Q4 2024 Insteel Industries Inc Earnings Call
Okay.
Speaker Change: Good morning, and thank you for joining us for the instill industries fourth quarter 'twenty 'twenty four earnings call. My name is currently and I'll be your coordinator for today, because that's registered a question during the call you can do so by pressing star one telephone keypad and sort of mucus. That's a line of questioning it'll be stuff with let's see.
I'd like to hand, it to your host Mr. H Woltz <unk> see us instill industry used to begin the floor is yours.
Speaker Change: Thank you Carla and good morning. Thank you for your interest in and steel and welcome to our fourth quarter 2020 conference call, which will be conducted by Scott Your fruity, our vice President CFO and Treasurer and me.
Speaker Change: We began let me remind you that some of our comments made on 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.
Speaker Change: Risk factors are described in our periodic filings with the SEC.
Speaker Change: Despite haven't seen signs of an upturn in market activity. During Q3 during Q4, we experienced a continuation of sluggish market conditions, resulting in weak order backlogs it contributed to inefficiencies at our plants.
Speaker Change: We continue to believe that patience is our only viable strategy since we're unable to create demand and competitors, who believe that reducing prices will stimulate demand or result in market share gains are simply mistaken.
Speaker Change: We've noted that market lethargy is not limited to reinforcing markets following weaker forecast for producers of summit steel aggregates and other construction materials.
Speaker Change: We look forward to obtaining higher operating rates lower costs and improved revenue and margins that we believe will be supported by future market conditions I'm going to turn the call over to Scott to comment on our financial results for the quarter and the macro environment and then I'll pick it up to discuss our business outlook.
Scott: Thank you H and good morning to everyone joining us today as highlighted in our press release earlier, our fourth quarter financial performance for fiscal 2024 reflects the ongoing challenges of tighter spreads between selling prices and raw material costs relative to the prior year quarter. As a result net earnings for the period drop to four seven.
Scott: Our <unk> per share compared to $5 6 million or 29 cents per share a year ago.
Scott: Net sales for the quarter fell by 14, 7% to $134 3 million, primarily driven by 12, 9% decline in average selling prices.
Scott: Actual basis average selling prices fell by two 8% as we've highlighted in previous calls Acs were again adversely impacted by ongoing competitive pricing pressures within our welded wire reinforcing market and the growing influence of low priced PC strand imports.
Scott: Despite experiencing a modest year over year improvement in shipping volume during the third quarter shipment fell slightly in the current period declined two 1% on a sequential basis shipments were down five 2%.
Scott: The decrease was driven by a combination of weak market conditions within our construction end markets.
Scott: Packaged oil price PC strand imports and adverse weather conditions in certain of our markets during the quarter.
Scott: Gross profit for the fourth quarter fell $1 7 million from a year ago to $12 3 million. However, gross margin decreased 20 basis points to nine 1%, primarily due to lower unit conversion costs and higher production levels, partially offset by lower spreads.
Scott: On a sequential basis gross profit decreased $3 1 million from the third quarter and gross margin declined by 150 basis points due to lower spreads and decreased volumes.
Scott: Unit conversion cost for the fourth quarter improved year over year as we continue to align operating schedules with current market conditions and further leverage our recent capital investments. However, as I indicated during our third quarter call spreads have remained under pressure in the current period as decline in selling prices once again exceeded the reduction in.
Scott: Our average inventory carrying values.
Scott: Hits in the first quarter of fiscal 2025, we expect that profit margin will continue to face short term pressure due to the ongoing competitive landscape that patent selling prices compounded by the anticipated seasonal slowdown in demand.
Scott: SG&A expense for the quarter decreased to $7 5 million or five 6% of net sales from $8 1 million or five 2% of net sales last year.
Scott: The decrease primarily resulted from a favorable relative year over year change in the cash surrender value of life insurance policies combined with lower compensation costs under our return on capital based incentive plan, which was negatively impacted by the weak or full year results.
Our effective tax rate for the fourth quarter.
Scott: But largely unchanged at 23% up slightly from 22, 5% last year.
Scott: Looking ahead to fiscal 2025, we expect our effective rate remained steady at around 23% subject to the level of pre tax earnings book tax differences and the other assumptions and estimates that controls our tax provision calculation.
Scott: Moving to the cash flow statement of balance sheet cash flow from operations operations for the quarter declined $16 2 million from $38 6 million last year due to a reduction in the relative change in net working capital.
