Q1 2024 Insteel Industries Inc Earnings Call
Good morning, and welcome to Ensco industry, that's cool.
When people earnings call My name is Carla and that'll be albrightsville today threats.
Richard to your question makes Q&A. Please crush thoughtful if I wanted to know kind of think he thought he was terrific question any point speaks for itself, but if I can.
Now how does it feel like H well.
Speaker Change: To begin please go ahead when you're ready.
Okay.
Speaker Change: Thank you.
Speaker Change: Good morning. Thank you for your interest in <unk> and welcome to our first quarter 2024 conference call, which will be conducted by Scott <unk>, Our vice President CFO and Treasurer and me.
Scott: 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.
Scott: These risk factors are described in our periodic filings with the SEC.
Scott: The recent environment has been challenging for the company in view of inventory accumulation throughout the supply chain and a significant downward reset in steel prices that occurred following several quarters of extreme supply tightness and significant market price escalations.
We believe these headwinds of about run their course, and we continue to be optimistic about the underlying level of demand for our products I'm.
I'm going to call the turn the call over to Scott to comment on our financial results for the quarter and the macro environment and then I'll take the call back up to discuss our business outlook.
Scott: Thank you H and good morning to everyone joining us on the call.
Scott: As we anticipated business conditions remained challenging during the first quarter of fiscal 2024, as we continue to navigate through the ongoing pressure of narrowing spreads between selling prices and raw material costs, coupled with elevated unit manufacturing costs. As a result net earnings for the quarter declined to $1 1 million or <unk> <unk> per share.
Scott: From $11 1 million or <unk> 57 per share in the prior year period.
Scott: Net sales for the quarter fell 27, 1% from a year ago, driven primarily by a reduction in average selling prices as shipments remained flat.
Scott: A decline in <unk> for the quarter reflects a persistent competitive environment and the steep decline in steel scrap prices over the past year sequentially Asps dropped by seven 9% from the fourth quarter as pricing pressure continues during the period driven by both ongoing domestic competition and the growing impact of low priced imports.
Scott: PC strand.
Scott: As we move into the second quarter, there are indications that the decline in our selling price may be ending.
Scott: Steel scrap prices reverse their downward trend during the quarter and have risen by $80 since November.
Scott: Wire rod producers of follow implementing price increases in December and January.
Scott: In response to the rising cost of our raw materials, we have initiated our own price increases earlier this month extending across most of our product lines. The start of an upward trend or a leveling out of prices due to these increases could put it into a headwind that has been negative.
Scott: I think our results over the last year.
Scott: Shipments for the quarter, which has historically been our slowest period of the year due to the onset of winter weather and holiday schedules were essentially unchanged from the same period last year, but down 16, 1% sequentially from Q4.
Scott: During the quarter benefited from improved shipping levels within our residential construction end market, helping offset ongoing weakness in our infrastructure and commercial markets, which continue to be impacted by project delays customer destocking and weak demand in certain regions of the country.
Scott: Gross profit for the quarter declined 11.
Scott: $5 million from a year ago, while gross margin narrowed to 550 basis points to five 2% on.
Scott: On a sequential basis gross profit fell $7 7 million from the fourth quarter and gross margin decreased 370 basis points to.
Scott: Continuing compression of spreads can be attributed to the pricing pressures I mentioned earlier with the year over year decrease in asps, surpassing a reduction in our inventory carrying values.
Scott: As noted earlier in response to the recent escalation in our raw material costs.
Scott: Price increases this much this month, which should favorably impact our second quarter spread in margin as higher selling prices will be matched against the assumption of lower cost inventories under the first in first out accounting methodology.
Scott: Apart from the spread compression, we also experienced higher unit conversion costs. As we continued the planned reduction of finished good inventories at certain plants. This led to operating operating inefficiencies and elevated unit conversion costs, which are further amplified by ongoing inflationary cost pressures. However, as we move into the second quarter.
Scott: We expect a reduction in unit conversion cost as operating levels are gradually increased.
Scott: SG&A expense for the quarter decreased $800000 of $6 4 million or five 2% of net sales from $7 1 million or four 3% of net sales last year.
Scott: Mainly due to lower compensation expense under our return on capital based incentive plan, which was negatively impacted by weaker results in the current year period.
Scott: Our effective tax rate rose to 27, 2% from 22, 9% a year ago.
Scott: The increase was largely driven by permanent book tax differences and the effect of a discrete tax item, which had an amplified impact on our rate due to the lower pre tax earnings looking ahead to the balance of the year, we expect our effective rate to run close to 23%.
