Q4 2021 Insteel Industries Inc Earnings Call
Good day, and thank you for standing by.
Welcome to the steel industry.
Fourth 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.
I'll ask a question during this session you'll need to press star one on your telephone please.
Please be advised that today's conference is being recorded.
<unk> if you require assistance during the conference Please press Star zero.
I would now like to hand, the conference over to your speaker today, H Woltz, President and Chief Executive Officer.
Good morning. Thank you for your interest in any steel and welcome to our fourth quarter 2021 conference call, which will be conducted.
Goodbye, Mark Carano, our senior Vice President CFO, and Treasurer and me before we begin let me remind you that some of the comments made in our presentation are considered to be forward looking statements that are subject to various risks and uncertainties, which could cause actual results to differ materially from those projected.
These risk factors are described in our periodic filings with the SEC.
We're pleased with our fourth quarter results that were driven by surging demand for our reinforcing products and escalating steel prices. We exposed we expect both trends to continue into calendar 2022.
During.
<unk> <unk> of strong demand and escalating pricing the company's results typically are favorably impacted by the implementation of price increases sufficient to recover higher costs together with the consumption of lower cost inventories under first in first out accounting.
Im going to turn the call.
Call over to Mark to comment on our financial results for the quarter and the macro environment and then I'll kick it back up to discuss our business outlook.
Thank you H and good morning to everyone joining us on the call.
In our release earlier today and steel reported record financial performance for our fourth quarter as well as our full year fiscal.
In 2021, our net earnings for the fourth quarter more than tripled to $25 2 million from $7 4 million a year ago and earnings per diluted share rose to $1 28 from 38 per share, bringing the total for the fiscal year to $3 41 per diluted share, which is the highest level.
Fiscal two earnings in our history.
These historically strong results were achieved despite supply chain and labor challenges that plague not only our business, but much of the U S economy.
Like our third quarter of 2021, the robust demand environment for our concrete reinforcing products allowed us to increase prices to recover rapidly.
Level of raw material costs that continued unabated in our fourth quarter.
As H referenced in his opening comments these price increases often generate a tiny timing benefit in our spread.
This benefit offset the negative impact of considerably lower shipments and plant operating inefficiencies, resulting from interconnection.
Consistent raw material availability and constrained labor markets.
Average selling prices in the fourth quarter were up 56, 1% relative to the prior year and sequentially average selling prices increased 18, 8% for Q3, 2021, which was our third sequential quarter of price increases.
Increased greater than 10%.
Shipments for the quarter decreased 26% from last year, and 10, 3% sequentially from Q3 2020 the.
The decline in shipments as compared to last year and sequentially was not due to a lack of demand it.
There was the direct result of the tight.
Global Rod supply environment, and particularly a domestic raw material market that is currently producing sufficient supply of wire rod to meet domestic demand.
To note shipments from the prior quarter benefited from an extra week based on our fiscal calendar on a pro forma basis adjusting the prior quarter to reflect.
<unk> the same 13 week period as the current quarter the year over year decrease was 14, 5%.
Gross profit for the quarter increased $20 5 million from a year ago and gross margin expanded to 23, 3% due primarily to a widening in spreads as average selling prices outpaced rod cost increases.
In the period.
Our fourth quarter gross margin was above normalized run rate levels. Despite the impact of plant operating inefficiencies, which led to a meaningful increase in our unit conversion costs.
On a sequential basis gross profit increased $8 4 million and gross margin expanded 370 basis points.
SG&A expense for the quarter decreased $2 million to $7 3 million and as a percentage of sales decreased 240 basis points to four 3%.
The decrease was primarily a result of lower compensation expense under our return on capital based incentive plan the non recurrence of a contingent payment related to a prior.
Acquisition that we recorded in the fourth quarter of 2020.
And lower run rate legal expenses, given the completion of our successful trade case actions.
To note our annual incentive plan was fully expensed in the third quarter of this fiscal year, given the strong financial results.
The decrease in SG&A costs was partially offset by.
<unk> 0.4 million change in the cash surrender value of life insurance policies relative to the prior quarter.
Our effective tax rate for the quarter increased marginally to 22, 7% from 28% last year due primarily to changes in permanent book tax differences.
