Q4 2020 Insteel Industries Inc Earnings Call
[music].
This time, all participants are listen only mode.
And we will conduct a question ive seen fashion.
Detections will follow at that time.
If I didn't watch would be equally.
That's putting a comprehensive peace, but I just thought that yes, I'm glad to be on telephone.
I've already made during this conference is being recorded I would.
I would now like to turn the conference over to your host mR.H. Woltz, President and CEO often steel. Please go ahead Sir.
Good morning. Thank you for your interest in Insteel and welcome to our fourth quarter 2020 earnings call, which will be conducted by Merck Serono, Our senior Vice President CFO and Treasurer and me, let me read.
Let me remind you that some of the comments made on today's 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 SEC.
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 Mark to review our financial results, then I'll follow up to comment more on business conditions and other recent developments.
Thank you H. and good morning to everyone joining us on the call as we reported earlier today the fourth quarter of fiscal 2020 proved to be a strong quarter for insteel.
Robust demand in our construction end markets. In addition to a sustained recovery in spreads from depressed levels of a year ago were the key drivers in our performance excluding the nonrecurring charges referenced in our release net earnings rose to 38 cents per share as compared to a net loss of nine cents per share last year.
To note the current year quarter also benefited from having an extra week as compared to the prior year based on our fiscal calendar.
Shipments for the quarter increased 27.7% from last year and 12.1% sequentially for Q3 the.
The fourth quarter of fiscal 2020 was our highest quarterly shipment level in the company's history, even excluding the extra week in the quarter and exceeding our previous high watermark in the third quarter of 2016.
The fourth quarter shipping performance was driven by continued strength in construction activity across all our end markets as compared to last year with engineered structural mesh and PC strand, leading the growth in the quarter.
Average selling prices, though remained under pressure and declined 4.6% from last year, but.
But there are signs of improvement at sequentially average selling prices increased 1.1%, which represented the first increase in seven sequential quarters.
As we've communicated in previous calls low priced import competition in the PC strand and standard welded wire markets, respectively remain intense and continues to have a negative impact on our average selling prices combined they represented approximately 30% of our fourth quarter revenue and experienced an average selling price decline of.
8% as compared to a decline of 3% for the balance of the business relative to last year.
This does represent an improvement from our third quarter 2020 levels, though as we highlighted during that quarter. These products also represented 30% of revenue, but they experienced a 20% decline in average selling prices as compared to an 8% decline for the balance of the business.
While this positive trend may prove to be temporary we do believe that the antidumping and countervailing duty cases, we have filed have had a positive impact on the market.
Gross profit for the quarter rose $15.6 million from a year ago to $19.5 million and gross margin expanded over 1000 basis points to 14.1% due to the impact of incremental volume and the recovery in spreads between selling prices and raw material costs.
On a sequential basis gross profit increased $4.7 million from the third quarter and gross margin widened 200 basis points, primarily due to shipment volume and to a lesser extent a widening in spreads.
Spreads over the last two sequential fiscal quarters of 2020 have been consistently above the depressed levels experienced during the last two comparable quarters of fiscal 2019, as we benefited from the consumption of lower price rod inventory that exceeded the negative impact from the steady decline in average selling prices go.
Given current market rod pricing and stabilizing average selling prices, we would expect to maintain these more normalized spread levels into Q1 of fiscal 2021.
As Jay expense for the quarter Rose 3.4 million to $9.4 million or 6.7% of net sales from $5.9 million or 5.2% of net sales last year. This is.
This increase was largely driven by three areas first we experienced higher incentive compensation expense under our return on capital based incentive plan due to our strong financial results. This year.
You may recall that we did not incur any incentive compensation expense in the fourth quarter of last year or for the full fiscal year of 2019, given our performance during that reporting period.
Next we incurred higher legal expenses relative to our normal run rate solely in support of our trade case initiatives.
And finally, we revalued the earn out liability related to an acquisition given measurement of its performance. This is the conclusion of the measurement period. So no future expenses will be incurred with respect to it.
Our effective tax rate for the year decreased to 21.4% for the fiscal year 2020 from 24.9% last year due to the benefit of an annual well carry back provision of the cares Act and the utilization of selected state and our wells, excluding the cares act benefit our effective tax rate would have been too.
22.3%.
Looking ahead to next year, we expect our effective tax rate will continue to run around 23% subject to the level of pre tax earnings book tax differences and other assumptions and estimates that factor into our tax provision calculations.
Moving to the balance sheet and cash flow statement cash flow from operations for the quarter generated $11.4 million largely from earnings with a minimal change in working capital as compared to 32.5 million in cash flow last year, which was primarily the result of a $31.4 million reduction in working capital due to a rebalancing of our inventories during the.
At quarter from the elevated levels experienced during much of last year.
Based on our sales forecast for Q1, our year end inventories represented three months of shipments compared with two and a half months at the end of the third quarter and were valued at an average unit cost that was lower than the beginning quarter average and the amount reflected in Q4 cost of sales. These.
