Insteel Industries, Inc. (NYSE:IIIN) Q1 2024 Earnings Call Transcript
Insteel Industries, Inc. (NYSE:IIIN) Q1 2024 Earnings Call Transcript January 18, 2024
Insteel Industries, Inc. beats earnings expectations. Reported EPS is $0.06, expectations were $0.05. IIIN isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. And welcome to Insteel Industries First Quarter 2024 Earnings Call. My name is Carla, and I will be your operator for today. [Operator Instructions] I will now hand over to your host H. Woltz, CEO to begin. Please go ahead when you are ready.
H. Woltz: Thank you. Good morning. Thank you for your interest in Insteel and welcome to our first quarter 2024 conference call which will be conducted by Scot Jafroodi, our 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 and which could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. The recent environment has been challenging for the company in view of inventory accumulations throughout the supply chain and a significant downward reset in steel prices that occurred following several quarters of extreme supply tightness and significant market price escalations.
We believe these headwinds have about run their course and we continue to be optimistic about the underlying level of demand for our products. I'm going to call -- turn the call over to Scot to comment on our financial results for the quarter and the macro environment. And then, I'll pick the call back up to discuss our business outlook.
Scot Jafroodi: Thank you, H and good morning to everyone joining us on the call. As we anticipated, business conditions remain challenging during the first quarter of fiscal 2024 as we continue to navigate through the ongoing pressure a narrowing spread between selling prices and raw material costs coupled with elevated unit manufacturing costs. As a result, net earnings for the quarter declined to $1.1 million or $0.06 per share from $11.1 million or $0.57 per share in the prior year period. Net sales for the quarter fell 27.1% from a year ago, driven primarily by a reduction in average selling prices as shipments remains flat. The decline in ASPs for the quarter reflects a persistent competitive environment and the steep decline in steel scrap prices over the past year.
Sequentially, ASPs dropped by 7.9% from the fourth quarter as pricing pressure continued during the period driven by both ongoing domestic competition and the growing impact of low priced imported PC strand. As we move into the second quarter, there are indications that the decline in our selling prices may be ending. Steel scrap prices reversed their downward trend during the quarter and have risen by $80 since November. Wire rod producers have followed and made price increases in December and January. In response to the rising cost of our raw materials, we have initiated our own price increases earlier this month, extending across most of our product lines. The start of an upward trend or a leveling out of prices due to these increases could put an end to a headwind that has been negatively impacting our results over the last year.
Shipments for the quarter, which have historically been our slowest period of the year due to the onset of winter weather and holiday schedules, were essentially unchanged from the same period last year, but down 16.1% sequentially from Q4. Volumes during the quarter benefited from improved shipping levels within our residential construction end markets helping offset ongoing weakness in our infrastructure in commercial markets, which continue to be impacted by project delays, customer destocking and weak demand in certain regions of the country. Gross profit for the quarter declined $11.5 million from a year ago, while gross margin narrowed 550 basis points to 5.2%. On a sequential basis, gross profit fell $7.7 million from the fourth quarter and gross margin decreased 370 basis points.
The continuing compression of spreads can be attributed to the pricing pressures I mentioned earlier with the year-over-year decrease in ASP surpassing a reduction in our inventory carrying values. As noted earlier, in response to the recent escalation in our raw material costs, we've been submitted price increases this month – this month which should favorably impact our second quarter spread and margin as higher selling prices will be matched against the consumption of lower cost inventories under the first-in, first-out accounting methodology. Apart from the spread compression, we also experienced higher unit conversion costs as we continue to plan reduction of finished good inventories in certain plants. This led to operating inefficiencies and elevated unit conversion costs which were further amplified by on billing inflationary cost pressures.
However, as we move into the second quarter, we expect a reduction in unit conversion costs as operating levels are gradually increased. SG&A expense for the quarter decreased $800,000 to $6.4 million or 5.2% of net sales from $7.1 million or 4.3% of net sales last year, mainly due to lower compensation expense under our return on capital based incentive plan, which was negatively impacted by weaker results in the current year period. Our effective tax rate rose to 27.2% from 22.9% a year ago. The increase was largely driven by permanent book tax differences and the effect of a discrete tax item which had an amplified impact on our rate due to the lower pre-tax earnings. Looking ahead to the balance of the year, we expect our effective rate to run close to 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 operations provided $21.8 million of cash in the first quarter. This is primarily due to our work change in working capital driven by a reduction in receivables reflecting the usual seasonal slowdown in sales and a decrease in inventories due to the lower average unit carrying values. Our inventory position at the end of the quarter represented three months of shipments on a forward-looking basis calculated off of our forecasted Q2 shipments. Finally, our inventories at the end of first quarter were valued at an average unit cost lower than our first quarter cost of sales and now approximate current replacement costs, which should favorably impact spreads and margins during the second quarter as we consume the lower cost material.
We incurred $12.3 million in capital expenditures in the first quarter and remain committed to our full year target of $30 million. H will provide more detail on this topic in his remarks. In December, we returned $48.6 million of capital to our shareholders through the payment of a $2.50 per share special dividend in addition to our regular quarterly dividend, marking the highest special dividend the company has paid in seventh year over the last eight years, we have paid a special dividend. Also during the quarter, we repurchased $539,000 of our common equity equal to approximately 19,000 shares. From a liquidity perspective, we ended the quarter with $85.6 million of cash on hand and no borrowings outstanding on our $100 million revolving credit facility, providing us ample liquidity and financial flexibility going forward.
