Insteel Industries, Inc. (IIIN)

F2Q10 (Qtr End 04/03/10) Earnings Call Transcript

April 22, 2009 10:00 am ET

Executives

H. Woltz – Chairman, President and CEO

Mike Gazmarian – VP, CFO and Treasurer


Analysts

Tim Hayes – Davenport & Company

Robert Kelly – Sidoti

Nat Kellogg – Hudson Securities

John Cawler – Oppenheimer

Presentation

Operator

Good day ladies and gentlemen, and welcome to your Insteel Industries second quarter 2010 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). And as a reminder, this is being recorded. I'd now like to introduce Mr. H.Woltz. Please go ahead, sir.

H. Woltz

Thank you, good morning and thank you for your interest in Insteel, and welcome to our second quarter 2010 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 in our presentation 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.

I'll now turn it over to Mike to review our second quarter financial results in the macro environment, and then will follow-up to comment more on market conditions, the PC strand trade cases and our business outlook.

Mike Gazmarian

Thank you. H. As we reported earlier this morning, Insteel returned to profitability during the second quarter of fiscal 2010 and further strengthened its financial position despite the continuation of challenging business condition. Net earnings for the quarter ended April 3rd, were $1.6 million or $0.09 per share, compared with the net loss of $16.4 million or $0.94 per share for the same period last year.

The prior year loss for the quarter includes the pretax charge of $16.1 million or $0.58 per share after tax for inventory write-downs to reduce the carrying value of inventory to the lower cost-to-market, excluding these write-downs; the year ago loss would have been $0.36 per share.

Insteel results for the second quarter were favorably impacted by higher shipment wider spreads between selling prices and raw material cost, lower unit conversion cost and the lower effective income tax rate. Net sales for the quarter increased 3.7% from the prior year driven by 34.7% increase in shipment, which more than offset at 23% decrease in average selling prices.

On a sequential basis, net sales rose 26.9% from the first quarter of fiscal 2010. Despite the adverse weather conditions that we experienced during the quarter, Q2 shipments were up 25.7% sequentially from Q1. The sequential increase in shipments were significantly higher than the usual seasonal improvement we experienced between Q1 and Q2 which prior to 2009 had ranged from 8% to 13% over the previous five years.

We believe the larger increase this year was driven by customer inventory restocking and hedge buying in anticipation to future price increases, which more than offset the negative impact of the unusually severe winter weather in most of our markets. Even with the pickup in volume for the quarter, our Q2 shipments were still anywhere from 27% to 36% under the comparable period in 2006 to 2008.

Average selling prices for the second quarter rose 0.9% sequentially from Q1 due to the price increases that were implemented during the quarter in response to the escalation in the cost of our primary raw material, hot-rolled steel-wire rod. The timing of our increases has lagged somewhat behind the announced increases for wire rod due to competitive pricing pressures.

We've announced additional price increases that have or will be going into effect to recover this higher cost. Gross profit for the second quarter was $6.2 million or 11.9% of net sales compared with the gross loss of $21 million in the prior year. Gross profit for the prior year quarter includes the $16.1 million charge for inventory write-downs diluted to earlier.

Excluding these write-downs to prior year growth loss would have been $4.9 million. The year-over-year improvement in gross profit was driven by the lack of inventory write-downs in the current year period. The increase in shipments, wire spread between average selling prices and raw material costs and lower unit conversion costs.

Our overall capacity utilization remained at depressed levels for the quarter were showed some improvement increasing to 49% and 33% in the first quarter and 35% a year ago. As a result, total unit production for the quarter was up 39% from last year and 35.3% on a sequential basis from Q1, which translated into sizeable reductions in our unit conversion cost.

SG&A expense for the second quarter decreased $0.2 million from the prior year, primarily due to the relative changes in the cash surrender value of life insurance policies, which depreciated in value in the current year quarter of decreasing in the prior year. Our effective income tax rate for the quarter dropped to 17.8%, compared with 35.8% a year ago due to changes in the federal tax regulations regarding the carry back of net operating losses, which increased the amount of the tax refund that we received during the quarter relative to the prior year loss together with changes and permanent book versus tax differences.

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