Insteel Industries Inc (IIIN) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insteel Industries third-quarter 2013 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 be given at that time. (Operator Instructions). As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, H. Woltz, Insteel's President and CEO. You may begin.

Thank you. Thank you for your interest in Insteel and welcome to our third-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 on today's call 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.

All forward-looking statements are based on our current expectations and information that is currently available. We disclaim any obligation to update these statements in the future to reflect the occurrence of anticipated or unanticipated events or new information. I'll now turn it over to Mike to review our third-quarter financial results and the macro indicators for our construction end markets. 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 rose to $3.3 million or $0.18 a share for the third quarter of fiscal 2013, from $0.9 million or $0.05 a share in the same period a year ago, marking the third consecutive quarter that we posted significant year-over-year improvement. Our results for the quarter include a $0.4 million charge that was recorded in other expense for the net loss on the disposal of equipment, which reduced net earnings by $0.01 a share.

Through the first nine months of the fiscal year, net earnings were $9.4 million or $0.51 a diluted share, the highest level for the period since the onset of the downturn in our construction end markets in 2008. Net sales for the third quarter rose 3.6% from the prior year on a 9.3% increase in shipments, which more than offset a 5.3% reduction in average selling prices.

On a sequential basis, net sales increased 17% from Q2, driven by a 21.7% increase in shipments which exceeded the usual seasonal upturn coming off the depressed volume of last quarter that resulted from the severe winter weather in most of our markets. Despite the healthy sequential increase, shipments for the third quarter were also unfavorably impacted by the weather, particularly the excessive rainfall in the Southeast and Midwest. The continuation of the adverse weather has made it difficult for us to get a clear view of the actual underlying demand trends for our products and the magnitude of any weather-related pickup that may occur when weather conditions return to normal.

Following a period of relatively stable pricing through the first half of the year, average selling prices for the third quarter fell 3.9% on a sequential basis from Q2 as competitive pricing pressures intensified in most of our markets. We believe this pricing erosion was facilitated by the softening in raw material costs that occurred during the quarter, which is expected to reverse course in August in view of the recent upturn in steel scrap prices.

Gross profit for the third quarter rose to $10.9 million from $6.4 million a year ago, with gross margins rising to 11.3% of net sales from 6.8% due to wider spreads and, to a lesser extent, higher shipments and lower unit conversion costs relative to the prior year quarter. On a sequential basis, gross profit decreased $0.1 million from Q2 and gross margins fell 3% due to the drop-off in selling prices which offset the favorable impact of the increase in shipments and lower unit conversion costs.

SG&A expense for the third quarter rose $0.5 million from the prior year largely due to higher incentive compensation driven by our improved results. Our effective income tax rate for the third quarter fell to 35.5% from 38.6% in the prior year quarter, primarily due to changes in book versus tax differences which had an amplified impact on the prior year rate due to the relatively low level of pretax income.

Moving to the cash flow statement and balance sheet, operating activities provided $5.7 million of cash for the third quarter while using $10.1 million in the same period a year ago, primarily due to the relative year-over-year changes in net working capital and the increased earnings in the current year. Accounts Receivable rose $3.8 million during the quarter due to the sequential increase in sales. Inventories rose $2.3 million or 3.5% on a 4.8% increase in units, less a 1.2% decrease in average unit values and accounts payable and accrued expenses rose $5.5 million due to higher raw material purchases and import receipts during the quarter.

Our inventory position at the end of the quarter represented about three months of shipments on a forward-looking basis, calculated off of forecasted shipments for the fourth quarter. In the wake of the recent downturn in raw material costs and the offshore purchases that were received during the quarter, our inventory carrying value reflected lower average unit costs than third-quarter cost of sales, which should favorably impact our fourth-quarter results.

Capital expenditures through the first nine months of the year were essentially unchanged from the prior year at $4.4 million. We ended the quarter with $12.1 million of cash and cash equivalents, up $4.2 million from the previous quarter and no borrowings outstanding on our $100 million revolving credit facility.

As we look ahead to the remainder of fiscal 2013, the most recent macro data for our construction end markets reflects continued improvement led by the ongoing recovery in the housing sector, which has historically served as a precursor for increased private nonresidential construction spending, our primary demand driver. Through the first five months of the year, total construction spending in the US was up 6.2% year over year driven by private residential construction, which rose 25.2%, while private nonresidential construction was up only 0.6%, and public construction dropped 5.2%.

