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Worthington Industries Inc. (NYSE:WOR)

F2Q09 Earnings Call

December 18, 2008; 1.30 pm ET

Executives

John McConnell - Chairman of the Board, Chief Executive Officer

George Stoe - Executive Vice President and Chief Operating Officer

Andy Rose - Vice President and Chief Financial Officer

Bob Mcmaster - Senior Financial Adviser

Richard Welch - Controller

Allison Sanders - Director, Investor Relations

Analysts

Michelle Applebaum - Michelle Applebaum Research

Chris Olin - Cleveland Research

Bob Richard - Longbow Research

Chuck Bradford - Bradford Research

John Tumazos - John Tumazos Very Independent Research

Tim Hayes - Davenport & Company

Leo Larkin - Standard & Poor’s

Mark Parr - KeyBanc Capital Markets

Sal Tharani - Goldman Sachs

Operator

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

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

Allison Sanders

Thank you Judy 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 that could cause actual results to differ from those suggested.

Please refer to the press release for more detail on factors that could cause the 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 Chief Executive Officer; George Stoe, President and Chief Operating Officer; Andy Rose, Vice President and Chief Financial Officer; Bob McMaster, Senior Financial Advisor; and Richard Welch, Controller. John McConnell will begin. John.

John McConnell

Good afternoon everybody, I appreciate you joining us today. Now as you know, Worthington Industries is operating in the opening months of the superior economic retraction that quickly wrapped its arms around the world. Given this environment, we provided more information in this morning’s earnings release than normal, but these are not normal times.

Shortly, I look forward to introducing you to Andy Rose, our new Chief Financial Officer who along with George Stoe will provide additional information on the company from a financial and operating perspective. Since Andy’s in his third week with us you may also hear from Bob McMaster who has been working with us for the past three months with the Senior Financial Advisor and Richard Welch, our Controller.

Before I turn the call over to them, I’d like to remind you that beginning in October we made a series of announcements which are indicative of our mindset and the depth and speed of the retraction we face. The announcements included closures, permanent reductions in workforce and temporary shuttering of several locations in an indefinite period of time.

Our most recent announcements included two significant non-cash write-downs, the first lowered inventory values at both Metal Framing and Steel Processing and the second eliminated goodwill from the Metal Framing balance sheet. While difficult, all of our actions over the past two months openly place us in a better position to deal with the economic crisis that we face.

The future course of the economy remains unclear and until the depth and breadth of the retraction begins to clarify, we will continue to operate under the assumption that the economy will continue to weaken and that it will be an extended period of time before it begins to recover.

Given this uncertainty, we feel fortunate that on a relative basis our balance sheet was strong when we entered the retraction and that we were well over a year into our work with an outside consulting group to improve our business model. The knowledge gained during these efforts has allowed us to act very quickly on additional opportunities, to reduce cost and improve our operations.

I’m now going to turn the call over to Andy Rose, our Chief Financial Officer. Considering his years of experience in private equity and value creation, we are excited to have Andy on board with the company. Andy.

Andy Rose

Thank you, John. Good afternoon, everyone. I’m excited to be here as CFO of this great company and I look forward to working with all of you. As this quarter’s results clearly demonstrate, there are some significant issues in the U.S. economy that are creating challenges, particularly for our two main business segments.

We’ve been working hard to mitigate the effects of the economic downturn. Those efforts when combined with the efficiencies gained from the transformation plan should enable us to emerge as a stronger company in the future.

For our second quarter of fiscal 2009 which ended November 30, 2008, we reported a net loss of $2.02 of share. There were four charges contributing to this loss which I’ll touch on momentarily, but excluding charges in both periods earnings per share would have been marginally profitable compared to $0.22 earnings last year.

The four pretax charges in this quarter included a $98 million inventory write-down, a $97 million goodwill impairment, $12 million in restructuring charges and $3 million in increased bad debt reserves.