Scott: Subject to the level of pre tax earnings book tax differences and the other assumptions and estimates that compose our tax provision calculation.
Scott: Moving to the cash flow statement and balance sheet cash flow from operations provided $21 $8 million of cash in the first quarter. This was primarily due to the work change in working capital driven by a reduction in receivables, reflecting the usual seasonal slowdown in sales and a decrease in inventories due to the lower average unit carrying values.
Scott: Our inventory position at the end of the quarter represented three months of shipments on a forward looking basis calculated off of our forecasted Q2 shipments finally, our inventories at the end of the first quarter were revalued in an average unit cost lower than our first quarter cost of sales and now approximate current replacement costs.
Scott: We should favorably impact spreads and margins during the second quarter as we can see in the lower cost materials.
Scott: We incurred $12 3 million and capital expenditures in the first quarter and remain committed to our full year target of $30 million eight will provide more detail on this topic in his remarks.
Scott: In December we returned $48 $6 million of capital to our shareholders through the payment of a $2 50 per share special dividend. In addition to our regular quarterly dividend.
Scott: Marking the highest special dividend is paid in seventh year over the last eight years, we have paid a special dividend.
Scott: Also during the quarter, we repurchased $539000 of our common equity equal to approximately 19000 shares.
Scott: From a liquidity perspective, we ended the quarter with $85 $6 million of cash on hand, and no borrowings outstanding on our $100 million revolving credit facility, providing us ample liquidity and financial flexibility going forward.
Scott: As we move into the second quarter of fiscal 2024 weeks.
Scott: We expect gradual improvement in our construction end markets.
Scott: Leading indicators for nonresidential construction spending architectural billing and not as a minimum indexes imply relatively stable conditions going forward in November ABR remained in negative territory for the fourth consecutive month with a score of $45. Three aims score below 50 indicates a decline in business conditions, However, slightly low score.
Scott: There were positive signs within report that there's indications that credit conditions are beginning to ease with firms, noting an increase inquiries for future projects.
Scott: The Dodge momentum index, another leading indicator for nonresidential building construction rebound of 3% in December rising to 186 six.
Scott: With commercial planning, improving 1% and institutional planning up six 1% on a year over year basis overall index lower by 2% Dodge.
Scott: <unk> noted that despite ongoing labor and construction cost challenges there are substantial number of projects currently in the planning stages that will support construction spending into 2025.
Scott: Turning to the macro indicators of our construction end markets. The monthly construction spending data continues to remain strong with the November report showing total spending on a seasonally adjusted basis up approximately 11% from last year with nonresidential construction of 18% with public High Wing Street construction is one of our larger end uses for our.
Scott: Next up over 15%, however, while construction spending remains elevated.
<unk> met shipments another measure that we track continue to lag 2022 levels and shipments were down three 6% for the month of October and two 9% year over year.
Scott: This concludes my prepared remarks, I will now turn the call back over to H.
H: Thank you Scott.
We commented last quarter the difficult Q1 operating environment was expected as we are as we faced headwinds, including declining steel prices inventory liquidations by customers the need to align our finished goods inventories to reflect lower shipments and finally the north.
H: <unk> seasonal downturn in construction activity.
H: As a first in first out reporter declining steel prices.
H: It <unk> affect reported earnings as a matter of simple mathematics.
H: Particularly sharp increase in steel prices during 2021, and 2020 to produce a tailwind for earnings during these periods and a sharp reduction of prices during 2023 extending into Q1 2024 created a substantial headwind for the.
H: Companies that was exacerbated by inventory liquidations and inflationary pressures on costs.
H: Fortunately it appears that pricing is heading out.
H: Fuel price stability should contribute to an improved operating environment for the company.
H: As mentioned in the release shipments of reinforcing products into the housing markets have recovered nicely since collapsing we're getting in May 2022 at the onset of the fed's interest rate increases.
H: <unk> have been compressed however, its higher cost inventory flows through cost of sales process, that's now behind us.
H: Shipments of welded wire reinforcement into infrastructure markets continued to show weakness, particularly in the Midwest and western markets, while customers are by and large busy many have storage yards that are full of finished products due to contractor delays and others are reducing inventory.
H: While theres not objective data to support our view, it's not surprising that inventory corrections would occur following the recent extreme tightness of supply.
H: This phenomenon was repeated throughout the supply chain and we experienced the same dynamics in our raw material suppliers if.
