreign steel coming in, certainly sporadically, because it's unreliable on when it's actually going to show up too often. It's an area that we want to continue to work on and we're going to continue to keep our eyes open but we looked elsewhere, not so much from a pricing basis as much as a available basis when you get into the March/April timeframes.

Michael Morrisroe from Bernstein.

Thank you. It's Michael Morrisroe from Bear Stearns. Obviously, your association with the Big 3 has been more detrimental in light of the marketshare losses. Can you just touch or refresh my memory on your transplant exposure and what you guys are doing to perhaps increase your exposure there?

It's certainly an area that we have been working on for a number of years. We've made some significant progress in some places and I'd say incremental progress in others, so it's a clear focus for us.

On a percentage basis, John, I don't know how it would stack up. Let him look at some of that data here and see if we can give you a good sense of how the two trade each other off.

One of the things we have been successful with the Big 3, while they have been losing market share, is we have been increasing our share with them and I think improving our relationships with them, so each time that they may not be moving forward, we are able to move a little bit forward with them and offset some of that.

For the second quarter, I mean, John just said it, our market penetration into the Big 3 is getting larger, even though as their production drops. We've done -- and I think we talked about this the last two calls -- we have, with our engineering our metal (indiscernible) just been able to do some material substitution, which allows us to get more of the products that they are producing on the transplant side (indiscernible) continue to gain ground.

When we talk about our automotive-related exposure, it's to the Big 3 but it's also to Tier 1 and Tier 2, etc., so when we lump that in at 50 percent, we are talking about the entire chain and some of the people that we sell into chain and we tie into automotive also do business with the transplants.

A lot of times, we don't know whether our product is designated to a certain production run or model run, whether it's the transplant model or the domestic model, so we have done a very good job of penetrating Tier 1s and Tier 2s; that has diversified their base. But we can't give you the detail because we really don't know a lot from them on where that product goes at the end. We're trying to do a much better job of understanding that, but it's not to the point of reliable information that I could give you.

Right, but I guess the marketshare losses or the problems you are having are an end-product that you can identify that goes to the Big 3. Can you just comment on what the percentage is there and how you're trying to perhaps alleviate exposure there? Not necessarily your products that go to the auto suppliers?

I guess we're not going to able to give you that. I thought we had that; I saw it the other day. For instance, our efforts with transplants that keep us in the kind of business we're used to doing, the kind of business that we're good at doing and oftentimes is profitable because of multiple processes. We have been the successful penetrating one of the transplants, a very good one. That is now one of our top (inaudible) accounts but beyond that, we are really at introductory levels with the (inaudible). I don't know if that helps you but I can't give you the specific tonnage that is direct between the progress we made in selling transplants versus where we are with Big 3 on a percentage relationship.

That's for enough. I wonder if I could just follow up on the issue with your supplier announcing the surcharge? Are you expecting the other mini-mills to comply and go along with that?

It wouldn't surprise me.

Mark Parr of McDonald Investments.

Thank you again. One question, John, that you've addressed in the past is the percent of your contract mix that is fully covered with long-term supply agreements. Can you give us a sense of what percentage of your current contract base is fully covered with supply contracts?

A kind of rule of thumb that I always used to operate with, with the Steel Group in particular, was that they could have 15 to 20 percent uncovered. At the moment, I believe we're running very close to 100 percent coverage and that's where we're probably going to try to keep it -- (multiple speakers).

That's correct.

We are pretty much on a one-to-one relationship with those (indiscernible).

Mark, we have approximately between 1.2 and 1.3 million tons on contract.

One last question -- you had indicated that there were mills that have idled capacity right now they are thinking about bringing back on. I was just wondering if you could provide some examples of what mills you would anticipate would have excess capacity currently available to bring back on within a three to six months time frame.

You know, we aren't going to talk about the confidential conversations we have with our suppliers. I think you know as well as we do who is consolidated with who and what blast furnaces are down, etc., so we would rather not comment on those private conversations we have with our suppliers.

Okay, would it be another way of perhaps answer this, or addressing the issue -- I mean, based on your extensive knowledge of the flat-rolled supply marketplace, how much total additional capacity do you think exists out there with the integrated mills versus the mini-mills? Looking at it just from a total market perspective? If you don't feel comfortable answering that, that's fine, but I am just trying to get a sense of how much availability is really out there on the flat-rolled side.

