Q1 2022 Insteel Industries Inc Earnings Call

At $8 1 million or <unk> 42 per diluted share in the prior year, representing a 181% increase in EPS.

These historically strong results were achieved thanks to a robust demand environment for our concrete reinforcing products that remains broad based across all our regions and markets.

Much like our last two sequential quarters. This environment allows us to raise average selling prices to recover rapidly increasing raw material costs as well as increased labor and other manufacturing costs.

This in turn delivered an expansion in our spread between average selling prices and raw materials relative to the prior year quarter.

But the inadequate supply of domestic steel rod and wire Rod remains a challenge and impacted our ability to meet fully our customer demand.

As a result, we increasingly turn to the international steel markets to supplement our raw material inventories as much as practical.

Average selling prices in the first quarter increased 69, 4% relative to the prior year sequentially average selling prices increased 10, 7% from Q4 of 2021, which was our fourth sequential quarter of a price increase greater than 10%.

Shipments for the quarter decreased 11, 9% from last year due to ongoing domestic rod available availability issues and not due to any weakness in our end market demand.

On a sequential basis shipments declined five 9% from Q4 2021, largely reflecting the usual seasonality in our demand.

Gross profit for the quarter increased $22 five to $42 2 million from a year ago and gross margin expanded over 700 basis points to 23, 7%.

This increase was due to widening spreads and average selling prices.

That outpaced rod cost increases during the period.

As we've remarked in prior calls during environments is strong demand and escalating pricing. Our results typically are favorably impacted by the implementation of price increases sufficient to cover the higher replacement cost of our raw materials and the consumption of lower cost inventories under our first in first out accounting methodology.

On a sequential basis gross profit increased $2 3 million and gross margins remained above 23% for the second consecutive quarter.

SG&A expense for the quarter increased three 7 million to $12 3 million, but as a percentage of sales have decreased 300 basis points to six 9%.

This dollar increase was primarily primarily a result of higher compensation expense under our return on capital based incentive plan.

This expense was partially offset by lower run rate legal expenses, given the conclusion of our trade action in the latter half of 2021.

Our effective tax rate for the quarter was virtually unchanged at 23%, which is down slightly from 23, 2% last year.

Looking ahead to the balance of the year, we would expect our effective tax rate will remain steady at 23% subject to the level of pre tax earnings book tax differences and the other assumptions and estimates that compose our tax provision calculation.

Moving to the cash flow statement and balance sheet cash flow from operations for the quarter generated $13 6 million due to the record earnings performance that offset an increase in working capital.

The increase in working capital is a function of both higher unit prices for inventories and a temporary timing impact stemming from year end payment schedules.

We encourage <unk> 8 million in capital expenditures and.

And remain committed to our full year target of $25 million given the many initiatives that we have underway.

Based on our sales forecast as of Q1, our quarter end inventories represented one seven months of shipments compared with $1 nine months at the end of the fourth quarter.

The tight rod supply market referenced earlier continues to suppress our overall inventory levels, but particularly with respect to our finished goods inventories.

And finally, our inventories at the end of the first quarter of 2022 were valued at an average unit cost that was higher than our fourth quarter cost of sales and still remains favorable relative to current replacement costs.

In December we returned $39 $4 million of capital to our shareholders through the payment of $2 per share special cash dividend. In addition to our regular quarterly dividend, marking the fifth year over the last six years, we paid a special dividend.

We ended the quarter was $63 million of cash on hand, and no borrowings outstanding on our $100 million revolving credit facility.

As we look ahead to the balance of the fiscal year, we expect demand to remain strong across all our markets our shipment trends in the current quarter and customer sentiment support this perspective.

In addition, third party, leading indicators for nonresidential construction spending such as Abi and Dodge, which rebounded dramatically during much of 2021 have remained positive and reflect levels consistent with prior recovery periods.

Public nonresidential construction spending has also remained resilient and will clearly benefit from additional infrastructure spending following the passage of the infrastructure Bill in November .

Each will cover this topic in more detail during his commentary.

This concludes my prepared remarks, I will now turn the call back over to H.

Thank you Marc as.

It reflected in the release, our strong first quarter results were driven by robust nonresidential construction markets and escalating steel prices above all we think are in steel teammates for their perseverance through challenging circumstances and their focus on execution excellence and working safely.

Market conditions during our first quarter closely resemble those of the previous three quarters characterized by robust demand for our products and limited availability and escalating prices for our primary raw material hot rolled steel wire rod.

Consistent with our recent experience these supply bottlenecks contributed to inefficiencies at certain manufacturing facilities and customer service disruptions.

As we mentioned last quarter, we've been active in the international steel market and deliveries from offshore sources began to supplement domestic supplies during Q1 our.

Our offshore commitments will ramp up during Q2 and Q3 to the degree that we believe operational and customer service disruptions will be eliminated by next month provided of course that our suppliers, both domestic and offshore perform as agreed.

