Q2 2022 Insteel Industries Inc Earnings Call
For the quarter and the macro environment, and then I'll pick it back up to discuss our business outlook.
Good morning to everyone joining us on the call.
As we highlighted in our release earlier today, the second quarter of 2022 was a record quarter of financial performance, We reported quarterly revenue of $213 2 million or an increase of 53, 4% from $139 million in the prior year.
And net earnings of $39 million or $1 99 per diluted share as compared to $14 9 million or <unk> 76 per diluted share in the prior year, representing a 162% increase in earnings per share.
These record results were achieved due to a robust demand environment for our concrete reinforcing products that remained broad based across all regions and markets.
Was the case in our last three sequential quarters. This environment allowed 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 a spread expansion between average selling prices and raw materials relative to the prior year quarter.
But the inadequate supply of domestic steel wire Rod remained a challenge in the quarter.
Straining our ability to meet fully our customer demand and generating plant operating inefficiencies and increased conversion costs.
Average selling prices in the fourth.
In the second quarter increased 65, 4% relative to the prior year sequentially.
Sequentially average selling prices increased 10, 1% from Q1 2022.
Which represents our fifth sequential quarter of a price increase greater than 10%.
Shipments for the quarter decreased seven 2% from last year due to ongoing domestic wire rod availability issues, which was particularly acute at the beginning of the quarter and not due to any weakness in our end market demand.
On a sequential basis shipments increased eight 5% from Q1 2022 as wire rod supply challenges receded in the latter half of the quarter.
In addition to the usual benefit from a seasonal uptick in demand that typically occurs at this time of the year.
Gross profit for the quarter increased $26 8 million or 89% to $57 1 million from a year ago and gross margin expanded over 510 basis points to 26, 8%.
This increase was due to a widening in spreads as average selling prices outpaced rod cost increases during the period.
As we've highlighted in prior calls during an environment of strong demand and escalating pricing. Our results typically are favorably impacted by the implementation of price increases sufficient to cover the higher replacement costs for our raw materials and the consumption of lower cost inventories under first in first out accounting methodology.
On a sequential basis gross profit increased $14 7 million or 35% gross margins remained above 23% for the third consecutive quarter.
SG&A expense for the quarter decreased $3 1 million to $7 2 million and as a percentage of sales a decrease from 400 basis points to three 4% due to the leverage from record revenue levels.
The dollar decrease was primarily the result of lower compensation expense under our return on capital based incentive plan and lower run rate legal expenses, given the conclusion of our trade cases in the latter half of 2021.
Our effective tax rate for the quarter was virtually unchanged at 22, 3% as compared to 22, 5% last year.
Looking ahead to the balance of the year, we expect our effective rate will remain steady at 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 cash flow to the cash flow statement and balance sheet cash flow from operations for the quarter generated $6 3 million.
Increased working capital due to higher inventory levels for raw materials offset the impact of record earnings performance.
Inventories increased as we added to our raw materials in advance of our seasonally strongest quarters in Q3 and Q4.
The tight rod supply environment that we'd experienced in the prior three quarters began to recede in our second quarter as we made progress supplementing our domestic supply shortfalls with material from foreign sources.
Based on our sales forecast for Q2.
Our quarter end inventories represented two two months of shipments compared with $1 seven months at the end of the first quarter and $1 nine months at the end of our fourth quarter of fiscal 2021.
Our inventories at the end of the second quarter of 2022 were valued at an average unit cost that was that was higher than our first quarter cost of sales and remained favorable.
Relative to current replacement costs.
We incurred $7 8 million in capital expenditures in the quarter for a total of $8 6 million through the first half of our fiscal year.
We remain committed to our full year target of $25 million given the many initiatives underway that we highlighted in previous calls.
Additionally, in the quarter. The previously disclosed sale of our Summerville facility was completed which resulted in cash proceeds of $6 7 million.
From a liquidity perspective, we ended the quarter was $69 7 million of cash on hand, and no borrowings outstanding on our $100 million revolving credit facility.
Looking ahead to the balance of fiscal 2022, we expect demand to remain strong across all our markets our shipment trends in the current quarter and customer sentiment remained positive.
Record high steel prices remain a concern, but they have yet to impact demand in our markets and.
In fact, leading indicators and forecast for nonresidential construction reflect a robust outlook for the balance of the calendar year and beyond with growth continuing already strong segments like warehousing distribution and growth now recovering and previously weaker segments like office and leisure.
Unlike the recent prior quarters, we expect to be able to support this robust customer demand without the supply constraints that hampered our prior quarter performance.
But it is not without challenges as it will require us to secure effectively raw material supply from offshore sources to bridge the gap, resulting from ongoing shortfalls in the domestic supplier base.
That concludes my prepared remarks, I'll now turn the call back over to H.
Thank you Mark.
As reflected in the release and in marks comments, our second quarter results were driven by robust nonresidential construction markets and escalating steel prices above all we think our <unk> teammates for their perseverance through challenging circumstances and their focus on execution excellence and working safely.
