Worthington Enterprises Inc (WOR) 2004 Q3 法說會逐字稿

Good afternoon. Welcome to Worthington Industries third 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, Julie. 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 to risks and uncertainties which could cause actual results to differ from those suggested. Please refer to the press release for more detail on factors that could cause actual results to differ materially. For those who are interested in listening to this conference call again, a replay will be available on the home page of our Web site at www.worthingtonindustries.com.

With me in the room today are John McConnell, Chairman and CEO; John Christie, President and Chief Financial Officer, 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. The session will then be open to questions from the audience, followed by concluding remarks from John McConnell. Mr. McConnell will begin our presentation now. John?

Allison, thank you. Good afternoon and thank you for joining us in our review of our third quarter.

Our results for the third quarter are good, and a continuation of the trend that we highlighted last quarter. Demand is strengthening and the steel supply is extremely tight. While both of these trends are real, they are not interconnected in a normal supply-and-demand relationship. We will talk more about that later.

Now, at this time, during our second quarter review, we had not filled our position of chief financial officer. As you are aware, we announced toward the end of January that John Christie, our then president and Chief Operating Officer and acting as interim chief financial officer, would permanently assume this position of President and Chief Financial Officer. We did not replace the vacated position of chief operating officer.

This was an excellent move for our company at this time, and we were able to make it based on really two critical factors. First and foremost, that Mr. Christie possessed the qualifications for this critical position, and second, that the strength of our business presence was there, and that they now report to me. This has been a seamless transition, which speaks to Mr. Christie's versatility and the underlying talent of our people both in finance and in operations.

Mr. Christie, would you please review the quarter for us?

Thank you, John. Good afternoon, everybody.

For our third quarter, which ended on February 29, we reported earnings per share of 28 cents, more than double last year's 13-cent quarter, and up 40% from the 20 cents we reported in our previous quarter. We have talked regularly about the volatility of steel pricing, particularly in recent years, and the negative effect of significant rapid movements. Our focus has been on managing these peaks and valleys to deliver consistent earnings.

One of the keys to this process is controlling inventory, an effort of ours for the last several years. Well-managed inventory has the effect of tempering both the positive impact of rising steel prices and lower priced inventory on hand flows through cost of goods sold, and the negative impact of falling steel prices when the reverse occurs. With inventory levels consistently under 60 days, we have curtailed some of the upside benefit that we would have realized in the current environment, but we do so with the knowledge that this will work in our favor on the downside. Even so, this was a very good third quarter.

For the quarter, sales were $558 million, up 4% from $537 million last year. The sales increase was due almost entirely to higher volumes in all three business segments. Sales prices were actually down from the year-ago period, and offset some of the volume pick-up.

The reverse is true, compared to last quarter, where the 3% price increase -- or sales increase from $540 million was due almost entirely to the higher pricing offset by a small volume decline. Widening spreads between selling prices and raw material costs, and to a lesser extent, gradually improving demand, positively impacted our gross margin, which rose to 15.5% from 12.2% in the year-ago quarter, and 12.5% last quarter.

SG&A expenses increased in dollar terms and as a percentage of sales from 8.6% to 8.8%. The $3 million year-over-year increase is a result of higher benefits expense and profit sharing, which varies with earnings. Higher benefits and profit sharing also drove the $4 million increase the last quarter.

Operating income increased 95% to $37 million from $19 million, and as a percentage of sales, from 3.6% to 6.7%. Compared to our most recent quarter, operating income rose 70% from $22 million to $37 million, and as a percentage of sales, from 4.1% to 6.7%. Interest expense was similar to last quarter, but down nearly $1 million, or 12% on a year-over-year basis, primarily because of lower debt levels we have maintained during fiscal 2004.

Equity income comes from six unconsolidated joint ventures representing our ownership portion of each joint venture's net income. It was unchanged from the previous quarter, but up 20% from $7 million last year, to $8 million. As we've regularly mentioned, joint venture income is a consistent and significant contributor to our profitability.

The improvement in year-over-year results was driven by two -- two of our largest joint ventures, WAVE, which manufactures ceiling grid, and TWB, our laser welding venture. All but one of the four smaller joint ventures had double-digit earnings growth as well. Income tax expense increased in line with earnings and represents an effective tax rate of 37%.

Now to the balance sheet. Total debt, including $70 million outstanding on our accounts receivable securitization facility, was down $151 million, compared to the year-ago quarter, down $68 million compared to our May year end, and virtually unchanged from last quarter. Our debt to debt capitalization ratio was 31% at the end of the quarter, 35.8% if the securitization facility of $70 million is included in the calculation. Cash on hand at quarter-end was $7 million, and we had no borrowings under our $235 million revolving credit facility.

We continue to be very disciplined with regard to capital spending. For the quarter, cap ex was $9 million, and year to date totals $24 million. Depreciation is almost twice cap ex at $17 million for the quarter, and $50 million year to date.

We expect cap ex to increase as we embark on a multi-year enterprise resources planning, or an ERP system, which is expected to cost $35 million incrementally. The $35 million ERP project is expected to add $21 million to cap ex, and $14 million to SG&A over several years. As is usually the case with projects like this, the benefits are back-end loaded, and the costs front-end loaded.

