H. Woltz - President and CEO Mike Gazmarian - Vice President, CFO and Treasurer.

Tyson Bauer - Kansas City Capital Mike Conti - Sidoti & Company.

Good day, ladies and gentlemen. And welcome to the Insteel Industries' First Quarter 2015 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 conference is being recorded.

I’d now like to turn the conference overt to your host for today Mr. H. Woltz, Insteel’s President and CEO. Sir, you may begin..

Thank you. Good morning. And thank you for your interest in Insteel and welcome to our first quarter 2015 conference call, which will be conducted by Mike Gazmarian, our Vice President, CFO and Treasurer, and me..

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 first quarter financial results and the macro indicators for our 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 for the first quarter of fiscal 2015 improved to $4.2 million or $0.22 a diluted share from $2.7 million or $0.15 a share a year ago, rising at the highest level for the first quarter in seven years.

Net sales for the quarter rose 26.8% from last year to $110.6 million, driven by the addition of business provided by the ASW acquisition in the current year quarter together with higher sales at our other facilities.

Shipments which were up 20.9% from last year have now risen year-over-year for seven straight quarters and at double-digit rate for the previous four quarters reflecting the continuing recovery in our construction end markets.

As I mentioned on our last call, despite the recent improvement, we are still operating well under the levels that would be expected in the more 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.

Average selling prices for the quarter rose 4.9% from last year, partially due to favorable changes in our product mix related to the ASW acquisition.

On a sequential basis, net sales fell 5.5% from the fourth quarter and 6.7% decrease in shipment due to the usual seasonal balance churn partially offset by 1.3% increase in average selling prices also related to a more favorable product mix.

Gross profit for the quarter improved to $12 million from $9.1 million a year ago with gross margins widening 50 basis points to 10.9% from 10.4% due to higher spreads between selling prices and raw material costs, together with the increase in shipments partially offset by higher unit converging costs.

The increase in convergence cost was primarily centered at our Pennsylvania facility where we removed an older production line in preparation for the installation of the new line and at our Tennessee facility for the initial inefficiencies associated with the startup of the new cleaning house following the completion of the repair work related to the fire that occurred last January.

We estimate that the excess cost at these locations had the effect of reducing our gross margin by approximately 130 basis points for the quarter.

SG&A expense for the quarter rose $0.9 million from a year ago, primarily due to increases in compensation and employee benefit costs together with the relative changes in the cash surrender value of life insurance policies.

The increase in comp cost was largely related to higher incentive plant expense driven by our improved financial results in the current year. Our effective income tax rate for the quarter dropped to 34.5% from 36.6% in the prior year, primarily due to changes in permanent book versus tax difference.

Going forward, our effective rate will continue to be subject to fluctuation based upon a level of future earnings, changes in permanent book versus 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, operating activities used $9.5 million of cash for the quarter, primarily due to a $22.7 million reduction in accounts payable and accrued expenses largely related to lower raw material purchases in the later portion of the quarter together with changes in the mix of vendors and payment terms.

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 second quarter.

And our inventory valuation reflected lower raw material costs and Q1 cost of sales implying wider spreads in the second quarter assuming selling prices remain at or above the Q1 level.

We ended the quarter with $10 million of borrowings outstanding on our $100 million revolving credit facility providing us with plenty of liquidity to pursue additional growth opportunities.

As we move into the remainder of fiscal 2015, we are encouraged by the continued improvement in the macro indicators for our nonresidential construction end markets.

Through the first 11 months of the year, private nonresidential construction spending was up 10.8% from last year driven by double-digit increases in office, hotel, power, manufacturing and commercial categories.

Although the Architectural Billings Index has reflected some moderation in recent months following 50.9 in November, it has now exceeded the 50 growth threshold for seven consecutive months and 23 of the previous 28 months, its longest positive streak since 2007.

In December, the Dodge Momentum Index, another leading indicator for nonresidential building construction was up 17.3% year-over-year and 15.1% for the prior three months relative to the same period last year rising to its highest level since February 2009.

