Insteel Industries, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the InSteel Industries third quarter 2020 conference call. At this time, all 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 will 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. Today's call is being hosted by H. Waltz President and Chief Executive Officer, and Mark Carano, Vice President, CFO, and Treasurer. I would now like to hand the conference over to your first speaker today, Mr. H. Waltz. Thank you. Please go ahead, sir.

Good morning. Thank you for your interest in InSteel, and welcome to our third quarter 2020 earnings call, which will be conducted by Mark Carano, our Vice President, CFO, and Treasurer, and me. This is Mark's first earnings call with the company, and we welcome him to the InSteel team. Before we begin today, I'd like those on the call to be aware that Mike Gazmarian, who faithfully and competently served as InSteel's CFO for 25 years, will leave the company effective July 31st. On behalf of our entire management team and the board of directors, I would like to thank Mike for his performance orientation, leadership, and integrity that were instrumental in transforming InSteel into the premier competitor in its markets. He was strongly focused on making our company a good place to work and shareholder-friendly for investors. Mike, we wish you the very best going forward. Pertaining to the call today, 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 current expectations and information that's 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 Mark to review our third quarter financial results. Then I'll follow up to comment more on business conditions and other recent developments.

Great. Thank you, H. And good morning to everyone joining us on the call. I'm pleased to be here participating in my first earnings call with the CFO of InSeal. As we reported earlier today, the recovery in spreads between selling prices and raw materials from the depressed levels of a year ago was the key driver in our strong results for the third quarter of fiscal 2020. Additionally, our performance also benefited from strong shipment growth relative to the prior year period. Excluding the non-recurring charges and gain that were referenced in our release, net earnings rose to $0.30 a share from $0.11 a share last year. Shipments for the quarter rose 9.5% from last year and 7.4% sequentially from Q2, which represented the second highest quarter of shipments in the last 10 years, a level that was only exceeded in the third quarter of 2016. The strong shipping performance was driven by increased construction activity across most of our markets, the benefit of incremental tonnage from the Strandtec manufacturing acquisition, and a return to generally more favorable weather conditions for construction activities this year as compared to the prior period. Partially offsetting the benefit of these increased shipments, though, was the impact of declining average selling prices, which fell sequentially for the sixth straight quarter, declining 11.7% from last year and 1.2% sequentially from Q2. And in those markets susceptible to import competition, the pricing pressure was more pronounced. In certain of our PC strand and standard welded wire reinforcement markets susceptible to import competition, which represents about 30% of our overall sales for the quarter, average selling prices in these markets declined 20% year over year, which was more than double the 8% decline for the remainder of our business. As we've conveyed on previous calls, low-priced import competition in the PC strand and standard welded wire markets, respectively, remains intense and continues to have a negative impact on our average selling prices. To level the playing field in those markets, we are aggressively pursuing actions with the U.S. government and international trade authorities and remain optimistic that our efforts will be successful in remedying these market inequities through duties or other mechanisms. Gross profit for the quarter increased $6.6 million to $14.8 million from a year ago, and gross margin widened 560 basis points the 12.1% from 6.5%, primarily due to the wider spreads and, to a lesser extent, the increase in shipments. While on a sequential basis, gross profit decreased $477,000 from the second quarter and gross margin declined 117 basis points. Spreads in the quarter expanded to more historically normal levels from a year ago as we benefited from the consumption of low-priced rod inventory that exceeded the negative impact from a decline in average selling prices from the prior quarter. Current spread levels over the last two fiscal quarters have been consistently above these historically depressed levels experienced during our first quarter of fiscal 2020 and the last two quarters of fiscal 2019. Scrap pricing trends, which can affect our raw material comps, remain under downward pressure as signaled by the benchmark Chicago Shredded Index declining from $297 per ton in January 2020 to $235 per ton in July 2020. SG&A expense for the quarter rose $1.2 million to $6.7 million, or 5.5% of net sales from 4.4% last year. The increase was primarily driven by accruals for incentive comp and legal costs, that were partially offset by a favorable $589,000 year-over-year change in the cash surrender value of life insurance policies due to the rebound in the financial markets over the last few months. Our effective tax rate through the first nine months of the year decreased to 21.7% from 22.4% last year due to a $224,000 benefit recorded in the quarter related to the NOL carryback provisions of the CARES Act. Excluding this benefit, our effective tax rate for the first nine months of the year would have been 23.2% as compared to last year's 22.4%. 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 other assumptions and estimates factored into our tax provision calculation. Moving to the balance sheet and cash flow statement, Operating activities provided $17.9 million of cash for the quarter due to a combination of earnings, and an $8.4 million reduction in working capital driven largely by the timing of accounts payable related to raw material purchases. Based on our sales forecast for Q4, our quarter-end inventories represented 2.4 months of shipments compared with 2.5 months at the end of the second quarter, and on an overall basis, average unit carrying value is relatively close to the amounts reflected in Q3 cost of sales. We concluded the quarter with $61.4 million of cash on hand, or over $3 a share, and no borrowings outstanding on our $100 million revolving credit facility, for which we have almost 100% availability today. As we look ahead to the fourth quarter of this fiscal year, we expect our markets to be strong as customers remain busy working through their backlogs. but our visibility in the fiscal 2021 remains limited due to the sustained uncertainty resulting from the COVID-19 outbreak. Fortunately, our financial flexibility, owing to our strong liquidity position mentioned earlier, combined with our flexible operating model positions us well to navigate through today's uncertain marketplace and act opportunistically as and if opportunities arise. Our capital deployment strategies remain focused on maintaining adequate financial strength while balancing the pursuit of our three objectives, reinvesting in the business to improve our operating model through cost and productivity improvements or capital expenditures to accelerate our organic growth, executing on strategic opportunities that meet our return parameters to support inorganic growth, and returning capital to shareholders in a disciplined manner.