Insteel Industries Inc (IIIN) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insteel Industries fourth-quarter 2014 conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. H. Woltz, President and Chief Executive Officer. Sir, please begin.

Thank you, Michelle. Thank you for your interest in Insteel, and welcome to our fourth-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 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. 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 fourth-quarter financial results the macro indicators for our construction markets, then 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 of fiscal 2014 improved to $4.6 million, or $0.24 to diluted share, from $2.3 million, or $0.13 a share, in the prior-year quarter. Excluding the restructuring charges and acquisition costs associated with the American Spring Wire acquisition and a net gain from insurance proceeds related to the fire at our Gallatin facility, net earnings for the quarter were $4.9 million, or $0.26 a diluted share, the highest level for the fourth quarter in six years.

Net sales for the quarter rose 19.3% from last year to a record high $117.1 million, driven by a 15% increase in shipments, which also reached an all-time high, and a 3.7% increase in average selling prices. Our shipments have now risen on a year-over-year basis for six consecutive quarters and in 8 of the previous 9 quarters, reflecting the strengthening conditions in our construction end markets.

As I mentioned on our last call, despite the improvement, the recent highs are in no way indicative of our top-line potential in the normalized construction environment, as our pro forma 2008 sales exceeded $600 million including the standalone revenues for ASW's PC strand business and Ivy Steel & Wire, which we acquired in November 2010.

On a sequential basis, net sales rose 3.4% from the third quarter on a 1.4% increase in shipment and a 2% increase in average selling prices. Gross profit for the quarter improved to $13.8 million from $8.7 million a year ago, with gross margins widening 300 basis points to 11.8% from 8.8% due to higher spreads between selling prices and raw material costs and the increase in shipments, which were partially offset by higher unit conversion costs related to labor inefficiencies at certain of our plants.

The Gallatin fire an insurance claim did not impact our operating costs for the quarter or year, as the out-of-pocket expenses recorded in cost of sales and SG&A expense were offset by insurance proceeds.

Other income for the quarter includes the $1.4 million net gain that I alluded to earlier for the insurance proceeds attributed to the replacement of property and equipment destroyed in the fire. For the year, the net gain was $1.8 million, reflecting $2.7 million of insurance proceeds plus a $0.9 million loss on the assets that were written off.

SG&A expense for the quarter rose $1.2 million from a year ago primarily due to higher compensation expenses, largely incentive comp under our return-on-capital plan driven by our improved results, together with the relative changes in the cash surrender value of life insurance policies and higher health insurance costs.

Our effective income tax rate for the quarter was 31.7%, compared with 31.1% in the prior year, and will continue to be subject to fluctuations based upon the level of future earnings, changes in permanent tax differences, and adjustments to the other assumptions and estimates entering into the tax provision calculation.

Moving to the cash flow statement and balance sheet, cash provided by operating activities improved to $7.1 million for the quarter primarily due to the increase in earnings and the relative year-over-year changes in network and capital, which provided $0.2 million while using $2.2 million in the same period a year ago.

Accounts receivable rose $4.6 million, driven by the sequential increase in sales and the addition of ASW's receivables. The inventories increased $2.7 million, also due to the ASW acquisition, and accounts payable on accrued expenses fell $1.1 million.

Our inventory position at the end of the quarter represented around three months of shipments on a forward-looking basis calculated off of forecasted shipments for the first quarter.

Capital expenditures for the year totaled $9 million, which included $4.8 million in outlays related to the Gallatin fire. We expect CapEx for fiscal 2015 to be in the range of $11 million to $13 million. We ended the quarter with $3.1 million of cash on hand and no borrowings outstanding on our $100 million revolving credit facility, providing us with ample liquidity.

As we move into fiscal 2015, the macro indicators for our construction end markets are reflecting continued improvement. Through the first eight months of the year, private non-residential construction spending was up 11.6% from last year, and the seasonally adjusted annual rate has risen on a year-over-year basis for 13 straight months and at a double-digit rate in seven of the last eight months. After dropping into negative territory earlier in the year, the architectural Billings Index has exceeded the 50 growth threshold for four straight months in 20 of the previous 25 months, its longest positive streak since 2007.

