Worthington Enterprises Inc (WOR) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Worthington Industries third quarter 2006 earnings results conference call. [OPERATOR INSTRUCTIONS]

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

Thank you, Pat, and 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 listening to this conference call again, a replay will be available on the home page of our website at www.worthingtonindustries.com. With me in the room are John McConnell, Chairman and CEO, John Christie, President and CFO, George Stoe, EVP and COO, and Richard Welsh, Controller. John McConnell will open today's, followed by a review of financial and operating performance by John Christie. The session will be opened to questions from the audience after John McConnell's concluding remarks.

John?

Thank you, Allison, and thank all you for joining us today. I've looked forward to our call this quarter more than any I recall in the last few years. I had mixed reactions to our performance this quarter and if I do, I'm sure you do, which is why I'm glad to have this opportunity to talk about the quarter in more detail. There were separate dynamics in play in our two largest business segments which led to compressed earnings. In metal framing, I believe that we executed very well in what was identified and turned out to be a short-term issue in the market. In steel processing, I was disappointed in the decisions that we made in the second half of calendar '05 in the midst of a changing industry dynamic. To be completely fair, however, when I consider the actions and results of our competitors during this time frame and the written views expressed by many who follow the steel industry on future pricing, I'd say our performance was mediocre. In other words, the basis upon which we made daily operating decisions throughout this time frame did not turn out correct, but we had a lot of company in the misreading of this situation. Let me be very clear, however. Running with the herd and mediocrat -- mediocre performance are not acceptable in Worthington Industries.

And last, as you know, we reported three out-of-period adjustments this quarter. I'm not going to spend much time discussing them, as John Christie will provide further insight in his comments and they will be disclosed in detail in our 10-Q. I do believe it's important to note, however, that each of these issues were identified and brought forward by our staff and resolved. It is equally important to note that, while these adjustments were material to this quarter, they will not be material to the year nor any prior period. As the primary person certifying our financial results, I want you to know I have complete confidence in our controls and in our people to follow and enforce them.

I'm going to turn this over to John Christie, our President and Chief Financial Officer, to review the quarter in more detail, and I'll come back following John with comments on our forward view.

Thank you, John. Good afternoon, everybody. We reported earnings per share of $0.21 for our third quarter of fiscal 2006, which ended on February 28, 2006. That compares to the third quarter record results of $0.37 of fiscal 2005. Results for the quarter included out-of-period adjustments, which negatively impacted earnings per share by $0.04. I'll touch on each of these items in more detail in the course of my remarks. Third quarter, which for us spans the months of December through February, is typically the weakest quarter in all three business segments, due to holiday and weather-related shutdowns. This dynamic was especially true this year, as December was one of the most challenging months in years. On a consolidated business, sales of $682 million fell 9% from last year's record $747 million, due to lower pricing. Volumes were up in metal flaming, flat in steel processing and down slightly in pressure cylinders. Our gross profit margin fell to 11.6% from 14.6% last years due to reduced spreads between selling prices and material costs in steel processing and metal framing segments, as well as increased manufacturing expenses, particularly in zinc, energy and freight.

SG&X -- SG&A expenses were down slightly in dollars but rose as a percentage of sales, from 7.2% to 7.8%. SG&A expense included a $4 million adjustment to correct an under-accrual of consulting expenses during the previous five quarters. These expenses accumulinate -- accumulated in a balance sheet account and were inadvertently not reclassified to the proper expense accounts. A settlement of a large bankruptcy case resulted in a $4 million decrease in bad debt expense for the quarter and largely offset this adjustment. Quarterly operating income was $26 million or 3.7% of sales, compared to $55 million or 7.4% of sales in the year-ago period.

Equity income from six unconsolidated joint ventures fell to $8 million from $15 million, primarily as a result of a $6 million tax charge at Acerex, our Mexican steel processing facility. Excluding the charge, equity income would have been $14 million, reflecting the continued strong earnings at our WAVE joint venture, which generates the majority of our equity income. WAVE is benefiting from increased construction activity -- both in new and refurbishings -- product invasion and expansion into new markets. The tax charge in Acerex in the equity income line relates to a misinterpretation of Mexican tax law, compounded by an error in the conversion of the Mexican financial statements to U.S. GAAP. Income taxes for Worthington, however, were favorably impacted by a $3 million adjustment related to accruing taxes on the foreign earnings of our WAVE joint venture. These earnings are considered to be permanently reinvested, and, therefore, taxes should not been accrued. Our estimated effective tax rate for fiscal 2006 is 36.4%.

