Insteel Industries Inc (IIIN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insteel Industries first-quarter 2012 earnings 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 is being recorded. I would now like to introduce our host for today, Mr. H.O. Woltz III, President and CEO of Insteel Industries. Sir, please go ahead.

Thank you, Karen. Thank you for your interest in Insteel and welcome to our first-quarter 2012 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'll now turn it over to Mike to review our first-quarter financial results and then I'll follow up to comment more on market conditions and our business outlook.

Thank you, H. As we reported earlier this morning, despite ongoing weakness in our construction end markets, Insteel posted improved results for the first quarter ended December 31, which is typically the weakest period of our fiscal year from a volume standpoint due to the onset of winter weather and related seasonal drop-off in construction activity.

The net loss for the quarter narrowed to $0.2 million or $0.01 per share from $6.7 million, or $0.44 a share in the year-ago period.

Our results for the quarter include a $0.4 million gain on the early extinguishment of debt related to the discount on our pre-payment of the subordinated note that was issued in connection with the Ivy acquisition and $0.6 million of net restructuring charges, primarily associated with the reconfiguration of our welded wire reinforcement operations.

The net loss for the prior-year quarter includes $7.1 million of net restructuring charges and acquisition-related costs related to the Ivy acquisition. Excluding these items from both periods, we were essentially at a break-even level in the current-year quarter compared to a net loss of $0.19 a share in the year-ago period.

The primary macro indicators for our markets continue to show signs of stabilizing during the quarter following the unprecedented drop-off in demand that we have experienced since 2008. In the most recent monthly construction spending report from the Department of Commerce, total construction spending rose to its highest level since June 2010. Private nonresidential construction, our primary demand driver, has increased on a year-over-year basis for six consecutive months and is now 14% above its January 2011 low. Despite these recent favorable developments, however, private nonresidential construction remains 33% below its January 2008 high, and we expect that demand for our concrete reinforcing products will remain at depressed levels pending a more pronounced recovery in the labor market and in the overall economy.

Net sales for the first quarter were up 62.1% from the prior year, primarily due to the addition of Ivy's business, together with higher average selling prices with shipments rising 40.4% and average selling prices increasing 15.5%.

On a sequential basis, shipments were down 13.8% from Q4 due to the usual seasonal downturn while average selling prices declined 0.7% as a result of competitive pricing pressures.

Gross profit for the first quarter improved to $4.7 million from a gross loss of $0.1 million in the year-ago quarter with gross margins increasing to 5.5% of net sales from a negative 0.3% due to the incremental contribution generated by the Ivy facilities, higher spreads between selling prices and raw material costs, and lower unit conversion costs relative to the year-ago period.

On a sequential basis, gross profit fell $4.8 million from Q4, and gross margins narrowed by 230 basis points due to the seasonal decline in shipments, lower spreads, and higher unit conversion costs resulting from the reduced operating schedules.

SG&A expense for the first quarter increased $0.4 million from the prior year, primarily due to higher compensation and health insurance costs.

Our effective income tax rate for the first quarter was 37.9% compared with 34.1% a year ago due to changes in book versus tax differences. Going forward, our effective rate will continue to be subject to fluctuations based upon future earnings, changes in permanent book versus tax differences, and adjustments in the other assumptions and estimates that enter into our tax provision calculations.

Moving to the cash flow statement and balance sheet, operating activities used $0.7 million of cash for the first quarter compared to $5.1 million in the year-ago period, primarily due to the reduced loss in the current-year quarter.

The net working capital component of accounts receivable inventories and accounts payable and accrued expenses used $2.9 million of cash in the current-year quarter, while providing $2 million in the prior-year period, primarily due to the $11.7 million reduction in accounts payable and accrued expenses in the current year, largely related to reduced raw material purchases.

Accounts receivable decreased $5.8 million, or 13.9% during the quarter while inventories decreased $3 million, or 3.9% sequentially from Q4, due to a 3.5% reduction in units and a 0.4% decline in average unit values.

