Q1 2021 Insteel Industries Inc Earnings Call

January 21, 2021

We are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need a press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press Star then zero I would like to hand, the conference over to one of your speakers today, Mr. H Woltz, Sir Please go ahead.

Good morning. Thank you for your interest in steel and welcome to our first quarter 2021 earnings call, which will be conducted by Mark Carano, Our senior Vice President CFO and Treasurer and me.

Before we begin 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.

<unk> or new information I will now turn the call over to Marc to review, our first quarter financial results and current market conditions.

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

As we reported earlier this morning, the first quarter of fiscal 2021 was another strong quarter for in steel on markets continued to experience solid demand throughout the fall as the momentum we experienced in the fourth quarter continued in a seasonally strong pace, which coupled with a rebound in spreads from the depressed levels last year were stored gross.

Margin to more normalized levels.

Earnings per share for the quarter increased to 42 per share as compared to <unk> <unk> per share a year ago.

Shipments for the quarter were up 21, 6% from last year, but down 15, 2% sequentially from Q4, reflecting both the usual seasonality in our demand and as you recall Q4 2020 benefited from the inclusion of an extra week in that quarter based on the fiscal 2020 calendar.

Q1, though was the highest first quarter shipment level in the company's history exceeding our previous first quarter high in 2018.

Robust demand in our markets compared to last year led to broad based shipment growth across virtually all our products and it remained consistently strong across all three months of the quarter.

Average selling prices increased 1% from last year and 2% sequentially from Q4 due in part to price increases implemented in the latter half of the quarter to offset the rising cost of raw materials.

Gross profit for the quarter increased $13 6 million from a year ago and gross margin expanded over 1000 basis points to 16, 6% primarily due to the sustained recovery in spreads between selling prices and raw material costs. In addition to the impact of incremental volume and marginally lower conversion costs.

On a sequential basis gross profit increased <unk> 4 million and gross margin widened to 250 basis points, primarily due to an incremental widening spreads.

SG&A expense for the quarter increased $2 8 million to $8 6 million from $5 7 million last year or seven two percentage of net sales from five 9% last year.

The increase was attributed to two areas first accruals for incentive compensation expense under our return on capital based incentive plan due to our strong results in the first quarter. As you may recall, we did not incur any incentive compensation expense in the first quarter of last year and.

And second higher legal expenses relative to our normal run rate in support of our ongoing trade cases.

Our effective tax rate for the quarter increased marginally to 23, 2% from 22, 7% last year due to changes in permanent book tax differences.

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

Moving to the balance sheet and cash flow statement cash flow from operations for the quarter generated $14 million largely due to earnings with a minimal increase in working capital given the strong quarterly performance as compared to $29 6 million in cash flow generated last year, which was primarily primarily the result of a $24 6 million reduction in.

Working capital.

Based on our sales forecast for the second quarter of 2021, our quarter end inventories represented two four months of shipments compared with three months at the end of the fourth quarter.

<unk> inventories at the end of the first quarter of 2021 were valued at an average unit cost that was higher than our fourth quarter cost of sales.

<unk> relative to current replacement costs.

In December we returned $29 million of capital to our shareholders through the payment of $1 50 per share special cash dividend. In addition to our regular quarterly dividend, marking the fourth year over the last five years, we've paid a special dividend.

We ended the quarter with $52 million of cash on hand, or just over $2 50, a share and no borrowings outstanding on our $100 million revolving credit facility, providing us with ample financial flexibility to support our strategic initiatives.

As we look ahead to the balance of the year. We are cautiously optimistic that demand will remain steady across our markets our near term shipment trends in market sentiment support this perspective.

In addition, we have announced price increases during the first quarter to offset the impact of rising raw material costs and I'll have largely been accepted accepted by the market and a further indication of construction end market strength. These.

These increases should exhibit a more pronounced effect on our average selling prices in Q2, helping to maintain our profitability levels.

As <unk> will describe in more detail, we received a favorable final determinations with respect to several of the PC strand trade cases, which should finally resolved some of the illegal activity that has adversely affected this market.

Despite the forecast of a substantial decline in infrastructure related spending due to the financial strange from COVID-19, those dire predictions have not materialized to date through the first 11 months of 2020 public construction remained resilient with spending up four 3% from the prior year.

