Insteel Industries Inc (IIIN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Insteel Industries first-quarter 2013 conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to hand the conference over to Mr. H.O. Woltz the third, President and CEO. Sir, you may begin.

Thank you. Good morning. Thank you for your interest in Insteel, and welcome to our first-quarter 2013 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, Insteel posted improved results for the first quarter ended December 29 with net earnings rising to $2.4 million or $0.13 per diluted share, the highest level for Q1 since 2008 prior to the onset of the recessionary conditions in our construction end markets.

Our results for the quarter were favorably impacted by widening spreads relative to the depressed levels we've experienced over the past year due to the consumption of higher cost inventory purchased in prior periods, coupled with declining selling prices.

Net sales for the first quarter were up 1.3% from the prior year on a 5.5% increase in shipments, partially offset by a 4% reduction in average selling prices. On a sequential basis, net sales were down 12.2% from Q4 on a 12.6% decrease in shipments, reflecting the usual seasonal downturn related to winter weather and the drop-off in construction activity.

Average selling prices for Q1 were up 0.5% from the fourth quarter, which marked the first time they've risen sequentially since the fourth quarter of 2012.

Gross profit for the first quarter rose to $8.6 million from $4.7 million a year ago with gross margins rising to 10% of net sales from 5.5% due to the widening in spreads together with higher shipments and lower unit conversion costs.

On a sequential basis, gross profit was up $2.7 million from Q4, and gross margins rose 4% due to the increase in spreads, which more than offset higher unit conversion costs and lowers shipments resulting from the seasonal downturn in demand.

SG&A expense for the first quarter was up $0.3 million from the prior year, primarily due to the relative year-over-year changes in the cash surrender value of life insurance policies and higher compensation expense, partially offset by lower bad debt expense. Interest expense for the first quarter fell by $0.2 million from the prior year, due to the decrease in our average debt level in the current year and lower borrowing rates in our revolving credit facility relative to the $13.5 million note that was outstanding through most of the prior year quarter.

Our effective income tax rate for the fourth quarter dropped to 34.7% from 37.9% a year ago, primarily due to changes in permanent book versus tax differences.

Moving to the cash flow statement and balance sheet, operating activities provided $23.5 million of cash for the first quarter, while using $0.7 million in the same period a year ago.

The year-over-year improvement was primarily driven by the relative changes in networking capital, which provided $17 million of cash in the current year, while using $2.9 million in the prior year.

Accounts receivable fell $6.9 million during the first quarter due to the sequential decrease in sales, and inventories fell $9.5 million from Q4 on a 12% reduction in units and a 2.9% decrease in average unit values, while accounts payable and accrued expenses rose $0.5 million.

The strong operating cash flow for the quarter allowed us to repay the $11.5 million of borrowings that were outstanding on our revolving credit facility, returned $5 million to shareholders through the payment of a $4.5 million special cash dividend cash and $0.5 million regular cash dividend and fund $2.6 million of capital expenditures, primarily related to the expansion of our ESM business.

We ended the quarter with $4.8 million of cash and cash equivalents and no borrowings outstanding on our revolving credit facility.

As we look ahead to the remainder of fiscal 2013, the latest macro data for our construction end markets reflects mixed signals. The recovery in the housing market appears to be gaining momentum with private residential construction spending rising to its highest level in four years. Assuming this positive trend continues, the increase in new home construction should begin to favorably impact certain statements within the private nonresidential sector, our primary demand driver.

Growth in nonres activity, however, is likely to remain modest, pending a more pronounced recovery in the overall economy.

In November, the Architectural Billings Index, a leading indicator for nonresidential construction activity, rose to 53.2, its highest level since November 2007, and it has now remained in positive territory for four straight months.

It's still unclear whether this improvement represents the beginning of a sustainable trend, however, considering the high degree of volatility in the index over the past year.

Despite the ongoing uncertainty in our markets, we expect our financial results for the balance of the year will be favorably impacted by the anticipated benefits realized from the recently completed reconfiguration of our welded wire reinforcement operations and the increase in contribution provided by the Ivy acquisition.

I will now turn the call back over to H.

Thank you, Mike. Our Q1 results reflect stronger market conditions than we had expected going into the quarter. Shipments exceeded our forecasts, which favorably impacted revenues and unit conversion costs as we found it necessary to schedule most plants at higher rates of capacity utilization than originally planned. Spreads between raw material costs and selling values widened due to a more muted price competition during the quarter and the consumption of lower cost raw material that Mike alluded to in his comments.

I should emphasize that the pricing environment continues to be highly competitive. There seems to have been, however, a slight but noticeable reduction in the number of competitive pricing situations raised by our customers. Although it's too early to consider the uptick in shipments to be a sustainable trend, we can report that through the first half of January, activity has remained at an elevated level relative to prior expectations.