Second quarter sales of $745 million were up 4% from $714 million for the same period last year. Compared to the prior period, the sales increase was due to much higher pricing, almost entirely offset by weaker volumes, especially in the Steel Processing and Metal Framing segments where the volume declines were unprecedented.

The gross profit margin was eliminated by a combined $95 million inventory write-down in the Steel Processing and Metal Framing segment, that impacted the material cost and the cost of goods sold line.

This lower of cost to market adjustment had the effect of recognizing losses in the current quarter that would have been realized over the next several months as inventory on the balance sheet at November 30, 2008 was sold.

As required by accounting standards, those future losses are required to be recognized in the current quarter. Had we not taken the adjustment, the gross profit margin would have been 5.4%, down from 9.8% in the comparable quarter last year.

SG&A expense fell $6 million to 6.5% of sales from 7.6%. The decline was primarily due to reduced compensation expense related to lower earnings, partially offset by the $3 million increased in the reserve for bad debt. The increase in reserves for bad debt is principally tied to the automotive industry.

We believe our reserve is sized appropriately based on where we are today. We continue to monitor the developments in Detroit and Washington and will adjust our reserves as the situation wants.

Excluding the four charges, we would have had an operating loss of $5 million. Operating income does not include $11 million in equity income from joint ventures. Equity income fell $4 million from the prior year period, because of an inventory write-down at our Mexican Steel Processing joint venture, which otherwise would have been profitable. Our share of that write-down was $3 million.

Wave’s earnings represented the bulk of the equity income and they continue to be solid, though not at the record level of recent quarters. As we’ve mentioned in various press releases we have sold or terminated several of our smaller joint ventures such as Viking & Worthington Steel Enterprise and Canessa Worthington Slovakia.

These ventures were not delivering the growth opportunities originally envisioned. We expect equity income from the remaining joint ventures to continue to represent a major component of total earnings. As a group, the unconsolidated joint ventures generated $200 million in sales during our second quarter and paid us $14 million in dividends.

Miscellaneous expense declined $1 million due primarily to the lower results at our consolidated joint venture, Spartan Steel Coating. Miscellaneous expense is where we deduct our minority partner’s interest in this consolidated joint venture.

We estimate that our effective tax rate for the year will be 17.3%. However, given the quarterly loss and the mix between domestic and foreign earnings, our income tax benefit for the quarter is $49 million or 23.5% of pretax income.

Now for the balance sheet, total debt was $371 million at quarter end, down $74 million from our August quarter end. At quarter end, our total debt-to-cap ratio was 33.7%. For the second quarter, cash provided by operating activities was $57 million. Working capital requirements continued to decline due to reduced sales volume and lower Steel prices. We are utilizing excess cash to pay down debt and continue to have significant availability under our revolving credit facility.

For the quarter, capital spending was $15 million compared to depreciation of $16 million. We expect capital spending to be slightly higher than depreciation of $65 million for the year. Almost half of the total spend is attributable to two attractive projects already in process in Steel Processing and Cylinders.

Now more specifically about second quarter results for each of our three primary business segment beginning with Steel Processing which represented 47% of revenues this quarter.

Steel Processing’s quarterly sales rose 2% to $352 million from $344 million in last year’s second quarter. The increase was due to higher pricing, relative to the comparable quarter last year and a change in the product mix that resulted in more direct business both of which were offset by a 35% average decline in volumes.

Tolling business was off even more significantly than our direct business. About one fourth of the decline in tolling was due to the contribution of the tolling business of our Taylor facility to the WSP joint venture. The balance was due to reduced demand from our toll customers, primarily the mills that have taken work in-house as their business has slowed. Our mix of direct versus tolling was 55% to 45% this quarter, compared to 48% to 52% in the year ago quarter.

Demand weakness in all customer groups, especially automotive and construction contributed to the overall volume decline. Automotive now represents approximately 48% of the business in the steel processing segment, down from a peak of 61% in November 2005. For the Company as a whole, exposure to automotive is now 25%.