Highway and street construction on one of the largest end use applications for our products generally remained level with last year and the last three months of highway and street construction spending has exceeded the same three month period last year by almost 4%.

But uncertainties do remain that underpin our cautious outlook the impact of COVID-19 remains a risk to our markets on our operations.

Recent rapid exco escalation in our raw material cost is a concern that has not impacted demand to date as we've been successful mitigating through price increases.

But as was the case in past cycles. These high velocity increases in raw costs can create a volatile environment as supply and demand seeking equilibrium over the coming months.

And third and third party forecast for nonresidential construction spending remains a cause for concern.

<unk> in the middle mid summer of 2020, followed by modest improvements in the early fall.

Appear to have lost their upward momentum and it remained stagnant at their current levels levels, which are below the expansionary levels experienced before the impact of the economic slowdown in March of 2020.

I'll now turn the call back over to H. Thank.

Thank you Mark.

As reflected in the release, our strong first quarter results were driven by resilient nonresidential construction markets and late in the quarter by expectations for rising steel prices were pleased with the solid underlying level of demand for our products and our financial performance and we think are in steel team mates for their focus on working.

Safely and execution excellence during.

During Q1, we continued to observe CDC recommended procedures for managing exposure to COVID-19, and its transmission at our plants on administrative offices, while we had staffing disruptions during the quarter related to quarantines, none of our locations was materially affected by operating restrictions.

<unk> 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 we do not expect a surge of infections to affect our operating plans.

Over the course of the last three earnings calls we've reported that in steel along with other U S. Producers had filed antidumping and countervailing duty trade cases to address illegally traded imports of PC strand and standard welded wire reinforcement.

The PC Strand cases were filed in April 2020 against 15 countries debt represented 89% of PC strand imports during 2019.

On January eight the International Trade Commission issued its affirmative final injury determination with respect to Argentina, Colombia, Egypt, Netherlands, Saudi Arabia, Taiwan, Turkey, and the United Arab Emirates, resulting in the implementation of duties ranging from <unk>.

4% to 194% of value, which we believe are sufficient to address the injurious behavior of these countries.

It now appears that the cases against Indonesia, Italy, Malaysia, South Africa, Spain, Tunisia in Ukraine will conclude during our third fiscal quarter.

We are delighted to have prevailed conclusively with respect to eight of the 15 respond on countries. We're now focused on obtaining similar outcomes and the remaining seven cases.

We previously reported that the pendency of the cases had favorably impacted the market and we expect the <unk> position.

Position of these anti dumping duties to contribute to improved long term market fundamentals.

At the end of June 2020 in steel and for other domestic producers of standard welded wire reinforcing filed antidumping and countervailing duty petitions against Mexico, alleging dumping margins ranging from 56% to 161% of value and illegal government.

Subsidies of the Mexican industry, we received a favorable preliminary injury determination in August and the iron ore and through hearing is scheduled for February 12.

We expect to know the outcome of these cases before the end of the current quarter debt.

Apartment of Commerce found a preliminary dumping margin of between 64 and 153%.

A value for the largest Mexican producer, but has not concluded margin determinations for the other producers as with the PC Strand cases dependency of the Mexico cases has had a favorable impact on the market, but we must win the cases to address the illegal activity for the long term.

Turning to Capex, we continue to expect 2021 to come in at approximately 20 million.

The ESN project underway at our Dayton, Texas plant is on track for commissioning during our third fiscal quarter and we expect to pursue additional investments in 2021 to support our growth in this market.

During the quarter. We also continued the process of updating and relocating the major production equipment, we acquired through the Strand Tech manufacturing acquisition in March 2020, we expect commissioning to begin for the remaining production lines by the end of the quarter and are already realized on our fate.

Impact on unit conversion costs at the plants were relocated equipment is up and running.

The renovation and relocation process, which is drawing to a close has been a substantial undertaking that consumed a significant portion of our internal engineering capacity.

We look forward to turning the attention of this talented group two other important projects, which are scheduled for fiscal 2021.

To express my appreciation to the engineering group and to those supporting the group for their outstanding performance on the SPM project.

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 has not been helpful to the marketing process. So we're focused on expediting completion of these activities to advance the sale process.

Without delay.