From a balance sheet perspective, net total debt was $274 million, down almost $100 million from a year ago. Debt is net of $113 million in cash and short-term investments. We will be using the cash portfolio to repay a $142 million in debt, which matures in May. At quarter end, including that debt, our total debt to capitalization ratio was 30.6, giving us great flexibility going forward. Capital spending was $18 million, compared to depreciation of $14 million. We expect the CapEx for the year, excluding any acquisitions, will be approximately $60 million, in line with annual depreciation. Major ongoing projects include our ERP project, a furnace upgrade at our Spartan joint venture galvanizing facility, and our UltraSTEEL product conversion at Dietrich.

Looking more closely at our three primary business segments, steel processing, representing 52% of our revenues this quarter, sales of $352 million fell 15% from the $415 million in last year's third quarter. The year-over-year sales decrease was due to lower pricing. Volumes were flat, despite reduced production volumes at the big three, especially in the month of December. Inventory was well controlled at 61 days, unchanged from a year ago. Delivery schedules from the mills improved, but are still not optimal. Operating income for steel processing fell to $11 million from the record $31 million last year. The operating margin fell to 3% of sales from 7.5% last year, primarily as a result of a narrow spread between selling prices and material costs and increased manufacturing expenses, particularly zinc, natural gas and freight.

Our metal framing segment, representing 26% of researches in the quarter. Year-over-year volumes were up 6%, although not enough to offset lower pricing. As a result, third quarter sales of $180 million were down 7% from last year's February quarter of $194 million. Operating income declined from $15 million to $6 million as a result of competitive pricing pressures, higher manufacturing expense, including freight and our startup in Canada. The operating margin fell to 3.2% from 7.7%. All indications are that demand is picking up noticeably, as we move into the busy construction season. The commercial construction, and even now office construction indices, have trended up, all of which are leading indicatals -- indicators for metal framing, which is utilized a bit later in the construction cycle. Market prices are going up, as demand increases. Our competitors have announced price increases and so have we. We announced a 12% price increase effective March 6th, and yesterday announced a 10% increase effective April 17th.

Finally, in our pressure cylinder segment, which represented 16% of total Company revenues, sales for the quarter decreased slightly to $111 million and actually were up, if you exclude foreign currency transaction impact. Volumes were down 6% due to pre-buying done early by a customer in advance of higher contract pricing. Even so, spreads improved as a result of a richer product mix, and operating income remained at $10 million or 8.9% of sales, compared to 9.3% last year. The cylinder segment is positioned well, as we enter the seasonally strong fourth quarter.

John?

Well, thank you, John. Now turning to what lies ahead. Let's look at steel processing business, first, in it's simplest terms. Coming out of mid-'04 to mid-'05 price spike, much was written and many people believed that steel pricing would continue to fall under a wave of import pressure. During this time frame, we agreed to fixed-price agreements with many of our customers without balancing arrangements with our suppliers, who were continuing on a more real-time pricing model from the previous 12 months. Even as pricing turned upward in September, many people believed, and continued to believe, that pricing would soften in the fourth quarter, due to an expected rise of the import levels. As increased pricing held, the bulk of our resulting margin compression began to materialize late in our second quarter, peeking in December. Corrective action has been taken in our pricing policies, and our margins have shown sequential improvement, beginning in January through the opening weeks of March.

We will continue to see improvement in our steel processing segment's results. We have put in place a general price increase effective April 1st to bolster our efforts with individual customers. We are closely monitoring what we believe will continue to have upward pressure on our raw material cost, and we are prepared to act in concert with the market. We will also continue to work with both our suppliers and our customers to find pricing mechanisms, which work over the long-term to the satisfaction of all.

And we will also have a stronger performance in our metal framing segment for the fourth quarter. To understand this better, let me explain the dynamics that affect the third quarter. We announced a price increase in October that was not followed by our competitors in this still somewhat fragmented industry. Instead, our competitors fought hard for market share, we believe to gain their best possible share position in the face of our introduction of UltraSTEEL. Ed Ponko and his team did an excellent job during the past five months protecting market share with as little deterioration to margins as possible. As competitors worked through their lower-cost inventories, they announced a price increase effective in March, and as the -- which the Dietrich team had predicted to the month. This was quickly followed by a second increase in April, and as you heard earlier from John Christie, we participated in both of these increases. Margins have already begun to bounce back, and we will see further improvement at the quarter unfolds.

