Insteel Industries, Inc.

Q1 2022 Earnings Conference Call


spk_0: hello and welcome to the instill industries first quarter twenty twenty two earnings school my name is alex now be a coordinates they if you'd like to ask a question at the end of the presentation you can do so by pressing style one on the telephone keypads if you're like to withdraw your question you compress start to own on hand over to your house hate wants president and ceo of instill please go ahead hate
spk_1: thank you alex
spk_2: good morning
spk_1: thank you for your interest in in steal and welcome to our first quarter two thousand twenty two conference call which will be conducted by mark corrado or senior vice presidency fo 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 so object to various risks and uncertainties which could cause actual results to differ materially from those projected these risk factors are described in our periodic filings with the se si we're pleased with our first quarter results were driven by surging the man or a reinforcing products and escalating steel prices we believe the outlook for a market is highly positive and has been materially enhanced by the passage of the infrastructure investment and job that i'm going to turn the call and 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
spk_3: morning to everyone joining us on the call
spk_1: as we noted in are released earlier today the first quarter of twenty twenty two was another period of outstanding results in fact we reported record quarterly revenue of one hundred and seventy eight point five million or an increase of forty nine point two percent from one hundred and nineteen point six million in the prior year
spk_3: and we recorded records first quarter net earnings of twenty three point one million or a dollar a team per diluted share as compared to eight point one million or forty two cents per diluted share in the prior year representing a one hundred and eighty one percent increase in a p s he historically strong results were achieved actual bucks demand environments are concrete reinforcing products that remains broad based across all regions and markets
spk_1: much like our last two sequential quarters this environment allows us to raid average selling prices to recover rapidly increasing raw material costs as well as increase the labor and other manufacturing costs
spk_3: this in turn delivered an expansion or spread between average selling price is a raw materials routed to the prior year quarter but the inadequate supply domestic steel rod why rod remained to challenge and impacted our ability to meet fully our customer demand as a result we increasingly turned to the international steel markets to supplement or raw material inventories as much as practical
spk_1: average selling price isn't the first quarter increased sixty nine point four percent relative to the prior year sequentially average selling price increased and point seven percent from que for twenty twenty one which was our for sequential quarter of a price increase greater than ten percent shipments for the quarter decreased eleven point nine percent from last year due to ongoing domestic rod of the veil ability issues and not due to any weakness in our and market demand on a sequential basis shipment declined five point nine percent from two for twenty twenty one largely reflecting the usual seasonality in our demand
spk_3: gross profit for the quarter increased twenty two point five million to forty two point two million from a year ago and gross margin expanded over seven hundred basis points to twenty three point seven percent
spk_1: this increase was due to widening spreads an average selling prices that outpace rod cost increases during the period
spk_3: as we remarked in prior calls during environments strong demand an escalating pricing a result typically or favorably impacted by the implementation of price increases sufficient to cover the high replacement cost of our raw materials and the consumption of lower cost inventories under our first in first out accounting methodology on a sequential basis gross profit increase two point three million and gross margins remained about twenty three percent for the second consecutive quarter et in a expense for the quarter increase three point seven million to twelve point three million but at the percentage of sales decreased three hundred basis points to six point nine percent
spk_1: the dollar increase was primer primarily a result higher compensation expense under a return on capital based incentive plan this expense was partially offset by lower run rate legal expenses given the conclusion of our trade action in the latter half of twenty twenty one
spk_3: our back to tax rate for the quarter was virtually unchanged at twenty three percent which is down slightly from twenty three point two percent last year looking ahead to the balcony year we would expect are effective tax rate will remain steady at twenty three percent subject to the level of pre tax earnings the tax differences and the other assumptions and estimate the composer tax provision calculation
spk_1: moving to the casual statement and balance sheet casual from operations the quarter generated thirteen point six million due to the record earnings performance that offset an increase in working capital the increase in working capital the pumpkin about higher unit prices for inventories and a temporary timing impact stemming from year and payments schedules we encourage zero point eight million in capital expenditures and remain committed to our for your target and twenty five million even the many initiatives that we have underway