I don't think we can really give you a good answer because just being able to make a ton of steel, there's a lot of capacity, I think, that could come into the marketplace, but I don't think it would be very effective. So, from a cost standpoint or from a quality standpoint, there is certainly some capacity that is there, as John talked about, the consolidation process that people have taken certain assets down -- that if they bring them back up, they will be looking to bring them up on a long-term basis. I think they won't be anxious to do that until they see true demand stability. I think that will take them at least into mid-'04 to make that kind of decision. I don't think it's more than 25 percent of current capacity; I think it's something much less than that. But you know, it could help stabilize pricing to demand if another 15 or 10 percent capacity addition came on.

Do you think that the lack of slab availability moving into '04 could be an issue from a supply perspective for the U.S. market in the first half of next year?

I have not thought about it prior to your asking.

The reason I mention it, I'm just looking at -- slab imports on a year-to-date basis through October were down 50 percent. I'm just -- and you read all this trade press about China buying all these slabs up from everybody. I'm just wondering if they are domestic mills that have kind of been kind out of left because China has been more aggressive or willing to pay up for slabs. I know that U.S. Steel has indicated that they were actually producing more slabs in the fourth quarter as opposed to bringing the mills down for normal year-end shutdowns.

That's just like everything else, it follows the money. You are correct that there is steel exiting this country to fuel China's growth. Mark, industries capacity I think peaked at 130 million tons and bottomed at 90 million and they brought some back, so I think we're probably around 100 million tons here in the United States. Our demand runs around 120 million tons. We've always been -- (technical difficulty) -- importer of steel. I think part of it is mix right now, and right now, it's following the money.

I'm just trying to think -- because the tighter the supply situation really is, I kind of tend to agree with Chuck; I'm not really seeing a lot of pickup in end demand but conversely though, I am seeing some what appear to be potential supply constraints.

I think that's what we're trying to say, is that there's more of a supply tightening here than there is a demand pickup and that supply is not going to loosen up until this demand is proven.

But we have clearly seen, as I said, a pickup in our demand across the board in all industry segments. But to John's last point, I think we do feel we have to wait until we get into the February and March kind of timeframe to see how well things sold through there, how much excess orders are in the chain right now, because they are clearly there to some degree; I don't know how much.

A simple example, we supply 100 percent of the steel to a company that makes tool boxes. Schedules have ramped up unbelievably for tool boxes because retailers are anticipating a very strong Christmas holiday season. If there's a bunch of tool boxes left around there when Christmas is over, demand is going to fall off pretty quick. I mean, that's kind of where we are. But clearly, demand certainly in our order book is up and it's up fairly evenly across the board.

Thanks for sharing your insights. I appreciate it very much. Thank you.

Mark Cohen (ph) from MTC (ph) Advisors.

You mentioned, in part of your presentation, that you made comments about your propane business. Could you help me understand that a little bit better, kind of what it is you exactly do in that arena? Is it like a blue Rhino type thing?

Well, we make pressure vessels that gas goes into and we make a series of sizes that propane goes into. Our largest product line is what we call a 20 pound tank, and you would be familiar with it if you have an outdoor grill. That's usually the tank that is sold with an outdoor grill.

In April of 2002, there were regulations changed where that product had to have a new valve. So from 2002 through 2003, we saw a huge ramp up in that volume because when you took your tank back in, you had to buy a new one because they were prohibited from filling the old tank, okay? There was a feeling that that would peak after the regulation got clear through. However, the exchange business has picked up and so, from our volume standpoint, we are continuing to add new customers to that; we have done some product enhancements to our 20 pounders. When they talk about that product, propane, we're mostly talking about our 20-pounders. We have not seen that volume fall off like I think some people anticipated. That's what we're talking about.

What do you call that? What is the brand name of your product?

You would get the brand name of our product at an exchanger. Our various customers are the exchanges. We would not have a Worthington (indiscernible) product, but we would sell to the people who take that and put their brand cage around it.

So you sell to the Blue Rhinos of the world -- (multiple speakers)?

To some of the exchangers and to the OEMs, the grill manufacturers and the propane appliance manufacturers.

Just so you know, we make cylinders for industrial gases, refrigerant gases; we make a whole range (inaudible) outdoor heating, which are very large tanks, as well as we have our own brand name around the helium tank that we created and produced here called Fun Time Products -- Balloon Time products, excuse me.

(OPERATOR INSTRUCTIONS). At this time, we have no further questions.

Well, thank you all for joining us today. I think, I hope -- if you would, if you have a moment, call myself or Allison and let us know how the concluding remarks -- whether or not they were helpful to you or not. To the degree they were, we will certainly stick with that kind of thing and look at the broad-based indices as well as specific indicators here and how they relate that will hopefully give you a good sense of the upcoming quarter.

We don't like either missing dramatically or being over where the consensus estimates are. It would be nice if we could figure out how to get these back in line without giving specific guidance or at least a little closer together.

Thank you all for joining us today and we look forward to seeing you next quarter.