Q4 2022 Insteel Industries Inc Earnings Call
H Woltz, President and CEO of steel industries. Please go ahead.
Thank you James.
Good morning, Thank you for your interest and in steel and welcome to our fourth quarter 2022 conference 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 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.
These risk factors are described in our periodic filings with the SEC.
We're pleased with in steels record financial performance in fiscal 2022, generating net earnings of $125 million and return on capital of 36%.
During much of the year, we experience substantially rising costs, both in raw materials and plant operating cost, including labor energy and consumables, while the rising price environment produced a tailwind for earnings as average selling prices rose. It also created considerable.
Operational and customer service challenges for our people, including shortages of nearly every input into our process, which created uncertainty surrounding production schedules.
I'm, particularly proud of our people for the discipline. They showed in this environment as they generally avoided over commitments that would result in customer disappointment, while lead times extended by and large we understood the impact of the environment on our ability to deliver to customers and we fulfilled the customer commitment.
Once we made which speaks highly of the professionalism of our people our focus on customer needs and the effectiveness of our information systems.
As we enter fiscal 2023, we believe the outlook for our markets is positive and has been materially enhanced by the passage of the infrastructure investment and jobs Act.
Im 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 outlook.
Thank you H and good morning to everyone joining us for the call.
As we highlighted in the release the fourth quarter of 2022 was a historically strong period of financial performance, we reported revenue of $208 million or an increase of 21, 4% from $171 $3 million in the prior year and net earnings of $24 3 million or one.
<unk> 24 per diluted share as compared to $25 2 million from $1 28 per diluted share in the prior year.
Our results benefited from incremental price increases to recover the continued escalation in raw material and plant operating costs average selling prices in the fourth quarter increased 26, 1% relative to the prior year.
Sequentially from the third quarter of 2022 average selling prices decreased two 6%.
This decrease in average selling prices was driven by weakness in our product line most exposed to the residential construction markets.
Excluding the impact of that product line on average selling prices would have resulted in a 1% increase sequentially, reflecting the resilience of our nonresidential construction markets.
Despite the robust demand environment shipments for the quarter decreased three 7% from last year sequentially from the third quarter of 2022 shipments declined 6%.
The lack of shipment momentum resulted primarily from three issues.
Ongoing weakness in the residential construction markets relative to historically robots conditions last year weighed on demand much like we highlighted in the third quarter of 2022.
Our customer base began managing their inventory on hand to more normalized levels as availability constraints for many of our product lines subsided from the unprecedented shortages earlier in the fiscal year.
And labor availability across our plant footprint, which we highlighted in the third quarter of 2002 remains an issue while we experienced modest signs of improved labor recruiting and retention during the fourth quarter, our plant's ability to increase production due to the level consistent with customer demand continued to be a challenge.
Gross profit for the quarter was $39 $8 million or effectively unchanged from the same period last year at $39 9 million.
Gross margin declined 420 basis points to 19, 1%.
This decrease was due to the decline in shipment volumes for the quarter. In addition to the impact of higher overall plant operating costs, which offset the benefit of widening spreads between average selling prices and raw material costs.
Specifically inflation in labor rates in energy have negatively impacted our overall plant operating costs.
On a sequential basis gross profit decreased $18 $3 million from a record level in the third quarter of 2002 due primarily to the same drivers previously stated in addition to a modest reduction in spreads.
SG&A expense for the quarter increased $1 million to $8 3 million, but as a percentage of sales that decreased marginally to 4%.
The dollar increase was primarily primarily the result of the relative quarterly change in the cash surrender value of life insurance policies, which from an accounting perspective is reflected as an increase in SG&A expense.
Our effective tax rate for the quarter was largely unchanged at 23%, which is up minimally from 22, 7% last year.
Looking ahead to the balance looking ahead to next 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.
Moving to the cash flow statement and balance sheet cash flow from operations for the quarter used $9 four.
$4 million increased working capital due to a $29 $2 million reduction in accounts payable.
And accrued expenses and a $5 $2 million increase in inventories offset the impact of strong earnings.
You May recall, we ended the third quarter of 22 with an elevated accounts payable balance of $77 $2 million due to the timing of raw material deliveries.
Based on our sales forecast for Q1, our quarter end inventories represent four three months of shipments compared with $3 four months at the end of the third quarter.
These raw material purchases, along with the weaker than anticipated shipments in the fourth quarter increased inventories moderately above normalized levels of approximately three months.
And finally, our inventories at the end of the fourth quarter of 'twenty two we're valued at an average unit cost.
Marginally lower than the beginning of the quarter.