After capitalizing $3 million this quarter, we expect to spend about $7 million next quarter, $5 million of which will be capitalized, for a total of $10 million in fiscal 2004. For fiscal 2005, we expect a similar amount, with $6 million of the $10 million in 2005 being capitalized.

Even with this project, annual cap ex is expected to remain less than depreciation. Our disciplined spending helps us deliver on our financial priorities, which include using funds generated from operations to reduce debt, to pay our dividends, and to 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, which represents 58% of our revenues. Processed steel sales rose 1% to $326 million, which is an increase of $4 million from last year's third quarter and from our most recent second quarter.

The year-over-year sales increase was due largely to higher volumes, as prices actually decreased relative to the year-ago quarter, even though it has risen significantly in recent months. Overall, volumes were up 2%. Compared to our second quarter, however, volumes were down nominally, which is normal, given the seasonal automotive slow-down that occurs in this quarter.

Capacity utilization, which is calculated on a 24/7 basis, and was stable, with both the year-ago quarter and our previous quarter at approximately 70% for steel. Inventories were up a bit for the quarter at 56 days, versus 51 days for the year-ago quarter, and 49 days last quarter.

Obtaining steel is currently challenging, but our long-term relationships with the mills are advantageous. We have been able to provide our customers' needs in virtually all cases.

Operating income from processed steel rose to $18 million from $9 million last year, nearly doubling; and from $14 million last quarter, an increase of 30%. As a result, the operating margin also rose to 5.5% from 2.8% and 4.3%, respectively. In both cases, the increase was primarily due to a widening of the spread between average selling prices and material costs.

Our Decatur, Alabama, processing steel facility also benefited from lower-priced inventory, which helped to offset the continuing deterioration we've seen in the published spreads between hot and cold roll steel. In addition, we've reduced head count and other costs of facility in recent months.

Decatur's better results contributed about a third of the year-over-year increase in operating income for this segment. In the short run, the steel pricing environment will help this facility. But longer term, we believe that Decatur is limited by its current configuration, and as we said last quarter, we are considering all options.

Turning now to our metal framing segment, which represents 26% of revenue. Third quarter sales of $147 million were up 9% from last year's February quarter, and 3% from our second quarter this year. Year-over-year volumes were up 7%, much better than the overall 3% year-over-year decline in the office construction market. Compared to last quarter, however, volumes were actually down 4%, with the normal slowness of the winter construction quarter.

Most recently, we are finding that our ability to obtain steel is a significant advantage relative to our smaller competitors, and we are confident that we are gaining market share as a result. Operating income of $13 million tripled from $4 million for the comparable quarter of fiscal 2003, and is nearly off the charts as a percentage basis from the $1 million recorded last quarter. Consequently, the operating margin was restored to a more normal 8.8%, compared to 3.0% last year and a .6% last quarter.

From August, 2002 until most recently, we have been experiencing depressed commercial construction demand and deteriorating spreads between selling prices and material costs in our metal framing business. In addition, we incurred one-time integration costs related to the Unimast acquisition. Now, these costs are gone and we are benefiting from the realization of some of the acquisition synergies in a widening of spreads.

Demand is picking up slightly, and, more importantly, Dietrich Metal Framing is able to obtain steel when many of its competitors, which are much smaller companies, cannot. Even with the weakness in the commercial construction market, we expect to see continued improvement in the selling price material cost spread as we normally do in a rising price environment.

Finally, in our pressure cylinders segment, sales for the quarter were up 8% from last year. Much of the dollar-sales increase was due to the relative weakness of the dollar to the foreign currency, as overall unit sales were up only 3%. Better North American unit sales were offset by a decline at our European facilities, where the strong Euro has made it unattractive for our customers to export product.

Compared to last quarter, sales were up 12%, and volumes up 31%, a normal seasonal increase as cylinders and its customers ramp up for the peak spring selling season and a mix of product sales that has changed from last quarter. Operating income increased $8 million -- to $8 million from $7 million last year, and last quarter.

The operating margin rose accordingly to 9.8% from 9.5% in both periods, with manufacturing improvements at our European facilities. Our pressure cylinders segment continues to be a great business for us, with excellent profitability and returns on capital.

In summary, this was a good quarter in a normally slow time period for Worthington Industries. We anticipate an even better fourth quarter, given current states of the steel industry, and improving economy, and the seasonal strength in all of our three business segments.

Thank you. John?

John, thank you very much. That was very thorough.

Now, earlier, I said that increasing demand in the current steel market were not interconnected. Increased demand, due to an improving economic environment is part of, albeit a smaller part of, the restricted supply and dramatic rise in steel industry pricing. The primary dynamics driving the steel industry, however, as most of you who follow the industry know, are the availability and the price of raw materials essential to the steel-making process. The two primary drivers of these are coking coal and scrap. Consequently, we will be watching these two underlying factors closely as well as several others as indicators for future movement in steel pricing.

Now, before fielding your questions, I would like to, again this quarter, review some key economic indicators which we believe provide insight into our current and future results. As we began calendar year 2004, the overall economy continued to grow at a strong rate of 4%. This was the second consecutive quarter of strong GDP growth.

The IP and the IP Manufacturing Indexes have both posted their third straight quarter-over-previous-quarter improvement. It is a good trend, and their strongest percentage gains in three years. Big Three automotive production showed continued year-over-year weakness, but is forecast to show a modest year-over-year gain during our fourth quarter, which will be its first in a year.

