Insteel Industries, Inc.

Good day and thank you for standing by. Welcome to the InSteel Industries 7th Quarter 2021 conference call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this 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. I would now like to hand the conference over to your speaker today, Mr. H. Waltz, President and CEO. Please go ahead.

Thank you. Good morning, and thank you for your interest in InSteel, and welcome to our second quarter 2021 conference call, which will be conducted by Mark Carano, our Senior Vice President, CFO, and Treasurer, and me. Before we begin, let me remind you that some of the comments made in our 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. The risk factors are described in our periodic filings with the SEC. We're pleased with our second quarter performance that was driven by strong underlying demand for our reinforcing products and escalating steel prices. We expect both trends to continue through our third quarter and likely through the end of the fiscal year. During environments of strong demand and escalating pricing, the company's results are typically favorably impacted by the implementation of price increases sufficient to recover the higher replacement costs for our raw materials together with the consumption of lower-cost inventories under the first-in, first-out accounting method. I'm going to turn the call over to Mark to comment on our financial results for the quarter and the macro environment, and then I'll pick it back up to discuss our business outlook.

Thank you, H, and good morning to everyone joining us today. As we reported earlier this morning, InSteel posted exceptionally strong results driven by continued robust demand for its concrete reinforcing products, which has remained resilient over the last four quarters, and a widening of spreads between selling prices and raw material costs. Net earnings for the quarter more than tripled from a year ago, rising to 14.9 million, or 76 cents per diluted share, from 4.4 million, or 23 cents per share. Shipments for the quarter increased 5% from last year and 3.1% sequentially from Q1. Volume growth for the quarter was broad-based across our footprint, and consistent during all three months of the quarter, despite very minor disruptions from the inclement weather in Texas and much of the middle of the United States. Average selling prices increased 15% from last year and 12.7% sequentially from Q1, due primarily to price increases implemented in the latter half of the first quarter and throughout the second quarter to offset the rapidly escalating raw material costs. The supply of wire rod in the U.S. market has become progressively more constrained during the quarter, given strong overall demand, leading to substantial price increases. To add some perspective to this, steel scrap, the primary input in production of wire rod, has increased in price by more than 60% over the last six months relative to the benchmark Chicago shredded index. Gross profit for the quarter increased $15 million from a year ago, and gross margin expanded to 21.7%, due primarily to widening in spreads as average selling prices outpaced rod cost increases during the period. Gross margin remained consistently above 20% during each month of the second quarter, reflecting the underlying strength of demand for our reinforcing products and our success in passing rising costs through the supply chain. On a sequential basis, gross profit increased 10.6 million, and gross margin widened 500 basis points, again, due to both an incremental relative widening of spreads and increased shipments. Gross margin is at the high end of recent historical results, and while sustainable in the near term, we would expect some normalization once raw material prices stabilize. SG&A expense for the quarter increased 0.7 million to 10.3 million, but declined as a percentage of sales to 7.4 percent from 8.4 percent last year. The increase was largely a result of higher compensation costs under our return on capital-based incentive plan driven by our strong results this year. As you may recall, we did not incur any incentive compensation expense in the second quarter of last year. In addition, we continued to incur higher legal expenses relative to our normal run rate in support of our ongoing trade cases And these costs were partially offset by a favorable $2 million change in the cash surrender value of life insurance policies. Our effective tax rate for the quarter increased marginally to 22.5% from 21.2% last year due to changes in permanent book tax differences and discrete tax benefit recorded in Q2 2020 in connection with the CARES Act. Looking ahead to the remainder of the year, we expect our effective tax rate will run around 23%, subject to a level of pre-tax earnings, book tax differences, and other assumptions and estimates that compose our tax provision calculation. Moving to the balance sheet and cash flow statement, cash flow from operations for the quarter generated $15.3 million, largely due to earnings, with a minimal change in working capital, given the strong quarterly performance as compared to using $3 million last year when net working capital increased $13.8 million. Based on our sales forecast for the third quarter of 2021, our quarter-end inventories represented two months of shipments compared with 2.4 months at the end of the first quarter. The tight supply market referenced earlier has impacted our inventory levels, which are trending below normalized levels of forecasted shipments at the end of the second quarter. Finally, our inventories at the end of the second quarter of 2021 were valued at an average unit cost that was higher than our first quarter cost of sales. but remain favorable relative to current replacement costs. We concluded the quarter with $58.9 million of cash on hand, or just over $3 per share, and no borrowings outstanding on our $100 million revolving credit facility, providing us with ample financial flexibility to support our strategic initiatives. Looking ahead, our optimism has increased given the steady demand we are experiencing in our markets. Although we are still early in the third quarter, or order book has remained strong and shipments have continued to trend above forecast levels. Recent leading market indicators like ABI and Dodge have finally rebounded to levels not seen since the start of the pandemic in March of 2020. Both indices have been trending steadily upwards since the start of the year and typically would be a harbinger for growth in the private non-residential construction markets in the next nine to 12 months. Spending in key areas like highway and street construction, one of the largest consumers of our products, over the last 12 months through February 2021 have remained on par with the level in the prior comparable 12-month period through February 2020. And it remains 5% above the average annual spend over the last five years. And as H will cover in more detail, we have received favorable determinations with respect to the PC strand trade and standard welded wire cases, which should favorably impact these markets going forward. With the uncertainties of COVID-19, while the uncertainties of COVID-19 are not behind us, our markets and operations have seen limited negative impact from it over the last 12 months. With the vaccine rollout progressively steadily across the nation, we hope this risk will remain contained and within a few quarters no longer pose any material risk. And finally, the tight supply environment for rod and the rapid escalation in this raw material cost is an area we are actively managing across our markets and plant footprint, as there does not appear to be any sign that these trends will abate in the near term. To date, we've been successful passing those incremental costs through the supply chain, although inadequate supplies could have an adverse impact on operations at certain manufacturing facilities over the next two months. With that, I'll now turn the call back over to H. Thank you, Mark.