We incurred $3 6 million in capital expenditures in the fourth quarter for a total of $15 9 million for the fiscal year in support of our expansion of the engineered structural mesh business as well as cost and productivity improvements H.
<unk> will provide more details on these important efforts in his prepared remarks.
While investing in the business to enhance its growth and reduce cost remains our top priority. We continue to return capital to shareholders throughout the course of the fiscal year.
The combination of a special dividend of $2 per share in the first quarter and the four regular quarterly dividends of <unk> <unk> per share amounted to $2 12 per share in dividends for fiscal year 'twenty two.
Also during the quarter, we repurchased $1 $2 million of common equity equal to approximately 41000 shares.
From a liquidity perspective, we ended the quarter with $48 $3 million of cash on hand, and no borrowings outstanding on our revolving credit facility.
Looking ahead to fiscal 'twenty, three we remain optimistic about the state of our markets shipped.
Shipments and average selling prices in the beginning weeks of the first quarter are trending above forecasted levels, which is an encouraging sign and what is our historically lowest shipment volume quarter of any fiscal year.
Customer backlogs remain robust across both the private and public nonresidential construction markets with no meaningful signs of concern today, and third party, leading indicators and forecast for nonresidential construction reflect a steady and positive outlook for demand in our markets.
Construction employment levels continue to rebound with the majority of states reporting construction unemployment levels that are now on par with the low levels recorded immediately preceding the pandemic.
And overall construction employment as measured by the Bureau of Labor Statistics was three 4% in September 22, and is approaching the lowest levels recorded over the last 10 years.
And finally, the market has yet to layer in any meaningful funding from the infrastructure investment and jobs acts Act, which should begin to materialize over the next 12 months.
We are closely monitoring the heightened uncertainty regarding the direction of the overall U S economy.
Particularly as certain areas like residential construction.
Like the residential construction market remained weak.
This concludes my prepared remarks, I will now turn the call back over to H.
Thank you Mark.
Our fourth quarter results were strong by any measure despite the impact of a deteriorating housing market that we first detected last may and referenced in the Q3 earnings call.
While housing weakness is likely to persist through this interest rate cycle. We're fortunate that our exposure to this market is relatively low which we approximate to be 15% of revenues the remainder of our markets private nonresidential and publicly funded infrastructure applications remained strong with customer.
<unk> reporting substantial backlogs and a healthy pace of new quotations.
Over the last few quarters, we identified an adequate supplies of our primary raw material hot rolled steel wire rod is a constraint to production and shipments and we indicated that we had turned to offshore markets to supplement domestic supplies by the end of the third quarter receipts of offshore raw materials had.
Filled most of our supply gaps the unexpected downturn in housing markets together with tighter inventory management by many customers had an unfavorable impact on Q4 shipments and resulted an unplanned inventory growth, we expect excess inventories to be depleted by the end of the.
Current quarter or early in Q2.
We continue to be optimistic about the impact on our markets of the infrastructure investment and jobs Act and believe it will create significant demand for our products in 2023.
The need for infrastructure investment in the U S has been obvious for decades, but funding has consistently been adequate relative to the need. It now appears that funding short shortfalls 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.
<unk> provided by the infrastructure investment and jobs Act.
Turning to Capex 2022, Capex came in substantially lower than expectations based on actual equipment delivery schedules and cash outflows relative to our initial plans no projects had been abandoned or intentionally delayed by the company in view of the.
These timing considerations, we expect 2023 outlays to be elevated as delayed deliveries and related cash outflows catch up to expectations. We believe capex in 2023 should come in at about $30 million subject to uncertainties related to vendor performance.
And supply chain issues.
These investments have state and state of the art technology will expand our product capabilities and favorably impact our cash cost of production as we mentioned in an earlier call new production lines will be installed at the Missouri, Kentucky, and Arizona plants to better address market needs were carefully evaluating additional.
<unk> would have that would have similar beneficial impact on our market position and our cost profile.
Going forward, we are aware of rising risk related to the future performance of the U S economy and are carefully monitoring the environment at the same time, we plan to aggressively pursue actions to maximize shipments optimize our costs and to pursue growth opportunities both organic and through acquisitions.
<unk>.
This concludes our prepared remarks, and we will now take your questions. Candace would you. Please explain the procedure for asking questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad is there any reason you'd like to remove your question. Please press star followed by case again. It is star followed by one to ask a question as a reminder, if you are using a speakerphone. Please pick up your handset before asking your question.
So our first question comes from the line of Helio.
From Sidoti <unk> co.
Your line is now open. Please go ahead.
Hey, good morning, Thanks, very much for taking my questions.
<unk>.
Good morning, I appreciate you guys, calling out the difference in pricing, excluding the product line most exposed to residential.