Nonresidential and office construction indexes both reflected continued weakness. but the data continues to support our belief that these markets have stabilized and will not see further significant deterioration. When combined with our direct experience of demand increases across the broad base of our steel customers, we believe this information points to a growing manufacturing economy which will continue year-over-year improvements for the remainder of calendar 2004.

At this point we will be happy to take any of your questions.

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one. You will be prompted to record your name. To withdraw your request, press star two. One moment, please, for the first question.

The question comes from Bob Lagapo (phonetic) with CIBC World Markets. Sir, you may ask your question.

Hi, good afternoon. I just had a few quick questions. One on the processed steel. Given the rapid increase in the steel pricing, I know you mentioned the spread in metal framing continued to improve, but what are you seeing currently in the processed steel segment in terms of the spread, and also, where are you seeing the volume improvement?

Well, we see improved spread in the steel markets, as well as metal framing. I think John Christie did a nice job of highlighting some of that for you as he went through and he talked about inventory and inventory flow-through. That is a contributor to the spread, as well as a number of other important factors which go back to our consolidation efforts, and we started two years ago. So, both of those things have been important parts of seeing some increase in spread in the markets in steel.

Okay. And in terms of Decatur, is there a specific time line that you have in mind, as far as the options go that you had mentioned?

We do not.

Okay. And lastly, in terms of metal framing, when you think about what's happened in the business, the fact that there has been such a large improvement, I'm guessing, you know, a lot of it has to do with the price increases that you implemented over the last three years. Is there anything left to do in terms of the costs or, I know you mentioned a lot of the costs have already been taken out of that business, but is there anything left to do in terms of integrating the Unimast business?

The integration of Unimast and Dietrich are essentially complete. One of the things that you might have missed when John was going through there was he said most of the benefit from that sits out in front of us at this point. We really just completed those consolidation efforts. So those costs will continue to bleed off as we go forward in metal framing.

Okay, because when I look at the spread, and you had indicated this during your presentation, in terms of the spread being similar to where it was in the, you know, prior to the acquisition of Unimast, you know, what is your take on the margins? I mean, I know the margins are about half of what they were prior to the Unimast acquisition. You know, what is it going to take to get back to those margin levels?

Well, I think the one year was very exceptional. That was when our margins were 12% or 13%. We have said in the past that normal margins in this business really run from 8-10%.

We had some bottlenecks before the consolidation, particularly in our shipping bays. We moved several of the old Dietrich facilities into the larger Unimast facilities, and as John indicated, those costs are behind us. We expect to pick up the synergies. As our shipping costs go down, trucks aren't going to be delayed as long, there are a lot of things like that. We also are getting much more productivity, or, as we call it, footage per man hour, in each of the plants now that we have reorganized them. So, from a productivity standpoint, I think are you going to start to see us pick up there and hopefully maintain these margins. And it also has been helpful to have the price increases, without question.

Right. Terrific. Thank you.

Michelle Applebaum with Michelle Applebaum Companies. You may ask your question.

Hi. Let's see, a couple of things I wanted to ask you. On steel spreads, you seem to be going back and forth between future tense and past tense and I want to be clear on which we're talking about. Do you expect steel spreads to widen further in the May quarter than they were in the February quarter?

Michelle, I think it is difficult to say. We can't track perfectly for ourselves, or for you, where inventory flow-through is at the moment, and there are, as you know, a lot of factors out there, out in front of us. We do expect the fourth quarter to be strong across the board.

Okay. Are you giving any specific guidance on where the fourth quarter is going to be?

No, we are are not. And you know, as you know, and I suppose this can get to be contentious between the analyst community and ourselves, but we made a decision several years ago not to give guidance, and that's the position we currently adhere to.

John, let me ask you a question. Your August quarter that you've reported in September, you missed the quarter by 50%. Your November quarter that you reported in middle of December, you beat the analysts by 100%. This quarter, you came in double again. And your stock is, today, it is up 62 cents but it is under-performing Steel Group. And you just reported the second quarter in a row of double the street's expectations. Do you think -- why do you think that your stock has been, I think, among the steels, the weakest -- one of the weaker performing stocks?

Well, I don't know that I would agree with you on our performance. I didn't do an evaluation of our stock performance versus everybody else before we came today. I know we carry essentially the highest multiple in the industry, which is an indication of stock performance and confidence in the Company. But I haven't tracked a specific time period of our movement versus somebody else's, but I think the stock has performed fairly well.

Okay. So you don't -- so you don't think that the positive surprises and the negative surprises hurt the stock?

Oh, I don't -- Michelle, it would be nice if everybody were aligned in the market always received an answer it expected. Because-- and I think we've done a pretty good job of talking about forward expectation, dropped in economic indicators last quarter, of continuing that practice, but you know, overall, the markets have been up and down. And I don't know who's-- in other words, I think everybody could probably do a better job-- well, I'm not going to get into a situation of having to criticize the work of analysts. I know it is a difficult job.

But at this point, we are not going to give forward guidance. And, hopefully, as we continue these practices of giving our view and current economic indicators, looking to the future at where they are and what the trends are, that those gaps between analysts, their analysis and their expectations versus our performance, will start to close.

Okay. Well, maybe. I know I certainly was higher than the street this quarter, after learning my lesson last quarter. So -- all right. Thanks.