Looking ahead to next.
And unfair and barring any changes in the U S corporate tax rate under consideration by Washington, 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.
Based on our sales.
Next year cast for Q1, our year end inventories represented $1 nine months of shipments compared with $1 nine months at the end of the third quarter.
The tight rod supply market referenced earlier continues to suppress our inventory levels, which has been a recurring dynamic throughout our fiscal year and we continue to trend below normalized.
Sales for levels of forecasted shipments at the end of the fourth quarter.
Finally, our inventories at the end of fourth quarter of 2021 were valued at an average unit cost that was higher than our third quarter cost of sales, but remained favorable relative to current replacement costs.
During the year, we invested over $17 five.
<unk> lean in our business, which was primarily focused on completing the relocation of the STM assets and additional investments in our engineered structural mesh business, our free cash flow, our operating cash flow less capital expenditures was $52 4 million or eight 9% of revenues.
We returned $31 3 million of capital.
To shareholders in fiscal 2021 through the payment of a $1 50 special cash dividend. In addition to our regular cash dividends, marking the fourth special dividend to date, we have paid since 2016 of over $1 a share.
We finished the year with $89 8 million of cash on hand or over $4 50 a share.
And no borrowings outstanding under our $100 million revolving credit facility.
Turning to the outlook our construction end markets remains strong today with no signs of a slowdown and leading indicators in consensus growth estimates for construction spending signaling continued strong growth into the coming calendar year.
Third party forecast for nonresidential construction spending have rebounded dramatically since January 2021, and only recently leveled off in their rate of change in the last couple of months.
But both the architectural billings index and the Dodge momentum index, a recording levels pre the pandemic and in fact Abi Register.
Its highest monthly score in index history during the summer of this year.
While not all sub segments of private nonresidential construction of fully rebounded yet from the pandemic like lodging and office others are experienced robust growth relative to past levels.
For example, some of the larger private nonresidential.
<unk> construction subsectors from a dollar size perspective like warehouse in general commercial have increased at double digit percentages of 11% and 16% respectively through the first eight months of the calendar year relative to the prior year comparable period.
Public nonresidential spending has remained resilient through this calendar year and.
And should benefit from an overall strengthening economy as its impact.
An already healthy state and municipal finances.
In addition, the bipartisan infrastructure Bill will add to this momentum in future years, if the current administration and Congress eventually move forward with it.
And lastly on.
Unemployment another important measure that we attract.
It increased just under 3% through August of this year relative to last year and the unemployment rate in construction declined substantially to four 8% from seven 6%.
This drop in the unemployment rate when considered relative to the overall levels of concern.
Instructions employment growth is an area. We are monitoring for its impact on project activity. The data potentially implies the workforce may not be expanding enough to meet expected demand, resulting in increased project labor costs and reduced availability and impact we have felt across our own plant footprint.
This concludes my prepared.
<unk> remarks, and I'll now turn the call back over to H.
Thank you Mark.
As reflected in the release, our strong fourth quarter results were driven by robust non residential construction markets and escalating steel prices above all we think are in steel Tim teammates for their perseverance through challenging circumstances.
And their focus on execution excellence and working safely.
While we're pleased with the solid underlying demand for our products and our financial performance. There have been changes in our markets that are unprecedented and unsustainable.
As we reported in the release Asp's escalated almost.
<unk> percent from the prior quarter and nearly 60% from the fourth quarter last year for the first time in my career, both purchases of wire rod like in steel and purchasers of our finished products have prioritized availability of product and subordinated pricing considerations. This trend is driven.
20 tight supplies of hot rolled steel Rod, which is clearly under produced domestically, resulting in substantial monthly price increases and poor performance to schedule by most of our suppliers.
The unreliability of deliveries has in turn call. It income caused the inconsistency and institute.
<unk> customer service as we've contended with constant delivery delays and sporadic interruptions of our plant operations.
While these dynamics are not constructive in the longer term for in steel business model or our customers' needs and current conditions will likely persist for the near term unless.
Driven there are substantial improvements in steel availability that alleviate the current short supply.
As we mentioned in the release, we turn to the international steel markets to supplement domestic supplies up until very recently, however, robust demand globally has resulted in limited availability.
