Worthington Enterprises Inc (WOR) 2006 Q2 法說會逐字稿

Good afternoon and welcome to the Worthington Industries second quarter 2006 earnings results conference call. All participants will be able to listen only until the question-and-answer session of the call. This call is being recorded at the request of Worthington Industries. If there are any objections you may disconnect at this time.

I would like to introduce your first speaker, Ms. Allison Sanders, Director of Investor Relations. Ms. Sanders, you may begin.

Good afternoon everyone. 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 listen 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 CFO; and Richard Welch, controller.

John Christie will begin today's call with a review of financial and operating performance followed by remarks from John McConnell. The session will then be opened to questions from the audience. John.

Thank you Allison. Good afternoon, everybody. Thank you for joining us. For our second quarter of fiscal 2006 which ended on November 30, 2005, we reported earnings per share of $0.44. These results represented our second best second quarter and were surpassed only by last year's record second quarter of $0.54. The quarter's results included a positive impact of a $5 million reduction in insurance reserves which contributed $0.04 to earnings per share.

Because we are largely self-insured with respect to workers compensation, general liabilities, property damage and other claims, we maintain reserves for claims based on third party actuarial valuations that take into consideration historical claim data, trends and costs, and other reasonable assumptions. The accrual for these estimated liabilities are reviewed regularly.

With the establishment of a centrally coordinated environmental health and safety program in fiscal 2002, good leadership by the Program Safety Director, and the consolidation of several facilities over the past three years, we have experienced a significant reduction in claims -- especially workers compensation. While these benefits impacts earnings in the current period it is a direct result of financial investments, employee behavior and management decisions made over the past several years.

Now to discuss the operating results. Second quarter sales of 700 million were 6% below the record second quarter sales of 745 million for the same period last year. The sales decrease was entirely due to lower pricing which reflected the significantly lower steel prices that prevailed this year versus last year. More importantly, volumes were up in all three business segments.

Narrower spreads between raw material costs and selling prices reduced our gross profit margin from 16.7% to 14.8%. We are encouraged the gross profit margin improved steadily throughout the quarter and was significantly -- up significantly from 10.9 in our first quarter of 2006. Manufacturing and distribution cost has been a challenge as many nonsteel raw material and commodity costs have soared. As you know we do not make steel so we are not a major energy consumer like the mills. But even so, items such as electricity, natural gas, zinc, freight and fuel are all up from last year.

While we were able to pass along some costs and hedge others the net effect was still negative. Excluding the portion of the increase due to higher volumes these costs were up collectively about $5 million for a net earnings per share impact of $0.04.

SG&A fell 2 million in the second quarter but rose slightly to 7.7% of sales from 7.5% last year. The reduction was primarily due to lower bad debt expense. While quarterly operating income declined from 68 million in the year ago quarter to 50 million or a 7.1% of sales, it nearly doubled from last quarter's 28 million.

As you know operating income excludes a significant equity income that we earn from our unconsolidated joint ventures. For the quarter, equity income was $14 million, up 21% from $12 million last year primarily due to near-record results at our wave joint venture.

As a group the unconsolidated joint venture generated $208 million in sales during the three months corresponding with our second quarter. Collectively, unconsolidated joint venture pretax return on committed capital continues to average 40%.

The net miscellaneous income expense category favorably impacted results by $3 million, due to investment returns on cash and short-term assets and reduced minority interest elimination for our consolidated joint ventures.

Interest expense was up $1 million due to higher rates and borrowings this year compared to last. Income tax expense was down due to lower net earnings and a reduction in deferred tax liabilities. Deferred taxes are reduced by 1.4 million as a result of the favorable treatment of dividends received from foreign subsidiaries as provided for in the American Jobs Creation Act of 2004. We expect that our effective tax rate for fiscal 2006 will be about 35% excluding one-time benefits and audit resolutions that occur in the normal course of business.

Now to the balance sheet. Net total debt was 184 million, which was net of 204 million in cash and short-term investments at quarter end. Net debt, including outstandings on the now unused receivable securitization facility, is lower than it has been in a decade. At quarter end it was down $160 million from November 2004, down 147 million from our May 2005 fiscal year-end, and down 53 million from last quarter.

Net debt reductions have been possible because of the strength of free cash flow -- that is operating cash flow after CapEx and dividends -- which was nearly $60 million for the quarter and over $150 million for the six months year-to-date.