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 the balance of 2021 on markets have considerable momentum that we believe will continue at least into our third fiscal quarter, although numerous uncertainties affect our ability to provide an accurate forecast of business conditions through the end of the year.

Primary among those are the impact from 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.

With that said, we expect strong financial performance over the next few months driven by robust demand trends for our products and rapid significant escalation in steel costs, which we are passing through the supply chain.

We also expect the new administration and Congress to come to terms on a long term infrastructure investment program, which should inspire confidence on our markets and drive increased consumption of our products, although the timing of any positive impact is unknown.

Going forward, we will closely monitor market conditions and aggressively pursue the appropriate actions to maximize our shipments and optimize our costs and we are well positioned to pursue attractive growth opportunities both organic and through acquisition.

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

Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

And then any background noise, we ask that you. Please place your line on mute. Once your question has been stated.

Our first question comes from the line of jewelry over mono with Sidoti. Your line is open. Please go ahead.

Hey, good morning, happy new year.

Good morning, good morning.

I guess my first question is just on the the.

Very impressive tonnage shipping shipment data you reported.

Mark you talked about this some of the categories of non residential highway and street was up.

4%.

Three months.

July has been strong which has been okay.

But can you just talk about that.

Relative to the 20% year over year increase in shipments are you seeing are you seeing kind of.

And just talk about what areas, maybe you're seeing some sort of.

Strength.

Yeah Julio.

The strength is actually pretty broad based across all our end markets, we haven't seen any particular weakness.

Highway and street construction is one area that we follow closely just because it's a large.

Market for us and as I mentioned that state level throughout the year and then over the last three months, it's actually up over where it was over that same period last year, but there really wasn't a particular market that debt that jumped out as being stronger.

A stronger than usual or weaker than usual.

I would add I think youre aware that debt, we have a very difficult time.

Actually demonstrating causal linkage between any of those components of construction spending that are reported and our shipments.

It's very difficult for us to point to definitive drivers.

Yes.

I guess.

Maybe taking on another stab at that I mean, maybe instead of drilling into the sub sectors.

Public construction, making up a bigger percentage then.

The driver relative to past years from here.

Is it residential maybe up from I don't know if you can give me any color on that.

I would tell you we don't we don't detect any shifts in the drivers of our order entry.

As Mark indicated the business has been strong across the board.

There are no laggards.

Got it.

20% was really.

Really impressive there.

And.

I guess.

H you talked about you do expect strength.

In the end markets, just to kind of support or at least your third quarter.

Does that expectation kind of.

Kind of factor in the same kind of backdrop, you've seen in this quarter and in the last two quarters in debt.

No.

Public construction continues to be robust.

Those projects are.

Previously.

What kind of drives up essentially in maybe third or fourth quarter of the year.

Well as you know we are notorious for.

Our lack of visibility out beyond a few weeks in the business and so I would say no. There are no specifics that would cause me to suggest that our fourth quarter is not going to be strong.

But just in view of the overall uncertainty that is.

That's present all around us I would just be hesitant to make any observation past past, what we can see pretty clearly which is through this quarter and into third quarter.

Yes, no understood.

I guess.

Maybe just last one from me is can you talk about the ability of the industry to kind of absorb.

Any further price increases.

If steel prices kind of continue on our current trajectory.

So good question and I.

I would tell you that what we're seeing in the last few weeks is probably unprecedented we have back to back triple digit price increases per ton.

And historically these things don't have long runs, but there are differences debt.

<unk> are at work in the market today relative.

Relative to past cycles, where we've seen price run ups.

So as you know we've been asked many times.

What really drives our ability to pass cost increases through to the market and we have consistently replied that it has strength in demand for our products.

And certainly we see that today and while I would not welcome further raw material cost or scrap cost increases that necessitate or raising prices further I do expect that if that were to happen debt.

The market is strong enough for us to pass these through.

At the risk of an ability to do that is really quite low.

The other the other factor at work today is that hot rolled steel wire Rod is in very tight supply and you may know that in the past. We have also commented that tight supply conditions tend to to have the same impact on.

On pricing ability in our markets as does our strong order book for our products and that is that wire rod is not available and unlimited.

Quantities and and that adds further strength to two.

