Good morning, ladies and gentlemen, and welcome to the Insteel Industries Fourth Quarter 2020 Conference Call. At this time, all participants' lines are in a listen-only mode. Later we'll conduct a question-and-answer session [Operator Instructions]. As a reminder this conference is being recorded.

I would now like to turn the conference over to your host Mr. H. Woltz, President and CEO of Insteel. Please go ahead sir..

Good morning. Thank you for your interest in Insteel and welcome to our fourth quarter 2020 earnings call which will be conducted by Mark Carano, our Senior Vice President, CFO and Treasurer and me.

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 and 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 will now turn the call over to Mark to review our financial results.

Then I'll follow up to comment more on business conditions and other recent developments..

Thank you, H, and good morning to everyone joining us on the call. As we reported earlier today, the fourth quarter of fiscal 2020 proved to be a strong quarter for Insteel. Robust demand in our construction end markets in addition to a sustained recovery and spreads from depressed levels of year ago were the key drivers in our performance.

Excluding the non-recurring charges referenced in our release. Net earnings rose to $0.38 per share as compared to a net loss of $0.09 per share last year. To note, the current year quarter also benefitted from having an extra week as compared to the prior year based on our fiscal calendar.

Shipments for the quarter increased 27.7% from last year and 12.1% sequentially from Q3. The fourth quarter of fiscal 2020 was our highest quarterly shipment level in the company's history even excluding the extra week in the quarter and exceeding our previous high watermark in the third quarter of 2016.

The fourth quarter shipping performance was driven by continued strength in construction activity across all our end markets as compared to last year with engineered structural mesh and PC strand leading the growth in the quarter. Average selling prices though remained under pressure and declined 4.6% from last year.

But there are signs of improvements as sequentially average selling prices increased to 1.1% which represented the first increase in seven sequential quarters.

As we've communicated in previous calls low priced import competition in the PC strand and standard welded wire markets respectively remain intense and continues to have a negative impact on our average selling prices combined, they represented approximately 30% of our fourth quarter revenue and experience an average selling price decline of 8% as compared to a decline of 3% for the balance of the business relative to last year.

This does represent improvement from our third quarter 2020 levels though as we highlighted during that quarter these products also represented 30% of revenue. But they experienced 20% decline in average selling prices as compared to an 8% decline for the balance of the business.

While this positive trend may prove to be temporary, we do believe that the anti-dumping and countervailing duty cases we've filed have had a positive impact on the market.

Gross profit for the quarter rose $15.6 million from a year ago to $19.5 million and gross margin expanded over 1,000 basis points to 14.1% due to the impact of incremental volume and the recovery and spreads between selling prices and raw material cost.

On a sequential basis, gross profit increased $4.7 million from the third quarter and gross margin widened 200 basis points primarily due to shipment volume into a lesser extent of widening and spreads.

Spreads over the last two sequential fiscal quarters of 2020 have been consistently above the depressed levels experienced during the last two comparable quarters of fiscal 2019 as we benefited from the consumption of lower price rod inventory that exceeded the negative impact from the steady decline in average selling prices.

Given current market rod pricing and stabilizing average selling prices we would expect to maintain these more normalized spread levels into Q1 of fiscal 2021. SG&A expense for the quarter rose $3.4 million to $9.4 million or 6.7% of net sales from $5.9 million or 5.2% of net sales last year. This increase was largely driven by three areas.

First, we experience higher incentive compensation under our return on capital-based incentive plan due to our strong financial results this year. You may recall that we did not incur any incentive compensation expense in the fourth quarter of last year or for the full fiscal year of 2019 given our performance during that reported period.

Next, we incurred legal expenses relative to our normal run rate solely in support of our trade case initiatives and finally we revalued the earn out liability related to an acquisition given measurement of its performance. This is conclusion of the measurement so no future expenses will be incurred with respect to it.

Our effective tax rate for the year decreased to 21.4% for the fiscal year 2020 from 24.9% last year due to the benefit of NOL carryback provisions of the CARES Act and utilization of selected state NOLs excluding the CARES benefit our effective tax rate would have been 22.3%.

Looking ahead the next year, we expect our effective tax rate will continue to run around 23% subject to the level of pretax earnings, book tax differences and other assumptions and estimates that factor into our tax provision calculations.

Moving to the balance sheet and cash flow statement, cash flow from operations for the quarter generated $11.4 million largely from earnings with a minimal change in working capital.

As compared to $32.5 million in cash flow last year which was primarily the result of $31.4 million reduction in working capital due to a rebalancing of our inventories during that quarter from the elevated levels experienced during much of last year.

