Insteel Industries Inc (IIIN) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Insteel Industries fourth quarter earnings release conference call. As a reminder, today's call is being recorded. For opening remarks and introductions I would like to turn the conference over to Insteel's President and Chief Executive Officer, H.O. Woltz III. Please go ahead, sir.

Thank you. Thank you for your interest in Insteel, and welcome to our fourth quarter 2007 conference call which will be conducted by Mike Gazmarian, our Vice President and Chief Financial Officer, and me. Before we begin, let me remind you that some of the comments that are made in our presentation are considered to be forward-looking statements. Forward-looking statements are subject to various risks and uncertainties that can cause actual results to differ materially from those projected. These risk factors are described in our periodic reports with the SEC.

As reported in this morning's earning release, Insteel encountered turbulence during the fourth quarter brought about by the continued weakness in the housing sector, PC strand import competition, rising raw material costs and adverse weather conditions in certain regions of the country.

I am going to turn the presentation over to Mike to comment on our financial results for the quarter, and then I will pick it back up to comment on our business outlook.

Thank you, H. As we reported in this morning's press release, Insteel's financial results for the fourth quarter ended September 29th were negatively impacted by the continuation of weak demand in certain of our markets. Earnings from continuing operations were $5.1 million or $0.28 per diluted share compared with $9.5 million or $0.52 per diluted share in the prior year. Including the results of the industrial wire business we exited last June, net earnings were $5.2 million or $0.28 per diluted share compared with $10.1 million or $0.55 per diluted share a year ago.

Market conditions across our productlines continued to diverge during the quarter with demand for concrete reinforcing products used in nonresidential construction applications remaining strong, and demand from customers with significant exposure to the housing sector remaining weak. These differences are consistent with the most recent monthly construction spending data reported by the Census Bureau.

For the month of August the seasonally adjusted annual rate of total construction spending rose 0.2% from the revised July estimate but was down 1.7% from a year ago due to the weakness in the housing market. Private nonresidential construction for August increased 2.3% from the previous month and 15.2% from last year, while public construction was up 0.7% from July and 14.7% from a year ago. In contrast, private residential construction was down 1.5% from July and 16.5% from last year and has now fallen for 18 straight months. The eight-month year-to-date totals reflect the same trends with private nonresidential construction of 17.1% from last year, public construction up 11.6% and private residential construction down 17.7%.

Moving back to Insteel's financial results for the quarter, net sales were down 9.9% from a year ago, primarily due to a 9.4% decrease in shipments. The drop-off in volume was primarily due to the same factors that impacted us during the third quarter. First, we continue to limit our solicitation of business from post-tension accounts in the PC strand market in view of the depressed pricing levels resulting from import competition and the weakness in residential construction. We believe that housing represents somewhere in the range of 50% of the market for post-tensioners where strand is used in slab-on-grade applications.

Second, demand from customers with a higher degree of exposure to the housing market remain weak. And finally, the unusually rainy weather in certain of our markets, particularly in Texas, hampered construction activity, resulting in reduced shipments. On a sequential basis shipments were down 2.8% from the third quarter.

Average selling prices for the quarter were slightly lower than a year ago, declining 0.4% but were down 3.1% on a sequential basis from Q3 due to the weak demand and resulting pricing pressures. Sales of welded wire reinforcement products for the quarter decreased 4.6% from last year while PC strand sales were down 18% due to our decision to pursue minimal post-tension business during the current year quarter.

As indicated earlier, the year-over-year shipment comparisons varied across productlines depending upon their relative dependency on the housing market. Shipments of PC strand to precasters and ESM shipments, which are both strictly used for nonresidential construction applications, were up a combined 17.8% from last year due to the continuation of strong demand and the ramp up of a new ESM line in our North Carolina facility.

On the other hand, shipments of concrete pipe reinforcement and standard welded wire reinforcement, which have both been significantly impacted by the drop-off in housing, were down 9.2% from the prior year on a combined basis. Another indicator of these differences is a comparison we referenced in today's release where excluding the post-tension strand revenues from both periods, shipments for the remainder of our business were up 2.1% from last year, again reflecting the continued strength of nonresidential construction.

Gross profit for the quarter decreased to $12.7 million from $18.3 million last year due to the lower shipments, higher unit conversion cost and narrower spreads primarily resulting from higher raw material costs. With gross margins falling to 17.1% of net sales from 22.2% last year and 22% in Q3. On a sequential basis gross profit was down $4.6 million from the third quarter primarily due to the pricing pressures and to a lesser extent higher unit conversion cost, lower shipments and higher raw material costs.