spk_3: based on ourselves forecast as a cue one or quarter and inventories represented one point seven months of shipments compared with one point nine months at the end of the fourth quarter the type rod supply market referenced earlier continues to suppress or overall inventory levels but particularly with respect to finished goods inventories
spk_4: and finally or inventory the the end of the first quarter of twenty twenty two were valued at an average to cost that was higher than our fourth quarter cost sales and still remains favorable relatives current replacement cost
spk_3: in december we returned thirty nine point four million of capital to our shareholders to the payment of it to dollar per share special cash dividend in addition to our regular quarterly dividend marking the fifth year over the last six years we paid a special dividend we ended a quarter with sixty three million of cash on hand i know borrowings outstanding on our one hundred million dollar revolving credit facility as we look ahead to the bound to the fiscal year we expect demand to remain strong across all our markets
spk_1: our ship and trends in the current quarter and customer sentiment support this perspective in addition third party leading indicators for non residential construction spending such as a b i dodge which rebounded dramatically during much of twenty twenty one have remain positive and reflect levels consistent with prior recovery periods public non residential construction spending has also remain resilient and will clearly benefit from additional infrastructure spending falling the passage of the infrastructure bill in november h will cover this topic in more detail during his commentary
spk_3: that concludes my prepared remarks on now turn the call back over age
spk_1: thank you mark as refresh if reflected in the release are strong first quarter results were driven by robots non residential construction markets and escalating steel prices above all we thank our and steel tim teammates for their perseverance they're challenging circumstances and their focus on execution a excellence and working safely market conditions during our first quarter closely resemble those of the previous three quarters characterized by robots demand for our products and limited availability and escalating prices for primary raw material hartnell steel wire right consistent with our recent experience the supply bottlenecks contributed to inefficiencies at certain manufacturing facilities and customer service disruptions as we mentioned last quarter we've been active in the international steel market and deliveries from off shore sources began to supplement
spk_4: domestic supplies during que one or offshore commitments will ramp up during cute to and que three to the degree that we believe operational and customer service disruptions would be eliminated by next month provided of course that our suppliers both domestic and offshore
spk_5: perform as agree
spk_1: we reported last quarter that it was likely the by noon ministration with transition away from the section two thirty two steal tear up first with respect to the european union and later with other trading partners in december the you and us agreed to a terror for a quota were about certain quantities of hot rolled steel would enter the us market terror free and volumes over the quota level would be assessed the twenty five percent tariff with respect to steel wire ride the transition to a tear or up or a quota offers little really for purchasers since the tariff free volume of wire rod that can enter the us market from you producers is minuscule relative to the supply deficit we expect similar outcomes with other regions as the administration transitions away from section two thirty two and we do not for city that future trade deals in the pattern of the you deal will materially affect the supply demand imbalance experienced in the us during fiscal que one congress passed and the president signed the infrastructure investment in jobs act which is arguably the most consequential infrastructure legislation and funding since the interstate highway system was conceived at it's core is the reauthorization of the three hundred four billion of surface transportation programs and new spending of five hundred fifty billion with the vast majority of the barnes to be spent over a five year period we expect a stimulant of impact of the legislation to become evident in our markets late in two thousand twenty two and to ramp up over the next four years while there are many unknown details at this point we expect the legislation to create significant positive momentum for our markets turning the cat facts as we mentioned in the release we recently reached agreement with a group of capital equipment suppliers for purchases approximating twenty million of state of the art production technology that will expand our product capabilities and favorably impact out fast cost of production a major part of the investment packages targeted toward our missouri and at arizona facilities with expected start ups in fiscal two thousand twenty three our earlier catholics present to rejection of twenty five million for two thousand and twenty two will be affected by the timing of payments and delivery schedules we're considering additional projects that would have similar beneficial impact on our market position and costs profile these are exciting times britain's deal going forward we plan to closely monitor market conditions and aggressively pursue the appropriate actions to maximize shipments and operates and optimize our costs and were well positioned pursue attractive growth opportunities both organic and dressed as