Based on our sales forecast for Q1, our year end inventories represented three months of shipments compared with 2.5 months at the end of the third quarter and were valued at an average unit cost that was lower than the beginning quarter average and the amount reflected in Q4 cost of sales.

These lower costs should favorably impact our margins during the first quarter assuming average selling prices remain stable. Capital expenditures were $7.1 million for the year down $3.4 million from last year and remained largely focused on cost and productivity improvement initiatives in addition to recurring maintenance requirements.

Looking ahead to 2021, we expect CapEx to total up to $20 million including important initiatives related to relocating and upgrading the STM assets and investments to further the growth in our engineered structural mesh business as well as our customary recurring maintenance needs.

We concluded the quarter with $68.7 million of cash on hand or approximately $3.50 a share and no borrowings outstanding on our $100 million revolving credit facility. Looking ahead to fiscal 2021, we continue to experience steady demand in the early weeks of Q1 as our customer base executes existing project backlogs.

But the lingering impact of COVID-19 on US economic recovery remains a risk to our business. As we progress through fiscal year, we expect our financial results will remain vulnerable to the path of these evolving market conditions and their impact on both non-residential and infrastructure markets.

While recent third-party forecast for non-residential construction spending indicated bottoming or modest improvement from trends earlier in the year. We're cautious on the demand outlook. The Architecture Billings Index and Dodge Momentum Index leading indicators for non-residential construction support these trends.

ABI has rebounded from a multi-year low of 29.5 in April after stalling at 40 during the summer ABI registered an increase to 47 yesterday. But it has remained below the 50 threshold for seven consecutive months.

Dodge which hit a low point in June of this year has posted three sequential increases in July, August and September gaining 2.2% over that period. These along with other indicators typically would signal a slowdown broadly across non-residential construction activity.

But the drivers behind the economic weakness make the magnitude and timing of any impact unclear. Turning to public infrastructure spending has yet to experience the level of weakness forecast at the beginning of the pandemic. But the impact varies by state and region.

Certain large markets for our business like Texas have remained steady relative to historic levels. In addition through the first eight months of the year, public construction spending increased 6.1% from a year ago with highway and street construction one of the largest end application for our products increased 2%.

Despite these economic uncertainties we continue to focus on optimizing our operations, safeguarding our employees and advancing our key growth and market initiatives. Our success in the engineered structural mesh market in fiscal 2020 should position us for continued expansion of that product in 2021.

Additionally, the trade cases alleging illegal activity by importers in certain of our markets which are expected to be resolved in fiscal 2021 have progressed favorably and we believe the facts supporting the cases are strong.

Finally, we will continue evaluate acquisitions opportunistically in our existing business that may arise in this challenging environment.

These initiatives remain consistent with our capital deployment that balances maintaining appropriate financial strength for pursuit of our three objectives reinvesting in the business to improve our operating model through cost and productivity improvements or capital expenditures to accelerate our organic growth, executing on strategic opportunities that meet our return parameters to support inorganic growth and returning capital shareholders in a disciplined manner.

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

Thank you, Mark. As Mark indicated. Our fourth quarter results reflect strong shipment growth relative to the prior year driven by resilient non-residential construction markets.

We also benefited from the closer alignment between raw material costs and average selling prices as reflected in the recovery of our gross margin which was distorted in the prior year by the downward spiral and steel prices and unexpected weak demand.

Gross margin is trending closer to a normalized level following the relative stability we've seen recently in steel prices. We're pleased with the solid underlying demand for our products and our financial performance and we thank our Insteel teammates for their focus on working safely and execution excellence.

During Q4, 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 experience normal operations subject to the same quarantine related staffing complications that effected Insteel.

As of now we expect to continue fulfilling customer requirements and do not expect to surge of infections to affect our operating plans. During Q4, we completed the customer integration activities related to our Q2 acquisition of certain assets of Strand-Tech Manufacturing.

We appreciate the confidence placed in Insteel by former Strand-Tech customers and are gratified that practically all of these relationships are ongoing and mutually beneficial. Our engineering team has been onsite at the Strand-Tech plant continuously updating and renovating equipment that will be deployed at other Insteel facilities.

Commissioning activities are presently underway for the first two production lines that were relocated. These capacity additions were relating [ph] process bottlenecks and contribute to significant improvements in the unit cost of production in addition to playing an important role in accommodating our anticipated PC strand growth.

The renovation and relocation process is a substantial undertaking which is absorbed a significant portion of our internal engineering capacity and will continue to do so into our second fiscal quarter.

I'd like to express my appreciation to the engineering group and those supporting the group for the truly remarkable progress they've made up to this point. We look forward to completing this initiative and moving onto promising opportunities in other parts of the business.

