Hello, and welcome to today's Insteel Industries second quarter 2022 earnings call. My name is Bally, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please follow the operator's instructions. I would now like to pass the conference over to H.O. Woltz, President and CEO. H.O., please go ahead.

Thank you, Bally. Good morning and thank you for your interest in Insteel. Welcome to our second 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 that 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 our second quarter results that were driven by surging demand for our reinforcing products and escalating steel prices. We believe the outlook for our markets is highly 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.

Good morning to everyone joining us on the call. As we highlighted in our release earlier today, the second quarter of 2022 was a record quarter for financial performance. We reported quarterly revenue of $213.2 million, an increase of 53.4% from $139 million in the prior year, and net earnings of $39 million, or $1.99 per diluted share, as compared to $14.9 million, or $0.76 per diluted share, in the prior year, representing a 162% increase in earnings per share. These record results were achieved due to a robust demand environment for our concrete reinforcing products that remains broad-based across all regions and markets. As was the case in our last three sequential quarters, this environment allowed us to raise average selling prices to recover rapidly increasing raw material costs, as well as increased labor and other manufacturing costs. This in turn delivered a spread expansion between average selling prices and raw materials relative to the prior year quarter. However, the inadequate supply of domestic steel wire rod remained a challenge in the quarter, restraining our ability to fully meet customer demand, generating plant operating inefficiencies and increasing conversion costs. Average selling prices in the second quarter increased 65.4% relative to the prior year. Sequentially, average selling prices increased 10.1% from Q1 2022, which represents our fifth sequential quarter of a price increase greater than 10%. Shipments for the quarter decreased 7.2% from last year due to ongoing domestic wire rod availability issues, which were particularly acute at the beginning of the quarter, and were not due to any weakness in our end market demand. On a sequential basis, shipments increased 8.5% from Q1 2022 as wire rod supply challenges receded in the latter half of the quarter, in addition to the usual benefit from a seasonal uptick in demand that typically occurs at this time of the year. Gross profit for the quarter increased by $26.8 million or 89%, to $57.1 million from a year ago, and gross margin expanded over 510 basis points to 26.8%. This increase was due to a widening of spreads as average selling prices outpaced rod cost increases during the period. As we highlighted in prior calls, during environments of strong demand and escalating pricing, our results typically are favorably impacted by the implementation of price increases sufficient to cover the higher replacement cost for our raw materials and the consumption of lower cost inventories under first-in, first-out accounting methodology. On a sequential basis, gross profit increased by $14.7 million or 35%, and gross margins remained above 23% for the third consecutive quarter. SG&A expense for the quarter decreased by $3.1 million to $7.2 million, and as a percentage of sales, it decreased from 400 basis points to 3.4% due to the leverage from record revenue levels. The dollar decrease was primarily a result of lower compensation expense under our return on capital-based incentive plan and lower run rate legal expenses, given the conclusion of our trade cases in the latter half of 2021. Our effective tax rate for the quarter was virtually unchanged at 22.3% as compared to 22.5% last year. Looking ahead to the balance of the 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 calculation. Moving to the cash flow statement and balance sheet, cash flow from operations for the quarter generated $6.3 million; increased working capital due to higher inventory levels for raw materials offset the impact of record earnings performance. Inventories increased as we added to our raw materials in advance of our seasonally strongest quarters in Q3 and Q4. The tight rod supply environment that we experienced in the prior three quarters began to ease in our second quarter as we made progress supplementing our domestic supply shortfalls with material from foreign sources. Based on our sales forecasts for Q2, our quarter-end inventories represented 2.2 months of shipments, compared with 1.7 months at the end of the first quarter and 1.9 months at the end of our fourth quarter of fiscal 2021. Our inventories at the end of the second quarter of 2022, were valued at an average unit cost that was higher than our first quarter cost of sales and remain favorable relative to current replacement cost. We incurred $7.8 million in capital expenditures in the quarter for a total of $8.6 million for the first half of our fiscal year. We remain committed to our full-year target of $25 million, given the many initiatives underway that we highlighted in previous calls. Additionally, in the quarter, the previously disclosed sale of our Summerville facility was completed, which resulted in cash proceeds of $6.7 million. From a liquidity perspective, we ended the quarter with $69.7 million of cash on hand and no borrowings outstanding on our $100 million revolving credit facility. Looking ahead to the balance of fiscal 2022, we expect demand to remain strong across all our markets. Our shipment trends in the current quarter and customer sentiment remain positive. Record-high steel prices remain a concern, but they've yet to impact demand in our markets. In fact, leading indicators and forecasts for non-residential construction reflect a robust outlook for the balance of the calendar year and beyond, with growth continuing in already strong segments like warehouse and distribution and recovery in previously weaker segments like office and leisure. Unlike the recent prior quarters, we expect to be able to support this robust customer demand without the supply constraints that hampered our prior quarterly performance. However, it is not without challenges, as it will require us to effectively secure raw material supply from offshore sources to bridge the gap resulting from ongoing shortfalls in the domestic supplier base. That concludes my prepared remarks. I will now turn the call back over to H.O.