Now, on our second quarter conference call we spoke about the properties of UltraSTEEL, our licensed product from Hadley, PLC. Now to clarify some confusion from last quarter, UltraSTEEL is a replacement product for our existing steel studs used in commercial building markets. We do believe that it will play a future role in competing in the residential markets, where wood and concrete remain dominant, but that is not the primary mission of this product. We told you this product would stand out from others in the commodity commercial stud business, and that is UltraSTEEL's mission, to provide a distinct advantage in our core commercial business, a steel-stud to steel-stud battleground.

During the quarter, we announced the sublicensing of UltraSTEEL to the second largest producer of steel studs in North America. Some people's initial reaction to this announcement was, hey, if it's so good, why would you make it available to your largest competitor? Well, we believe that having a second source is important to many of our customers and, perhaps more importantly, that having broader availability will facilitate a quicker acceptance of this product as the industry standard. Frankly we believe the decision by our largest competitor to sublicense UltraSTEEL from us speaks more loudly than anything else we can say about the advantages UltraSTEEL brings to the market.. The deployment of UltraSTEEL continues up the east coast from its introduction in Florida. We have completed the conversion of our non-load bearing studs of UltraSTEEL in our four facilities in the southeastern United States, and we have begun the conversation of our four northeastern facilities, which'll be complete in July. And if I said northeastern before, that was southeastern and then on to northeastern.

We anticipate continued strength in both our cylinder operations and our largest of our unconsolidated joint ventures with Armstrong World Industries, WAVE. Our cylinder segment has remained very strong throughout the year, based on solid demand for its core products, newly acquired product lines, and the strength of our industrial gas containers produced in Austria. We have seen continuation of this performance and we will see record results from cylinders for the year. Though not as visible to you as our other business segments, WAVE has produced excellent results for the year, and we expect that to continue. And we expect to see growth continue, as current markets remain robust, and we investigate additional opportunities to expand internationally.

Our operating performance for this quarter was short of the consensus analyst expectation. We have outlined the issues, which led to weaker results of our two largest segments. In metal framing I believe we tactically executed very well in recognizing the short-term nature of a competitive threat. In steel processing, clearly, a better appreciation of the markets shifting from one controlled by buyers to one controlled by sellers may have improved results. In both instances, however, these issues are past. We have already seen improvement in our earnings performance and that will continue. Our Company has been, and will continue to perform very well. We remain in an excellent position to produce the earnings growth necessary to meet our number one corporate goal, and that is to increase the value of our shareholders investment.

At this point, we'll be happy to take any questions you have.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Ms. Michelle Applebaum with Michelle Applebaum Research. Your line is open.

Hi.

Hello. How you doing, Michelle?

I'm okay. I'm so pleased to have the honor of the first question today.

Pleased to have you be first.

Let's see, where to begin. You know, I understand the Company has a policy of not giving guidance at all. It just sounds like what happened this quarter was sort of planted in the -- from the summer months, and if you were out there making longer-term price commitments to your customers and not having hedged positions on the buy side, that was kind of a change from what I understand the Company's policies have been in prior periods. I haven't -- I do recall hearing this once before as an explanation for a short fall, maybe three or four years ago, but it's pretty rare. I'm just wondering why none of this was shared with the Street in terms of -- when you released in December, did you see this coming? And if so, could you have sort of warned us?

When we released in September, no, we did not --

December, December.

I'm sorry?

In December. The November quarter came out.

We were just starting to see -- as I said, it was late '02 that we started to see the problem showing up. It peeked in December and, no, we didn't have a good enough handle on it to talk to you about it. I think that, clearly, if -- as I read the transcripts from anybody in this industry that were delivered in conference calls in January, they spoke to this issue that had gone on for several months and materialized itself, I think [inaudible] in December has well [inaudible] out. These are -- you know, these were tactical decisions, and you made a very good point. We do not want to be in a place where we're betting on inventory price position changes to make money. There was a fundamental change in how these markets are working. Quarterly pricing, which used to be an easily understood and well announced in advance stock price, that -- none of that exists anymore.