A portion of the 204 million cash and securities portfolio will be used to repay 142 million in debt which matures in May 2006. At quarter end, our total debt to capitalization ratio was 30.9%. Capital spending was $12 million, a bit lower than depreciation of 15 million. But we expect the CapEx for the year excluding any acquisitions will be greater than annual depreciation of nearly $60 million.

Before I discuss our business segments,I should mention that during the quarter there were a number of small organizational changes that slightly impacted segment numbers and historical comparisons. None of these were material; but we have lifted the changes in the press release and also provided restated and originally reported numbers in the supplemental information schedule and the press release to help with your comparisons.

My segment discussions today begins with steel processing which represents 52% of our revenue this quarter. This segment no longer includes Gerstenslager, our stamping company. Therefore the name changed from Processed Steel Products to Steel Processing. My comparisons are to the restated numbers. Steel Processing's quarterly sales fell 16% (ph) to 364 million from 436 million in last year's second quarter. The decrease was due to lower pricing -- down 18% as our volume was up 2%. Solid increases in construction-related processing business on both a direct and toll basis contributed to the volume increase. Construction strength helped offset weaknesses and some of our smaller customer segments such as appliance, lawn and garden, and tubing. The automotive-related business was up modestly. Inventories were well controlled at 57 days, compared to 61 days a year ago.

While operating income for Steel Processing fell to 25 million from 35 million in last year's record quarter, it was up significantly from last quarter's 8 million. As a result, the operating margin fell to 6.8% from 7.9 last year and rose from the 2.4% last quarter. As you may recall last year's spreads between average selling prices and material costs widened dramatically, with the rapid run-up in steel prices only to retract significantly last quarter. With the relatively stable pricing of this quarter operating income improved.

Turning now to metal framing segments which represents 27% of our revenue this quarter. The year-over-year volumes were up 18%, enough to offset lower pricing. We believe that improved demand reflects the combination of factors, including pent-up demand, rebuilding in Florida's last year's hurricane and market share gains. As a result second quarter sales were 192 million, up 1% from last year's November quarter of 191 million.

Dietrich's tons in inventory decreased 3% in a year-over-year time period. Days in inventory also declined from 96 days to 80 days. Operating income declined from 26 million in what was one of the best quarters in metal framing history to 14 million, as a result of narrower spreads that resulted from the following price environment. The operating margin fell to 7.2% from 13.7. Both operating income and margin were improved from the prior quarter.

Finally, in our pressure cylinder segment which represents 15% of the total Company revenues, sales for the quarter were up 13% or $12 million from last year. The Western Industry's asset acquisition contributed a portion of that increase as its year ago quarter included only 11 weeks of operations versus 13 weeks. Improved European operations also contributed another 5 million. Total unit volumes were up 34%, due to the acquired assets and strength in Europe.

Operating income was up 2 million, increasing from 9 million in the year ago quarter to 11 million. Consequently, the operating margin rose from 9.3% to 10.5%. The improvement in profitability is primarily due to the restructuring of our European operations, where we have increased volumes in and all product lines, improved cost structures and increased revenues by exiting unprofitable low margin product lines such as our Portugal LPG and introducing new product lines such as our air tanks and helium business in Europe.

To conclude, this quarter tangibly demonstrated the benefits of a few of the long-term programs that we have implemented to reduce, control risks and cost. From insurance claims and hedging basic commodities to the European cylinders market. As a result from an earnings perspective, this was the second best second quarter in the Company's history.

John, I will now turn it to John McConnell for some concluding remarks.

Thank you, John. I think as John said and I believe the results really speak for themselves. We had a very good second quarter to our fiscal year 2006. I certainly want to thank our management team and all those here who worked so hard every day to produce strong results for our shareholders.

Last quarter I mentioned a few of our internal growth initiatives; and before we move on to your questions, I will provide a brief update.

Last quarter we introduced you and the general public, Ultra Steel. It's a patented protected process that we have licensed from (indiscernible) Ultra Steel of England. Ultra Steel transforms our core framing products in a manner that sets us apart in the marketplace. It does so with lower sound transmission rates, higher fire ratings and best of all for our customers it installs faster and safer. We have completed the conversion of our Florida facilities and have begun to move north. We will complete the conversion of our facilities which serve our Eastern markets by the end of this summer which represents 40 to 45% of our drywall stud sales.

