Insteel Industries, Inc.

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

Good morning. Thank you for your interest in InSteel, and welcome to our second quarter 2020 earnings call, which will be conducted by Mike Gasmerian, 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 our second quarter financial results and market outlook, then I'll follow up to comment more on business conditions and other recent developments.

Thank you, H., and good morning to everyone joining us on the call. As we reported earlier today, despite continued margin pressure in our market subject to import competition, InSeal posted strong results for the second quarter of fiscal 2020. Excluding the non-recurring charges and gain that were referenced in our release, net earnings rose to 29 cents a share from a penny a share last year. The earnings improvement for the quarter was driven by wider spreads between selling prices and raw material costs. and strengthening demand for our concrete reinforcing products. Shipments for the quarter rose 19.2 percent from last year and 19.7 percent sequentially from Q1, rising to their highest level since the third quarter of 2018 and the third highest in our history for the second quarter. The strong shipping performance was driven by increased construction activity across most of our markets supported by the generally more favorable weather conditions this year. Average selling prices fell sequentially for the fifth straight quarter, but to a lesser extent, declining 1.2% from Q1. The pricing pressure continued to be more severe in certain of our PC strand and standard welded wire reinforcement markets susceptible to import competition, which represented around 25% of our overall sales for the quarter. ASPs for these markets dropped 22 percent year-over-year, which was double the 11 percent reduction for the remainder of our business. As we've conveyed on previous calls, import competition in these markets has intensified in the wake of the Section 232 tariffs on imported steel, which apply to imports of our primary raw material, hot-rolled steel wire rods, but not to our finished products. The program has incentivized foreign competitors ramp up their downstream exports and aggressively undersell U.S. producers, resulting in material injury to the domestic PC strand industry. Gross profit for the quarter increased $8.3 million from a year ago, and gross margin widened 700 basis points at 13.3% from 6.3%, primarily due to the higher spread and, to a lesser extent, the increase in shipments. While on a sequential basis, gross profit rose $9 million from the first quarter and gross margin widened 690 basis points driven by the same factors together with lower manufacturing costs. There continued to be a wide disparity in the relative profitability of our plants during the quarter with the location supplying markets subject to import competition significantly underperforming our other facilities. If you roll up the plans that have been more adversely affected by imports, their combined gross profit amounted to 0.7 million for a gross margin of only 2.3% on around a quarter of our sales as compared to 14.6 million of gross profit for a 17.2% gross margin for the remainder of our business. SG&A expense for the quarter rose 3 million to 9.6 million from 6.6 million or 8.4% in net sales from 5.9% last year. The sharp increase is primarily driven by an unfavorable 1.8 million year-over-year change in the cash surrender value of life insurance policies due to the downturn in the financial markets with the remainder largely from increases in incentive and stock-based compensation and legal expense. Our effective tax rate through the first half of the year fell to 21.4% from 23.9 percent last year due to a 0.2 million benefit recorded in the quarter related to the NOL carryback provisions of the CARES Act. Excluding this benefit, our effective rate for the first half of the year would have been 24.4 percent as compared to last year's 23.9 percent. Looking ahead to the remainder of the year, we expect our effective rate will run around 23 percent 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 statement, operating activities used $3 million of cash for the quarter due to a $13.8 million build in working capital driven by increases in receivables and, to a much lesser extent, inventories on the higher sales. Based on our sales forecast for Q3, our quarter end inventories represented two and a half months of shipments compared with 2.9 months at the end of the first quarter. And on an overall basis, average unit carrying values are relatively close to the amounts reflected in Q2 cost of sales. After funding the STRANDTEC acquisition, we ended the quarter with $40.4 million of cash on hand, or over $2 a share, and no borrowings outstanding on our $100 million revolving credit facility, providing us with ample financial flexibility, and the ability to pursue additional growth opportunities that may develop in this challenging environment. In allocating our cash flow and managing the cyclical nature of our business, we remain focused 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. As we look ahead to the second half of the fiscal year, our visibility is limited due to the heightened uncertainty resulting from the COVID-19 outbreak and the actions taken by governmental authorities to control the spread of the virus. With our business deemed to be critical infrastructure by the Department of Homeland Security, the pandemic has had a minimal effect on InSteel thus far, as we have not experienced any disruptions in our operations and our customers have remained busy working through backlogs. Going forward, however, its eventual impact will be determined based on future developments that are highly uncertain depending on the severity and duration of the outbreak and the effectiveness of the actions that are taken to contain or mitigate it. In view of our debt-free balance sheet, our high liquidity and undrawn credit facility, and our highly variable cost structure, We believe that we are ideally positioned to navigate through these challenges and remain hopeful they could be a catalyst for further growth opportunities to become available. I will now turn the call back over to H. Thank you, Mike.