Ability for export to the U S as home markets have been more attractive to the steel producers.
We will continue to pursue important transactions for non buy America applications to fill voids created by the difficult domestic production and service environment.
Until we develop more competitive sourcing.
<unk> opportunities, we expect the robust demand environment to support passing escalating costs through the supply chain.
Most of you are aware that since March 2018, the section 232 steel tariffs implemented by the Trump administration has caused complications for wire rod purchasers.
Including in steel.
There are indications that the <unk> administration is pursuing alternatives that would replace the $2 30 to tear up with another managed trade tool most likely a tariff rate quota.
While in steel would welcome the elimination of $2 32, whether a tariff rate.
<unk> would constitute an improvement depends on the tariff free volumes allowed into the U S. The tariff rate for volumes over the threshold and other administrative provisions of the program. We expect details of our new arrangement with the European Union to be available in the next few weeks and there is speculation.
Quota that any new EU program could serve as a template for agreements with other regions.
Turning to Capex. We finished 2021 at just under $18 million, which is slightly under the projection we communicated during the Q3 call.
While commissioning our new <unk> production line.
<unk> has taken longer than expected, we've crossed important technical thresholds and plan to move forward with additional cat capacity expansions during fiscal 2022.
Subject to the timing of planned expenditures, we estimate capex for 2022 to come in between 'twenty and.
<unk> $25 million targeted towards supporting the growth of our <unk> product line, improving quality, reducing the cash cost of production and enhancing our information technology infrastructure.
We plan to closely monitor market conditions and aggressively pursue the appropriate.
Rate actions to maximize 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. Daniel would you. Please explain the procedure for asking questions.
As a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound key please.
Please standby, while we compile the Q&A roster.
Our first question comes from Julio Romero with Sidoti <unk> Company. Your line is open.
Hey, good morning, good morning, Mark.
Good morning, good morning.
So my first question would be on on the shipments in the quarter.
Can you talk about whether there was any weather impact in any of your regions or was the decrease solely attributable to the tight wire rod supply.
Okay.
No we lost some production time, when one of the Hurricanes came through but.
It really didn't affect shipments as much as it did production.
The shipping phenomenon.
Related to supply concerns.
Okay, Okay got it and.
<unk> I think.
I have heard you mentioned in your comments that you said that.
In terms of foreign.
Wire rod availability.
It's been.
Maybe not equally as tough, but just as tough until very recently have you seen.
Has there been any recent changes that have kind of alleviate.
Did that somewhat.
Yes, maybe at the margin Julio.
It is.
There are some opportunities out there, but it's still a.
The fact that global markets are strong and.
And imports are.
Less available then.
As you might expect.
Got it and last quarter I believe you mentioned that.
There was two mills in the U S that could be returning to the market.
Did that happen or are there any other opportunities to bring on additional domestic capacity for wire rod.
There was a major upgrade at a Texas steel mill.
And.
After having been down for several weeks.
<unk> upgraded hardware and software that mills returned to the market at a rather slow pace I think.
<unk>.
And their projections in terms of ramp up volumes, which is continuing to have a negative effect on supply.
The other mills that had experienced outages that were related to accidents did come back online pretty much as scheduled and all.
Our operating.
<unk> now.
Okay.
I guess, just turning to pricing and I'm fascinated by the Asps and how dramatically Dave.
<unk> been able to.
To rise and I guess, how well you've executed there.
But just listening to your remarks, H I think.
Yes.
The way I interpret it is that the conditions that.
Port that pricing should persist at least in the near term.
Certainly I expect that yes Julio.
Okay.
It's quite the pricing there.
Yeah.
I don't think I see that anywhere when I go back historically my model I haven't ever seen everything.
Okay.
At its core voice, nor hopefully yeah.
Hum.
Okay I'll pass it on and I'll Circle circle back with any follow ups. Okay. Thanks, so much.
Again, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Our next question comes from Tyson Bauer with CK capital. Your line is now open.
Good morning, gentlemen.
Good morning.
Tyson.
No.
The benefit obviously with the price increases as robust as it was throughout the quarter.