Coming behind the rollout of Ultra Steel is our development work with Nova Chemicals which we also announced last quarter. We are well down the road with our partners in developing the capabilities to mass produce structurally insulated exterior wall panels -- which not wholly solve the current thermal transfer issues of steel studs and exterior walls -- but does so in a manner that results in superior insulating properties, using materials that are wider and therefore mold-resistant as well as termite-proof.

We are excited about the potential for this new product and its ability to produce a second wave of growth behind our deployment of Ultra Steel.

Our first midrise building in China is under construction and as a reminder this is the first of two buildings which we will use to determine both our ability to build competitively in China, and its acceptance of hollow wall construction techniques to the general public there.

And finally, with Steel Pack which we also mentioned last quarter we are on track to deliver several thousand palettes to a major retailer for a multi-month trial this spring. We are very confident in the ability of our lighter weight steel palettes to perform in this trial as it delivers to our professional customers a shipping platform that is impervious to mold bacteria and cross product can contamination that can occur moving household chemicals and food products into retail outlets.

For these and other reasons, we are confident in our ability to deliver a on the number one goal here at Worthington Industries. That is, to earn money for our shareholders and increase the value of their investment. At this point we will take any questions that you might have.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) David Taylor.

David B. Taylor & Co. JP, pretty decent quarter in a tough environment. I have a few questions. What exactly caused you to realize the change in your reserves to self insurance program this quarter rather than last quarter or next quarter?

Merry Christmas; good to hear from you again and I'm going to let John answer that.

We review from that growth standpoint all the time and our claims rate has dropped significantly over the last five years as we consolidated, eliminated Malvern (ph), sold a big portion of the Decatur operation etc. so really claims experience came back and looking at the further risks out forward they felt that we were overreserved at the time, based on the great past claims history we've had and what we think the risk is, going forward. So we were out of the range of the actuarial valuations so we brought ourselves back in.

Would this suggest that perhaps in years going forward, a penny or two less of expenses?

Yes. In fact our insurance premiums this year based on our loss histories etc. are declining. For the tough coming year.

Gerstenslager, what precipitated the change in the divisional segment accounting to -- for this and I gathered that the subsidiary is unprofitable. Is this correct?

That is incorrect. It does produce external operating income for the organization. When we brought Gerstenslager in the organization, it was under steel management and reported to the president of our Steel Processing division. We have changed that and there was very little synergy between Gerstenslager and Steel Processing and they used material that was not supplied by the Steel Processing division. So we felt it best to not confuse people about our Steel Processing division and so we have segmented that out into other periods.

I would note that in the new divisional breakouts, that other which includes this is evaporating (ph) at a loss. Is that because of corporate overhead or what?

The bulk of that loss has been in our move into try to expand metal framing into various different venues; and we purchased a construction design company several years ago. We have been building from a supply and designed and from a build several midrise units and our learning curve over the past two years has -- the learning curve has been at a lost. The bulk of that loss in Other is the building products.

Mark Parr.

Keybanc Capital Markets. I had a couple questions. First of all what is your sense as far as auto vacation shutdowns. Are you looking at -- does it looked like a week or does it look like two weeks and give us some color on that, from your perspective, please.

I can't give you any color at all. I assume you are talking about the Christmas holiday break and not summer vacation but not the summer shutdown but --

Right. Did I say summer? I apologize. It's so warm up here in Cleveland, I never know.

I can't really give you any color about the schedules for holiday shutdowns between the automotive companies.

Another question if I could. It's clear that you are very happy with the initial rollout of Ultra Steel and you are expanding it. Could you talk to the -- we understand the benefits in the field. Could you talk to the financial model on Ultra Steel and what your experience has been thus far versus the older line product?

I haven't seen the data out of Florida on the actual production of the product and where we are but remember, much of Florida has been the break in process where we learn to make this product from a licensing agreement so their data would be skewed from early on.

Right now from talking to Ed without a specific discussion about it I believe our models are exactly what we had hoped they would be, which is, we don't have any degradation in production speeds. We are able to produce this product and ultimately, because of the linear feet are greater as we produce and sell this we are even -- if we just held the market price let alone get some more we will add to our margins, as a result. And I'm confident that is exactly what is happening as we have learned how to make this product down in Florida -- which is why we are now ready to push up into the northern East Coast and serve those markets and then aggressively continue across the country.

One last question; could you give us some color on the pricing outlook for the cylinders business over the next several quarters?

