Insteel Industries Inc (IIIN) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insteel Industries first-quarter 2014 conference call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As reminder, this call is being recorded. I would like to turn the call over today to H. Woltz. Mr. Woltz, you may begin.

Good morning. Thank you for your interest in Insteel and welcome to our first-quarter 2014 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 do not assume any obligation to update these statements in the future to reflect the occurrence of anticipated or unanticipated events or new information.

I will now turn the call over to Mike to review our first-quarter financial results and the macro indicators for our construction end markets, and then I will 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 first quarter of fiscal 2014 rose to $2.7 million or $0.15 a share, from $2.4 million or $0.13 a diluted share in the same period last year. Although our results for the quarter remained depressed on an absolute basis, reflecting the historically low level of construction activity, this marks the fifth consecutive quarter in which we have posted year-over-year improvement and our highest first-quarter earnings in six years.

Net sales for the quarter were up 1.5% from the prior year, driven by a 6.4% increase in shipments, which was partially offset by a 4.6% reduction in average selling prices. On a sequential basis, shipments fell 11.3% from the fourth quarter due to the usual seasonal downturn from the onset of winter weather and drop off in construction activity, while average selling prices rose slightly during the quarter.

Gross profit for the quarter rose to $9.1 million from $8.6 million a year ago, and gross margins widened to 10.4% from 10%, due to the increase in shipments and higher spreads between selling prices and raw material costs. Despite the seasonal drop off in shipments, gross profit rose $0.4 million sequentially from Q4 and gross margins increased 1.6% due to wider spreads.

SG&A expense for the quarter fell $0.1 million from year ago, largely due to the relative changes in the cash surrender value of life insurance policies. Our effective income tax rate for the quarter was 36.6% versus 34.7% in the prior year due to changes in permanent book versus tax differences. 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 $6.3 million of cash for the quarter compared with $23.5 million in the same period a year ago as net working capital provided $0.5 million of cash this year versus $17 million in the prior year, primarily due to the relevant year-over-year changes in inventories.

Accounts receivable fell $7.4 million during the quarter as a result of the seasonal drop off in sales. Inventories rose $11.2 million, and accounts payable and accrued expenses increased $4.1 million, largely due to higher import receipts during the quarter. Our inventory position at the end of the quarter represented around 3 1/2 months of shipment on a forward-looking basis, calculated off of forecasted shipments for next quarter, and reflected a lower average unit cost than our Q1 cost of sales, which should favorably impact our second-quarter results.

Capital expenditures for the quarter amounted to $2 million compared with $2.6 million in the prior year. We ended the quarter with $19 million of cash and cash equivalents, up $3.5 million from the previous quarter, and no borrowings outstanding on our $100 million revolving credit facility, providing us with ample liquidity.

Looking ahead to the remainder of fiscal 2014, we are encouraged by the recent improvements in the various macro indicators for our construction end market. In November, private nonresidential construction spending increased for the fifth consecutive month and has now risen almost 11% since last January. Although public construction spending has remained relatively weak on an overall basis, the highway and street category, which includes bridges and is one of the largest end-use applications for our products, was up 4.6% from a year ago and should begin to benefit to a greater extent from the increased TIFIA funding that was provided for in the MAP-21 federal transportation funding authorization. Dodge nonresidential starts continue to show positive growth trends for the 12 months ending in November, rising 14% year-over-year on a square-footage basis.

Although the Architectural Billings Index moderated to 49.8 in November, it has remained above the 50 growth threshold for 14 of the previous 16 months, its longest positive streak since 2007. Assuming these favorable trends continue in the coming months, we expect to see gradual improvement in the demand for our products over the remainder of the year.

I will now turn the call back over to H.

Thank you, Mike. As reflected in our release and in Mike's comments, we are encouraged by the continued improvement in market conditions during the first quarter. Recent industry statistics, as well as most respected construction forecasts for 2014, are consistent with our previously stated view that demand for our reinforcing products should gradually improve over the course of the year. Our capacity utilization level, however, has remained depressed, coming in at under 50% for Q1, and we suspect that are competitors are experiencing the same trend.

As we've pointed out previously, we believe the reduced operating levels, together with declining prices for hot-rolled wire rod, our primary raw material, have been responsible for the highly competitive pricing environment that has affected our financial results for several orders. Through much of 2013 declining prices for hot-rolled wire rod were driven by similar deterioration in prices for steel scrap. During our first fiscal quarter, however, steel scrap prices rose sharply, resulting in price increases by wire rod producers that became effective in December and January. Consequently, we have announced price increases for our reinforcing products that are sufficient to recover these additional costs as well as increases in our freight costs.

Several competitors have announced comparable increases. While we would prefer stronger underlying demand fundamentals as the basis for pursuing price increases, we believe the magnitude of the wire rod increases will focus competitors on the need to recover rising costs. Going forward, higher transaction prices are essential to maintaining acceptable profit margins.

With respect to CapEx, you may recall that we had just commissioned the new specially engineered structural mesh production line at our North Carolina plant at the time of our last earnings call. We have continued to ramp up its operating rate and are pleased with customer acceptance of the unique products that we are now providing to the market. We expect to achieve the projected level of output and margins during 2014.

Capital expenditures for 2014 are expected to total less than $12 million and will be focused on opportunities to reduce costs, enhance quality, improve our information systems infrastructure, and expand capacity as warranted. Wire rod inventories are elevated relative to prior periods, due to a rising percentage of offshore purchases together with expectations for improving volume levels and the prospect that domestic producers may file trade cases during the current quarter against one or more countries active in the US market.

Participation in the offshore market implies higher inventory levels due to the larger order 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 inherent pricing exposure due to the longer order lead times relative to domestic purchases.