These lower costs should favorably impact our margins during the first quarter, assuming average selling prices remained stable.
Capital expenditures were $7.1 million for the year down $3.4 million from last year and remain largely focused on cost and productivity improvement initiatives. In addition to recurring maintenance requirements.
Looking ahead to 2021, we expect capex to total up to $20 million, including important initiatives related to relocating and upgrading the FCM assets.
And investments to further the growth in our engineered structural messages business as well as our customary recurring maintenance needs.
We concluded the quarter with $68.7 million of cash on hand, or approximately $3.50 a share and no borrowings outstanding on our $100 million revolving credit facility.
Looking ahead to fiscal 2021, we continue to experience steady demand in the early weeks of Q1 as our customer base executes existing project backlogs.
But the lingering impact of COVID-19 on us economic recovery remains a risk to our business as we progress through fiscal year, we expect our financial results will remain vulnerable to the path of these evolving market conditions and their impact on both non residential and infrastructure markets.
While recent third party forecast for non residential construction spending indicate a bottoming or modest improvement from trends earlier in the year, we are cautious on the demand outlook the or.
The architectural billings index, and the Dodge momentum index, leading indicators for nonresidential construction support these trends.
Aby has rebounded from a multi year low of 29.5 in April after stalling at 40 during the summer Abby I registered an increase to 47 yesterday.
But it has remained below the 50 threshold for seven consecutive months.
Dodge, which had a low point in June of this year has posted three sequential increases in July August and September gaining 2.2% over that period.
These along with other indicators typically would signal a slowdown broadly across nonresidential construction activity.
The drivers behind the economic weakness make the magnitude and timing of any impact unclear.
Turning to public infrastructure spending has yet to experience the level of weakness forecast at the beginning of the pandemic.
But the impact varies by state and region certain large markets for our business like Texas have remained steady relative to historical levels. In addition.
In addition through the first eight months of the year public construction spending increased 6.1% from a year ago with highway and street construction one of the largest end applications for our products increased 2% 2%.
Despite these economic uncertainties, we continue to focus on optimizing our operations safeguarding our employees and advancing our key growth and market initiatives. Our success in the engineered structural mesh market in fiscal 2020 and should position us for continued expansion of that product in 2021.
Additionally, the trade cases, alleging illegal activity by importers in certain of our markets, which are expected to be resolved in fiscal 2021 have progressed favourably and we believe the fact supporting cases are strong five.
Finally, we will continue to evaluate acquisitions opportunistically in our existing business that may arise in this challenging environment.
These initiatives remain consistent with our capital deployment strategy that balances maintaining appropriate financial strength the pro.
The pursuit of our three objectives reinvesting in the business to improve our operating model through cost and productivity improvements or capital expenditures to accelerate organic growth.
Executing on strategic opportunities that meet our return parameters for inorganic growth.
And returning capital to shareholders in a disciplined manner.
I will now Corp, I will now turn the call back over to age.
Thank you Mark.
As Mark indicated our fourth quarter results reflect strong shipment growth relative to the prior year driven by resilient nonresidential construction markets. We also benefited from the closer alignment between raw material costs and average selling prices as reflected in the recovery of our gross margin, which was the store.
We did in the prior year by the downward spiral in steel prices and unexpected weak demand growth.
Gross margin is trending closer to a normalized level following the relative stability. We've seen recently in steel prices were paid.
We're pleased with the solid underlying demand for our products and our financial performance and we thank our in steel Tim team mates for their focus on working safely and execution excellence during.
During Q4, we continued to observe CDC recommended procedures for managing exposure to covert Knight team and its transmission at our plants and administrative offices while.
We had staffing disruptions during the quarter related to quarantines, none of our locations was materially affected by operating restrictions and most customers also experienced normal operations subject to the same quarantine related staffing complications that effective in steel as of.
Now, we expect to continue fulfilling customer requirements and do not expect to surge of infections to affect our operating plans.
During Q4, we completed the customer integration activities related to our Q2 acquisition of certain that sets of Stantec manufacturing we have.
We appreciate the confidence placed in steel by former Strand Tech customers and are gratified that practically all of these relationships are ongoing and mutually beneficial.
Our engineering team has been on site at the Strand Tech plant continuously updating and renovating equipment that will be deployed at other insteel facilities.
Commissioning activities are presently underway for the first two production lines that were relocated.
These capacity additions or leave process bottlenecks and contribute to significant improvements in the unit cost of production. In addition to playing an important role in accommodating our anticipated PC strand growth.
The renovation and relocation process is a substantial undertaking which is absorbed a significant portion of our internal engineering capacity and we will continue to do so into our second fiscal quarter.
I'd like to express my appreciation to the engineering group and those supporting two groups for the truly remarkable progress they've made up to this point, we look forward to completing this initiative and moving on to promising opportunities in other parts of the business.
The Strand Tech real property has been listed for sale and has generated a great deal of interest among prospective buyers are.
Our continued presence on site, while renovating equipment is not particularly helpful to the marketing process. So we're focused on expediting completion of these activities to advance the sale process without delay.