As you know there are several different markets that the cylinder company serves. We continue I think to feel overall demand and high-pressure and then the air tanks which is, right now, a small part of our business so that products will remain not under any significant pricing pressure. In fact, our backlogs are generally very strong and -- both in Europe and United States for industrial gas products.

Point pound production would probably be the place where we would have the most pricing pressure. At the moment and for the foreseeable future we are not contemplating any price reductions. We feel we have been able to hold the pricing out in the marketplace and unless there was a significant decline in steel pricing, we believe we will be able to.

Is the pricing pressure on the 20 pound market, is that from competitive suppliers or is that from the (indiscernible) manufacturers?

That is from competitive suppliers. We don't have a lot of direct role business. The model for distributing this product changed over the past five years. It mainly goes to the exchange people and retail outlets directly. But there is an overcapacity in this country and certainly around the world for 20 pound production. That is where the pressure may come from as people look to expand their ability to produce on their lot.

Congratulations on a solid quarter.

John Novak.

CIBC. Can you give us a sense of where, what line item the insurance credit was placed in?

Cost of goods sold.

What was it with respect to mix when we look at the cylinder business that allowed for a sequential increase in operating profits yet a sequential decline in volumes?

Well as you know we made the Western Industries acquisition in September last year; we also have introduced new products to the field, the helium area, the funtime balloon area where we have packaged and have been able to get a higher premium value for the new site,s we have introduced. We also shut down the Portugal LPG facility which drug down the overall margins for that area and we introduced a new line -- Air Tanks -- in the European market and that has been extremely good for us and then as John said, the industrial gas business in Europe has been very good for us.

And John answered the question very well but maybe to help visually I don't know if you've ever been camping or done anything with remote propane sources but the Western acquisition was this very small, very portable cylinder. It sells for a lot less and, obviously, we didn't have it going on before so you have a lot more units and a lot lower price points which doesn't necessarily impact anything else. It is a good business for us and we are anxious to continue to grow that.

On a sequential basis, what accounted for the increase in SG&A from basically 48 million to 54 million, given that revenues were relatively constant?

SG&A actually for the period went down -- for the -- .

Yes year-over-year but sequentially it is up.

Well we -- you mean year.

(MULTIPLE SPEAKERS)

Over November 30, 2004, versus November 30 of 2005. That quarter?

No, Q2 versus Q1 not Q2 versus Q2.

We are implementing a new ERP system that we have talked about the last 18 months and we have gone into Phase II and in this quarter, we have a sales recognition program for our top salesman in the country and that always hits SG&A in this quarter.

So sequentially we should see it decline next quarter?

Yes.

And in terms of your various growth initiatives that were detailed particularly Ultra Steel and the insulated panels. When we look forward over the next couple of years how much do you think you can actually expand your output as a result of those initiatives? Or is this just pure margin?

I believe it is going to be a combination of both. It certainly is going to help our margins and we will have United States in the products to which this applies, primarily our drywall stud product completed in about another year and perhaps a little sooner. That will account for about 70% of the products we sell, because that is the largest volume product we have.

We believe that it will have a significant impact and we will be careful about how much impact want to have because of our position in the market already. But we believe that we can capture market share and will capture market share as a result of the rollout. It is a much superior product to what is currently being produced by ourselves or our competitors. The reason that you see us roll out geographically in areas side-by-side is because we do have to work through the issue of having two different types of products in the field with our customers. You might see a modest rise in inventory over the next 18 months or so as we go through this rollout again, as a result of that. But we will see impact in both, I'm confident.

When do you expect to have the full conversion completed?

Again I think we will be across the U.S. serving all markets in 12 months or so from now. Right around that time -- 12 to 15 months.

Carina Petrie.

(indiscernible) Research. I was just hoping someone would repeat the margins spread, the comparison quarter-over-quarter and year-over-year?

For all business segments?

No. Just for Process Steel.

For Process Steel. Okay. That would be in our operating margin. hold on a minute. Our operating margin fell this quarter to 6.8% from 7.9 last year but it rose from last quarter when we were only at 2.4% last quarter.

John Tumazos.

Prudential Equity Group. I am very interested in the $2.4 million gain in equity affiliates which I presume is the non-res part of the cycle kicking in in the suspended ceiling business and the 18% volume gain in construction framing which I guess is stud footage.

Yes.

Now that the non res part of the cycle is coming in, coming along, expanding, is there room for the equity affiliates' income to double again?