Our inventory position at the end of the quarter represented about 3.5 months of shipments on a forward-looking basis, calculated off of our forecasted shipments for Q2 with raw materials at 57 days, WIP at 5, and finished goods at 40.

Capital expenditures came in at $1 million for the quarter versus $0.5 million in the year-ago period and are expected to total less than $10 million for fiscal 2012. We ended the quarter with $16.4 million of borrowings outstanding on our revolving credit facility and $57.5 million of additional borrowing capacity.

As we look ahead to the remainder of fiscal 2012, there continues to be a high degree of uncertainty regarding the timing and trajectory for a recovery in our construction end markets. The architectural Billings Index, a leading indicator for nonresidential construction activity, has shown significant improvement over the past two months, rising above the 50 growth threshold to 52 in November and December. At this point, it's still too early to determine whether this recent upturn represents the beginning of a positive trend.

The prospects for infrastructure construction spending will be significantly impacted by the timing for the resolution of a new federal highway funding bill. While the short-term extensions that have been enacted have served to maintain funding at the levels provided for in the previous SAFETEA-LU authorization, the lack of visibility has shifted the project mix away from longer-term new build projects to repair and maintenance-type work that is less likely to require the use of our products.

Although there has been recent movement in Congress towards the five- or six-year measure that would maintain funding at current levels, there continues to be a lack of clarity regarding the final outcome. Given all the other legislative priorities, it is unlikely that the House and Senate will be able to pass bills and negotiate a final bill before the March 31 expiration date for the latest extension, which will likely result in yet another short-term extension.

Despite these ongoing uncertainties, as we move into our busy season, we expect that our financial results will be favorably impacted by the increasing contribution provided by the Ivy acquisition and the anticipated benefits from the reconfiguration of our welded wire reinforcement operations.

I will now turn the call back over to H.

Thank you, Mike. Over the last several quarters we've reported that demand for our products remained extremely weak and that competitive pricing pressure had escalated. These unfavorable trends continued during our first quarter, and we expect that market conditions will remain difficult in the current quarter and possibly throughout 2012, absent a recovery in nonresidential construction. The competitive pressures we are experiencing across all of our public lines reflect the depressed level of capacity utilization throughout the industry, which has led some of our competitors to employ aggressive tactics to minimize further deterioration in their operating rates and cash flow.

In view of these realities, we maintain our conservative outlook and remain focused on minimizing our cash operating costs, maintaining our market share, and preserving our financial flexibility.

Following the Ivy acquisition last year, we've reported on our restructuring activities, which are intended to align the product mix and capacities of our facilities with the requirements of our customers and markets. I'm glad to report that these activities are essentially complete and that our focus has now shifted to operator training and the realization of anticipated cost and productivity improvements at the newly-reconfigured facilities.

Over the past year, we've relocated a total of six welded wire reinforcing production lines and completed a significant construction project at our Jacksonville facility. With the completion of these activities, we expect to benefit from enhanced customer service, lower inbound and outbound freight costs, and lower unit conversion costs, primarily at the former Ivy facilities. The timing for the completion of these activities is favorable as we're positioned to capitalize on the seasonal upturn in demand that typically occurs later in the year.

The most significant improvement opportunities for the Company are related to the ramp up of production lines at the former Ivy facilities located in Florida and Arizona, which have been operating at less than 30% of capacity due to weak market conditions as well as the disruptions related to our reconfiguration activities and relocation of equipment.

The constraints that we have experienced related to material flows and product mix capabilities have now been resolved, and we expect improved financial results at both facilities as volumes recover.

Following several months of relative calm in the market for our primary raw material, hot rolled steel wire rod, pricing volatility returned in November driven by fluctuations in the prices for steel scrap, which has escalated in recent months following a brief decline. During December and January, rod producers have announced price increases totaling $70 to $80 per ton, depending on the grade, to recover these rising scrap costs.

We believe the increases are likely to stick due to favorable demand for wire rod together with the usual seasonal upturn that is expected in the coming months.

