Worthington Enterprises Inc (WOR) 2006 Q4 法說會逐字稿

Good afternoon and welcome to the Worthington Industries' fourth quarter and year end earnings results conference call. (OPERATOR INSTRUCTIONS). I would like to introduce your first speaker today, Ms. Allison Sanders, Director of Investor Relations. Thank you, 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 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, Chief Executive Officer; John Christie, President and Chief Financial Officer; George Stoe, Executive Vice President and Chief Operating Officer; and Richard Welch, Controller. John McConnell will open today's call.

And I am happy to tell you in advance you will hear from George Stoe today. The last time he sat in with us, and the longer he has been in the role of Chief Operating Officer, the more we wanted to expose him to you. And so I will probably back down a little bit on things I have to say, and the volume of what we want to say doesn't change too much, so George will just take part of that.

I'm very pleased with our performance this quarter. I think we did a good job across the board, particularly when you go back to the third quarter and we told you of two really significant problems we had during that quarter when we were disappointed in our results. One was a self-inflicted wound in our steel company, really over forward pricing and some bad judgments made during the closing part of the first and second quarters that really materialized in the third quarter. We told you that we had fix that problem once it was discovered, and I am very pleased with their execution in getting it fixed.

Just as decisions that were made earlier on showed up in the third quarter, actions taken in the third quarter to fix that problem -- the fix is not immediate, but I think the results and improvement in the earnings of the steel company are very clear in our earnings. It has been a positive trend forward throughout the quarter, with May being the strongest month in there. And I think we have clear forward momentum as they have extracted themselves from the hole that we dug. So I'm very pleased with what is going on there, and very proud of the fairly new leadership team we have. And I think that going through that probably helped them mature and galvanize as a group as a result of having to go through that.

The other problem was in Dietrich, where we mentioned the significant battle over marketshare, as we think largely in advance of our rollout of UltraSTEEL, people fighting for share, and margin compression that resulted. We also said at the time that we believed that was over, and that it was as well as it was going to get, and that competitors were no longer going to fight for share, and if steel prices were rising, have to go out for increases themselves, and that also occurred.

So in both of those cases we saw significant improvement in the fourth quarter over the third, and good forward momentum as we go forward in both of those businesses to continue to improve the their earnings.

Cylinders obviously did a great job, WAVE performed very well. And again, across the board, this quarter I can only say I'm very pleased with the operations of the Company.

Who is up next? John? So next we will go to John, and give you a financial slant on the performance. And then you will hear from George on an operating basis.

Good afternoon, everybody. We reported earnings per share of $0.67 for our fourth quarter. It was the second-best fourth quarter in Worthington's history, compared to $0.46 last year. The current quarter's results include a $0.14 per share benefit from the gain on the sale of our Acerex steel processing joint venture in Mexico to our partner, Ternium. Even without the gain on the sale, results were up 15% over the prior year.

Record fourth quarter sales of 822 million slightly surpassed last year's record sales of 817 million, and were up 21% from our third quarter. Compared to our third quarter, volumes, pricing and most importantly, spreads between selling prices and material costs were up in all three business segments.

Our gross profit margin rose to 13.9 compared to 12.9 in the year-ago quarter and 11.6 last quarter. The improvement in gross margin is meaningful, particularly given the continued pressure on margins from higher manufacturing expenses such as zinc, energy and freight.

SG&A expense increased in absolute dollars and relative to sales, rising to 7.2% from 6.2% in the year-ago quarter. The $8 million year-over-year increase is primarily a result of higher profit-sharing, which fluctuate with earnings, and benefits expense.

Quarterly operating income was 55 million, or 6.7% of sales, very much in line with last year's quarterly results. Both miscellaneous and interest expense continue at levels similar to last year. Interest expense is expected to decline $2 million per quarter going forward as a result of our recent long-term debt repayments. Equity income was significant. It increased almost 50% from what were strong results last year to $21 million, due to record performances at WAVE and TWB, two of our five unconsolidated joint ventures.

Our joint ventures don't always get the attention we feel they should, and joint venture accounting rules tend to mask some of their performance. So let me point out that quarterly equity income has now tripled from what was typical five years ago. We just sold one of these ventures, Acerex, for a $27 million pretax gain on an initial investment of $6 million.

Our average annual pretax return on committed capital in the ventures over the last five years exceeds 40%, and for the quarter it exceeded 60%, and that was excluding the Acerex gain. Currently at more than 55 million annually, equity income is one of our most consistent and significant sources of income.

Quarterly income taxes were impacted by the tax on the Acerex gain, which was at a 53% rate, partially offset by the reversal of the reserves established for the investment tax credit in the state of Ohio, which reserve became unnecessary with the recent ruling by the US Supreme Court.

