Good morning. Thank you for attending today's Insteel Industries First Quarter 2023 Earnings Call. My name is Faram and I will be your moderator for today's call. All lines will remain muted during the presentation portion of the call, with an opportunity for questions and answers at the end. It is now my pleasure to pass the conference over to our host, H. Woltz, President and Chief Executive Officer of Insteel Industries. Mr. Woltz, please proceed.

Thank you, Faram. Good morning. Thank you for your interest in Insteel and welcome to our first quarter 2023 conference call which will be conducted by Scot Jafroodi, our Vice President, CFO and Treasurer and me. While Scot has only recently been named CFO, he is a long-time Insteel employee who is intimately familiar with company markets and operations. We congratulate Scot on his elevation to CFO and we're confident he will add value to the company. 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 which could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. Beginning in Q3 of 2022, residential-related markets began to weaken as interest rates rose and those markets remained weak through the first quarter of 2023. We do not expect significant recovery of residential markets until there are signs that the interest rate environment is changing. Unlike residential markets, we believe the shipment weakness we experienced in non-residential markets is related to customer inventory management and destocking rather than impaired demand for our products. Following several quarters of extended lead times and inadequate supplies, customers found that excessive inventory levels and purchase commitments could be safely curtailed as lead times normalized. Notwithstanding the weakness that is apparent in Q1 results, we believe that 2023 will be a good year for our non-residential markets and for the company. I'm going to turn the call over to Scot 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.

Thank you, H., and good morning to everybody joining us on the call. I'm pleased to be here participating in my first earnings call as the CFO of Insteel. As we reported earlier today, our results for the quarter were unfavorably impacted by a decline in shipments and the narrowing of spreads between selling prices and raw material costs. Net earnings for the first quarter fell to $11.1 million from record earnings of $23.1 million a year ago, and earnings per share dropped to $0.57 from $1.18 per diluted share in the prior year. As referenced in our release, earnings for the current year quarter benefited from a $3.3 million or $0.13 per share gain on the sale of property, plant and equipment. Net sales for the quarter fell 6.5% from last year on a 10% decrease in shipments, partially offset by a 3.9% increase in average selling prices. Our shipping volume for the first quarter, which has historically been our slowest period of the year due to the onset of winter weather and holiday schedules, was adversely impacted by the previously mentioned inventory management and destocking measures pursued by our customers along with the continued weakness in the residential construction market that first began in the second half of fiscal 2022. On a sequential basis, net sales were down 19.8% from the fourth quarter due to a 12% drop-off in shipments and an 8.8% decrease in average selling prices. Falling raw material costs and competitive pricing pressures eroded ASPs during the quarter, with the largest decline in average selling prices from Q4 within our product line most exposed to the residential markets. Gross profit for the quarter fell $24.6 million from a year ago and gross margin narrowed to 10.7% from 23.7% due to lower spreads between average selling prices and raw material costs, along with a reduction in volume and higher overall plant operating costs resulting from lower production levels. On a sequential basis, gross profit fell $22 million from the fourth quarter and gross margin decreased 840 basis points. As we have highlighted throughout the prior year, during environments of strong demand and escalating steel prices, our results are favorably impacted by both the implementation of price increases sufficient to recover the higher replacement costs for our raw material and the consumption of lower-cost inventories under first-in, first-out accounting methodology. However, during periods of declining steel prices, as we had during our first quarter, we experienced the opposite effect under FIFO and our gross margins narrowed due to the consumption of higher-cost inventories matched against lower average selling prices for our products. As we have noted in our fourth quarter earnings call, we finished fiscal 2022 with 4.3 months of inventory on hand, valued on a FIFO basis. As such, our first quarter spreads and margins have been adversely impacted by the matching of higher-cost inventory purchased in fiscal 2022 against lower average selling prices for our products. Going forward, we should benefit from a gradual reduction in these costs as more recent lower-priced raw material purchases are consumed from inventory, assuming our selling prices remain flat or fall to a lesser extent. SG&A expense for the quarter decreased $5.2 million to $7.2 million or 4.3% of net sales from $12.3 million or 6.9% of net sales last year, mainly due to lower compensation expense under our return on capital-based incentive plan, which was driven by weaker results in the current year. To note, our return on capital-based incentive plan was fully expensed in the first quarter of the prior year, given the record financial performance. As we've highlighted in our release, other income for the quarter includes a $3.3 million net gain on the sale of property, plant and equipment. Our effective tax rate was virtually unchanged at 22.9%, which is down from 23% last year. Looking ahead to the balance of the year, we expect our effective rate will remain steady at 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 $33 million of cash in the first quarter due to our working capital reduction that was driven by a $26.5 million decrease in inventories along with a $12.9 million decrease in accounts receivable. You may recall we had ended the previous quarter with an elevated inventory balance, largely due to the increase in raw material purchases as we replenished our inventories from depressed levels earlier in 2022. Over the course of the first quarter, we scaled back our inventory purchases, particularly during December. As of the end of the first quarter, our inventory position represented 3.9 months of shipments on a forward-looking basis, calculated from our Q2 sales forecast. Finally, our inventories at the end of the first quarter were valued at average unit cost lower than the beginning of the quarter but still unfavorable relative to current replacement costs. We incurred $8.2 million in capital expenditures in the first quarter and remain committed to our full-year target of $30 million, given the many initiatives that we have underway. H. will provide more detail on this topic in his remarks. In December, we returned $39.5 million of capital to our shareholders through the payment of a $2 per share special cash dividend, in addition to our regular quarterly dividend, marking six years over the last seven years, we have paid a special dividend in the second year in a row, we paid a $2 per share special dividend. Also during the quarter, we repurchased $916,000 of our common equity, equal to approximately 32,000 shares. From a liquidity perspective, we ended the quarter with $42.6 million of cash on hand and no borrowings outstanding on our $100 million revolving credit facility. As you move into the second quarter of fiscal 2023, our market outlook for the remainder of the year remains positive as we are encouraged by continued strong demand and backlog in our non-residential construction markets. However, the most recent report from the third-party leading indicators for non-residential construction spending, ABI and Dodge, have been somewhat mixed. In November, ABI remained in negative territory for the second straight month, falling to 46.6. However, the Dodge Momentum Index, another leading indicator for non-residential building construction, has rebounded over the last several months, rising to 222.3 in December. On a year-over-year basis, the overall index was up 40% driven by strength in both the commercial component which was up 51% and the institutional projects that were 20% higher. Finally, last week, the AIA released the semi-annual construction forecast for non-residential building construction for 2023 and 2024, reflecting continued growth for the current year. Spending on non-residential building was projected to increase 5.8% during 2023, driven by gains in industrial, institutional, and commercial sectors. This concludes my prepared remarks. I'll now turn the call back over to H.