Turning to our credit trade case initiatives in April in steel together with two other domestic PC strand producers filed anti dumping petitions against 15 countries, representing 89% of total PC strand imports that entered the us in 2019 in addition.
On to a countervailing duty petitions against Turkey, alleging illegal subsidies.
The scope of the filings, which alleged dumping margins ranging from 24% to 194% of value reflects the year responsible behavior of respondents in the us market over the 2017 to 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. It now appears that about half of the cases will wrap up in early January with the balance concluding during our third fiscal quarter.
As Mark indicated previously dependency of these cases has had a favorable impact on the market, which is certainly welcome after years of import driven downward pricing pressure.
We must win the cases, however to level the playing field with these parties on an ongoing basis.
While we can't forecast the outcomes, we're pleased with developments up to this point and we believe the facts support our allegations and that will be successful.
At the end of June in steel and for other domestic producers of standard standard welded wire reinforcing filed anti dumping and countervailing duty petitions against Mexico, alleging dumping margins ranging from 56% to 161% of value and illegal government subsidies subsidy.
Use of the Mexican industry input.
Import penetration has risen consistently as Mexican producers has persisted in dramatically under selling the us market.
We received a favorable preliminary determination of injury from the International Trade Commission in August which shifted the investigation to the department of Commerce. It now.
It now appears that these cases will wrap up during our third fiscal quarter or early in the fourth quarter.
As with the PC Strand cases, we can't predict the outcome, but we're pleased with the developments up to now and we believe we will ultimately obtain anti dumping and countervailing duty orders with respect to Mexican producers.
Turning to Capex as reported we came in at just over $7 million for 2020, which was substantially under our prior estimates.
The shortfall is purely timing related largely connected with a significant projects supporting our engineered structural mesh growth that was delayed but which is now moving ahead at a rapid pace.
Given the momentum of this project and other EPS NIM initiatives significant investments related to the renovation and relocation of the strand Tech assets and further upgrades to our information technology, We expect 2021 capex to come in at approximately $20 million.
We view the 2020 cat that shortfall as an opportunity cost and we look forward to improving our competitive position and our growth prospects by successfully completing a number of attractive investments across our product portfolio.
Our capex strategy continues to be focused on reducing cash cost of production improving the quality of our products supporting growth initiatives and improving our information technology infrastructure and capabilities.
Turning to our outlook for 2021 during the Q3 call. We indicated that we expected a strong fourth quarter in view of the momentum in our markets while most.
While momentum is still favorable numerous uncertainties affect our ability to accurately forecast 2021.
Primary among those with the impact of the downturn on funding sources for public construction and the increased risk profile of the private nonresidential construction market and in fact, the entire economy.
We would not be surprised to see some softening as the consequences of the pandemic driven downturn rippled through our markets. Although recent macro forecasts are more encouraging than those made three or four months ago.
Also we are optimistic that once we're past the upcoming election bipartisan support will emerge for increased infrastructure spending which would provide economic stimulus stimulus promoted by many politicians, while also generating long term investment returns for taxpayers.
We will continue to closely monitor market conditions and aggressively pursue the appropriate actions to optimize our costs and we will continue to be vigilant in pursuing attractive growth opportunities both organically and through acquisition.
This concludes our prepared remarks, and we'll now take your questions main would you. Please explain the procedure for asking questions.
Ladies and gentlemen, if you have a question at this time.
Press Star then the number one.
Just one telephone.
If you keep your question has been answered our unique James J. Sandusky. Please pass the turn key.
Okay.
Our first question comes from Matt.
Your line is open.
Hey, good morning, Mark Good morning H.
Good morning.
So I guess I wanted to start off with.
What you're hearing from customers in.
In regards there maybe a level of concern about staying local funding and a potential drop off there and when does that the timing of that potentially affect.
In steel.
I think thats, a $64 question for sure and as you might expect there is a wide range of expectations among our customers from from certain customers, who have strong backlogs going through but what would be our second fiscal quarter to certain customers wondering what theyre going to do in.
January.
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I would say that's also been the circumstance for the last few months. So so at this point.
Not sure that we can give real good insightful guidance on on.
On how funding is going to to impact on the order book going forward I think it is going to be more of a month to month evaluation.
Got it I guess, maybe asked another way I mean is.
Assuming no.
No benefit.
From this type of stimulus or.
Or whatever I mean.
Can they get through 369 months without.
Some type of.
Stimulus for them.
I mean, it sounds like the question is really how long is that pipeline and.
No I would say it probably goes well into our second quarter.
But but I don't know that it would go into the third or fourth.
And that's that's one man's opinion, okay. That's not the result of of any objective data analysis.
Okay No I appreciate thats helpful.
On the engineered structural mesh side can you talk about how much did.
Did DSMB makeup.
A portion of your portfolio in.
In fiscal 2000, and maybe how much growth you expect in 21.
Either from a unit perspective, or a percentage perspective.