You're talking about the wave in particular?

Yes sir.

Well we think that Wave is still on a very good growth pattern. As you know we take Wave Global, in China or in Europe. We just built consolidated two plants in the U.S. into one very much more efficient plant in Haberdean (ph), Maryland. And so we have the capacity to grow and we think the forecast looks bright.

Could you elaborate a little bit, I guess, when the Gerstenslager profitability was published last, it appeared to be more than it currently is and could you give us a little snapshot as to what has happened? Is there some guy in China stamping imitation Ford and GM parts that's kicking Gerstenslager's butt?

No. I saw what you felt Gerstenslager may be doing. Gerstenslager really its main business is replacement where they take dies on consignment from production facilities and they produce replacement parts. As models have run out longer, the decay curve after they come out is shortened because they are holding the platform longer and they are making larger bridge runs for the replacement parts business. That is the first thing.

So the OEMs -- you are doing what Gerty used to do?

They are holding longer bridge runs, yes, to take advantage of their labor and their capacity.

The second thing would be that Gerstenslager also does very limited but very profitable offload on major model productions when the model is moving rapidly and (MULTIPLE SPEAKERS)

You mean if GM runs out of capacity Gerty does some parts for it?

They have the offload source because of their capacity to run short and to run the type of dies they need and, of course, with the auto industry the way it is, the offload business has declined also.

Don't the Japanese guys that are selling a lot of models use that or they do it internal?

We do have Japanese customers and I think several of the large ones are trying to figure out their replacement parts strategy in the U.S. today as the number of models they have in the field continues to expand. Several of them have not made the decision on whether they will source from offshore or find the local source for production and distribution.

Does this mean that the Worthington public company paid J. Mack too much to buy Gerty a couple of years ago?

It does not. Based on, certainly at the time I would say it was a very fair price and probably not as much as it should have been based on the model that was in place and earnings they were generated. That model did change after a number of years of producing excellent returns for us. We are -- to expand on the one question -- doing aftermarket work for two of the new domestics and being very creative and finding some other things to do while we are stamping some packaging containers for some people.

So and John, that model is likely just as likely to change back in some way as they look at -- as auto, domestic auto, old domestic auto looks at how it is doing some of this work itself. Some of the plants that they considered closing have been in direct competition with what Gerstenslager does and that may change what goes on there. They are looking at a number of different alternatives, as well.

We built a new plant I think in 2002 in Clyde, Ohio, specifically for certain types of business out of a specific auto company of which did not come to fruition at the amount we thought. But that new plant which is in Clyde is full and is operating profitably and is producing positive EDA for the Company. Our older facility in Worcester -- as models have changed and the dies have become larger and more configuration in the dies, it becomes harder for us to get the models into the Worcester plant and so that is why we built Clyde in 2002.

What is the product Clyde is making to get the good EDA different than (inaudible) (MULTIPLE SPEAKERS)

They do have a little offload and they have the replacement and aftermarket business. They have a combination.

Chris Brown.

Longbow Research. Could you comment more specifically on the current trends in automotive industry? For example is GM prebuying steel in anticipation for a production curtailment on the (inaudible) ? In your opinion what would affect or what effect would a (indiscernible) strike have on this steel industry?

I'm not aware that they are buying anymore and they have in the past on trying to get ready for unknown events. I don't believe that's the case. I believe their wait (ph) on purpose which has been strong for many years now remains about what it was. As far as its effects if Delphi were to go on strike, obviously, it could and it would be difficult to say the least for General Motors to produce cars at some point. I can't speculate as to what that would be. How much cushion they have. How long the strike would need to last to get into it because I'm not familiar with that.

Obviously there would not be a good event for the auto industry and GM in particular and all those including (indiscernible) supply there. I think we have a lot of people who are very focused on resolving the issues at Delphi including General Motors, if you read the papers. that's what they say. They're very involved in all this. So we hope for the best result from a bunch of people focused, including the union, in getting this resolved.

Part of our business has been to of course divert or change our exposures to certain industries and as we have said in the past the automobile industry is good for us. And we do a lot in it. It's still in total Worthington around 10% of our business but if you take the top 25 customers we had in the year ago quarter, and our top 25 customers in this quarter, we have seven new customers that have broken into the top 25 that were not in the top 25 a year ago.

So we had done a very good job of going out and attracting new business and of those seven, four are not in the auto industry.

