Insteel Industries Inc (IIIN) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Insteel Industries fourth quarter 2010 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 at that time. (Operator Instructions). As a reminder, this conference may be recorded.

I would like to introduce your host for today, Mr. H. Woltz, III, Insteel's President and CEO.

Thank you Karen. Good morning. Thank you for your interest in Insteel. And welcome to our fourth-quarter 2010 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 in our presentation 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.

I will now turn it over to Mike to review our fourth-quarter financial results, then follow up to comment more on market conditions and our business outlook.

Thank you, H. As we reported earlier this morning, Insteel incurred a loss from continuing operations of $1.7 million or $0.09 a share for the quarter, compared with earnings from continuing operations of $2.8 million or $0.16 a share for the same period last year.

The loss for the quarter includes pretax charges totaling $1.9 million or $0.06 a share after tax, for inventory write-downs and the settlement of litigation. $0.4 million, or $0.01 a share after tax, was related to inventory write-downs to reduce the carrying value of inventory associated with our standard welded wire reinforcement product line to the lower of cost or market as a result of competitive pricing pressures. The other $1.5 million or $0.05 a share after tax was for the settlement of the litigation matter that has been discussed in our SEC filings on an ongoing basis dating back to fiscal year 2008.

We are pleased to have this matter resolved, which will serve to eliminate the associated legal fees that we have been incurring and restore the commercial relationship with this customer going forward.

Excluding these charges, the loss from continuing operations for the quarter would've been $0.03 a share.

In addition to these charges, our results for the quarter were unfavorably impacted by lower shipments and compressed spreads between selling prices and raw material costs, which were driven by the continuation of weak market conditions.

Net sales for the fourth quarter were down 8% from the prior year due to a 13.8% decrease in shipments, which was partially offset by a 6.7% increase in average selling prices.

On a sequential basis, net sales were down 9.2% from the third quarter on a 7.5% decrease in shipments and a 2% decrease in average selling prices.

Gross profit for the fourth quarter fell to $2.3 million from $7.7 million in the third quarter and $9 million in the prior year, with gross margins dropping to 4.2% of net sales from 12.4% in the third quarter and 14.8% in the prior year.

Gross profit for the current year quarter includes the $0.4 million charge for inventory write-downs that I alluded to earlier.

The year-over-year reduction in gross profit for the quarter was primarily driven by the narrowing in spreads between average selling prices and raw material costs and to a lesser extent the decrease in shipments.

Our total unit production for the fourth quarter was down 22% from last year and 6% on a sequential basis from Q3, which reduced overall capacity utilization to 49% from 52% in the third quarter and 56% a year ago.

SG&A expense for the fourth quarter decreased $0.3 million from the prior year, primarily due to reductions in legal and consulting expenses, a large portion of which were related to the fees we were incurring a year ago associated with the PC strand trade cases.

Interest expense for the fourth quarter decreased to $42,000 from $157,000 a year ago due to reduced amortization of capitalized financing costs resulting from the June 2010 amendment of our credit facility.

Our effective income tax rate on continuing operations for the fourth quarter decreased to 41.9% from 43.0% a year ago, primarily due to changes in permanent book versus tax differences.

Going forward, our effective tax rate will be subject to change, depending upon the level of future earnings, which could skew the impact of permanent differences, or as there are adjustments in any of the estimates that enter into our tax provision calculation.

Moving to the cash flow statement and balance sheet, continuing operating activities used $1.6 million of cash for the fourth quarter, while providing $15.5 million in the prior-year quarter, primarily due to the year over year changes in net working capital, together with the loss that was incurred during the current-year quarter.

Net working capital used $1.6 million of cash during the current-year quarter, while providing $8.3 million in the prior-year quarter, largely due to the $8.4 million increase in payables from Q3 to Q4 last year.

Accounts receivable decreased $3.5 million during the quarter due to the sequential reductions in shipments and average selling prices, as well is a slight decrease in our days sales outstanding.

Q4 inventories are up $2.1 million from the third quarter due to a 4.9% increase in units on flat average unit values.

Based on our forecasted run rate for Q1, which has historically been our seasonal low point from a volume standpoint, our inventory position at the end of the big year represented about 3.5 months of shipments.

Accounts payable and accrued expenses were down $2.8 million from Q3, primarily due to lower raw material purchases and accrued income taxes.