The Strand-Tech real [ph] property has been listed for sale and has generated a great deal of interest among prospective buyers. Our continued presence onsite while renovating equipment is not particularly helpful to the marketing process, so we're focused on expediting completion of these activities to advance the sale process without delay.

Turning to our trade case initiatives, in April, Insteel together with two other domestic PC strand procedures filed anti-dumping petitions against 15 countries representing 89% of total PC strand imports that entered the US in 2019 in addition to countervailing duty petition against Turkey alleging illegal subsidies.

The scope of the filings which allege dumping margins ranging from 24% to 194% of value reflects the irresponsible behavior or respondents in the US market over the 2017 to 2019 investigation period.

On June 1, the International Trade Commission issued its affirmative preliminary injury determination and the investigation shifted over to the Department of Commerce. It now appears that about half of the cases were wrapped up in early January with the balance concluding during our third fiscal quarter.

As Mark indicated previously, dependency of these cases has had a favorable impact on the market which is certainly welcome after years of import driven downward pricing pressure. We must win the cases however to level the playing field with these parties on an ongoing basis.

While we can't forecast the outcomes, we're pleased with developments up to this point and we believe the fact supports our allegations and it will be successful.

At the end of June, 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.

Import penetration has risen consistently as Mexican producers have persisted in dramatically underselling the US market. We received a favorable preliminary determination of injury from the International Trade Commission in August which shifted the investigation to the Department of Commerce.

It now appears that these cases were wrapped up during our third fiscal quarter or early in the fourth quarter. As with the PC strand cases. We can't predict the outcome, but we're pleased with the developments up to now and we believe we'll ultimately obtain anti-dumping and countervailing duty orders with respect to Mexican producers.

Turning to CapEx, as reported we came in at just over $7 million for 2020 which was substantially under our prior estimates. The shortfall is purely timing related largely connected with the significant project supporting our engineered structural mesh growth that was delayed but which is now moving ahead at a rapid pace.

Given the momentum of this project and other ESM initiatives, significant investments related to the renovation and relocation of the Strand-Tech assets and further upgrades to our information technology. We expect 2021 CapEx to come in at approximately $20 million.

We did the 2020 CapEx shortfall as an opportunity cost and we look forward to improving our competitive position and our growth prospects by successfully completing of attractive investments across our product portfolio.

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 2021, during the Q3 call we indicated that we expected a strong fourth quarter in view of the momentum in our markets. While momentum is still favorable numerous uncertainties affect our ability to accurately forecast 2021.

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.

We would not be surprised to see some softening as the consequences of the pandemic driven downturn ripple through our markets although recent macro forecasts are more encouraged and then those made three or four months ago.

Also we're optimistic, that once we're past the upcoming election Bipartisan support will emerge for increased infrastructure spending which would provide economic stimulus promoted by many politicians while also generating long-term investment returns for tax payers.

We'll continue to closely monitor market conditions and aggressively pursue the appropriate actions to optimize our cost and will continue to be vigilant in pursuing attractive growth opportunities both organic and through acquisitions. This concludes our prepared remarks and we'll now take your questions.

[Indiscernible] would you please explain the procedure for asking questions..

[Operator Instructions] our first question comes from Julio Romero of Sidoti. Your line is open..

So I guess I wanted to start off what you're hearing from customers in regards maybe a level of concern about staying local funding and a potential drop off there.

When does the timing of that potentially effect Insteel?.

I think that's a $64 question for sure and as you might expect. There is a wide range of expectations among our customers from certain customers who have strong backlogs going through what would be our second fiscal quarter to certain customers wondering what they're going to do in January.

I would say that's also been the circumstance for the last few months. So at this point, I'm not sure that we can give real good insightful guidance on how funding is going to impact on the order book going forward. I think it's going to be more of a month-to-month evaluation..

Got it. Maybe asked another way, I mean is assuming no benefit from this type of stimulus or whatever I mean. You know can they get through three, six, nine months without some type of stimulus for them..

I mean it sounds like the question is really how long is that pipeline? I would say it probably goes well into our second quarter. But I don't know that it would go into the third or fourth. And that's one man's opinion, okay that's not the result of any objective data analysis..

Okay, I appreciate it. That's helpful.

On the engineered structural mesh side, can you talk about how much did ESM make up as a portion of your portfolio in fiscal 2020 and maybe how much growth you expect in 2021 either from a unit perspective or percentage perspective?.

No, we don't disclose on that level of detail. But I can tell you that we're growing in solid double digits and expect to continue doing so..

