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spk00: Good morning and a warm welcome to the InSteel Industries fourth quarter 2022 earnings conference call. My name is Candice and I will be your moderator for today's call. All lines have been placed on mute during the presentation portion of the call, with an opportunity for question and answer at the end. If you'd 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 our host, H. Waltz, President and CEO of Steele Industries, please go ahead.
spk03: Thank you, Candice. Good morning. Thank you for your interest in InSteel, and welcome to our fourth 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 InSteel's record financial performance in fiscal 2022, generating net earnings of $125 million and return on capital of 36%. During much of the year, we experienced substantially rising costs, both in raw materials and plant operating costs, including labor, energy, and consumables. While the rising price environment produced a tailwind for earnings as average selling prices rose, it also created considerable operational and customer service challenges for our people, including shortages of nearly every input into our process, which created uncertainty surrounding production schedules. I'm particularly proud of our people for the discipline they showed in this environment as they generally avoided over-commitments that would result in customer disappointment. While lead times extended, by and large we understood the impact of the environment on our ability to deliver to customers, and we fulfilled the customer commitments we made, which speaks highly of the professionalism of our people, our focus on customer needs, and the effectiveness of our information systems. As we enter fiscal 2023, we believe the outlook for our markets is 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.
spk02: Thank you, H, and good morning to everyone joining us for the call. As we highlighted in the release, the fourth quarter of 2022 was a historically strong period of financial performance. We reported revenue of $208 million, or an increase of 21.4%, from $171.3 million in the prior year, and net earnings of $24.3 million, or $1.24 per diluted share, as compared to $25.2 million, or $1.28 per diluted share, in the prior year. Our results benefited from incremental price increases to recover the continued escalation in raw material and plant operating costs. Average selling prices in the fourth quarter increased 26.1% relative to the prior year. Sequentially, from the third quarter of 2022, average selling prices decreased 2.6%. This decrease in average selling prices was driven by weakness in our product line most exposed to the residential construction markets. Excluding the impact of that product line on average selling prices would have resulted in a 1% increase sequentially, reflecting the resilience of our non-residential construction markets. Despite the robust demand environment, shipments for the quarter decreased 3.7% from last year. Sequentially, from the third quarter of 2022, shipments declined 6%. The lack of shipment momentum resulted primarily from three issues. Ongoing weakness in the residential construction markets relative to historically robust conditions last year weighed on demand, much like we highlighted in the third quarter of 2022. Our customer base began managing their inventory on hand to more normalized levels as availability constraints for many of our product lines subsided from the unprecedented shortages earlier in the fiscal year. And labor availability across our plant footprint, which we highlighted in the third quarter of 22, remains an issue. While we experienced modest signs of improved labor recruiting and retention during the fourth quarter, our plant's ability to increase production to a capacity level consistent with customer demand continued to be a challenge. Gross profit for the quarter was $39.8 million, or effectively unchanged from the same period last year at $39.9 million. Gross margin declined 420 basis points to 19.1%. This decrease was due to the decline in shipment volumes for the quarter, in addition to the impact of higher overall plant operating costs, which offset the benefit of widening spreads between average selling prices and raw material costs. Specifically, inflation in labor rates and energy have negatively impacted our overall plant operating costs. On a sequential basis, gross profit decreased 18.3 million from a record level in the third quarter of 22 due primarily to the same drivers previously stated, in addition to a modest reduction in spreads. FG&A expense for the quarter increased 1 million to 8.3 million, but as a percentage of sales, it decreased marginally to 4%. The dollar increase was primarily the result of the relative quarterly change in the cash surrender value of life insurance policies. which from an accounting perspective is reflected as an increase in SG&A expense. Our effective tax rate for the quarter was largely unchanged at 23%, which is up minimally from 22.7% last year. Looking ahead to the balance, looking ahead to next 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. Moving to the cash flow statement and balance sheet, cash flow from operations for the quarter used $9.4 million, increased working capital due to a $29.2 million reduction in accounts payable and accrued expenses, and a $5.2 million increase in inventories offset the impact of strong earnings. You may recall we ended the third quarter of 22 with an elevated accounts payable balance of $77.2 million due to the timing of raw material deliveries. Based on our sales forecast for Q1, our quarter end inventories represent 4.3 months of shipments compared with 3.4 months at the end of the third quarter. These raw material purchases, along with the weaker than anticipated shipments in the fourth quarter, increased inventories moderately above normalized levels of approximately three months. And finally, our inventories at the end of the fourth quarter of 22 were valued at an average unit cost