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Insteel Industries Inc. (NASDAQ:IIIN)

F1Q 2014 Results Earnings Call

January 16, 2014 10:00 AM ET

Executives

H. O. Woltz - Chairman, President and CEO

Mike Gazmarian - Vice President, CFO and Treasurer

Analysts

Tyson Bauer - KC Capital

Robert Kelly - Sidoti

Chris Olin - Cleveland Research

Operator

Good day, ladies and gentlemen. And welcome to the Insteel Industries' First Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow that time. (Operator Instructions)

As a reminder, this call is being recorded. I would like to turn the call over today to H. O. Woltz. Mr. Woltz, you may begin.

H. O. Woltz

Thank you. Good morning. Thank you for your interest in Insteel and welcome to our first quarter 2014 conference call which will be conducted by Mike Gazmarian, our Vice President, CFO and Treasurer, and me.

Before we begin, let me remind you that some of the comments made on today's call are considered to be forward-looking statements. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC.

All forward-looking statements are based on our current expectations and information that’s currently available. We do not assume any obligation to update these statements in the future to reflect the occurrence of anticipated or unanticipated events or new information.

I’ll now turn the call over to Mike to review our first quarter financial results and the macro indicators for our construction end markets and then I’ll follow-up to comment more on market conditions and our business outlook.

Mike Gazmarian

Thank you, H. As we reported earlier this morning, Insteel's net earnings for the first quarter of fiscal 2014 rose to $2.7 million or $0.15 a share from $2.4 million or $0.13 a diluted share in the same period last year.

Although, our results for the quarter remained depressed on an absolute basis, reflecting the historically low level of construction activity, this marks the fifth consecutive quarter in which we posted year-over-year improvement and our highest first quarter earnings in six years.

Net sales for the quarter were up 1.5% from the prior year, driven by 6.4% increase in shipments, which is partially offset by a 4.6% reduction in average selling prices. On a sequential basis, shipments fell 11.3% from the fourth quarter due to the usual seasonal downturn from the onset of winter weather and drop off in construction activity, while average selling prices rose slightly during the quarter.

Gross profit for the quarter rose to $9.1 million from $8.6 million a year ago and gross margins widen to 10.4% from 10% due to the increase in shipment and higher spreads between selling prices and raw material costs. Despite the seasonal drop off in shipments, gross profit rose $0.4 million sequentially from Q4 and gross margins increased 1.6% due to wider spreads.

SG&A expense for the quarter fell $0.1 million from a year ago largely due to the relevant changes in the cash to render value of life insurance policies. Our effective income tax rate for the quarter was 36.6% versus 34.7% in the prior year, due to changes in permanent book versus tax differences.

Going forward, our effective rate will continue to be subject to fluctuation based upon the level of future earning, changes in permanent book versus tax differences and adjustments to the other assumptions and estimates entering into our tax provision calculation.

Moving to the cash flow statement and balance sheet, operating activities provided $6.3 million of cash for the quarter, compared with $23.5 million in the same period a year ago, as net working capital provided a $0.5 million of cash this year versus $17 million in a prior year, primarily due to the relative year-over-year changes in inventories.

Accounts receivable fell $7.4 million during the quarter as a result of the seasonal drop off in sales. Inventories rose $11.2 million and accounts payable and accrued expenses increased $4.1 million, largely due to higher import receipts during the quarter.

Our inventory position at the end of the quarter represented around three and half months of shipments on a forward-looking basis, calculated off of forecasted shipments for next quarter and reflected lower average unit costs than our Q1 cost of sales, which should favorably impact our second quarter results.

Capital expenditures for the quarter amounted to $2 million, compared with $2.6 million in a prior year. We ended the quarter with $19 million of cash and cash equivalents, up $3.5 million from the previous quarter and no borrowings outstanding on our 100 million revolving credit facility, providing us with ample liquidity.

Looking ahead to the remainder of fiscal 2014, we are encouraged by the recent improvement in the various macro indicators for our construction end markets. In November, private non-residential construction spending increased for the fifth consecutive month and is now risen almost 11% since last January.

Although, public construction spending has remained relatively weak on an overall basis, the highway and street category, which includes bridges and is one of the largest end used applications for our products, was up 4.6% from a year ago and should begin to benefit to a greater extent from an increased TIFIA funding that was provided for in the Map-21 federal transportation funding authorization.

Dodge non-residential starts continued to show positive growth trends to the 12-months ending in November, rising 14% year-over-year on a square footage basis. Although, the Architectural Billings Index moderated to 49.8 in November, it has remained above the 50 growth threshold for ‘14 of the previous 16 months, its longest positive streak since 2007. Assuming these favorable trends continue in the coming months, we expect to see gradual improvement in the demand for our products over the remainder of the year.

I will now turn the call back over to H.

