Q4 2019 Earnings Call

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I'd now like to hand to conference over to your speaker today, H. Woltz, President and CEO . Thank you. Please go ahead Sir.

Good morning. Thank you for your interest in steel and welcome to our fourth quarter 2019 earnings call, which will be conducted by might Gazmarian, Our vice President CFO and Treasurer and me before we began let me remind you that some of the comments made on todays call are considered to be forward looking statements which are subject.

Various risks or uncertainties that could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the FCC.

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, where new information.

Now I'll turn it over to Mike to review, our first fourth quarter financial results and outlook for our markets then I'll follow up to comment more on business conditions.

Thank you H. and good morning to everyone joining us on the call.

As we reported earlier today Insteels results for the fourth quarter fiscal 2019 continue to be negatively impacted by the surge in low priced import competition spurred by the section to 32 tariffs on imported steel, resulting in a loss of nine cents a share as compared to 49 cents.

The share of earnings in the prior year period.

The increase in imports continue to be centered in certain of our PC strand and standard welded wire reinforcing markets were foreign competitors are leveraging the considerable cost advantage. They now enjoy as a result for the tariffs, which have driven U.S. prices for hot rolled steel wire rod our primary raw material. So.

Essentially higher than global market levels.

Not surprisingly foreign competitors have responded by underpricing domestic producers in order to expand their market share.

Following the record rainfall we experience to the first nine months of the fiscal year, which resulted in construction project delays in deferred orders. The weather was largely a non factor during the fourth quarter with precipitation following the average or below average levels across most of our markets.

Despite the improvement in the weather shipments for the quarter fell 4% sequentially from Q3 and are up only 7.2% from the depressed level over a year ago.

Drilling down into the year over year comp shipments into markets most affected by import competition, which represented around 30% of our sales for the quarter were essentially unchanged from year ago, reflecting the surgeon imports while the volume for the remainder of our business was up 11.9%.

Average selling prices for the quarter fell another 6.5% from a third quarter and were down 12.8% year over year due to the import related pricing pressure as well as domestic competitors attempts to backfill watched volume and retain existing business.

The ASP erosion was more pronounced in markets subject to import competition, where the sequential reduction from Q3 was 10% which is more than doubled the 4.2% decrease for the remainder of our business.

Gross profit for the quarter fell 15.7 million from a year ago, and gross margin narrowed to 3.4% due to the compression in spreads between selling prices in raw material costs.

On a sequential basis gross profit decreased 4.4 million from a third quarter and gross margin fell 310 basis points also due to lower spreads and to a lesser extent the reduction in shipments.

The spread compression that we've experienced over the course of this year has been compounded by the consumption to higher cost inventory and the declining price environment.

Considering that were typically carrying around three months of inventory valued on a FIFO basis. The ongoing price pressure has resulted in the matching a blower s. piece, where our products against higher cost inventory that was purchased in earlier period further reducing spreads in margins.

This on favorable trend has persisted during the year. Following the initial run up in prices that occurred during the second half of fiscal 2018.

SGN a expense for the quarter fell 1.6 million to 5.9 million or 5.2% in that sales from seven and a half million for 6.2% last year due to lower incentive comp expense driven by a weaker financial results and to a lesser extent a reduction in the earn out liability relay.

Did the O U P transact transaction.

Our effective tax rate for the year rose to 24.9% from 22.4% through the third quarter and 22.7% last year, excluding the impact of the three point Threemillion deferred tax remeasurement gain on the prior year amount.

The increase was largely driven by permanent book tax differences, which had an amplified impact on the rate due to the lower pre tax earnings together with an increase in the overall state tax rate.

Moving to the balance sheet and cash flow statement cash flow from operations for the quarter Rose to 32, and a half million from 4.1 million last year due to a 31.4 million reduction in working capital as we made significant progress rebalancing or inventories from the elevated levels of earlier in the.

Year.

Following Q3's 12.6 million decrease inventories dropped another 33.8 million during the fourth quarter on a 27% reduction in the quantity on hand, and an 8% decrease in average unit costs, reflecting the continuing decline in wire on prices.