Now looking at the balance sheet, net total debt of 194 million was down 137 from last year. During the quarter we paid off $142 million of long-term debt using cash balances. At the end of the year our debt-to-capitalization ratio was 21.1% compared to 32.1% at the end of fiscal 2005.

Capital spending was $17 million for the quarter compared to 15 million in depreciation. For the year CapEx totaled 60 million and depreciation was 57. For next year we expect that CapEx, excluding any acquisitions, will be somewhat higher than depreciation, probably in the 65 to $75 million range.

Now looking at the performance of each of our business segments, Steel Processing represented 50% of total revenues for the quarter and the year. Quarterly sales were 418 million, were down 5% from the 438 million as a result of lower selling prices relative to the prior-year period as volumes were up 7%. The largest customer group served by this segment is the automotive group. Despite flat production by the traditional Big Three, our automotive business volumes were up. We believe that the major automotive manufacturers are reducing the number of suppliers that they use, and that will benefit us from this consolidation.

Quarterly, operating income was 18 million, or 4.3% of sales, and was down from the strong 2005, when Steel Processing earned 25 million, or 5.8 of sales. The thinner spread and elevated zinc costs explain the difference in the year-over-year results. For the year Steel Processing sales fell to 14%, or 233 million, to 1.5 billion from 1.7 billion last year. The decrease was due to lower pricing, which moves with raw material prices for steel, and a product mix change to increase tolling. Operating income was 62 million. It was half that of fiscal 2005, which was the best year ever for Steel Processing.

The Metal Framing segment represented 27% of revenues for the quarter and the year. Fourth quarter sales were 219 million, were down slightly from last year's 222 million. Tier 2 sales were down because of lower year-over-year pricing, which fluctuates with steel prices, offset by volumes which were up 3%.

Sequentially, volumes were up 14%, and commercial construction, especially office building activity, appears to be good and improving. We have instituted monthly price increases effective in April as a result of increasing galvanized steel raw material costs, tight supplies and increased demand. The full benefit from these prices often lag announcements due to previously quoted jobs that are filled at the old pricing quotes. These improved conditions lead to very strong operating results in May, which were more than double any other month in the year.

For the quarter operating income was 17 million. It was down from 19 million in May 2005 quarter. However, the current quarter includes a $3 million charge related to the closure of a facility in La Porte, Indiana. Going forward, we expect to save $1 million annually as a result of this closure. Excluding the charge for the closure, which was recorded in the cost of goods sold, the operating margin was 8.9%, up significantly from the 3.2% last quarter and up from 8.4% in the year-ago quarter.

For the full year sales were down 6% to 796 million from a record 844 million last year. The sales decline was solely a result of lower steel prices as annual volumes were up 7%. Full-year operating income was 47 million compared to 114 million with an operating margin of 5.9.

Finally in our Pressure Cylinders segment, which represents 17% of total Company revenues, sales for the quarter were up 7%, or $10 million, from last year to 138 million. Operating income increased 82% from 11 million to 20 million as a result of excellent performance in Europe, and the realization of a number of consolidation savings from our Western Cylinders acquisition. The operating margin as a percentage of sales rose to 15% from 9%, as much of our product line growth is in higher-margin products.

For the full year Pressure Cylinders sales increased 13%, or 54 million, from 408 million to 462 million. Operating income grew 47% to 49 million from 34 million, due primarily to very strong results from our European operations, where we have invested in new products, exited others, and optimized operations. Sales and operating income in Pressure Cylinders set records for both the quarter and the year.

And on the positive note, I'm going to turn over to George Stoe, our COO.

John and John have asked me to talk a little bit about our strategy and the things that we're doing in trying to improve the businesses going forward. Our strategy here at Worthington is really quite simple. We want to drive long-term growth, while leveraging our core compensation in Steel Processing with higher value-added downstream businesses that consume its products, are leaders in their markets, and have strong growth opportunities. We are accomplishing this by optimizing existing operations, developing and commercializing new products and applications, pursuing strategic acquisitions or joint ventures.

How are we optimizing operations? Each of our business segments has established specific and aggressive cost reduction programs. The cost savings targets are categorized and monitored on a monthly basis. Here are just a few of the examples of the things that we are currently doing.

We are continuing the rationalization of our manufacturing facilities within Dietrich. John mentioned earlier that we closed the La Porte, Indiana facility this quarter. We continue to carefully evaluate our existing facilities to determine our changing needs to best optimize production and better serve the marketplace. We are adding 20% capacity at our Spartan galvanizing facility, which will concurrently lower our incremental costs due to better furnace utilization. This added capacity will only require adding four additional people. Our recent best practices efforts have focused on sledding and blanking operations within this Steel group. Sledding efficiency has improved to 20% as a result of these efforts.