Have any calculations all kind of what that FIFO benefit was in the quarter and how much of that gets muted as we get into fiscal Q1, do we stabilize a little bit that draws.
Draws that margin down just from the accounting aspect.
Okay.
It's really hard to say, what's going to happen in 2020 to Tyson.
And so far as whether steel prices stabilize or whether they continue to escalate.
I think the only thing we could say.
Here is that our inventory levels have fallen to about $1 nine months from about 35 or more a couple of quarters ago. So so the impact of the FIFO phenomenon is is muted.
Relative to earlier in the year.
Doug.
So what we just witnessed in experience has some staying power.
At least until we get into a seasonal situation, which begs. The question do you anticipate the same seasonality as we typically you have seen before or does production and shipments gets shifted.
South of the Mason Dixon line, and we really don't have that seasonality. This year as we've seen in years past.
Well that's a good question.
I think that.
Underlying seasonality trends have changed.
Be distorted.
Lack of availability of material.
Cereals, and I'm, not referring to only steel, but the underlying the underlying seasonality is driven by weather.
And I don't think that there's been any fundamental change there.
Okay.
So you don't anticipate that we will just have more freight going south.
From your more northern production facilities that are unable to service projects that shut down once we get to winter.
There is some of that Tyson some of our product lines are more are more seasonal.
Than others, but.
I don't think you'll see a departure from the norm that you've come to expect from any deal.
Yes.
Have you quantified or roughly kind of the percentage that you're short on your wire rod supply that you could be taking in.
You could bring in 2030% more and still.
Just to try to meet some of the demand that you've had to turn away.
Okay.
But maybe maybe to answer a question you didn't ask but it's a little less speculative I would tell you that our entire shipment shortfalls.
Paul is related to two wire rod availability and not demand and on that on the pro forma result that was down shipments were down about 14, 5%. So all of that is related to supply concerns.
Correct.
Not to say.
That we wouldn't have shipped more than last year had we had sufficient supplies of steel, but it's speculative as to how much more we may have shipped.
Right.
Well you talked about disruptions at the production facilities, so those kinds of things.
Are you.
Is it almost hand to.
Hand to mouth situation as you get it in.
Our re that tight or give us a little flavor on the tightness and the ability to meet your shipping schedules.
Well, we've actually lost a considerable amount of manufacturing time Tyson.
When plants have been completely.
Out of.
Wire rod.
Okay.
Do you anticipate if you have greater visibility and greater supply ease that that pricing will.
Soften or is there just that.
Much demand out there in the marketplace that the pricing really would stay firm.
As you are able to make more shipments.
Yes, I do not think that pricing would weaken.
If we had.
Extra wire rod suppliers I think the market.
Market strong enough so that everyone would be.
Would be glad to see an environment, where our service improved and we could completely fulfill their requirements and I think we could do that at existing prices. Okay.
Hey, do you have a calculation on kind of the wage increase the production.
To increase year over year, as you've had to incentivize and try to retain labor.
Yeah, but we haven't disclosed it Tyson, but it's it's a considerable.
Impact to our cost.
Okay and last question.
We've been wanting an infrastructure bill for so many years lived through.
<unk> plus <unk> in the past.
Oriented scenario right now careful what you wish for or it's better to have that increased demand over that longer term and figure it out on the supply side than it is.
As not to have the infrastructure bill at this time.
Well.
Thanks.
But we need an infrastructure bill, but we need an infrastructure bill that is focused on infrastructure and not to get political about it but I just I.
I have grave misgivings about the bill that is known as the bipartisan infrastructure Bill and the one thing I'm not sure who thinks this industry needs to be stimulated at this point.
Yes.
Have a hard time understanding that.
So it is possible that too much of a good.
Good thing.
Well I think it's just purely inflationary yes, that's too much of a good thing okay. That's what I thought thank you gentlemen.
Thank you.
I am not showing any further questions at this time I would now like to turn the conference back to.
H.
Yeah.
Okay. Thank you for your interest in and steel.
You're free to contact us if you have further questions and we look forward to talking to you next quarter.
<unk>.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Good day, and thank you for standing by.
Welcome to the NN steel industries fourth quarter 2021 conference call.
