H.O. Woltz III - Chairman, President and CEO Michael C. Gazmarian - VP, CFO, and Treasurer.

Tyson Bauer - Kansas City Capital Associates.

Good day, ladies and gentlemen and welcome to the Insteel Industries' Fourth Quarter 2014 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 follow that time. (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'll now turn the call over to Mike to review our fourth quarter financial results and 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 per 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 of 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 eight of the previous nine 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 a 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 and a 1.4% percent 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 converging costs related to labour inefficiencies at certain of our plants.

The Gallatin fire and 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, 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 totalled $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 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 and 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 were 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 stop-gap measure that was enacted to extend the previous MAP-21 funding bills through May.

We remain hopeful that the longer-term funding solutions will be developed following the November elections that facilitates the passage of a multiyear 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 during 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.

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 U.S. 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 U.S.

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 cleaned wire rod within a few weeks.

I would like to reiterate my appreciation to our total processing partners and to all of the Insteel team that made this unfortunate incident a non-event for our customers.

As you are aware on October 15th, I am sorry on August 15th 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 (ph) production technology in certain portions of the operation.

We are in the process of firming up our investment plan for the facility to reduce this 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 U.S. We will share more details about our plans in the 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 under way involve cost reduction and rounding out of capacity within our standard welded wire reinforcing product line.

In the current quarter we’ll 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 toward 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 nonresidential construction markets is continuing although the market environment remains highly competitive.

Consistent with prior periods, we’ll continue to focus on achieving further improvements in 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.

Michelle would you please explain the procedure for asking questions..

Sure, thank you. [Operator Instructions]. Our first question comes from the line of John Kohler (ph) with Oppenhiemer & Close. Your line is open. Please go ahead..

Good morning gentlemen, how are you today?.

Good morning, well, thank you John..

Great, I just had two quick questions. I am figuring that the ASW contribution at the top line is about 3 million in Q4, is that realistic.

I didn't know if there were production hiccups or…?.

Unfortunately, it’s been similar to what we experienced on the Ivy transaction just 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 had was the capacity utilization includes -- the 57% includes ASW right?.

Correct..

Okay, thanks a lot..

Thank you and our next question comes from the line of Tyson Bauer from KC Capital, your line is open. Please go ahead..

Nice quarter gentlemen, and hopefully a better quarter as you go forward..

Thanks Tyson..

Couple of 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 ball park how many basis points 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 [your end] (ph) prices, just cost improvements?.

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 were up to 12.7 and 12.6, relatively flat in Q2 and Q3 and then we dropped off 80 basis points this quarter.

I mean there is a lot of moving parts when you consider changes in our product mix and the addition of the ASW plans. But just in terms of our fourth quarter results, if you were to pro forma and kind of normal office for some of those factors I think the gross margins would have been at or slightly exceeded the previous quarter levels.

I mean just in terms of the total potential improvement, I mean that’s more difficult, difficult to quantify, I don’t know that are going to throw out a percentage or estimate on that..

But Tyson there is plenty of room for improvement which we are pursuing every day..

Okay, once Gallatin gets back up to running "normally," given the proximity, given what you had done when you did the Ivy 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 the 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 wouldn’t undertake a serious rationalization effort unless we came to a different conclusion. .

Okay.

And last question from me, when you combine Ivy with yourselves and 2010 combining number 1, number 2, ASW is another number 2 combining with number 1, give us an idea, are you now over 50% of the market share, do you have more strength given the 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, when you are asking the question Tyson, are you referring strictly to PC strand or are you referring to welded wire reinforcement..

To PC strand..

Yeah, it is 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 Buy America requirements and the segments which does not.

And in 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 steel around the world, that doesn’t help us in the imported segment of the market and 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. .

In the Buy America side, pretty well is your market?.

Well, I mean there is plenty of competition out there Tyson, but I mean it is obvious that we have grown with the American Spring Wire acquisition and they did have a very attractive product mix, represented by heavy Buy America oriented participation. .

Sounds great, thank you gentlemen. .

Thank you. (Operator Instructions). And I am 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. .

Well 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..