marginally lower than the beginning of the quarter. We incurred $3.6 million in capital expenditures in the fourth quarter for a total of $15.9 million for the fiscal year in support of our expansion of the engineered structural mesh business, as well as cost and productivity improvements. H will provide more details on these important efforts in his prepared remarks. While investing in the business to enhance its growth and reduce costs remains our top priority, we continue to return capital to shareholders throughout the course of the fiscal year. The combination of a special dividend of $2 per share in the first quarter and the four regular quarterly dividends of 3 cents per share amounted to $2.12 per share in dividends for fiscal year 22. Also during the quarter, we repurchased $1.2 million of common equity equal to approximately 41,000 shares. From a liquidity perspective, we ended the quarter with $48.3 million of cash on hand and no borrowings outstanding on our revolving credit facility. Looking ahead to fiscal 23, we remain optimistic about the state of our markets. Shipments and average selling prices in the beginning weeks of the first quarter are trending above forecasted levels, which is an encouraging sign in what is our historically lowest shipment volume quarter of any fiscal year. Customer backlogs remain robust across both the private and public non-residential construction markets, with no meaningful signs of concern today. and third-party leading indicators and forecasts for non-residential construction reflect a steady and positive outlook for demand in our markets. Construction employment levels continue to rebound, with a majority of states reporting construction unemployment levels that are now on par with the low levels recorded immediately preceding the pandemic. And overall, construction employment, as measured by the Bureau of Labor Statistics, was 3.4% in September 22. and is approaching the lowest levels recorded over the last 10 years. And finally, the market has yet to layer in any meaningful funding from the Infrastructure Investment and Jobs Act, which should begin to materialize over the next 12 months. We are, though, closely monitoring the heightened uncertainty regarding the direction of the overall U.S. economy, particularly as certain areas, like the residential construction market, remain weak. This concludes my prepared remarks. I will now turn the call back over to H. Thank you, Mark.
spk03: Our fourth quarter results were strong by any measure, despite the impact of a deteriorating housing market that we first detected last May and referenced in the Q3 earnings call. While housing weakness is likely to persist through this interest rate cycle, we're fortunate that our exposure to this market is relatively low, which we approximate to be 15% of revenues. The remainder of our markets, private, non-residential, and publicly funded infrastructure applications remain strong with customers reporting substantial backlogs and a healthy pace of new quotations. Over the last few quarters, we identified inadequate supplies of our primary raw material, hot-rolled steel wire rod, as a constraint to production and shipments, and we indicated that we had turned to offshore markets to supplement domestic supplies. By the end of the third quarter, receipts of offshore raw materials had filled most of our supply gaps. The unexpected downturn in housing markets, together with tighter inventory management by many customers, had an unfavorable impact on Q4 shipments and resulted in unplanned inventory growth. We expect excess inventories to be depleted by the end of the current quarter or early in Q2. We continue to be optimistic about the impact on our markets of the Infrastructure Investment and Jobs Act and believe it will create significant demand for our products in 2023. The need for infrastructure investment in the U.S. has been obvious for decades, but funding has consistently been adequate relative to the need. It now appears that funding shortfalls will decline in significance as obstacles to investment in view of the strong fiscal condition of state and local governments together with the new funding provided by the Infrastructure Investment and Jobs Act. Turning to CapEx, 2022 CapEx came in substantially lower than expectations based on actual equipment delivery schedules and cash outflows relative to our initial plans. No projects have been abandoned or intentionally delayed by the company. In view of these timing considerations, we expect 2023 outlays to be elevated as delayed deliveries and related cash outflows catch up to expectations. We believe CapEx in 2023 should come in at about $30 million, subject to uncertainties related to vendor performance and supply chain issues. These investments in state of the art technology will expand our product capabilities and favorably impact our cash cost of production. As we mentioned in an earlier call, new production lines will be installed at the Missouri, Kentucky, and Arizona plants to better address market needs. We're carefully evaluating additional projects that would have similar beneficial impact on our market position and our cost profile. Going forward, We're aware of rising risks related to the future performance of the U.S. economy and are carefully monitoring the environment. At the same time, we plan to aggressively pursue actions to maximize shipments and optimize our costs and to pursue growth opportunities, both organic and through acquisition. This concludes our prepared remarks and we'll now take your questions. Candace, would you please explain the procedure for asking questions?
spk00: Thank you. If you'd like to ask a question, please press Start followed by 1 on your telephone keypad. If for any reason you'd like to remove your question, please press Start followed by 2. Again, it is Start followed by 1 to ask your question. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. So our first question comes from the line of Julio Romeo from Sedottian Co. Your line is now open. Please go ahead.