At this time all participants are in a listen only mode.
After the speaker.
A presentation there will be a question and answer session.
To ask a question during the session you will need a press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require assistance during the conference Please press Star zero.
I would now like to hand, the conference over to your speaker today H woltz.
President and Chief Executive Officer.
Good morning. Thank you for your interest in any steel and welcome to our fourth quarter 2021 conference call, which will be conducted by Mark Corrado, Our senior Vice President CFO and Treasurer and me before we begin let me remind you that some of.
That's made in our presentation are considered to be forward looking statements that are subject to various risks and uncertainties, which could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC.
We're pleased with our fourth quarter results that were driven by.
Surging demand for our reinforcing products and escalating steel prices, we export we expect both trends to continue into calendar 2022.
During environments of strong demand and escalating pricing the company's results typically are favorably impacted by the implementation.
Com price increases sufficient to recover higher costs together with the consumption of lower cost inventories under first in first out accounting.
I am going to turn the call over to Mark to comment on our financial results for the quarter and the macro environment and then I'll pick it back up to discuss our business.
<unk>.
Thank you H and good morning to everyone joining us on the call.
Ah released earlier today and steel reported record financial performance for our fourth quarter as well as our full year fiscal 2021, our net earnings for the fourth quarter more than tripled to $25 2 million from $7 4 million a year ago.
And earnings per diluted share rose to $1 28 from <unk> 38 per share, bringing the total for the fiscal year to $3 41 per diluted share, which is the highest level of earnings in our history.
The historically strong results were achieved despite supply chain and labor challenges that plague not only.
Our business, but much of the U S economy.
Our third quarter of 2021, the robust demand environment for our concrete reinforcing products allowed us to increase prices to recover rapidly increasing raw material costs that continued unabated in our fourth quarter.
As <unk> referenced in his opening comments these price increases.
Greece's often generate a tiny timing benefit in our spread.
This benefit offset the negative impact of considerably lower shipments and plant operating inefficiencies, resulting from inconsistent raw material availability and constrained labor markets.
Average selling prices in the fourth quarter were up 56.
1% relative to the prior year and sequentially average selling prices increased 18, 8% for Q3, 2021, which was our third sequential quarter of price increases greater than 10%.
Shipments for the quarter decreased 26% from last year and $10.
Percent sequentially from Q3 2020 the.
The decline in shipments as compared to last year and sequentially was not due to a lack of demand it.
It was the direct result of the tight global Rod supply environment, and particularly a domestic raw material market that is currently producing an insufficient supply of wire rod.
Rod to meet domestic demand.
To note shipments from the prior quarter benefited from an extra week based on our fiscal calendar on a pro forma basis adjusting the prior quarter to reflect the same 13 week period as the current quarter the year over year decrease was 14, 5%.
Gross profit for.
<unk> increased $20 5 million from a year ago, and gross margin expanded to 23, 3% due primarily to a widening in spreads as average selling prices outpaced rod cost increases during the period.
Our fourth quarter gross margin was above normalized run rate levels. Despite the impact of plant operating.
Quarter, and CS, which led to a meaningful increase in our unit conversion costs.
On a sequential basis gross profit increased $8 4 million and gross margin expanded 370 basis points.
SG&A expense for the quarter decreased 2 million to $7 3 million and as a percentage of sales decreased 200.
<unk> points to four 3%.
The decrease was primarily a result of lower compensation expense under our return on capital based incentive plan. The non recurrence of a contingent payment related to a prior acquisition that we recorded in the fourth quarter of 2020 and lower run rate legal expenses, given the completion of our successful.
It will trade case actions.
To note our annual incentive plan was fully expensed in the third quarter of this fiscal year, given the strong financial results.
The decrease in SG&A costs was partially offset by an unfavorable <unk> 4 million change in the cash surrender value of life insurance policies relative to the prior quarter.
Our effective tax rate for the quarter increased marginally to 22, 7% from 28% last year due primarily to changes in permanent book tax differences looking ahead to next year and barring any changes in the U S corporate tax rate under consideration by Washington, We expect our effective tax rate will run around 20.
83% subject to the level of pre tax earnings book tax differences and other assumptions and estimates that compose our tax provision calculation.