To summarize, the recovery in nonresidential construction markets continues to be gradual, and the market environment remains highly competitive. Favorable reports relative to construction spending and a recovery in non-res markets have yet to translate into a meaningful uptick in capacity utilization rates. Consistent with prior periods, we plan to focus on improving the effectiveness of our manufacturing operations and identifying additional opportunities to broaden our product offering and grow through acquisition.

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

(Operator Instructions) Tyson Bauer from KC Capital.

A couple quick questions -- we've seen some increased activities states have taken to bolster their infrastructure spending. I think it was Pennsylvania passed gas tax increases. There's some rumbling at the federal level, coming this fall, that that could happen also. In general, in your opinion, are a lot of these increases there to support increased activity? Or are a lot of those just backfilling deficits for the funding that is currently going on and budgeting that is a lot of times being replaced by general funds being drawn into those infrastructure committees?

Tyson, I think it varies depending on the specific state. But generally it appears that a lot of the revenue-raising measures are really geared toward increased activity from the depressed level of recent years.

Okay, which leads me into -- you talked about a gradual increase, and if we were going to attempt to put numbers on that I would suggest that gradual means probably growing at 10% or less. Accelerated growth would be over 10% in a given year. What's it going to take to move gradual to accelerated, in your opinion?

I think it will really require a more pronounced recovery in the economy. We are seeing some positive signs with the most recent quarterly report, just a more -- but a more significant uptick and also just more growth in the labor market.

And Tyson, I think that there's just a tremendous amount of conservatism at play in the private non-res sector, where there's a still a lot of uncertainty in the economy and political uncertainty exists. So, I think we have to get past that. And in addition, I think that on the infrastructure and government-funded side of our markets there just has to be a healthier level of spending commitment to see that come back.

You know, your prior question concerning state efforts to bolster spending -- while it's difficult to quantify it to a net impact in the governmental sector, it definitely is good news. But the question is, is it sufficient to really move the needle? And it's hard to say. I think we are not going to be able to get past the point that there needs to be a more solid commitment by the federal government to support infrastructure spending. The rest of this is working around the edges of the problem.

Okay, and last question from me -- if we have this general consensus of a rising tide, albeit gradual, are some of these [TIFIA] projects that are upcoming or those that have been announced like in New York, New Jersey -- are those large enough to move the needle for you if you are selected as the supplier? Or are they more or less one-offs?

No single project is going to have a substantial material impact on Insteel. It really takes the cumulative nature because keep in mind that some of these large projects actually ship over 18 months or two years. So while on their own they represent significant commitments, they are spread over a reasonable amount of time.

I think when you look at the TIFIA funding, the total potential volume coming out of that relative to the MAP-21 authorization, it would imply a pretty significant increase. But on an individual basis these projects really won't have a significant impact, as H. indicated. But when you roll it all up, it is pretty meaningful.

All right, thank you, gentlemen.

Robert Kelly of Sidoti.

Just a question on the raw material increases that you are seeing and if you've instituted or announced any price increases.

You mean the magnitude?

Yes.

Yes, okay. Generally speaking, over the course of December and January we've seen wire rod price increase announcements totaling $50 to $70 per ton. Last night another one for $23 a ton was floated by a major wire rod producer. Our increases vary by product line, to some respect. But if you said it was in the neighborhood of $80 per ton, then that would be a good assumption.

Okay. So you think you are going to recover all of the announced increase?

Well, we are certainly going to attempt to.

That's the plan. Got it. As far as the commentary in the press release about customer sentiment, can you just talk a little bit about that? Is it optimism on the part of your customers, or is it order flow hitting their book?

I think that the outlook is generally more optimistic for our customers, driven by better order books that we are seeing. We are seeing customers who were pouring concrete two and three days a week a year ago, pouring four or five days a week. And it's a spotty and it's regional, but I think there's no doubt that the trend is generally positive. It just -- it's modest but positive.

Okay, fair enough. And then during the final part of the prepared remarks you talked about potential trade actions filed by -- was it wire rod players or your competitors? (Multiple speakers).

It's widely speculated in the industry that there will be dumping and maybe countervailing duty cases filed by the domestic wire rod producers during the current quarter. There's no confirmation of that, but it has been widely speculated for several months. And I would say the chances are greater than 50% that it happens.

Okay. And then just taking that out a little bit, assuming they were successful, what does that do for Insteel as far as pricing? Would that benefit your pricing if wire rod producers were to get a favorable ruling?

It's hard to say. But I would tell you that the constant downward drift of pricing in the wire rod market public hasn't really aided the fundamentals of our business.

Understood. Thanks, guys.

Chris Olin of Cleveland Research.

I just wanted to touch a little bit about the news flow that has been coming in with all this energy infrastructure investment going across the Gulf states and the LNG export facilities. I'm just wondering, do you expect that to have a material impact on your business, or do you have exposure to that?

Yes. We keep an eye on those projects and can tell you that we expect that they would have a beneficial impact on our market. The LNG facilities, should they be built, are rather intensive users of our product. And some of the other related projects such as refineries and chemical installations are pretty intensive in the use of prestressed concrete piling and other products that contain our reinforcing materials. And we generally consider it very positive for our business, although we can't quantify the impact.

Interesting. Would you estimate -- is it a second-half 2014 driver, or it would be more of a 2015 issue?

One of the two, I think, would be likely, although I probably put it in 2015 more than 2014. There seems to be a lot of political aspects to getting these projects off the ground.

Okay, thanks a lot.

(Operator Instructions) I am not showing any questions at this time. Please proceed with any further remarks.

We appreciate your interest in the Company, and we encourage your follow-up should questions emerge later on. Thank you.

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