If we could dig deeper into that one product line that has seen the price weakness.
Do you think you have seen the worst of the pricing pressures sequentially on that one product line.
Do you see prices stabilizing going lower I would just love to hear how you guys are thinking about that.
I think maybe two things are going on Julio.
First it's.
Well publicized that the housing market has weakened substantially but beyond that the market has changed from one where there was a critical short supply of the product to one where it is no longer in short supply and as a result.
We uncovered which customers or multiple ordering from suppliers to cover their needs and as a result, I think there is an inventory bulge that developed so there is consumption is off some from lower residential construction demand, but also probably more important is inventory rebalancing.
Going on.
<unk>.
That market and in others, but I think inventory change is probably the bigger story.
Got it that's really helpful and I guess, it really come down to supply and demand.
Yeah.
You also talked about on your prepared remarks, the first few weeks of.
Of the first quarter, you've seen shipments in asp's trending above forecasted levels.
Just a little bit more about kind of the trends youre seeing.
During the first few weeks of October .
Well as we acknowledged on multiple occasions, hulio, our vision and our ability to see beyond a few weeks is really minimal due to the low lead times that are expected by our customer base. So I would say it's week to week, but.
But on a year over year basis.
At this point the trends are positive and.
<unk>.
Order entry is brisk.
So right now I would just tell you that the market looks pretty solid.
Yeah.
Okay got it and just turning to the the.
The balance sheet I saw you guys did some repurchases $1 2 million in the quarter.
Is that something we.
Opportunistic in your view or how should we think about.
Potential repurchases in coming quarters.
I think the bigger the bigger question is just the expectation of free cash flow.
And should free cash flow.
<unk> the needs of the business what do we do with it and you know we have a history of having repurchase shares on occasion as well as paying special dividends on.
Occasions, and we will evaluate both of those those options if we get to the point that we believe free cash flow is beyond the.
Needs of the business you can expect us to return cash to shareholders, but if we were to if we were to change our outlook and see that that we expect to cigna.
Significant downturn in the economy than we may have different consideration about about returning cash to shareholders just depends on the circumstances in our view at the time, we made the decision.
Okay makes sense, thanks, very much for taking the questions I'll hop back into queue.
Thank you Julia.
Thanks Keith.
Our next question comes from the line of Tyson viewer.
K C capital. Your line is now open. Please go ahead.
Good morning, gentlemen.
An excellent anti some good morning.
I'm going to just jump onto asset H and that was your policies at the board level regarding your focus on free cash flow and what to do with it versus earnings that you may have compiled during this past year.
Even though obviously you run through our cash management cycle with your seasonality where.
Yes, you have four one months of inventory youre going to get that down to three so we should see an influx of cash coming in here you talked about a solid October starting out.
Given your outlook on the infrastructure and those are you more prone to.
View, a return of capital to shareholders with that expectation.
And are willing to have a little more.
Fore sight.
On returning some of that inventory into cash or at least not having those working capital needs going forward now that we'll lap the anniversary those.
So does that come into play when you make that decision on the special dividend in the next couple of weeks and what you do with that return of capital policy that you're discussing.
Well.
As is consistent with our past statements Tyson that the very first priority for any use of cash would be would be to grow the company.
We had acquisition opportunities, where if we have additional organic capex opportunities, we'll certainly deal with those first and then I think you are correct. There will be a working capital release over the coming months and it's likely to be pretty substantial.
<unk>.
So we'll just evaluate we'll reevaluate.
<unk>.
Whether to return cash and how to return cash.
Based on the circumstances that exist at the time, which would imply we look at our share price. We look at our cash expectations. We look at the state of the general economy, and what's expected there.
Then I'll come to a conclusion about about the best route for the company.
That has.
Because I think it sends a mixed message if you have such great results.
Look.
And then because of a timing issue on cash flow.
Is that all of a sudden you pulled back a little bit on what you have normally historically done on your special dividend.
Because of something that is more of a point in time as opposed to an overall view of what your business expectations ourselves.
Just my little <unk> on that not that you care.
The Abi data showed expansion again in September .
Industry with seven months of backlog, obviously housing is the weakness there, but institutional other things are still remains strong which means your customer base, where the bulk of your business is strong.
In the housing segment.
Are we returning to an order pattern, even if they're at a lower level.
Because they right size their inventories in the last quarter, which didn't slow it down at all or stopped it.
So any return helps your ability for shipments and better efficiencies at your facilities.
So we get back into a normal order patterns, regardless of what level. It is.
Yes.
First of all let me say that just as a caveat.
Our insight into this as a little blurry.