In response to escalating rod costs, we announced an increase of $50 per ton for welded wire reinforcement products effective in January and we'll evaluate additional increases as required to recover higher raw material costs.

At this point, we've elected to hold off in announcing an increase for PC strand products in view of heightened competitive pricing activity, but we'll continue to monitor the market and evaluate our position later in the quarter.

While implementing price increases is challenging, it's particularly difficult in an environment suffering from such depressed capacity utilization levels. We believe, however, that prices will ultimately rise to recover these additional raw material costs, given their magnitude and the margin pressures affecting the industry.

In summary, although the deterioration that has occurred in the construction sector appears to be abating, we believe that market conditions in 2012 are unlikely to improve materially from 2011. While continued market weakness is not welcome, we believe this environment could yield additional growth opportunities that would further strengthen our competitive position and earnings potential.

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

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

Thanks for the comments about what you're doing with wire rod -- or your prices to try to stay up with the increase in wire rod prices from the mills.

On that note, I wanted to ask more of a longer-term question. Wire rod prices back say, six, seven years ago were a lot lower than they are today. Assuming that non-res gets back to that level, say 2005, should we be viewing your company's profitability on a dollars per ton basis or on say operating margins? And the question -- what I'm trying to get to is, wire rod costs are so much higher; could we see you get back to the same dollars of profitability that you did back in '05, but see a contraction in, say, operating margins that might actually mask the fact that you're maintaining your dollars of profitability, if that question makes sense?

I think you're right in that if the increases in our selling prices moved in lockstep with the changes in rod going forward, that would imply a reduction in the percentage margins. But we're hopeful that as market conditions recover and we get back to those previous levels that there will be the opportunity for enhanced spreads similar to what we had experienced in prior years. So we haven't seen anything over the past few years that would cause us to believe that there's been a permanent shift in the market that would preclude us from getting back up to those historical margin levels.

Okay. So I guess if I asked it in a different way, if wire rod prices were to hold at whatever today's level is, which is again, substantially higher than six, seven years ago, and then we actually get non-res activity back to what we saw in the mid-2000's, is it possible to get operating margins back to say, 15%? Or is that a level that is out of reach given that wire rod prices are so much higher?

Tim, I really don't think that there is a linkage with the wire rod prices that would impair the earnings potential of the company. And when you refer to 2005 to 2006, I'm not exactly sure whether rod prices are actually that much different than they were at certain peaks during those times. If you went back to pre-2004, then it's another matter entirely.

Okay, thank you.

(Operator Instructions). Alan Brochstein, AB Analytical.

Hey, guys, congratulations. It sounds like you've done a good job integrating Ivy. And if I'm reading your comments right, is maybe another acquisition looking like something that could happen this year if industry conditions remain depressed? Is that what you were saying?

Well, I think it's the same comment that we've made for a few quarters now, where the environment is pretty inhospitable out there. And I think that it's very impossible that it will give rise to further consolidation in the market. And we believe we're positioned to participate in that, and we're very interested in capitalizing on what we believe would be good timing for the Company and just for the industry as well.

I think last quarter you had said you were surprised that more capacity wasn't coming out. Has there been any capacity? Do you have an update on that?

No, nothing meaningful has really come out of the industry. In certain product lines that are standard products in nature, there have been some companies that have exited, but it's not really a material amount of capacity that is gone.

Okay. And then also, how do you think about the pent-up demand? I know there's been a lot of speculation about highway construction bill that's not happening; it sounds like you don't think it's going to happen now. But when it does happen, how much of a pop do you think the industry could have?

I think if you just look at it from a macro standpoint, considering the construction spending data, although we've seen -- which I think is a good proxy if you drill down to the private non-res construction, that's a good proxy for demand for our products, even though it's improved in recent months, we're still around 33% below the peak level from a few years back, I believe, back in 2008. So I think that's probably a good indicator of the upside potential in terms of a recovery.

Okay. Well, thanks a lot, guys. Good luck in this year.

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

Okay. Well, we appreciate your interest in Insteel and your participation in today's call. Don't hesitate to follow up with us if you have further questions. Thank you.

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