Insteel Industries Inc (IIIN) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insteel Industries fourth-quarter 2012 earnings call. (Operator Instructions). As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, H.O. Woltz. Sir, you may begin.

Thank you. Good morning, and thank you for your interest in Insteel and welcome to our fourth-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, which 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 fourth-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, Insteel's net earnings for the fourth quarter ended September 29 remained relatively flat at $0.8 million, compared with $0.9 million in the third quarter and $1 million in the same period a year ago. Earnings per diluted share were unchanged from both the third quarter and the prior year at $0.05.

Our fourth-quarter results were unfavorably impacted by continued weakness in our construction end markets and further compression in spread, similar to what we experienced during the third quarter, reflecting the consumption of higher-cost inventory under FIFO accounting that was purchased in earlier periods, matched against declining selling prices.

Net sales for the fourth quarter were down 1.2% from the prior year as a 5.1% reduction in average selling prices offset a 4.1% increase in shipments. On a sequential basis, net sales were up 4.6% from Q3 on a 6.8% increase in shipments, partially offset by a 2.1% decrease in average selling prices.

Gross profit for the fourth quarter fell to $5.9 million from $7.7 million in the year-ago quarter, with gross margins narrowing to 6% of net sales from 7.8% due to the compression in spread, which more than offset the favorable impact of higher shipments and lower unit conversion costs. On a sequential basis, gross profit fell $0.5 million from Q3 and gross margins decreased 80 basis points, primarily due to further compression in spreads.

SG&A expense for the fourth quarter was down $1.4 million from the prior year, primarily due to the relative year-over-year changes in the cash surrender value of life insurance policies, the net gain on the proceeds from a life insurance claim, and lower compensation expense.

Interest expense for the fourth quarter fell to about half the prior-year level, largely due to the lower borrowing rates on our revolving credit facility relative to the $13.5 million note related to the Ivy acquisition that was outstanding in the prior-year quarter and prepaid in December.

Our effective income tax rate for the fourth quarter dropped to 27.5% from 47.9% a year ago, primarily due to changes in permanent book versus tax differences, which have an amplified impact on the rate at lower levels of pre-tax earnings. Going forward, our effective rate will continue to be subject to fluctuations based upon the level of future earnings, 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 $11.4 million of cash for the fourth quarter, while using $3.2 million in the same period last year, primarily due to the year-over-year changes in net working capital largely related to the current-year reduction in inventories.

Accounts receivable rose $1.4 million during the quarter due to the sequential increase in sales, and inventories fell $11.6 million from Q3 on an 8.3% decrease in units and a 7.3% decline in average unit values, while accounts payable and accrued expenses fell $2.1 million, primarily due to lower raw material purchases in the latter part of the quarter.

Our inventory position at the end of the quarter represented a little over 3.5 months of shipments on a forward-looking basis, calculated off of our forecasted Q1 shipments, and reflected lower unit values than the material that was sold during the fourth quarter under FIFO accounting, due to the recent decline in raw material costs.

Capital expenditures came in at $8.1 million for the year versus $7.9 million last year and are expected to total less than $12 million in fiscal 2013, which is consistent with our previous indication that CapEx would not exceed $20 million over the 2012 to 2013 period.

We ended the quarter with $11.5 million outstanding on our revolving credit facility, down $7.1 million from the end of Q3, and $67.2 million of additional borrowing availability.

As we head into fiscal 2013, the latest macro data for the construction sector reflects mixed signals. Total construction spending for August fell to its lowest level in four months, due to weakening outlays for non-residential construction.

After showing signs of improvement earlier in the year, private nonres construction has now fallen sequentially for three straight months. Public construction was down 3.5% from a year ago, due to ongoing budget pressures at the state and local level and the winding down of federal stimulus spending. In contrast, the continued improvement in the housing sector has driven private residential construction to its highest level since January 2009.

Yesterday's housing report for September reflected similar strength, with total starts rising to the highest level in over four years. Assuming these favorable trends continue, the improvement in new home construction should begin to favorably impact certain segments of the private nonresidential sector.

In August, the Architectural Billings Index, a leading indicator for non-residential construction activity, moved above the 50 growth threshold for the first time in five months, improving to 50.2 from 48.7 the prior month, and has now improved sequentially for three consecutive months. Considering the high degree of variability in the index over the past year, however, it is unclear whether this favorable trend will continue, pending more positive signs in the economy and in the job market.

Despite the ongoing uncertainty in our markets, as we move into fiscal 2013 we expect that our financial results will be favorably impacted by the anticipated benefits realized from the recently completed reconfiguration of our welded wire reinforcement operations and the increasing contribution provided by the Ivy acquisition.

I'll now turn the call back over to H.

Thank you, Mike.

Our Q4 results reflect the continuation of weak market conditions we reported to you over the last several quarters. Our expectation going into 2013 is for only a modest increase in shipments, pending a broader-based economic recovery that would spur more robust job creation and construction activity.

