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Insteel Industries Inc (NYSE:IIIN)
Q1 2021 Earnings Call
Jan 21, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Insteel Industries' First Quarter 2021 Conference Call. [Operator Instructions]

I would like to hand the conference over to one of your speakers today, Mr. H. Woltz. Sir, please go ahead.

H.O. Woltz -- Chairman, President and Chief Executive Officer

Good morning. Thank you for your interest in Insteel and welcome to our first quarter 2021 earnings 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 on today's call are considered to be forward-looking statements, which are subject to various risks, uncertainties that could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. All forward-looking statements are based on our current expectations and information that is currently available. We do not assume any obligation to update these statements in the future to reflect the occurrence of anticipated or unanticipated events or new information.

I'll now turn the call over to Mark to review our first quarter financial results and current market conditions.

Mark A. Carano -- Senior Vice President, Chief Financial Officer and Treasurer

Thank you, H., and good morning, everyone joining us on the call. As we reported earlier this morning. The first quarter of fiscal 2021 was another strong quarter for Insteel. Our markets continue to experience solid demand throughout the fall as the momentum we experienced in the fourth quarter continued at a seasonally strong pace, which coupled with the rebound in spreads from their depressed levels last year, restored gross margin to more normalized levels.

Earnings per share for the quarter increased to $0.42 per share as compared to $0.03 per share a year ago. Shipments for the quarter were up 21.6% from last year but down 15.2% sequentially from Q4 reflecting both the usual seasonality in our demand. And as you recall, Q4 2020 benefited from the inclusion of an extra week in that quarter based on the fiscal 2020 calendar. Q1 though was the highest first quarter shipment level in the Company's history, exceeding the previous first quarter high in 2018. Robust demand in our markets compared to last year led to broad-based shipment growth across virtually all our products and it remained consistently strong across all three months of the quarter.

Average selling prices increased 1% from last year and 2% sequentially from Q4 due in part to price increases implemented in the latter half of the quarter to offset the rising cost of raw materials. Gross profit for the quarter increased $13.6 million from a year ago and gross margin expanded over 1,000 basis points to 16.6%, primarily due to the sustained recovery in spreads between selling prices and raw material costs, in addition to the impact of incremental volume and marginally lower conversion costs. On a sequential basis, gross profit increased $0.4 million, and gross margin widened 250 basis points, primarily due to an incremental widening of spreads.

SG&A expense for the quarter increased $2.8 million to $8.6 million from $5.7 million last year or 7.2% of net sales from 5.9% last year. The increase was attributed to two areas. First accruals for incentive compensation expense under our return on capital-based incentive plan due to our strong results in the first quarter. As you may recall, we did not incur any incentive compensation expense in the first quarter of last year. And second, higher legal expenses relative to our normal run rate in support of our ongoing trade cases.

Our effective tax rate for the quarter increased marginally to 23.2% from 22.7% last year due to changes in permanent book-tax differences. Looking ahead to the remainder of the year, we expect our effective tax rate will run 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 balance sheet and cash flow statement. Cash flow from operations for the quarter generated $14 million, largely due to earnings with a minimal increase in working capital given the strong quarterly performance as compared to $29.6 million in cash flow generated last year, which was primarily the result of a $24.6 million reduction in working capital. Based on our sales forecast, for the second quarter of 2021, our quarter-end inventories represented 2.4 months of shipments compared with three months at the end of the fourth quarter.

Our inventories at the end of the first quarter of 2021 were valued at an average unit cost that was higher than our fourth quarter cost of sales, but favorable relative to current replacement cost. In December we returned $29 million of capital to our shareholders through the payment of $1.50 per share special cash dividend in addition to our regular quarterly dividend, marking the fourth year over the last five years, we paid a special dividend.

We ended the quarter with $50.2 million of cash on hand or just over $2.50 a share and no borrowings outstanding on our $100 million revolving credit facility providing us with ample financial flexibility to support our strategic initiatives. As we look ahead to the balance of the year, we are cautiously optimistic, the demand will remain steady across our markets. Our near term shipment trends and market sentiment support this perspective. In addition, we've announced price increases during the first quarter to offset the impact of rising raw material costs, and all have largely been accepted by the market in a further indication of construction end market strength. These increases should exhibit a more pronounced effect on our average selling prices in Q2, helping to maintain our profitability levels.