Our ability to collect increases in the marketplace. So I would just I would just repeat that we really don't want to see this continue but as with many things beyond our control and if it if the price run up does continue on us.

Certainly believes the market is strong enough. So that it would we would not see any adverse impact on our margins.

That's helpful I'll hop back into queue, good start to the year. Thanks. Thank.

Thank you. Thank you.

Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.

And our next question comes from the line of Tyson Bauer with KC capital. Your line is open. Please go ahead.

Gentlemen.

Good morning Tyson.

Just to add on to what you are saying H given your position within your markets being either the top or the second.

On a manufacturer as far as market share and prominence.

Do you not get a competitive advantage when you do see some tight supply or the growing demand.

You are able to react and pushed through.

More favorable actions than your competitors so in this environment.

Are you not strengthening your competitive advantage in showing that might over your smaller competitors.

It's hard for me to give you a straight answer on that but I would tell you that in the current environment, we're less worried about.

<unk> on what Theyre doing with their pricing and we may normally be.

We understand the economics of our business and we understand that in a market environment like this we should be expected.

<unk> performed well and I think I think.

All the stars are aligned so that.

We will.

Okay.

Given your scale of economies.

Are you able to source better.

And in the past, where you've been able to bring in large quantities of imported steel that was kind of shut off to you.

That reopening or is that on options still there where you can get more favorable front end cost.

Well with respect to domestic purchases, we really don't know on.

We don't know how we purchase relative to our competitors, we do the best we can and.

That's the sum and substance of it one thing that is quite different and today's market as compared to other tight wire rod markets in an environment, where prices have run up is there is practically no imported product available too.

To loosen up supply now it's on.

Bailable, but it would be available.

Prices that are even higher than domestic prices today. So so my belief is that that discipline on on availability and supply.

We'll probably give this run legs that it may not have had.

And.

Prior environments.

Okay.

Given the comments it sounds like margin outlook loosen.

Short term or going into Q3.

Looking at something Thats fairly stable.

Youre able to maneuver and keep that similar to what we just saw.

Then we start getting into the seasonally better quarters.

Would you anticipate that what we just had on Q1 will be able to be replicated and pushed through through the rest of the year.

Yes.

It's always hard to make a definitive statement Tyson but.

I don't see why that would not be the case right now of course things could change, but right now I'd say that it's pretty good.

From a good chance that margins will continue strong.

Working capital needs, obviously, the higher input costs.

Are those kind of cash conversion cycles, what are we anticipating here for working capital needs. This year.

I mean, I think types, depending on the cost of rod in this pricing environment I suspect we will.

Be using working capital or we're building it.

Over the period of into Q2, and the balance of the year debt.

Yep.

Is there any given trade action that has already occurred or pending and that is more beneficial to steel.

And that pendency of those actions being partially felt already.

This is kind of an open ended question, but how much benefit have we already seen on how much more is there to be received should things continue to be finalized in your favor.

Well.

It's the case with both the standard welded wire reinforcement on.

And PC Strand cases, Theyre, just theyre pendency has strengthened the market.

Try to quantify that is impossible, but certainly the offshore or cross the border suppliers become much more cautious due to potential adverse consequences. During the pendency of the cases, so that has helped.

It helps us win in the cases as we've done with eight of the 15 countries.

And in the PC Strand arena so so.

I expect net we will.

We will adequately address the illegal activity of the remaining seven PC strand countries, and Mexico and standard welded wire reinforcement.

And that there will be.

Improved market fundamentals long term because of that and I would hasten to say that we will see other countries come into the market, particularly in PC strand, probably less so and welded wire reinforcement, but this is the nature of it.

We've been through this cycle, many times, but but dealing with 15 bad actors.

Is nothing but highly positive for the long term fundamentals for this market.

Okay and the last question from me, we've gone through previous administrations, who are controlled both houses and the presidency.

Out of them talk about infrastructure on the need and we start out with hope and then we somewhat get desensitized to the continuing talks because they can't figure out the funding mechanisms of this.

At this time any different or are we still in that honeymoon very hopeful that we're going to see something long term at the federal level and as things drag on we may get desensitized to it once again what is there anything different this go around.

I think the difference this time around is that the entire country is practically immune to deficit spending and funding things seems to be no real importance to anyone Republican or Democrat and and that is largely acquired I expect to see a bit.