On the Cylinder side our efforts in the Cylinders business have resulted in annual savings for 2006 of $2.2 million. Those projects identified and completed during 2006 will ultimately result in annual savings of $4.7 million, and range from automation efforts to gauge reduction projects, and a myriad of other significant projects. We also completed the consolidation of our newest one pound cylinder manufacturing facilities from two into one during 2006. These savings are not included in the $4.7 million of identifiable savings.

The second part of this strategy is developing and commercializing new products and applications. An important part of the continued growth and expansion of our businesses is new product development and process differentiation. We're working on a number of new products in each business segment.

On the Steel Processing side, [Primacoat], a new acrylic chrome-free and corrosion-resistant coating product that has some unique advantages over existing products. This project is used as either a prepainted primer or a final top coat. This product streamlines the manufacturing process for our customers, and has the potential to be used in a variety of end use applications, like roofing, flooring and joists, racking and shelving, HVAC, agricultural buildings, and in the automotive sector for wheel rims.

On the Dietrich side, we have discussed in previous calls our newest product within Dietrich, UltraSTEEL. The rollout has now been completed in all of our East Coast operations -- there're eight of those -- out of 27 total locations. These eight locations cover 60% of the total production within the Dietrich operation. The last phase of the conversion will be completed by April of 2007, and includes our Far West facility.

During fiscal Q4 16% of the linear feet sold were UltraSTEEL. The rollout is going as expected, and the product has been well received. As we announced earlier, we sublicensed this patented products to our largest competitor, who is also converting their production capability on a geographic basis, and would help to make UltraSTEEL the market standard.

In our Cylinders business we're seeking to expand our new air tank product line beyond existing European operation, and also expanding our successful Balloon Time helium product internationally. Our facilities in Austria and Canada are now both producing scuba tanks, a relatively new product for us here in North American.

In some of our other businesses, Steelpac is using feedback from field trials for a major retailer to improve its steel pallet offering. They will also be taking advantage of the new US and international wood packaging regulations that go into effect this July. These regulations call for all wood pallets entering the US to be heat treated or fumigated. We have already seen the benefit of this regulation as a number of domestic customers are carefully evaluating steel pallets.

And the Metal Framing building that we're erecting in China is 90% complete. We have been working closely with the Ministry of Construction on this project, as they look for alternative building materials. Initial reactions are very positive and encouraging.

The last part of our strategy is pursuing strategic acquisitions and joint ventures. John mentioned earlier that this quarter we monetized our joint venture in Acerex for a significant gain. In addition, all of our businesses are reviewing, as they regularly do, a variety of strategic acquisition possibilities.

Thank you, John. I will turn it back to you.

Thank you. Well done, both of you. I appreciate the additional insight you have provided. At this point we will be happy to take any questions that you have.

(OPERATOR INSTRUCTIONS). David Taylor with David P. Taylor and Company.

Very decent quarter, guys. My first question -- I have two -- I would really like to address to J.P. Worthington has long had a history of being very employee friendly. When you have closed La Porte, what are you doing for your employees?

That is a question that I can't sit here and answer. In the past, we have typically given severance and set up, I believe, around the number of years of service, though it may have had -- it usually also has a minimum on it of three to four months. And typically it probably averages 6 or more for employees at closures. But it would vary because it is based on the number of years of service basis. So on La Porte, I can't tell you exactly how that came out. We certainly try to do everything we can to provide some assistance in how do you get to the market and look for -- and call other employers in the area to help direct our employees on where to go. And we also provide a fair amount of up-front notice, so that they can get prepared.

Have any significant number of them been transferred to other Worthington operations?

We have often -- and in fact, I think we have always, where we have openings, let them know. Most people don't like to relocate. We have had that happen a number of different times, but it's a very small number.

My second question has to do with the statement in the press release that the 14.1 ounce cylinders had a substantial decline of, I think, 1.1 million units was the figure that was cited. This is the old, traditional refrigerant product, I assume?

No, David, it's not. This is the new business that we brought in Wisconsin. The 14 ounce cylinders are the hand torches. We have an exclusive contract arrangement with BERNZ-O-MATIC. And we have a new contract with them that started in January of this year. They did some prebuying at the end of last year to take advantage of some reduced price materials that were available to them, and they did not buy as much in the first half of this year.

But they are contractually obligated with us to take a minimum amount of cylinders this year, and we certainly expect, and they have told us that they will live up to that obligation. So we should see those volumes come up in the second half.

Chris Olin with Cleveland Research.

Can you talk a little bit about the zinc cost? Are you having any success in terms of putting a zinc surcharge through? And anything on that in terms of maybe some kind of fuel surcharge? I guess I'm wondering what the contracts are structured like and how you expect margins to change going forward.