Despite the welcome news on first-quarter shipments, we expect only a modest increase in shipments for 2013, pending a broader-based economic recovery that would spur more robust job creation and construction activity. We continue to focus on cost reduction opportunities in our operations and additional opportunities to broaden our product offering and enhance our ability to capitalize on improving demand environment.

Our ESM expansion projects are proceeding, which entail the commissioning during this quarter of a new production line at the Texas facility and the startup of a relocated line at the Missouri facility. The new production line that will produce specialty ESM products at the North Carolina plant is now expected to be commissioned late in the third quarter due to delays from our equipment supplier.

As we previously indicated, these projects are expected to have a beneficial impact on operating costs, enhance our customer responsiveness and expand the scope of the rebar replacement options we can offer to the market. Taken together, we expect they will generate $15 million to $20 million of incremental revenues annually when fully operational, and we expect them to contribute to earnings during the current fiscal year.

Turning to our raw material markets, following the extreme volatility in the steel scrap market during the fourth quarter of fiscal 2012, conditions moderated somewhat during the first quarter with prices fluctuating in the range of $20 to $30 per ton as compared to more than twice that amount during Q4.

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 volatility as an opportunity to enhance their metal margins. Their success with this strategy is ultimately determined by the relative supply/demand balance in the marketplace.

In view of the continued strength in the automotive market, which is a significant demand driver for wire rod, any meaningful recovery in the construction sector during 2013 could cause raw material availability to tighten considerably with a corresponding impact on pricing.

To summarize, up to this point in fiscal 2013, we've been pleasantly surprised by the stronger than anticipated demand for our products in what continues to be a challenging environment. We are also encouraged by the continuing recovery of the housing market as new home construction spurs demand for our products and frequently serves as a leading indicator for non-residential construction, our primary demand driver.

With that said, if the market is, in fact, entering an early stage of recovery, it's likely to be gradual and protracted as there are no underlying fundamentals that indicate we are on the precipice of a robust uptick in demand.

Shipments of engineered structural mesh should be positively affected by both better market conditions and the ramp-up of our new and reconfigured production lines. The growth in shipments for other product lines is likely to be more muted pending a broader-based economic recovery or until we complete another acquisition.

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

(Operator Instructions). Tyson Bauer, Kansas City Capital.

Good morning, gentlemen. An excellent quarter. (multiple speakers). H., you talked about some of the marketplace, the volume growth there. Are you able to really kind of in your opinion break that between the growth in the marketplace as opposed to just the benefit in some of your competitors or the competitive landscape not being quite so cut throat as we've seen in previous quarters?

Well, as I emphasized, the pricing environment, Tyson, is still highly competitive. I would venture to say that underlying the improvement in our results is increased demand probably to a greater degree than a lower level of competitive activity.

Okay. In regards to preliminary budgets that you've seen at the state levels in municipality, are they still being very cautious as we enter into the next 12 months, or are you seeing some renewed activity of getting some projects in the planning stage?

No, I think the constrictions at the state level continue to be a concern, although you are reading today about a number of states that are beginning to see positive results of the efficiency and cost curtailment activities that have been taking place over the last year, together with improved tax revenues that are driven by some level of economic recovery. But I would say that trend is good, but in terms of it really generating a lot of definitive kinds of leads and projects right now, I don't see it.

Okay. In the fourth quarter, we've seen rebar prices in China go up considerably relative to where they were. Does that have, at least if you isolate that, a benefit for you here domestically?

I think the changes in hot-rolled products in China is really related to the significant increases in iron ore prices that we've seen since the second calendar quarter of 2012. Clearly as you focus on the markets here, the competitiveness of our products, particularly ESM, is affected by the domestic pricing for rebar. And to the extent that the overwhelming majority of our product is certified under domestic content or by America rules, the offshore price is of less dramatic importance to us from a month-to-month point of view.

Okay. And just in summary, it does appear that you are pushing us toward favorable comparisons as we go through with the potential for second half being much better here than the first half, depending on how things roll out on the macro side?

Tyson, I'd have to say that's one interpretation, but we are really still pretty cautious about what's going on that, you know, we operate with minimal backlogs and visibility, and while we're glad to be in the position that we're in now, we certainly aren't taking anything for granted going forward.

All right. Thanks a lot, gentlemen.

Robert Kelly, Sidoti & Co.

Good morning. I had a question on spreads as we kind of move into the rest of fiscal 2013. You've consumed a couple of months of low-cost raw material, and I'm assuming you've seen a little bit of creep-up in your raw material costs from where we were in 4Q? Are you able to price accordingly to maintain spreads at the rate they were in the fiscal first quarter?

Well to the extent we're carrying approximately three months of inventory, we know what our good costs of sales are going to be over that amount of volume, Bob. But the volatility certainly has not gone away. It's been muted in the last two or three months.

But I wouldn't tell you that we would feel confident in having the ability to pass through a spike in raw material prices should it happen. I don't expect that for January or February that being a spike in raw material costs, but there's no say in that it won't happen in March or April. And I don't feel like we have the pricing flexibility just to pass that through.