Infrastructure program approved with that said if you think back to the Obama infrastructure program. It is also it is also important to know what the money will be spent for <unk> and <unk> and <unk>.

History would tell us that infrastructure on the definition of infrastructure tends to expand to cover anything that they want to spend money on so the details will be very important when.

We'd start to see information on on how on infrastructure.

Program is put together.

Alright, Thank you gentlemen.

Thank you.

Thank you and I'm showing no further questions at this time I would like to turn the conference back over to the company for any further remarks.

Okay. Thank you. We appreciate your interest in <unk> and we look forward to talking to you in the next quarterly call. Thank you.

Ladies and gentlemen, thank you for participating on today's conference. This does conclude the program and you may all disconnect everyone have a great day.

[music].

Yeah.

[music].

Hello, Ladies and gentlemen, thank you for standing by and welcome to the infill industries first quarter 2021 conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need a press star one on your telephone please be advised for today's conference is being.

Recorded if you require any further assistance. Please press Star then zero I would like day on the conference over to one of your speakers today, Mr. H Woltz, Sir Please go ahead.

Good morning, Thank you for your interest in and steel and welcome to our first quarter 2021 earnings call, which will be conducted by Mark Carano, Our senior Vice President CFO and Treasurer and me before we begin 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.

These risk factors are described on 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.

<unk> or new information I will now turn the call over to Marc to review, our first quarter financial results from current market conditions.

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

As we reported earlier this morning, the first quarter of fiscal 2021 was another strong quarter for in steel our markets continued to experience solid demand throughout the fall as the momentum we experienced in the fourth quarter continued in a seasonally strong pace, which coupled with a rebound in spreads from net depressed levels last year were stored gross.

Margin to more normalized levels.

Earnings per share for the quarter increased to 42 cents per share as compared to <unk> <unk> per share a year ago.

Q1, though was the highest first quarter shipment level in the company's history exceeding our previous first quarter high in 2018.

Robust demand in our markets compared to last year led to broad based shipment growth across virtually all of our products and it remained consistently strong across all three months of the quarter.

Average selling prices increased 1% from last year and 2% sequentially from Q4 due in part to price increases implemented in the latter half of the quarter to offset the rising cost of raw materials.

Gross profit for the quarter increased $13 6 million from a year ago on gross margin expanded over 1000 basis points to 16, 6%, primarily due to the sustained recovery in spreads between selling prices and raw material costs. In addition to the impact of incremental volume and marginally lower conversion costs.

On a sequential basis gross profit increased <unk> 4 million and gross margin widened to 250 basis points, primarily due to an incremental widening spreads.

SG&A expense for the quarter increased $2 8 million to $8 6 million from $5 7 million last year or seven 2% of net sales from five 9% last year.

Second higher legal expenses relative to our normal run rate in support of our ongoing trade cases.

Our effective tax rate for the quarter increased marginally to 23, 2% from 22, 7% last year due to changes in permanent book tax differences looking ahead to the remainder of the year, we expect our effective tax rate will run around 23% subject to the level of pre tax earnings book tax differences and other assumptions and estimates.

What's that compose our tax provision calculation.

Moving to the balance sheet and cash flow statement cash flow from operations for the quarter generated $14 million largely due to earnings with a minimal increase in working capital given the strong quarterly performance as compared to $29 $6 million in cash flow generated last year, which is primarily primarily the result of a $24 6 million reduction in work.

On capital.

Based on our sales forecast for the second quarter of 2021, our quarter end inventories represented two four months of shipments compared with three months at the end of the fourth quarter.

Our inventories at the end of the first quarter of 2021 were valued at an average unit cost that was higher than our fourth fourth quarter cost of sales.

But favorable relative to current replacement costs.

We ended the quarter with $50 2 million of cash on hand, or just over $2 50, a share and no borrowings outstanding on our $100 million revolving credit facility, providing us with ample financial flexibility to support our strategic initiatives.

As we look ahead to the balance of the year. We are cautiously optimistic that demand will remain steady across our markets our near term shipment trends in market sentiment support this perspective.

In addition, we've announced price increases during the first quarter to offset the impact of rising raw material costs and I'll have largely been accepted accepted by the market and a further indication of construction end market strength.

