Insteel Industries, Inc.

Hello and welcome to the Instil Industries First Quarter 2022 Earnings Call. My name is Alex and I will be your coordinator today. If you'd like to ask a question at the end of the presentation, you can do so by pressing star 1 on your telephone keypads. If you'd like to withdraw your question, you can press star 2. I will now hand over to your host, H. Waltz, President and CEO of Instil. Please go ahead, H. Thank you, Alex.

Good morning. Thank you for your interest in InSteel and welcome to our first quarter 2022 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. These risk factors are described in our periodic filings with the SEC. We're pleased with our first quarter results that were driven by surging demand for our reinforcing products and escalating steel prices. We believe the outlook for our markets is highly positive and has been materially enhanced by the passage of the Infrastructure Investment and Jobs Act. 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.

Good morning to everyone joining us on the call. As we noted in our release earlier today, the first quarter of 2022 was another period of outstanding results. In fact, we reported record quarterly revenue of $178.5 million, or an increase of 49.2%. from 119.6 million in the prior year, and we reported record first quarter net earnings of 23.1 million, or $1.18 per diluted share, as compared to 8.1 million, or 42 cents per diluted share, in the prior year, representing a 181% increase in EPS. These historically strong results were achieved thanks to a robust demand environment for our concrete reinforcing products. that remains broad-based across all our regions and markets. Much like our last two sequential quarters, this environment allows us to raise average selling prices to recover rapidly increasing raw material costs, as well as increase labor and other manufacturing costs. This in turn delivered an expansion in our spread between average selling prices and raw materials relative to the prior year quarter. But the inadequate supply of domestic steel rod WireRod remained a challenge and impacted our ability to meet fully our customer demand. As a result, we increasingly turned to the international steel markets to supplement our raw material inventories as much as practical. Average selling prices in the first quarter increased 69.4% relative to the prior year. Sequentially, average selling prices increased 10.7% from Q4 2021, which was our fourth sequential quarter of a price increase greater than 10%. Shipments for the quarter decreased 11.9% from last year due to ongoing domestic rot availability issues and not due to any weakness in our end market demand. On a sequential basis, shipments declined 5.9% from Q4 2021, largely reflecting the usual seasonality in our demand. Gross profit for the quarter increased $22.5 million to $42.2 million from a year ago, and gross margin expanded over 700 basis points to 23.7%. This increase was due to widening spreads in average selling prices that outpaced rod cost increases during the period. As we've remarked in prior calls, during environments of strong demand and escalating pricing, our results typically are favorably impacted by the implementation of price increases sufficient to cover the higher 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 increased $2.3 million and gross margins remained above 23% for the second consecutive quarter. SG&A expense for the quarter increased $3.7 million to $12.3 million, but as a percentage of sales, it decreased 300 basis points to 6.9%. This dollar increase was primarily a result of higher compensation expense under our 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 2021. Our effective tax rate for the quarter was virtually unchanged at 23%, which is down slightly from 23.2% last year. Looking ahead to the balance of the year, we would expect our effective tax rate will remain steady at 23%, subject to the level of pre-tax earnings, book tax differences, and the other assumptions and estimates that compose our tax provision calculation. Moving to the cash flow statement and balance sheet, cash flow from operation for the quarter generated $13.6 million due to the record earnings performance that offset an increase in working capital. The increase in working capital is a function of both higher unit prices for inventories and a temporary timing impact stemming from year-end payment schedules. We encourage $0.8 million in capital expenditures and remain committed to our full-year target of $25 million given the many initiatives that we have underway. Based on our sales forecast as of Q1, our quarter-end inventories represented 1.7 months of shipments compared with 1.9 months at the end of the fourth quarter. The tight rod supply market referenced earlier continues to suppress our overall inventory levels, but particularly with respect to our finished goods inventories. And finally, our inventories at the end of the first quarter of 2022 were valued at an average unit cost that was higher than our fourth quarter cost of sales and still remains favorable relative to current replacement costs. In December, we returned $39.4 million of capital to our shareholders through the payment of a $2 per share special cash dividend in addition to our regular quarterly dividend, marking the fifth year over the last six years we've paid a special dividend. We ended the quarter with $63 million of cash on hand and no borrowings outstanding on our $100 million revolving credit facility. As we look ahead to the balance of the fiscal year, we expect demand to remain strong across all our markets. Our shipment trends in the current quarter and customer sentiment support this perspective. In addition, third party leading indicators for non-residential construction spending, such as ABI and Dodge, which rebounded dramatically during much of 2021, have remained positive and reflect levels consistent with prior recovery periods. Public non-residential construction spending has also remained resilient and will clearly benefit from additional infrastructure spending following the passage of the infrastructure bill in November. H will cover this topic in more detail during his commentary. This concludes my prepared remarks. I'll now turn the call back over to H. Thank you, Mark.