Excluding the $57 million inventory write down taken in the steel processing segment, the total spread between selling prices and material costs declined 29% compared to the prior year quarter. While average selling prices were higher for the quarter, they fell rapidly as the quarter progressed. However, material costs rose significantly due to the flow-through impact of inventory on hand that was purchased earlier at much higher prices. The segment had an operating loss of $72 million including the impact of the inventory write down. It would have been a $15 million loss without it.

The Metal Framing segment represented approximately 24% of revenues. It too experienced dynamics similar to those of the steel processing segment. Compared to the prior year, sales were down slightly to $180 million as higher average pricing was offset by a 27% decline in volumes.

Selling prices fell rapidly with demand and steel pricing during the quarter and the cost of inventory on hand was high, depressing spreads and profitability. Ongoing challenges in this business combined with the market deterioration that has occurred since last quarter led us to impair the goodwill associated with this segment in its entirety or $97 million.

Excluding the impairment, the inventory write down of $38 million and restructuring charges of $4 million, metal framing would have reported a $15 million loss. Both the steel processing and Metal Framing segments have taken actions quickly in an attempt to limit losses to the current quarter. With revalued assets, fewer facilities and headcount, both businesses are better prepared to weather a recessionary environment.

Finally, in our Pressure Cylinders segment which represented 19% of company revenues, sales for the quarter were up 7% or $9 million to $142 million, as selling prices increased primarily as a result of increased raw material costs. New business helped to offset the softening in demand, particularly in the air brake tank product line. The sales team at cylinders has been very successful over the last few quarters in obtaining several major new accounts.

Operating income increased almost $3 million to $20 million. The operating margin increased to 14.2% from 13.1%, largely as a result of reductions in overhead expense. New business and well-controlled costs helped the Cylinders segment maintain profitability despite the general economic slowdown.

That concludes my comments. Again, I look forward to working with all of you. George Stoe will now continue with remarks on operations.

George Stoe

Thank you, Andy. We mentioned on our last call that we expected our business to be off in the second quarter from the relatively robust levels we saw in the first quarter. However, the swiftness and severity of the downturn was surprising. This, coupled with an approximate 50% drop in steel prices, led to the dramatic change in our situation from our first fiscal quarter. Economic realities like those we now face call for decisive and forceful actions.

During our last call we emphasized our plans to reduce costs, to maximize asset utilization and to drive operational improvements. Those initiatives have been accelerated as we chart our course through this downturn. In our steel processing segment, we have announced the permanent closure of our Louisville, Kentucky facility and reduced salary and hourly headcount by approximately 300.

The downturn in the commercial building sector has been just as swift and onerous. Many of the construction projects have either been postponed or cancelled. To better align our Metal Framing segment with current conditions, we have announced the permanent or temporary closure of an additional four facilities. This is an addition to the three we idled earlier this year. In total, we have reduced our workforce by more than 300 salary and hourly people this year.

As most of you know, Worthington has a long history of striving to minimize dislocations during the loss in the business cycle. We perceive this downturn to be extraordinary and we must align our facilities and the workforce with the current conditions. On a brighter note, our Cylinders business has only been impacted in a minor way during the current downturn. Our strong market positions, creative product offerings, and cooperative customer relationships have helped to mitigate the slight decline we have seen on the volume side.

Over the last several calls, John McConnell has detailed for you our transformational effort. We will continue to reduce costs, maximize our asset utilizations, while driving operational improvement. The swift and extraordinary downturn in the overall economy was impossible to predict; however, we believe we have reacted boldly and forcefully to right size our businesses and to take the necessary steps to weather the current storm.

I’ll now turn it back to John McConnell for final comments.

John McConnell

George, thank you very much and Andy. Clearly, this is not a normal operating environment and we are not running the business as if it is. We will continue to closely monitor the economic climate and act accordingly.

While our retrenchment decisions were necessary in the opening months of the recession and more may well follow, we have also and will continue to make prudent investments in the company. As we are taking aggressive action to not get behind the retraction in demand, we also do not want to be playing catch-up when the markets strengthen, whether that’s one year from now or five years from now. We will be ready when the opportunities come.

