Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Insteel Industries Inc (IIIN, Financial) experienced a steady increase in momentum, leading to ramped-up operating hours in their welded wire reinforcement business.
- The company reported a strengthening demand environment and increased activity across construction end markets.
- Cash flow from operations generated $18.7 million, driven by net earnings and a reduction in net working capital.
- Insteel Industries Inc (IIIN) remains debt-free with $97.7 million in cash on hand, providing ample financial flexibility.
- The company continues to invest in state-of-the-art technology, which is expected to expand product capabilities and reduce production costs.
Negative Points
- Net earnings for the third quarter fell to $6.6 million from $10.6 million a year ago, a significant decline.
- Net sales for the quarter declined 12% due to a 16.3% decrease in average selling prices, despite a 5.1% increase in shipments.
- Competitive pricing pressures and low-priced PC strand imports continue to negatively impact selling prices.
- Gross profit decreased to $15.4 million from $20.4 million in the prior-year quarter, with gross margin narrowing to 10.6% from 12.3%.
- Hiring challenges persist due to low unemployment rates, impacting the ability to ramp up operating hours effectively.
Q & A Highlights
Q: You sound much more optimistic about improving conditions. Can you talk about what you're seeing across your end markets that gives you optimism that demand is indeed improving?
A: Both our forecasts and our order entry rate cause us to be optimistic. We've seen a steady and slow improvement in our order intake and market conditions. We had scaled back operating hours earlier in the year, which partly explains why our backlog and lead times have expanded.
Q: You mentioned the challenge of retaining and attracting qualified workers. How are you tackling that challenge?
A: It's a challenging environment. We hire five or six people, and maybe two or three are still with us in 60 or 90 days. We have to train them and ensure they work safely. The labor market is tight, with unemployment rates below 4% in most areas, making it difficult to find people who enjoy industrial work.
Q: Do you expect the Infrastructure Investment and Jobs Act (IIJA) to eventually have a clear impact on demand for Insteel's products?
A: I don't expect projects to come with a big banner saying they are funded by IIJA. The nature of our products is inconsistent with that. We might see the impact of IIJA in 2024 and 2025, but it won't be transparent enough to say a specific percentage of our shipments are related to IIJA.
Q: How are you thinking about private demand, including residential and non-residential, over the next few months and into 2025?
A: The outlook for residential is reasonably bullish and less uncertain than private commercial. Interest rate reductions would support both segments of private construction spending. Some customers have delayed projects in anticipation of rate cuts, but the projects are not dead.
Q: With new capacity lines coming online and greater automation, are you focusing more on volume impacts and less on pricing?
A: No, we are not focusing less on pricing. The forces affecting labor costs are the same nationwide, but the degree varies by labor market. All labor markets have been affected and are more costly today than previously. We aim to be competitive in every market we operate in.
Q: Given your outlook and improvements in demand metrics, how do you plan to convert that into shareholder returns?
A: All investments we've made have a return component of cost reduction and capacity expansion. If there's no market, we won't realize the return based on increased demand until market conditions improve. We are confident that our investments will return greater than the cost of capital.
Q: How should we think about the impact of a potential change in administration on Insteel, particularly regarding Section 232 tariffs?
A: It's hard to predict what a new administration might do. The Trump administration implemented Section 232, and we described the problem to them hypothetically. Now, we can demonstrate the actual impact. The Biden administration is sympathetic, but it takes a presidential proclamation to add PC strand to 232, which is a heavy lift. We believe the underlying logic is compelling, and we will eventually get a fix.
Q: Have you found that any of your customers have changed the timing of projects in anticipation of rate cuts?
A: Yes, some customers have delayed projects due to higher costs and financing rates. They are waiting for better conditions. When you re-quote a project multiple times, it's clear that customers are hesitant to start due to these factors.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