Another leading indicator for non-residential building construction, the Dodge Momentum Index, has reflected some moderation in recent months after a strong first half of the year, but was still up 8.1% year over year in September and 11.1% for the previous three months relative to the same period last year.

The outlook for federal infrastructure spending remains unclear in view of the short-term stopgap measure that was enacted to extend the previous MAP-21 funding bill through May. We remain hopeful that a longer-term funding solution will be developed following the November election that facilitates the passage of a multi-year authorization providing greater certainty of funding at the state and local level.

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 fourth quarter. These favorable trends are largely consistent with the various macro indicators and forecasts for the construction sector and our previously stated view that demand for our reinforcing products should continue to improve over the next few quarters. While our capacity utilization improved to 57% from 50% last year, it remains depressed on an absolute basis, and we suspect that competitors are operating at comparable rates.

Taken together, slow growth, capacity additions by certain competitors, and concerns about the resilience of the construction recovery have contributed to a highly competitive pricing environment that prevails in our markets. We expect these conditions will persist until there are further meaningful improvements in demand.

With that said, the pricing environment beyond our fourth quarter remained relatively stable, reflecting growing demand for reinforcing products and lower volatility in the pricing for our principal raw material, hot-rolled wire rod. Ultimately, we expect there will be an opportunity to expand margins as market conditions continue to improve and capacity utilization rates rise, allowing producers to sell more selectively.

As Mike mentioned, we have ramped up operating hours to accommodate increased demand for our products, and we have experienced operating inefficiencies at certain of our facilities related to hiring, training, and retaining new employees. Improving our performance in these areas is a primary focus for us, and we expect to make significant progress in the coming months.

As we reported previously, last January a group of domestic wire rod producers filed anti-dumping and countervailing duty cases against China, which has been the primary source of imported rod into the US market for the last two years. The Department of Commerce published its preliminary determination in the CVD case indicating subsidy rates of between 10% and 81%. In addition, the department found dumping margins of up to 110%. The final determination in the case is expected before the end of January.

In anticipation of China's exit from the US market, we have transitioned to other offshore sources for the portion of our raw material requirement that is imported, which can vary depending on market conditions from about 15% to 30% of our total requirements. In assessing the attractiveness of offshore purchases, we consider the working-capital implications and pricing exposure that are inherent due to longer lead times and larger order quantities relative to domestic purchases.

Mike touched on the financial impact of the fire that we experienced in January at the Tennessee PC strand facility. The repair work on the facility is substantially complete, and we have begun commissioning activities at the newly rebuilt unit. At this point, we are gradually ramping up operations and expect the facility to be self-sufficient for clean wire rod within a few weeks. I would like to reiterate my appreciation to our toll processing partners and to all the Insteel team that made this unfortunate incident a nonevent for our customers.

As you are aware, on October 15 -- sorry, on August 15, we closed on the purchase of the PC strand assets of American Spring Wire, which included production facilities in Houston, Texas, and Newnan, Georgia. The integration of these plants has proceeded smoothly, and both have transitioned over to Insteel information systems and operating metrics. We appreciate the excellent work of our people at Houston and Newnan as well as our operating, finance, sales, and IS groups for their efforts in effectively executing our integration plan.

The addition of the Houston facility provides us with a manufacturing presence in the nation's most robust market for PC strand and in close proximity to both domestic and offshore raw material suppliers. The Houston plant is efficient despite employing antiquated production technology in certain portions of the operation. We are in the process of firming up our investment plan for the facility to reduce its operating cost and provide additional capacity with the objective of transforming it into an ultra low-cost strand producer situated in the center of the strongest consuming market in the US. We will share more details about our plans in a future call.

Turning to CapEx, as reflected in our release, we expect to invest between $11 million and $13 million in our facilities and technology infrastructure over the course of 2015. Two of the most significant projects that are underway involve cost reduction and rounding out of capacity within our standard welded wire reinforcing product line.

During the current quarter, we will begin the installation of a high-output production line at our Pennsylvania facility that will replace obsolete technology and provide increased capacity for certain SKUs that have been in tight supply within our Company. The line is expected to be commissioned in our second quarter, and it should contribute to earnings during the last half of the fiscal year.