Market conditions during our second 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.
As we mentioned previously we have been active in the international steel market in deliveries from offshore sources began to supplement domestic supplies during Q1.
Our offshore deliveries ramped up during <unk>.
During Q2, and we will continue we will continue receiving offshore material in Q3, and Q4 to the extent that we believe operational and customer service disruptions are behind US provided of course that our suppliers, both domestic and offshore perform as agreed.
As expected the by the administration has continued to unwind the section 232, tera, replacing it with tariff rate quota mechanisms, which have a similar market impact as the $2 32 tariff and are largely ineffective and increasing availability of offshore material that is competitive in the world.
Market.
We noted in the last quarterly earnings call that Congress passed and the President signed the infrastructure investment and jobs Act, which is arguably the most consequential infrastructure funding package since the intra state highway system was conceived.
At its core is re authorization of 304 billion of surface transportation programs and new spending of $550 billion with the 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, creating significant momentum for our markets.
The need for infrastructure investment in the U S has been obvious for decades, but funding has consistently been inadequate to address the need for the first time. It appears that funding short falls will decline in significance as obstacles to investment in view of the strong physical condition of state and local governments.
Together with the new funding provided by the infrastructure investment and jobs Act.
Anecdotally, there's never been a time when our customer base has enjoyed the level of activity and strength of backlogs that they enjoy today.
Many customers are booked through 2022, and our quoting availability in 2023, which is unprecedented.
Turning to Capex three of our facilities will receive new production lines and related ancillary equipment over the course of the next year as Capex rises significantly relative to 2021 since.
Since deliveries will extend into 2023, it's difficult to pinpoint 2022, capex, which will be affected by the timing of payments. We will have a clearer view of this by the Q3 earnings call. These investments in state of the art technology will expand our product capabilities and favorably impact.
Cash cost of production.
We're considering additional product or projects that would have similar beneficial impact on our market position and our cost profile.
Going forward, 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 both organic and through acquisition.
This concludes our prepared remarks, and we'll now take your questions Bailey would you. Please explain again the procedure for asking questions.
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Our first question today comes from Tyson Bauer from KC capital Tyson. Please go ahead. Your line is now open.
Hey, good morning, gentlemen.
You delivered a very good morning to you shareholders.
Hey, good morning, good morning.
Do you think now that we've strung together enough quarters, we have the infrastructure Bill in hand, and given your current outlook that the.
The marketplace really needs to do a reset.
On modeling on the outlook.
Not in a historical run up the cycle peak and then come right back down.
This really does have legs for that period, you talked about to five years.
Given the supply constraints still look like they will be in place with that increased demand out there.
I think it's a very good question Tyson.
And.
Of course, we don't model our own results, we we take a shorter term view of our force of our forecasting but as I've said in my comments, there's never been a time when the roadway in front of US has been as attractive from a funding perspective as it is today.
How long how long will the robust environment last in and what are the many potential obstacles that could get in the way.
It's hard to enumerate them, but I would tell you that where we are positive about our outlook as we've ever been.
Yes, even theoretical peak earnings calculations that we've had since covering you you've just shattered and blown all of those out of the water.
This is all without really meaningful shipment volume increases.
Once.
You have the ability to secure better supply.
And shipment volume kind of follow through with pricing.
Do you think you can maintain that kind of margin profile because of the demand profile is there.
To be able to accept.
Any kind of improvement in your capacity to produce.
Yes, I mean, I think if you look at it from a historical perspective Tyson had we not had the raw material shortages that we've described our shipments would have been up double digits without any impact whatsoever on pricing.
So going forward if the environment is similar than I would expect that the market would gladly accept the new capacity that we're bringing in.
And up to this point.
There's been there's been little pricing pressure and that's what we would expect going forward.
The demand is what drives this and what sets the economics for our business and as I mentioned, we've never seen it as strong.
Alright.
Previously what of the two main segments engineered mesh and then PC strand PC Strand had had the lower margin profile because you still have some imports situations quote unquote keep you honest I suppose.
With the sanctions on Russia, Russia, being an exporter of PC strands in the U S market.
Do you see any potential incremental benefit if they're excluded one directly on the PC strand and two because they are large global supplier of say pig iron and scrap and those that helps also keep the expectations for steel prices.
<unk>.
Yes, I mean, I think we're still we're still working through the mechanics of Av.
The conflict related impact on our markets on the one hand, you do have you do have the prospect for fewer exports of finished products on the other hand, both Ukraine and Russia are major suppliers of both semi finished and raw metallics to the steel industry.
<unk> wide.
Is having the impact of raising cost worldwide because.
Countries are obviously out of the market.
At this point the only part of our business that has substantial import competition is the post tension segment of our PC strand business.
And we are concerned that domestic steel prices that are elevated beyond world market prices give rise to the potential for rising imports of PC strand into that market segment.
And we've seen some of that.
However, offset an offsetting.
That extremely high ocean freight rates, which have tended to raise the cost of imported PC strand substantially.