Thank you, Mark. As reflected in the release and in Mark's comments, our second quarter results were driven by robust non-residential construction markets and escalating steel prices. Above all, we thank our Insteel teammates for their perseverance through challenging circumstances and their focus on execution, excellence, and working safely. Market conditions during our second quarter closely resemble those of the previous three quarters, characterized by robust demand for our products and limited availability and escalating prices for our primary raw material, hot-rolled steel wire rod. Consistent with our recent experience, these supply bottlenecks contributed to inefficiencies at certain manufacturing facilities and customer service disruptions. As we mentioned previously, we've been active in the international steel market, and deliveries from offshore sources began to supplement domestic supplies during Q1. Our offshore deliveries ramped up during Q2, and we'll continue receiving offshore material in Q3 and Q4 to the extent that we believe operational and customer service disruptions are behind us, provided, of course, that our suppliers, both domestic and offshore, perform as agreed. As expected, the Biden administration has continued to unwind the Section 232 tariff, replacing it with tariff rate quota mechanisms which have a similar market impact as the 232 tariff and are largely ineffective in increasing the availability of offshore material that is competitive in the world market. We noted in the last quarterly earnings call that Congress passed and the President signed the infrastructure investment and jobs act, which is arguably the most consequential infrastructure funding package since the interstate highway system was conceived. At its core is the re-authorization of $304 billion of surface transportation programs and new spending of $550 billion, with the majority of the funds to be spent over a five-year period. We expect the stimulative impact of the legislation to become evident in our markets late in 2022 and to ramp up over the next four years, creating significant momentum for our markets. The need for infrastructure investment in the U.S. has been obvious for decades, but funding has consistently been inadequate to address the need. For the first time, it appears that funding concerns will decline in significance as obstacles to investment in view of the strong fiscal condition of state and local governments, alongside the new funding provided by the infrastructure investment and jobs act. Anecdotally, there's never been a time when our customer base has enjoyed such a level of activity and strength of backlogs that they enjoy today. Many customers are booked through 2022 and are quoting availability in 2023, which is unprecedented. Turning to CapEx, three of our facilities will receive new production lines and related ancillary equipment over the course of the next year as CapEx rises significantly relative to 2021. Since deliveries will extend into 2023, it's difficult to pinpoint 2022 CapEx, which will be affected by the timing of payments. We'll have a clearer view of this by the Q3 earnings call. These investments in state-of-the-art technology will expand our product capabilities and favorably impact our cash cost of production. We are considering additional product projects that would have a similar beneficial impact on our market position and our cost profile. Going forward, we plan to closely monitor market conditions and aggressively pursue the appropriate actions to maximize shipments and optimize our costs. We are well-positioned to pursue attractive growth opportunities, both organic and through acquisition. This concludes our prepared remarks, and we’ll now take your questions. Bailey, would you please explain again the procedure for asking questions?

Our first question today comes from Tyson Bauer from KC Capital. Tyson, please go ahead. Your line is now open.

Good morning, gentlemen. And you delivered a very good morning to your shareholders.

Good morning, Tyson.

Good morning.

Do you think now that we're strong enough to gather enough quarters, we have the infrastructure bill in hand and given your current outlook, that the marketplace really needs to do a reset on modeling and the outlook? We're not in a historical run-up to the cycle peak and then come right back down; this really does have legs for that period you talked about, the five years, given that the supply constraints still look like they'll be in place with that increased demand out there?

I think it's a very good question, Tyson. Of course, we don't model our own results; we take a shorter-term view of our forecasting. But as I've said in my comments, there's never been a time when the roadway in front of us has been as attractive from a funding perspective as it is today. How long will the robust environment last, and what are the many potential obstacles that could get in the way? It's hard to enumerate them. But I would tell you that we're as positive about our outlook as we've ever been.

Even with our theoretical peak earnings calculations, you’ve exceeded all expectations without significant increases in shipment volume. If you manage to secure better supply and can increase shipment volume while maintaining pricing, do you believe you can sustain that margin profile given that the demand is there to support any improvement in your production capacity?

I think if you look at it from a historical perspective, Tyson, had we not had the raw material shortages that we've described, our shipments would have been up double-digits without any impact whatsoever on pricing. So going forward, if the environment is similar, then I would expect that the market would gladly accept the new capacity that we're bringing in. Up to this point, there has been little pricing pressure, and that's what we would expect going forward. The demand drives this and what sets the economics for our business. As I mentioned, we've never seen it this strong.

Right. Previously, what's of the two main segments, Engineered Mesh and then PC Strand? PC Strand had had the lower margin profile because you still have some import situations, quote-unquote, QP honest. I suppose. With the sanctions on Russia and Russia being an export for PC strands in the U.S. market, do you see any potential incremental benefit if they're excluded? One directly on the PC strand and, two, because they are a large global supplier of PC iron and scrap, and that helps also keep the expectations for steel prices elevated?