Scott: Capital providers to $5 3 million cash in the fourth quarter, driven mostly by a $2 $9 million reduction in receivables, reflecting the decline in average selling prices.
Scott: Our inventory position at the end of the quarter represented three months of shipments on a forward looking basis calculated off of forecasted Q1 shipments.
Scott: Compared with $2 five months at the end of the third quarter.
It's worth noting that our inventories at the end of the fourth quarter were valued in the average unit cost lower than our fourth quarter cost of sales.
Scott: Expect it to have a favorable impact on spreads and margins in the first quarter as a lower cost material is consumed and reflected in cost of sales provided that average selling prices did not decrease to a greater extent.
Scott: We incurred $1 $7 million of capital expenditures in the fourth quarter for a total of $19 1 million for the year, which is down $11 6 million from last year.
Scott: Looking ahead to fiscal 2025 weeks that capital expenditures totaled $22 million eight to provide more detail on this topic in his remarks.
Scott: Along with our ongoing efforts to invest in the business to drive both growth and cost reduction our strong financial position allowed us to return $52 8 million capital to our shareholders in fiscal 2024 through a combination of dividends and share buybacks. This included our highest ever special dividend of $2 <unk> per share alongside our fourth quarter.
Scott: The dividend, marking the fourth consecutive year that we just paid a special dividend of at least $1 50 per share. Furthermore, we repurchase approximately 58000 shares of our common equity.
Scott: During fiscal 2024 equivalent to $1 $8 million through our share buyback program.
Scott: From a liquidity perspective, we ended the quarter with $111 $5 million of cash on hand or debt free with no borrowings outstanding on our $100 million revolving credit facility.
Scott: As we enter fiscal 2025, we anticipate a gradual improvement in the business outlook within our construction end markets.
Scott: Expectations based on the potential for additional interest rate cuts by the federal reserve, which is projected to stimulate demand. However, it's important to note that the current macro indicators for our construction markets present, a somewhat mixed picture.
Scott: The most recent reports for the architectural billings and Dodge momentum index as leading indicators for nonresidential building construction.
Scott: TV to imply weaker business conditions going forward.
Scott: The Dodge momentum index, which tracks nonresidential building projects going into planning decreased four 2% September down to $208 six.
Scott: However, if the index is still 21% higher than September 2023.
Scott: It's noted that the decline in September was driven by drop within the commercial construction segment, driven largely by a moderation of data center activity disliked if.
Scott: Suggest that nonresidential activity is expected to increase at 2025 progression driven by the federal reserve rate cuts.
Scott: In August the Abi continue to remain in negative territory with a score of $45 seven and you score below 50 indicates a decline in business conditions. However, it was a positive sign as firms reported an increase in inquiries for future projects, indicating a potential shift in momentum.
Scott: We are also encouraged by the most recent construction spending data, which continues to show strength data from the U S Department of Commerce shows that for the first eight months of the calendar year total construction spending on a seasonally adjusted annual basis.
Scott: Four 1% from August of last year, nonresidential construction spending sort of five 2% increase with public Highway Street construction one of the major end uses for our products.
Scott: <unk> seen a three 5% increase however, while construction spending remains high you would ship U S cement shipments another metric we monitor continue.
Scott: <unk> continues to lag behind 2023 levels with shipments decreasing by two 9% in July and five 2% in the first seven months of the calendar year.
Speaker Change: This concludes my prepared remarks, I will now turn the call back over to H.
H: Thank you Scott as we commented last quarter the operating environment. During fiscal 2024 was difficult 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 normalcy.
H: Seasonal downturn in construction activity.
H: The result of course with lower operating rates at our plants price competition from competitors experiencing the same weak conditions in steel and inadequate utilization of the capital investments that we've made over the past few years.
H: As we look forward to 2025, we expect to see positive trends in nonresidential construction, resulting from the downward trajectory in interest rates, where their demand for our products recovers to acceptable levels. However is unknowable.
Speaker Change: Scott mentioned and as we have stated in the last couple of earnings calls were increasingly affected by low priced imported PC strand producers in a variety of countries that appear to be circumventing. The section 232 tariff on hot rolled steel I found stream.
Speaker Change: Continuing the trend that began last year. The average unit value of imported PC strand is lower than the domestic market price for wire rod the raw material from which PC strand is produced.
Speaker Change: The industry is carefully scrutinizing strand imports and we will pursue antidumping and countervailing duty cases as may be justified. We are also working with the administration to resolve the section 232 tariff disconnect that resulted in wire rod being subject to the tariff and PC strand being.