John Tumazos with Prudential, you may ask your questions.

Congratulations on the quarter. It is really impressive that you processed a couple percent more steel, that your day supply of inventory went up, that your dollar inventory went up, not just because of dollar pricing but because of tons. A couple of your suppliers had noteworthy production hiccoughs that were reported in the press.

Did you get a preferential allocation from the suppliers that had bumps in the road, or did you get more steel from other domestic suppliers who were so eager to gain share with Worthington? Or, did you get more steel from Canadian or foreign suppliers, and are you ordering steel abroad? January import data suggested somebody got some steel in from aboard at the margin that month.

John, there is really no way for me to answer that question factually, one way or another. I think that I would reemphasize things that we've talked about in the past, that we've worked hard at consolidating our supply, focusing on who we believe critical suppliers are in the future and who we would like to align with, and I think that has been beneficial to us. Whether they have treated us better or worse than anybody else, I can't speak to.

But I would say that I believe those relationships and the way we've gone about building them has been helpful to us. We have, though it would not be reflected in these numbers because it has not arrived, and I will let John speak to this, because I can't remember the exact number, but we have a small amount of steel coming from abroad that is not here yet.

That's correct. A small amount, but also, I think we talked about this starting about two, two and a half years ago. We set up really processes with certain of the mills to allow them to control their inventory better and allow us to control our inventory better, and to take costs out of the channel.

And I think, as things have tightened up in our order entry system, and the way we have worked that virtual management system of inventory between the two of us, both the supplier and Worthington, I think that has been a great benefit to us in the last, really, four or five months in particular.

Is it okay for us to assume that you've got some great ways to get steel in there, so good you don't want to say them on a conference call where they might -- where word might get out to other guys?

No, and I -- there is no black box that we've got hidden someplace on that issue. It has been the result, I think, again, of a lot of hard work over the last four or five years on a very focused effort to build relationships, and I know that that has been beneficial to us.

John, this may sound corny, but since 1955, you don't know our company, we have had a philosophy that actually states we treat our suppliers, our customers, our employees, et cetera, the way we want to be treated. And these are the times in this industry, when you live by your philosophy, that I think people really appreciate it and we're trying to treat everybody fairly.

Thank you.

Leo Larkin with Standard and Poor's, you may ask your question.

Good afternoon. Could you give us guidance for Cap Ex for '05 and DD&A?

We will run probably again about $70-75 million in depreciation with our increase in system spending. We will still be below that. We will probably be between $50 million and $60 million in total Cap Ex for 2005.

Okay. Thank you.

Evan Steen with EOS Partners, you may ask your question.

Hi, guys. A couple of housecleaning questions. Could you break out where the $3.9 million gain is on the income statement?

Yes. We acquired an asset in the Unimast acquisition in the Dietrich organization and we sold that.

Okay, but I'm saying is it -- is it a credit to cost of goods sold or SG&A? Or is it blended into that other expense line?

Cost of goods sold.

Okay. Thanks. Okay. The next one, you said SG&A was up in part due to profit sharing, and things like that. Any way to give us a feel how to try to model that out going forward?

I assume that it is going to be similar in the fourth quarter, that you will do pretty good on your profit sharing. But is there any guidance you can give us to how that number is calculated or just sort of-- the SG&A obviously jumped around a lot. Just trying to get a better feel for how to get my hands around that, going forward.

Well, we have said that our SG&A will probably run somewhere between 7-9%. We tried to hold it, really, around the 8-8 1/2%. But, as we stated, profit sharing, really, that is a variable number with us. As our earnings go up and down, hopefully, as you said, they are going to continue to trend up, but that is a big portion of our SG&A variable, is the profit sharing.

Okay. Could you also talk about the tolling in the steel processing segment this quarter? Maybe give us what the tons were, and I assume in a rising price environment, that business becomes less attractive, from a profitability standpoint?

Well, we have taken that out. Because of competitive reasons, we used to break that out. I can tell you though, that our tolling, as typical, is, you know, it stays somewhere around 40% of our total tons.

Okay. And. the other question, could you give us -- I'm not asking for earnings guidance, but could you just, for modeling purposes, given the sharp increase in prices, and the fact that you stated this quarter your actual pricing in the steel segment was lower, year over year, could you give us some sense of how much we should expect ASP per ton to increase on a sequential basis?

ASP per ton?

Well, in other words the price of steel is doubled almost in certain instances in like three months. Well, maybe not quite three months. But if your ASP here is -- I'm just taking a very simplistic view. It is not the actual.

But if I take your total tons in that segment divided by the-- or, the revenues divided by the tons, I will come out with an average price per ton. And I don't have that exactly in front of me, but the fact is steel pricing is going up, as you said, or has gone up already, dramatically, in the last three months. It hasn't hit your P&L yet, but it will, and that will obviously have an enormous impact on the revenues in that segment.

So, any sense on-- you know, in other words, I could see your revenues in that segment being north of $400 million in the next quarter. That doesn't mean you're going to have outsized profits, because you're looking at it on a gross profit per ton. But what I'm asking for is to give some guidance in terms of how much we could expect the pricing to increase on a per-ton basis going forward, not necessarily the gross profit per ton.