The outlook for infrastructure construction however remains uncertain in view of the upcoming expiration of the current MAP-21 federal transportation funding authorization in May.

Considering 40% drop in gas prices that has occurred since the summer, it would appear to be an opportune time to consider raising the federal fuel tax to cover the ongoing shortfall in the highway trust fund.

A recent analysis by ESTOW indicated that a $0.01 increase in the gas and diesel fuel tax would generate about $1.75 billion of additional revenues implying at around $0.09 increase would be required to cover the funding shortfall at current spending levels.

Considering the lack of consensus in Washington, however, particularly in the house is appearing more likely that the short-term funding extension will be pursued to buy additional time to arrive at a longer-term solution. I will not turn the call back over to H..

Thank you, Mike. As reflected in our earnings release and in Mike's comments, we are encouraged by the positive momentum that we've seen in our construction end markets in recent quarters.

These favorable trends are largely consistent with the various macro indicators and forecasts for the construction sector and all indications are that market should continue to improve for 2015.

Continuing the positive trend of the last few quarters, our overall capacity utilization improved to 54% from 47% last year reflecting the strengthening in demand for our products.

While we welcome these recent improvements, we believe that more robust rates of growth and higher levels of industry capacity utilization are prerequisites for meaningful margin expansion and the pricing will remain highly competitive in their absence.

With that said, the pricing environment for most product lines during our first quarter remained relatively stable and spreads widened slightly from the previous quarter. There's a great deal of uncertainty in worldwide steel markets driven by macroeconomic weakness and the softening in commodity prices almost across the board.

In the U.S., steel scrap prices which can heavily influence wire rod pricing have generally declined over the past few months but remain high relative to iron ore and derivative metallic units. Domestic scrap pricing is expected to display unexpected strength for February due to the impact of adverse weather on incoming supplies of obsolete scrap.

We believe however that the prevailing trend for the next few months is more likely to be downward as the scrap market seeks closer alignment with iron ore markets. To the extent, that strengthening market dynamics supports stable selling prices for our products, we expect spread and margins to widen somewhat over the next couple of quarters.

As we've mentioned previously though, it’s difficult to accurately forecast our selling prices and volumes given the dynamic nature of our markets.

We mentioned last quarter that we have experienced inefficiencies related to ramping up operating hours of several facilities and that resolving those inefficiencies would be a primary area of focus for us.

Over the past few months, we have adjusted shift schedules and wage structures at certain facilities to address turnover and recruiting challenges with some positive results.

The labor market for our Texas facilities has been particularly competitive and we are hopeful that our changes together with the recent downturn in the oil patch will support our drive for higher productivity and lower operating costs.

As we have reported previously, we spent much of fiscal 2014 recovering from the fire that destroyed the cleaning house at the Gallatin, Tennessee facility last January. During our first quarter, we ramped up to the point that the plant was self sufficient by the end of the quarter.

We are pleased with the outcome of the project and the cost and productivity of the benefits associated with restoration of our on-site cleaning capabilities.

As indicated in our earnings release this morning, the completion of this project is a prerequisite to optimizing the conversion costs of our expanded PC strand operations following the completion of the ASW acquisition.

We are currently assessing alternative cost reduction strategies, all of which are premised upon the Tennessee facility operating at previous utilization and productivity levels. We expect to provide additional information about our operating strategy in the near future, but cannot comment further at this time.

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

During the current quarter, we expect to commission a high output standard welded wire reinforcing production line at the Pennsylvania facility that will replace obsolete technology and provide increased capacity for certain SKUs where we have routinely experience capacity constraints.

We expect the production line to contribute to earnings during the second half of fiscal 2015. During our third quarter, we expect to commission a wire production line at the Florida welded wire reinforcing facility that will round out capacity and contribute to reduced operating costs.

Other expenditures will be focused on maintaining our facilities, improving quality, lowering our operating costs and improving our information technology infrastructure. Finally, as we mentioned following the ASW acquisition, we plan to significantly expand the manufacturing capabilities at the Houston facility.