As H. will describe the more detail, we received favorable final determinations with respect to several of the PC Strand trade cases which should finally resolve some of the illegal activity that has adversely, had affected this market. Despite the forecast of a substantial decline in infrastructure-related spending due to the financial strains from COVID-19, those dire predictions have not materialized to-date. Through the first 11 months of 2020, public construction remained resilient with spending up 4.3% from the prior year. Highway and street construction, one of the largest end-use applications for our products generally remained level with last year.

In the last three months of highway and street construction, spending has exceeded the same three month period last year by almost 4%. But uncertainties do remain that underpin our cautious outlook. The impact of COVID-19 remains a risk to our markets and our operations. The recent rapid escalation in our raw material cost is a concern that has not impacted demand to date as we've been successful mitigating through price increases. But as was the case in past cycles these high velocity increases in rod cost can create a volatile environment as supply and demand seek an equilibrium over the coming months.

And third -- and third-party forecasts for non-residential construction spending remain a cause for concern. Bottoming in the middle, mid-summer of 2020 followed by modest improvements in the early fall. They appear to have lost their upward momentum and have remained stagnant at their current levels. Levels which are below the expansion rate levels experienced before the impact of the economic slowdown in March of 2020.

I'll now turn the call back over to H.

H.O. Woltz -- Chairman, President and Chief Executive Officer

Thank you, Mark. As reflected in the release, our strong first quarter results were driven by resilient non-residential construction markets and late in the quarter, by expectations for rising steel prices. We're pleased with the solid underlying level of demand for our products and our financial performance and we thank our Insteel team mates for their focus on working safely and execution excellence. During Q1, we continue to observe CDC recommended procedures for managing exposure to COVID-19 and its transmission at our plants and administrative offices.

While we had staffing disruptions during the quarter related to quarantines, none of our locations was materially affected by operating restrictions and most customers also experienced normal operations subject to the same quarantine-related staffing complications that affected Insteel. As of now, we expect to continue fulfilling customer requirements and we do not expect the surge of infections to affect our operating plans.

Over the course of the last three earnings calls, we've reported that Insteel along with other US producers had filed anti-dumping and countervailing duty trade cases to address illegally traded imports of PC Strand and standard welded wire reinforcement. The PC Strand cases were filed in April 2020 against 15 countries that represented 89% of PC Strand imports during 2019. On January 8, the International Trade Commission issued its affirmative final injury determination with respect to Argentina, Colombia, Egypt, Netherlands, Saudi Arabia, Taiwan, Turkey and United Arab Emirates, resulting in the implementation of duties ranging from 24% to 194% of value, which we believe are sufficient to address the injurious behavior of these countries. It now appears that the cases against Indonesia, Italy, Malaysia, South Africa, Spain, Tunisia and Ukraine will conclude during our third fiscal quarter.

We are delighted to have prevailed conclusively with respect to 8 of the 15 responder countries. We're now focused on obtaining similar outcomes in the remaining seven cases. We previously reported that the pendency of the cases had favorably impacted the market, and we expect the position of these anti-dumping duties to contribute to improved long-term market fundamentals. At the end of June 2020, Insteel and four other domestic producers of standard welded wire reinforcing filed anti-dumping and countervailing duty petitions against Mexico alleging dumping margins ranging from 56% to 161% of value and illegal government subsidies of the Mexican industry.

We received a favorable preliminary injury determination in August and the final injury hearing is scheduled for February 12. We expect to know the outcome of these cases before the end of the current quarter. The Department of Commerce found a preliminary dumping margin of between 64% and 153% of value for the largest Mexican producer, but has not concluded margin determinations for the other producers. As with the PC Strand cases, the pendency of the Mexico cases has had a favorable impact on the market, but we must win the cases to address the illegal activity for the long term.