So we're in a month to month waiting game to know what's going to happen in that part of our business, but I would tell you that the post tension segment of our PC strand business is strong with favorable margins.
Is the balance.
The product line is performing very well and demand is robust.
And last question for me your board has an interesting problem. It's a great problem to have and that is how do you.
Set a policy to effectively returning capital to shareholders and receive a valuation benefit for the company overall.
Great.
Yes.
You don't want to provide.
I mean I think as.
As we kind of mentioned in the past right, we're always our board.
In conjunction with management is looking at the best methods to return capital to shareholders.
The options available to us.
I'll also retaining that flexibility to support the business to the extent that there is.
Both organic and inorganic growth opportunities.
So that's fine all options are on the table.
I think Thats fair.
Alright, thank you.
Thank you.
Thank you Tyson.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
The next question today comes from Julio Romero from Sidoti.
Please go ahead. Your line is now open.
Hey, good morning.
Could you just talk to that.
The change in the supply environment, you are sourcing more from overseas can you maybe expand a bit on how thats changed in your business and does the change in sourcing.
With any new risks <unk> benefits.
Okay.
Sure.
Yes, good morning, Julio Thank you for participating in the call.
I would tell you that that our preference would be to.
Purchase our raw materials domestically, if we could do that.
The supply chain is obviously much shorter on the risk is lower because we are exposed to.
Both the.
The increases and decreases in value of the product when we have 60 or 90 day delivery.
<unk> four for offshore steel.
And up until up until this.
This chronic shortage in the domestic market develop.
We were very very heavily if not almost entirely sourcing domestically.
It just is no longer possible.
And I would tell you the conditions were exacerbated in 2021 by a host of unplanned and planned steel mill outages that that had a dramatic impact on domestic availability most of those most of those situations have clear.
<unk>.
And the industry seems to be operating more normally today. So so after a period of where the pipeline becomes a little better stopped we would expect the domestic availability to improve.
So that we werent.
So compelled to go to the international market, but nevertheless.
For 2022, we are where we are and through the end of our fiscal year.
Two we're going to be looking at substantial quantities of imported steel being required for us to operate our plants and when I say substantial.
That means probably 20% to 25% of our requirement.
Very helpful.
Paul I appreciate the answer there and.
Yes.
As you see beyond 'twenty two.
A more normalized domestic environment in terms of wire rod.
Okay.
It would be coming from steel mills.
They were previously had outages coming back online, but not necessarily any additional capacity being.
About what.
Would that be fair.
Yeah.
I think it's fair for what we know today, but I would I would make two observations one is.
Just in 2018, two things happened almost simultaneously, we had 10, new dumping orders issued against wire Rod.
Borders to the U S market.
Those 10 orders affected countries that exported over half of the imported wire rod to the U S. So those countries are effectively out of the market going forward and the other thing that happened just just right at the same time was that the Trump administration imposed a $2 32.
Sure.
And it's hard to discern the impact of each of those.
Actions on the market, but but what we can say is that metal spreads for wire rod producers have expanded dramatically relative to the last 10 years and the question is does that does that continue or or is there a normalization.
That debt.
It will cause those metal spreads to contract and of course, the conundrum for every steel producer, whether its wire rod or flat products or whatever every every steel purchaser that has import competition today is at a distinct disadvantage to offshore competitors.
Because of the out of whack nature of steel prices in the U S market relative to the rest of the world and that is that is.
A formidable challenge for purchasers of steel so I don't know what the answer is but I can tell you that the conditions are are unprecedented and we will only know overtime, whether whether there is a normalization in those metal spreads or weather we have experienced.
<unk> function.
That causes.
<unk> margins to be much wider than they have historically.
Understood and.
Can you maybe speak to the SG&A that you posted this quarter.
It was a little bit lower than I expected.
How much of that is from maybe lower volumes versus maybe efficiencies youre seeing.
How much of that is maybe.
Leverage benefit from the Strand Tech acquisition, you did couple of years ago.
Yes, so the SG&A line really just relates to kind of corporate related overhead not any other cost.
Related to the manufacturing or the like so.
The biggest driver in the drop was.
Accruals with respect to our return on capital incentive plan, our annual incentive plan that we have in place.
And then as I mentioned.
The probably the second component was with respect to a drop in legal expenses.
In that we are no longer supporting the.
The tariff cases like we were at this time last year.
Got it that makes sense I'll hop back into queue. Thanks very much.
Thank you.
Thank you.
There are currently no further questions registered at this time, so as a reminder, <unk> staff followed by one on your telephone keypad to register your question.
There are no additional questions waiting at this time, so I'll pass the conference back over to H Woltz for closing remarks. Please go ahead.
Thank you. We appreciate your interest and in steel look forward to talking to you next quarter and would remind you refer you to call us in the meantime, if you have follow up questions. Thank you.
Thank you that concludes the steel industry second quarter 'twenty two earnings call. Thank you for your participation you may now disconnect your lines.
Okay.
Okay.