I think as our guys out there on the ground every day battling for business to bring here were finding, that all of our competitors were giving prices for a quarter coming up, when prices were not known yet to our end of the industry. We went ahead and participated in that. Those were decisions that were made on a tactical, daily basis. I'm not going to go back and execute people at this time over that. Again, everybody had a -- everybody's learning how to operate in what is a new dynamic in the steel business, and we are learning, as well, as we go forward. The issues about having the exposed business, again, have been corrected, and our pricing policies and models are back in effect, as we'd like them to be. In fact, again, I think a lot of this, Michelle, whether we prewarned or not -- and we don't give guidance -- so, therefore, there was no reason to prewarn. I think that information was out there probably two months ago to the entire analyst community.

The information that you had price commitments that you didn't have --

The information that everyone suffered severe margin depression in their fourth quarters or third quarter. The quarters ended December, and they talked about in January on calls.

Okay. I guess that, as the thing from some of our peers, Worthington generally did a better job of matching, where other people had not always matched. I think that that's where I'm a little confused and wondering if you chose not to have your commitments to customers covered by commitments from sellers? Or was the availability of commitments from sellers just not there?

Well, two parts of that. First of all, it's clear the latter. The availability at the time customers were saying, hey, your competitor's committed to a price; you guys need to commit to a price. And our guys on -- again, out there it's a different view that they have battling every day, trying to bring business into this Company, were bringing that messages back to decision makers within steel, who went ahead and took the risk. We did not know they were doing so, nearly to the extent that it was going on until late in the second quarter. And I'd say it was actually even early December that it became very obvious we had a pricing issue in steel and we began to dig into it, and it has been corrected very quickly.

And again, it's not as easy to say, you know, you guys in the steel company, you can gamble a little bit, but you must come to John Christie and I and get approval first. That's the way we used to operate. This model today, where pricing decisions really are much more real time than ever before [inaudible] 2004, that doesn't work so well. We had to kind of readjust to pricing policies and different levels of approval on how we would accept risk in the market place, and we have done so.

Was there an implicit expectation that steel prices -- you made illusions in your opening comments about you made tactical decisions in the summer about the direction of steel prices. What I thought I heard you saying was that you expected steel prices to drop, so you'd be covered anyway?

I am saying that people making tactical daily decisions I think were influenced by reams of information that was being written by a lot of people in the industry saying import pressure is going to come and lower prices on a continuing basis. And that same song was sung to me by many people writing about the industry again in September -- even after prices started up -- saying, listen, prices aren't going to hold out.

Not me, by the way, just for the record.

I didn't say you. I didn't say any names.

Okay.

I'm just saying -- so I think guys out there who are battling, our people out there battling, felt some comfort in taking of that, based on what they thought was a credible best guess going forward, because they didn't think they had an alternative. We couldn't get steel prices promised in advance of when our customers seemed to require. Coming out of that price peak in -- price spike in '05, I think there're a lot of people who believe the industry wouldn't have a pricing discipline, even though they had consolidated the melt side of this industry significantly. I think we have said from a strategic point of view fairly consistently, and I think on these calls, that our view was that they would, and that we would have stable pricing going forward, --

Right, that's what I thought I heard.

-- that we would not see import pressure, mainly because the economies in Asia and Europe, we believed, were growing and solid, and there was no reason for people to import here. And I believe those dynamics have proven true. Clearly, we had a disconnect in our forward view between daily decisions being made in this Company and what we thought was going on in the market place here strategically. Again, that has been corrected.

Would you do me a favor and tell your salesman that the most junior salesman at Worthington typically knows multiples of what the most senior analyst on Wall Street knows on what's happening in the steel market, and they should be listening to you instead of us?

We have had our conversations. We are all clear here on what we're doing. So at this point, I don't know how else I can expand --

No, that expla -- the Company didn't intentionally -- and I thought I heard you say -- and this is very different -- the Company didn't intentionally made a bet, though, on steel prices?

No, ma'am, we did not

Okay, that's good. So there's no fundamental change. It sounds like some individual decisions were made and things got a little bit out of control, which we did see with your peers. It's just, typically, when we've seen other types of events with your peers in other historical surprising cycles, we've generally seen the amplitude of the curve dramatically smaller and sometimes no surprise at Worthington, so that's why I was asking if that was a change.

It will not change.

Sounds like it's fixed

It is.

Terrific. And then, just quickly, you made a terrific call on steel prices. You called for stability when you did your conference call in December. So what's your view currently?