These increases should exhibit a more pronounced effect on our average selling prices in Q2, helping to maintain our profitability levels.

Despite the forecast of a substantial decline in infrastructure related spending due to the financial strength from COVID-19, those dire predictions have not materialized to date through the first 11 months of 2020 public construction remained resilient with spending up four 3% from the prior year.

But uncertainties do remain that underpin our cautious outlook.

The impact of COVID-19 remains a risk to our markets on our operations.

Recent rapid exco escalation in our raw material cost is a concern that has not impacted demand to date as we have been successful mitigating through price increases.

But as was the case in past cycles. These high velocity increases in raw costs can create a volatile environment as supply and demand seeking equilibrium over the coming months.

And third and third party forecast for nonresidential construction spending remains a cause for concern.

Bottoming in the middle mid summer of 2020, followed by modest improvements in the early fall. They appear to have lost their upward momentum remained stagnant at their current levels levels, which are below the expansionary levels experienced before the impact of the economic slowdown in March of 2020.

I'll now turn the call back over to H. Thank.

Thank you Marc as reflected in the release, our strong first quarter results were driven by resilient nonresidential construction markets and late in the quarter on expectations for rising steel prices were pleased with the solid underlying level of demand for our products and our financial performance and we think are in steel team mates.

For their focus on working safely and execution excellence.

<unk> and most customers also experienced normal operations subject to the same quarantine related staffing complications that affected and steel.

As of now we expect to continue fulfilling customer requirements and we do not expect a surge of infections to affect our operating plans.

Over the course of the last three earnings calls we've reported that in steel along with other U S. Producers had filed anti dumping and countervailing duty trade cases to address illegally traded imports of PC strand and standard welded wire reinforcement.

The PC Strand cases were filed in April 2020 against 15 countries debt represented 89% of PC strand imports during 2019 on.

On January eight the International Trade Commission issued its affirmative final injury determination with respect to Argentina, Colombia, Egypt, Netherlands, Saudi Arabia, Taiwan, Turkey, and United Arab Emirates, resulting in the implementation of duties ranging from 12.

4% to 194% of value, which we believe are sufficient to address the injurious behavior of these countries.

It now appears that the cases against Indonesia, Italy, Malaysia, South Africa, Spain, Tunisia in Ukraine will conclude during our third fiscal quarter.

We are delighted to have prevailed conclusively with respect to eight of the 15 respond on countries. We're now focused on obtaining similar outcomes and the remaining seven cases.

We previously reported that the pendency of the cases had favorably impacted the market and we expect the <unk> position.

Position of these anti dumping duties to contribute to improved long term market fundamentals.

At the end of June 2020 in steel and for other domestic producers of 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 of the Mexican industry.

We received a favorable preliminary injury determination in August and the iron ore and through hearing is scheduled for February 12, we.

We expect to know the outcome of these cases before the end of the current quarter.

The department of Commerce found a preliminary dumping margin of between 64 and 153%.

Turning to Capex, we continue to expect 2021 to come on at approximately $20 million.

The ECM project underway at our Dayton, Texas plant is on track for commissioning during our third fiscal quarter and we expect to pursue additional investments from 2021 to support our growth in this market.

During the quarter. We also continued the process of updating and relocating the major production equipment, we acquired through the Strand Tech manufacturing acquisition in March 2020.

We expect commissioning to begin for the remaining production lines by the end of the current quarter and are already realized on a favorable impact on unit conversion costs at the plants were relocated equipment is up and running.

The renovation and relocation process, which is drawing to a close has been a substantial undertaking net consumed a significant portion of our internal engineering capacity.

Look forward to turning the attention of this talented group two other important projects, which are scheduled for fiscal 2021 I'd like to express my appreciation to the engineering group and to those supporting the group for their outstanding performance on the SPM project.

Without delay.

Our capex strategy continues to be focused on reducing cash costs of production improving the quality of our products supporting growth initiatives and improving our information technology infrastructure and capabilities.

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.

With that said, we expect strong financial performance over the next few months driven by current robust demand trends for our products and rapid significant escalation in steel costs, which we are passing through the supply chain.

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

Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your telephone quest.