Based on our sales forecast for Q1, our year end inventories represented $1 nine months of shipments compared with $1 nine months at the end of the third.
Quarter.
The tight rod supply market referenced earlier continues to suppress our inventory levels, which has been a recurring dynamic throughout our fiscal year and we continue to trend below normalized levels or forecasted shipments at the end of the fourth quarter.
Finally, our inventories at the end of fourth quarter of 2020.
Third were valued at an average unit cost that was higher than our third quarter cost of sales, but remained favorable relative to current replacement costs.
During the year, we invested over $17 5 million in our business, which was primarily focused on completing the relocation of the FTM assets and additional investments in our engineered structural mesh.
'twenty one furnace.
Our free cash flow, our operating cash flow less capital expenditures was $52 4 million or eight 9% of revenues.
We returned $31 $3 million of capital to shareholders in fiscal 2021 through the payment of a $1 50 special cash dividend. In addition to our regular cash dividends.
Less spend in the fourth special dividend to date, we have paid since 2016 of over $1 a share.
We finished the year with $89 $8 million of cash on hand, or over $4 50, a share and no borrowings outstanding under our $100 million revolving credit facility.
Turning to the outlook, our construction end markets.
Martin Maine's strong today with no signs of a slowdown and leading indicators in consensus growth estimates for construction spending signaling continued strong growth into the coming calendar year.
Third party forecast for nonresidential construction spending have rebounded dramatically since January 2021.
And only recently leveled off in their rate of change in the last couple of months.
But both the architectural billings index and the Dodge momentum index, a recording levels pre the pandemic and in fact Abi registered its highest monthly score in index history. During the summer of this year.
While not all sub segments.
A private nonresidential construction of fully rebounded yet from the pandemic like lodging and office others are experienced robust growth relative to past levels for.
For example, some of the larger private nonresidential construction subsectors from a dollar size perspective like warehouse in general commercial have increased at double digit percentages.
<unk> of 11% and 16% respectively through the first eight months of the calendar year relative to the prior year comparable period.
Public nonresidential spending has remained resilient through this calendar year and should benefit from an overall strengthening economy as its impact.
An already healthy state and municipal finance.
Yes.
In addition, the bipartisan infrastructure Bill will add to this momentum in future years, if the current administration and Congress eventually move forward with it.
And lastly on construction employment another important measure that we attract.
It increased just under 3% through August of this year.
And since it's the last year and the unemployment rate in construction declined substantially to four 8% from seven 6%.
This drop in the unemployment rate when considered relative to the overall levels of construction employment growth is an area. We are monitoring for its impact on project activity the data potentially implies the workforce may not be.
Our rally enough to meet expected demand, resulting in increased project labor costs and reduced availability and impact we have felt across our own plant footprint.
This concludes my prepared remarks, and I'll now turn the call back over to H.
Thank you Mark.
Reflected in the release, our strong fourth quarter.
Expanding ups were driven by robust non residential construction markets and escalating steel prices above all we think are in steel Tim teammates for their perseverance through challenging circumstances and their focus on execution excellence and working safely.
While we're pleased with the solid underlying.
Regional demand for our products and our financial performance there have been changes in our markets that are unprecedented and unsustainable as.
As we reported in the release Asp's escalated almost 20% from the prior quarter and nearly 60% from the fourth quarter last year for the first time in my career.
Rear boat purchases of wire rod like in steel and purchasers of our finished products have prioritized availability of product and subordinated pricing considerations. This trend is driven by tight supplies of hot rolled steel rod, which is clearly under produced domestically resulting in substantial.
<unk> monthly price increases in core performance to schedule by most of our suppliers the.
The unreliability of deliveries has in turn called income cause inconsistency and in steels customer service as we've contended with constant delivery delays and sporadic interruptions of our plant <unk>.
<unk>.
While these dynamics are not constructive in the longer term for in steel business model or our customers' needs and current conditions will likely persist for the near term unless there are substantial improvements in steel availability that alleviate the current short supply.
<unk>.
Operations in the release, we've turned to the international steel markets to supplement domestic supplies up until very recently, however, robust demand globally has resulted in limited availability for export to the U S. As home markets have been more attractive to these steel producers.