Lastly, we are often asked questions by you following this call, which look into the broad dynamics of the industries that we serve, that’s expected and understandable. On this call, we will be heeding the comments of an economist I recently listened to, who said “Predicting the future is always a tricky business and in this environment it’s impossible.”

Having said that, we’ll be happy to address any questions you have as best we can.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michelle Applebaum - Michelle Applebaum Research.

Michelle Applebaum - Michelle Applebaum Research

So I wanted to ask you two questions. First, what are your thoughts about the whole car check law and what’s going on with that?

John McConnell

Well, obviously we are not in favor of car check. We think it takes away what makes a unionized, union campaigns and election honest, which is the right to a private vote and we would hope that it is not passed in Congress.

Michelle Applebaum - Michelle Applebaum Research

And what do you think is going to happen? It was passed by the house and then…

John McConnell

Well, it is not passed in the Senate yet?

Michelle Applebaum - Michelle Applebaum Research

Yes, but it’s got to come back. It passed in the house I think last spring, but it never went to vote in the Senate. It wouldn’t have passed.

John McConnell

Yes, we were aware of that one. I thought you meant that just occurred and I missed it.

Michelle Applebaum - Michelle Applebaum Research

No the old one.

John McConnell

Yes. So I’m not sure what you’re asking me.

Michelle Applebaum - Michelle Applebaum Research

I mean, I think the unions played a really big role in electing Obama and he said positive things about it. So, do you thing it’s a for sure and if it’s passed, what do you think happens with you guys?

John McConnell

Well one, I certainly don’t think it’s a for sure. Secondly, as I led into this I said I probably aren’t going to make many predictions on the future of the businesses that we deal in every day and I’m certainly not going to make any predictions on political, but obviously in that environment, we continue to have good relationships with our employees. We would hope that they would see through the kind of hood wink in the sense that particularly the name of the bill carries and respond accordingly.

Michelle Applebaum - Michelle Applebaum Research

You mean free choice?

John McConnell

Yes.

Michelle Applebaum - Michelle Applebaum Research

Somewhat oxymoronic free choice?

John McConnell

Yes.

Michelle Applebaum - Michelle Applebaum Research

Okay. Then my second question is, how should we think about the dividend?

Andy Rose

Well, I think the way you have always looked at us and how we behave. We will give the recommendation to the board every quarter. The board will consider it, we’ll review where we are at that point in time and make a decision on the payment of the dividend. We have historically and if you all comeback to ‘01, ‘02, we continue to pay the dividend in a significant downturn. It is our number one philosophical tenant to return money to our shareholders and that is the primary vehicle at the movement to do so. So, we will keep those things in mind and we hold it in high regard in important to our shareholders and our share price performance, but every quarter will stand independent in its valuation.

Michelle Applebaum - Michelle Applebaum Research

You’ve never cut before, right?

John McConnell

No, ma’am.

Michelle Applebaum - Michelle Applebaum Research

And how many years have you not increased?

Andy Rose

Four years ago in 2005, I’m sorry.

Operator

Your next question comes from Chris Olin - Cleveland Research.

Chris Olin - Cleveland Research

Can you help me a little bit more on the metal framing side of the businesses? I guess specifically the facilities you’re closing for this next round, will you be able to supply those regions with other facilities or are you’re essentially walking away from those markets and then secondly, what stabilizes this business? I guess I know you’re not predicting any market changes, but I mean what would you look for in terms of putting a bottom onto this kind of erosion?

John McConnell

In Metal Framing, we clearly have plans to reach back into those markets from other facilities at the moment and I’m going to let George comment more on the actual market plan on that when just in broad form, I think one of the clearest indicators that we’re going to be following is the unemployment rate. I think you can’t get to the end of this thing until that settles down and we stabilize unemployment. After a continued wave of more people without jobs it can only continue to feed the monster.

