Insteel Industries, Inc.

Hello and welcome to today's InSteel Industries second quarter 2022 earnings call. My name is Bailey and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to H. Walsh, President and CEO. H, please go ahead.

Thank you, Bailey. Good morning, and thank you for your interest in InSteel. Welcome to our second 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 second 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 highlighted in our release earlier today, the second quarter of 2022 was a record quarter of financial performance. We reported quarterly revenue of 213.2 million or an increase of 53.4% from 139 million in the prior year. and net earnings of $39 million or $1.99 per diluted share as compared to $14.9 million or $0.76 per diluted share in the prior year, representing a 162% increase in earnings per share. These record results were achieved due to a robust demand environment for our concrete reinforcing products that remain broad-based across all regions and markets. As was the case in our last three sequential quarters, this environment allowed 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 a spread expansion between average selling prices and raw materials relative to the prior year quarter. But the inadequate supply of domestic steel wire rod remained the challenge in the quarter, restraining our ability to meet fully our customer demand and generating plant operating inefficiencies and increased conversion costs. Average selling prices in the second quarter increased 65.4% relative to the prior year. Sequentially, average selling prices increased 10.1% from Q1 2022, which represents our fifth sequential quarter of a price increase greater than 10%. Shipments for the quarter decreased 7.2% from last year due to ongoing domestic wire rod availability issues, which was particularly acute at the beginning of the quarter and not due to any weakness in our end market demand. On a sequential basis, shipments increased 8.5% from Q1 2022 as wire rod supply challenges receded in the latter half of the quarter, in addition to the usual benefit from a seasonal uptick in demand that typically occurs at this time of the year. Gross profit for the quarter increased 26.8 million or 89% to 57.1 million from a year ago and gross margin expanded over 510 basis points to 26.8%. This increase was due to a widening in spreads as average selling prices outpaced rod cost increases during the period. As we've highlighted 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 for our raw materials and the consumption of lower-cost inventories under first-in, first-out accounting methodology. On a sequential basis, gross profit increased 14.7 million, or 35 percent, and gross margins remained above 23 percent for the third consecutive quarter. SG&A expense for the quarter decreased $3.1 million to $7.2 million, and as a percentage of sales, it decreased from 400 basis points to 3.4% due to the leverage from record revenue levels. The dollar decrease was primarily the result of lower compensation expense under our return on capital-based incentive plan and lower run rate legal expenses given the conclusion of our trade cases in the latter half of 2021. Our effective tax rate for the quarter was virtually unchanged at 22.3% as compared to 22.5% last year. Looking ahead to the balance of the year, we expect our effective rate will remain steady at around 23%, subject to the level of pre-tax earnings, book tax differences, and other assumptions and estimates that compose our tax provision calculation. Moving to the cash flow statement and balance sheet, cash flow from operations for the quarter generated $6.3 million. Increased working capital due to higher inventory levels for raw materials offset the impact of record earnings performance. Inventories increased as we added to our raw materials in advance of our seasonally strongest quarters in Q3 and Q4. The tight rod supply environment that we'd experienced in the prior three quarters began to recede in our second quarter as we made progress supplementing our domestic supply shortfalls with material from foreign sources. Based on our sales forecast for Q2, our quarter-end inventories represented 2.2 months of shipments compared with 1.7 months at the end of the first quarter and 1.9 months at the end of our fourth quarter of fiscal 2021. Our inventories at the end of the second quarter of 2022 were valued at an average unit cost that was higher than our first quarter cost of sales and remained favorable relative to current replacement costs. We incurred $7.8 million in capital expenditures in the quarter for a total of $8.6 million through the first half of our fiscal year. We remain committed to our full-year target of $25 million given the many initiatives underway that we highlighted in previous calls. Additionally, in the quarter, the previously disclosed sale of our Somerville facility was completed, which resulted in cash proceeds of 6.7 million. From a liquidity perspective, we ended the quarter with 69.7 million of cash on hand and no borrowings outstanding on our $100 million revolving credit facility. Looking ahead to the balance of fiscal 2022, we expect demand to remain strong across all our markets. Our shipment trends in the current quarter and customer sentiment remain positive. Record high steel prices remain a concern, but they've yet to impact demand in our markets. In fact, leading indicators and forecasts for non-residential construction reflect a robust outlook for the balance of the calendar year and beyond. With growth continuing in already strong segments like warehouse and distribution, and growth now recovering in previously weaker segments like office and leisure, Unlike the recent prior quarters, we expect to be able to support this robust customer demand without the supply constraints that hampered our prior quarterly performance. But it is not without challenges, as it will require us to secure effectively raw material supply from offshore sources to bridge the gap resulting from ongoing shortfalls in the domestic supplier base. That concludes my prepared remarks. I'll now turn the call back over to H. Thank you, Mark.