No I mean, we don't we don't disclose that level of detail, but I can tell you that that we're growing in solid double digits.
And and expect to continue doing so.
Okay got it and I guess on the $20 million in Capex for 21.
Would any of that like be be necessarily catch up.
In terms of.
Things missed out in fiscal 20 or.
Just any color there.
Yes, well I mean, we've reported we've reported for the last three or four quarters at least that we had a delayed project in support of our EPS in business, where we had to work with with an OEM vendor to resolve some unanticipated problems with a production line.
That we installed at our North Carolina facility on and that took quite a while it set us back a year or so so those problems have been resolved and we are moving ahead.
Full force to put another line in that is so we're preparing foundations now and expect that we'll see a Q2 or Q3 startup of of that line in 2021. So so we've stayed on top of all routine customary sort of recurring.
Maintenance needs.
We did we did.
Have a significant hole on our growth initiatives relative to this on anticipated delayed.
And and certainly as a as I said in the prepared comments as an opportunity cost, but right now were looking forward, we're not looking behind and we're going to move with dispatch to bring this line up and get its product into the market.
Got it that's helpful I'll hop back into queue. Thank you.
Our next question comes from Tyson Bauer of KC capital. Your line is open.
Good morning, gentlemen.
Hi, guys. Good morning, just a.
Just a follow up on previous questioners.
Topic do you have any hard numbers on the state and local muni bond activity as far as relative to maybe a year ago for seeing them take advantage of the lower interest rates and doing more principal bonds or any.
Any sense or any industry data that you have that you could give us a reference point.
I don't I don't think there's any we don't have any hard data Tyson, but we are aware of increased activity at the state and local level in financing infrastructure projects with bond proceeds in and actually it's been ongoing for four at.
At least a couple of years, we view it as a very positive development, but unfortunately I don't think we can pack down those numbers at this point.
You see the individual headlines those certain states and that that seem like they are growing that activity and taken advantage, but no real composite data that I've seen.
You mentioned that you are starting to get some positive impact because of the trade actions due to typically there's a retroactive date that importers would have to make up the difference. If there is an injury that is.
Taken by domestic producers as weak.
As we go into 21.
That should grow depending on if you get a favorable results or not do you know what that retroactive dates are.
Well.
That question.
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Would require a very very lengthy answer suffice it to say that the retro activity is generally associated with critical circumstances filings and as of this week. We have made those filings on approximately 12 10 or 12 of.
The 15 countries, where we could support a critical circumstances finding.
Or filing.
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As a final the critical circumstances allegations will not be finally acted on until the very last part of the case in our third or fourth quarter. So so on I think the impact of the cases is that.
That the move.
The market risk has been elevated significantly for importers of record on the uncertainty is significant and the potential financial consequences are meaningful so I think that's the backdrop.
Net debt has has created some more favorable market circumstances for us, but as I've said in the prepared comments we have to win these cases for any of this to make any difference on an ongoing basis.
Correct, but by your actions you've kind of made the shot across the bile.
This past week.
Actually I would say that we fired a torpedo below the waterline.
Yes.
We'll go with that.
With depending on how the election turns out there could be immense consequences.
For capital gains for private entities companies.
Raising their tax.
Obligations for a sale of their entities do you think that opens up or potentially opens up some more M&A opportunities before year end pending the election results.
And honestly I don't.
I don't think so Tyson.
I don't think that the M&A opportunities that are out there for us are so much.
Dependent upon those kinds of considerations I think I think they are longer term than that okay.
In the past when the weather's been poor weather its winter weather or wet weather in those three revised kind of use that as a.
Push things to the right or otherwise this your fiscal fourth quarter pretty much as ideal weather for most of the country did that.
Did that help the quarter results, having that kind of favorable weather.
Yes, I think what we would say is that weather patterns that have more normalized FFO and im not so sure that we've had all kinds our hurricane activity. This disrupted on the Gulf Coast and Texas markets.
Bye bye relative to last year, certainly it's a it's a tremendous improvement so yes, im always dubious of the weather excuse and I know that weve proper dead on numerous occasions, but yeah. We would certainly acknowledge that we welcome the return to normal outage.
Weather patterns and there is no doubt it helped us although although we can't quantify it and haven't really haven't really attempted to quantify.
The last question as we looked at the uncertainty in some of the sectors impacted by those.
Is it more than non res.
Commercial construction that gives you a little more pause on what's going to transpire in the next.
369 months or is it really the public spending aspect to that.
As more of a wildcard for you.
Right now I would tell you that the public side of it is is.
The larger question Mark for Us as we see and on private Nonres, we believe that a lot of the E. Commerce driven construction that we have benefited from in 2020 on will continue well in or through 2021. So so so.
I'd say the bigger wildcard is on the public side all right. Thank you gentlemen.
Good day, ladies and gentlemen, if you have a question. Please press star then the number one.
Number one.
Tom.
If your question has.
Great and Youve seen movements Safran lucky in the sponsor.
Hello, showing no further questions at this time I would like to know conference Mark to meet mR.H. Woltz.