So that’s going to be a key indicator of what we’re looking at in construction. In particular we’ll also be looking at availability of funds for people at rates and the terms that are acceptable. You will start seeing some building go on again. Those will be the two key things we’re watching for that industry and George, if you have any additional comments feeding the markets, that would be great.

George Stoe

Chris, I think out in Phoenix, we have the Gulf in the California facility that will be able to service that market with in Lunenburg and New Hampshire where we’ll be able to service that out of Boonton, New Jersey. The one area that we probably expect to lose some position is down in Miami. That market has been so depressed and the prices are so bad that we haven’t made any money down there in quite a while. So it won’t be a damaging bowl for us to lose some volume down there.

Michelle Applebaum - Michelle Applebaum Research

Is there a typical radius that these facilities can shift outwards in terms of mileage or anything like they can give out?

John McConnell

Well, I think that a few years ago, there was a feeling that it was 400 miles, but I think that things have changed and I think that both us and our competitors are traveling longer distances today with the product in growing it successfully.

Operator

Your next question comes from Bob Richard - Longbow Research

Bob Richard - Longbow Research

Long-term debt, I mean you have some debt coming due in fiscal year, let’s say somewhere between September of ‘09 and August of 2010. Can you tell us where particularly that will be coming due?

Andy Rose

Yes, the 2009 bonds are due in December of 2009.

Bob Richard - Longbow Research

So, that’s the $145 million?

Andy Rose

Correct.

Bob Richard - Longbow Research

So the goodwill all written off for Metal Framing, so the balance of your goodwill that’s on the balance sheet if I heard right, is only on the Pressure Cylinders segment; is that correct?

John McConnell

Yes, sir.

Bob Richard - Longbow Research

So, there would be minimal risk of any write-down going forward there, right?

John McConnell

Yes, sir.

Bob Richard - Longbow Research

Okay, quick follow-up, direct mix richer this quarter. Do you expect that going forward, John?

John McConnell

Talking about direct and tolling?

Bob Richard - Longbow Research

Yes, direct versus tolling.

John McConnell

The question was do we expect…?

Bob Richard - Longbow Research

The direct mix to be richer; normally you’re 50/50, it sounds like you’re 60/40 now?

John McConnell

Yes, I’m sorry I have trouble wrapping my head around your question, but yes. Obviously as the mills have retracted capacity and they have also sought to utilize their capacity during the time when it’s wide open, so they pulled a lot of tolling work back inside and I think it will stay that way for a while until you see a little strengthening in demand.

Bob Richard - Longbow Research

And that should help you as prices come up, right?

John McConnell

That would help as prices come up and as prices come up, I expect to see some tolling also come back.

Bob Richard - Longbow Research

Okay, I appreciate that point. What is your feel, whispers of price increases on flat roll at the beginning of next year that would be supported by the service centers to prop up their inventory values? Do you think there’s any traction in those statements?

John McConnell

Again, I think it is a very difficult time to make any assumptions about what’s going to happen. We certainly have a view of what may happen, but with retraction of capacity by the mills down to around a 50% level, they’ve got to be not too far ahead of demand. So some up-tick in demand could create a tightening and therefore some price increases could occur. I’m not at all certain that that environment is going to set up that way at this point, so we’ll have to wait and see.

Bob Richard - Longbow Research

Okay and one follow-up, I appreciate that. You discussed a lot of liquidity available. Could you through a number out there or is that going to be in your Q or is that something you can discuss now?

Andy Rose

The answer is on the revolver, we have in excess of $300 million available.

Operator

Your next question comes from Chuck Bradford - Bradford Research.

Chuck Bradford – Bradford Research

Can you talk a bit about your debt covenants; what’s the most restrictive and what happens if we have another quarter like this and then also does the goodwill write down count against the covenants?

John McConnell

The key debt covenants are debt-to-cap ratio which is at 55% and EBITDA to interest coverage ratio, which is for two of our three facilities; for our revolving facility is 3.25 times, for one of our bonds it’s three times. So, that’s where the covenants are set.