In May, the Architectural Billings Index, a leading indicator for nonresidential construction activity, rebounded to 52.9 after dropping into negative territory the previous month. It has now remained above the 50 growth threshold for nine of the previous 10 months, implying increased non-res structure and spending in the coming months, assuming the historical correlation holds up between architectural design activity and nonresidential construction. We look forward to demonstrating the increased earnings power that we believe we have developed as our markets recover and utilization rates ramp up to reasonable levels. I will now turn the call back over to H.

Thank you, Mike. As reflected in our release and in Mike's comments, activity levels in our markets improved marginally during the third quarter, continuing a plodding recovery characterized by sluggish construction spending and employment. Weather conditions, which adversely affected volumes in Q2, continued to be less than ideal during the quarter with abnormal amounts of rain affecting construction projects in much of the country. Looking forward, our opinion is unchanged regarding the likely pace of the recovery through the next few quarters. We expect gradually improving conditions and the absence of a catalyst for a more robust recovery.

We reported last quarter that spreads between raw material costs and selling values had widened somewhat compared to the depressed level of 2012. Although spreads continue to show significant year-over-year improvement in the third quarter, they compressed on a sequential basis relative to Q2 due to competitive pricing pressures. These pressures intensified during the quarter, even in regions where business activity is more robust and our operating rates are higher. These pressures are likely to persist throughout the fourth fiscal quarter.

We are in the final phase of completing the ESM expansion projects that have been ongoing throughout fiscal 2013. The new Texas line that was commissioned during the second quarter is staffed and operating around the clock, and has met our expectations of reducing lead time, improving quality, and lowering operating costs. The new North Carolina production line, which will produce specialty ESM products, should be commissioned over the course of the next couple of weeks. We are pleased with the test product that we've produced and expect to ramp up operating hours through the balance of the quarter.

Turning to our raw material markets, wire rod prices have trended downward for the past few months, following declining steel scrap prices. In July, however, the scrap market reversed course as prices rose, depending on grade and region, in the range of $20 to $45 per ton. We expect domestic wire rod producers to attempt to recover their rising costs in August transaction prices. Internationally, wire rod prices trended downward over the quarter, driven by lower world market prices for steelmaking inputs and competitive market conditions.

We were active in the offshore market for a portion of our requirements during Q3 and expect that this will continue throughout 2013. As we've mentioned previously, participating in the offshore market implies higher inventory levels due to larger quantities that are required to make economic shipments. In assessing the attractiveness of offshore purchases, we consider the working capital implications as well as the exposures related to the longer order lead times relative to domestic purchases.

Previous to this conference call, we had estimated that CapEx would not exceed $12 million during 2013. We've revised our estimate down to approximately $7 million due primarily to timing issues with certain initiatives we are analyzing. We'll be firming up our fiscal 2014 estimate shortly, which may include a portion of these outlays that were previously expected for 2013. As is typically the case, our investment plan will focus on cost reduction opportunities, infrastructure enhancement, and providing new capacities to support product lines that offer growth potential.

In summary, while we continue to see signs of recovery in our markets, the trajectory is reasonably flat and the market environment remains highly competitive pending a catalyst that would propel acceleration and growth. Consistent with prior periods, we plan to focus on successfully commissioning the new North Carolina ESM production line, reducing costs in our manufacturing operations, and identifying additional opportunities to broaden our product offering and growth through acquisition. This concludes our prepared remarks and we will now take your questions. Ashley, would you please explain the procedure for asking questions?

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

In describing the raw materials in the pricing environment as we go forward, are you still -- we're in a holding pattern, although we are -- favorably on the outlook. We're just not getting over that hump to get that necessary momentum, and is it going to require something on municipality public spending programs to really get that momentum going? And housing and commercial building can't quite do it on their own?

Well, I think the spending statistics bear out the underlying premise of your question, Tyson, that it's -- there's just nothing robust happening out there in any of the sectors that primarily drive demand for our products. So, I think ultimately higher spending levels are going to be required to create additional demand for Insteel's products.

Okay. Will it more likely come from the state and local level this time around, as opposed from the federal government as we start to see greater tax receipts? Some other things that we've seen in the news, whether it's California or various other states, where we're starting to see some surplus levels?

Yes, it seems like there's movement in that direction just given the ongoing uncertainty at the federal level and the alternative sources of funding that the states are beginning to pursue.

Your highlighting on the North Carolina specialty ESM line, is that different then some of the other lines you've done? And, if so, what kind of acceptance and what has you excited about this new line?