Certainly in zinc we have not approached it at a surcharge basis, but have continually increased our price in the marketplace to keep up with it. Fuel -- George, are we doing anything in particular at the moment?

Really just trying to make sure that we keep adjusting our freight rates to take into account the higher cost of fuel. But neither are operating under a surcharge basis.

So even though some of the mills have implemented surcharges, you guys have not decided to do that -- of yet? Is there a chance you will try to do something like that?

We have never really taken that approach in the marketplace. We typically go off our pricing. And we have costs, and we have price. So we have not typically followed the line that the mills have used several times in the past, nor this time.

And then my last question. Have you given thoughts in terms of M&A in the processing side? We have seen a lot of work from the steel mills. I'm just wondering if you have any thoughts on how consolidation will affect you or your part of the industry.

We look at it all the time. We have been pretty clear on this call that we think it's a very positive thing. We figure it will continue to have a stabilizing effect on steel pricing going forward. I think we have seen a significant consolidation that has taken place in the past couple of years, that that is the case. But we'll see what happens.

Overall, we think it's very positive. Obviously, we are continuing to look at where our relationships are, and what mills are the ones left standing. So far we have been fortunate in betting the right way on who is going to play the game for the long term. So we pay a lot of attention to it. And I think it's good for the industry, and therefore it is good for the distribution side of the industry as well.

On the processing side we have indicated that the expansion in the area would be typically on a geographical basis or a follow-the-customer basis. So in the growth of the processing side, naturally we have got the opportunity to look at smaller things for sale. I think people are coming off the unrealistic multiples on the great 2004, 2005 years that they had. But we are looking more at geographical expansion into areas where we can baseload with existing customer base and also follow the sister companies for processes like blanking and slitting.

Mark Parr with KeyBanc Capital Markets.

Good quarter. One of the things I was curious, and I would like to see if there something you can say -- the quarterly returns out of the Metal Framing business have really shown a tremendous amount of volatility. And I just wonder if there is an opportunity here with some of the things that you have done and you're doing that we can see perhaps some more stable margin picture emerge over the next 6 to 12 months?

I think you will. I think there are a number of things you have got to keep in mind with Metal Framing. One was our experience of -- I think, the strong competitive reaction to our new product introduction, the fact that we are in the middle of that product introduction. It carries a significant cost. It's a massive effort to change each one of these markets over. That's why we do it one at a time and we do them concurrent with each other, so that we can do it as orderly as possible. And we're also carrying a load of new expansion into Canada that takes a while to get grounded. And we're confident in the move there, and that it will be successful in the long term. But at the moment it's not producing anything.

So we have those things going on underneath what you see that have impact on those margins. John, do you have something you want to --?

That's right; you have got to remember that you are also looking back. If you try to get some sort of trend, we integrated Unimast over an 18-month period, which caused some fluctuation. And then the items John just mentioned. If you would back out the startup costs we're having in Canada to enter that new market and the charge-off of LaPorte this quarter, we would have been just to almost a 10% margin in that business, if you back those two back in.

In extrapolating or trying to get some sense of future performance out of your comments related to the fourth quarter for Metal Framing, I think you had indicated that the profitability in May was roughly double what it had been for any other month in the year.

That is correct.

And I guess that lends me to a question. A., is this sustainable, or B., is there a potential fallout in terms of reduction in shipping volumes for the August quarter? Or how do you see that profit picture emerging over the next several months?

Well, as far as this quarter, as I said, May was by far our best. We instituted price increases in April. Some of the work that was being ordered -- being filled in April, and really the last part of March, where projects that were bid for construction in the first quarter, or in the earlier part of the year, that had old pricing to it. Those are out of the system, so we are shipping now to the projects that are coming onstream.

And you have got to remember, the projects that come out of the ground, we come into those construction projects in a lag time from what really you see in construction reports. So as the billings go up, we go in later. So we are seeing fairly strong shipments going into this quarter.

We think this upcoming quarter will continue on the course it is on.

That is really helpful. Just lastly, John, you had mentioned -- I think I may have missed this, but you had mentioned something on the tax side. The gain on Acerex was taxed at a 53% rate. Was there a partial offset, a tax benefit that you discussed as well? Could you go over that again, please?

We had -- this goes back -- we had a reserve set up for a lawsuit that was filed on investment tax credit in the state of Ohio. The Supreme Court ruled that in our favor basically, and so that reserve came back out.

Did you quantify how big that was?

It affected us five quarters ago. This has been around for a couple of times and it --.

This was the elimination of tax incentives to businesses, and so we simply had to stop taking them. And now we have got to put them back in.

So did you quantify it at all?

3.1 million.

