Q3 2020 Insteel Industries Inc Earnings Call

July 16, 2020

[music].

At this time, all participants' lines ARNA listen only mode.

After the speakers presentation, there will be a question and answer session.

It's a question during the session you will need a press star one on your telephone.

Please be advised with today's conference is being recorded.

If you require any further assistance please press star zero.

Todays call is being hosted by H., Woltz, President and Chief Executive Officer, and more Corona, Vice President CFO and treasurer.

I'd now like to hand, the conference over to your first speaker today mR.H. Woltz. Thank you. Please go ahead Sir.

Good morning. Thank you for your interest in steel and welcome to our third quarter 2020 earnings call, which will be conducted by Mark Corrado, Our vice President CFO and Treasurer and me.

This is March 1st earnings call. It the company and we welcome him to the in steel team.

Before we begin today a light goes on the call to be aware that might gazmarian, who faithfully incompetently served as in steel CFO for 25 years will leave the company effective July 31.

On behalf of our entire management team and the board of directors I would like to thank Mike for his performance orientation leadership and integrity that were instrumental in transforming in steel into the premier competitor in its markets. He was strongly focused on making our company a good place to work and.

Shareholder friendly for investors might we wish you the very best going forward.

Pertaining to the call today, let me remind you that some of the comments made on todays 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 FCC.

All forward looking statements are based on current expectations and information Thats 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.

Ill now turn the call over to Mark to review, our third quarter financial results, then I'll follow up to comment more on business conditions and other recent developments.

Great. Thank you H. and good morning to everyone joining us on the call I'm pleased to be here participating in my first earnings call as the CFO of in steel.

As we reported earlier today the recovery in spreads between selling prices in raw materials from the depressed levels of a year ago would be the key driver in our strong results for the third quarter fiscal 2020. Additionally, our performance also benefited from strong shipment growth relative to the prior year period.

Excluding the nonrecurring charges in gain that we are referenced in our release net earnings rose to 30 cents a share from 11 cents a share last year.

Shipments for the quarter rose, 9.5% from last year, and 7.4% sequentially from Q2, which represented the second highest quarter of shipments in the last 10 years a level that was only exceeded in the third quarter of 2016.

The strong shipping performance was driven by increased construction activity across most of our markets the benefit of incremental tonnage from the strand Tech manufacturing acquisition and a return to generally more favorable weather conditions for construction activity this year as compared to the prior period.

Partially offsetting the benefit of these increased shipments, though was the impact of declining average selling prices, which fell sequentially for the sixth straight quarter declining 11.7% from last year and 1.2% sequentially from Q2.

And in those markets susceptible to import competition the pricing pressure was more pronounced in certain of our PC strand in standard welded wire reinforcement markets susceptible them for competition, which represents about 30% of our overall sales for the quarter average selling prices in these markets declined 20% year over.

Per year, which was more than doubled the 8% decline for the remainder of our business.

As we conveyed on price previous calls low priced import competition in the PC strand in standard welded wire markets respectively.

Remains intense and continues to have a negative impact on our average selling prices.

To level, the playing field in those markets, we are aggressively pursuing actions with us government and international trade authorities and remain optimistic that our efforts will be successful in remedying. These market in equities in duties or other mechanisms.

Gross profit for the quarter increased 6.6 million to 14.8 million from a year ago, and gross margin widened 560 basis points to 12.1% from 6.5% primarily due to the wider spreads and to a lesser extent the increase in shipments while on a sequential basis gross profit decrease.

Just $477000 from the second quarter gross margin declined 117 basis points.

Spreads in the quarter expanded to more historically normal levels from a year ago as we benefited from the consumption of low price rod inventory that exceeded the negative impact from a decline in average selling prices from the prior quarter.

Current spread levels over the last two fiscal quarters have been consistently above these historically depressed levels experienced during our fiscal force our first quarter of fiscal 2020, and the last two quarters of fiscal 2019.

Scrap pricing trends, which can affect our material raw material costs remain under downward pressure has signaled by the benchmark Chicago Shredded index declining from $297 per signed in January 2022 through $235 per ton in July 2020.

At GNS expense for the quarter Rose 1.2 million to 6.7 million or 5.5% of net sales from 4.4% last year.

The increase was primarily driven by accruals for incentive comp and legal costs that were partially offset by favorable $589000 year over year change in the cash surrender value of life insurance policies.