It remains the same. I believe that -- as I said in my comments, that prices will be stable, and I believe if there's any pressure out there, it is upward pressure on pricing. So that has been our view and that remains our view. I think prices will continue to cycle. I've never said stability equals a number, but it will cycle in smaller increments and over broader periods of time. I think that's good for producers, I think that's good for us as processors and distributors, and I think it's awful good for our customers. Everybody's got to readjust to a different way this industry's working today versus where it was 18 months ago, because it is different. We're not in Kansas anymore and people have long emergency memories.

I will tell you a brief story for -- well, I'll make it very brief. A retired executive who used to run this steel Company several back -- this goes back four or five years -- I'm sorry, it goes back to the beginning of '04. He had not been running the Company for several years. But I said you've got to feel good about where this is, and he said, well, as long as it lasts. I said, well, it ought to last forever. He said no, it never will. So, people who've been in this industry a long time have long memories. And, unfortunately, [inaudible] don't recognize what's going on at the moment. I believe there is a fundamental change. We have believed that it would occur. I think it has occurred. I think it's withstood it's first test of being tested out there. This is a seller's market, period.

Well, if anybody saw it coming, you guys did, so I would imagine that the positioning has been changed and I appreciate that. I appreciate all the explanation, too. Thanks a lot. I'll let somebody else have a turn.

Thank you. Our next question comes from Mr. Michael Willemse with CIBC World Markets. Your line is open.

Good afternoon guys. Could you go over your six or 12-month contract pricing situation, and did a change in pricing, perhaps after December, cause any description in the quarter?

When you ask us to review our 6 to 12 month pricing contracts, you're talking about with --

The percentage of your steel processing -- what percent is the tons is on contract?

With our customers or with both sides?

Both sides and perhaps, how much is just with the customer?

I'm going to ask George Stoe. You'll have not -- this is the first time George has been on a call. He's, as you recall, our Executive Vice President and Chief Operating Officer. George has really been working hard to get his feet on the ground. These are some of the issues he's ran -- he ran down as we've started to develop these pricing problems. So, George, why don't you speak to where we are going forward with our commitments?

Michael, I guess the best way to describe this for you in brief detail is to say that we really got this broken down into several segments. We've got monthly agreements and we have quarterly agreements. We've got agreements that were six months in length, and also yearly agreements. Those agreements were -- throughout the first quarter were, probably, about 40 to 50% of our total business. We have now changed that. We only have a very, very small percentage of our business that is anything other than spot. I think that John addressed -- John Christie addressed when he talked about this, one of the challenges that we had going into this period of time were the deliveries that we were faced with. We had some commitments from millions where we were planning to use that material to meet some of these commitments, and those deliveries were light and we had to buy metal on the spot market to make that -- that up along the way. So, going forward, beyond the end of the first quarter, we have very, very little volume at all that is not matched up with a corresponding coverage with a mill.

Okay. And some of the price competition among service centers, is there any idea that, perhaps, some service centers might have contracted more imported tons and got a little bit of a discount there?

I don't believe so. We have operations in many parts of the world. We're very familiar with what foreign producers are doing, as a result. We're always actively looking for what the import market could bring to us. And, you know, really when it comes down to it, particularly at our end of the business, availability is one of the biggest issues, as well as they are operating in fairly robust markets of their own. But as you probably recall, we continue to have import restrictions on most hot roll products from most areas of the world. There are only a few that are capable of shipping hot roll here. We have a small amount that comes to us occasionally, but again, there is not that much available, so I don't think that that's the case.

Okay.

And besides, and again, looking -- if you looked at their fourth quarter -- their quarter ended December results, their operating margins and pieces encompassed at pieces of steel processing for companies that were wholly steel processing, their margins were reported to be certainly no better than ours or perhaps a hair worse, as we extrapolate out the data ourselves. I don't think anybody had any particular advantage of us. I think we all were going down that road together, looking to keep orders coming in the front door, and feeling somewhat secure in the forward-pricing improvements for the people making those choices at the time. And they just turned out to be wrong.

Okay. And for the metal framing, you ann -- you said that you announced a 12% price increase on March 5th and a 10% price increase April 17th. Is that right?

Yes.

What kind of a price increase did you put in the steel processing, or is it kind of varied between products?

The mix would vary, depending on product. That would be the answer.

Okay. And what was your toll processing percentage in the quarter?

Toll processing for the -- was about 47%.

Okay. And is there any -- I guess any ideas of sublicensing your UltraSTEEL to other companies, or are you just going to stick with Clark Western for now and see how it goes?