We appreciate your interest in Insteel, we thank you for your time this morning, and we welcome your contacts zone going forward. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
Have a wonderful day.
Your next.
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Good morning, ladies and gentlemen, and welcome to Insteel Industries' fourth quarter 2014 conference call.
This time, all participants are listen only mode.
They will conduct a question after fashion detection.
Section will follow at that time.
If I don't watch or did they acquired.
That's pretty confident they specify them yet on the telephone.
I buy my day. This conference is being recorded I would now.
I would now like to turn to my friends over to your host mR.H. Woltz, President and CEO Oscar Spieler. Please go ahead Sir.
Good morning, Ben.
Thank you for your interest in Insteel and welcome to our fourth quarter 2020 earnings call, which will be conducted by Merck Serono, Our senior Vice President CFO and Treasurer and me let me.
Let me remind you that some of the comments made on today's 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 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 Mark to review our financial results, then I'll follow up to comment more on business conditions and other recent developments.
Thank you H. and good morning to everyone joining us on the call as we reported earlier today the fourth quarter of fiscal 2020 proved to be a strong quarter for insteel.
Robust demand in our construction end markets. In addition to a sustained recovery in spreads from depressed levels of a year ago were the key drivers in our performance excluding the nonrecurring charges referenced in our release net earnings rose to 38 cents per share as compared to a net loss of nine cents per share last year.
To note the current year quarter also benefited from having an extra week as compared to the prior year based on our fiscal calendar.
Shipments for the quarter increased 27.7% from last year, and 12.1% sequentially for Q3, but.
The fourth quarter of fiscal 2020, with our highest quarterly shipment level in the company's history, even excluding the extra week in the quarter and exceeding our previous high watermark in the third quarter of 2016.
The fourth quarter shipping performance was driven by continued strength in construction activity across all our end markets as compared to last year with engineered structural mesh and PC strand, leading the growth in the quarter.
Average selling prices, though remained under pressure and declined 4.6% from last year, but.
But there are signs of improvement at sequentially average selling prices increased 1.1%, which represented the first increase in seven sequential quarters.
As we've communicated in previous calls low priced import competition in the PC strand and standard welded wire markets, respectively remain intense and continues to have a negative impact on our average selling prices combined they represented approximately 30% of our fourth quarter revenue and experienced an average selling price decline of.
8% as compared to a decline of 3% for the balance of the business relative to last year.
It does represent an improvement from our third quarter 2020 levels, though as we highlighted during that quarter. These products also represented 30% of revenue they experienced a 20% decline in average selling prices as compared to an 8% decline for the balance of the business.
While this positive trend may prove to be temporary we do believe that the antidumping and countervailing duty cases, we have filed have had a positive impact on the market.
Gross profit for the quarter rose $15.6 million from a year ago to 19.5 million and gross margin expanded over 1000 basis points to 14.1% due to the impact of incremental volume and the recovery in spreads between selling prices and raw material costs.
On a sequential basis gross profit increased 4.7 million from the third quarter gross margin widened 200 basis points, primarily due to shipment volume and to a lesser extent a widening in spreads.
Spreads over the last two sequential fiscal quarters of 2020 have been consistently above the depressed levels experienced during the last two comparable quarters of fiscal 2019, as we benefited from the consumption of lower price rod inventory that exceeded the negative impact from a steady decline in average selling prices.
Given current market rod pricing and stabilizing average selling prices, we would expect to maintain these more normalized spread levels into Q1 of fiscal 2021.
As Jay expense for the quarter Rose 3.4 million to 9.4 million or 6.7% of net sales from $5.9 million or 5.2% of net sales last year.
This increase was largely driven by three areas first we experienced higher incentive compensation expense under our return on capital based incentive plan due to our strong financial results. This year you may recall that we did not incur any incentive compensation expense in the fourth quarter of last year or for the full fiscal year of 2019 given our.
Performance during that reporting period.
Next we incurred higher legal expenses relative to our normal run rate solely in support of our trade case initiatives.
And finally, we revalued the earn out liability related to an acquisition given measurement of its performance. This is the conclusion of that measurement period. So no future expenses will be incurred with respect to it.
Our effective tax rate for the year decreased to 21.4% for the fiscal year 2020 from 24.9% last year due to the benefit of an annual well carry back provision of the cares Act and the utilization of selected state and our wells, excluding the care tax benefit our effective tax rate would have been.
22.3% looking.
Looking ahead to next year, we expect our effective tax rate will continue to run around 23% subject to the level of pre tax earnings book tax differences and other assumptions and estimates that factor into our tax provision calculations.
Moving to the balance sheet and cash flow statement cash flow from operations for the quarter generated 11.4 million largely from earnings with a minimal change in working capital as compared to 32.5 million in cash flow last year, which was primarily the result of a 31.4 million reduction in working capital due to a rebalancing of our inventories during that.
Quarter from the elevated levels experienced during much of last year.