This project will entail initial capital expenditures during fiscal 2015 and additional expenditures during fiscal 2016. We will provide future updates as project advances. We are pleased to see that 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 grow through acquisition. This concludes our prepared remarks and we will now take your questions.

Ben, would you please explain the procedure for asking questions?.

Absolutely. [Operator Instructions] Our first question comes from the line of Tyson Bauer of Kansas City Capital. Your line is open. Please go ahead..

Good morning, gentlemen. Excellent quarter..

Good morning, Tyson..

Good morning, Tyson..

Let’s hit on the one topic that we discussed in the last call. At this point, it looks like you have a little better outlook going forward. And that was that decision between asset rationalization and growing into the year available capacity.

It sounds like now given the outlook that your -- it’s more of a high breadth decision that you’ve made, and that is in certain areas take advantage of those economics and the need for either better capacity or fulfil the capacity you already have. And maybe other areas of weakness, you may see some rationalization.

Would that be an accurate depiction of what you decided?.

Well, I think our direction, Tyson, has continually been toward evaluating all of our assets and configuring them for optimal cost effectiveness.

And in terms of the rationalizations that we’ve made over the last few years, particularly following the Ivy acquisition, I think we are in good shape concerning our current technology, our current geographic footprint, and our product mix. So I feel pretty comfortable there.

But we will continue to evaluate our technology and our opportunities to reduce cost relative to what’s available in the marketplace. And we are in a good position to continue on investing to stay on the leading edge of cost in our industry..

With that said, and the outlook that you provided, where do you think you can get that capacity utilization up when we’re in our seasonally stronger Q3 and Q4?.

I think it’s hard to say. It depends at the rate at which we see the market recovery continue. But we really haven’t tried to forecast where capacity utilization will go and when we will get there.

And I think we have mentioned previously on calls that capacity utilization varies by product line, where some product lines are learning at significantly higher levels than the average and some at lower levels. So that continues to be the case and we expect that it will be the case going forward..

Do you have a sense of where you think the distribution channels are going to be on the wholesale level? As far as their inventory levels, as we get into the warmer months, given the outlook that you provided that we could be seeing some pricing fluctuations as we go forward, what’s your sense on how that’s going to be saturated?.

As far as the inventories throughout the supply chain with our customers or…?.

Yes..

Yeah. I mean, I think at this point, we don’t see there being any inventory stocking changes or hedge removes on the part of our customers. I think everyone is just focused on maintaining their inventories at reasonable levels, or hasn’t taken mix or either way..

Yeah. I would go so far as to say Tyson that I think there is a reasonable amount of conservatism in the market with just the macro factors that you see affecting commodity prices. I don’t think that those trends have created any impetus for significant inventory growth..

Okay. And the last issue at the risk of being a kid where parents tell you don’t touch any, touch it anyway. Talking about federal funding for infrastructure, obviously, we know the history here. And we may get some eye rolling on, will they or will they not actually do something this time.

Is it likely that we could see state act before the federal programs and where they take advantage of increasing some of their spending as they act somewhat quicker than the feds have obviously? So you may get a benefit may be at the state level first before we see the federal level?.

Yeah, I think you are already seeing that trend underway. We’re over the past year or so, there have been a significant number of states that have pursued increases in the fuel tax as well as changes in their wholesale tax or sales taxes and more movement toward the private, public partnerships.

So I think when you look at the state and the local construction spending, there has actually been some upward movement there recently or as if the federal level remains relatively flat. And we would expect those trends to continue going forward..

Okay.

What do we actually see an increase in federal spending or is this just to backfill their deficit of revenue generation for that trust fund and we may just continue at the level we’ve been at? They just find a new funding mechanism?.

Okay. I’d be very surprised if on a net basis there's any significant increase in spending at the federal level..

Okay, thank you..

Thank you. [Operator Instructions] Our next question comes from the line of Mike Conti of Sidoti & Company. Your line is open, please go ahead..

Hey, it’s Mike. Good morning..