I think we're still working through the mechanics of the conflict-related impact on our markets. On the one hand, you do have the prospect for fewer exports of finished products. On the other hand, both Ukraine and Russia are major suppliers of both semi-finished and raw metallics to the steel industry worldwide, which is having the impact of raising costs worldwide because both countries are obviously out of the market. At this point, the only part of our business that has substantial import competition is the post-tensioned segment of our PC strand business. And we are concerned that elevated domestic steel prices that are beyond world market prices give rise to the potential for rising imports of PC strand into that market segment. We have seen some of that. However, offsetting that are extremely high ocean freight rates, which have tended to raise the cost of imported PC strand substantially. So we're in a month-to-month waiting game to know what's going to happen in that part of our business. But I would tell you that the post-tensioned segment of our PC strand business is strong with favorable margins, as is the balance of the product line, which is performing very well and demand is robust.

And last question for me, your board has an interesting problem, it's a great problem to have. And that is, how do you set a policy to effectively return capital to your shareholders and receive evaluation benefit for the company overall?

As we mentioned before, our board, along with management, is always exploring the best ways to return capital to shareholders while maintaining the flexibility to support the business as needed.

That's a point. All options are on the table.

I think that's fair.

Alright. Thank you.

Thank you.

Thank you, Tyson. As a reminder, if you would like to ask a question, please follow the operator's instructions. The next question today comes from Julio Romero from Sidoti. Julio, please go ahead. Your line is now open.

Hey, good morning. Could you just talk to the change in the supply environment? You are sourcing more from overseas. Can you maybe expand a bit on how that's a change in your business? And does the change in sourcing come with any new risks and benefits?

Yeah. Good morning, Julio. Thank you for participating in the call. I would tell you that our preference would be to purchase our raw materials domestically. If we could do that, the supply chain is obviously much shorter, and the risk is lower because we're exposed to both the increases and decreases in value of the product when we have 60 or 90-day delivery horizons for offshore steel. Up until this chronic shortage in the domestic market developed, we relied very heavily, if not almost entirely, on sourcing domestically. That just is no longer possible. The conditions were exacerbated in 2021 by a host of unplanned and planned steel mill outages, which had a dramatic impact on domestic availability. Most of those situations have cleared, and the industry seems to be operating more normally today.

So after a period where the pipeline becomes a little better stocked, we would expect the domestic availability to improve so that we weren't so compelled to go to the international market. But nevertheless, for 2022, we are where we are, and through the end of our fiscal year, we're going to be looking at substantial quantities of imported steel being required for us to operate our plants. When I say substantial, that means probably 20% to 25% of our requirement.

Very helpful. I appreciate the answer there. And I guess as you see beyond '22, a more normalized domestic environment in terms of wire rod, that would be coming from steel mills that previously had outages coming back online, but not necessarily any additional capacity being added. Would that be fair?

I think it's fair for what we know today, but I would make two observations. One is just in 2018, two things happened almost simultaneously. We had 10 new dumping orders issued against wire rod exports to the U.S. market. Those 10 orders affected countries that exported over half of the imported wire rod to the U.S. market. So those countries are effectively out of the market going forward. The other thing that happened just right at the same time was that the Trump administration imposed the 232 tariff. It's hard to discern the impact of each of those actions on the market. But what we can say is that metal spreads for wire rod producers have expanded dramatically relative to the last ten years. The question is whether that continues or if normalization occurs that would cause our metal spreads to contract. For every steel producer, whether it's wire rod, flat products, or whatever, every steel purchaser that has import competition today is at a distinct disadvantage to offshore competitors because of the elevated nature of steel prices in the U.S. market relative to the rest of the world. That is a formidable challenge for purchasers of steel. Therefore, I don't know what the answer is, but I can tell you that the conditions are unprecedented, and we will only know over time whether there's a normalization in those metal spreads or whether we have experienced a step function that causes margins to be much wider than they have historically.

Understood. And can you maybe speak to the SG&A that you posted this quarter? It was a little bit lower than I expected. How much of that is from maybe lower volumes versus efficiencies you're seeing, and how much of that is maybe a leverage benefit from the Strand-Tech acquisition you did a couple of years ago?

The SG&A line really just relates to corporate-related overhead, not any other cost related to manufacturing or the like. So the biggest driver in the drop was accruals with respect to our return on capital incentive plan, our annual incentive plan that we have in place. The second major component was a drop in legal expenses, as we're no longer supporting the tariff cases like we were at this time last year.

Got it. That makes sense. I'll hop back into the queue. Thanks very much.

Thank you.

Thank you. There are currently no further questions registered at this time. As a reminder, if you would like to ask a question, please follow the operator's instructions. There are no additional questions waiting at this time, so I'll pass the conference back over to H.O. Woltz for closing remarks. Please go ahead.

Thank you. We appreciate your interest in Insteel. We look forward to talking to you next quarter, and we'd remind you that you're free to call us in the meantime if you have follow-up questions. Thank you.

Thank you. That concludes the Insteel Industries second quarter 2022 earnings call. Thank you for your participation. You may now disconnect your lines.