In view of these trends, we continue to focus on further cost-reduction opportunities in our operations and additional investments that broaden our product offering, reduce our operating costs, and enhance our ability to capitalize on an eventual recovery in demand.

As Mike mentioned, our ESM expansion products remain on track, which entail the commissioning during our second fiscal quarter of new production lines at the North Carolina and Texas facilities and the relocation of a third line to the Missouri facility. We previously indicated that these projects will enable us to reduce our operating costs, enhance our customer responsiveness, and expand the scope of the rebar replacement options we provide to the market.

Taken together, we expect that they'll generate $15 million to $20 million of incremental revenues when fully operational, and they should contribute to earnings during the current fiscal year.

Turning to our raw material markets, we've continued to experience heightened levels of volatility since our last earnings call. After dropping precipitously in July, steel scrap prices rebounded in August, only to fall off significantly again in September and in October. While these fluctuations have generally translated into corresponding changes in the prices for our primary raw material, hot rolled steel wire rod, our suppliers are motivated to use scrap market volatility as an opportunity to enhance their metal margins. Their ability to do so, however, is ultimately determined by the relative supply/demand balance in the marketplace.

The impact of declining wire rod pricing on the profitability of our industry ultimately depends on the competitive dynamics in our markets, and ongoing uncertainty precludes us from forecasting margins over the next few months. As we've indicated previously, we're focused on providing quality products and exemplary service at competitive prices and maintaining our market-leading position.

In summary, conditions in our markets for the first half of 2013 are likely to resemble those who've experienced for the last several quarters, characterized by the continuation of weak demand and a highly competitive pricing environment. While we expect modest growth in shipments of engineered structural mesh over the next few quarters, the growth expectations for our other product lines are muted, pending a broader-based economic recovery or until we're able to consummate another acquisition.

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

(Operator Instructions). Tyson Bauer, KC Capital.

Good morning, gentlemen.

Good morning, Tyson.

Good morning, Tyson.

A couple of quick items. You talked about the recent housing starts being better than what we've seen in years past, and that is kind of an early indicator for some of the non-residential construction. Given your past cycles or your history here, what kind of time lag is typical? And is it different this go-around because we're working off such small beginning numbers that even a small percentage increase, although favorable, it may take a longer to trigger some of these nonresidential construction numbers to improve quicker?

Yes, I don't know that the historical relationships or trends will necessarily repeat themselves this time, just given the magnitude of the downturn that's occurred.

As you said, the housing start growth from a percentage standpoint has been pretty hefty, but that's off an extremely low base, and relatively speaking, when you go back and look at the normal level over a longer period, it should be in the 1.5 million range or the peak level a few years ago. Even with these high percentage increases, it's going to take an extended period to get back up to those levels.

And I would say we'd probably expect the same to be true for nonresidential. That typically lags after housing. Housing is the first sector that turns up, and then you gradually see improvement in nonres. And I think at this point, we'd expect the upturn to be gradual over an extended period.

Is there a displacement that you are viewing between public spending decline with the private sectors improving? Are we kind of in a rough patch right now where those lines aren't matching up so we're ending up with a little bit of a void?

Yes, earlier in the year, we were seeing more of an upturn in private nonres, and that's consistent with the macro data. When you look at the spending data, there was a nice run up earlier in the year, but then over the past few months, the past three months in particular, there's been a drop off.

So at this point, it's difficult to say. I think some of that is just related to the increased uncertainty approaching the end of the year with all these political and economic issues, so moving into next year, there could be some improvement. But at this point, it's unclear.

The public sector spending has continued to decline. The recent extension of the federal highway funding bill should alleviate that and serve to mitigate that decrease, but you still have budget pressures at the state and local level that are pushing it lower.

Tyson, one other point that I would make is despite the fact that we saw some reasonably robust increases in private nonres spending earlier in the year, it really didn't translate into a noticeable impact on our business, which is curious in some respects but nonetheless a fact.

I was going to comment -- that's my last topic. When we did the Ivy transaction and combining one and two in several of your markets, one of the main tenets that we thought we were going to see is much better pricing power by your firm. We really have not seen that since that transaction, even as we've taken the costs out of the business. Any thoughts there on why we haven't had better pricing controls or ability with such a large market share?

Well, I mean, I'm not so sure that we shared that same feeling, that we were going to have a whole lot of pricing power in this market.

I think that with Insteel operating below 50% capacity, it's reasonable to expect that many of our current competitors are doing the same and that conditions are very difficult and there's just a huge scramble in the industry for maybe not just market share, but for survival. So I think the difficult conditions have bred desperate tactics on the part of a lot of competitors, and it's hard to say when that changes.

Thanks a lot, gentlemen.

(Operator Instructions). At this time, I'm not showing any further questions from the phone lines.

Okay. In that case, thank you for your interest in the Company. If you have questions later on, don't hesitate to call us for follow up. Thank you.

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