Capital expenditures for the fourth quarter declined from the prior year to $0.2 million, bringing the total year to $1.5 million, compared with $2.4 million in 2009.

Looking forward, we expect CapEx for fiscal 2011 to come in at less than $5 million.

Investing activities of discontinued operations reflected on our cash flow statement reflects $2.4 million of net proceeds from the sale of our idled Virginia facility previously associated with our industrial wire business, which was completed during the quarter.

We did not repurchase any shares of our stock during the fourth quarter under a 25 million share repurchase authorization.

Going forward, we will continue to be opportunistic in repurchasing shares based on our business outlook and cash flow expectations while maintaining ample borrowing capacity and financial flexibility to capitalize on any growth opportunities that may arise.

We ended the quarter debt-free with $45.9 million of cash and cash equivalents, or about $2.61 per share, up $1.8 million from Q3 and $10.8 million from a year ago.

As we move into fiscal 2011, the primary macro indicators for the construction sector point to continued weakness, particularly in commercial construction, until a more pronounced recovery in the economy and in the job market begins to take hold.

Considering our highly competitive cost structure and our strong balance sheet, we believe we are well-positioned to navigate our way through this challenging business environment and capitalize on any growth opportunities that may develop.

I will now turn the call back over to H.

Thank you Mike. I want to focus my comments on current market conditions, our outlook for demand over the next few quarters, and developments in our raw material markets.

As we discussed on the conference call last quarter, heightened competitive pricing activity had begun to adversely impact margins across each of Insteel's product lines. We mentioned that those trends were likely to continue into our fourth quarter, further depressing margins, in view of Insteel's commitment to keep its customers competitive in an environment of increasingly chaotic pricing behavior by competitors.

Those concerns proved to be well-founded as reflected in our fourth-quarter results that were released today.

Spreads between selling prices and raw material costs have reached levels that have severely impacted the operating results of our industry and are likely to challenge the survival of less cost-effective or more highly leveraged producers. In fact, as reflected in today's earnings release, we've seen some fallout of higher-cost competitors that had not invested in their facilities and presumably elected to close the doors rather than incur continued operating losses.

While these exits from the market illustrate the harsh competitive environment that exists, the elimination of these standard welded wire reinforcing competitors is not expected to have a significant market impact for the immediate future, just given the depressed level of demand. Nonetheless, it is encouraging to see some initial indications that market forces are spurring a reconciliation of supply and demand.

The primary challenge we continue to face is simply a lack of demand for our products, driven by an economy that is at best stuck in neutral with historically low levels of consumption of welded wire reinforcing and PC strand.

Employment growth is marginal, economic and tax policies are unfathomable, creating enormous uncertainty and undermining the eventual recovery of the private sector.

As Mike mentioned in his comments, Insteel operated at only 49% of capacity for the fourth fiscal quarter, as compared to 56% in the fourth quarter of 2009. The comparison is particularly sobering when you consider that Q4 normally benefits from strong positive seasonal forces and that Q4 last year was extremely weak.

Needless to say, at this point we see no indications of a near-term recovery in demand.

Turning to our raw material markets, after significant price escalation between January and June, softening demand for wire rod and declining steel scrap prices have tempered pricing expectations through the remainder of the calendar year.

As we have learned over the last few years, however, wire rod prices correlate closely with changes in the steel scrap market, which is subject to abrupt changes of momentum based on a broad array of factors that extend well beyond just domestic supply and demand.

Considering the high degree of uncertainty in end demand for our products, together with unfavorable seasonal trends, we plan to reduce our inventory position over the next few months.

You may recall that we reported in the third quarter of quarter fiscal 2009 that two wire rod production facilities representing approximately 20% of domestic capacity were suspending operations. A New Jersey facility was slated to close permanently, and a facility in South Carolina was being idled indefinitely.

While the permanent closure of the New Jersey facility is complete, recently there have been reports that the South Carolina facility will resume operations early in 2011.

We've had a long history of purchasing from this facility, which is well situated relative to our North Carolina, Tennessee and Florida manufacturing plants, and a resumption of operations would be a positive development for Insteel.

Finally, I want to mention that subsequent to the end of the fourth fiscal quarter, we resolved litigation with a customer that had been pending for almost three years. In addition to eliminating the ongoing litigation cost, the risk of an adverse jury verdict, and a significant ongoing distraction for the company, we believe the resolution of this matter will lead to a resumption of commercial relations between our companies, which would clearly be a favorable development given the current market environment.