It is very different from anything that we've done previously, Tyson. That the product makes -- the production line makes shaped products where we sell -- currently sell circular reinforcing, trapezoidal reinforcing, all sorts of nontraditional designs. Today we fabricate those products by actually hand cutting them into the final shape and the new production line will produce those products to the net intended shape without manual fabrication cutting that we presently do. And we eliminate all the yield loss associated with having to make those cutouts from various sheets. So, it is quite different. It's lower volume, higher value, special products.

And to your knowledge are you the only one capable of doing that?

I assume you're referring to in the US, and the answer would be, to my knowledge, no one else has this capability.

Very well. Thank you, gentlemen.

Landon Shanks, Century Management.

Good morning, guys. I just got to see, are you all going to be able to give us any information about the Tatano acquisition? Just about the general size of that company, and pricing, and whether or not you're going to keep their facility in Pennsylvania? Because I know you already have a facility there for the welded wire reinforcement.

Actually, Tatano remains in business. We didn't acquire the entity. We acquired only one production line from their ongoing business.

And is that one in Pennsylvania?

We acquired -- it was located in Pennsylvania and we've subsequently removed it from its location in Pennsylvania and transported it to one of our facilities.

Okay.

Where the transaction was immaterial, we really don't want to drill down into the details on it.

No, that's totally fine. And just the second one I was going to see is, you all were talking about you all's activity and doing some purchases offshore. Are you all planning on doing that to the size that you all have done -- I think it was back in Q3 of last year, that you all made several large purchases. Does that look like that's going to be a plan going forward to try to take advantage of those prices? Or does it just totally depend on where those markets head?

Well, it is a situation that's evaluated every time that our requirements develop. We've been consistently in the offshore market for the last several quarters and I wouldn't expect that you'll see any change of note from the case that has taken place over the last few quarters.

Okay. And then I had one last quick one. I know you all are always, in your presentations you're giving us the sizes [heat-treated] rebar that can be -- that you all estimate could be replaced by ESM. Has any of the growth that you all have seen recently, has that been just current customers ordering more? Or has any of that -- what's the progress been on getting new customers to convert from that rebar to using ESM?

We are continually working to convert new customers. That's a core activity of our sales and marketing and engineering groups. And the answer is, yes, we continue to convert new users, no question about it, both in the precast and the cast-in-place markets.

Okay. All right. Thank you. That's all I had.

Matthew Dodson, JWest, LLC.

Congratulations on the quarter. Just one quick question. You guys last quarter talked about your customers were more optimistic about the future, and now it sounds like you don't see the demand quite as strong. Can you help us understand, has something changed? Or just more granular on the demand environment going forward.

I don't think anything has changed from last quarter. We just continue to see a recovery that's unimpressive, although business is certainly better than at any time since the downturn that began in 2008. I would say that the outlook has remained about the same compared to our comments of last quarter.

And as we mentioned in our comments, the weather continued to have a significant impact on the quarter, which has made it more difficult to get a real clear view of the underlying trends.

Maybe in June and July, has been pretty nice weather so far. Have you seen more of a stable demand environment? And can you help us understand, during the good weather is demand that much better?

Well, actually, we haven't seen any good weather yet. We've continued to be affected by abnormal amounts of rain in many parts of the country. And what unfolds for the current quarter we don't know, and as you may know, our backlogs are small. Our reaction time has to be quick, so we don't have a lot of facts to be able to make any sort of projection for what we're going to see this quarter.

And my last question for you. Can you guys talk about TIFIA and what you're seeing there with MAP-21? Is that getting pushed out more to 2014? Or will you see a seasonal uptick into the back half of 2013?

From what we're hearing, it has been pushed out to some extent, or I think the general outlook is that it will be more of a positive in 2014 versus this year.

Got you. Perfect. Thank you very much and good luck next quarter.

John Kohler, Oppenheimer.

I guess most of my questions have been answered. Just one quick question on pricing. Is it your opinion that your competitors are going to keep their pricing pretty sharp until they've worked through their existing low-cost inventory? Or do you think they'll take advantage of the situation of rising raw material prices to make a little extra money?

Should they do or what will they do? (laughter) I think that part of what we're seeing is that business conditions in some of the other markets for wire products have been very disappointing this year. And some of our competitors who participate in a wider range of markets than Insteel have focused on reinforcing markets to a higher degree because of the disappointing shipment levels they are seeing in some of their other markets. And then so to answer your question, I don't expect to see a material change during our fourth quarter. I think it's going to remain highly competitive.

Great. I appreciate that. Thanks again.

(Operator Instructions). I am not showing any other questions in the queue.

Okay. In that case, we appreciate your interest in Insteel and we look forward to updating you next quarter. 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.