Turning to capex, we continue to expect 2021 to come in at approximately $20 million. The ESM project under way at our Dayton, Texas plant is on track for commissioning during our third fiscal quarter, and we expect to pursue additional investments in 2021 to support our growth in this market. During the quarter, we also continued the process of updating and relocating the major production equipment, we acquired through the Strand-Tech Manufacturing acquisition in March 2020. We expect commissioning to begin for the remaining production lines by the end of the current quarter and are already realizing a favorable impact on unit conversion costs at the plants where relocated equipment is up and running.

The renovation and relocation process which is drawing to a close, has been a substantial undertaking that consumed a significant portion of our internal engineering capacity. We look forward to turning the attention of this talented group to other important projects which are scheduled for fiscal 2021. I'd like to express my appreciation to the engineering group and to those supporting the group for their outstanding performance on the STM project. The Strand-Tech real property has been listed for sale and has generated a great deal of interest among prospective buyers.

Our continued presence on the site while renovating equipment has not been helpful to the marketing process, so we're focused on expediting completion of these activities to advance the sale process without delay. Our capex strategy continues to be focused on reducing cash cost of production, improving the quality of our products, supporting growth initiatives and improving our information technology infrastructure and capabilities.

Turning to our outlook for the balance of 2021, our markets have considerable momentum that we believe will continue at least into our third fiscal quarter although numerous uncertainties affect our ability to provide an accurate forecast of business conditions through the end of the year. Primary among those, are the impact of the downturn on funding sources for public construction and the increased risk profile of the private non-residential construction market and in fact, the entire economy.

With that said, we expect strong financial performance over the next few months driven by current robust demand trends for our products and rapid significant escalations in steel costs, which we are passing through the supply chain. We also expect the new administration and Congress to come to terms on a long-term infrastructure investment program, which should inspire confidence in our markets and drive increased consumption of our products, although the timing of any positive impact is unknown.

Going forward, we'll closely monitor market conditions and aggressively pursue the appropriate actions to maximize our shipments and optimize our costs, and we're well positioned to pursue attractive growth opportunities, both organic and through acquisition.

This concludes our prepared remarks, and we'll now take your questions. Michelle, would you please explain the procedure for asking questions?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Julio Romero with Sidoti. Your line is open. Please go ahead.

Julio Romero -- Sidoti & Company -- Analyst

Hey, good morning. Happy New Year.

H.O. Woltz -- Chairman, President and Chief Executive Officer

Good morning, Julio.

Mark A. Carano -- Senior Vice President, Chief Financial Officer and Treasurer

Good morning.

Julio Romero -- Sidoti & Company -- Analyst

I guess my first question is just on the very impressive tonnage [Phonetic] shipment data you reported. Mark, I think you talked about this. Some of these [Technical Issues] categories of non-residential, highway and street was up 4% in the last three [Phonetic] months. [Technical Issues] has been strong, which has been OK. But can you just talk about that relative to the 20% year-over-year increase in shipments you're seeing. Are you seeing kind of, and just talk about what areas maybe you're seeing some strength?

Mark A. Carano -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah, Julio. I mean, the strength is actually pretty broad based across all our end markets. We haven't seen any particular weakness. Highway and street construction is one area that we follow closely, just because it's a large market for us. And as I mentioned, that state level throughout the year and then, over the last three months, it's actually up over where it was over that same period last year. But there really wasn't a particular market that jumped out as being stronger than usual or weaker than usual.

H.O. Woltz -- Chairman, President and Chief Executive Officer

Yeah. And Julio, I would add, I think you're aware that we have a very difficult time on actually demonstrating cause or linkage between any of those components of construction spending that are reported and our shipments. It's very difficult for us to point to definitive drivers.

Julio Romero -- Sidoti & Company -- Analyst

Yeah. I guess, maybe taking another stab at that. I mean, maybe instead of drilling into the sub-sectors, is maybe public construction making up a bigger percentage than a driver relative to past years -- is the residential maybe outperform, I don't know, if you can give me any color on that.

H.O. Woltz -- Chairman, President and Chief Executive Officer

Yeah, I would tell you, we don't -- we don't detect any shifts in the drivers of our order entry. As Mark indicated, the business has been strong across the board. There are no -- there are no laggards.