We probably aren't going to give you a number or try to predict what the average selling price is going to be in the upcoming quarter. Anything, as we work to pass on increases with our customers from our suppliers, are areas that we don't normally want to venture too far down the road of percentages and how much we passed on, or how much we were able to pass on of any given increase, and I think it is going to be difficult to give you a solid forward view. John had something he wanted to throw in on this.

I think, you know, without question, we are naturally going to have top line growth in all three business segments. Dietrich Industries, probably as much as a percentage of top line growth increase, probably even more than our steel segment.

We really focus on trying to manage the margin. That's why we focus on the inventory and the buy side. So we are definitely going to have top line growth. How much, based on, you know, average per ton, we aren't going to venture there, but are you going to see a nice top line growth.

Okay. And last question, you spoke about inventory and how you kept your inventories relatively tight, despite the price increase, because on the back end, when prices start to fall, you will get the benefits then.

Could you just speak in general, what your strategy is, and how you manage this. When prices are moving around so fast, so rapidly, what is your strategy with regards to that specifically A, as you mentioned, on the way up, you make a lot of money, but B, on the way down, if you get caught with the wrong product or the wrong price, you will get hurt. I'm just curious how the company views that.

Well, we view it as a game we don't want to play. We are not in the trading business or in the process value-added business down every one of our product lines.

And, as the volatility of the steel markets has increased dramatically over the last 20 years, the penalties for failing to play that game perfectly are much more dramatic. And what we've tried to -- what we have moved toward is instilling more discipline in our systems, that these are not the bets we're going to place. The bet we're going to place-- we're not going to place a bet. We're going to have a targeted amount of inventory to what we believe given market conditions are going to be.

And that's what our goals are, and that's how we try to operate the business. It is not a science, and we're trying to get better at it all the time.

I guess, also, one of -- with the last five years, you know, the first time the dog bites you, it is the dog's fault. The second time, it is yours.

We got caught in the middle part of 2001 when prices dropped. Our inventory was running around 75 or 80 days. We learned a lesson. That inventory again got up and we considered a price drop that extended really -- the price dropped fast, it dropped in very short cycle, and we got caught there again twice in the last five years. Then, as we've talked about, in a declining market until just recently, we had a tremendous amount of inventory with the Dietrich organization, which we have now flattened out at around 60, and we think that is ideal for the number of products we have across all of our product lines with Dietrich. So -- I mean we've got a target of inventory, and we are making best efforts to keep us in those targets.

Okay. And then the final question, can you tell me, in the processed steel segment, what percentage of -- do you think your shipments are taught to auto and what the percentage of non-auto is.

Of our direct business, direct to the Big Three, would be a little bit less than 15%, to the entire auto, which would be tier one, secondary, et cetera. Our direct shipments would -- I mean, our -- yeah, our direct tons would be just a little bit less than 50%.

Okay. Perfect. Okay. Thank you very much. Nice quarter.

Thank you.

Lloyd O'Carroll with BB&T. You may ask your question.

Okay. Yeah. The question of the day has been,surcharge pass-throughs. Can you review where things stand, what percentage of customers or volume you're confident that the surcharges pass-through is not an issue, and generally where things stand?

I can understand that being the question of the day, and it obviously is for us as each new round of price increases comes out. But we aren't going to review where we are on a percentage penetration of the customers or what percentage of the overall surcharge plus base price increases have successfully been passed along or not.

It is a difficult issue and obviously a sensitive one, as we value both our suppliers and our customers in these relationships. And we really can't give you much information I think that will be very helpful.

Okay. Thank you.

Fritz von Carp with Sage Asset Management. You may ask your question.

It's been asked already. Thanks.

Jackie -- or Jack Frank, you may ask your question.

Yeah. Can you talk a little bit more about end market demand, as well as steel prices in the next six months? And then, what price point you think you would start considering more imports?

The end market demand, as we were indicating throughout our prepared remarks, has been in the steel business, of strong, really, across the board. On whether it is lawn and garden, could be coal (phonetic) or it could be tubing, construction markets, automotive. They are really all up in very, very nice moves, double-digit increases, pretty much across the board.

And the other markets we serve, you know, as again, we've said, is that the construction markets remain pretty flat. I would say demand on the cylinder side is fairly flat, up slightly but fairly flat. And that's where we are with our markets.

And in regards to imports and --

On import demand? We don't have a price bogey out there that we're pointing to that this becomes a time to to go out and look. I think it will actually work more in reverse.

There will be a point in time where imports begin to flow in if prices continue to go up at a greater rate than they are here. And I don't -- reading most of the analytical work that you all on this call have done, you are not anticipating a huge influx of imports. And, probably at the current markets, in our forward view would be we do not, either.

I think the other risk right now is. there is a long lead time, order time, for imports, and you order in today's environment with arriving here, either several months later, et cetera, a bigger price risk, depending on how you're going to price it with the supplier. So, with those long lead times, it would give us a larger risk, we feel.

And are you seeing any customers decrease their orders because the steel prices have increase sod much?

Have we seen any what?

Any decrease in customer orders?

We have not seen a decrease in customer orders. Again, we see demand as strong across the board in almost every market segment.

Regardless of this price increase so far?

Correct. And strong, should we change the word strengthening.

Strengthening. Okay. Thank you.

Doug Christopher with Crowell Weedon, you may ask your question.