We don't expect to generate shipping volumes immediately that would be material to Insteel's overall performance. But over time we expect to restore this relationship to the important position that it occupied prior to the disagreement that resulted in a commercial hiatus.

In view of the likely continuation of weak market conditions, we'll focus our efforts on minimizing cash operating costs, maintaining our market share, and preserving our financial flexibility so we are able to pursue any attractive growth opportunities that may arise during this downturn.

This concludes our prepared remarks, and we will now take your questions. Karen, would you please explain the procedure for asking questions.

(Operator Instructions) Robert Kelly, Sidoti.

Just had a question. You talked about the intensifying pricing pressures in the release, but on a sequential basis pricing -- average pricing only down 2%. Can you just kind of reconcile what is going on there?

Well, pricing -- competitive pricing activity is at a high level. Of course when we talk about pricing and the impact on Insteel's profitability, it also goes to the question of spreads between wire rod costs and selling prices, and the spreads have clearly narrowed as some of the higher raw material cost from earlier in the year is going through cost of sales at a time when competitors have elected not only not to seek to recover higher raw material costs in the market but to in fact reduce selling prices, so the impact on spreads is what is really driving the poor results.

Right. But the selling price has held pretty firm sequentially. And you've kind of worked through a big portion of your high-cost raw material. Should we expect spreads to stay stable for the next couple of quarters? Or do you expect pricing competition to take prices another leg down?

Well, clearly the competitive pricing pressure continues. We will know only month-to-month what happens on transaction prices for wire rod. So at this point it is not something we can forecast. But let me just say, to sum it up, we feel margin pressure.

Understood. Can you talk about the size and the scope of the closures you saw and that you called out in the release? And what (multiple speakers) focused on?

They are -- I think more they are indicative of market conditions rather than of themselves being of great substance. Both of the producers were reasonably small, producing between 25,000 and 35,000 tons per year. They've both focused solely on standard welded wire reinforcing products, and from our knowledge, both were fairly antiquated facilities from an operating point of view.

Part of your efforts to match the lower industry pricing was to effect some of this consolidation. Is this the strategy for the next -- for the foreseeable future? Do you just (multiple speakers)

No. I think what is really driving Insteel's commercial policies right now is that our customers expect that we keep them competitive in a market that is increasingly chaotic. We're going to do that.

You may recall from prior quarters we indicated that we had made what we would consider to be a valiant effort to recover higher raw material prices in the marketplace, and we hung out there for weeks as we watched competitors undercut us and indicate that they really weren't interested in doing that. So here we are.

We're not going to lose our market share. We're going to keep our customers competitive. And we're just going to have to wait for some recovery or some change in market conditions.

Okay. And then finally you ended the year with almost $46 million in cash on the balance sheet. How do you think about uses for cash, especially with it seems like some of your -- quote, unquote -- growth opportunities are not going to be surviving much longer. What are your opportunities for M&A and things like that as far as uses for cash?

Well, let me say first, we feel awfully good about having it on the balance sheet at this point, in view of the hostile environment that we're operating in. We are, as Mike pointed out, extremely well positioned to capitalize on the opportunities, and we're looking, and I don't think we can say more than we're just -- we're interested and we're proactive. So we're hopeful something positive emerges this what is a pretty dismal environment.

What are your thoughts on -- as far as returning it to shareholders at this point in the game?

Well, I think we have a pretty good record of doing that, Bob. It would take an assessment by the company and the Board that, given all circumstances, it was the right thing to do, to either recommence the share repurchases or look at another special dividend of some type.

So we're constantly evaluating that, and it remains a high priority for us.

Thanks guys.

(Operator Instructions) map Tim Hayes, Davenport & Company.

Just one question. Mike, could you repeat the year-over-year changes for pricing and shipments, please?

Sure. On a year-over-year basis, shipments were down 13.8%, and that was partially offset -- the impact of that was partially offset by a 6.7% increase in average selling prices.

Did you have the sequential numbers? Or --?

Yes, we do. Thanks.

Sir, does that conclude your question?

Yes it does.

Thank you. I show no further questions in the queue at this time.

Okay. Thank you for your interest in the company, and we'll look forward to updating you next quarter.

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