Due to the rebound in the financial markets over the last few months.

Our effective tax rate through the first nine months of the year decreased to 21.7% from 22.4% last year due to a $224000 benefit recorded in the quarter related to the NFL carry back provisions of the cares Act.

Excluding this benefit our effective tax rate for the first nine months of the year would have been 23.2% as compared to last years, 22.4%.

Looking ahead to the remainder of the year, we expect our effective rate will run around 23% subject to the level of pre tax earnings book tax differences and other assumptions and estimates factored into our tax provision calculation.

Moving to the balance sheet and cash flow statement operating activities provided $17.9 million of cash for the quarter due to a combination of earnings.

And an $8.4 million reduction in working capital driven largely by the timing of accounts payable related to raw material purchases.

Based on our sales forecast for Q4 quarter end inventories represented 2.4 months of shipments compared with 2.5 months at the end of the second quarter and on an overall basis average unit carrying values were relatively close to the amounts reflected in Q3 cost of sales.

We concluded the quarter with 61.4 million of cash on hand, or over $3 or share and no borrowings outstanding on our $100 million revolving credit facility for which we have almost 100% availability today.

As we look ahead to the fourth quarter of this fiscal year, we expect our markets to be strong as customers remain busy working through their backlogs.

But our visibility into fiscal 2021 remains limited due to the sustained uncertainty, resulting from the kovac 19 outbreak.

Fortunately, our financial for financial flexibility, owing to our strong liquidity position mentioned earlier combined with our flexible operating model positions us well to navigate through today's uncertain marketplace and act opportunistically as in with as an if opportunities arise.

Our capital deployment strategies remain focused on maintaining adequate financial strength, while balancing the pursuit of our three objectives reinvesting in the business to improve our operating model through cost and productivity improvements or capital expenditures expenditures to accelerate or our organic growth.

Executing on strategic opportunities that meet our return parameters to support inorganic growth.

And returning capital to shareholders in a disciplined manner.

I will now turn the call back over to age.

As Mark indicated our third quarter results reflect strong shipment growth relative to the prior year driven by favorable underlying demand for our concrete reinforcing products and returned to more normalized seasonal weather patterns. We also benefited from the closer alignment between our raw material costs and.

Average selling prices were pleased with the solid underlying demand for our products and our Q3 three financial performance.

In response to the co bid 19 outbreak, we're observing CDC recommended procedures for managing exposure to the virus and its transmission at our plants as well as our administrative offices.

With our industry deemed essential none of our manufacturing facilities was materially affected by coded related operating restrictions during the third quarter.

Order entry has remained robust although we saw some moderation in the northeast Midwest during the quarter, reflecting coded related regulatory responses, which is now largely abated.

Through the beginning of this week the company had 29 confirmed Cove at night team cases affecting six plants and our administrative offices. Fortunately, there's been only one hospitalization and 18 employees have recovered and returned to work.

Our hospitalized employ as recovering and we look forward to welcome him welcoming him back to the plant.

Although we are unable to predict the ultimate impact to the virus on our business as a general statement customers are adhering to normal operating schedules and the impact on our operations has been minimal.

We remain committed to fulfilling customer requirements provided that we can do so without compromising the safety of our people.

Should we eventually experience a precipitous drop off in demand, we're prepared to make the appropriate adjustments to our operating plans.

While pandemic concerns did not materially affect our operations. During Q3, we elected to schedule two weeks of downtime during the quarter at two plants producing standard reinforcing products. We're finished goods inventories were trending toward excessive levels due to the impact of Mexican imports on this product line.

I will comment more on imports later in the presentation.

As you know we completed the acquisition of certain assets of Strand Tech manufacturing in March.

Integration activities have proceeded smoothly and the closure plan for the Somerville site. This on schedule.

Customer service and order fulfillment responsibilities were transferred to in steel facilities immediately upon closing and our people delivered a practically seamless transition for strand type customers.

Since closing our engineering team has been on site in the summer mill facility continuously updating and renovating equipment that will be deployed at other in steel plants. The first equipment transfers are now underway beginning the process, which will continue into Q2, but fiscal 2021.

We expect to realize significant operating leverage from the strand Tech production assets, which will be used to eliminate process bottlenecks at the Tennessee, Texas, and Florida PC strand plants.

The Somerville real property has been listed for sale and we're pleased with the level of interest its received.