spk01: Hey, good morning. Thanks very much for taking my questions. I appreciate you guys calling out the difference in pricing, excluding the product line most exposed to residential. If we could dig deeper into that one product line that has seen the price weakness, do you think you've seen the worst of the pricing pressure sequentially on that one product line? Do you see prices stabilizing, going lower? We'd just love to hear how you guys are thinking about that. Yeah.
spk03: I think maybe two things are going on, Julio. First, it's well publicized that the housing market has weakened substantially. But beyond that, the market has changed from one where there was a critical short supply of the product to one where it is no longer in short supply. And as a result, you know, we uncovered which customers were multiple ordering from different suppliers to cover their needs. And as a result, I think there's an inventory bulbs that develop. So there's consumption is off some from lower residential construction demand, but also probably more important is inventory rebalancing that's going on in that market and in others. But I think inventory change is probably the bigger story.
spk01: Got it. That's really helpful. And I guess it really does come down to supply and demand. You also talked about, guys, on your prepared remarks, you know, the first few weeks of the first quarter, you've seen shipments and ASPs trending above forecasted levels. Just a little bit more about kind of the trends you're seeing during the first few weeks of October.
spk03: Well, as we've acknowledged on multiple occasions, Julio, our vision and our ability to see beyond a few weeks is really minimal due to the low lead times that are expected by our customer base. So I would say it's week to week, but on a year-over-year basis at this point, the trends are positive and order entry is brisk. So right now, I'd just tell you that the market looks pretty solid.
spk01: Okay, got it. And just turning to the balance sheet, I saw you guys did some repurchases, $1.2 million in the quarter. Is that something we, you know, be opportunistic in your view, or how should we think about potential repurchases in the coming quarters?
spk03: I think the bigger question is just the expectation of free cash flow and should free cash flow exceed the needs of the business, what do we do with it? And, you know, we have a history of having repurchased shares on occasion as well as paying special dividends on occasions, and we will evaluate both of those options If we get to the point that we believe free cash flow is beyond the needs of the business, you can expect us to return the cash to shareholders. But if we were to change our outlook and see that we expected a significant downturn in the economy, then we may have different consideration about returning cash to shareholders. It just depends on the circumstances and our view at the time we make the decision.
spk01: Okay, makes sense. Thanks very much for taking the questions. I'll hop back into the queue.
spk03: Thank you, Julia.
spk00: Thank you. Our next question comes from the line of Tyson Buer from KC Capital. Your line is now open. Please go ahead.
spk04: Good morning, gentlemen. Good morning, Tyson. Good morning. I'm going to just jump on to what you last said, H, and that was your policies at the board level regarding your focus on free cash flow and what to do with it versus earnings that you may have compiled during this past year, even though obviously you've run through a cash management cycle with your seasonality where, yes, you have 4.1 months of inventory, you're going to get that down to three, so we should see an influx of cash coming here. You talked about a solid October starting out. Given your outlook on the infrastructure and those, are you more prone to view a return of capital to shareholders with that expectation and willing to have a little more foresight on returning some of that inventory into cash or at least not having those working capital needs going forward. Now that will lap an anniversary of those. So does that come into play when you make that decision on the special dividend in the next couple of weeks and what you do with that return of capital policy that you're discussing?
spk03: Well, as is consistent with our past statements, Tyson, that the very first priority for any use of cash would be to grow the company. If we had acquisition opportunities, if we have additional organic CapEx opportunities, we'll certainly deal with those first. And then, I think you're correct, there will be a working capital release over the coming months, and it's likely to be pretty substantial. So we'll just evaluate whether to return cash and how to return cash based on the circumstances that exist at the time, which would imply we look at our share price, we look at our cash expectations, we look at the state of the general economy. and what's expected there and then come to a conclusion about the best route for the company.
spk04: Okay. Because I think it sends a mixed message if you have such great results, your outlook, and then because of a timing issue on cash flow that all of a sudden you pull back a little bit on what you have normally historically done in your special dividend because of something that is more of a point in time as opposed to an overall view of what your business expectations are. So just my little two cents on that, not that you care. The ABI data showed expansion again in September. Industry with seven months of backlog, obviously housing is the weakness there, but institutional other things still remain strong, which means your customer base for the bulk of your business is strong. In the housing segment, are we returning to an order pattern, even if they're at a lower level, because they right-sized their inventories in the last quarter, which didn't slow it down. It almost stopped it. So any return helps your ability for shipments and better efficiencies at your facilities, just so we get back into a normal order pattern, regardless of what level it is.