spk_6: position
spk_1: this concludes are prepared remarks and will now take your questions alex would you please explain the procedure for asking questions
spk_0: thank you should like to ask a question in my day saved by pressing style one on your telephone keypad and should lights withdraw your question you compress start a our first question false day comes from tyson the power from casey capital tyson your line is now open
spk_7: good morning gentlemen an excellent quarter
spk_1: the more enticing
spk_7: he touched or a couple of key subjects and it seems like are getting a sunset or the pricing focuses overshadowing the underlined the man that of allowing you to have the pricing power that you exhibit that the man that you're saying that is a prolonged would you agree were in a prolonged say
spk_8: michael have elevated demand that should give you better pricing power as we go forward and given the low inventory turns you can adjust much quicker than you haven't previous cycles
spk_1: what times i think the i think the current environment is really consistent with the way we've described our business overtime which is that that that the string of of our margins on and our financial performance is really driven by the dynamics of supply and my man for the products we produce rather than so much what's going on and raw material market and and i would say that i don't ever recall on a market environment with stronger demand characteristics when we see now on and are fully believe that the the passage of the bipartisan infrastructure legislation will have a meaningful positive impact on market conditions all though there is a ramp up period there and in we wouldn't expect to see tangible benefits of that till later in two thousand and twenty two
spk_7: and all up on that were saying these preliminary state budgets come out what's a napkin increases and their infrastructure spending as they want to states are having state surpluses as a result of inflows to their out to the state coffers that really starts the hit and two thousand twenty three but that is carried through two three years
spk_1: the think absolutely so and an end up being one of the more surprising aspects of of of the economy over the last year so and in in the covert environment has been the fiscal condition of states and municipalities which has been very strong arm incomplete erickson to the dire forecasts that that we saw at the beginning of of the code that night mean experience the states were flush with cash by and large even before it's infrastructure legislation was passed
spk_7: that guy at set aside demands not the issue that's gonna remain robust you got your supply your input labor and freight one of those you touched on are you suggesting that you're going to be able to ease that supply as you with those imported steel products so we should see or could see a recovery and though shipment volumes and latter part of the current quarter and you three
spk_1: where are all of our comments on have to be viewed in the context of of our supply base performing as agree and if that happens we believe that in the current quarter we will have eliminated the know raw material supply deficit that is adversely affected our our shipments over in the last three quarters on a course it's a week to week and a month to month on consideration because we are relying on our suppliers to perform it has agreed and if they don't then then we have another set of considerations if they do on i'm confident that that on
spk_7: we have adequate materials to meet the market like a and you can maintain margin profile because the demand is strong enough that you're just solving the front an issue
spk_1: the demand is still there to support the margins are seen the demand is going to be there to support healthy attractive margins for in still keep in mind that we have pointed out over time and over the course of the run up in these prices that the five low impact on on cost of sales and the resulting gross margins has been reasonably significant as we've seen prices skyrocket for for well over a year multiple consecutive quarters so so when prices level out and stabilize on then then that tail wind will disappear it's a justified
spk_7: function of mathematics but we believe that are margins will be attractive relative to on historical results and we're we're pleased with where we are
spk_1: at last question given the currency debacle and turkey which has been a source of steel on the path where you as that had a positive direct or indirect impact on your ability to secure supply
spk_9: no turkey's under adopting water in the us and a hand on they are really not a factor at this point
spk_0: that i thank you
spk_10: thanks tyson or next question comes from a junior romero from subtlety julia your line is now open thanks hey good morning mark annoying h humor
spk_1: hey i just had equipment for you guys the agreement to purchase the capital equipment
spk_11: ah of twenty million it is that incremental to year previous contacts plants
spk_10: no it is part of the cabbage plan