Based on our sales forecast for Q1, our quarter end inventories represented 3.1 month to shipments compared with three and a half months at the ended the third quarter valued at an average unit costs that was lower than the beginning average and the amount reflected in Q4 cost to sales.

He is lower costs should favorably impact our margins during the first quarter and less asps fall to the same or a greater extent as was the case the last two quarters due to continued pricing pressure.

On a pro forma basis, our gross margin for the fourth quarter would have been around 500 basis points higher than their reported amount at cost of sales was adjusted to reflect the lower carrying value of ending inventory in asps were unchanged.

And allocating our cash flow and managing the cyclical nature of our business. We continue to focus on three objective reinvesting in the business for growth and to improve our cost and productivity, maintaining adequate financial strength and flexibility and returning capital to our shareholders in a disciplined manner.

Going forward, we will continue to balance these objectives in deploying capital in any excess cash balances.

Capital expenditures came in at 10 in half million for the year down 7.8 million from last year focus on cost and productivity improvement initiatives. In addition to recurring maintenance requirements.

Looking ahead to 2020, we expect capex to come in at less than 17 million.

We ended the quarter with 38.2 million a cash on hand, or just under $2 a share and no borrowings outstanding under 100 million revolving credit facility, providing us with substantial financial flexibility and the ability to pursue any attractive growth opportunities that may arise in this challenging environment.

Looking ahead to fiscal 2020, we expect favorable conditions in our construction end markets with higher growth in the infrastructure segment offsetting further moderation in nonresidential tivity as we move later into the cycle.

Through the first eight months of the year public construction spending was up 5.7% from a year ago with highway in street construction one of the largest end use applications for our products rising 10.8% year over year.

The favorable trends for state contract weddings over the past few years should translate into continued growth in infrastructure spending in the coming quarters, particularly in larger markets, such as Texas, Florida, and California supported by various funding initiatives, including fuel tax increases bond issuances.

Another ballot measures.

Architectural billings and Dodge momentum index is leading indicators for non residential building construction I remain flat this year, reflecting relatively stable conditions with the BDI, averaging 50.1, just above the 50 growth threshold through August .

The recent a consensus construction forecast reflects the growth in nonresidential building construction slowing and Tony Tony but remaining positive at 2.4%.

We should also benefit from any weather related deferral of business from earlier this year as contractors continue to play catch up in the coming quarters.

I'll now turn the call back over the age.

Thank you might as Mike indicated our fourth quarter results reflect modestly improving shipment trends relative to the prior year, resulting from reasonably favorable underlying demand for our reinforcing products and a return to more normalized weather conditions looking forward, we expect construction market conditions will soon.

For continued growth in the demand for our products during fiscal 2020 or.

Not surprisingly our fourth quarter financial performance was negatively impacted by the continuing surge of imported products that weve contended with since last year through the first half of calendar 2019, PC strand imports increased by nearly 50% from the prior year and imports of standard welded wire.

Reinforcing from Mexico have increased by 60% in both cases foreign competitors have expanded their market share by underpricing domestic producers, which has served to displace us production and U.S. workers.

Average unit values for import should fall into levels that are only marginally above U.S. wire rod prices, creating an unsustainable competitive environment prudent for domestic producers.

Unfortunately current conditions continue to incentivize foreign competitors to ship production downstream and capitalize on the market distortions that have been created by U.S. trade policy.

So it appears the administration is firmly committed to it steel trade policy. The only reasonable resolution of these distortions is to extend the section to 32 Terra to include downstream products.

We have continued our dialogue with the administration and believe they understand the unintended consequences of current policy and our valuating options to address a matter, although it's not possible to predict whether they'll take action to correct. The distortions that have been created.

It's obvious however that the impact of current plot policy as antithetical to an administration that is arguably more focused than any prior administration on the strengthening of the domestic manufacturing industries.

Well continue to reassess our operating strategy in response to the unfavorable market changes, resulting from the Terra but our current plans are to continue to compete with low priced imports run our plants and strive for additional improvements in manufacturing efficiencies and cost while we work toward a sat.

This factory resolution of trade matters with the administration.