We're also working through the process of disposing of equipment that will not be utilized by other in steel facilities.

In summary up to this point, we're very pleased with the stress tek transaction, including customer retention and the status of our integration efforts.

As we mentioned during the Q2 call on April 16th in steel together with two other domestic PC strand producers file an anti dumping petitions against 15 countries, representing 89% of total PC strand imports entering to us in 2019 in addition to a countervail.

On duty petition against Turkey, alleging illegal subsidies.

The scope of the filing switch alleged dumping margins ranging from 24% to 194% reflects the agregious behavior of PC strand producers from these countries in the U.S market over the 2017 2019 investigation period.

On June 1st the International Trade Commission issued its affirmative preliminary injury determination and the investigation shifted over to the department of Commerce.

Additional milestones or tentatively scheduled for September in November 2020, and April and May 2021.

I should point out however that the timeline for the cases could be impacted by procedural considerations at the department of Commerce and the International Trade Commission.

On June Thirtyth in steel and for other domestic producers of standard welded wire reinforcing filed an anti dumping petition against Mexico, alleging dumping margins from 56% to 161% of value.

For a protracted period of time imports of Mexican standard welded wire reinforcement has substantially under sold the domestic market and consequently, Mexican import penetration has increased significantly.

This case will follow a similar timeline as PC strand cases, although it will be somewhat compressed. So it's only one country is involved in the filing.

We expect the international trade commission to render its preliminary determination of injury by the middle of August.

As with any litigation, it's not possible to predict the outcome of these cases, but we believe the allocations made in the cases are strongly supported by the underlying facts and extensive analysis and we expect the cases to be successful.

Turning to Capex. We had initially estimated 2020 expenditures of approximately 17 million subject to revisions as we moved through the year.

Last quarter, we indicated that 2020, capex would likely be substantially under 17 million due to delays in committing to an investment for our engineered structural mesh business.

Subsequently questions surrounding that project were resolved and we committed to move forward during Q3.

While we were unable to predict with certainty the timing of outlays. We now believe that 2020 Catholic Capex will come in at approximately 12 million.

Our capex strategy continues to be focused on reducing cash cost of production improving the quality of our products supporting the growth of our engineered structural mesh business and improving our information technology infrastructure and capabilities.

As we head further into Q4, we expect another quarter of solid shipments on reasonable financial performance.

Looking out to 2021, however market conditions are uncertain in view of the impact of the pandemic on funding sources for public construction and the increased risks as created for private non residential construction, we would not be surprised to see some softening as the consequences of this.

Significant downturn and economic activity our felt in our markets.

We'll continue to closely monitor market conditions and aggressively pursue the appropriate actions to optimize our costs will also continue to be vigilant in pursuing growth opportunities, both organic and through acquisition.

This concludes our prepared remarks, and we'll now take your questions. Daniel would you. Please explain the procedure for asking questions.

As a reminder to ask the question you will need to press star one on your telephone to withdraw your question press the pound key.

Please standby and while we compile the Q and a roster.

Our first question comes from Julio Romero with Sidoti and company. Your line is Alex.

Hey, good morning, Mikes, Mark good morning H. good.

Good morning hernia.

I get to start can you maybe talk about.

Cokemaking response I appreciate the comments in the prepared remarks, but maybe just talk about more broadly within the biggest impact in your view.

It sounds like again minimal impact but.

Would you say the biggest impact would be 80 customer uncertainty or or any changes in the competitive environment or anything else that.

These with highly.

Yes, well so so.

While the impact has been minimal on our operations the concern has been high.

We have customers, who have difficulty per predicting their operating rates based on the impact of infections in their manufacturing facilities. We have had disruptions in our own manufacturing facilities as we've been conservative in quarantine procedures and.

And.

We ensure that people get the right attention if they've been exposed which means that we wind up with vacancies in in our operations and shifts that aren't completely staffed and clearly that span.

That's been a problem for us to work around.

But but overall I'd say the uncertainty that's been created may be the most significant impact at this point because neither in steel nor in steels customers can say exactly what operating configurations and and conditions will be on next week or next month or.

In the fall so I'd say that file we typically don't have on a long view of demand in our markets.

Thats, particularly true right now because.

Everything's subject to change on a daily basis.

That's helpful and I guess on that point as you talk to your customers that you talk to the coffee manufacturers.