Julio Romero -- Sidoti & Company -- Analyst

Got it. Just 20% was really impressive there. And I guess H., you talked about, you do expect strength in the end markets just kind of support through at least your third quarter. Does that expectation kind of -- kind of factor in the same kind of backdrop you've seen in this quarter and then in last two quarters in that, public construction continues to be robust kind of those projects are previously funded. And that will kind of drives up eventually in, maybe third or fourth quarter of the year.

H.O. Woltz -- Chairman, President and Chief Executive Officer

Well, as you know, we're notorious for our lack of visibility out beyond a few weeks in the business. And so I would say, no, there are no specifics that would cause me to suggest that our fourth quarter is not going to be strong, but just in view of the overall uncertainty that is -- that's present all around us, I would just be hesitant to make any observation past what we can see pretty clearly which is through this quarter and into third quarter.

Julio Romero -- Sidoti & Company -- Analyst

Yeah. No, understood. I guess maybe just last one from me. Can you talk about the ability of the industry to kind of absorb, any further price increases if steel price just kind of continue on the current trajectory.

H.O. Woltz -- Chairman, President and Chief Executive Officer

It's a good question, and I would tell you that what we're seeing in the last few weeks is probably unprecedented. We have back to back triple-digit price increases per tonne, and historically, these things don't have long runs, but their differences that are at work in the market today relative to past cycles, where we've seen price run-ups. So, as you know, we've been asked many times what really drives our ability to pass cost increases through to the market and we have consistently replied that it is strength in demand for our products.

And certainly, we see that today. And while, I would not welcome further raw material costs or scrap cost increases that necessitate our raising prices further, I do expect that if that were to happen that the market is strong enough for us to pass these through and at the risk of inability to do that is really quite low. On the other -- the other factor at work today is that hot-rolled steel wire rod is in very tight supply. And you may know that in the past, we have also commented that tight supply conditions tend to -- to have the same impact on pricing ability in our markets as does our strong order book for our products, and that is -- that wire rod is not available in unlimited quantities. And that adds further strength to our ability to collect increases in the marketplace. So I would just -- I would just repeat that we really don't want to see this continue. But as with many things is beyond our control and if the price run up does continue, I certainly believe the market is strong enough so that it would -- we would not see any adverse impact on our margins.

Julio Romero -- Sidoti & Company -- Analyst

That's helpful. I'll hop back into queue. Good start to the year. Thanks.

H.O. Woltz -- Chairman, President and Chief Executive Officer

Thank you.

Mark A. Carano -- Senior Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

Thank you. [Operator Instructions] And our next question comes from the line of Tyson Bauer with KC Capital. Your line is open. Please go ahead.

Tyson Bauer -- KC Capital -- Analyst

Good morning, gentlemen.

H.O. Woltz -- Chairman, President and Chief Executive Officer

Good morning, Tyson.

Tyson Bauer -- KC Capital -- Analyst

Just to add on to what you were saying H., given your position within your markets being either the top or the second manufacturer as far as market share and prominence, do you not get a competitive advantage, when you do see some tight supply or the growing demand that you're able to react and push through more favorable actions than your competitors. So in this environment, are you not strengthening your competitive advantage and showing that might over your smaller competitors.

H.O. Woltz -- Chairman, President and Chief Executive Officer

It's hard for me to give you a straight answer on that, Tyson. But I would tell you that in the current environment, we're less worried about competitors and what they're doing with their pricing, then we may normally be. We understand the economics of our business and we understand that in a market environment like this, we should be expected to perform well and I think -- I think on all the stars are aligned, so that we will.

Tyson Bauer -- KC Capital -- Analyst

Okay. Given your scale of economies, are you able to source better. And in the past where you've been able to bring in large quantities of imported steel that was kind of shut off to you? Is that reopening or is that an option still there, where you can get more favorable front end cost?

H.O. Woltz -- Chairman, President and Chief Executive Officer

Well, with respect to domestic purchases, we really don't know on -- we don't know how we purchase relative to our competitors. We do the best we can. And that's the sum and substance of it. One thing that is quite different in today's market as compared to other tight wire rod markets and environments where prices run up is -- there is practically no imported product available to loosen up supply. Now, I mean, it's available, but it would be available at prices that are even higher than domestic prices today. So -- so my belief is that that discipline on availability and supply will on probably give this run legs that it may not have had -- in prior environments.