Speaker Change: Uncovered by the tariff we believe the administration understands the illogic of the current condition that is actually arent hot roll of producers that worthy intended beneficiaries of the section 232 tariff for these reasons. We are optimistic that a resolution will be forthcoming although were real.
Speaker Change: Think about the influence of a presidential election and its in the influence it has all the process of governing.
Speaker Change: We're optimistic about the impact on our markets and the infrastructure investment and jobs Act. Although at this point, it's difficult to point to specific projects that have affected demand with respect I J J the secretary of transportation as acknowledged delays of multiple years between appropriate.
Speaker Change: <unk> and increased demand for construction services and materials.
Speaker Change: Administration has also been clear that abuse I J H is a new way of funding infrastructure investment and not as a stimulus program in other words. It does not appear to surprise the administration that the impact of the legislation on infrastructure spending thus far is muted.
Speaker Change: Meanwhile of course inflation is impacting project cost and jeopardizing the viability of some projects. Despite these obstacles, we believe that a J a bonds will ultimately be allocated to product projects and spent as intended with the beneficial impact on our industry.
Speaker Change: Turning to Capex, we ended fiscal 2024 at $19 1 million with a forecast of $22 million for fiscal 2025 that includes 2024 carryover of $6 1 million.
Speaker Change: On an ongoing basis, we would expect capex to range closer to DNA and to be elevated in years, when we elect to expand capacity or incorporate new technology into our facilities through equipment replacements.
Speaker Change: The investments that we've made in state of the art technology will expand our product capabilities and favorably impact our cash cost of production.
Speaker Change: We believe the company's failing to take advantage of significant technological innovations will become increasingly uncompetitive.
Speaker Change: It's unfortunate that some of our recent investments have come on line during a period of market weakness that has prevented full deployment of our new resources, we shouldn't that however that we undertake new projects based on our long term view of their potential impact on the business and we do not try to time markets.
Speaker Change: As you know in steel continues to be debt free and has substantial flexibility to make decisions for the long term best interest of its customers and its shareholders.
Speaker Change: Looking ahead, we are aware of the substantial risks related to future performance of the U S economy, and we're monitoring the environment in any event, we are well positioned to pursue actions to maximize shipments and optimize our costs and to pursue attractive growth opportunities both organic and through acquisition.
Speaker Change: This concludes our prepared remarks, and we'll now take your questions Karli would you. Please explain the procedure for asking questions.
Speaker Change: Yeah.
Karli: Thank you, but now let Switzerland lines for Q&A, if you would like to ask a question. Please press star followed by one telephone keypad.
Karli: I guess, that's my question queue. Please press star two.
Speaker Change: Our first question comes from Julio Romero with Sidoti <unk> Company.
Karli: Your line is not likely.
Julio Romero: Thanks, Hey, good morning agent Scott.
Speaker Change: Good morning.
Julio Romero: Hey, maybe first off I know you folks are located in North Carolina I Hope you all are safe.
Julio Romero: Maybe to start on a demand trend in the quarter, if you could talk about it.
Julio Romero: The month to month cadence of shipments in July August and September.
Julio Romero: The first part of the quarter was lower and we finished.
Julio Romero: September year over year pretty much even.
Julio Romero: Okay, Okay, and what's your sense of maybe the.
Julio Romero: The impacts.
Julio Romero: On volumes in the quarter I know you listed a couple of factors the adverse weather core demand in the low priced PC strand impact any way to kind of.
Julio Romero: Rank those those impacts.
I don't know, how you quantify julio but but.
Speaker Change: We lost hundreds of production hours and shipping hours due to weather events, including hurricanes and unnamed tropical events.
Speaker Change: And of course, if we lost that time, our customers lost.
Speaker Change: Well yeah.
Speaker Change: And.
Speaker Change: I would tell you business is probably better than our shipments reflect.
Speaker Change: There's still a lot of optimism among our customers and end.
Speaker Change: They are quoting a lot of work so so while while we are in a period of softness in our.
Speaker Change: Our market.
Speaker Change: It's not the end of the world and and I think we're positioned to see this market bounce back in 2020 or at least not fall off the edge of the table and get worse.
Speaker Change: Understood.
Speaker Change: I understand volumes were flat year over year.
Speaker Change: As you said.
Speaker Change: You know maybe the market doesn't it doesn't get worse at 25, but maybe what's your sense of.
Speaker Change: Or are there kind of a gradual improvement in business conditions, Iga monies et cetera can lead to volume growth in in fiscal 'twenty five.