Hi. Thank you. I know that you just mentioned that the end markets for the cylinders being relatively flat, but anything -- could you talk -- shed a little light on the fundamentals in that market, anything substantial? We had the legislative benefit over the last 18 months. Anything there? And then second, do you expect to pay down any more debt within the next quarter or two?

On your comment on cylinders, we consider cylinders a stable market. I think a lot of people thought that after the overfill protection device legislation went through, that we would see a huge fall-off. We have not.

As we've said in the past, that market is shifting more to an exchange market, where one cylinder in somebody's hand requires so much in float, because of the way the exchange system works. So, cylinders has been very stable. We also are introducing this spring a new product in our 20-pound or our portable steel cylinder, which has the ability, as we said, that the Flame-saver has the ability to let someone judge when they are going to run out of gas.

We also have Balloon Time, a new product that has been introduced. So we're seeing a mixed change, but we're also making sure that -- and we are seeing, through product innovation and a shift in the way the market works, a steady flow of demand in that, not dropping, not increasing, in double digits, just single-digit increase.

All right. Thanks. And the debt, any expectations over the next couple of quarters?

We would say with prices, as someone mentioned, going up, we would say that our debt, which would be our short-term debt, would be flat to slightly higher over the next quarter.

Thank you.

Dick Henderson with Pershing LLC, you may ask your question.

Yes, again, great quarter. A couple of questions. With your observation that the economy is broadening into-- more into the manufacturing and industrial markets, is it fair to say that that improves your pricing flexibility? As you get away from the, you know, the concentrated automakers?

Yes.

Okay. Thanks. The other question is, could you kind of update us on, in your metal framing business, your penetration of the residential construction markets, and in light of of rising prices, and vis-a-vis, you know, wood prices, lumber prices, et cetera? Some thoughts there, please?

Our penetration into residential is probably not moving forward at a pace that-- I can tell you it has moved two percentage points this quarter over last. We continue to keep all feet to the fire and drive that forward. It is an important part of what we want to do. And more specifically, an important part of your question is, we do not believe that, at the current market, that the increases are going to hinder our ability to further penetrate residential.

As you know, wood has risen fairly dramatically as well, not quite as much, but certainly come up. And when you get down to the cost of materials impact on this product, and we're driving toward full installed costs as opposed to to just a stud on the residential side, have a ways to go on that, but that's what we're doing, the impacts are lessened.

Thank you.

Michelle Applebaum with Michelle Applebaum Companies, you may ask your question.

Hey. With regard to the steel stud business, and I thought that was a really good question, you're saying that you're able to -- you're still able to pass this through and make margin. Can you give me some idea of how much steel cloth is of total cost of putting this into place? In other words, of the stud, how much of the cost is steel? And then how much is the relative -- you know, where do we want to start getting nervous?

Michelle, I mean, do you want to know the cost of goods in the steel stud or --

Well, tell me what to look for. You guys have done an incredible thing, and what you're done, and that's business, I mean, you know, I've been hearing about framing since, you know, early '80s and you guys, you know, went out and did it, and you've made incredible penetration. You've, you know, spent a lot of money to do it. And you know, you're doing it. And the number of projects you've got going is tremendous.

And what do I want to look for to start getting worried about steel cost in that business? Is it a relative price between -- I know that the cost reduction you provided in end user was very, very large when steel prices were lower. How much wiggle room do you have with steel prices as much higher as they have become?

The -- let me try to frame it up this way and then -- let me try to frame it up this way, and John Christie will add a few comments here. But, on the commercial side, the impacts versus other products of penetration really are nonexistent. There is a point where all -- the rising cost of steel, whether it is in girders and look at all kind of construction, all the steel products that go into commercial buildings, can probably have some impact in delaying some buildings. I don't think we're there yet.

We have some developers and builders kind of caught in the middle of commitments made six months ago that didn't foresee this coming, as no one did, to the degree that it did. On the residential side, which I think is really where you're focusing your question, the impacts, we -- at the point we're at now, with the last increase, are still in good shape to be competitive.

We may be able to go a little more and still be competitive, and you have to factor in things that, not just as wood prices rise and the cost of doing business with wood is rising, whether it is mold or termite issues or other things that continue to rise, the -- to raise the price of building with wood, I think those things are going to continue to grow, and give us plenty of room to bring forward what we think is a much better fully-installed quality approach to building.

Michelle, on the cost side, when prices got really low, it probably hurt us more from a competitive position, because. as you know, we process up coils and second steel in Dietrich to lower our overall cost of materials. And when materials were low, that cost advantage was being dissipated. As prices go higher our cost advantage of providing product out the door to Dietrich becomes much more competitive.

At what point, you know, it becomes less competitive with concrete and wood, I don't -- we can't say that. I mean we're trying to track it. The other answer to the question about residential the gentleman had before, we have a lot of programs going with single family, but we also have a lot more programs and are penetrating the market of material switch substitution for multi-family residential, or student housing, or from a residential standpoint, but not single-family homes. So from that side, we are seeing and we are pushing with several programs a material substitution from wood, concrete, red iron, into light gauge metal framing, and that type of structure, from three to eight stories. And we're making great penetration there.

Okay. Let's switch gears. I haven't heard, and maybe I'm not paying enough attention, but I haven't heard a steel forecast here. And I'm going to ask you, you know, John, do you think that steel prices -- I mean, I know we're talking about over $600 a ton in April, do you think that -- but we're getting noise that scrap prices are coming down in Asia. Do you think steel prices are going to head down or up from here?