Thanks. That is a big help. If I could ask one more questions, just about the market? John, could you talk a little bit about what you are seeing regarding steel prices? And I would also be really curious to hear how you have achieved a 7% unit volume growth in the last seven months, given the automotive exposure you have. It seems like a remarkably positive achievement. And I would love to get some more color on that as well.

Forward, what do we see in the steel markets? We are going to say pretty much what we have always been saying, which probably there is not as much as you would like. But we think steel prices, as we see it, staying in a fairly tight band. We don't think there is going to be a lot of volatility on it. I don't think it's going to roaring down. I don't think it's going to go up a whole lot more than it is.

But it will be a fairly stable market. We have talked about it; we have a younger -- a new -- better word -- sales team running our steel company. We are very pleased with the work they are doing. Much of it is really laying the groundwork that will be more beneficial as we go forward than it is right now. But they are doing all the right things that we would like them to do. We are very pleased with their performance. And some of that is just grinding it out and really paying attention to the marketplace, paying attention to account generation. And they are doing a good job across the board at looking for new opportunities out there.

Congratulations on a good quarter.

John Tumazos from Prudential.

Congrats on the good performance. John, I respect your opinion. And I am a little confused at the volatility of total steel offtake in the US market. I keep an apparent consumption for daytime series, and look at that the way some people might look at the service center data, but in different sort of way. And in 2003 it averaged about 318,000 tons a day for the year. In 2004 June, it dropped to 390. And then July 2005 fell to 293. And this February got to 391. And with some May import data it is probably going to be in the 380 or 390 or significant high range.

My best guess is that the real use of steel is 335 or 340,000 tons a day. And I am worried that 15 or 20% of what is coming into the market now might be more than what is really being used. What I'm interested in is your best judgment of what is true use and what is overbuying, and if sheet is different than the market as a whole?

And often when -- what I almost always say to Mark's question about what do we see in the market was that you all have probably as much or better information as we do from all the people you talk to and all the data you look at.

Well, we don't buy 4 million tons a year like you do, John. You are kicking ass.

Well, (multiple speakers) certainly are in the market all the time and have a view. But that was interesting to listen to some of the analysis you are doing.

I don't think that there is a lot of pre buying going on. I don't think there is a big ball of artificial build on going on out there, certainly not like you would have seen in the past in advance of price increases. There probably is some; some people can't help themselves. I think that is a part of what was hurting Metal Framing earlier as well was some distributors out buying more than they needed. And we had to work through some of that earlier this year.

But I don't think is a lot of that going on, John. I don't think there is a lot of artificial demand for presently. And that is just our segment and what we look at, the flat-rolled products. I don't know, John or George, if you have a different thought or view of that. But I would guess it's probably out there some. Whenever price is advancing, there's usually someone doing it. But I do not think it's a significant amount.

A year ago, John, at year end we were about 57, 58 days of total inventory. We are 61, 62 now. Of course, we do an awfully good job of trying to manage ourselves under 65 days. But I agree with John, I don't see a lot of overloading of the inventory right now.

I think steel availability is not -- you can't just pick it up and get it, either. So I think that prevents a little bit of that, if they want to do it. It is still remains fairly tight, and I think the mills will probably continue to do a good job of matching capacity and availability to demand.

On average, how many weeks late are your typical suppliers?

I don't know that they would like me critiquing them.

You are not critiquing anyone. Just on average, 4, 8 or 12?

I would tell you, John, I think that we have some suppliers that have been right on target and have provided us with very good delivery, and we have had some that have been extended. I think that over the last few months they have gotten better than they were probably earlier this year. But generally we are in pretty good shape. I would say that maybe the worst-case scenario today is somebody being four to six weeks late.

That's the worst?

Yes.

That's pretty good, for the steel business.

It's probably a good opportunity to pass some kudos onto the gentleman named Bob Mowery, who we had come in and start leading our purchasing functions across the board, including steel. And he's done really nice job of reaching out to all the mills, and continuing down the philosophical roads to which we have always worked, but really trying to build relationships and make sure we all understand what they need, what we need, what the game is like, and looking to build more alliance type relationships as we go forward with a few mills in particular.

So Bob is doing a very nice job. And delivery is always one of the things he talks about, but not in a table pounding manner but one of, how can we help you get it to us on a quicker, probably more efficient manner. I'm sorry. John has passed me a note that I can't read. So go ahead.

John is making the point that there is less contract business today. In the past there was a fair amount of either three-month or six-month contract business, more being brought on the spot today. I think the mills are in much better shape than they were three to six months ago.

Michael Willemse with CIBC World Markets.

Is it safe to assume, just given the industry environment, that there were no material inventory holding gains in the quarter in either of your divisions?

That's correct.