Good morning, Mike..

Yeah, just a few question. I’ll start out with the average selling prices that’s three consecutive quarters in a row of the increases.

Can you describe what’s driving that?.

Well, certainly this quarter the ASW acquisition had an impact on it. But there's been no -- there's been no wholesale change in market conditions with respect to selling prices and moving them up or down or their fluctuations. It’s mainly a mix issue..

Okay.

And then being that it is a mix issue and ASW is with the PC strand, are you seeing any quantifiable benefits from the exit of Chinese imports?.

Actually those imports exited in 2009 and 2010. And certainly the trade case that cost that exit has turned out to be a good investment for the company and the industry. But -- much of that volume has been replaced by other countries, which is an expected phenomenon. It’s just the way that the marketplace works.

So imports of PC strand have always been a consideration for the company and they always will be. At this point, we are keeping a close eye on the underselling that's going on for about four or five different countries. And when it's time to act, we will. But for right now it’s more of a monitor situation for us..

Great, got it. And what are you seeing more from a regional point of view, I know if he stated the big three Texas, California, Florida.

What other regions are showing signs of strength or perhaps weakness?.

Well, I mean seasonally speaking certainly you are seeing the upper Midwest and the Northeast sort of lethargic right now as they wait for better construction periods. You named the largest reinforcing consumer markets in California, Texas and Florida. They all are showing signs of life.

Although, there is seasonality associated with those markets as well where Texas as had ice, California’s had torrential rain, so there’s a seasonal aspect of the business doesn't go away even in those geographies. But I think, I wouldn’t say that there's any geographic area on that is exceptionally weak at this point.

I think, there -- you could say, they're all recovering to one degree or another and certainly, that’s a welcome sign for Insteel..

Sure. No. Absolutely.

And Mike, you’ve mentioned on your comment, you guys had a mix of vendors and your payment terms are change, is that an issue going forward?.

Well, there’s always going to be some volatility there depending upon the mix of domestic purchases versus imports where depending on the specific vendors that have balances outstanding as to the end of the quarter, that can skew the days payable higher or lowers.

So, and I think, there’s always going to be some fluctuations related to that in this past quarter and there’s really a timing issue, if you look back at Q4, we had a significant build in our payables.

This related the timing of purchases at the previous period and this quarter it swung in the other direction or within the quarter, there was a drop-off in purchasing activity near the end of the quarter.

So I’m assuming that purchasing activity picks back up again, particularly, we heading the busy season, you’d expect to see it go back in the other direction..

And just to clarifying in case there is any question about it. We’ve not experienced any change in payment terms from any specific vendor, is it's a mix issue, it's not a negotiation issue..

Sure. Okay.

And then H, I just wanted to -- I guess clarify with you mentioned the spread expansion, obviously, you see commodity prices go down yet low carbon wire rod prices have been relatively stable? Can you just give some insight on that price diversion and I guess, some implications on how that should affect the second quarter and the second half of this year?.

Well, let me start by saying that we are notoriously poor at forecasting those things. But certainly, it's well known that steel scrap has declined. It's well known that steel scrap is an important factor and price of steel scrap is an important factor and the price of our primary raw material which is hot rolled wire rod.

And that to the extent that scrap continues to decline on if wire rod prices were to reflect similar declines on and if the strength in our markets that we have seen over the past couple quarters and then the improving trends, if they were to continue so that we develop just a little more pricing power in our market then I think the math would tell you that a widening of spreads and potentially an improvement in margins could be in the offing for Insteel and for the industry in general.

But there are a lot of ifs and that explanation end and we have seen environments where these trends work to our benefit in the past. It's possible that they will this time but that's not a promises, it's hypothetical..

Great. That’s all the questions I had..

Okay. Thank you..

Thank you. And I’m showing no further questions in the queue. I’d like to turn the conference back over Mr. Woltz for any closing remark..

Okay. Thank you. We appreciate your interest in the company and if you have questions don't hesitate to call us back. Thank you..

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of your day..