As we move into the second quarter of fiscal 2024, we expect gradual improvement in our construction end markets. Leading indicators for non-residential Construction Spending, Architectural Billing and Dodge momentum Indexes imply roughly stable conditions going forward. In November, ABI remained in negative territory for the fourth consecutive month. With the score of 45.3%, aim score below 50 in the case of decline in business conditions. However, despite the low score, there were positive signs of in report and there's indications that credit conditions are beginning to ease with firms noting an increase in inquiries for future projects The Dodge Momentum Index, another leading indicator for non-residential building construction rebounded 3% in December, rising to 18.6% with commercial planning improving 1% and additional planning up 6.1% on a year-over-year basis, the overall mix was lower by 2%.
And Dodge noted that despite ongoing labor and construction cost challenges, there are a substantial number of projects currently in the planning stages that will support construction spending into 2025. Turning to the macro indicators of our construction end markets. The monthly construction spending data continues to remain strong, with the November report showing total spending on a seasonally adjusted basis, up approximately 11% from last year, with non-residential construction of 18% and public idling street construction, one of our larger end uses for our products, up over 15%. However, while trucks or spending remain elevated, U.S. met shipments, another measure that we track continue to lag 2022 levels and shipments were down 3.6% for the month of October, and 2.9% year-over-year.
This concludes my prepared remarks, and I'll now turn the call back over to H.
H. Woltz: Thank you, Scot. As we commented last quarter, the difficult Q1 operating environment was expected as we faced headwinds, including declining steel prices, inventory liquidations by customers, the need to align our finished goods inventories to reflect lower shipments. And finally, the normal seasonal downturn in construction activity. As we first-in, first-out reporter, declining steel prices unfavorably affect reported earnings as a matter of simple mathematics. The particularly sharp increase Insteel prices during 2021 and in 2022, produced a tailwind for earnings during these periods and the sharp reduction of prices during 2023, extending into Q1 2024 created a substantial headwind for the company that was exacerbated by inventory liquidations and inflationary pressures on costs.
Fortunately, it appears that pricing is heading up. More steel price stability should contribute to an improved operating environment for the company. As mentioned in the release, shipments of reinforcing products into the housing markets have recovered nicely since collapsing beginning in May 2022 at the onset of the Fed's interest rate increases. Margins have been compressed. However, its higher cost inventory flows through cost of sales, a process that's now behind us. Shipments of welded wire reinforcement into infrastructure markets continue to show weakness, particularly in the Midwest and Western markets. While customers are by and large busy, many have storage yards that are full of finished products due to contractor delays and others are reducing inventories.
While there's not objective data to support our view, it's not surprising that inventory corrections would occur following the recent extreme tightness of supply. This phenomenon was repeated throughout the supply chain and we experienced the same dynamics in our raw material supplies. If we are correct, Insteel shipments and production should accelerate at seasonally favorable weather patterns displaced the winter chill. PC strand shipments were flat for the quarter, although the mix improved. As mentioned in our last two earnings calls, we are increasingly affected by low-priced imported PC strand. For instance, the average unit value of imported PC strand for November quarter-to-date, which is the most recent data was lower than the domestic market price for wire rod.
The raw material from which PC strand is produced. The industry is carefully scrutinizing strand imports and will pursue any trade actions that are justified. We're optimistic about the impact on our markets of the Infrastructure Investment and Jobs Act, although it's still difficult to point to any specific projects that have affected demand. With respect to IIJA, the Secretary of Transportation has acknowledged, "delays of 1, 2, 3 or more years between funding, when funding is appropriated and authorized and when those dollars are assigned to a project." Meanwhile, of course, inflation is impacting project cost and jeopardizing the viability of some projects. Despite these obstacles, we believe that IIJA funds will ultimately be allocated to projects and spent as intended with the beneficial impact on our industry.
The question is when, not if. Turning to CapEx. We indicated in prior calls and press releases that CapEx for 2024 was expected to come in at approximately $3 million. Following 2023 CapEx of $30.7 million, we have been asked whether there's been a permanent step-up in CapEx expectations for the company. The answer is no. On an ongoing basis, we would expect CapEx to range closer to depreciation and amortization and to be elevated in years, we like to expand capacity or incorporate new technology into our facilities through equipment replacement. As a reminder, the CapEx amounts for 2023 and 2024, are heavily influenced by the addition of three new production lines at our welded wire reinforcement plants and the addition of a production line at a PC strand plan.
The scale of these additions is not a recurring event. The investments we're making in state-of-the-art technology will expand our product capabilities and favorable impact of cash cost of production. And companies that failed to make such investments will become increasingly uncompetitive. As you know, Insteel continues to be debt-free and has substantial flexibility to make decisions for the long-term best interest of the business. Looking ahead, we are aware of the substantial risk related to future performance of the U.S. economy, and we're monitoring the environment. We believe that in addition to elevated interest rates, heightened conservatism among customers that are concerned about the macro environment would be contributing to a slower market recovery.
In any event, we're well-positioned 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. Carla, would you please explain the procedure for asking questions?
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