SG&A expense continued to trend within a relatively narrow range rising $0.1 million from a year ago and $0.4 million from the third quarter to about the same level as the second quarter.

Interest expense which primarily consists of non-cash amortization of capitalized financing costs was relatively flat compared with the prior year, while interest income was down due to lower average cash balances in the current year. Our overall effective income tax rate for the quarter including the discontinued operations component increased to 37.3% versus 33.2% in the prior year. The reduced rate last year was largely related to higher compensation expense for tax versus book purposes related to stock options and higher tax credits. Barring any significant changes in our tax position, permanent differences or tax valuation allowance, we expect the effective rate to remain in the range of 36% to 37%.

Moving to the cash flow statement and balance sheet, operating activities and continuing operations provided $6.4 million of cash for the quarter compared with $9.7 million a year ago, primarily due to the lower earnings in the current year. There were offsetting changes within that working capital during the quarter with inventories dropping $12.3 million and accounts payable and accrued expenses falling $13 million due to sharply lower purchases over the last two months of the quarter and changes in the mix of vendor payment terms.

Going forward, we expect payables to ratchet back up and represent a source of cash as we restore purchasing volumes to normalized levels. Based on our forecasted run rate for Q1, which has historically been our lowest shipment quarter of the year, our quarter end inventories represented about three months of shipments.

The strong operating cash flow for the quarter enabled us to fund $3.7 million of capital expenditures, a $1.1 million of dividends and end the quarter debt free, with $8.7 million in cash, an increase of $2.4 million from the third quarter.

Total addition to property, plant and equipment, including the accounts payable related to PP&E reflected at the bottom of the cash flow statement were $3.8 million for the quarter compared with $7.3 million last year, bringing the total year additions to just under $18 million versus $19 million last year. The majority of the current year additions were related to the Texas ESM and Delaware standard welded wire reinforcement expansions, which started up in the fourth quarter; the North Carolina ESM and Tennessee PC strand expansions was started up in the first quarter, and the upgrading of our Florida PC strand operation, which we now expect will be completed during the third quarter of 2008 due to delays and equipment deliveries.

Based on increases in the costs associated with the upgrading of the Florida plant and the addition of some smaller projects at other locations, we currently expect CapEx to wind up at around $10 million for 2008 instead of the $3 million to $5 million we previously indicated which had represented a base maintenance level of spending. This amount is subject to change based on adjustments in project timelines or scope, future market conditions or financial performance and additional growth opportunities that may arise.

As of the end of the quarter, we have not repurchased any shares of our common stock under the $25 million share repurchase authorization, which runs through January 5, 2008 as we have opted to maintain maximum flexibility in being positioned to pursue any attractive growth opportunities that may arise, either organic through additional CapEx or through acquisitions. Going forward we will continue to evaluate the repurchase of shares based upon the expected timing and funding requirements for such opportunities, as well as evaluation of our shares relative to our business outlook and cash flow expectations.

As we head into 2008 we expect some moderation in the growth rate for nonresidential construction consistent with yesterday's architectural billings index or ABI report for the month of September. The ABI serves as a leading indicator for nonresidential construction based on the typical nine to twelve-month lag time between architecture billings and construction spending, with any score above 50 indicating an increase in billings from the previous month. In September the ABI fell to 51.9 from 53.9 in August, implying the continuation of increasing nonresidential construction activity but at a reduced rate of growth and had been implied in previous months.

Looking forward, we believe that our 2008 results will be favorably impacted by the continued growth in nonresidential construction coupled with the increasing contributions from our growth in cost reduction initiatives over the course of the year.

I will now turn it back over to H.

Thank you, Mike. As reflected in our release this morning, our topline expectations for the fourth quarter proved to be overly optimistic due to continued weakness in housing related markets together with the change in plans related to our intention to source and distribute offshore material to certain portions of the PC strand market. While housing starts for the quarter were down approximately 24% compared to last year, Insteel's fourth quarter shipments of PC strand for housing related slab-on-grade applications declined 76% from last year due to low-priced import competition and weak demand.

In a previous earnings call we indicated our intention to supply offshore material for certain applications until economics once again favor domestic production. Shortly after we initiated this program, however, Chinese suppliers began to experience rising cost, which they wanted to recover through higher prices thereby making the program unattractive to Insteel. We discontinued these activities after purchasing only about 20% of the quantities we initially planned to distribute during the quarter. Over time this trend of significantly rising cost in China, particularly for metallic units, transportation services and export-related tax incentives should improve Insteel's relative competitive position and better position us to compete with imported material for slab-on-grade applications, a market that represented 14% of our total shipments in 2006.