Based on our sales forecast for Q1, our year end inventories represented three months of shipments compared with two and a half months at the end of the third quarter and were valued at an average unit cost that was lower than the beginning quarter average and the amount reflected in Q4 cost of sales these low.
These lower costs should favorably impact our margins during the first quarter, assuming average selling prices remained stable.
Capital expenditures were $7.1 million for the year down $3.4 million from last year and remain largely focused on cost and productivity improvement initiatives. In addition to recurring maintenance requirements.
Looking ahead.
The 2021, we expect capex to total up to $20 million, including important initiatives related to relocating and upgrading the FCM assets and investments to further the growth in our engineered structural mess because business as well as our customary recurring maintenance needs.
We concluded the quarter with $68.7 million of cash on hand, or approximately $3.50 a share and no borrowings outstanding on our $100 million revolving credit facility.
Looking ahead to fiscal 2021, we continue to experience steady demand in the early weeks of Q1 as our customer base executes existing project backlogs.
But the lingering impact of COVID-19 on us economic recovery remains a risk to our business as we progress through fiscal year, we expect our financial results will remain vulnerable to the path of these evolving market conditions and their impact on both non residential and infrastructure markets.
While recent third party forecast for non residential construction spending indicate a bottoming or modest improvement from trends earlier in the year, we are cautious on the demand outlook.
Architectural billings index, and the Dodge momentum index, leading indicators for non residential construction support these trends.
Has rebounded from a multi year low of 29.5 in April after stalling. It 40 during the summer EBI registered an increase to 47 yesterday.
But it has remained below the 50 threshold for seven consecutive months.
Dodge, which hit a low point in June of this year has posted three sequential increases in July August and September gaining 2.2% over that period.
These along with other indicators typically would signal a slowdown broadly across non residential construction activity.
But the drivers behind the economic weakness make magnitude and timing of any impact unclear.
Turning to public infrastructure spending has yet to experience the level of weakness forecast at the beginning of the pandemic.
But the impact varies by state and region.
Certain large markets for our business like Texas have remained steady relative to historical levels. In addition.
In addition through the first eight months of the year public construction spending increased 6.1% from a year ago with highway and street construction one of the largest end applications for our products increased 2% 2%.
Despite these economic uncertainties, we continue to focus on optimizing our operations safeguarding our employees and advancing our key growth and market initiatives. Our success in the engineered structural mesh market in fiscal 2020 should position us for continued expansion of that product in 2021.
Additionally, the trade cases, alleging illegal activity by importers in certain of our markets, which are expected to be resolved in fiscal 2021 have progressed favourably. We believe the fact supporting the cases are strong fine.
Finally, we will continue to evaluate acquisitions opportunistically in our existing business that may arise in this challenging environment.
These initiatives remain consistent with our capital deployment strategy that balances maintaining appropriate financial strength the pro.
The pursuit of our three objectives reinvesting in the business to improve our operating model through cost and productivity improvements or capital expenditures to accelerate organic growth.
Executing on strategic opportunities that meet our return parameters for inorganic growth.
And returning capital to shareholders in a disciplined manner.
I will now Corp, I will now turn the call back over to H.
Thank you Mark.
As Mark indicated our fourth quarter results reflect strong shipment growth relative to the prior year driven by resilient non residential construction markets. We also benefited from the closer alignment between raw material costs and average selling prices as reflected in the recovery of our gross margin, which was the store.
Got it and the prior year by the downward spiral in steel prices and unexpected weak demand gross.
Gross margin is trending closer to a normalized level following the relative stability. We've seen recently in steel prices were paid.
We're pleased with the solid underlying demand for our products and our financial performance and we thank our Insteel Tim team mates for their focus on working safely and execution excellence during.
During Q4, we continued to observe CDC recommended procedures for managing exposure to covert Knight team and its transmission at our plants and administrative offices.
We had staffing disruptions during the quarter related to quarantines, none of our locations was materially affected by operating restrictions and most customers also experienced normal operations subject to the same quarantine related staffing complications that affected in steel as of.
Now, we expect to continue fulfilling customer requirements and do not expect a surge of infections to affect our operating plans.
During Q4, we completed the customer integration activities related to our Q2 acquisition of certain assets of street impact manufacturing we have.
We appreciate the confidence placed in steel former strand tech customers and are gratified that practically all of these relationships are ongoing and mutually beneficial.
Our engineering team has been on site at the Strand Tech plant continuously updating and renovating equipment that will be deployed at other insteel facilities.
Commissioning activities are presently underway for the first two production lines that were relocated.
These capacity additions or leave process bottlenecks and contribute to significant improvements in the unit cost of production. In addition to playing an important role in accommodating our anticipated PC strand growth.
The renovation and relocation process is a substantial undertaking which is absorbed a significant portion of our internal engineering capacity and we'll continue to do so into our second fiscal quarter.
I'd like to express my appreciation to the engineering group and those supporting the group for the truly remarkable progress they've made up to this point, we look forward to completing this initiative and moving on to promising opportunities in other parts of the business.