It is impossible to say. I'm going to come back on you, Michelle, and throw it back to your original question until I've given it a little more thought, since it was asked, and this is one of the issues, I suppose.

Again, if I read all the materials, and information that you all put out, as well as a number of other people put out, I frame up a consensus view that says that steel pricing may fall during the second half of this calendar year, though it will not be a huge fall. It will be substantially above historic-- recent historic levels.

I would say that we, in some range, would probably generally agree with that. But at some point here in the next seven to eight months, steel pricing will start to settle down to some level, but will remain at a pretty good number relative to where it has been five, six months ago. But we will see where we -- where we end up. And that's what we have to do.

And if I go back to this question of guidance that you asked me, and though we had talked about it before, it surprised me a little bit when you asked. So I apologize I didn't have a better answer, and I'm not sure this one is any better, But if I think of ourselves in this room in the second quarter, and we were talking about what we saw coming up, did we have better eyes because we're in the business, on what the third quarter would look like at that point than some of you, even though you talked to a whole bunch of people, certainly in the respect that we knew that our earnings would probably be better than you were projecting them, I would say yes to that. That doesn't mean that we're right -- any more right every time than that.

But, to the magnitude that steel prices went up, and it was something that would not have been in our radar screen. That was not anticipated at the levels it was. So, we would have probably been a little closer to right than you, but we would have just joined the group in being somewhat wrong in what happened over the upcoming quarter.

The steel markets are very volatile, as you know, over the last 20 years. Again, they've gotten more volatile. But to the key, and to me, the heart of the question, does our stock perform better or worse because we missed the expectations laid out by analysts? I would hope not, and I don't believe so.

I believe the markets reward financial performance, and that's who what we deliver and that's what our job is, and that's what we're going to focus on. And I would hope that the market is not simply rewarding how close we come to someone else's best guess.

Yeah, I think that -- I think that there is a lot of different factors that go into that. But it is frustrating that, you know, as we both have shared and certainly, the volatility. I mean, you could have had your conference call two weeks after your conference call on, I guess it was December 12, and I think you would have given a very different call. Am I right? Closer to Christmas?

Well, I remember that we spent a fair amount of time on that call talking about the constriction of steel we saw coming up and spent a lot of time in Q&A with people just not understanding or believing that we were right on that.

Yeah.

And I mean, we knew, because we were being blanked in some areas and had to really scramble and work hard to get done what we got done. But, yeah, we certainly saw it, and you're right ,if we were certainly, you know, in late December or early January, our view would have been different in just that short a period of time.

Now, do you think that the surcharges -- I mean, it is clear that U.S. Steel, which, right now I guess their base price is 580 and they've got a $30 surcharge, and we all know they've got a slightly different cost structure, it does seem clear they're moving away from this whole surcharge business. Do you think that if scrap prices come down, the surcharges will be replaced with higher base prices? So that net net, we won't be seeing kind of -- one of these rollercoasters on the way down over the summer?

Well, again, I can't answer their business for them. It is a good question and one what we all -- I think each one of the mills is handling that, clearly, differently. If you took an approach-- if you pulled them off the approach they clearly have indicated that they surcharges to offset their change. That's their public stance and posture. I'm happy to tell you that's what they say they with going to do. U.S., as you said, has take an little different run at it.

Ultimately, you know, the feeling there is, or the bet would be, is what do you feel about consolidation and these -- that the number of players playing the pricing game has changed significantly. And most people, again, reading most of what you all write, and I would probably agree, and I think it is healthy for the steel industry, if pricing were more stable, and hopefully, as we consolidate the industry, that will be the result.

Okay. Great answer. Appreciate it. Thanks for all your thoughts.

Once again, to ask a question, please press star one. John Tumazos with Prudential, you may ask your question.

If Worthington is the largest hot roll buyer, and Worthington was able to increase inventories and volumes in the quarter, should we infer from that, that the steel market isn't really tight?

You should not .

John, first of all, you picked up on that point, and that's a good point.

It is one that -- actually I -- John and I wrestled with a little bit and just started some conversations about, you know, really how did we manage to do that. If -- there are some answers we're starting to understand, and some of it has to do with timing, when the steel arrived, where we were with the particular customer, and I think you will find that that has more to do with some of the build-up than it does that steel is not tight.

I mean, it was just random events of when incoming arrivals -- the steel came the last week of the quarter, so to speak?

Well, I think we're getting underneath that. That is more, certainly, the case than the market is soft and we can't sell it fast enough, and we're just building it up. That is not the case and that would be a mis-diagnosis of what those numbers represent.

Should we think of it like a Hail Mary pass, where right at the end of the game the calvary got there and you got full of steel?

Well, I wouldn't think of it that way, either. There is a -- I have an answer that I would rather -- I would want to just not going to give on the call.

So far as --

We're dancing here a little bit on where we are, so let me just put it that way, because that's as forthright as I can be about it.

Okay. Thank you, John.

Yvonne Varano with Jefferies, you may ask your question.

Thanks. I just wanted to go back to the gross margin, briefly. Because it does look like your average pricing in 2 Q this year compared to a year ago came down, and that we did see the margin expansion, and I was wondering if it was safe to assume that was really mostly due to the way you account for your inventory?