H: If we are correct in steel shipments and production should accelerate at seasonally favorable weather patterns displace the winter chill.
H: PC strand shipments were flat for the quarter, although the mix improved.
H: As mentioned in our last two earnings calls we are increasingly affected by low priced imported PC strand.
H: For instance, the average unit value of imported PC strand for November quarter to date, which is the most recent data was lower than the domestic market price for wire rod the raw material from which PC strand is produced.
H: The industry is carefully scrutinizing strand imports and we will pursue any trade actions that are justified.
H: We're optimistic about the impact on our market. So the infrastructure investment and jobs Act, although it's still difficult to point to any specific projects that have affected demand.
H: With respect to the secretary of transportation as acknowledge quote delays of 123 or more years between funding when funding is appropriated and authorized and when those dollars are assigned to a project unquote.
H: Meanwhile of course inflation is impacting project cost and jeopardizing the viability of some projects. Despite these obstacles, we believe that I I J a funds will ultimately be allocated to projects and spent as intended with a beneficial impact on our industry.
H: <unk> when not if.
H: Turning to Capex, we indicated in prior calls from press releases that Capex for 2024 was expected to come in at approximately $30 million.
Following 2023 Capex of $37 million, we have been asked whether theres been a permanent step up in capex expectations for the company.
H: The answer is no.
H: On an ongoing basis, we would expect capex to range closer to depreciation and amortization and to be elevated in years, we elect to expand capacity or incorporate new technology into our facilities through equipment replacement.
As a reminder, the capex amounts for 2023 and 2024 are heavily influenced by the addition of three new production lines at our welded wire reinforcement plants and the addition of a production line at our PC Strand plant.
The scale of these additions is not a recurring event.
The investments, we're making in state of the art technology will expand our product capabilities and favorably impact our cash cost of production and companies that fail to make such investments will become increasingly uncompetitive.
H: As you know in steel continues to be debt free and has substantial flexibility to make decisions for the long term best interest of the business.
H: Looking ahead, we are.
H: Aware of the substantial risks related to future performance of the U S economy, and we're monitoring the environment.
H: We believe that inhibition to elevated interest rates heightened conservatism among customers that are concerned about the macro environment could be contributing to a slower market recovery.
H: In any event, we are well positioned to aggressively pursue actions to maximize shipments and optimize our costs and to pursue growth opportunities both organic and through acquisition.
H: This concludes our prepared remarks, and we'll now take your questions. Carla would you. Please explain the procedure for asking questions.
Carla: Thank you thank.
Carla: If you'd like to ask a question you may do two quick questions. So one by one and you kind of think keypad.
Carla: Your question. Please ensure your device is Amit lately if.
Carla: If you wish to thank you for your question. Please press star followed by Jay.
Speaker Change: Don't ask me calls last question from Julio Romero from Sidoti.
Julio Romero: Company <unk>.
Julio Romero: Your line is now open. Please go ahead.
Speaker Change: Thanks, Hey, good morning, <unk> and good morning, Scott.
Tomorrow morning to start.
Speaker Change: I was hoping you could update US hey, good morning, I was hoping you could update us on the competitive pricing pressures that you spoke about last quarter in October.
Speaker Change: And has the rise in steel scrap kind of ease some of those competitive pressures.
Speaker Change: Yeah of course, it's always difficult to know exactly what drives behavior in the markets, but but I would suspect that that the entire marketplace has experienced the rather disappointing volume.
Speaker Change: <unk>.
Speaker Change: Volume experienced in Mcl has same.
Speaker Change: And theres been an overreaction.
Speaker Change: Certain competitors to believe but reducing price will stimulate volume and of course as as steel costs came down.
I suppose our competitors believe that they would they would be able to offset lower average selling prices with lower steel cost of course.
Speaker Change: That dog chases its tail for quite a while so.
Speaker Change: The bottom line is we were glad to see that steel scrap prices stopped their free fall.
Speaker Change: I had to say that the overall steel market.
Speaker Change: And our segment wire Rod and long products has begun to stabilize and move up.
Speaker Change: And and.
Speaker Change: We think that the stable steel market that we see in front of us for the next few months, we'll certainly benefit our operating environment.
Speaker Change: Okay.
Speaker Change: Got it that's very helpful and I guess.
At stabilization.
Speaker Change: One would think would lead to more rationality within the marketplace at least on the on the domestic side, but I'm curious if you're seeing a divergence on the imported side.
Speaker Change: And if there's any notable.
Speaker Change: Differentiation between.
Speaker Change: Pressures, you're seeing from domestic versus imports.