The Strand Tech real property has been listed for sale and has generated a great deal of interest among prospective buyers.
Our continued presence on site, while renovating equipment is not particularly helpful to the marketing process. So we're focused on expediting completion of these activities to advance the sale process without delay.
Turning to our credit trade case initiatives in April in steel together with two other domestic PC strand producers filed anti dumping petitions against 15 countries, representing 89% of total PC strand imports that entered the us in 2019 in addition.
To a countervailing duty petitions against Turkey, alleging illegal subsidies.
The scope of the filings, which alleged dumping margins ranging from 24% to 194% of value reflects the year responsible behavior of respondents in the us market over the 2017 to 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. It now appears that about half of the cases will wrap up in early January with the balance concluding during our third fiscal quarter.
As Mark indicated previously dependency of these cases has had a favorable impact on the market, which is certainly welcome after years of import driven downward pricing pressure.
We must win the cases, however to level the playing field with these parties on an ongoing basis.
While we can't forecast the outcomes, we're pleased with developments up to this point and we believe the facts support our allegations and that will be successful.
At the end of June in steel and for other domestic producers of standard standard welded wire reinforcing filed anti dumping and countervailing duty petitions against Mexico, alleging dumping margins ranging from 56% to 161% of value and illegal government subsidies.
Subsidies of the Mexican industry.
Import penetration has risen consistently as Mexican producers had persisted and dramatically under selling the us market.
We received a favorable preliminary determination of injury from the International Trade Commission in August which shifted the investigation to the department of Commerce. It now.
It now appears that these cases will wrap up during our third fiscal quarter or early in the fourth quarter.
As with the PC Strand cases, we can't predict the outcome, but we're pleased with the developments up to now and we believe we will ultimately obtain antidumping and countervailing duty orders with respect to Mexican producers.
Turning to Capex as reported we came in at just over 7 million for 2020, which was substantially under our prior estimates.
The shortfall is purely timing related largely connected with the significant projects supporting our engineered structural mesh growth that was delayed but which is now moving ahead at a rapid pace.
Given the momentum of this project and other EPS NIM initiatives significant investments related to the renovation and relocation of the strand Tech assets and further upgrades to our information technology, We expect 2021 capex to come in at approximately $20 million.
We view the 2020 cap that shortfall as an opportunity cost and we look forward to improving our competitive position and our growth prospects by successfully completing a number of attractive investments across our product portfolio.
Our capex strategy continues to be focused on reducing cash cost of production improving the quality of our products supporting growth initiatives and improving our information technology infrastructure and capabilities.
Turning to our outlook for 2021 during the Q3 call. We indicated that we expected a strong fourth quarter in view of the momentum in our markets while most.
While momentum is still favorable numerous uncertainties affect our ability to accurately forecast 2021.
Primary among those are the impact of the downturn on funding sources for public construction and the increased risk profile of the private nonresidential construction market and in fact, the entire economy.
We would not be surprised to see some softening as the consequences of the pandemic driven downturn ripple through our markets. Although recent macro forecasts are more encouraging than those made three or four months ago.
Also we are optimistic that once we are past the upcoming election bipartisan support will emerge for increased infrastructure spending which would provide economic stimulus stimulus promoted by many politicians, while also generating long term investment returns for taxpayers.
We will continue to closely monitor market conditions and aggressively pursue the appropriate actions to optimize our costs and we will continue to be vigilant in pursuing attractive growth opportunities both organically and through acquisition.
This concludes our prepared remarks, and we'll now take your questions main would you. Please explain the procedure for asking questions.
Ladies and gentlemen, if you have a question at this time thank you.
As a star EBITDA number one.
Just on telephone.
If your question has been answered our unique strain move your cellphone Vicki Please pass the pad.
[music].
Our first question comes from Meredith of Bill Your line is open.
Hi, Good morning, Mark Good morning age.
Good morning.
So I guess I wanted to start off with.
What you're hearing from customers.
In regards there maybe a level of concern about staying local funding and a potential drop off there and when does that the timing of that potentially affect.
In steel.
I think thats, a $64 question for sure and as you might expect there is a wide range of expectations among our customers from from certain customers, who have strong backlogs going through but what would be our second fiscal quarter to certain customers wondering what theyre going to do in.
January.
I would say that's also been the circumstance for the last few months. So so at this point.
Not sure that we can give real good insightful guidance on on.
On how fundings going to to impact on the order book going forward I think it's going to be more of a mark to market valuation.
Got it I guess, maybe asked another way I mean is.
Assuming no.
No benefit.
From this type of stimulus or.
Or whatever I mean.
Can they get through 369 months without.
Some type of.
Stimulus for them.
I mean, it sounds like the question is really how long is that pipeline and.
No I would say it probably goes well into our second quarter.
But but I don't know that it will go into the third or fourth.
And that's that's one man's opinion, okay. That's not the result of any objective data analysis.
Okay No I appreciate that's helpful.
The engineered structural mesh side can you talk about how much did.
Yes that make up.
A portion of your portfolio in.