Our second project targeted towards cost reduction and rounding out of capacity at our Florida welded wire reinforcing facility is expected to commence late in the second quarter or early in the third quarter. Other expenditures will be focused on maintaining our facilities, improving quality, lowering our operating costs, and improving our technology.

To summarize, the recovery in non-residential construction markets is continuing, although the market environment remains highly competitive. Consistent with prior periods, we will continue to focus on achieving further improvements in the effectiveness of 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. Michelle, would you please explain the procedure for asking questions?

(Operator Instructions) John Kohler, Oppenheimer and Co.

I just had two quick questions. I'm figuring that the ASW contribution to the topline was about $3 million in Q4. Is that realistic? I didn't know if there were production hiccups or --

Unfortunately, it's similar to what we experienced on the Ivy transaction with our integration efforts and the shifting of business between locations. It's really difficult to pinpoint the exact impact. But I think you can approximate it just based on their prior 12-month run rate.

Okay, great. And then the last question I have was the capacity utilization include -- the 57% includes ASW, right?

Correct.

Okay. Thanks a lot.

Tyson Bauer, KC Capital.

Nice quarter, gentlemen, and hopefully better quarters as we go forward.

Thanks, Tyson.

A couple quick questions. You mentioned a lot of different areas that you can improve your operating, things that you can control within your own facilities. Do you have an idea or ballpark on how many basis points you can -- you think you can improve just because of the way you are operating in those facilities that does not have to do with raw material prices or [end] prices? Just cost improvements?

Yes, I think just on a sequential basis, if you look back at our quarterly results for the year, we started in Q1 at a gross margin level at 10.4, and then we're up to 12.7 and 12.6 relatively flat in Q2 and Q3, and then we dropped off 80 basis points this quarter. And there's a lot of moving parts when you consider changes in our product mix and the addition of the ASW plants. But just in terms of our fourth-quarter results, if you were to pro forma and kind of normalize for some of those factors, I think that the gross margins would have been at or slightly exceeded the previous-quarter level.

In terms of the total potential improvement, that's more difficult to quantify. I don't know that we would want to throw out a percentage or estimate on that.

No, but, Tyson, there's plenty of room for improvement of which we are pursuing every day.

Okay. Once Gallatin gets back up to running quote unquote normally, given the proximity, given what you had done when you did the IB acquisition, is there room for asset rationalization within the Company at that point in time depending on the market factors? And if so, what kind of utilization improvements would that give you?

Well, I think you hit on the key factor that has to be considered as you look at rationalization opportunities, and that is market outlook. And at this point, we believe that there is a strong chance that the market supports efficient operations at all of these facilities, and we would not undertake a serious rationalization effort unless we came to a different conclusion.

Okay. Last question for me. When you combined Ivy with yourselves in 2010 as combining number one and number two, ASW is another number two combining with number one. Give us an idea -- are you now over 50% of the market share? Do you have more strength in given regions than others? And is your main threat still imports even though we do have the tariffs in place that should get renewed next year?

Okay, and when you -- when you're asking the question, Tyson, are you referring strictly to PC strand, or are you referring to welded wire reinforcement?

To PC strand.

Yes, it's hard to know exactly where we stack up in the market. As we have discussed before, the market is bifurcated into the segment that has heavy by-America requirements and the segment which does not. And then the segment which does not have those requirements, we do continue to see imported PC strand as the major competitive threat to our business. And certainly with developments in China, and China's willingness to spread low-cost deal around the world, that doesn't help us in the imported segment of the market in competing with those imports. But I would tell you that up to this point, we have occupied a solid market position in the segment of the market that is affected by imports and that we expect to do the same going forward.

And the by-America side, pretty well is your market?

Well, there's plenty of competition out there, Tyson. But it's obvious that, yes, we have grown with the American Spring Wire acquisition. And they did have a very attractive product mix represented heavily by-America oriented participation.

Sounds great. Thank you, gentlemen.

(Operator Instructions) And I'm showing no further questions at this time, and I would like to turn the call back to management for any closing remarks.

Okay. Thank you. We appreciate your interest in the Company, and we look forward to talking to you next quarter. Thank you.

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