H. O. Woltz

Thank you, Mike. As reflected in our release and in Mike's comments, we are encouraged by the continued improvement in market conditions during the first quarter. Recent industry statistics as well as most respected construction forecast for 2014 are consistent with our previously stated view that demand for our reinforcing products should gradually improve over the course of the year.

Our capacity utilization level, however, has remained depressed, coming in at under 50% for Q1, and we suspect that our competitors were experiencing the same trend. As we’ve pointed out previously, we believe the reduced operating levels together with declining prices for hot-rolled wire rod, our primary raw material have been responsible for the highly competitive pricing environment that has affected our financial results for several quarters.

Through much of 2013, declining prices for hot-rolled wire rod were driven by similar deterioration in prices for steel scrap. During our first fiscal quarter, however, steel scrap prices rose sharply resulting in price increase by wire rod producers that became effective in December and January. Consequently, we have announced price increases for our reinforcing products that are sufficient to recover these additional costs as well as increases in our freight costs.

Several competitors have announced comparable increases. While we would prefer a stronger underlying demand fundamentals as the basis for pursuing price increases, we believe the magnitude of the wire rod increases will focus competitors on the need to recover rising costs. Going forward, higher transaction prices are essential to maintaining acceptable profit margins.

With respect to CapEx, you may recall that we’ve just commissioned the new specialty engineered structural mesh production line at our North Carolina plant at the time of our last earnings call. We’ve continued to ramp up its operating rate and are pleased with customers acceptance of the unique products that we are now providing to the market. We expect to achieve the projected level of output and margins during 2014.

Capital expenditures for 2014 are expected to total less than $12 million, and will be focused on opportunities to reduce costs, enhance quality, improve our information systems infrastructure and expand capacity as warranted. Wire rod inventories are elevated relative to prior periods due to a rising percentage of offshore purchases together with expectations for improving volume levels, and the prospect that domestic producers may file trade cases during the current quarter against one or more countries active in the U.S. market.

Participation in the offshore market implies higher inventory levels due to the larger order quantities that are required to make economic shipments. In assessing the attractiveness of offshore purchases, we consider the working capital implications as well as the inherent pricing exposure due to the longer order lead times relative to domestic purchases.

To summarize, the recovery in non-residential construction markets continues to be gradual and the market environment remains highly competitive. Favorable reports relative to construction spending and the recovery in non-res markets have yet to translate into a meaningful uptick and capacity utilization rates. Consistent with prior periods, we plan to focus on improving the effectiveness of our manufacturing operations and identifying additional opportunities to broaden our product offering and grow through acquisition.

This concludes our prepared remarks and we'll now take your questions. Kevin, would you please explain the procedure for asking questions?

Question-and-Answer Session

Operator

Yes. (Operator Instructions) Our first question comes from Tyson Bauer from KC Capital. Your line is now open.

Tyson Bauer - KC Capital

Gentlemen.

H. O. Woltz

Good morning, Tyson.

Tyson Bauer - KC Capital

Couple of quick questions, we’ve seen some increased activities states have taken to bolster their infrastructure spending. I think as Pennsylvania past a gas tax increases, there’s some rumbling at the federal level coming this fall that could happen also. In general and European, there were lot of these increases there to support increased activity where a lot of those just backfilling deficits for the funding that is currently going on in budgeting, that is a lot of times been replaced by general funds been drawn into those infrastructure committees.

H. O. Woltz

Tyson, I think it varies depending on the specific state, but generally it appears that a lot of the revenue raising measures are clearly geared towards increased activity from the depressed level of recent years.

Tyson Bauer - KC Capital

Okay. What leads me into -- you talked about the gradual increase and we were going to intend to put numbers on that. I would suggest a gradual means probably growing at 10% or less, accelerated growth to be over 10% in a given year. What’s it going to take to move gradual to accelerated, in your opinion?

H. O. Woltz

I think it will really require a more pronounced recovery in the economy where we’re seeing some positive signs with the most recent quarterly report. It is the most, bit more significant uptick and also it’s more growth in the labor market.

Mike Gazmarian

And, Tyson, I think that there's just a tremendous amount of conservatives in that play in the private non-res sector where there's still a lot of uncertainty in the economy and political uncertainty exists. So, I think we have to get past that. And in addition, I think on the infrastructure and government-funded side of our markets, there just has to be a healthier level of spending commitment to see that come back.

Your prior question concerning state efforts to bolster spending while it is difficult to quantify to a net impact in the governmental sector, it definitely is good news but the question, is it sufficient to really move the needle and it's hard to say. I think we're not going to be able to get past the point that there needs to be a more solid commitment by the federal government to support infrastructure spending. The rest of this is working around the edges of the problem.