And in the Pressure Cylinders business, you mentioned the improvement was mainly due to consolidation of facilities, some cost-cutting. So should I assume that that's a reasonable run rate going forward, the operating profit in that division?

Do you want me to handle that, John, since I just left Cylinders?

Yes.

I think that, obviously, the Cylinders business has been in transition. We have grown that business over the last few years from $320 million in sales. This year, as John mentioned, we finished up the year at $462 million in sales. And we accomplished that in a number of ways. If you recall in some of the past calls, we talked about some of the things that we did in Europe by getting out of some of the lower-end product lines on the LPG side in Portugal.

We got into a new product line in the Czech Republic introducing air tanks. Product mix changes have been very good. And the results that we're getting out of Austria today have really been just a wonderful experience for us. It has been the kind of thing that we have worked hard to position them, both in terms of their position with the customers, their product offerings, and the pricing that has now paid great benefits for us.

The Acerex joint venture sale, how much -- was there any equity income from Acerex included in the equity income line?

There was a small amount. I forget exactly what it was. For the year -- but not for the quarter there was no (multiple speakers).

Just for the quarter. There is nothing material for the quarter?

There was nothing at all.

Oh, nothing at all from Acerex in the quarter?

(multiple speakers) 1 million for this quarter.

1 million? Okay. But that strong quarter that was all just related to the strong performance at the TWB and WAV?

Correct.

In the TWB, is there much exposure to the GMT 900 platform?

I don't know.

No.

Well that is fair. And just one more question. There has been a couple announcements of increased galvanizing capacity at some of the steel mills. Do you think there's enough demand in the market to absorb all that galvanizing capacity?

Honestly, I couldn't tell you much capacity is being added. But I think that we feel very comfortable that we can do what we need to do with our increased capacity out of Spartan. And I think you will find there are some transitions going on in galv that's getting more specialized. And certainly down the road we expect to be consuming more on the Metal Framing side to help offset any access capacity.

But I think some of the older lines at some point that may find themselves looking for markets. But right now I think it's probably a pretty stable situation. And I don't think that is going to affect it too much.

Timothy Hayes with Davenport.

I just had two questions. One, what was the percentage of tolling for Steel Processing in the quarter?

It was 47%.

And then the price increases that you announced for Metal Framing, do you have a rough idea of how much of that is sticking in the marketplace? Is it maybe half or three quarters or all of it?

Halfway through May we had about 60% of it. I couldn't tell you right now how much, but we're probably nearing the 100% on the April and probably around 50% on the May.

Andy Chang with Dundee Advisers.

I wonder if you could talk about the business fundamentals for WAVE JV currently? It seems it's maybe experiencing some similar business environment as the Metal Framing. But I was just wondering if you have visibility towards the second half of the year? And also what the numbers were in terms of equity income this quarter versus the previous quarter?

For WAV?

Yes.

Well, fundamentally WAVE is an international business. Dietrich is not -- Dietrich is a domestic business since we have gone into Canada. So we are looking at a global market on WAVE. WAVE has done a very good job. We have been in China for several years. In fact, they are looking at expanding into India, as we sit here. And they also have about 75% of their products sold today are products that they did not have five years ago. They have been very good at going out to the contractor market and giving the contractor product that lets them take labor and put speed into the project.

They also are in a disciplined market. Their competitors, WAV, etc., they are a very disciplined market, so that's very good. I will get you the figure on WAVE.

And not to mention that we are very pleased with the partner we have and what a nice job they do in Armstrong World Industries. And that's another big component of success with that joint venture.

WAVE -- do you want for the quarter or for the year?

For the quarter and year, if you could?

WAVE had sales for the quarter of 93 million, and had operating income of around 29 million. And for the year they were in excess of 325 million in sales, and had operating income of over 90 million.

That's your share, right?

No. That's the total, and then we would have had 50% of that.

And would you say the improving results -- is that the global economic growth, or just better pricing, or what kind of cyclicality are we -- are we gaining the marketshare? How should we think about that?

Great global buying of steel, getting pricing. And we just opened a new plant about a year ago in Aberdeen, Maryland, which merged two old, more obsolete facilities into one to get much more efficiency.

Great job.

[Dan Wayland] with Bear Stearns.

Most of my questions have been answered. But if you could just give some general comments in terms of what you are seeing in the commercial construction market. And then also if there any regional pockets of strength, possibly from last year's hurricane season?

I think there's continued strength in the overall commercial construction markets. And I think they have been adjusting to a higher level of steel pricing that might have delayed some jobs, but I think that is going away. I think the market overall was strong and will continue so.