I would caution, though, that we believe inventories of imported strand are at elevated levels in view of the high volume of imports that entered the US through the month of July. Given the expectations for housing starts over the next couple of quarters, it could take quite a while to complete the rebalancing of inventories. On an encouraging note, in August which was the first full month that Customs entries reflected lower VAT rebates, Chinese imports fell 39% from the average trailing twelve-month level and unit pricing rose 6%.

Concerning the potential for further changes in Chinese export tax policies for PC strand, there are indications the Government is considering another round of revisions, but there has been no official comment. We have demonstrated for US trade negotiators the impact of low-priced imports on our industry and have urged them in their ongoing negotiations with the Chinese to insist on further policy changes that would remove the incentive to export PC strand at below-market pricing.

Turning to our outlook for the markets for the next couple quarters, while it is unlikely that there will be positive developments within those portions of our business that have significant exposure to the housing market, we expect demand related to nonresidential construction to grow, but at a more moderate rate than we experienced in '06 or '07. This environment should provide the opportunity for us to ramp up the operating rates of our new engineered structural mesh production lines where product acceptance continues to gain momentum.

We also anticipate significant improvements in our unit conversion costs as startup related inefficiencies are eliminated and our new investments contribute to higher productivity. As we developed our business plan for 2008, the most difficult assumption to lock in was the anticipated spread between selling values and raw material costs in view of the strengthening domestic wire rod market.

To summarize the market environment, the most recent data for US apparent consumption of wire rod indicates that demand has fallen 29% compared to last year. But the supply is contracted even more than demand. In recent years, imported wire rod has accounted for over half of US apparent consumption. Through eight months of 2007, however, imports have declined 43% as the US market has become less attractive to offshore rod producers due to robust demand in other parts of the world and the weakness of the dollar. And the trend for decreasing imports of wire rod is accelerating with August imports down 55% from a year ago.

As the availability and price of imported wire rod became less attractive during 2007, rod consumers shifted orders to domestic producers, resulting in higher capacity utilization for the domestic industry and a related increase in pricing power. A $30 per ton price increase was implemented for the current quarter, and we expect additional increases to be announced for the first calendar quarter of 2008.

In view of these developments, we recently announced price increases for welded wire reinforcement products with effective dates ranging from October 16 to November 5 depending on productline. We are evaluating our pricing position with respect to PC strand and should decide on our course of action within a few days. As we pointed out in the release this morning, our ability to recover higher cost through price increases will be determined by the strength of demand and the competitive dynamics in the marketplace.

This concludes our prepared remarks. We will now take your questions. Darryl would you please explain the procedure for asking questions?

(OPERATOR INSTRUCTIONS) Casey Flavin, CJS Securities.

Hi, it is actually Arnie Ursaner from CJS Securities. Good morning. A couple of questions I have is can you -- I'm trying to get a little bit of a feel for the first half of your fiscal year. Your shipments were down 11% in Q4, and we are now going up against two pretty difficult comps in the next two quarters on shipment volume. So first thing I would like to get a feel -- well, it is all related to the first half, so shipment volume, how much do you expect it to decline? And given your much higher raw material costs, are your price increases sufficient in and of themselves to even cover your higher cost? Why don't we start with those two questions?

On the shipment comparison issue that will largely be driven by the timing of this, of our re-entry into the post-tension segment, which is driven by the -- which will ultimately be driven by the rebalancing of inventories throughout the supply chain. Because in the first half of 2006 we were active in those segments, and as H. indicated in his comments, for the year as a whole it represented around 14% of our shipments. So I would say it is unlikely that we would be back in within definitely within the first quarter. Beyond that it will be more of a question mark as far as the timing of when the inventories are rebalanced.

Will your shipments be down more or less than the line you had in the current quarter?

We're really not -- we don't provide guidance at that level.

Well, you are in a public conference call. You certainly have the ability to do so if you chose. The second question, why don't we speak to margins, are your price increases sufficient to recover margin, all other things being equal?

We announced a $40 a ton increase, Arnie, and we have incurred a $30 per ton ride cost increase at the announced rate, at any rate. So certainly we would expect to attempt to recover all of our increased costs, as well as anything else that the market would allow us to get.