We are definitely just staying where we are, and we believe that will give us enough availability of product, as both of us get up to speed here. Our agreement is to bring them into markets behind us, as we move forward, so the availability in each market will be there as quickly as possible. But that, I believe, is all we need to do.

When do you think Clark Western will be rolling out the product?

We would -- I cannot give you an answer of the timing. Somewhere in the neighborhood of two to three, maybe three and a half months would be my best guess on that.

Okay. Thanks a lot, guys.

I'm sorry, we're working with them now, rolling out the equipment requirement that they will need to make that product.

So we're in the planning stages of helping them plan the deployment, so that's the best answer we can give you on that.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from [Sal Teranie] with Goldman Sachs. Your line is open.

Good afternoon, guys. Can you just give us some idea of your pricing power and your market share in the steel framing business? You made a comment that the October price increase you announced wasn't successful because competitors didn't go along, but then the competitors raised the pricing margin, you followed them. I was just wondering, I thought you guys are the largest supplier in this field?

We are, and while we are, our share of that market probably isn't enough to just say here's what we're going to do and whether everybody else follows or not doesn't matter. When there's enough capacity out there, there -- since that is still a fairly fragmented market and there's enough people out there, if they don't follow, our customers can get this product elsewhere. We went through this -- again, I congratulate the Dietrich team. They saw what was going on. They made their own calculations of how much lower-priced inventory might be in the pipeline, told us when they thought this would change. In other words, we -- we didn't just walk away. We protected market share. It eroded very, very slightly. So most of the impact was felt on margins, until they said uncle. And they did, in March.

Now, also, we have commented in the past that this is a regional market, and in some regions we would have more pricing power than other regions. We have different competitors in different regions and competitors of different size, so it's always been a regionally-driven market.

Okay. Can you also comment on new gros -- new joint venture with I will believe [Lennar], offering similar product? Is -- are they a big player in this industry?

Well, they are a relatively new player in the industry. And certainly when I talk to people in Nucor, I make sure they understand we welcome them in, because the more people there are in this business pushing residential construction, the better it is for all of us because it's got a lot of room left to grow. I think that's helping for, again, our forward view. We've worked with in Lennar the past and hope to again at some point in the future. But we congratulate them on making this decision to move forward and actually invest some money, as I understand it, in a commitment to steel studs as a form of construction. So I think it's nothing but good. And we think that's another sign of people in that industry starting to look for alternative products that make a great deal of sense.

What is the -- your joint venture.How far is your joint venture -- your joint venture with [Noris] Chemical on that panels -- coated panels you were going to offer?

We've talked about that before in the sense that we were through a large part of the development phase, and that's really about what we really remain today.

Okay, thank you.

Thank you. Our next question comes from Clint Coghill with CCM. Your line is open.

Hello, fellows. A couple of quick questions for you. With the UltraSTEEL, do you anticipate -- you had mentioned that you anticipate that margins would pop back up to sort of more in line with where they had been, I believe. And I was trying to get a feel for is that over the past couple of quarters, or is that over a longer term perspective, like where margins were in 2003, 2004?

Well, I think -- first of all, we didn't say margins would pop up due to UltraSTEEL. We said they would pop up because of price increases that has taken place and the run's been made and stiff armed, and we're moving on and the market's moving on. UltraSTEEL -- so I think margins will return to a previous 12-month level would be my best shot at that. [PAPER SHUFFLING] -- through some papers. UltraSTEEL, we think will help us increase our market penetration and will increase our linear foot production, which you'll start hearing us talk more about that than tons in metal framing, going forward. We think that will be additive at another point down the road as we get more fully deployed.

And with regard to the -- there was a little bit of talk with some of the service centers and I'm just trying to get a feel for -- you guys seem like you're sort of in the middle of the margin continuum in the industry, where companies like [Reirson] and [Telino] that they probably would cater to some different end, and markets would have margins that are substantially below that, which you achieve. However, there's some companies that achieve margins that are higher, so I'm just trying to get a feel for do you believe there's room for long-term margin improvement in the future or do you believe that it's -- there's more of a risk of some of the companies that have lower margins to try to enter the space a little more aggressively using price?

Well, I can't really speak to what other companies are going to be able to do with margins. I do think that the -- a more stable pricing environment in which I believe we are in -- one that moves up and down, but more slowly -- is beneficial to anybody in the industry overall. Certainly, when you look at Reirson, you look at someone who has a substantially different end market than we do. I think everything that's been going on, while everybody has to adjust their thinking on how to compete in it on a daily basis, is healthy for the industry.