Anything that happens as a result of the hurricane, the main impacts are code related that we find beneficial, as they go in and look and want to make sure they have built stronger homes. And is also something that doesn't occur for probably 24 to 36 months following an event. You can still go to Florida in pockets where it has been two years or more, and there are still 1,000 blue tarp roofs. So the impacts from a direct business standpoint are later. And the most immediate things that happen are going in and then trying to look at where the codes were in a state, and we have been very active and successful in working in Mississippi and Louisiana and getting them to adopt stronger building codes, which were needed.

We have three, really, areas that are related to construction. One, of course would be the WAVE joint venture. We have Dietrich -- well, really four. Our volume is up in the construction market out of our Steel Processing division. And then we also had a joint venture with MiTek called Aegis. And that also has got strength going into the quarter. So from all angles, we're seeing strength from the construction market.

Sal Therani with Goldman Sachs.

You mentioned that actually you're seeing that your business with the auto industry was increasing for the last few quarters, and in spite of flat production rate. And then you mentioned that you believed that all the majors are reducing the number of suppliers. Is that something you have seen, or is it based on your results as you're increasing the marketshare -- increasing the volume on a flat production rate?

I'm going to repeat some of what you said, just to make sure I heard it correctly. But you're asking, is our increased participation in automotive due to supplier consolidation? Is that what you asked?

Yes, or is it because that they are consolidating suppliers? Or is it something you have heard from them, or is it just your deduction from your results?

Well, obviously I'm not going to speak for any of the automotive companies. But I feel that our increased participation is due to a very good performance in the things that we have done there over the years in delivering good quality and service, which they demand. I think that, if I were in their shoes and look that the number of people in this space that they may touch that I would assume that they would look to do business with fewer of them. But again, I can't speak for them and won't.

But I think it's an opportunity still out in front of us that, if it's not happening, it is likely to happen. And I think we're positioned well to continue to increase our share there.

Probably about five years ago in our steel sales area and marketing area, we formed an automotive group that has concentrated on certain areas of the automotive market based on the products and the services that we can provide. And I would have to give the guys out in the field great credit in that they have focused and they have delivered on the areas where we can add the greatest value. And I think that's what you're seeing.

And on Metal Framing margins, your price increase in April, we have seen, since then steel price increases all the way up to now July and August. Do you foresee any other price increases in Metal Framing, or do you think that you had enough price increase to absorb the rising costs of steel?

We don't have any further increases announced at this point, and I don't believe that they are needed for current price levels.

And so it has taken into account the pricing level we are seeing in the market all way up to July and August?

It wasn't just one increase back in April. We had an increase in April, a couple in May, and other one going into June. So has been a culmination of those that have gotten us into the position that we are now. It wasn't just one increase along the way.

And lastly, what percentage of your total steel from Steel Processing is under contract?

Very little at the moment, so I can give you an exact percentage. It would be much lower then, say, a year or two ago -- two years ago, anyway. Probably something under 20%, I would guess.

Hardin Bethea with DePrince, Race & Zollo.

It looks like all my questions have been answered except for one, and I'm not sure you will disclose this or not. Just the rough magnitude of price increases in Metal Framing has been since April, I guess including the April 1 and subsequent increases?

I have that listed, but it's not with me. But I know that two of them, of the three that George talked about in April and May, were both 10%.

The 10%, 10% and then --.

Right.

Something less than that for the remaining --.

I think it was another 10 or 12%.

It was 12.

And I guess it's fair to assume then if May was kind of starting really to reflect the April -- all of the April increase and maybe a little bit of the May increase, or partial May increases?

I think that's true. And I think we also saw, as you look at those results, that some of the volume was up in May because we had already announced another increase for June. And I think that people came to the realization that those price increases were going to stick in the marketplace and came into buy material in the May timeframe before they got to June.

As John P. said the last call, we did not lead these price increases. So in the past, in late November, when we saw this coming, we did put a price increase in, but it was not followed, so we had to back off. This one we're following into the market and seem to be getting the price as the contracts come up.

The last part, related to Metal Framing, would be the transition to UltraSTEEL as well as -- I guess, how far your competitor -- your licensee is along in the process. Can you qualify any impact, or can you see any margin impact from that, whether positive or negative, to this point?

As to the first question, our sublicensee has not started yet, but is about to soon. And our agreement is to follow us in each market after we are done. And so, once we start this, we'll start alternating actually markets. And once they begin, we will get (indiscernible) first Florida -- whenever (indiscernible) converted, which was our first insulation. And then we will go back to one of ours, and then we'll go to theirs, and we continue that pattern going forward. And had the answer to the second question is, yes, positive increases in margin.

I might have also mentioned in my comments that in our fourth quarter 16% of the material that we shipped out of Dietrich was UltraSTEEL as we started this rollout of the new facilities and the change in equipment. And it's right on schedule and right where we expected it to be.