We will continue.
As we pursue important transactions for non buy America applications to fill voids created by the difficult domestic production and service environment.
Until we develop more competitive sourcing opportunities, we expect the robust demand environment to support passing escalating costs through the supply chain.
Chain.
Most of you are aware that since March 2018, the section 232 steel tariffs implemented by the Trump administration has cause complications for wire rod purchasers, including in steel.
There are indications that the biden administration's pursuing alternatives that would replace.
The $2 32 tariff with another managed trade tool most likely a tariff rate quota.
While in steel would welcome the elimination of $2 32, whether a tariff rate quota would constitute an improvement depends on the tariff free volumes allowed into the U S. The tariff rate.
For volumes over the threshold and other administrative provisions of the program. We expect details of our new arrangement with the European Union to be available in the next few weeks and they or speculation that any new EU program could serve as a template for agreements with other regions.
Turning.
Capex. We finished 2021 at just under $18 million, which is slightly under the projection we communicated during the Q3 call.
While commissioning our new <unk> production line in Texas has taken longer than expected, we've crossed important technical thresholds and plan to move forward with additional.
Capacity expansions during fiscal 2022.
Subject to the timing of planned expenditures, we estimate capex for 2022 to come in between 20 and $25 million targeted towards supporting the growth of our <unk> product.
<unk> line improving quality reducing.
<unk>, the cash cost of production and enhancing our information technology infrastructure.
We plan to closely monitor market conditions and aggressively pursue the appropriate actions to maximize shipments and optimize our costs and we are well positioned to pursue attractive growth opportunities.
<unk>, both organic and through acquisition.
This concludes our prepared remarks, and we will now take your questions. Daniel would you. Please explain the procedure for asking questions.
As a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question.
Press the pound key please.
Please stand by while we compile the Q&A roster.
Our first question comes from Julio Romero with Sidoti <unk> Company. Your line is open.
Hey, good morning, H good morning, Mark.
Good morning, good morning.
So my first question would be on on the shipments in the quarter.
Can you talk about whether there was any weather impact in any of your regions or was the decrease solely attributable to tight wire rod supply.
No we lost some production time, when one of the Hurricanes came through but.
It really didn't affect shipments as much as it did production.
The shipping.
Amazon is related to supply concerns.
Okay, Okay got it and.
H I think.
I have heard you mentioned in your comments that you said that in terms of.
Foreign.
Wire rod availability that's been.
Maybe not equally as tough, but just as tough until very recently have you seen.
Has there been any recent changes that have kind of alleviated that somewhat.
Yes, maybe at the margin Julio.
It is.
<unk>.
There are some opportunities out there, but it's still a <unk>.
At the global markets are strong and.
And imports are.
<unk>.
Less available than you might expect.
Got it and.
Last quarter I believe you mentioned that.
There was two mills in the U S that could be returning to the market.
Did that happen or are there any other opportunities to bring on additional domestic capacity for wire rod.
There was a major upgrade at a text.
Texas Steel mill.
And after having been down for several weeks.
Upgrading hardware and software that mills returned to the market at a rather slow pace I think.
They are.
<unk> in terms of ramp up volumes, which is.
Can you and to have a negative effect on supply.
The other mills that had experienced outages that were related to accidents did come back online pretty much as scheduled and are operating now.
Okay.
I guess, just turning to pricing in SaaS.
<unk> by the Asps and how dramatically Dave.
<unk> been able to.
To rise I guess, how well you've executed there.
But just listening to your remarks, H I think.
No.
The way I interpret it is that the conditions that.
As can support that pricing should persist at least in the near term.
Certainly I expect that yes Julio.
Okay.
It's quite the pricing there.
I don't think I see that anywhere.
Go back historically my model I have ever seen.
We were in that.
<unk>.
Sure, Hey, void, nor hopefully yes.
Okay I'll pass it on and I'll Circle circle back with any follow ups. Okay. Thanks, so much.
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Our next question comes from Tyson Bauer with CK capital. Your line is now open.
Good morning, gentlemen.
Good morning.
Oh.
The benefit obviously.
Price increases as robust as it was throughout the quarter.