Interesting. What percent capacity is Dietrich currently operating at?

Dietrich's capacity once again would vary across its facilities. If you look at its conversion plants where we're actually making the product the capacity utilization rates would be low and low by design. We are set up to service customers on a 24-hour notification basis and do so. In our plants that we are actually bringing in some material, that we are preparing to go out to get rollform including (indiscernible) operating rates there are higher. In all cases, we have plenty of room to expand and support the growth that we see out in front of us.

Our rollforming lines which would be working on the Hadley and our other structural and our other products be safe to say that they are operating under 40% capacity. And we have said in the past that we have plenty of capacity without capital expenditure to handle growth in this business.

Michelle Applebaum.

Michelle Applebaum Research. I have a couple of questions, some of them are smaller. Against a couple are bigger. The first question you mentioned on the insurance gain that it was in cost of goods sold but how'd you allocate it across the segments?

Based, really, a lot of it is in the workers comp area and it's based on the number of heads in each area.

Can you quantify that please? The dollars impact?

I couldn't right now but if you took the number of labors we have in each one of our segments, they would get their equal proportion share.

Because when you -- it's a gain and it's going show up in your operating margins for next quarter when your operating margins might be short you might want to -- you might be mentioning it them so we should probably have it in our models to forecast other than cost of goods sold. Do you understand what I'm saying?

Yes.

It's probably meaningful.

The second question was -- if you can provide that, it would be helpful. The second question was you mentioned marketshare games at Dietrich in the quarter, marketshare of sale subs or marketshare competing (indiscernible) what kind of marketshare did you mean?

I'm sorry. Could you repeat the question?

In John's remarks he was talking about results at Dietrich he went through a couple of factors. One was he mentioned there were gains in marketshare at Dietrich. Steel sub versus what?

Our percentage of the steel stud market.

So there'S others you are taking share from, you're saying?

And there are -- and part of the reason that we went and expanded into the design area of this is to do material substitution. And you know, our long-term game plan -- and we've worked on it quite a while -- is to get the light gauge metal framing into new areas of building and like midrises, hotel construction etc. so the metal framing market is gaining and that is our percentage of the metal framing market.

The next point, I just wanted to address John's comment previously about Gerstenslager. When you bought Gerstenslager and they were doing four or five times the margin that you back out because I did the exact same -- as soon as you restated those numbers I sat there and calculated the 3% EBIT margin at Gerstenslager which was a big difference than when you bought it.

But at the time you bought it I think consensus view given the profitability of the Company was that you didn't pay enough as opposed to what John's comment was. I was curious. How many years was it before you saw this deterioration?

I will answer that Michelle. It started with -- Gerstenslager business stayed very steady. In fact grew up to about halfway through 2002 and then we saw models going stronger and also the change in technology and I didn't mention this in John's question. With airbag technology and electronics in cars, seems they are totaling cars with less damage which allows more what I would call junkyard replacement parts being out there for conversion.

I guess that's good news for society however. Last question. Your -- historically 10 years ago I would have said you are one of the largest in your industry. But there's been a lot more consolidation around you. You haven't at least in the sales processing side seem to have been a buyer or a seller recently in any meaningful way. With all this going on with big multiples paid for Worthington types of companies out there from private equity types, I was just wondering where you stand in terms of where you might see yourself in this consolidating industry?

I believe we do have a share of the things that we are involved in that is certainly not one that people can put aside or if significant and it's a business that we believe we can compete in very profitably, going forward. We have said publicly and we'll continue and we are looking at expansion of the steel processing business and the geographic areas to which we are not. So that wouldn't be out after larger competitive assets, we'd be after smaller ones or greenfield sites. John had something he wanted to add to that.

Michelle, you kind of summed it up. If we are in a bidding war with private equity and they are going to pay 8, 8.5, 9 times for an industry we know about, an industry that we know where the margins are, we just aren't going to get into that war. We have said we are going to expand our capital expenditures this year. We are doing that through increasing our capacity at some of our existing facilities. We are doing a furnace expansion. You know, at the Spartan facility we brought in new product lines, at our Della facility and acrylic line, acrylic coating.

So we are spending money I think in a very good way in the areas that we know the business. But we are not going to go out and pay a premium to be in the business where we know how tough the margins are to get and how good you have to be to get them.