We reported last quarter that it was likely the <unk> administration with transition away from the section 232 steel tariffs first with respect to the European Union and later with other trading partners.

In December the EU and U S agreed to a tariff rate quota whereby certain quantities of hot rolled steel would enter the U S market tariff free and volumes over the quota level would be assessed the 25% tariff.

With respect to steel wire rod the transition to a tariff rate quota offers little relief for purchasers since the tariff free volume of wire rod that can enter the U S market from EU producers is miniscule relative to the supply deficit.

We expect similar outcomes with other regions as the administration transitions away from section 232, and we do not foresee that future trade deals and the pattern of the EU deal will materially affect the supply demand imbalance experienced in the U S.

During fiscal Q1 Congress passed and the President signed the infrastructure investment and jobs Act, which is arguably the most consequential infrastructure legislation and funding since the Interstate highway system was conceived.

At its core is the reauthorization of 304 billion of surface transportation programs and new spending of $550 billion with the vast majority of the funds to be spent over a five year period.

We expect the stimulative impact of the legislation to become evident in our markets late in 2022 and to ramp up over the next four years. While there are many unknowns details at this point, we expect the legislation to create significant positive momentum for our markets.

Turning to Capex as we mentioned in the release, we recently reached agreement with a group of capital equipment suppliers for purchases approximating $20 million of state of the art production technology that will expand our product capabilities and favorably impact our cash cost of production.

A major part of the investment package is targeted toward our Missouri, Arizona facilities with expected startups in fiscal 2023.

Our earlier Capex.

<unk> of $25 million for 2022 will be affected by the timing of payments and delivery schedules. We are considering additional projects that would have similar beneficial impact on our market position and cost profile.

These are exciting times for <unk> steel going forward, we plan to closely monitor market conditions and aggressively pursue the appropriate actions to maximize shipments and operate and optimize our costs and we are well positioned to pursue attractive growth opportunities, both organic and through acquisitions.

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

Thank you and you would like to ask a question.

By pressing star one on your telephone keypad, if you would like to withdraw your question you compress stock today.

Our first question today comes from Tyson Bauer from KC capital.

Your line is now open.

Yes, good morning, gentlemen, and excellent quarter.

Good morning Tyson.

You touched on a couple of key subjects and it seems like we're getting a sense that the pricing focus is overshadowing the underlying demand that is allowing you to have the pricing power that you exhibit.

That demand that youre seeing that as a prolong would you agree we're in a prolonged cycle of elevated demand that should give you better pricing power as we go forward and given the low inventory turns you can adjust much quicker than you have in previous cycles.

Tyson I think I think the current environment is really consistent with the way. We've described our business over time, which is that that that the <unk>.

Strength of our margins and our financial performance, it's really driven by the dynamics of supply and demand for the products, we produce rather than so much what's going on in raw material markets and I would say that I don't ever recall.

Market environment with stronger demand characteristics than we see now.

And I fully believe.

The passage of the bipartisan infrastructure legislation will have a meaningful positive impact on market conditions although.

There is a ramp up period, there and we wouldn't expect to see tangible benefits of that until later in 2022.

And a follow up on that we're seeing so or at least preliminary state budgets come out with significant increases in infrastructure spending as they a lot of states are having state surpluses.

As a result of inflows to their to the state coffers.

That really starts to hit in 2023, but that is carried through two to three years.

Sure.

Absolutely, so and I think one of the more surprising aspects of.

The economy over the last year or so and the Covid.

Environment has been.

Physical condition of states and municipalities, which has been very strong.

In comparison to the dire forecast that that we saw at the beginning of the COVID-19 experience. The states were flushed with cash by and large even before this infrastructure legislation was passed.

Okay.

If we set aside demand is not the issue that's going to remain robust you got your supply your inputs labor and freight.

One of those you touched on are you, suggesting that youre going to be able to ease that supply issue with.

Those imported steel products, so we should see or could see a recovery in those shipment volumes in latter part of the current quarter and Q3.

Well all of our comments.

Have to be viewed in the context of our supply base performing as agreed and if that happens we believe that in the current quarter, we will have eliminated the.

Raw material supply deficit that has adversely affected our shipments over the last three quarters.

Of course, it week to week month to month.

Consideration because we are relying on our suppliers to perform as agreed and if they don't then then we have another set of considerations if they do.

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That.

We have adequate materials to meet the market.

Okay, and you can maintain margin profile.

Because the demand is strong enough that youre just solving the front end issue the.

The demand is still there to support the margins that you've seen.

The demand is going to be there to support healthy attractive margins for in steel keep in mind that we have pointed out over time and over the course of the run up in these prices that the FIFO impact.

Cost of sales and resulting gross margins has been reasonably significant.

As we've seen prices skyrocket four.

Well over a year of multiple consecutive quarters, so so when prices level out and stabilize.

Then then that tailwind will disappear.