And then as far as your comment in the press release, the housing market recovery perhaps spurring a broader-based recovery in nonres markets you play in, what sort of lag should we expect between housing and nonres? I mean how do you guys view that lag historically? Hello?

Well, we're here.

I don't know that we could state a definitive timeframe. I mean there are so many other variables involved as well that can impact nonres. I don't know that we would want to --

(multiple speakers) I think historically you may be looking at three or four quarters, Bob. But I don't know that that would hold true this time around.

Okay. And then just on cash flow, a really solid start to the year, but a lot of it is working capital that does not come back to you? Why did the inventory drop off so much, and are you not seeing similar demand from better than expected demand that you saw in 1Q spill into Q2? It just seems like a big inventory drawdown. And then what does that mean for the balance of the year for free cash flow?

I think a large part of the inventory drop down is just related -- is seasonal in nature. When you look at our quarter and position it, it represented slightly under three months of shipments, which I guess is we've been above that the past few quarters. But I'd say that's generally right in the typical range around three months on a forward-looking basis.

Going forward there will likely be a working capital build moving into Q2 and then into Q3, just due to the seasonal pickup in volume where that would typically result in an increase in receivables and inventories as well and then turn back in the other direction later in the year.

But typically in Q1 you see a large dropoff just with the reduction in volume and then the related reduction in receivables inventories.

Great. And then you talked about CapEx being less than $12 million for 2012 -- I am sorry for fiscal 2013?

Right.

What would -- I mean you did quite a bit last year. If you were to spend another $8 million or $9 million to get to that $12 million goal, what would it be targeted at?

There are some remaining balances related to the ESM expansion. There've been progress payments made with some remaining balances there, and then really just a variety of other projects primarily are just base maintenance level type needs that are recurring.

So maintenance CapEx is $8 million or $9 million a year?

I think we've said prior that we view base CapEx to be in the $5 million to $6 million range at a maintenance level, and the way we got to $12 million for 2013 is that in 2012 we expected about $20 million between 2012 and 2013. $8 million of that was spent in 2012, so the balance is $12 million. And it's not a goal necessarily. It's, I think, we typically said that it wouldn't exceed that.

Great. Thank you, guys.

(Operator Instructions) Tim Hayes, Davenport & Co.

Good morning. Just a couple of questions. I heard a CapEx number in the sort of -- was it $2.4 million range? With that for the new production lines?

The bulk of the CapEx for the quarter was related to the ESM expansion, you are correct.

Okay. And on -- we've been hearing some sort of chatter about potential wire rod case filed against China. Any thoughts on the likelihood that that would occur? I guess our concern there is, if it would, then you would perhaps get a spike in the domestic wire rod prices, and then you had to pass that through. Just was curious on your thoughts on that.

Keep it in mind that we really don't have insight into the details of what's going through the minds of the rod producers. I would say that the issue has arisen in our planning horizon, and we would expect that if a case were filed, that it couldn't be filed before late in the second calendar quarter or early in the third calendar quarter of 2013. And I think that the threshold for reaching an injury determination there is it's probably a long way away from them right now.

With that said, the impact of a case on China, particularly a successful case, would be pretty interesting on our industry. Because if you look back over time, a spike in wire rod prices hasn't necessarily been a bad event for our industry if it comes along with tightening availability.

So I think it is possible, but I would say it's less than 50%. And then the impact, if it were to happen, is it would be interesting.

Okay. And my final question, do you buy any offshore product for the non -- sort of the non "Buy America" contracts or business that you have?

We do, yes.

I mean, as a percentage of your purchases, what does offshore represent?

It ranges from 5% to 20%. It is probably somewhere in the middle right now, 10% to 15%.

Okay. Thank you.

Matthew Dodson, Edmunds White Partners.

Can you talk about kind of what you're seeing with the MAP-21 and TIFIA bill that was just passed. You know, the cement guys are really bullish on volume going forward and increasing price. I was hoping to kind of understand better what you're seeing there in Texas and Virginia, and can you kind of shine a little more color on that?

Well, we are certainly aware of it, and I think it has a prospect for improving the level of spending pretty significantly. But to tell you that we can point to specific projects which have grown out of the program would not be correct at this point in time. But we consider it a favorable underlying driver, but I would say the result is yet to be known.

You know, if these projects start in the spring or summer, when would you see those orders matriculate?

Well, when you say start, if that implies design and engineering, it could be 12 to 18 months later that it translates into demand for our product. And, as you know, a lot of these projects also include property acquisition, which can be fraught with all kinds of delays and problems.

So I guess it goes back to the shovel-ready concept that we heard so much about a few years ago. There's just really not such a thing in our industry, and these timelines can really be lengthy.

Thank you. I'm showing no one else in queue at this time.

Okay. Well, we appreciate your interest in Insteel, and feel free to call us back for follow-ups if something occurs to you. Thank you.

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