Speaker Change: Well, we're notoriously poor forecasters, but I would tell you that when weight that our annual snapshot of volumes for 2025.
Speaker Change: It is it is encouraging not discouraging so so I think that.
Speaker Change: But we'll see.
Speaker Change: Probably a gradual increase in activity in our markets over 2025, but I don't certainly don't expect any explosion of volumes, but.
Speaker Change: But I think the fundamentals are pretty solid.
Got it fundamental solid and kind of improving.
Speaker Change: And that trajectory I guess.
Speaker Change: Yeah.
Speaker Change: Sure.
Speaker Change: Okay and then just last one for me is if you could give us a quick refresher on where you guys are with kind of conversion of rebar users to your engineered structural mesh product.
Speaker Change: Yeah.
Speaker Change: We're plowing ahead full steam.
Speaker Change: We have created substantial new infrastructure within the company to promote and sell the product.
Our view is that that.
Speaker Change: Our legacy.
Speaker Change: Our legacy systems.
Legacy infrastructure is really not appropriate to to solicit and in developed markets that are project related.
Speaker Change: But but.
Speaker Change: It's an uphill battle and some in some respect, but we are fully committed and making good progress.
Speaker Change: Very good thanks for taking the questions and I'll hop back into queue.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you very much just as a reminder, if you put led to ask a question. Please press star followed by one telephone keypad. That's for me Josef that line of questioning is stopped by two.
Speaker Change: Our next question comes from Tyson Bauer of KC capital. Your line is now open.
Speaker Change: Good morning, gentlemen.
Speaker Change: Good morning, Susan.
Speaker Change: Uh huh.
Tyson Bauer: When we talk about the import price impacts that has been ongoing and you've had different scenarios in the past where that's affected you you've had some relief from certain countries and then we kind of fall back into that same trap.
Speaker Change: Oh.
Speaker Change: What are there any.
Speaker Change: Leverage you can pull outside of trade restrictions that allow you to lessen that impact.
Speaker Change: Or is it really reliant on those trade restrictions to be able to get that piece of especially the PC strand market more favorable for you.
Speaker Change: Is there anything like buy America.
Speaker Change: The other programs that can help that's outside of like actual.
Speaker Change: I'd restriction.
Speaker Change: Well, let me start by saying first that this is nothing.
Speaker Change: There is a segment of the PC strand market that has been impacted by imports forever.
Speaker Change: When we got into the business at 1993.
Speaker Change: Daniel today.
Speaker Change: In terms of our activity and it is a segment of the market that is affected by this it is not the entire market.
Speaker Change: And when we talk about our activity in and trade in the trade related space.
Speaker Change: <unk> is pursuing.
Speaker Change: Countries are importers of record who are violating U S trade laws, it's not a matter of are looking for restrictions against legitimate foreign competition. This is a matter of.
Speaker Change: Countries and companies that are in that are violating U S trade laws, we will pursue.
Speaker Change: Now the thing Thats different today from any other time since I've been in this business is the section 232 situation that we are facing where our raw material is covered by a 25% import tariff.
Speaker Change: The finished product is not covered by the tariff.
Speaker Change: Matt.
Speaker Change: This is an opportunity for arbitrage among among our offshore competitors that they are well aware of and they're taking advantage of our I would also note that it that it's severely undermines the intention of the administration and implementing section two.
Speaker Change: 32 tariffs in the first place.
Speaker Change: Their intent was to help the hot rolled steel producers, but if the hot rolled steel producers can't sell in steel wire rod because we're losing business to offshore competitors than the hot rolled producers are not really helped at all.
Speaker Change: And.
Speaker Change: We warned the Trump administration of this.
Speaker Change: This issue when they were considering section 232, but but our our warnings were not eat it.
Speaker Change: Now, we're working with the buyer and administration in cooperation with the hot rolled producers to make the point that this is working.
Speaker Change: So I'm confident that we will ultimately.
Speaker Change: Well ultimately reach a favorable resolution on this but nothing happens quickly in Washington, and we work hard on it we work hard on it for a long time.
Speaker Change: I would tell you we're close but we're not there.
Speaker Change: Yeah.
Speaker Change: But there is a United front within the steel industry, whether it's the Cleveland cliffs of the world or the new course or yourselves and other downstream guys.
Speaker Change: That are pushing for these activities to correct the 232 loophole.