Speaker Change: Or are you, referring to our raw material hulio or are you referring to.
Speaker Change: Pork competition with our finished products.
Speaker Change: I'm, referring to the finished product side of this.
Speaker Change: The the imported finished products are still kind of under pricing.
Speaker Change: Domestic such as yourself.
Speaker Change: Yes that is the case.
Speaker Change: It's interesting in the import volumes of PC strand are actually down but pricing.
Speaker Change: For imported products has.
Speaker Change: Really collapsed.
Speaker Change: So in certain segments of the PC strand business imports are a major competitive factor.
Speaker Change: And in the area.
Speaker Change: Currently been affected.
But by that import competition Julio this is not new for the company, we've experienced this over and over and over again to the extent that today, we have <unk>.
Speaker Change: Two dumping or countervailing duty orders against foreign countries.
Speaker Change: And if.
Speaker Change: The kind of destructive pricing that we're seeing now continues I think you can expect to see more trade activity by the domestic PC strand.
Speaker Change: Industry.
Speaker Change: Got it that's very helpful. There and then.
Speaker Change: Typically one.
Speaker Change: When steel scrap prices reverse towards the positive.
Speaker Change: Finished goods prices also reverse towards a positive you typically see a one quarter.
Speaker Change: FIFO tailwind.
Speaker Change: As you benefit from those higher prices of finished goods and the consumption of lower price inventory do you foresee that on the horizon.
Speaker Change: If so what's what's maybe your best guess as to when.
Speaker Change: The timing is realized within the P&L.
Speaker Change: Well, it's a database sort of.
Speaker Change: Sort of issue with us.
Speaker Change: We did announce price increases across practically all of our products that were effective in the first of January.
Speaker Change: Collecting those.
Speaker Change: Those increases as we speak.
Speaker Change: What next week brings is hard to say, but this way we're collecting the increases and if that were to continue for the quarter. Then you would see that you would see the impact of those increases in our Q2 results.
Speaker Change: Understood I'll hop back into queue, thanks very much.
Speaker Change: Thank you.
Speaker Change: Thank you as a reminder, if you'd like to ask a question. Please press star one by one.
Speaker Change: We will now take our next question from Todd.
Speaker Change: Okay.
Todd: Your line is now open. Please go ahead.
Good morning, gentlemen.
Speaker Change: Good morning.
Speaker Change: Just to follow up on <unk> last question.
Speaker Change: As he has mentioned that.
Speaker Change: We have seen.
Speaker Change: Storage layer that sometimes youll overshoot for a quarter and then we end up in this little yoyo situation on the on the margin, but when you had price increases are announced price increases you've also benefited from increased shipments ahead of those price increases and I'm.
Speaker Change: I'm wondering if that will be reflected in Q2 or because we're in the seasonally weaker quarter, that's somewhat gets muted as appose of.
Speaker Change: This happened during the summer months.
Speaker Change: I think that bad shipments for our Q2.
Speaker Change: Probably be affected by weather conditions as much as any quarter.
Speaker Change: For the company.
Speaker Change: And it's hard to know what what the impact will be but traditionally either Q1 or Q2 is our lowest shipping our lowest shipping quarter.
Speaker Change: I suspect that Q1 will be our lowest shipping quarter that Q2 will be better but it is it is weather affected.
Speaker Change: But in terms of whether this would be this environment would be more beneficial in the.
Speaker Change: The summer months in the winter months, I don't really think so Tyson.
Speaker Change: Except for the multipliers higher as we ship as we ship more.
Speaker Change: Ship more product, but the change the changes I think the important issue here that's very welcome Ed.
It in steel I think the other thing that's important to understand is just.
Speaker Change: How volatile this raw material market as bad or worse over the last 18 months, we've seen we've seen.
<unk> that are unprecedented and then we've seen those those numbers dropped back to.
Two lows and and backflip saw effect is good.
Speaker Change: Wanted to affect <unk> results, just bought matter simple mathematics.
Speaker Change: It's just part of the business.
Speaker Change: Okay, well it sounds like you're implying that there's been really no pushback to your price increases.
Speaker Change: Would that necessitate further price increases.
Speaker Change: Well I mean, there's always pushback to price increases.
Speaker Change: But I think the magnitude of increases in costs that we've seen are undeniable and yeah, I don't think theres any competitor in our industry.
Speaker Change: That would expect to absorb those raw material increases and I think the customer base is pretty realistic about.
Speaker Change: About sources of supply so so I think.