Question has been answered or you wish to remove yourself from the queue. Please press the pound key to prevent any background noise. We ask that you. Please place your line on mute. Once your question has been stated.

Our first question comes from the line of Giulio from Mono with Sidoti. Your line is open. Please go ahead.

Hey, good morning, happy new year.

Good morning.

Morning.

I guess my first question is just on the.

Very impressive tonnage shipping shipment data you reported.

Mark you talked about this some of the subcategories of non residential highway and street was up yes.

Yes, 4% the.

The lottery months, where supply has been strong which has been okay.

But can you just talk about that.

Relative to the 20% year over year increase in shipments Youre seeing.

Are you seeing kind of.

And just talk about what areas, maybe you're seeing some strength.

Yes Julio.

The strength is actually pretty broad based across all our end markets, we haven't seen any particular weakness.

Highway and street construction is one area that we follow closely just because it's a large.

Market for us and as I mentioned that stayed level throughout the year and then over the last three months, it's actually up over where it was over that same period last year, but there really wasn't a particular market that debt that jumped out as being stronger.

A stronger than usual or weaker than usual.

I would add that I think youre aware that debt, we have a very difficult time.

Actually demonstrating causal linkage between any of those components of construction spending that are reported and our shipments.

It's very difficult for us to point to definitive drivers.

Yes.

I guess.

Maybe taking on another stab at that I mean, maybe instead of drilling into the sub sectors.

Public construction, making up a bigger percentage then.

Oh.

The driver relative to past years or from you.

Is it residential maybe up from where I don't know if you can give me any color on that.

But I would tell you we don't we don't detect any shifts in the drivers of our order entry.

As Mark indicated the business has been strong across the board. There are no there are no laggards.

Got it and then just 20% was really.

Really impressive there.

And.

I guess.

H you talked about you do expect strength.

In the end markets, just to kind of support or at least your third quarter.

Does that expectation kind of.

Kind of factor in the same kind of backdrop, you've seen in this quarter and then the last two quarters in debt.

Public construction continues to be robust.

Those projects are previously.

Previously.

And what kind of drives up essentially.

Maybe third or fourth quarter of the year.

Well as you know we are notorious for our lack of visibility out beyond a few weeks on the business and so I would say no there there.

No specifics that would cause me to suggest that our fourth quarter is not moving to be strong.

But just in view of the overall uncertainty that is.

That's present all around us I would just be hesitant to make any observation past past, what we can see pretty clearly, which which is is through this quarter and into the third quarter.

Yes, no I understood.

I guess.

Maybe just last one from me is can you talk about the ability of the industry to kind of absorb.

Any further price increases.

If steel prices kind of continue on our current trajectory.

So good question.

I would tell you that what we're seeing in the last few weeks is probably unprecedented we have back to back triple digit.

Rice increases per ton.

And historically these things don't have long runs, but there are differences debt.

Net are at work in the market today.

Relative to past cycles, where we've seen price run ups.

So so as you know we've been asked many times.

What really drives our ability to pass cost increases through to the market and we have consistently replied that it has strength in demand for our products.

And certainly we see that today and while I would not welcome further raw material cost or scrap cost increases that necessitate or raising prices further.

Do expect net if that were to happen debt.

The market is strong enough for us to pass these through and that.

The risk of an ability to do that is really quite low.

On the other the other factor at work today.

Is that hot rolled steel wire rod is in very tight supply and you may know that in the past. We have also commented that tight supply conditions tend to to have the same impact on pricing ability in our markets.

As does our strong order book for our products and that is that wire rod is not available and unlimited.

Entities and and that adds further strength to two.

Our ability to collect the increases in the marketplace. So I would just I would just repeat that we really don't want to see this continue.

But as with many things beyond our control.

If the price run up does continue on us.

Certainly believe the market is strong enough. So that it would we would not see any adverse impact on our margins.

That's helpful I'll hop back into queue, good start to the year. Thanks. Thank.

Thank you. Thank you.

Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.

And our next question comes from the line of Tyson Bauer with KC capital. Your line is open. Please go ahead.

Gentlemen.

Good morning Tyson.

Just to add on to what you are saying H given your position within your markets being either the top or the second.

On a manufacturer as far as market share and prominence.

Do you not get a competitive advantage when you do see some tight supply or the growing demand that.