Chuck Bradford – Bradford Research

It would seem like you’re getting pretty close.

John McConnell

Yes, the answer is as it relates to the goodwill as is an add back to EBITDA for the interest coverage, on the debt to cap we have a fairly significant cushion. On the interest coverage ratio, the good news is that goodwill is a non-cash charge and its added back for that purpose.

Operator

Your next question comes from John Tumazos - John Tumazos Very Independent Research.

John Tumazos - John Tumazos Very Independent Research

It’s amazing that you wrote down only $3 million of receivables given the break man ship in so many aspects of the auto supply chain. Could you talk a little bit more about your doubtful accounts reserve policies, your credit policies. It seems like you walk on water if you’re only writing off $3 million.

George Stoe

Well and I’m definitely not going to get to the [Inaudible] because I would probably tend to agree with you, but the accounting rules; we’re following GAAP and working with our auditors on what we can or can’t do in this area, but Andy jump in there and bobble in some of that decisions with the audits.

Andy Rose

The answer on receivables is the way GAAP requires you to do it. It’s on a name-by-name basis and so we have and will continue to do that on a real-time basis. As it relates to the auto industry, we sort of break it into two categories, the Big Three and we look at our exposure there and then the suppliers.

The good news is as it relates to the Big Three; we have offsets in certain areas. There are bankruptcy laws that allow you to get preference payments within sort of the last 20 days of shipments and so when you sort of net all that out, our exposure is actually not as high as you might think it would be and what we’ve done is where we do have exposure, we started to reserve there. Similar concept as it relates to the suppliers, although we don’t typically have offsets there.

Just on a name by name basis, we have a very strong credit team that goes through the names and looks at where these suppliers are and where appropriate, where we feel like we’re getting at risk, we will start to reserve and so, what happens with the Big Three is your guess is as good as ours, but in terms of where we are today, we feel like we’re adequately reserved. If they were to file bankruptcy, obviously that’s going to sort of turn that world upside down.

One of the things that you can’t do is, is just start taking general reserves because you perceive increased risk in the system. GAAP does not allow for that.

George Stoe

John, this is George Stoe. I think also it’s important to note that as Andy mentioned, we have some offsets and that is really related to some of the resale programs that we have, where the mills supply the Big Three and they supply the material to us. So, we don’t have any exposure there other than our processing costs.

John McConnell

One other factor is in terms of November, December our receivables are at a seasonal low. So, obviously that weighs on the level of the reserve as well as our automotive accounts are largely paying the terms.

Operator

(Operator Instructions) Your next question comes from Tim Hayes - Davenport & Company.

Tim Hayes - Davenport & Company

The question on the inventory write-down; in terms of your inventories in terms of tonnage, how much of the percentage of those inventories were written down?

George Stoe

That’s the question that may take a little muddling here.

Andy Rose

I don’t know that I can give an exact percentage on what the percentage was, but we reviewed 100% of the inventory to determine whether or not it needed to be written down, the replacement costs were.

Tim Hayes - Davenport & Company

I mean, even if it’s kind of ballpark it would be fine.

Andy Rose

I think as a result of the exercise, I think it’s safe to say we’ve marked 100% of the inventory to current market; is that fair?

Tim Hayes - Davenport & Company

So, even material that you bought in, say middle of November was written down to values at the end of November?

Andy Rose

The process is really done on an average cost basis. To answer, we don’t have the information. Certainly, the most recent purchases did not contribute to that write-down; they were considered in the average if you will in terms of the inventory costs which we applied our expected future selling prices to.

Tim Hayes - Davenport & Company

And another question on your cost savings; you’ve been giving some updates on the current target of $39 million annual run rate. Do you have an update to that cost savings target?

Andy Rose

It is something we’re going to try to get away from. I can tell you that in things that have actually been executed at this point, that through the first half of this year that number would stand and remember when we’re giving you those numbers, those were identified things that we were going to do and some of them take a while to put in place. So we stand at about a $7 million actual reduction in costs and the balance of the year will end up about currently standing in the mid 30s.