Can you just talked to what areas within residential and nonresidential are holding up well.

I know you're couple assess through from the end projects, but.

Any sense of.

Public private and kind of areas within that would be helpful.

Yes, I think public construction has continued to be pretty robust stone as as you well aware on most of those projects were funded our prior to all the uncertainties that have developed we've also seen and on the private non res side, a tremendous amount of work in in the distribution center.

Market.

Which has been quite robust in and appears to continue to have a long glide path for us so.

I can't point out any any significant area of weakness at this point.

Got it and then.

On the volumes really strong quarter. There I was really impressed they are I mean, I was hoping you maybe quantify the incremental tonnage.

From Strand second quarter.

Good.

Yes, Julio that's actually Thats, a number that we we havent disclosed historically with respect to tonnage more broadly, but but also with respect to the acquisition and the other part of it is julio that it's difficult for us to know precisely.

On sense in certain cases, we're splitting business with stranded tech at certain accounts and and and we've really focused on just taking good care of those accounts that strand Tech was servicing.

But but it's it's really difficult for us to pin pinned down on the incremental tonnage.

Fair enough I guess, maybe maybe to ask another way I guess you mentioned the customer retention is in pretty good.

If you can speak to maybe the customer retention efforts at with Stantec, maybe that would be helpful.

Yeah well.

That was key customer retention is a key driver of making this transit transaction successful and and it probably won't surprise you to know that our focus has been on on.

Making good on our commitments for delivery.

Being competitive it with market pricing with these accounts and to the extent that that we can make their lives easier they'll stick with us and we've done that and where we're pleased with the retention on that that we've seen up to this point.

Really helpful. All back into queue. Thanks, very much. Thank you.

Thank you as a reminder, ladies and gentlemen that Star then one to ask a question.

Our next question comes from Tyson Bauer with KC capital. Your line is now open.

Good morning, gentlemen, an excellent quarter.

Good morning Tyson.

Can you give us a sense.

Reading a lot of headlines regarding the state bonding activity it would appear that municipalities states.

Outside of their general on typically do a lot of bonding that is project oriented or for the department of transportation and they're taken advantage of availability of lower rates.

At this current time does that help insulate or help out your particular business.

If they are to continue that pattern of increasing that bonding.

Yes, I mean, absolutely and I think this is a this is a trend that is not new.

As as Dsps have become more strapped for funds and localities municipalities have been strapped for funds over the last few years on we've seen at the local and state level that many of these entities have turned to bond financing or they have dealt with their own fuel.

Next issues in a local or statewide basis on two tried to replace some of the funding that in prior years may have come out in the federal government. So.

Yes, I think that the trend is positive for us, although I don't know that that.

I don't know that it would be sufficient to offset what we believe will be a pretty serious downturn in federal fuel, our receipts and and distributions in 2021, I think it remains to be soon.

Doesn't highway Trust fund technically run out of money I think at September So the action must be taken in some regards to maintain has that your understanding.

It is yes.

Would you anticipate.

Minimally maintenance.

Funding for that that we've seen the past two years or do you.

By end to the fact, they may try to increase that.

Availability as a stimulus.

Well.

Good questions on.

I think the context of the election in November on has to be considered in all of these scenarios and with the emphasis and focus on on.

Minimizing the code bit damage to our economy are fully expect that there'll be some sort of infrastructure action at the federal level, whether that comes before the election or after its hard to say.

But I would be I'll be very surprised if infrastructure funding isn't wrapped up into this whole stimulus and recovery of program that seems to be popular in Washington.

Okay.

Would you say when the referencing your 21 outlook, which obviously, it's early that the most uncertainty as proudly isolated or focus in on the private non res.

Portion of your business.

Our whether or not that can backfill current activity.

I would say both private non res and public construction of our concerns Tyson and when we talk to customers who have backlogs that goes six to eight months out on we're trying to keep our ear to the ground on bidding activity that's occurring for 2021.

And there's mix news on that at this point.

But but I think there are risks we are risks in both sectors.

Okay.

Well it appears are getting into an economy that is going to be more delivery base people, taking it at home as opposed to go into the stores, whether thats, a groceries or otherwise, which puts a much greater focus on Dcs that has been what Amazon has been doing some of the other big companies in that area.

Tilt up buildings typically are those kind of.

Manufacturing or that kind of construction.