Turning to Capex 2019 came in at 10.5 million, reflecting timing differences relative to our prior expectations. We're forecasting 2020 investments of approximately 17 million subject to revisions as we move through the year with investments targeted toward expanding our product capability.

These lowering the cash cost of production and updating technology, including our information systems.

During Q4, we continued commissioning activities for a new SM production line at our North Carolina facility that will increase capacity for certain niche products as well as substantially reduce our cash operating costs market conditions for SCM continued to be favorable which should support us.

Moving to ramp up of the line following additional modifications and the equipment vendors confirmation that complies with our performance specifications.

In summary, we believe that 2020 will be another growth year end demand for our products. We will remain focused on improving all aspects of our manufacturing operations and we'll continue our dialogue with the administration to address the challenges created by steel trade policy and we'll continue to be vigilant in pursuing.

Attractive growth opportunities, both organic and through acquisition.

This concludes our prepared remarks, and we'll now take your questions. Chris would you. Please explain the procedure for asking questions. Yes, Sir as a reminder to ask a question do we need to press star one on your telephone withdraw your question press the pound Keith Please standby will be comparable component una roster.

And our first question comes from the line of legal Romero Sidoti and company.

Hey, good morning, Mike Good morning H. good.

Good morning area.

Wanted to ask about your Asps.

Average selling prices it seems like earlier in the year, they were holding up a little better than maybe I expected.

Even with this kind of similar backdrop.

And it seems like that the levy is on selling prices might have kind of.

In a little bit harder this quarter.

Can you just try to quantify at all maybe how much industry dynamics inventory reduction by your competitors.

May have affected asps versus let's say the declining steel prices and.

Has that all kind of shake out.

I'm not so sure that we can answer the question exactly as it was as you asked fit but let me say that debt.

It's been highly competitive all year on it didnt change during our fourth quarter.

And it's driven both by domestic competition and import competition and I think one of the underlying realities is that steel prices worldwide have been under tremendous pressure on during 2019. So so I don't discern an uptick and the level of competitive activity it's been.

It's been pretty intense all year.

Yes, and Julio as I indicated my comments.

But.

The pricing pressure has been more pronounced and.

Those markets that are susceptible to import competition or if you if you drill down into that 6.5% sequential reduction.

The decrease.

For the import sensitive portion of our business was more than double the reduction for the remainder. So just again highlights the impact of the they increased import competition.

Okay. That's helpful.

Mike would you happen to have the 2019 gross profit drivers.

Kind of unchanged from last year or there is any.

Anything highlight there.

No I mean and term are you referring to the relative impact on the on the corridor or.

No I was just trying to.

Typically annually you guys breakout raw material cost of sales versus manufacturing and freight.

Right.

Yes, I will actually be posting an updated presentation.

Later today that'll that'll provide that detail but.

When you look at that changes or the components, you'll see there that shift with the raw material percentage being a little little higher relative to the other components, but that will be out there later today.

Okay, and just maybe you wouldn't want to hop back into queue is just.

Can you maybe talk about how weather has traded maybe throughout the first few weeks left over.

Yes, I mean still it's been it's been spotty I mean, there's been some.

Some markets that have experienced some some rainy stretches but but overall I think we're still back down closer to normalized levels from.

What we experienced through the first three quarters of the I think if you look at the Q4, whether data just from a precipitation standpoint. It was it was right in line with with the average levels.

Going back historically.

Got it I'll hop back into queue, thanks very much.

Thank you and our next question comes from the line of Tyson Bauer with KC capital. Your line is.

Good morning, gentlemen.

Wondering merchandising.

When we went through the period of the dollar strengthening as we saw plus the pending tariff.

Increases by another 5%.

Does that create an exacerbation of the problem that you had seen in the prior quarter and does that provide any some less of a little bit of relief as we go in if those metrics are in place.

As they were a quarter ago.

So certainly the strengthening dollar has has an influence, but but John I'd say, it's moderate at best on the tariff increase you're referring to is not applicable to the section to 32 steel tariff thats effect in steel, it's the probably the three a one tariff.

That is China issue so.

I would just tell you that though.

Dislocation of steel prices in the us relative to the west rest of the World continues unabated and continues to be the root cause of of.