Operator

Your next question comes from Leo Larkin - Standard & Poor’s.

Leo Larkin - Standard & Poor’s

Do you have any preliminary guidance for CapEx for 2010, CapEx, and DD&A?

John McConnell

I’m not sure we have a number for 2010. For 2009, we’re projecting just over $70 million.

Leo Larkin - Standard & Poor’s

Okay. Is there any chance it would be at least no higher than $70 million in 2010, assuming no acquisitions or anything?

John McConnell

I think that’s probably a fair statement, certainly, if the economic environment continues as it is. Our number for this year includes two projects that were started sort of before the economic turmoil hit and so they’re good projects that make sense to complete those projects. If the economy were to stay in its current state, it’s probably safe to say that we would be below that going forward.

Andy Rose

I think that, historically, as you know we typically have had CapEx that is at or below a little bit depreciation rates and this is a little bit above depreciation rates.

I think we would have pulled the trigger on both of these projects, if we were going to start them next week because they’re very strong projects at our two most profitable facilities that will increase their run rates going forward. So, we’re always pretty fiscally conservative and you could expect us to remain so in the future.

Leo Larkin - Standard & Poor’s

So, beyond those two projects, there’s really nothing on the horizon for fiscal 2010?

John McConnell

Well, we certainly didn’t do anything that would be kind of a nice thing to do, but not impactful. We’re only certainly going to continue to address things that we believe our impact for the organization.

Operator

(Operator Instructions) Your next question comes from Mark Parr - KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets

I have a number of questions just real quickly. First, is there any additional color you can give as far as just kind of the backlog or the project status in the framing business; kind of give some sense of future activity?

John McConnell

Outside of very few places, I’d say there has been nothing going in the pipeline, virtually nothing. There are some education, some healthcare, certainly some military work, but beyond that it is very, very thin.

George Stoe

Mark, I think also we’ve seen a fair amount over the last few months of de-stocking on our distributor side. I think when we get into January and beyond, we’ll really get a better sense of where we think the run rate will be. The last couple months have obviously not been very good.

Mark Parr - KeyBanc Capital Markets

Yes. No, that’s fair. One of the things that companies in financial distress will try to do is extend payables. I was just wondering, if you’re seeing any evidence of this late in the November quarter or post the November quarter where you’ve had customers come in and try to extend payment terms on you; particularly, related to the automotive arena.

John McConnell

Yes, I would be surprised if we didn’t. Our credit guys have done an excellent job as we’ve gone through this date and I expect they will continue. So, in some cases I’m sure they’re looking at this on an account by account basis. We may need a request like that and often we will not. So, it generally considers our knowledge of the customer and where we feel they sit.

I just was talking to one of our credit guys and you’re in an environment too Mark, that I think is indicative to understand and important to understand that we just had an account that we basically made them zero out there. Their balances before we’ll ship any more material, they did so and in other cases they’ll say that’s fine, we don’t care if you ship the material. So, it’s a tough environment and they’re doing a great job watching each account.

Mark Parr - KeyBanc Capital Markets

Okay. Just to get back to your comments on framing, you said in the November quarter there was a component of de-stocking and a component of end demand. Do you have any sense of how much of the demand pullback was related to each of those two categories? I mean is there anyway that you can give us some color on that?

John McConnell

I guess Mark, the discussion we’ve had with the distributor community and that’s where we sell the majority of the product through. It was really geographical; it was dependent upon where you were in the country and how their business was going down in the south central part in Texas, that business was holding up reasonably well and they were continuing to buy material and put material in inventory.

Other parts of the country, especially down in the Southeast, just the opposite was taking place. So, that would be a wild guess for me to come up with a separation in those numbers.

Mark Parr - KeyBanc Capital Markets

If I could just ask a general question on inventories overall; can you give us some color in terms of the tons of supply on hand at the end of November compared to the end of August?