Speaker Change: Yeah practically every steel vendor we have has supported US we have a letter from the congressional steel caucus supporting goes we have a letter from the American Iron and Steel Institute supporting those one from the steel manufacturers Association supporting us.
Speaker Change: And we have various senators who have weighed in a letter to the department of Commerce on the logic of the current situation and the need to fix it so so.
Speaker Change: We have a lot of firepower behind this but it is an election year and yeah. It is Washington, and just nothing happens fast.
Speaker Change: Okay.
Speaker Change: H given your vast experience going through cycles going through lowering interest rate environment versus rising interest rate environment.
Speaker Change: What has been your experience in the timelines to see actual results our improved results.
One we're in that mode of lowering interest rates do we need to see a pause before people take activity.
Speaker Change: Heart or while they are lowering people are just waiting for the next drop from the fed whether it's 25 50 basis points before they pull the trigger on a project.
Speaker Change: I think that's it's a great question and I would tell you personally my view is that interest rates have affected the projects that are speculative in nature, but probably not so much projects better that are are for owners.
Speaker Change: In my own experience.
Speaker Change: There is an interest rate of six or 7%. It is is not high enough so that it it it.
Speaker Change: And what is otherwise a good project into a bad project. So now if you're a speculator and if you're if you're building on spec than than the situations differently, but I don't think that interest rates are so high.
Speaker Change: That they have discouraged.
Speaker Change: The owners from best thing is they need to invest to build their businesses and and what happens when interest rates begin to fall as a really good question do people sit back and do they wait for the next 25 basis points or 50 basis points or do they pull the trigger.
Speaker Change: My guess is first they wait.
Speaker Change: And then you you get a set up reduction and I think that it probably.
Speaker Change: It probably loosened up some capital that will flow into projects.
Speaker Change: Okay.
Speaker Change: You talked about some of the impacts that you had from the hurricanes in the southeast are.
Speaker Change: Out of that on the back end, sometimes you get some favorable future opportunities.
Speaker Change: One of those that has been ongoing or let's say the concrete poles.
Speaker Change: How do they hold up in these last two hurricanes I mean is that something that gains acceleration, although be a small.
Speaker Change: There's a little niche part of your business.
Speaker Change: Do you see opportunities like that are rising as these storms increased frequency.
Speaker Change: Well.
Speaker Change: First I'm not really sure that they are increasing in frequency Tyson, but nevertheless, the damage that was brought about by the recent storms is stimulated for demand of our products with.
Speaker Change: With respect to concrete poles. It is an accepted applications and concrete poles are replacing wood poles.
Speaker Change: In all kinds of geographies, but particularly in storm affected zones, and our customers who produce poles are really busy and getting busier.
Speaker Change: The same is true for piping Colbert producers.
Speaker Change: Do you have all these roads that have washed out there is it is very stimulative to demand of those products. So yeah, the hurricanes and storms.
Speaker Change: What will create demand, but as you can appreciate first you have to clean it up and then and then you see some new demand.
Speaker Change: Okay and last question for me.
Speaker Change: Cash balances roughly a dollar a share less than it was say a year ago. When you did implement that to 50, obviously those decisions are yet to be made by the board, but does that imply a comfort level of at least the continuation of that dollar 50 minimum.
Speaker Change: Or greater as you make those decisions if we look at what you've done in the recent history versus where you stand today with your balance sheet.
Speaker Change: Well let.
Speaker Change: Let me let me answer.
Speaker Change: Question that you didn't really ask but that is just a repeat that that our capital allocation.
Speaker Change: Our attitude is that we first of all to deploy capital to grow our business and we'll do that at every opportunity that we can and if we determine that we have cash beyond the needs.
Speaker Change: Growing the business that we will return it to shareholders either through a special or through share repurchases and still this year from a share repurchase standpoint, there theyre all patents.
Speaker Change: In reality, the practicalities of that that makes it difficult for us to to deploy meaningful amounts of capital into share repurchases. So so I didn't answer your question, but I told you the way about the way we think of this this issue.
Speaker Change: Alright, Thank you gentlemen.
Speaker Change: Thank you.
Speaker Change: Thank you. We currently have no further questions. So I'd like to hand back to Mr. H woltz for any closing remarks.
Speaker Change: Okay, well, we appreciate your interest in the company. We thank you for your time. This morning, and we look forward to talking to you next quarter.
Speaker Change: Thank you.
Speaker Change: As we conclude today's call. We thank everyone for joining you may now disconnect your lines.
Speaker Change: Yeah.
Speaker Change: [music].