Maybe this is a different component of the margin structure, but the investment you are making in Canada, can you handicap the impact that is having on the cost structure at this point?

I would just say in the quarter we just ended, it was a negative impact of just a little under $1 million.

Mark Parr with KeyBanc Capital Markets.

I heard you say something that I never thought I would ever hear anybody at Worthington say. You said our contract business is less than 20% of our mix. And I followed you guys a long time, and it seems -- this really seems unusual. Can you talk a little bit about the thought process behind that? And what is going on in the market that would make you want to go so short?

To respond to that question, we're talking about contracts we have with customers on forward business. So we are really just reflective of where their desires are, and not trying to drive anything one way or the other. And I think everybody -- and I think I said before, maybe not the best phrase, but we are not in Kansas anymore. And I think everybody is kind of getting used to that, but a little unsettled yet as to what is really going to happen.

We have an absolute belief and are behaving in a manner that steel pricing is not going to be falling off the face of the earth any time, that the consolidation will lead to a much more flat kind of pricing. It's going to wag around, but not nearly as volatile as it used to be. I think a lot of our customers and other people just are not sure yet. And so they would like to not take longer positions on price.

It's an interesting situation. Where I think I agree with you in terms of what I'm seeing is that the mills and the service centers are trying to reduce the volatility, but it doesn't seem to be reflected in customer or buyer action yet. And that would be reflective of the very short nature of your current order book, I would think.

And I'll add one more piece of this, because I also believe this is what is going to happen. As a result -- when people kind of get comfortable with where we are, I think what you're going to see are the longest-term contracts that have ever been in the industry, at some point. I figure it won't be unusual to have a three to five year pricing commitment, because the more stable it becomes, the more opportunity there is for that kind of an arrangement.

And we will certainly work on what those models could be and how we can work with customers to take some flexibility in a long-term contract, and how do you build that in. And I think in three years at the most you're start to see long-term commitments, much longer than we did before, with annual or two or three year contracts at the most.

So while it's real short right now, I think it's going to lead to, at some point, much longer-term contracts than the industry is used to. I think this is just kind of an interim period here.

Michelle Appelbaum with Michelle Appelbaum Research.

Great looking quarter. I wanted to ask you -- and it's nice to see the margins in steel. Obviously, you didn't only talk the talk last quarter or when you told us what was going on; you are walking the walk as well.

I wanted to get your macro thoughts. There has been a lot more dialogue this year, including some of which of course from me, about potential combinations between those in service centers or processors or traders, the middleman of the industry. And that is something obviously that was [peaked] 20 years ago. And I just wanted to get your perspective and what your thoughts were about that.

And you're asking me about just -- would you repeat it again, real quick for me?

Business model -- we look at the last year and a half, and this somewhat insane volatility -- the mills can point at the service centers, and the service centers can point at the mills. The fact is that steel price went from 7.50 to 3.80 strictly on inventory and imports, obviously. But it was all the inventory cycle -- just the inventory cycle.

So one of the things people are talking about is maybe there is a business models that works a little bit better with service centers and mills. And there has been some dialogue about that this year. We hadn't heard that in a long, long time, the 1980s. And so I was just wondering, business model -- not Worthington's intentions -- but business model, what do you think of that as potentially a solution for some of the ills that plague us in this industry, now that we have solved so many of the other ills that have plagued us in this industry?

And you say the model. And I'm not sure I heard a specific --.

Service centers like Europe or service centers and mills are part of the same corporate entity.

Well, direct investment and the like?

Direct investment and ownership, with the idea being to expand transparency.

When I was talking about Bob Mowery, I used words like alliance, partnerships, and those kinds of things. I think, particularly as you look at fuel costs, I think both mills and the distribution networks are getting their products to the market that's available to them have to continue to look at more efficient methods to do so -- supply chains, location of facilities between mills and customers, and how you are aligned.

And so in some form everybody is going to be working more closely together to solve those issues and make this process more efficient. I think it is not a very efficient model at the moment. Now, which way that goes, don't know, and I can't predict. Obviously, this is an area of the world, and one of the few, that mills have never successfully been part of the long-term distribution of their product. So is that aberration going to remain forever? If you are betting, you would say unlikely.

So you think, one way or another, they are going to work better together?

Yes.

I am showing no further questions at this time.

Okay, thank you very much and thank you all for joining us, and giving us your very insightful questions. Again, we're very pleased with our performance this quarter. We did, as Michelle said or pointed out, clearly again we did do what we said we were going to do. And feel it was important for us to end the year with a lot of strength. And we have a lot of momentum as we are going forward.

Congratulations to all of our employees here. They did a wonderful job this quarter. And we thank you for joining us. We will see you next quarter.

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