Clint, I think the other thing that probably is important to say about that is that as John has -- John and John have talked about in the past, we're moving the Company more away from a dependence on the steel processing side and transforming the Company into more dependence on building construction. I think that's going to give us benefits in the future.

And, one other piece of that -- and George, I thought you were going to go right into it is that within the steel processing company, you would see a fair migration to building products within and in itself, both in supplying ourselves downstream, as in our model that we set up years ago and delivering on today prescribes, and a conscious effort to migrate in those directions.

Great. Thanks, guys.

Thank you. Our next question comes from Dan [Waylan] with Bear Stearns. Your line is open.

Hi, everyone. Just a quick question regarding your automotive exposure. Can you remind us what the mix is between the big three and the transplants, and if you expect that to change at all during the coming quarters?

We're probably asked that every quarter. We are predominantly a -- what I would call a traditional domestic supply-base company. We have a number of exciting but small opportunities that we continue to develop with the transplants and we will continue to work with them to develop those opportunities further. And they continue to tell us that they like us and down the road, as new programs start, we will continue to get different opportunities. It is a long road, as you know, to enter that business without having a partner that is already involved, but -- you know, our business is almost exclusively, if you look at it on a percentage basis, with traditional domestics.

Is that an opportunity -- you mentioned to have a partner get involved, is that something you could do another joint venture or be more aggressive in terms of maybe acquiring a company that has existing relationships?

Well, I think those are clearly options that we consider all the time, as we going forward and how to get into this market, or have a better presence in this market, a larger presence..

Okay, but not really at the top of the list of priorities?

No, I wouldn't say that. I just said there were a number of options. [LAUGHTER] If you are in the steel, you want -- you know, you can't ignore the automotive markets, and -- nor do you want to not be participating with all the people who make cars. So that's where we want to go. They obviously have done a nice job and we would like to participate in their growth, as well as the support of our traditional customer base here. George was just over in Japan recently, exploring some of those opportunities. So I would never say that it is not a priority. Growing this Company is a priority and that is certainly one of the components that we look at all the time.

The big three, or the domestic, is just about a little bit over 10% of our consolidated sales, so it's not a huge amount, and that have probably split somewhat equally between all three of the defined old domestics.

Okay, great. Thanks.

Thank you. Our next question comes from Ms. Michelle Applebaum with Michelle Applebaum research. Your line is open.

Hi, again. You said that you're migrating away from steel processing distribution into more of a construction products. Did I hear you say that correctly?

George was referring to where we have been -- from where we came to where we are today. That is not running away from any business that the steel company has. We continue to grow with the assets we have. We have said several times over the past several years our goal is to grow away from it down other product lines, and not just to building products. Our objectives are to be someone who takes steel and adds value to it down as many different avenues as we can towards end markets, and not in any particular end market do we wish to focus and concentrate.

Okay, so I did hear something slightly different than what I'd been hearing.

I think he was just stating where we are today and that building products clearly is the segment that has -- as well as cylinders, which has continued to grow very nicely, and much of that under George's leadership -- building products has grown very rapidly for us, so it has a dominant share. That shouldn't be translated when he talks about what our position is today where it wa -- compared to maybe six years ago, as we are focused only on building products.

Okay, it -- right now, there's just such an active market for distribution assets, along with almost everything else in your space. Might there be an opportunity for you to divest that business and redeploy those funds more opportunistically in the Dietrich businesses?

You know, no one is calling us and we are not actively looking to dispose of those assets in any way.

Okay, great. Thank you.

Thank you. Our next question comes from Sal Teranie with Goldman Sachs. Your line is open.

Thank you. Guys, one more thing. When you were in Chicago at Dietrich facility, I remember we talked about that joint venture you have in China, and I believe it was March, April time frame, and you thought the first building would be ready for testing. Any news on that?

I'm sorry.

We're on schedule.

The building?

Yes.

We are relatively on schedule. I believe we're going up in our third story at this point.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Mr. Michael Willemse with CIBC World Markets. Your line is open.

Could you just give us an update of the implementation of the ARP system?