Does that a key area for you and something that you excel at and provide that cost saving equation for those construction companies in that type of design.

Absolutely, it's a sweet spot for us and we have capitalized on it to a great degree this year.

We also believe that that trend has a long way to run for exactly the reason that you pointed out in the comment you made an opening your question.

So it's very robust and we expected to continue okay last one so I don't take up too much time.

You got a significant amount of cash built up years past you have at the board level examine the possible special dividend at the end of the year.

Is your 21 outlook too uncertain to put that under consideration or are you more focused stand on being conservative having the cash there and M&A opportunities should they arise.

Well.

Our position hasn't really changed Tyson that our first objective is to find attractive growth opportunities for the business.

Both organic and by acquisition.

We will continue to be conservative with respect to our balance sheet, because we believe it's us real strategic advantage in times of uncertainty, but with all that said, we're not going to hoard cash on that if we have cash that that is.

Is beyond that that we believe on a conservative basis is required to operate the business then we'll seriously consider returning to shareholders.

All right. Thank you gentlemen, thank you Mike for all years of service and dealing with you as a real pleasure and I hope things go elements again.

Thank you.

Im not showing any further questions at this time I would now like turn the call back over the H. woltz for any closing remarks.

Okay. Thank you. We appreciate your interest in the company encourage you to call us back with questions. If they arise when we look forward to speaking with you at the Q4 call. Thank you.

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

[music].

Hi.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the in steel Industries third quarter 2020 conference call.

At this time, all participants' lines or listen only mode.

After the speakers presentation, there will be a question and answer session to ask the question during the session you'll need a press star one on your telephone.

Please be advised with today's conference is being recorded.

If you require any further assistance please press star zero.

Todays call is being hosted by H., Woltz, President and Chief Executive Officer, and more Corona, Vice President CFO and treasurer.

Now I'd like to hand, the conference over to your first speaker today mR.H. Woltz. Thank you. Please go ahead Sir.

Good morning.

Thank you for your interest in steel and welcome to our third quarter 2020 earnings call, which will be conducted by Mark Corrado, Our vice President CFO and Treasurer and me.

This is mark first earnings call, what the company and we welcome into the in steel team.

Before we begin today a light goes on the call to be aware that might guess Marianne Faithfull incompetently served as in steel CFO for 25 years, well leave the company effective July 31st.

On behalf of our entire management team and the board of directors I would like to thank Mike for his performance orientation leadership and integrity that were instrumental in transforming insteel into the premier competitor in its markets. He was strongly focused on making our company a good place to work and share.

Older friendly for investors, Mike We wish you the very best going forward.

Pertaining to the call today.

Let me remind you that some of the comments made on todays 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 FCC.

All forward looking statements are based on 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 Mark to review, our third quarter financial results, then I'll follow up to comment more on business conditions and other recent developments.

Great. Thank you H. and good morning, everyone joining us on the call Im pleased to be here participating in my first earnings call. It the CFO of in steel.

As we reported earlier today the recovery in spreads between selling prices a raw materials from the depressed levels of a year ago would be the key driver in our strong results for the third quarter fiscal 2020. Additionally, our performance also benefited from strong shipment growth relative to the prior year period.

Excluding the nonrecurring charges and gains that were referenced in our release net earnings rose to 30 cents a share from 11 cents a share last year.

Partially offsetting the benefit of these increased shipments, though was the impact of declining average selling prices, which fell sequentially for the sixth straight quarter.

Declining 11.7% from last year, and 1.2% sequentially from Q2.

Year, which was more than doubled the 8% decline for the remainder of our business.

As we conveyed on previous calls low priced import competition in the PC strand in standard welded wire markets respectively.

Remains intense and continues to have a negative impact on our average selling prices.

To level, the playing field in those markets. We are aggressively pursuing actions with U.S. government and international trade authorities remain optimistic that our efforts will be successful in remedying these market in equities duties or other mechanisms.

Gross profit for the quarter increased 6.6 million to 14.8 million from a year ago and gross margin widen 560 basis points, the 12.1% from 6.5% primarily due to the wider spreads and to a lesser extent the increase in shipments while on a sequential basis gross profit.

$477000 from the second quarter gross margin declined 117 basis points.

Current spread levels over the last two fiscal quarters have been consistently above these historically depressed levels experienced during our fiscal fourth.

First quarter fiscal 2020, and the last two quarters of fiscal 2019.