Don't have any objective data that we can really rely on so so we're using estimates and we're using a market knowledge and we're using customer feedback to make our our conclusions here, but we have seen a tick up in order entry in these markets, which would indicate.
That may be the inventory corrections are close to having run their course and that would be the background for my statement.
The inventory imbalances may have been.
More more responsible for the weakness in the actual.
Rate of consumption of the product on job sites. So, yes, I think to the extent that too.
To the extent that those inventories have been dealt with then.
Very positive for us.
Okay.
And we knew coming in the fourth quarter that you had some lower fixed inventory and it seems like we were never able to really catch up during the quarter.
As you trended through and you talked about October being stronger than expected.
How did the quarter play out how did we go for July August September was that something that you were just started behind the eight ball I can never get ahead or where there some trending down that created the results that we saw.
I think.
So if youre asking about finished goods inventories.
As I recall, the third quarter call. We indicated we did enter.
That quarter and I think it was true as we finished it with lower levels of finished goods inventory than we would typically have at that time of year. So it's probably fair to say, we are still a bit in catch up mode with that as we work through the fourth quarter.
Demand has been strong enough that as we've made product we shipped it.
To the customer in that in that period of time, but there wasn't excess finished goods inventory available and I think Tyson aside from just the.
The housing related markets. There has been there's been a general loosening up of supply of our products to our customer base. So I think I think that customers throughout our markets have had the opportunity to evaluate their inventory levels and.
Adjust to an environment, where availability is more reasonable than it had been in the prior three or four quarters. So I think there's been some inventory management and liquidation across our whole business, but but.
Not to an alarming degree.
If I understood. Your question right, you're wondering you're wondering whether we were trending up or down or flat through the quarter.
I would tell you that that.
In our view the only weakness that we're seeing.
<unk> is in the housing related segments of the business.
With that also the caveat that there could be some inventory rebalancing going on in other markets, but.
But the rate of order entry has been positive customer outlooks are positive backlogs are positive and the non housing related sectors of the business.
Would lead us to conclude that that 2023 should be should be a good year absent any any kind of curve balls that come along.
Okay.
Suggested in there.
Comments to start the call was that outside of the housing product line.
<unk> been able to maintain spread.
Over the raw material cost part of the business.
Structural cost items labor energy those things that seem to be what's.
Hampering.
What remedies are there available or is that just something that you have to figure out how to overcome and become more automated and maybe that's why we have the big Capex.
Coming forward.
What do you do with that structural cost increase as opposed to just getting your spread over the wire rod.
Well I think I think you need to evaluate every component of that.
On its own for instance energy.
I guess, everyone has his own expectation for what's going to happen to energy costs and in some regions, where we operate.
The increases that we have incurred have been dramatic.
But not so much elsewhere. So are these permanent changes or are they.
Are they temporary it's hard to say.
In the case of energy because theres, so many outside influences, including the Texas Freeze of February 2021, the Ukraine, Russia contemplate.
On and on and on Okay. So I don't really know whether thats, a permanent or whether it's a temporary impact on our cost on the other hand, our labor costs have risen substantially and I would tell you that I really don't expect to see that.
That will back off so we'll have to deal with that through productivity through investment overtime and we will.
In terms of other commodities that we purchased two to operate our our factories, we've seen dramatic increases in some of those costs, but I believe that most of those will moderate over time, maybe not back to the lows of pre pandemic, but.
But we've seen we've seen price escalations of three and four times in certain of the supplies that we procure to operate.
Our plants I don't expect that that will persist for the long term. So what have we done in the meantime, as we've tried to deal with those cost increases through through pricing, our product and I don't know.
Sure helps.
We would have done it.
Okay and last one sudden monopolizing here.
Just happened to see a story on the National News regarding obviously, the hurricane in Florida, and how the utility companies are in essence.
De facto replacement going to be utilizing concrete poles.
And they're going to try to do that statewide and this kind of gives an opportunity to accelerate those programs are you involved in that.
<unk> is a product line at all and is that something you see as the benefit.
Going forward as we see some of these natural disasters in Florida, or California or other areas.
Absolutely we are involved in it.
A very substantial market for us and one that has bright prospects as you point out.
Those poles, those poles are prestress, Tyson and and they use both PC strand and they use mild steel reinforcement that we supplied so.
They are loaded up with our products.
And what kind of growth that you see there.
Well.
I can't tell you on that product specifically, but.
They are busy growth will be substantial.
Alright, Thank you gentlemen.
Thank you Tom.
Thank you no more questions registered at this time I would like to handover to management team for closing remarks.
Okay. We appreciate your time this morning, I'll feel free to call Us if you have questions and we'll talk to you next quarter. Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect your lines.
Okay.
Okay.
Yeah.