Of the pressures that we're feeling.

Okay.

Thank you talked about 500 basis points.

Reduction due to the inventory and pricing.

Obviously, you can't attribute all of that to the 30% that's affected directly by the imports.

There are way to try to splice flat to see where the.

True impacts came from.

Yes, I don't know that we can we can drill down to that.

To that level I think just getting back to my comments on spread compression that we've experienced over the course of this year, it's really just a function.

The timing being behind the curve aside from the increased import pressures.

The matching of this the higher cost inventory versus the.

Continued reduction in a piece so I think.

I think we just need to get to a point when we reach to reach a bottom and level out at some point I think.

Our results will be more reflective of.

Current the current market environment and.

Well get this timing issue behind us, but but as long as that persist we're likely to see that same that same dynamic and and Tyson just to add some context or that the American metal market reported yesterday that wire rod prices have fallen now for eight consecutive months, so that that sort of environments typically.

Challenging for us.

Okay.

I've been reports of a potential claw back.

The fast act that could be implemented July one of 2020.

Have any further color or commentary that you can provide in guards to those reports that possibility of 7.6 billion being taken back out of the original budget.

No we have seen some some references to that action.

In concern about the potential impact, but I think of greater concern is just what comes out.

Of the.

The budget process in DC, where we're back to operating under a continuing resolution that runs through.

November and you may recall that when there is a two year budget agreement reached.

Earlier that just hasn't the second year hasn't hasn't gone into effect yet.

Sending an agreement on on that the 2020 budget. So so I guess until we have better clarity there it's difficult to really.

Estimate what what with the overall impact would be weather get to that rescission, maybe it could it could be.

Reverse to there could be additional funding provided in.

Final final budget yet to be seen.

Okay. Thank you gentlemen, I'll go back in Q.

And as a reminder, ladies and gentlemen to ask a question you need to press star one on your telephone and to withdraw your question. Please press the pound.

And our next question comes from the line of Tim Curro by Goldman.

Hi, I'm trying to get a better understanding of the tariffs situation.

Can you be specific on any responses you had received related to your efforts to get the to 32 tariffs extended.

Well.

As I said in my prepared comments on we have been successful in providing extensive data on the impact of imports on on our performance and and.

I think it's clear that Theres, an unintended consequence, I think the administration appreciates that there's an unintended consequence on the question is whether there is action to resolve it.

Or not and honestly can't.

Can opine on or whether that will happen, but I do believe that that there is some degree of alarm at the adverse consequences on downstream producers of of the current environment and I believe that is fairly contrary to to the aspirate.

In terms of this administration to nurture.

The manufacturing industries so.

Optimist in May says that that there will be a resolution thats favorable to in steel all but it's difficult to note when that might happen.

Well I agree with your views, but when you say you've been successful does that mean that they had to acknowledge the problem in writing to you.

No.

And so is it just some open ended process, where there is no deadline.

Which a response has to be made.

Correct and then it would seem like there would be a formal process you filed a complaint and they're required to reply you in writing.

That's just not the situation right that's not the situation at all this is this as a matter of Adminstration prerogative and and that's how that's how the tariff was implemented and it will be adminstration prerogative to change it.

Okay.

Okay.

Is the problem also that.

You're not trying to get Harris relief, but you're trying to get tariffs applied to others and they just there's just not a real mechanism to deal with that.

You're correct that we have not we have not advocated for.

Termination of the section to 32 tariff we have advocated for recognition of the energy dependent so the supply chain, where you can't tariff upstream products and not tariff downstream products without creating exactly the situation that we are confronting right.

Now and by the way there was a six month investigation into the National security implications of steel imports that resulted in the implementation of the 232 tariff and during that process.

We made the point multiple times that should they find that that they're a national security implications of steel imports that warrant implementation of a terra they had to look at the entire supply chain and that just simply didnt happen.

Interesting.

Thanks for your responses.

Right.

We agree.

Thank you im not showing any further questions at this time I would now like to turn the call back to me.

Well, its president and CEO for any further March.

We appreciate your interest in steel.

We encourage your follow up if you have further questions and we look forward to talk into next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.