Just the function of mathematics, but we believe that our margins will be attractive relative to historical results and we're pleased with where we are.

Okay, and then last question given the currency debacle in Turkey, which has been a source of steel in the past, where you had that had a positive direct or indirect impact on your ability to secure supply.

No.

Turkey is under a dumping order in the U S.

And.

They are really not a factor at this point.

Okay. Thank you.

Thank you Tyson.

Question comes from Julio Romero from Sidoti Julien Your line is now open.

Thanks, Hey, good morning, Mark Good morning H.

Good morning.

Hey, I just had a quick one for you guys.

The agreement to purchase the capital equipment.

$20 million is that incremental to your previous Capex plans.

No it's part of the Capex plan.

We are just a little slower out Jim.

Yeah.

Understood and so but you are basically securing those $20 million.

You come to the agreement and then it just comes down to.

How quickly they can get you the equipment.

That's right and requisite payment schedules associated with that.

Got it and I might've missed it on your prepared commentary but.

Did you mentioned particular plants that debt.

Capital equipment would be targeting.

Let me, let me say first that that we have agreed to the package that I described.

In my prepared comments, but that doesn't mean that there wont be additional investments there. Most certainly will be the package that referred to in the prepared comments will be targeted primarily toward our Missouri and Arizona facilities.

Missouri, and Arizona got it.

Okay. That's all I have thanks very much.

Yes.

Thank you Julia.

We now have a follow up question from Tyson Bauer from KC capital Tyson. Your line is now open.

Okay in regards to that 20 million equipment package is that geared toward having more labor savings and more automation or is it just the speed of the processing that that is going to help out and better product quality those things.

Whats the new equipment package focus on resolving.

We will expand the breadth of products that we're capable of producing.

We will also reduce our cash cost of production through significant automation.

So so it helps us in really every aspect of.

All of them.

Market.

Production costs.

Okay.

Large part of the country really had not had winter begin until after the first of the year.

Which probably had some benefit towards you in the first quarter.

We're going to still see that seasonal pattern muted in the current quarter.

Or do you just have so much demand in the southern tier states that.

It's business as usual.

Well I think it's business as usual.

As usual implies that we are definitely affected by.

By the winter months in terms of the.

Ability to ship to job site and we have some customers that produce outside we have other customers, who produce and unneeded spaces. So so it's business as usual, but as I say as usual implies.

That there is there is a seasonality to the business that we can't overcome but I would tell you that by and large customer backlogs and customer optimism I don't think I've ever been greater so the motivation will be for customers to produce and for hidden steel to ship.

And we will do so.

Every extent that mother nature makes it possible.

Could we see a phenomenon of people trying to build up some inventories in.

In the seasonally weak period, so they have enough supply once we get into the warmer summer months.

I would not expect that because I don't think theres any producer thats capable of providing quantities.

In excess of what's being utilized in the current period.

Okay.

You did an acquisition in 2017 OHP.

<unk> engineering products for years after.

A lot of developments have happened and the tilt up construction market.

D C is being built.

Has that group performed as you thought.

What technological advancements have you been able to do.

With them in house for these last four years that provides you a bigger breadth of market capabilities going forward.

Well I think I think looking back at our decision to make that acquisition in 2017.

We would confirm today, our rationale for the acquisition was spot on.

We were slower out of the gate than we would've hoped to be because we had a lot to learn about about the new market that we're serving but as we look back today the growth has been substantial.

We are we are.

Significantly participating in the e-commerce build out of of Dcs that is happening around the country.

And we are involved in many applications and uses for our products.

<unk> only been able to access through a third party had we not made on the acquisition that has wound up coming in steel engineered products.

Okay and have you seen a greater acceptance of your products for the use in construction, whether non res or in the infrastructure.

Where you are approved in.

A lot more states than you were previously.

When you say approved in a lot more states the implication behind that is that.

It's a department of transportation application and Thats, that's generally not the case for in steel engineered products, where most of the most of the products are.

Our commercial in nature and not infrastructure related so so I think the merits of the product that we produce.

And the economics are are realized by concrete contractors and we're having we're having success because because we have a reasonable value proposition.

Which has had a greater acceptance and utilizing your product as opposed to maybe just straight rebar or some of the older.

Construction methods.

Yes for sure.

And over the course of time tight labor markets have been our friend in terms of the acceptance.

Engineered structural mesh on job sites, because while while the industry is slow to change.

It's significantly motivated to change when labor becomes a constricting factor for the amount of work that they can do so certainly we are in one of those.

And one of those labor markets now and that is definitely.

It's definitely helped us.

Right. Thank you gentlemen.

Thank you.

Thank you Tyson we have no further questions I will hand back over to H.

For any closing remarks over to you.

Okay. Thank you Alex. Thank you. We appreciate your interest and in steel and we look forward to talking with you next quarter and in the meantime don't hesitate to call US if you have questions.

Are you.

Thank you all for joining you may now disconnect.