Insteel Industries, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the InSteel Industries first quarter 2020 conference call. At this time, all participants' lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star, then 0 to reach an operator. I'd now like to hand the conference over to your speaker today, Mr. H. Woltz, President and CEO. Please go ahead, sir.

Thank you. Good morning, and thank you for your interest in InSteel. Welcome to our first quarter 2020 earnings call, which will be conducted by Mike Gasmarian, our Vice President, CFO, and Treasurer, and me. Before we begin, let me remind you that some of the comments made on today's call are considered to be forward-looking statements which are subject to various risks and uncertainties, that could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. All forward-looking statements are based on our current expectations and information that is currently available. We do not assume any obligation to update these statements in the future to reflect the occurrence of anticipated or unanticipated events or new information. I'll now turn the call over to Mike to review the first quarter financial results and outlook for our construction markets, and then I'll follow up and comment more on business conditions.

Thank you, H, and good morning to everyone joining us on the call. As we reported earlier today, the first quarter of fiscal 2020 proved to be another challenging period for InSteel as we continue to contend with low-priced import competition and the consumption of higher-cost inventory. Earnings per share for the quarter dropped to 3 cents from 19 cents a year ago, excluding last year's 2-cent-a-share non-recurring gain related to the disposition of fixed assets. As we've conveyed on previous calls, our import competition is centered and certain of our PC strand and standard welded wire reinforcement markets, where pricing pressure has intensified in the wake of the Section 232 tariffs on imported steel. The tariffs, which apply to imports of our primary raw material, hot-rolled steel wire rod, but not to our finished products, have driven domestic prices for wire rod substantially higher than global market levels, and foreign competitors have leveraged this cost advantage to expand their market share. Weather conditions for the corridor were generally more conducive for construction activity as compared to a year ago, when the near-record precipitation across our largest markets resulted in construction delays and deferred orders. Shipments for the quarter were up 11.7% from last year, but down 10.9% sequentially from Q4, reflecting the usual seasonal slowdown in demand. Average selling prices continued to decline during the quarter, falling another 3.4% from Q4, reflecting the impact of the import-related pricing pressure, together with domestic competitors' efforts to backfill lost volume as well as retain existing business. The price erosion was more pronounced in markets subject to import competition, which represented around 30% of our sales for the quarter, with ASPs for these markets dropping 8.3% sequentially from Q4 as compared to only a 2.1% decrease for the rest of our business. Gross profit for the quarter fell $4.7 million from a year ago, and gross margin narrowed 410 basis points to 6.4%, primarily due to lower spreads between ASPs and raw material costs. While on a sequential basis, gross profit rose $2.4 million from the fourth quarter and gross margin widened 300 basis points, driven by higher spreads relative to the depressed levels of Q4, which represented the low point over the past year. As I alluded to earlier, the spread compression we experienced during fiscal 2019 and in the first quarter of this year has been compounded by the continued consumption of higher cost inventory in a declining price environment. Considering that we're typically carrying around three months of inventory valued on a FIFO basis, our spreads and margins have been adversely affected by the matching of higher cost inventory purchased in prior periods with lower ASPs for our products. Fortunately, it appears this unfavorable trend could be coming to an end in view of the growing indications that steel prices may have reached a bottom, with scrap prices rising now for three straight months by a total of $80 a ton since October. Our wire rod suppliers have followed suit, announcing price increases in November, December, and January, and we've rolled out an initial increase across most of our product lines that went into effect earlier this month. Should these increases mark the beginning of an upward trend or an eventual leveling out of prices, it would eliminate a significant headwind that has been weighing on our results since early last year. SG&A expense for the quarter fell $0.8 million to $5.7 million from $6.5 million, or 5.9% of net sales from 6.3 last year, largely due to a favorable $0.9 million year-over-year change in the cash surrender value of life insurance policies, which increased $0.3 million this year as compared to a half million decrease last year. Our effective tax rate for the quarter fell to 22.7% from 23.5% last year, primarily due to changes in permanent book tax differences. Looking ahead to the remainder of the year, we expect our effective rate will run around 23%, subject to the level of pre-tax earnings, book tax differences, and the other assumptions and estimates entering into our tax provision calculation. Moving to the balance sheet and cash flow statements, Cash flow from operations for the quarter improved to $29.6 million, largely due to a $24.6 million decrease in working capital. The reduction in working capital was driven by an increase in payables resulting from higher raw material purchases in the latter part of the quarter, a reduction in receivables reflecting the usual seasonal slowdown in sales, and a reduction in inventories due to lower average unit carrying values. Based on our sales forecast for Q2, our quarter-end inventories represented 2.9 months of shipments compared with 3.1 months at the end of the fourth quarter. Our ending inventories were valued at an average unit cost that was lower than the beginning average in the amount reflected in Q1 cost of sales, which will favorably impact our spreads and margins during the second quarter. We ended the quarter with $67.1 million of cash on hand are just under $3.50 a share, and no borrowing is outstanding on our $100 million revolving credit facility, providing us with ample financial flexibility and the ability to pursue any attractive growth opportunities that may develop. In allocating our cash flow and managing the cyclical nature of our business, we continue to focus on three objectives, reinvesting in the business for growth and to improve our costs and productivity, maintaining adequate financial strength and flexibility, and returning capital to our shareholders in a disciplined manner. Going forward, we will continue to balance these objectives in deploying capital and any excess cash balances. As we move into the second quarter of fiscal 2020, our market outlook for the remainder of the year remains positive with higher growth in the infrastructure segment expected to offset further moderation and non-res activity. Through November, public construction spending was up 6.8% from the prior year, with highway and street construction, one of the largest end-use applications for our products, rising 8.8%. We expect this favorable trend will continue in 2020, driven primarily by higher state and local spending supported by fuel tax increases and the availability of low-cost debt financing and other ballot measures, together with the improved fiscal positions of states and municipalities. Following two short-term continuing resolutions, on December 20th, a federal transportation spending bill for fiscal 2020 was enacted, which eliminates the cloud of uncertainty that it threatened to curtail project commitments and allow states to receive their full-year spending authority. The new spending package increases federal highway funding another 2.4% up to the level authorized under the FAST Act and provides for an additional $2.2 billion of supplemental funding from the general fund. This marks the first time in five years that state DOTs will have their full spending authority prior to January 1st and provides a clear path for Congress to pursue a successor highway funding bill to the FAST Act, which expires at the end of fiscal 2020. In its annual forecast for 2020, the ARTBA is projecting at least 5% growth in the U.S. transportation infrastructure market after adjusting for project costs and inflation, which reflects 6% growth in the real value of public highway, street, and related construction investment by state DOTs and local governments, the largest market sector, and 3% growth in bridge and tunnel construction. After remaining relatively flat through most of the year, the architectural billings and Dodge Momentum Indexes, both leading indicators for non-residential building construction, have reflected recent improvement with the ABI rising to 51.9 in November, the second straight month of modest growth, and the DMI increasing 14.9% over the past four months. I will now turn the call back over to Age.