Pricing trends, which can affect our material raw material costs remain under downward pressure.

Ignored by the benchmark Chicago Shredded index declining from $297 person in January 2022 through $235 per ton in July 2020.

FG and expense for the quarter Rose 1.2 million to 6.7 million or 5.5% of net sales from 4.4% last year.

The increase was primarily driven by accruals for incentive comp and legal costs that were partially offset by a favorable $589000 year over year change in the cash surrender value of life insurance policies.

Due to the rebound in the financial markets over the last few months.

Our effective tax rate through the first nine months of the year decreased to 21.7% from 22.4% last year.

To a $224000 benefit recorded in the quarter related to the NFL carry back provisions of the cares Act.

Excluding this benefit our effective tax rate for the first nine months of the year would've been 23.2% as compared to last years, 22.4%.

Moving to the balance sheet and cash flow statement operating activities provided $17.9 million of cash for the quarter due to a combination of earnings.

And an $8.4 million reduction in working capital driven largely by the timing of accounts payable related to raw material purchases.

Based on our sales forecast for Q4, our quarter end inventories represented 2.4 months of shipments compared with 2.5 months at the end of the second quarter and on an overall basis average unit carrying values were relatively close the amounts reflected in Q3 cost of sales.

As we look ahead to the fourth quarter of this fiscal year, we expect our markets to be strong as customers remain busy working through their backlogs.

But our visibility into fiscal 2021 remains limited due to the sustained uncertainty, resulting from the cobot 19 outbreak.

Fortunately, our financial financial flexibility, owing to our strong liquidity position mentioned earlier combined with our flexible operating model positions us well to navigate through today's uncertain marketplace and act opportunistically as an with as an if opportunities arise.

Our capital deployment strategy remain focused on maintaining adequate financial strength, while balancing the pursuit of our three objectives reinvesting in the business to improve our operating model through cost and productivity improvements or capital expenditures expenditures to accelerate or our organic growth.

Executing on strategic opportunities that meet our return parameters to support inorganic growth.

And returning capital to shareholders may disciplined manner.

I will now turn the call back over to age.

Average selling prices were pleased with the solid underlying demand for our products and our Q3 three financial performance.

In response to the covert 19 outbreak, we're observing CDC recommended procedures for managing exposure to the virus and its transmission at our plants as well as our administrative offices.

With our industry deemed essential none of our manufacturing facilities was materially affected by posted related operating restrictions during the third quarter.

Order entry has remained robust although we saw some moderation in the northeast Midwest during the quarter, reflecting coded related regulatory responses, which is now largely a paid.

Through the beginning of this week the company had 29 unconfirmed Cove at 19 cases affecting six plants and our administrative offices. Fortunately theres been only one hospitalization and 18 employees have recovered and returned to work.

Our hospitalized employee is recovering and we look forward to welcome welcoming him back to the plant.

Although we are unable to predict the ultimate impact to the virus on our business as a general state what customers are adhering to normal operating schedules and the impact on our operations has been minimal.

We remain committed to fulfilling customer requirements provided that we can do so without compromising the safety of our people.

Should we eventually experience a precipitous drop off in demand, we're prepared to make the appropriate adjustments to our operating plans.

Well pandemic concerns did not materially affect our operations. During Q3, we elected to scheduled two weeks of downtime during the quarter at two plants producing standard reinforcing products were finished goods inventories were trending toward excessive levels due to the impact of Mexican imports on this product line.

I will comment more on imports later in the presentation.

As you know we completed the acquisition of certain assets of Strand pack manufacturing in March.

Integration activities have proceeded smoothly and the closure plan for the Somerville site. This on schedule.

Customer service and order fulfillment responsibilities were transferred to end steel facilities immediately upon closing and our people delivered a practically seamless transition for strand type customers.

We expect to realize significant operating leverage from the strand Tech production assets, which will be used to eliminate process bottlenecks at the Tennessee, Texas, and Florida PC strand plants.

Somerville real property has been listed for sale and we're pleased with the level of interest received we're also working through the process of disposing of equipment that will not be utilized by other in steel facilities.

In summary up to this point, we're very pleased with the stress tek transaction, including customer retention and the status of our integration efforts.

On duty petition against Turkey, alleging illegal subsidies.

Scope of the filing switch alleged dumping margins ranging from 24% to 194% reflects the agregious behavior of PC strand producers from these countries in the U.S market over the 2017 2019 investigation period.