And a little clarification on your share repurchase and kind of your use of your balance sheet to enhance shareholder value. I just want to be clear on a couple of facts. You authorized an additional $25 million. You had $25 million already in place. But is it correct that you have not purchased any shares yet at all? I knew you didn't purchase any in the quarter, but have you purchased any at all post the quarter?

Actually the $25 million replaced the previous authorization, so that reflects the total amount, and we have not purchased as of the end of the quarter, we had not purchased any shares under that $25 million authorization.

And I know the Board, H., has indicated they would like you to pursue or consider acquisitions, but with your shares trading at something in the range of 4 to 5 EBITDA on depressed earnings, why would your stock not be more attractive than any acquisitions you're likely to be considering in the short run?

We understand the concept.

As we indicated, we are really not going to comment on the specifics of our buyback program or our strategy. It's just going to be a function of the growth, the timing and scope of growth opportunities and our perceptions of the valuation of our stock and in view of our business outlook and cash flow expectations. I don't know that we can really go beyond that.

And just going back to the margin issue for one more minute, this quarter you had the benefit of some lower-priced steel purchases. Is that not correct, and as you start to run them through your 17% margin this quarter was among the lowest you've had in several years. And you're going into your seasonally slow period with higher cost. Would it be fair to assume that -- unless I am missing something -- how would your margins not be lower than where we are today?

It all depends on the success that we have with price increases, and I think it is really impossible to project at this point in time what the margins are going to look like for the first quarter.

And our cost of sales this quarter was unfavorably impacted by higher rod costs. The lower cost material had largely wound its way through in previous quarters; and when you look at what rod pricing has done over the past few months, there is a period where it declined prior to these recently announced increases. So I wouldn't view the margins as being inflated in any way by the benefit of lower cost material this quarter.

I will let others go, and to the extent Casey has more follow on questions I'll let him jump back in. Thank you.

Kevin Liu, B. Riley & Co.

First question, just wanted to get into the ASPs a little bit more. It had been down year-over-year, and it is kind of confusing to me because it seems like last quarter when you guys first made the decision to pull out of the post-tension market you saw a significant increase in terms of -- not (technical difficulty) but you saw an increase in the ASPs there. Given that you guys had a similar dynamical going this quarter, why were price -- why was pricing down?

Primarily due to the pricing pressures resulting from the weak demand within the quarter where you may recall in the third quarter we had implemented price increases at the beginning of the period. In this quarter we wound up having to reduce prices from those levels to some extent. It varied across productlines. But we did continue to see the benefit just from an average selling price standpoint from being out of that low-priced strand business. But it was offset by the dynamics in these other segments.

Kevin, just so there is no misunderstanding, the product that is going into the slab-on-grade housing applications is the identical product made by the identical set of competitors, as the product going into the more desirable market. So the entire industry has been affected by this, and it has caused a scramble for business in the sectors where the domestic industry can be competitive.

Just as a follow-up to that, in terms of the products that were doing well in ESM, also in the sales to precasters, is it fair to say that pricing there remains at or above levels experienced last quarter?

It wasn't as severely impacted -- it's what you would expect -- it wasn't as severely impacted as what we experienced in the housing related productline.

So in terms of the housing related stuff, then, so it was probably more on the concrete type side that you guys were facing some of the pricing pressures during the quarter?

Just the competition within the PC strand business that we do in the precast segment and the competition within, for instance the engineered structural mesh market, they are completely different sets of dynamics, although the products are frequently being sold to the same customer. So I wouldn't assume that pricing pressure on PC strand causes or has any relationship to the pricing dynamics for engineered structural mesh.

Actually on the ESM opportunities, how in terms of the utilization of some of the new expansion you put in, can you update us on that and also update us on type of demand you're seeing right now in your outlook for '08?

The ramp up of the North Carolina line has gone well. We are in the range of 70% of what we ultimately expect to get out of the production line. The Texas startup began in earnest probably in August and September, and they lost several electronic components during that period, that set our progress back. So they are in the very early stages. We are accepting and shipping orders from the production line in Texas, but we did lose probably 30 days through component failures during the startup period.

As far as the market outlook, we still feel comfortable that we are going to ramp those lines up on the pace that we originally assumed. I would say, though, that there are concerns in the Texas market for DOT funding. There have been a lot of articles recently about rather dire state of Texas DOT's funding situation, and that could have an impact on us. It would mean that we would go beyond the Texas market. It doesn't necessarily mean that we won't meet our volume goals.