spk03: Yeah, I mean, first of all, let me say that just as a caveat, our insight into this is a little blurry in that we don't have any objective data that we can really rely on. So we're using estimates and we're using market knowledge and we're using customer feedback to make our conclusions here. But we have seen a tick up in order entry in these markets, which would indicate that maybe the inventory corrections are close to having run their course. And that would be the background for my statement that inventory imbalances may have been more responsible for the weakness than the actual rate of consumption of the product on job sites. So, yeah, I think to the extent that those inventories have been dealt with, then that's very positive for us.
spk04: Okay. And we knew coming in the fourth quarter that you had some lower fixed inventory. And it seems like we were you were never able to really catch up during the quarter. As you trended through, and you talked about October being stronger than expected. How did the quarter play out? How did we go from, you know, July, August, September? Was that something that you were just started behind the eight ball and can never get ahead? or were there some trending down that created the results that we saw?
spk02: I think, Tyson, if you're asking about finished goods inventories, and as I recall the third quarter call, we indicated we did enter that quarter, and I think it was true, as we finished it with lower levels of finished goods inventory than we would typically have at that time of year. It's probably fair to say we're still a bit in catch-up mode with that as we work through the fourth quarter. Demand has been strong enough that as we made product, we shipped it to the customer in that period of time, but there wasn't excess finished goods inventory available.
spk03: And I think, Tyson, aside from just the housing-related markets, there's been a general loosening up of supply of our products to our customer base So I think that customers throughout our markets have had the opportunity to evaluate their inventory levels and adjust to an environment where availability is more reasonable than it had been in the prior three or four quarters. So I think there's been some inventory management and liquidation across the whole business, not to an alarming degree. And if I understood your question right, you're wondering whether we were trending up or down or flat through the quarter. I would tell you that in our view, the only weakness that we're seeing is in the housing related segment of the business. with also the caveat that there could be some inventory rebalancing going on in other markets. But the rate of order entry has been positive. Customer outlooks are positive. Backlogs are positive in the non-housing related sectors of the business, which would lead us to conclude that 2023 should be a good year absent any kind of curveballs that come along.
spk04: The suggestion in your comments to start the call was that outside of the housing product line that you've actually been able to maintain spread over the raw material cost part of the business. It's the structural cost items, labor, energy, those things that seem to be what's hampering. What remedies are there available or is that just something that you have to figure out how to overcome and become more automated, and maybe that's why we have the big CapEx coming forward. What do you do with that structural cost increase as opposed to just getting your spread over the wire rod?
spk03: Well, I think you need to evaluate every component of that on its own. For instance, energy. Everyone has his own expectation for what's going to happen to energy costs. And in some regions where we operate, the increases that we have incurred have been dramatic, but not so much elsewhere. So are these permanent changes or are they temporary? It's hard to say in the case of energy because there's so many outside influences, including the Texas freeze of February 2021, the Ukraine-Russia conflict, on and on and on. Okay, so I don't really know whether that's a permanent or whether it's a temporary impact on our costs. On the other hand, our labor costs have risen substantially and I tell you that I really don't expect to see that that that that will back off. So we'll have to deal with that through productivity through investment over time and we will and and. In terms of other commodities that we purchase to operate our factories, we've seen dramatic increases in some of those costs, but I believe that most of those will moderate over time. Maybe not back to the lows of pre-pandemic, but we've seen price escalations of three and four times in certain of the supplies that we procure to operate our plants, I don't expect that that will persist for the long term. What have we done in the meantime is we've tried to deal with those cost increases through pricing our product. I'm not sure how else we would have done it.
spk04: The last one, so I'm not monopolizing here. I just happened to see a story on the national news regarding, obviously, the hurricane in Florida and how the utility companies are, in essence, as a de facto replacement, going to be utilizing concrete poles, and they're going to try to do that statewide, and this kind of gives them an opportunity to accelerate those programs. Are you involved in that as far as a product line at all, and is that something you see as the benefit of
spk03: uh going forward as we see some of these natural disasters in florida or california other areas absolutely we're involved um and and it's a a very substantial market for us and one that has bright prospects as you point out those polls those polls are are pre-stressed tyson and and they use both pc strand and they use mild steel reinforcement that we supply so um they're loaded up with our products and what kind of growth do you see there well i i i can't i can't tell you on that product specifically but but um they're busy the growth will be substantial all right thank you gentlemen Thank you, Tyson.
spk00: Thank you. As there are no more questions registered this time, I'd like to hand over to the management team for closing remarks.
spk03: Okay. We appreciate your time this morning. Feel free to call us if you have questions, and we'll talk to you next quarter. Thank you.
spk00: Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines.
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