On June 1st the International Trade Commission issued its affirmative preliminary injury determination and the investigation shifted over to the department of Commerce.

Additional milestones or tentatively scheduled for September and November 2020, and April and May 2021.

I should point out however that the timeline for the cases could be impacted by procedural considerations at the department of Commerce and the International Trade Commission.

On June Thirtyth in steel and for other domestic producers of standard welded wire reinforcing filed an anti dumping petition against Mexico, alleging dumping margins from 56% to 161% of value.

For protracted period of time imports of Mexican standard welded wire reinforcement.

Annually undersold, the domestic market and consequently, Mexican import penetration has increased significantly.

This case will follow a similar timeline is PC strand cases, although it will be somewhat compressed. So it's only one country is involved in the filing.

We expect the international trade commission to render its preliminary determination of injury by the middle of August.

As with any litigation, it's not possible to predict the outcome of these cases, but we believe the allocations made into cases are strongly supported by the underlying facts and extensive analysis and we expect the cases to be successful.

Turning to Capex. We had initially estimated 2020 expenditures of approximately 17 million subject to revisions as we move through the year.

Last quarter, we indicated that 2020, capex would likely be substantially under 17 million due to delays in committing to an investment for our engineered structural mesh business.

Subsequently question surrounding that project were resolved and we committed to move forward during Q3.

While we are unable to predict with certainty the timing of outlays. We now believe that 2020 Catholic Capex will come in at approximately 12 million.

As we head further into Q4, we expect another quarter of solid shipments on reasonable financial performance.

Looking out for 2021, however market conditions are uncertain in view of the impact of the pandemic funding sources for public construction and the increased risks as created for private nonresidential construction, we would not be surprised to see some softening as the consequences of this.

Inefficient downturn and economic activity our fell in our markets.

This concludes our prepared remarks, and we'll now take your questions. Daniel would you. Please explain the procedure for asking questions.

As a reminder to ask the question you will need to press star one on your telephone to withdraw your question press the pound key.

Please standby and while we compile the Q and a roster.

Our first question comes from Julio Romero with Sidoti and company. Your line is Alex.

Hi, Good morning, Mikes, Mark good morning H. good.

Good morning Oreo.

Hi, good start can you maybe talk about.

Coordinating response I appreciate the comments in the prepared remarks, but maybe just talk about more broadly what's been the biggest impact in your view.

Yes, it sounds like again minimal impact but.

Would you say the biggest impact would be customer uncertainty or or any changes in the competitive environment or anything else that.

These worth highlighting.

Yes, well so so.

While the impact has been minimal on our operations the concern has been high.

And.

We ensure that people get the right attention if they've been exposed which means that we wind up with vacancies.

In our operations and shifts that aren't completely staffed and clearly that span that's been a problem for us to work around.

But but overall I'd say the uncertainty that's been created maybe the most significant impact at this point because neither in steel nor in steels customers can say exactly what operating configurations and and conditions will be next week or next month or.

In the fall so I'd say that file we typically don't have.

Our long view of demand in our markets, that's particularly true right now because.

Everything subject to change on a daily basis.

That's helpful and I guess on that point as you talk to your customers as you talk to the coffee manufacturers.

Can you just talked or what areas within residential or non residential are holding up well.

I know you're a couple of steps removed from the end project, but maybe any sense of.

Public private and kind of areas within that would be helpful.

Yes, I think public construction has continued to be pretty robust on as you well aware most of those projects were funded all prior to all the uncertainties that have developed we've also seen and on the private non res side, a tremendous amount of work in the distribution center.

Market.

Which has been quite robust and and appears to have continued to have a long glide path for us. So.

I can't point out any any significant area of weakness at this point.

Got it and then.

Yes on the volumes really strong quarter. There I was really impressed there I mean I was hoping you could maybe quantify the incremental tonnage.

From Strand second quarter.

Good.

Yes, Julio that's actually Thats, a number that we we havent disclosed historically with respect to tonnage more broadly, but but also with respect to the acquisition and the other part of it is polio that it's difficult for us to know precisely.

On sense in certain cases, we're splitting business with strand tech at certain accounts and and and we've really focused on just taking good care of those accounts that strand Tech was servicing.

But but it's it's really difficult for us to pin pinned down.

The incremental tonnage.