Tyson Bauer -- KC Capital -- Analyst

Okay. Given the comments, it sounds like margin outlook at least in the short term are going into Q3. We're looking at something that's fairly stable. You're able to maneuver and keep that similar to what we just saw. Then we start getting into the seasonally better quarters. Would you anticipate, that's -- what we just had in Q1 will be able to be replicated and push through -- throughout the rest of the year.

H.O. Woltz -- Chairman, President and Chief Executive Officer

It's always hard to make a definitive statement, Tyson. But I don't see why that would not be the case right now. Of course, things could change, but right now, I'd say that it's pretty good -- pretty good chance that margins will continue strong.

Tyson Bauer -- KC Capital -- Analyst

Working capital needs, obviously, the higher input costs, AR, those kind of cash conversion cycles, what are we anticipating here for working capital needs this year?

Mark A. Carano -- Senior Vice President, Chief Financial Officer and Treasurer

I mean, I think, Tyson, we'll -- depending on the cost of rod and this pricing environment, I suspect we'll be using working capital or building it over the period of, into Q2 and the balance of the year.

Tyson Bauer -- KC Capital -- Analyst

Okay. Is there any given trade action that has already occurred or pending that is more beneficial to Insteel and that pendency of those actions being partially felt already. This is kind of an open-ended question, but how much benefit have we already seen and how much more is there to be received, should things continue to be finalized in your favor?

H.O. Woltz -- Chairman, President and Chief Executive Officer

Well, it's the case with both the standard welded wire reinforcement and PC Strand cases that -- just their pendency has strengthened the market to try to quantify that is impossible. But on certainly the offshore or cross the border suppliers, become much more cautious due to potential adverse consequences during the pendency of the cases, so that has helped. But what really helps is when, in the cases as we've done with 8 of the 15 countries on -- in the PC Strand arena. So -- so I expect that we will -- we will, adequately address the illegal activity of the remaining seven PC Strand countries and Mexico and standard welded wire reinforcement and that there will be improved market fundamentals long term because of that. And I would hasten to say that we will see other countries come into the market particularly in PC Strand probably less so in welded wire reinforcement. But this is the nature of it. We've been through this cycle many times, but dealing with 15 bad actors is nothing but highly positive for the long-term fundamentals of this market.

Tyson Bauer -- KC Capital -- Analyst

And the last question for me. We've gone through previous administrations who have controlled both houses and the Presidency. A lot of them talk about infrastructure in the need and we start out with hope, and then we somewhat get desensitized to the continuing talks, because I can't figure out the funding mechanisms of this -- is this time any different or are we still in that honeymoon very hopeful that we're going to see something long term at the federal level. And as things drag on we may get desensitized to it once again. What -- is there anything different this go around well.

H.O. Woltz -- Chairman, President and Chief Executive Officer

I think -- I think the difference this time around is that, the entire country is practically immune to deficit spending and funding thing seems to be no real importance to anyone Republican or Democrat, and that is largely why I expect to see a big infrastructure program approved. With that said, if you think back to the Obama infrastructure program, it is also important to know what the money will be spent for. And history would tell us that infrastructure and the definition of infrastructure tends to expand to cover anything that they want to spend money on. So the details will be very important when we start to see information on how an infrastructure program is put together.

Tyson Bauer -- KC Capital -- Analyst

All right. Thank you, gentlemen.

H.O. Woltz -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. And I'm showing no further questions at this time, I would like to turn the conference back over to the Company for any further remarks.

H.O. Woltz -- Chairman, President and Chief Executive Officer

Okay, thank you. We appreciate your interest in Insteel. We look forward to talking to you in the next quarterly call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

H.O. Woltz -- Chairman, President and Chief Executive Officer

Mark A. Carano -- Senior Vice President, Chief Financial Officer and Treasurer

Julio Romero -- Sidoti & Company -- Analyst

Tyson Bauer -- KC Capital -- Analyst

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