Insteel Industries Inc. (NASDAQ:IIIN) Q1 2020 Earnings Conference Call - Final Transcript

Jan 16, 2020 • 10:00 am ET

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Insteel Industries Inc. (NASDAQ:IIIN) Q1 2020 Earnings Conference Call - Final Transcript

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Executive
Michael C. Gazmarian

dropping 8.3% sequentially from Q4 as compared to only a 2.1% decrease for the rest of our business.

Gross profit for the quarter fell $4.7 million from a year ago and gross margin narrowed 410 basis points to 6.4% primarily due to lower spreads between ASPs and raw material costs while on a sequential basis, gross profit rose $2.4 million from the fourth quarter and gross margin widened 300 basis points, driven by higher spreads relative to the depressed levels of Q4, which represented a low point over the past year.

As I alluded to you earlier, the spread compression we experienced during fiscal 2019 and in the first quarter of this year has been compounded by the continued consumption of higher cost inventory and a declining price environment. Considering that we're typically carrying around three months of inventory valued on a FIFO basis, our spreads and margins have been adversely affected by the matching of higher cost inventory purchased in prior periods with lower ASPs for our products.

Fortunately, it appears this unfavorable trend could be coming to an end in view of the growing indications that steel prices may have reached the bottom with scrap prices rising now for three straight months by a total of $80 a ton since October. Our wire rod suppliers have followed suit announcing price increases in November, December and January and we've rolled out an initial increase across most of our product lines that went into effect earlier this month.

Should these increases mark the beginning of an upward trend or an eventual leveling out of prices, it would eliminate the significant headwind that has been weighing [Phonetic] on our results since early last year. SG&A expense for the quarter fell $0.8 million to $5.7 million from $6.5 million or 5.9% in net sales from 6.3% last year, largely due to a favorable $0.9 million year-over-year change in the cash surrender value of life insurance policies, which increased $0.3 million this year as compared to $0.5 million decrease last year.

Our effective tax rate for the quarter fell to 22.7% from 23.5% last year, primarily due to changes in permanent book tax differences. Looking ahead to the remainder of the year, we expect our effective rate will run [Phonetic] around 23% subject to the level of pre-tax earnings, book-tax differences, and the other assumptions and estimates entering into our tax provision calculation.

Moving to the balance sheet and cash flow statement, cash flow from operations for the quarter improved to $29.6 million, largely due to a $24.6 million decrease in working capital. The reduction in working capital was driven by an increase in payables resulting from high raw material purchases in the latter part of the quarter, a reduction in receivables reflecting the usual seasonal slowdown in sales and a reduction in inventories due to lower average unit carrying values.

Based on our sales forecasts for Q2, our quarter and inventories represented 2.9 months of shipments, compared with 3.1 months at the