spk_1: with what would it would just a little at lower out there to guide them we know today
spk_10: understood and so but you're basically securing those twenty million you know you kind of the agreement and then it just comes down to ah how quickly they can get you the equipment that's right and and the requisite payment schedules associated with that
spk_1: got it and i might have missed it on your prepared commentary by did you mention know the particular plants that that the capital equipment would be targeting
spk_12: what let let me let me say first bet that we have agreed to the package that are described in in map appeared comments but that doesn't mean that there won't be additional investments there most certainly will be the package that refer to in the prepared com it will be targeted primarily
spk_10: toward our missouri and arizona facilities
spk_13: missouri in arizona got it
spk_0: okay that's all i have x ray much baggage
spk_7: trying to julio
spk_14: we now have a follow up question from tyson power from casey capital tyson your line is now open
spk_1: go out and regards to that twenty million the equipment package that geared toward having more labor savings and more automation or it's just the speed of the processing that that is going to help out and better product quality those things oh what's the new equipment packets focus on resolving
spk_7: a book will expand the breadth of products that were capable of producing on we will also reduce our cash cost of production through on significant automation are so so it it helps us and in really every aspect of the phone but market and in our production costs
spk_8: no cat
spk_1: large part of the country really had not had winter begin until after the first of the year which probably had some benefit to hurt you and the first quarter are we gonna still see that seasonal pattern muted and the current quarter hour do you just have so much demand in the southern tier states that it's business as usual
spk_7: well and i think it is business as usual but but as usual implies that we are definitely affected by by the winter months in terms of have the ability to shift to job site and we have some customers that produce outside we have other customers who
spk_1: to do this and unheeded spaces so so it's business as usual but as i say as usual implies on that there is a there isn't seasonality did business that we can't overcome but our our tell you that by and large customer backlogs and customer optimism
spk_7: i don't think you've ever been greater so the motivation will be for customers to produce on in for him steel to shirt on and we we will do so we into the pit the every extent that mother nature makes it possible could we see of a phenomenon of people trying to build up some inventories and the seasonally week period so they have enough supply once we get into the warmer summer months
spk_8: i would not expect that because i don't think there's any producer that's capable of of providing quantities on in excess of what's being utilized in the current period
spk_7: duquette
spk_1: he didn't acquisition and two thousand and seventeen l o you keep our teaser engineering products for years after a lot of developments or happen in the tilt up construction market
spk_4: dc is being built
spk_1: has that group performed as he thought and new and what technological advancements have you been able to do with them and house for these last four years that provides you a bigger a breath of market capabilities going forward
spk_7: i think i think looking back it at them are decision to make data acquisition in two thousand and seventeen would we were confirmed today that the rationale for the acquisition was spot on
spk_8: we were slower out of the gates than and we would have hoped to be because we have a lot to learn about about the new market do we were serving but as we look back today the growth has been substantial on we are we are on significantly participate being in the ecommerce build out of of the city's that that it's happening around the a country on and and we are involved in many applications in uses for our product that we would only been able to access to a third party had
spk_1: we not made on the acquisition that has wound up are coming in feel engineer products decay and have you seen a greater acceptance of your products for the use and construction whether non reds are in the infrastructure where your approved then
spk_7: a lot more states they were previously
spk_15: what we can you say approved on a lot more states the implication behind that is that that it and it's a department of transportation application and that's that's generally not the case for industrial engineer products were most of the most of the products are on our commercial and
spk_1: nature and not infrastructure related so so a thing that the merits of the product that we produce and and and the economics are are realize by concrete contractors on and were having were having a success because on because we have a reasonable bad you proposition
spk_16: which has had a greater acceptance and utilizing your product as opposed to maybe just straight rebar some of the older
spk_0: construction methods
spk_1: yeah for sure and i mean it it in over the course of time tight labor markets have been our friend in terms of the acceptance of engineered structural match on on job sites because wow wow the industry slow to change on it significantly

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