Have any calculations all kind of what that FIFO benefit was in the quarter and how much of that gets muted as we get into fiscal Q1, do we stabilize a little bit that draws that margin down just from the accounting aspect.
Okay.
It's really hard to say, what's going to happen in 2020 to Tyson.
And so far as whether steel prices stabilize or whether they continue to escalate.
I think the only thing we could say for sure is that our inventory levels have fallen to about $1 nine.
Nine months from about 35 or more on a couple of quarters ago. So so the impact of the FIFO phenomenon is is muted.
Relative to earlier in the year.
Okay.
So what we just witness an experience.
It has some staying power.
At least until we get into a seasonal situation, which begs. The question do you anticipate the same seasonality as we typically you haven't seen before or does production and shipments gets shifted south of the Mason Dixon line, and we really don't have that season.
Analogy this year as we've seen in years past.
Well that's a good question.
I don't think that underlying seasonality trends have changed they could be distorted.
A lack of availability of materials and I'm, not referring to only steel, but the undrawn.
Underlying the underlying seasonality is driven by weather.
And I don't think that there's been any fundamental change there.
Right.
So you don't anticipate that we will just have more freight going south from your more northern production facilities that are.
Well the service projects that have shut down once we get to winter.
There is some of that ties into some of our product lines are more are more seasonal than.
Than others, but.
I don't think Youll see a departure from the norm that.
<unk> come to expect from any steel.
Okay.
Have you quantified or roughly kind of the percentage that you're short on your wire rod supply that you could be taking in.
You could bring in 2030% more and.
And still.
Just to try to meet some of the demand that you've had to turn away.
Okay.
But maybe maybe to answer a question you didn't ask but it's a little less speculative I would tell you that our entire shipment shortfall is related to two wire rod availability.
And not demand and on that on the pro forma result that was down shipments were down about 14, 5%. So all of that is related to supply concerns.
Correct, it's not that's not to say that we wouldn't have shipped more than last year had we had sufficient.
Asian suppliers of steel, but it's speculative as to how much more we may have ship.
Right.
Well, you're talking about disruptions at the production facilities, so those kinds of things.
Are you.
Is that all of his hand.
Hand to mouth.
<unk> as you get it in.
I read that tight or give us a little flavor on the tightness and the ability to meet your shipping schedules.
Well, we've actually lost a considerable amount of manufacturing time Tyson when plants have been completely.
Out of.
Wire rod.
Doug would you anticipate.
Dissipate, if you have greater visibility and greater supply ease that that pricing will.
Soften or is there just that much demand out there in the marketplace that the <unk>.
Pricing really.
<unk>.
Stay firm.
As you are able to make more shipments.
Yes, I do not think that pricing would weaken.
If we had.
Extra wire rod suppliers I think the market is strong enough so that everyone would be.
We'd be glad to see an environment, where our service improved and we could completely fulfill their requirements.
Think we can do that at existing prices okay.
Hey, do you have a calculation on kind of the wage increase the production wage increase year over year as <unk> had to incentivize.
And tried to retain labor.
Yeah, but we haven't disclosed it pricing, but it's a it's a considerable.
Impact to our cost.
Okay and last question.
We've been wanting an infrastructure bill for so many years lived.
<unk>.
20, plus <unk> in the past.
Orient a scenario right now careful what you wish for our it's better to have that increased demand over that longer term and figure it out on the supply side than it is not to have the infrastructure Bill at this time.
Thrill.
We need to do.
Thanks.
We need an infrastructure bill, but we need an infrastructure bill that is focused on infrastructure and not to get political about it but I just I have grave misgivings about.
Bill that is known.
This is the bipartisan infrastructure Bill and the one thing I'm not sure who thinks this industry needs to be stimulated at this point.
I have a hard time understanding that.
So it is possible it too much of a good thing.
Well I think it's just purely inflationary yes.
Don't have much of a good thing okay. That's what I thought thank you gentlemen.
Okay. Thank you.
I am not showing any further questions at this time I would now like to turn the conference back to H Woltz.
Okay. Thank you for your interest in and steel on.
Feel free to contact us if you have further questions and we look forward to talking to you next quarter.
Thank you.
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