Speaker Change: Supply and demand have matched up in a way that makes us price increase round look attainable what happens in.
Speaker Change: In the future is going to be determined.
Speaker Change: The strength of demand for our products and also about what happens in the overall steel market and and it's.
Speaker Change: It's just.
Speaker Change: Beyond the us to be able to project that past a month or two out.
Speaker Change: And where are you the industry leader in implementing the price increases or where are you following others within the industry and their actions or have others, followed your actions now.
But we are typically the leader in the industry and we have seen the others follow our actions.
Speaker Change: Okay.
Speaker Change: Inventory levels were $9 million below where we were the prior quarter, which you have some seasonal lift in there.
Speaker Change: What's the split between the raw material and the finish and as that.
Speaker Change: The split something that.
Speaker Change: It was impacted by delayed shipments at the end of the quarter or is that fairly normal split from what you've seen in prior quarters.
Speaker Change: It would be a fairly normal split types out there there are a couple of product lines, where we've needed to reduce finished goods inventories.
Speaker Change: I don't think that Youll see our raw material inventories fall any further than where they are today.
Speaker Change: They're they're a very comfortable level and of course raw material inventories are a function of.
Speaker Change: Steel mill service levels. The worse the service levels are and the longer the lead times are extended and the higher the inventory levels, we have health care in and the other the other real driver there is our activity in offshore offshore markets, which is today at a low way up so.
Our raw material inventories or are comfortable for for the state of the business and our finished goods inventory liquidations are about complete but I wouldn't I wouldn't say that there is any.
Speaker Change: Any change in the split between raw materials and finished goods that that would be surprising.
Speaker Change: And the overall level should be as we gear up for the warmer seasonality will start to see the inventory amount creep up.
Speaker Change: As we get into the end of Q2 forward Okay.
Speaker Change: It sounds like right.
Speaker Change: Scott was there no incentive calculations are.
Speaker Change: Pay compensation that was included in Q1, so does that imply a true up possibility in future quarters that may have better profitability.
Speaker Change: Yes, there was no expense pick up in Q1 for the incentive plan and yes. It would it improving results in Q2 Q3 would celebrate that.
Speaker Change: Okay.
Speaker Change: When we look at Dodge, we look at Abi we look at all there.
Speaker Change: <unk> data.
Speaker Change: How much of that do you think is a very.
Speaker Change: As far as the expected projects, having better numbers is really dependent upon rate cuts on when those rate cuts occur that would spur actual activity.
Speaker Change: Whether that be in housing commercial or otherwise it seems like the infrastructure piece will be there given state and local municipality budgets on D O T.
Speaker Change: With the matching of the federal funds, so that side seems to be fairly high.
Speaker Change: High conviction level that will show up.
Speaker Change: What about the residential and more of the commercial side is that more rate dependent.
Speaker Change: Well I think I think in residential.
Speaker Change: Higher rates have already had the impact is as you can see from new home construction, which is the primary consumer of our product it hasn't been it hasn't been hurt nearly to the extent that overall home sales have been it's been hurt by higher rates. So I think.
Speaker Change: I think on the new construction side that.
Speaker Change: Trauma has run its course and that we should see.
Speaker Change: You should see.
Speaker Change: Reasonable market conditions going forward, we may not be building 2 million homes, a year, but it's not $1 2 million either so.
Speaker Change: It's run its course and really the issue for us in that market over the last few months has been more margin compression than it has been volumes volumes have recovered pretty nicely commercial.
Speaker Change: Commercial construction has undoubtedly been affected by higher interest rates, particularly spec.
Speculative projects that are not undertaken by owners I think that that interest rates have been high enough and the change has been has been dramatic enough to make some projects on economic.
Speaker Change: And we see many of that is coming back to market for re quotes time and time again.
Speaker Change: Just as an.
Speaker Change: Investors assess.
Speaker Change: Building projects, but it has been that market has been adversely affected.
Speaker Change: Certainly if interest rates were to to the game coming down I think it would have a beneficial impact there.
Speaker Change: Alright, Thank you gentlemen.
Speaker Change: Thank you Joseph.
Speaker Change: Thank you we have no further questions participants.
Speaker Change: Hi, Pedro.
Pedro: A final remark.
Pedro: Okay. Thank you and we appreciate your interest in the company.
Pedro: Look forward to our next call, where we fully expect to.
Pedro: Report much improved results. Thank you.
Pedro: This concludes today's call. Thank you for your participation you may now disconnect your lines.
Pedro: [music].