Insteel Industries, Inc.

Good morning, ladies and gentlemen, and welcome to the InSteel Industries' fourth quarter 2020 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchscreen telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. H. Waltz, President and CEO of InSteel. Please go ahead, sir.

Good morning. Thank you for your interest in InSteel, and welcome to our fourth quarter 2020 earnings call, which will be conducted by Mark Carano, our Senior Vice President, CFO, and Treasurer, and me. 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 Mark to review our financial results, 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, the fourth quarter of fiscal 2020 proved to be a strong quarter for InSteel. Robust demand in our construction end markets, in addition to a sustained recovery in spreads from depressed levels of a year ago, were the key drivers in our performance. Excluding the non-recurring charges referenced in our release, net earnings rose to 38 cents per share as compared to a net loss of 9 cents per share last year. To note, the current year quarter also benefited from having an extra week as compared to the prior year based on our fiscal calendar. Shipments for the quarter increased 27.7% from last year and 12.1% sequentially from Q3. The fourth quarter of fiscal 2020 was our highest quarterly shipment level in the company's history, even excluding the extra week in the quarter and exceeding our previous high watermark in the third quarter of 2016. The fourth quarter shipping performance was driven by continued strength in construction activity across all our end markets as compared to last year, with engineered structural mesh and PC strand leading the growth in the quarter. Average selling prices, though, remained under pressure and declined 4.6% from last year. But there are signs of improvement as sequentially average selling prices increased 1.1%, which represented the first increase in seven sequential quarters. As we've communicated in previous calls, low-priced import competition in the PC strand and standard welded wire markets, respectively, remain intense and continues to have a negative impact on our average selling prices. Combined, they represented approximately 30 percent of our fourth quarter revenue and experienced an average selling price decline of 8 percent as compared to a decline of 3 percent for the balance of the business relative to last year. This does represent an improvement from our third quarter 2020 levels, though. As we highlighted during that quarter, these products also represented 30 percent of revenue, but they experienced a 20 percent decline in average selling prices as compared to an 8 percent decline for the balance of the business. While this positive trend may prove to be temporary, we do believe that the anti-dumping and countervailing duty cases we have filed have had a positive impact on the market. Gross profit for the quarter rose $15.6 million from a year ago to $19.5 million, and gross margin expanded over 1,000 basis points to 14.1 percent due to the impact of incremental volume and the recovery in spreads between selling prices and raw material costs. On a sequential basis, gross profit increased $4.7 million from the third quarter and gross margin widened 200 basis points, primarily due to shipment volume and, to a lesser extent, a widening in spreads. Spreads over the last two sequential fiscal quarters of 2020 have been consistently above the depressed levels experienced during the last two comparable quarters of fiscal 2019. as we benefited from the consumption of lower-priced rod inventory that exceeded the negative impact from a steady decline in average selling prices. Given current market rod pricing and stabilizing average selling prices, we would expect to maintain these more normalized spread levels into Q1 of fiscal 2021. FG&A expense for the quarter rose $3.4 million to $9.4 million, or 6.7% of net sales, from $5.9 million, or 5.2% of net sales, last year. This increase was largely driven by three areas. First, we experienced higher incentive compensation expense under our return on capital-based incentive plan due to our strong financial results this year. You may recall that we did not incur any incentive compensation expense in the fourth quarter of last year or for the full fiscal year of 2019, given our performance during that reporting period. Next, we incurred higher legal expenses relative to our normal run rate solely in support of our trade case initiatives. And finally, we revalued the earn-out liability related to an acquisition given measurement of its performance. This is the conclusion of the measurement period, so no future expenses will be incurred with respect to it. Our effective tax rate for the year decreased to 21.4 percent for the fiscal year 2020 from 24.9 percent last year due to the benefit of an NOL carryback provision of the CARES Act and the utilization of selected state NOLs. Excluding the CARES Act benefit, our effective tax rate would have been 22.3 percent. Looking ahead to next year, we expect our effective tax rate will continue to run around 23 percent, subject to the level of pre-tax earnings, book tax differences, and other assumptions and estimates that factor into our tax provision calculations. Moving to the balance sheet and cash flow statement, cash flow from operations for the quarter generated 11.4 million, largely from earnings, with a minimal change in working capital. as compared to $32.5 million in cash flow last year, which was primarily the result of a $31.4 million reduction in working capital due to a rebalancing of our inventories during that quarter from the elevated levels experienced during much of last year. Based on our sales forecast for Q1, our year-end inventories represented three months of shipments compared with two and a half months at the end of the third quarter and were valued at an average unit cost that was lower than the beginning quarter average and the amount reflected in Q4 cost of sales. These lower costs should favorably impact our margins during the first quarter, assuming average selling prices remain stable. Capital expenditures were $7.1 million for the year, down $3.4 million from last year, and remain largely focused on cost and productivity improvement initiatives, in addition to recurring maintenance requirements. Looking ahead to 2021, We expect CapEx to total up to $20 million, including important initiatives related to relocating and upgrading the STM assets and investments to further the growth in our engineered structural mess business, as well as our customary recurring maintenance needs. We concluded the quarter with $68.7 million of cash on hand, or approximately $3.50 a share, and no borrowings outstanding on our $100 million revolving credit facility. Looking ahead to fiscal 2021, we continue to experience steady demand in the early weeks of Q1 as our customer base executes existing project backlogs. But the lingering impact of COVID-19 on the U.S. economic recovery remains a risk to our business. As we progress through the fiscal year, we expect our financial results will remain vulnerable to the path of these evolving market conditions and their impact on both non-residential and infrastructure markets. While recent third-party forecasts for non-residential construction spending indicate a bottoming or modest improvement from trends earlier in the year, we are cautious on the demand outlook. The Architectural Billings Index and the Dodge Momentum Index, leading indicators for non-residential construction, support these trends. ABI has rebounded from a multi-year low of 29.5 in April. After stalling at 40 during the summer, ABI registered an increase to 47 yesterday. but it has remained below the 50 threshold for seven consecutive months. Dodge, which hit a low point in June of this year, has posted three sequential increases in July, August, and September, gaining 2.2 percent over that period. These, along with other indicators, typically would signal a slowdown broadly across non-residential construction activity, but the drivers behind the economic weakness make the magnitude and timing of any impact unclear. Turning to public infrastructure, spending has yet to experience the level of weakness forecast at the beginning of the pandemic, but the impact varies by state and region. Certain large markets for our business, like Texas, have remained steady relative to historical levels. In addition, through the first eight months of the year, public construction spending increased 6.1% from a year ago, with highway and street construction, one of the largest end applications for our products, increased 2%. Despite these economic uncertainties, we continue to focus on optimizing our operations, safeguarding our employees, and advancing our key growth and market initiatives. Our success in the engineered structural mesh market in fiscal 2020 should position us for continued expansion of that product in 2021. Additionally, the trade cases alleging illegal activity by importers in certain of our markets, which are expected to be resolved in fiscal 2021, have progressed favorably and we believe the facts supporting the cases are strong. Finally, we will continue to evaluate acquisitions opportunistically in our existing business that may arise in this challenging environment. These initiatives remain consistent with our capital deployment strategy that balances maintaining appropriate financial strength for pursuit of our three objectives. Reinvesting in the business to improve our operating model through cost and productivity improvements or capital expenditures to accelerate organic growth. executing on strategic opportunities that meet our return parameters to support inorganic growth, and returning capital to shareholders in a disciplined manner. I'll now turn the call back over to H. Thank you, Mark.