Naturally, a portion of it would be inventory. You know, actually, we've also, and as John said earlier, you know, we took -- we closed facilities two years ago in a consolidation plan that we announced February of 2002, with some facilities that were not efficient, some facilities that were losing money, et cetera. That is also in these numbers, because we have completed that consolidation plan, on plan.

We have eliminated the costs that we expected to eliminate with that consolidation plan. And we actually, at the time, said we thought we would keep about 80-85% of the customers that were being affected by the places that we were going to close, and we actually did that. So, that increase in productivity from -- to the plants that we moved it has also helped, and absolutely, material costs are helping our margin.

But let me clarify something and then let someone jump in, because I don't think John means it the way he-- well, I'm not sure. Let's make sure everybody is hearing the same thing here.

The way I took your question is, you were asking did we make a change in our accounting practice or did we have some quirk in our accounting practice that would inflate our earnings numbers based on inventory, and the answer to that would be no.

No. No, is it the way that you account for inventory that you really ended up having some lower-priced inventory in your cost of goods calculation, that was the real reason for some of the margin expansion, your gross margin expansion?

No.

Well, I will -- we are looking around at each other, but I think the answer to that is no.

And maybe we need to understand your question again better, because John was hearing that as inventory flow-through and answering it along that line. And I don't think that's -- is that what you're asking?

Well, your margins expanded in the quarter.

Yes, but you're talking over what period? Compared to what period? A year ago?

Compared to a year ago.

There would be no change in the way we account for inventory in any of those period comparisons. Now, secondarily, if you're asking us, as we've, I think, been clear about, in a rising price environment, we are always selling through inventory that is purchased earlier and to a rising price market. Therefore, there is some expansion due to that. And that will always, you know, that is just the case.

We are asked by our customers in the way we do business, and in satisfying their -- their desire, is that we take the inventory risk, which is why we manage our inventories very tightly and very closely, because we would rather minimize that risk, and we don't view that as a central part of our business. So, if that is the focal point of the question, then --

Well, it appears that your average pricing actually went down year over year. Year over year. And again, as John is going back to, there are a number of other factors that are in our margin expansion. You know, we completed our plant closures and consolidation, all, almost all of which was in the steel company two years ago, over a year ago.

But the environment really hasn't allowed the success of that program and what it meant to us from a cost reduction standpoint to show up, because we've been in the middle of probably the deepest, longest manufacturing recession in 50 years. And, as earnings start to progress a little bit, we're leaving behind a lot of this cost that we used to carry. And you didn't see it, because earnings were staying flat to decreasing to, you know, they just weren't -- it wasn't there to show you the result of some of these exercises. That is clearly part of our expansion of margin.

Okay. Thank you.

Evan Steen with EOS Partners, you may ask your question.

Thanks. Just getting back to the metal framing, you brought up a very important point, which I think you alluded to, which is the availability to get steel, and how you are in a distinct advantage here, I assume for twofold, one because you can get it, and two, the smaller guys, even if they could get it, the working capital required is enormous, versus three months ago.

Could you talk about how you're taking advantage of that? And what maybe the longer-term implications are, with regards to you participantly taking market share? And maybe even the ability -- I don't know if you want to make small acquisitions of people who are out there who don't want to sell, but on the other hand they don't have enough working capital to really run their business efficiently.

Yeah, that's a very good question, very insightful. But, you know, in the short run, as far as market share goes, we are using almost all of our available supplies to make sure that we're taking care of the customers that we have. So there isn't a lot -- though it is a thoughtful part of our process, to see are there areas that we should be using our material to go after. And we are doing that very selectively with a very few customers that either we had a small share with, or had no share with.

We are keeping our eyes out for what this business environment may do to our competitive base, and watching it very closely. But I believe this would have to stay sustained without any decrease in prices for some period of months more for that to really start to happen. But we're going to keep our eyes out for it.

Okay. Fair enough. Okay. Thank you.

Now, we have, just to follow-up on that, we have a lot of capacity for growth inside Dietrich as it now stands, after the Unimast acquisition. So our ability to fill that capacity is great.

And on the comment of market share, we have had, over the period of the last two months, a couple contractors who could not be supplied by the initial house where they had placed their order, come over to our distributor system, to be able to have them place their order. So there has been some project movement based on lack of availability in that industry in certain pockets around the country.

Our final question comes from Leo Larkin with Standard and Poor's. You may ask your question, sir.

Yes. Should we expect interest expense to go up? You said that short term debt might rise a bit.

No, I don't think so. It will rise, it won't rise that much. If interest rates would go up, yes. But I think, as you can tell from our balance sheet, we have taken out a tremendous amount of debt.

We've kept this debt even in the last two or three months, with rising prices. We've been able to maintain our working capital in very good order. So I don't think you're going to see interest expense go up very much.

Thanks.

There are no more questions.

Well, again, thank you all for joining us. As again, we're very pleased with our performance this quarter.

As we look forward, we believe that we are in a good economy that's going to continue to ramp up and we think that the steel markets are pretty well locked in for the next two two to three months. We believe that we will have a good fourth quarter. And beyond that, we will continue to watch all the indicators and make our adjustments and moves to make sure we're in the best position we can be to both satisfy our customers and our shareholders as we go forward. Thank you again.