This is probably the fourth cycle since I've covered this dock in 25 years that I've asked the same exact question and gotten the same exact answer and typically the valuations do revert back. So I am glad to hear that. Then, finally I don't think anybody's asked about steel prices which is surprising. Can you kind of tell us, we know we've snapped back here. You do some contract business, I know. I would guess you are doing 6 less contract business than you did in '05. Would that be a fair guess?

We do contract obviously and like that end of the business we always match them off, certainly less than they were two years ago. As a percentage of the total. So the experience of '04, '05 really our fiscal year '05, calendar '04, '05, I think have a lot of people dive in, going along on time with steel purchases. But what's out there, we work to serve our customers and their desire in whichever manner they wish and most of them are much less contract business out there today than there was if you get past the core automotive.

We think pricing is fairly stable. There's certainly going to be some pressures back and forth here and you go through the Christmas break and there's always some downward pressure on pricing. But we think the economy remains strong and going to continue to grow. And more importantly I think the world economy is remaining strong; and that is the most important aspect in keeping steel someplace else.

Michelle you have known our Company a longtime. I think the assets we've disposed of or shut down the Malvern, the coal growing facility at Decatur, we had some overcapacity in Jackson, Michigan that we closed. I think you'll find -- and you are finding because there have been great fluctuations in steel pricing just in the last year -- that we have been able to stabilize our Company in the downturn. And we have been able to take advantage in the upturn but the down cycles are not as severe on us as they used to be because of the product mix we've changed out of.

So your outlook for steel prices is continued stability into the first and second quarters?

Yes and stability is a word that doesn't mean that it will stay the same but it does mean that I think there won't be radical moves over that time frame.

Where would you guesstimate better to the upper or better to the down in the first half?

It's hard to say. We are after a band of pricing that moves gradually over time and not tremendous distances, neither up our down. That would be what we desire when we tried to work with (indiscernible) mill sources and our customers.

You sound like you are a seller and a buyer so I guess we aren't going to get anything more than that. I am going to give up. Thank you very much; nice looking quarter and I do like (indiscernible) effect of all the restructuring. We forget about that because they're gone but certainly I know how torturous that all was in the process. So it's nice seeing that eliminated.

John Novak.

CIBC World Markets. Can you give us the number of tons that were pulled process during the quarter and a six-month number year-to-date for that as well?

I can't sit here and I don't know if we have the guide in the room.

I could tell you it was about about 46% of our total tons were toll; the other part was direct and we will try to find it before we get off.

Mark Parr.

Keybanc. I wanted to follow up on some of the other conversation around, steel pricing and steel market, federal (ph) steel market. Do you have any opinion on the change in availability of quality flat world imports? We've seen the Russians get really profitable and a lot less interested in destabilizing. We've seen other cross regional consolidation activity occurring on a global scale. So has that resulted in a decrease in the number of sources in the amount of quality hotrolled or coldrolled substrate?

That is a question I really can't answer in specific terms. I don't think that we are seeing -- we don't feel, probably, that the quality of production and availability (indiscernible) -- don't think it's diminished. It's probably increased. Beyond that I don't -- right now you don't see nor do you have nor do we feel a need to have a large component of steel brought in from abroad. You mentioned Russian steel and I think you are going to see tremendous growth in Eastern European areas that will probably occupy a fair amount of what they do. So I don't think there will be a huge motivation to continue to ship here and of course one of the (indiscernible) domestic presence and it is expanding its presence here for domestic production.

So I'm not sure -- I am sure I didn't answer your question. I am not sure exactly, I guess maybe partially what the question was but hope that helped some.

If I could do one follow-up. Does the permanent shutdown of Reardon and delays with ramping U.S. Steel's No. 14 furnace -- does that create a potential for some tightening up the steel supply in the first quarter from domestic sources?

They clearly have (inaudible) lead over into the first quarter to some degree and in the basis of how and where we need to be on a supply and basis here in the United States it is a capacity -- we still need to have some capacity closure in the United States. So longer-term, we will not present a shortage, I don't believe.

I will answer the -- I think Mr. Novak asked it. Just -- we did in excess of 900,000 tons and the percentages I gave you will give you a pretty good estimation of the difference between direct and total. Our total was in excess of 900,000 tons for the quarter.

(OPERATOR INSTRUCTIONS). I don't show any further questions at this time.

Thank you, all, again for joining us on this courtly conference call. We are proud of this quarter, it represents a very good performance and effort. And we look forward to the things that we have outlined out in front of you for our continued growth and profitability. Thank you.