Fair enough I guess, maybe maybe to ask another way I guess you mentioned the customer retention is in pretty good.

If you can speak to maybe the customer retention efforts at with Stantec, maybe that would be helpful.

Yes, well.

That was key customer retention is a key driver of making this transit transaction successful and and it probably won't surprise you to know that our focus has been on on.

Making good on our commitments for delivery.

Really helpful. All back into queue. Thanks, very much. Thank you.

Thank you as a reminder, ladies and gentlemen that Star then one to ask a question.

Our next question comes from Tyson Bauer with KC capital. Your line is now open.

Good morning, gentlemen, an excellent quarter.

Good morning Tyson.

Can you give us a sense.

Reading a lot of headlines regarding the state bonding activity it would appear that municipalities states.

Outside of their general on typically do a lot of bonding that is project oriented or for the department of transportation and they're taking advantage of the availability of lower rates.

At this current time does that help insulate or help out your particular business.

If they are to continue that pattern of increasing that bonding.

Yes, I mean, absolutely and I think this is this is a trend that is not new.

As as.

She said become more strapped for funds and localities municipalities have been strapped for funds over the last few years on we've seen at the local and state level that many of these entities have turned to bond financing or they have dealt with their own fuel tax issues in a local or statewide basis.

On to try to replace some of the funding that in prior years may have come out in the federal government. So.

Yes, I think that the trend is positive for us, although I don't know that that I.

I don't know that it would be sufficient to offset what we believe will be a pretty serious downturn federal fuel, our receipts and and distributions in 2021, I think it remains to be soon.

Doesn't highway Trust fund technically run out of money I think at September So the action must be taken in summary, guar just to maintain as that your understanding.

It is yes.

Would you anticipate.

Minimally maintenance.

Funding for that that we've seen the past two years or do you.

By end to the fact, they may try to increase that.

Availability as a stimulus.

Well.

Good questions.

I think the context of the election in November has to be considered in all of these scenarios and with the emphasis and focus on.

On.

Minimizing the code that damage to our economy are fully expect that there'll be some sort of infrastructure action at the federal level.

Whether that comes before the election or after is hard to say.

I would be I'll be very surprised if infrastructure funding isn't wrapped up into this whole stimulus and recovery of program that seems to be popular in Washington.

Okay. What are you, saying when you're referencing your 21 outlook, which obviously it's early.

That the most uncertainty as proudly isolated or focus in on the private non res.

Portion of your business.

Our whether or not that can backfill current activity.

I would say, both private nonresidential and public construction of our concerns Tyson and when we talk to customers who have backlogs that goes six to eight months out.

We're trying to keep our here the ground on bidding activity that's occurring for 2021, and there's mix news on that at this point.

But I think there are risks there risks in both sectors.

Okay.

Well. It appears we are getting into an economy thats going to be more delivery base people, taking it at home as opposed to go into the stores, whether thats, a groceries or otherwise, which puts a much greater focus on Dcs that has been what Amazon has been doing some of the other big companies in that area.

Tilt up buildings typically are those kind of.

Manufacturing or that kind of construction.

Does that a key area for you and something that you excel at and provides that cost saving equation for those construction companies and that type of design.

Absolutely, it's a sweet spot for us and we have capitalized on it to a great degree. This year on we also believe that that trend has a long way to run for exactly the reason that you pointed out in the comment you made an opening your question on so it's very robust and we.

Expected to continue.

Last one so I don't take up too much time.

You got a significant amount of cash built up years past you have at the board level examine the possible special dividend at the end of the year.

Is your 21 outlook too uncertain to put that under consideration or are you more focused stand on being conservative having the cash there and the M&A opportunities should they arise.

Well, our position hasn't really changed Tyson that our first objective is to find attractive growth opportunities for the business on both organic and by acquisition.

Is all beyond that we believe on a conservative basis is required to operate the business that will seriously consider returning it to shareholders.

All right. Thank you gentlemen, thank you Mike for all years of service and dealing with you as a real pleasure and I hope things go elements again.

Thank you.

I'm not showing any further questions at this time I would now let's turn the call back over to H. woltz for any closing remarks.

Okay. Thank you. We appreciate your interest in the company encourage you to call us back with questions. If they arise when we look forward to speaking with you at the Q4 call. Thank you.

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

Q3 2020 Insteel Industries Inc Earnings Call

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