We have completed all of the implementations around the corporate side that we wanted to get done in finance and HR. We are moving on the steel company and well into that project. That, of course, is the largest piece of this project. We are looking to open up the first facility implementation of Oracle sometime in the June time frame. That decision will not be made finally until Ap -- yes, the end of April, whether that's a green light or we pause momentarily before we start that rollout. We are approaching it, as I think you have to in these situations, that we are prepared to go with everything not 100% buttoned-up, because it's impossible to do. We selected global because it's a relatively small and very -- and a simple operation in terms of the equipment it has and the processes we have. So it's a good place to do the first implementation, iron out the bugs and move forward. That's where we are right now, so at the end of April, we'll make a go/no go decision on whether we start in June or we push it back a month. But they're working very had and we are aggressively trying to stay with a schedule in full.

How satisfied have you been with the implementation process so far?

We are very happy with the progress. It is a difficult implementation in change in the work environment if you have ever been through one or talked to people who've been through one, but our people have been just absolutely bulldogs in working through issues, and that's what you have to be committed to. You can't expect it to be perfect when it comes out of the box. You have to just keep grinding and we have. And after about two to three months of any particular area, you start to get to good daylight and start to see the benefits, and the problems start to diminish tremendously. So, now that we're on the back side of that -- by a year or more in some places -- we feel very good about what we've done and look forward to getting the complete implementations in steel, which will take up to two years from the beginning, just so we can get better and more real time information across the entire Company.

What have been the costs to date and what are the expected costs of this first phase?

We are --

Well, I was going to say I'm going to ask John or somebody to come up with number. It is -- but I was going to point the -- before we get it, it is a cost of doing business, but it's just a cost to our business that we carry today, and one that will -- obviously, the implementation time that goes away and all the people we have been working go away -- all the implementation as far as outside consultants and help goes. And, hopefully, it is in our plan to, through efficiency, reduce costs going forward. So, there'll be quite a transitional swing over the next two years. But right now it's clearly a burden, and I don't know what we have spent. We said at the start that it would be about a $60 million project. We're probably about 70 to 75% through. Of the $18 million we spent on capital expenditures this quarter, approximately $5 million was on the ERP system. Okay.

And a much better [inaudible] is this is an investment in our future, which we do have to carry until we get to the other side and get a return.

Okay, great. Thank you.

Thank you. Our next question comes from Leo Larkin with Standard & Poor's. Your line is open.

Hi, good afternoon. Could you give us any guidance for CapEx for '07? And my other question is you have some debt coming due. Is that going to be repaid or refinanced?

That -- the debt coming due will be May 15th of 2006, about $143 million. Our position now is about $113 million. We assume that we are going to pay most of that off in cash. We do have $435 million on the revolver that we have no usage on, so we will plan to pay that off.

Okay.

The debt we'll be paying off is at 7.125%, and we issued $100 million, as you know, in a private placement that we have a rate of about 5.26% on, and then our revolver will be -- borrowing cost at this time would be under 7.125% that we have on the existing debt.

Okay. And CapEx for '07?

CapEx will be about the same, $60 to $70 million. It'll be in line with our depreciation.

Okay, thank you.

Thank you. Our last question comes from Mr. John Tumazos with Prudential. Your line is open.

Hey, John. Just to kind of summarize your outlook statement and the initial questions clarifying it. As investors we should look at the margins in the February quarter almost as a nonrecurring item --

Yes.

-- and that you had some input-output pricing that was out of whack and that's been remedied and we should have a relatively normal, seasonally improved fourth quarter and we shouldn't be looking at $0.25 as the basis from which the trend is being established?

[inaudible] in the words seasonally adjusted period going forward, which is our strongest period, yes, you absolutely shouldn't be looking at $0.25 as the basis, but on a --

We should?

Pardon me?

You're saying we should or should not?

Well, you should not, because this quarter never compares --

This quarter should have been say $0.35 or something, $0.40, and then you'd seasonally improved to $0.45 or $0.50?

Well, without speaking to what the quarter would have been, it is over now and we did as we did. No, you should not view the dynamics of the third quarter as anything impacting the fourth.

Thank you, and we look forward to all your prosperity.

Thank you sir.

Thank you. I'm showing no further questions, gentlemen.

Thank you again for joining us on this call. As I said, I had looked forward to the opportunity to speak to this quarter, because there were a lot of different moving parts and many of which were -- particularly the two largest were for different reasons. And I wanted to make sure you all understood where we were, that these issues are behind us in metal framing and in steel, we have a very good handle on where we are today. We look forward to having a good fourth quarter. We appreciate your time and your insightful questions today. Thank you.

Thank you. That concludes today's conference call. You may disconnect at this time.