And lastly, in terms of your PC strand expansion for next year, I know you guys are just kind of working through the end of your upgrade program I guess, but just wondering why another year of [heavy] investment not considering you guys have some excess capacity now. And also whether given what has kind of gone on in the post-tension set of the market whether we should even assume that there would be an opportunity to get involved in that market again, even throughout '08 or in the first half or anything like that.

Addressing the first part of the question, historically over a long period of time the demand for PC strand has grown at a very attractive rate. The PC strand market has always been subject to cyclical up and downs, as well as to varying degrees of import competition that causes headaches and hiccups for some defined period of time. But the PC strand market has always also been attractively profitable for Insteel, and we have no reason to suspect that that is going to change. The time horizon for the PC strand investments that we've made is a multiple year time horizon, and we are comfortable that the investments will provide good returns for our shareholders over time. We can't start and stop long-term planning and long-term investment in our business based on what the Chinese do in any particular quarter.

With respect to the post-tension market itself and why would we expect that we could ever compete in it again, the reason is that the nature of the Chinese competition that we've been seeing is just unsustainable. The Chinese aren't making any money on the product. Chinese costs are rising rapidly, and I would say that one of two things will happen. Either real-life economics will begin to affect the Chinese and they will insist on making a profit on the product, in which case we will be able to compete with them. Or on the other hand if they just completely destroy the market, then we will file trade cases, and we'll prevail. So under either scenario I am confident that we will be back in the slab-on-grade, post-tension market at some point in time, but I don't know when that is. But I do know that when that time comes Insteel will be prepared to serve the market and will capture attractive returns doing so.

Just one other point to add on the Florida project that primarily focused on cost reductions rather than representing incremental capacity. So we would, as we get the upgrades completed and ramp up that equipment, we would expect to realize lower unit conversion costs coming onto that.

Okay. Thank you, guys.

Robert Kelly, Sidoti & Co.

Just a question on the current quarter. Your ability to raise price, is it affected at all by the fact that you're bringing on new incremental capacity on the ESM side, or is that pricing largely held up?

No. That pricing has largely held up.

You had mentioned that the ESM or the nonresidential kind of related products grew around 17% in this quarter. What kind of piece of the business just to give us a sense ballpark, are just pure play nonresidential?

I think we've indicated previously that while the mix has changed with the limited amount of post-tension business but I think we've previously indicated that precast business in prior years had represented about two-thirds of our overall PC strand volume. This year it represented a larger percentage where we pretty much been out of the post-tension segment. On ESM we haven't provided that breakout.

ESM is overwhelmingly nonresidential.

And just a question on the quarter to quarter, 4Q versus 3Q, if you can give us kind of a level of impact, was it all raw material pricing that drove the gross margin degradation, or did you feel some higher or reduced productivity? Order of magnitude if you can help us out there?

I guess in going from Q3 to Q4 I would say the biggest component would have been reduction in pricing. I think I had indicated that average selling prices were down 3.1% sequentially. So that would've been probably the largest component. And then to a lesser extent these would have been probably close to equal in magnitude. The higher unit conversion costs just with the production levels being lower, then the slightly lower volume during the quarter and then lastly the higher raw material costs.

And finally you guys had kind of stocked up on the lower cost imported rod. Has that run its course at this point?

It had to a large extent before this quarter, and the rod pricing has been moving in different directions. There are a few months there where it was actually on the decline within the quarter prior to these recently announced increases. So I would say that the quarter wasn't really unusually impacted either way by higher or lower cost rod.

Thanks.

Jeremy Hellman, Thompson, Davis & Co.

H., you mentioned prior couple questions ago regarding the DOT budget in Texas, and I kind of was going on a path I wanted to kind of see out a little bit more in terms of overall state budgetary health, and what impact you think that could have on that slice of nonresidential demand. Obviously with that I-35 bridge collapse there was this big renewed call for all this work that needs to be done but finding money to pay for it is always the issue. So I wanted to see what you thought about that, whether privatization of roadways will come into play, kind of some bigger longer-term thinking on that, what your perspective is.

I think you're exactly right, that funding is always the issue, and I didn't mean to imply that it is a different or a new issue. Texas, though, is just going through it, and the story is really a state-by-state story. And I know that Texas has recently deferred some projects in view of their budgetary expectations. Longer-term I do believe that the DOTs and at the federal and state levels are going to determine that they are unable to come close to meeting the infrastructure needs of the country and that you will see growing private investment in public infrastructure. And I personally believe that is an excellent development for our business longer-term. I think that we will see much more work actually hit the ground as a result of that.