You are able to react and pushed through.

More favorable actions than your competitors. So in this environment are you not strengthening your competitive advantage in showing that might over your smaller competitors.

It's hard for me to give you a straight answer on that but I would tell you that in the current environment. We're in.

Less worried about.

<unk> on what Theyre doing with their pricing than we may normally be.

We understand the economics of our business and we understand that in a market environment like this we should be expected.

<unk> performed well and I think I think on.

All the stars are aligned so that we will.

Okay.

And your scale of economies.

Are you able to source better.

And in the past, where you've been able to bring in large quantities of imported steel that was kind of shut off to you.

That reopening or is that on options still there where you can get more favorable front end cost.

Well with respect to domestic purchases, we really don't know on.

We don't know, how we purchase relative to our competitors.

We do the best we can and.

That's the sum and substance of it one thing that is quite different and today's market as compared to other tight wire rod markets.

In environments, where prices have run up is there is practically no imported product available too.

To loosen up supply now.

Favorable, but it would be available at prices that are even higher than domestic prices. Today. So so my belief is that debt discipline on on availability and supply.

Ill, probably give this run legs that it may not have had.

Prior environments.

Okay.

Given the comments it sounds like margin outlook to loosen.

Short term or going into Q3, we're looking at something thats fairly stable.

Youre able to maneuver and keep that similar to what we just saw.

Then we start getting into the seasonally better quarters would you anticipate that what we just had in Q1 will be able to be replicated and pushed through through the rest of the year.

It's always hard to make a definitive statement Tyson but.

I don't see why that would not be the case right now of course, Inc.

Things could change, but right now I'd say that that's pretty good.

We have a good chance that margins will continue strong.

Working capital needs, obviously, the higher input costs.

Are those kind of cash conversion cycles, what are we anticipating here for working capital needs. This year.

I mean, I think Tyson.

Depending on the cost of Rod in this pricing environment I suspect will we will be using working capital or or building it.

Over the period of into Q2, and the balance of the year.

Okay.

Is there any given trade action that has already occurred or pending and that is more beneficial to steel and the pendency of those actions being partially felt already.

This is kind of an open ended question, but how much benefit have we already seen on how much more is there to be received should things continue to be finalized in your favor.

Well.

It's the case with both the standard welded wire reinforcement.

And PC Strand cases, Theyre, just theyre pendency has strengthened the market.

With eight of the 15 countries.

And in the PC Strand arena so so.

Okay.

I expect that we will.

We will adequately address the illegal activity of the remaining seven PC strand countries, and Mexico and standard welded wire reinforcement and that there will be <unk>.

Proved market fundamentals long term because of that and I would hasten to say that we will see other countries come into the market, particularly in PC strand, probably less so and welded wire reinforcement, but this is the nature of it.

We've been through this cycle many times.

But dealing with 15 bad actors.

Is nothing but highly positive for the long term fundamentals for this market.

Okay and the last question from me, we've gone through previous administrations to a controlled both houses and the presidency.

A lot of them talk about Inc.

Infrastructure on the need.

We start out with hope and then when you somewhat get desensitized to the continuing talks because they can't figure out the funding mechanisms of this is this time any different or are we still on that honeymoon very hopeful that we're going to see something long term at the federal level and as things drag on we may get desensitized to at once.

Again, what is there anything different this go around.

Well I think I think the difference this time around is that the entire country is practically immune to deficit spending and funding things seems to be no real importance to anyone Republican or Democrat and and that is largely why I expect to see.

Big infrastructure program.

With that said if you think back to the Obama infrastructure program. It is also it is also important to know what the money will be spent for.

And.

History would tell us that infrastructure on the definition of infrastructure tends to expand to cover anything that they want to spend money on so the details will be very important when we start to see information on on how on infrastructure.

Graham has put together.

Alright, Thank you gentlemen.

Thank you.

Thank you and I'm showing no further questions at this time I would like to turn the conference back over to the company for any further remarks.

Okay. Thank you. We appreciate your interest in <unk> and we look forward to talking to you in the next quarterly call. Thank you.

Ladies and gentlemen, thank you for participating on today's conference. This does conclude the program and you may all disconnect everyone have a great day.

Q1 2021 Insteel Industries Inc Earnings Call

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