John McConnell

I can say this Mark; back really in September, when the downturn really started rearing its debt for us, throughout the company, we reduced our inventory from then until what we projected it will be at the end of December by 125,000 tons or $150 million.

Mark Parr - KeyBanc Capital Markets

Okay and so that’s a campaign that you are part of the way through at the end of November then, right?

John McConnell

Yes.

Mark Parr - KeyBanc Capital Markets

Okay. One other thing, I just wanted to talk about just general market conditions. We’ve been seeing some nascent signs of flat rolled pricing recovery. There maybe some indication that November represented a trough of spot pricing, at least over the near-term. It’s pretty clear that mill production has been below actual demand levels, so that’s been facilitating de-stocking.

I’m just curious, if you’ve begun to see any pickup in order momentum as a result of people, seeing a trough of pricing go by in November or if you’re seeing any activity on the part of the mills, particularly the integrated mills, that they may be getting to restart capacity, given the de-stocking that’s been going on over the last several months.

John McConnell

We have not and as George mentioned earlier, our current view really is we’ve got to the end of January, early February to really take a pulse on where things are. December is kind of scorched earth as I’m sure you understand. It always is and at this time normal vacations as you saw with Chrysler being, normal shutdown periods about two weeks are being extended and I expect we’ll see more of that. So, I think you’ve got to get to the other side in late January, early February to understand what’s going on.

Mark Parr - KeyBanc Capital Markets

Okay. In terms of the new initiatives that you’ve announced and that you discussed in the release, I may have missed this in your comments, but did you talk about the timing, how long it would take to realize those savings? Should we see all that in the February quarter or is it going to be really heading into fiscal 2010 before we really see that?

John McConnell

Some of the Dietrich’s stuff is staged out a little bit. George would be more familiar with the exact timing of it.

George Stoe

Mark, what we’re really doing is phasing some of those facilities out over a period of time but most of that will be done throughout this fiscal year. On the steel side, we expect that Louisville will be sometime in March or April until we wind that down.

Mark Parr - KeyBanc Capital Markets

Okay. So, it’s really more of a fourth quarter before we’ll begin to see any of the real…

George Stoe

I wouldn’t say that; I would say that you’re going to see parts of it throughout the balance of fiscal 2009 for us.

John McConnell

And I’ll probably get this wrong, so I’ll ask Bob and Andy and Rich to jump in here, but the effects of permanent reductions in force I suspect are felt immediately. So, there is some that’s occurring now and that’s a 300 number in steel. So it begins now and we’ll continue to unwind, but I didn’t want you to think nothing was going to be happening here for the third quarter, because all that goes in there.

Operator

Your next question comes from Sal Tharani - Goldman Sachs.

Sal Tharani - Goldman Sachs

Can you give us a color on your framing business; how much of that goes through the distribution channel or do you also sell directly to the contractors?

John McConnell

Just for the sake of conversation, I think you could say 100% of it goes through distribution. We do some of our own work internally, certainly supplying a sister company called integrated building systems, but the percentage that would not go through distribution is miniscule.

Sal Tharani - Goldman Sachs

Do you have any idea of the inventory situation distributors, backlogs over there?

John McConnell

I think George commented earlier that he believes that most are in a de-stocking mode and have been coming down.

Operator

At this time, I show no further questions.

John McConnell

Thank you very much and thank you all for joining us today. In these times, on one hand we’re going to head down, plow and keep one foot in front of the other and March through this environment and on the other hand we’re going to also keep our head up on the future for when things do turn around and be ready for that when it occurs.

So, we will continue to do the things that are necessary to make sure that we get through here, get through here with as many of our current employees as we can and hopefully that’s where the number is today, but we’ll see each day at a time. So again, thank you for joining us and we’ll look forward to talking to you throughout ‘09.

Operator

This concludes today’s conference call. Thank you for attending.

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Source: Worthington Industries F2Q09 (Qtr End 30/11/08) Earnings Call Transcript
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