So nearer term, when you look at state budgets and the impact that real estate related tax collections are going to have on the state budgets, is that any kind of a lurking monster that you see, or is that something that you think is would have more of a minor impact?

Generally the real estate tax is a benefit to local governments, not to state governments. And I think overall the budgetary health of the states is probably as positive as it has been for quite some time. We see here in North Carolina, though, that they are continuously fighting over moving funds into the general fund out of the transportation fund and similar things are going on everywhere continuously. But as an overall statement I don't see a lurking monster out there that would cause funding to decline across the board or on a wide basis.

Great. I appreciate it.

(OPERATOR INSTRUCTIONS) Nat Kellogg, Next Generation Equity.

I am just wondering if you can give us a little more color on any changes you've seen in pricing in the PC strand market. Obviously over the summer we had the drop in the subsidy for Chinese imports. Have you guys started to see anything on the pricing side, or that is still to come?

You're speaking strictly of Chinese pricing?

Yes, I guess PC strand in general, but obviously yes, more focused on the Chinese side.

The Chinese prices are coming up. Just in our own experience in sourcing strand there between the first transaction we made and the last transaction that we made, the price was probably $80 a ton higher, which is why we elected not to continue. The import statistics also show a similar trend with August, which was the first full month that Customs entries of Chinese strand reflect the lower VAT rebate; the average unit values rose about 6%. Now I think that is an encouraging trend, but still the average unit value is unrealistically low. We will need to see that trend continue for it to really be positive for us.

And what are their prices for -- you guys [do] PC strand about $900 a ton, and where are they?

I think the number for August was 685 or something.

Okay, so there is still a ways to go before that gap gets interesting for you guys?

Correct.

Although they have been on the rise; August is the latest data, but there are indications the raw material costs have significantly risen in addition to the freight costs and getting the material over here. So I expect we will see some additional increases.

And our discussions with the office of the US trade route have also been along the lines of insisting that the Chinese treat export tax policies with respect to PC strand the same as they are being treated for wire rod, which means that not only is there no export rebate on wire rod, there is actually a 10% export tax that is imposed on wire rod. And we strongly believe that that same treatment should be accorded PC strand, and the difference between where we are now and the wire rod treatment would be in the range of $100 a ton.

Right, which should go a long way. And now you guys actually I think last quarter and this quarter you basically were out of the post-tension PC strand market, but you were in the post-tension PC strand market in Q1 and Q2 of 2007. Is that correct?

Right.

Okay, so really it is not till you get to Q3 of '08 that that sort of comps -- that you will be complete -- that you sort of get a year-over-year comp where you were completely out of the PC strand post-tension market?

Right.

Okay, that's helpful. And H., I think you briefly mentioned at one point cost reduction initiatives. I am just wondering if I heard that correctly and if so if there is anything to that beyond sort of normal cost controls or just the normal type of business.

My comment was related to the inefficiencies that we've experienced as we have conducted some large-scale projects at our facilities. While I think those projects were by and large managed very well, they do create a lot of redundancies and inefficiencies. And those should disappear as we finished up most of those projects. Unfortunately I can't quantify for you to tell you what we incurred, but it was there. The other part of it is that each of the projects that we have undertaken and completed has a component of cost reduction through increased productivity as part of its return calculations. So now that we are past the building and the installing and the starting up, we will see the higher productivity which will help us address those unit conversion cost matters.

And then just on CapEx, obviously the CapEx being a little bit higher than maybe you guys had previously forecast, is that because things are sort of slipped into 2008? Or is that because you guys have found some additional project, additional spending you would like to do?

There are some rounding out kinds of projects that we are going to undertake. We also have incurred some higher costs on both our Florida, North Carolina and Texas projects related to the deterioration in the value of the dollar relative to the euro. We expected that each time we looked at potentially doing a forward purchase the dollar was at an all-time low, and we felt like those weren't opportune circumstances to do a forward purchase in. But the dollar kept declining, so we had some cost overruns related to that.

Okay. That's fair enough. And then just last question I know somebody asked about the stock buyback, but if you guys do come to the market and buy back shares will you guys announce that or that will just come up at the end of the next quarter?

We would provide an update at the next quarter end.

Thanks. That's all I got for now. Thanks, guys.

(OPERATOR INSTRUCTIONS) There are no further questions. I would like to turn it back over to management for any additional or closing remarks.

Thank you. We appreciate your interest in Insteel and look forward to talking with you on follow-up. Thank you.

Once again, ladies and gentlemen, this will conclude today's conference; and we thank you for your participation. You may now disconnect.