Tyson Bauer - KC Capital

Okay. And last question for me. If we have this general consensus of rising tide will be a gradual. Are some of these TIFIA -- projects that are upcoming, are those have been announced like in New York, New Jersey? Are those large enough to move the needle for you, if you're selected as a supplier or are they more or less one-offs?

H. O. Woltz

No single project is going to have a substantial material impact on Insteel. It really takes on the cumulative nature because keep in mind that some of these large projects actually ship over 18 months or two years. So while on their own, they represent significant commitments. They are spread over a reasonable amount of time.

Mike Gazmarian

I think when you look at the TIFIA funding, the total potential volume coming out of that relative to the Map-21 authorization that would imply a pretty significant increase. But on an individual basis, these projects really won’t have a significant impact as H indicated, but when you roll it all up, it is pretty meaningful.

Tyson Bauer - KC Capital

All right. Thank you, gentlemen.

H. O. Woltz

Thank you.

Operator

Next question comes from Robert Kelly of Sidoti. Your line is now open.

Robert Kelly - Sidoti

Good morning, guys.

H. O. Woltz

Good morning, Bob.

Mike Gazmarian

Good morning, Bob.

Robert Kelly - Sidoti

Just a question on the raw material increases that you’re seeing and if you’ve instituted or announced any price increases?

H. O. Woltz

You mean the magnitude?

Robert Kelly - Sidoti

Yes.

Mike Gazmarian

Yeah. Okay. Generally speaking over the course of December and January, we’ve seen wire rod price increase announcements totaling $50 to $70 per ton, last night another one for $23 a ton was floated by a major wire rod producer. Our increases vary by product line to some respect, but if you said, it was in the neighborhood of $80 per ton then that would be big a good assumption.

Robert Kelly - Sidoti

Okay. So you are going to, you think you are going to recover all of the announced increase?

Mike Gazmarian

Well, we are certainly going to it, yes.

Robert Kelly - Sidoti

That’s your plan. Got it. Yes.

Mike Gazmarian

Yeah.

Robert Kelly - Sidoti

Fair one. As far as the commentary in the press release about consumer -- customer sentiment? Could you just talk a little bit about that? Is it optimism on the part of your customers or is it order flow hitting there, hitting their book?

Mike Gazmarian

No. I think that the outlook is generally more optimistic for our customers driven by better order books that we are seeing, we are seeing customers who reporting concrete two and three days a week, a year ago reporting four to five days a week and its spotty and its regional, but I think it’s -- there is no doubt that the trend is generally positive, it’s just -- it’s modest but positive.

Robert Kelly - Sidoti

Okay. Fair enough. And then during the final part of the prepared remarks, you talked about potential trade actions filed by -- was it wire rod players or your competitors, that’s just…

Mike Gazmarian

No. It's widely speculated in the industry that there will dumping and maybe countervailing duty cases filed by the domestic wire rod producers during the current quarter. There is no confirmation of that but it has been widely speculated for several months and I would say the chances are greater than 50% that it happens.

Robert Kelly - Sidoti

Okay. And then just taken that out of whole bed, assuming that we are successful, what does that do for Insteel as far as pricing, that -- would that benefit your pricing, if wire rod producers were to get a favorable ruling?

Mike Gazmarian

It's hard to say, but I would tell you that the constant downward drift of pricing in the wire rod market probably hasn’t really aided the fundamentals of our business.

Robert Kelly - Sidoti

Understood. Thanks guys.

H. O. Woltz

Thanks, Bob.

Operator

Our next question comes from Chris Olin of Cleveland Research. Your line is now open.

Chris Olin - Cleveland Research

Good morning.

H. O. Woltz

Good morning, Chris.

Mike Gazmarian

Good morning.

Chris Olin - Cleveland Research

I just wanted to touch a little bit about the news flow that’s been coming in with all this energy infrastructure investment going across the Gulf States and the LNG export facility. I’m just wondering do you expect that to have a -- which really impact on your business or do you have exposure to that?

Mike Gazmarian

Yeah. We keep our eye on those projects and can tell you that we expected they would have a beneficial impact on our market. The LNG facility should they be built are rather intensive users of our products and some of the other related project such as refineries and chemical instillations are pretty intensive in the use of prestressed concrete piling and other products that contain reinforcing materials and we generally consider it very positive for our business, although we can't quantify the impact.

Chris Olin - Cleveland Research

Interesting. Would you estimate is it a second half ‘14 driver or would be more of 2015 issue?

Mike Gazmarian

One of the two I think would be likely, although I’ll probably put it in 2015 more than 2014. There seems to be a lot of political aspects to getting these projects off the ground.

Chris Olin - Cleveland Research

Okay. Thanks a lot.

Operator

(Operator instructions) I’m not showing any question at this time. Please proceed with any further remarks.

H. O. Woltz

Yeah. We appreciate your interest in the company. We encourage your follow-up, should questions emerge later on. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

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