In fiscal 2000, and maybe how much growth you expect in 21.
Either from a unit perspective, or a percentage perspective.
No I mean, we don't we don't disclose that level of detail, but I can tell you that that we're growing in solid double digits.
And and expect to continue doing so.
Okay got it and I guess on the 20 million in Capex for 21.
Would any of that like be be necessarily catch up.
In terms of.
Things missed out in fiscal 20 or.
Just any color there.
Yes, well I mean, we've reported we've reported for the last three or four quarters at least that we had a delayed project in support of our EPS in business.
Where we had to work with with an OEM vendor to resolve some unanticipated problems with a production line that we installed at our North Carolina facility.
And that took quite a while it set us back a year or so so those problems have been resolved.
And we are moving ahead.
Full force to put another line in that is so we're preparing foundations now and expect that we'll see a Q2 Q3 startup of of that line in 2021. So so we've stayed on top of all routine customary sort of recurring.
In maintenance needs.
We did we did.
Have a significant hole on our growth initiatives relative to two this on anticipated delays.
And and certainly as a as I said in the prepared comments as an opportunity cost, but right now were looking forward, we're not looking behind and we're going to move were dispatched to bring this line up and get its product into the market.
Got it that's helpful I'll hop back into queue. Thank you.
Our next question comes from Bryce symbolic of KC capital. Your line is open.
Good morning, gentlemen.
Morning, guys. Good morning, just.
Just a follow up on previous questioners.
Topic do you have any hard numbers on the state and local muni bond activity as far as relative to maybe a year ago for seeing them take advantage of the lower interest rates and doing more principal bonds or any.
Any sense or any industry data that you have that you could give us a reference point.
I don't I don't think there's any we don't have any hard data Tyson, but we are aware of increased activity at the state and local level in financing infrastructure projects with bond proceeds and and actually it's been ongoing for four.
At least a couple of years, we view it as a very positive development, but unfortunately I don't think we can pack down those numbers at this point.
You see the individual headlines on certain states and that that seem like they're growing that activity and taken advantage, but no real composite data that I've seen.
You mentioned that you are starting to get some positive impact because of the trade actions due to typically there's a retroactive date that importers would have to make up the difference. If there is an injury that is.
Taken by domestic producers as we go.
As we go into 21.
That should grow depending on if you get a favorable results or not do you know what that retroactive dates are.
Well.
That question.
Would require a very very lengthy answer suffice it to say that the retro activity is generally associated with critical circumstances filings and as of this week. We have made those filings on approximately 12.
10, or 12 of the 15 countries, where we could support.
Critical circumstances finding.
Or filing.
The critical circumstances allegations will not be finally acted on until the very last part of the case in our third or fourth quarter. So so I think the impact of the cases is.
Is that that the move.
The market risk has been elevated significantly for importers of record of the uncertainty is significant and the potential financial consequences are meaningful so I think that's the backdrop.
Net debt has has created some more favorable market circumstances for us, but as I've said in the prepared comments we have to win these cases for any of this to make any difference on an ongoing basis.
Correct, but by your actions you've kind of made the shot across the bile.
This past week.
Actually I would say that we fired a torpedo below the waterline.
Yes.
We'll go with that.
Depending on how the election turns out there could be immense consequences.
For capital gains for private entities companies.
Raising their tax.
Obligations for the sale of their entities do you think that opens up or potentially opens up some more M&A opportunities before year end pending the election results.
Honestly I don't.
Thanks Tyson.
I don't think that the M&A opportunities that are out there for us are so much.
Dependent upon those kinds of considerations I think I think they are longer term than that okay.
In the past when the weather has been poor weather its winter weather or wet weather in those three revised kind of use that as a.
Push things to the right or otherwise this.
Your fiscal fourth quarter pretty much as ideal weather for most of the country.
Did that help the quarter results, having that kind of favorable weather.
Yes, I think what we would say is that weather patterns that have more normalized I wouldn't I'm not so sure that we've had all kinds our hurricane activity this disrupted on that.
The Gulf Coast, and Texas markets.
But but relative to last year, certainly it's a it's a tremendous improvement so yes, im always dubious of the weather excuse and I know that weve proper dead on numerous occasions, but yeah. We would certainly acknowledge that we welcome the return to normal hours.
The weather patterns and Theres no doubt it helped us although although we can't quantify it and haven't really haven't really attempted to quantify.
Last question as we looked at the uncertainty in some of the sectors impacted by those.
Is it more of the non res is.
Commercial construction that gives you a little more pause on what's going to transpire in the next.
369 months or is it really the public spending aspect to that.
It was more of a wildcard for you.
Right now I would tell you that the public side of it is is a larger question Mark for US as we are seeing on private Nonres. We believe that a lot of the E commerce driven construction that we have benefited from in 2020.
We'll continue well in or through 2021. So so so I would say that the bigger wildcard is on the public side all right. Thank you gentlemen.
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We appreciate your interest in Insteel with thank you for your time this morning, and we welcome your context going forward. Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may now disconnect.