Okay, got it and I guess on the $20 million and CapEx for 2021, would any of that like be necessarily catch up in terms of things missed out in fiscal 2020, just any color there?.

Yes, I mean we reported for the last three or four quarters at least that we had a delay project and support of our ESM business. Where we had to work with an OEM vendor to resolve some unanticipated problems with a production line that we installed at our North Carolina facility and that took quite a while, it set us back a year.

So those problems have been resolved and we're moving ahead with full force to put another line in that is we're preparing foundations now and expect that we'll see a Q2 or Q3 startup of that line in 2021. So we stayed on top of all routine customary sort of recurring maintenance needs.

We did have a significant hole in our growth initiatives relative to this unanticipated delay and certainly as I said in the prepared comments. It's an opportunity cost. But right now we're looking forward. We're not looking behind and we're going to move with dispatch to bring this line up and get its product into the market..

Got it, that's helpful. I'll hop back into queue. Thank you..

Our next question comes from Tyson Bauer of KC Capital. Your line is open..

Just a follow-up on previous questioners topic.

Do you have any hard numbers on the state and local muni bond activity as far as relative to maybe a year ago for seeing them take advantage of the lower interest rates and doing more principal bonds or any sense, any industry data that you have that you could give us a reference point?.

We don't have any hard data, Tyson. But we are aware of increased activity at state and local level in financing infrastructure projects with bond proceeds and actually it's been ongoing for at least a couple of years. We view it as a very positive development. But unfortunately, I don't think we can tack [ph] down those numbers at this point..

You see, individual headlines of certain states and that, that seemed like they're growing that activity and taken advantage. But no real composite data that I've seen.

You mentioned that you're starting to get some positive impact because of the trade actions due to - typically there is a retroactive date that importers would have to make up difference if there is an injury that is taken by domestic producers.

As we go into 2021 that should grow depending on if you get favorable results or not, do you know what the retroactive dates are?.

Well that question would require a very, very lengthy answer. Suffice it to say, that the retroactivity is generally associated with critical circumstances filings and as of this week, we have made those filings on approximately 10 or 12 of the 15 countries where we could support a critical circumstance finding or filing.

The critical circumstances allegations will not be finally acted on until the very last part of the case in our third or fourth quarter. So I think the impact of the case is that the market risk has been elevated significant for importers of record, the uncertainty is significant and the financial consequences are meaningful.

So I think that's the backdrop that has created some more favorable market circumstances for us. But as I said in the prepared comments, we have to win these cases for any of this to make any difference on an ongoing basis..

Correct, by your actions you've kind of made the shot across the [indiscernible] this past week..

Actually I would say that we fired a torpedo below the water line..

We'll go with that. Depending on how the election turns out. There could be immense consequences for capital gains, for private entities, companies, raising their tax, obligations for sale of their entities.

Do you think that opens up or potentially opens up some more M&A opportunities before year end pending the election results?.

Honestly, I don't think so Tyson. I don't think that the M&A opportunities that are out there for us are so much dependent upon those kinds of considerations. I think they're longer term than that..

Okay, in the past - when the weather has been poor, whether it's winter weather or wet weather. We've always kind of used that as push things to the right or otherwise - your fiscal fourth quarter pretty much as ideal weather for most of the country.

Did that help the quarter results having that kind of favorable weather?.

Yes, I think what we would say is that weather patterns have more normalized. I'm not so sure that we've had all kinds of hurricane activity that's disrupted the Gulf Coast and Texas markets. But relative to last year certainly it's a tremendous improvement.

So yes, I'm always dubious of the weather excuse and I know that we've profit that on numerous occasions. But yes, we would certainly acknowledge that we welcome the return to normalized weather patterns. And there's no doubt, it helped us although we can't quantify and haven't really attempted to quantify..

Okay and last question. As we look at the uncertainty in some of the sectors impacted by those is it more the non-res commercial construction that gives you a little more pause on what's going to transpire in the next three, six, nine months.

Or is it really the public spending aspect that is more of a wild card for you?.

Right now I would tell you that, the public side of it is a larger question mark for us. As we're seeing on private non-res, we believe that a lot of the e-commerce driven construction that we have been [indiscernible] in 2020 will continue well in or through 2021, so I would say the bigger wild card is on public side..

All right, thank you gentlemen..

[Operator Instructions] I'm showing no further question at this time. I would like to turn the conference back to Mr. H. Woltz..

We appreciate your interest in Insteel. We thank you for your time this morning and we welcome your contacts going forward. Thank you..

Ladies and gentlemen, this concludes today's conference call. Thank you for participation and have a wonderful day. You may now disconnect..