Thank you, Scot. While we're not pleased with our first quarter results, we do not think our markets are deteriorating under the pressure of macroeconomic weakness that jeopardizes performance for fiscal 2023. Rather, we think underlying demand from residential markets has stabilized at a lower level and that demand is robust in non-residential markets. Under these circumstances, inventory corrections should be expected, following an extended period of constrained supply conditions when customers made purchases and commitments just in case rather than following more typical demand-pull purchasing tactics. Our view of the market is formed by conversations with many customers focusing on their projected operating rates, backlogs, and overall expectations for business conditions during the year. Also, recovering customer activity and internal order entry levels support the hypothesis that the inventory correction is running its course. Scot mentioned in his comments that we have 3.9 months of inventory on hand, which is more than is required based on business conditions. Insteel's inventory imbalance is centered primarily in residential-related markets, while inventories for non-residential construction markets are much more appropriate relative to business levels. Recall that we turned to offshore wire rod markets last year beginning in fiscal Q2 when domestic sources were unable to assure us of adequate supplies for our third and fourth fiscal quarters. As is our normal practice, we targeted imported volumes toward our housing-related markets which are generally make-to-stock products that rarely require certification of compliance with Buy America regulations. Our plan to supplement domestic supplies was upended when housing markets turned down sharply beginning in May 2022. Subsequent deterioration of ASPs in these markets created significant margin pressure, exacerbated by lower production volumes that extended the time horizon for resolving the inventory imbalance. We continue to be optimistic about the impact on our markets of the Infrastructure Investment and Jobs Act and believe it will positively impact our markets during 2023. The need for infrastructure investment in the U.S. has been obvious for decades but funding has consistently been inadequate. It now appears that funding shortfalls will decline in significance as obstacles to investment in view of the strong fiscal condition of state and local governments together with new funding provided by the Infrastructure Investment and Jobs Act. Turning to CapEx, we believe that 2023 should come in at about $30 million, subject to uncertainties related to vendor performance and supply chain issues. These investments in state-of-the-art technology will expand our product capabilities and favorably impact our cash cost of production. As we mentioned in an earlier call, new production lines will be installed at the Missouri, Kentucky, and Arizona plants to better address market needs. We're evaluating additional projects that would have similar beneficial impacts on our market position and cost profile. Going forward, we are aware of rising risks related to the future performance of the U.S. economy and are carefully monitoring the environment. At the same time, we plan to aggressively pursue actions to maximize shipments and optimize our costs and to pursue attractive growth opportunities, both organic and through acquisition. This concludes our prepared remarks and we'll now take your questions. Faram, would you please explain the procedure for asking questions?

My pleasure. Our first question comes from the line of Tyson Bauer with Kansas City Capital.

As we've seen in years past, we've kind of accustomed to these inventory adjustment orders that periodically take place. And typically, the thought process and the question always becomes the duration of that adjustment to a stabilized pricing environment. And can you give us a little bit of how the quarter progressed as we got into December? And was December impacted more materially because of weather holidays and just the slowdown of destocking at the year-end for most of your customer base? And how that kind of progresses into the fiscal second quarter? Will we see a snapback basically as we get into the warmer months in the second half of the year? Or is this something more of a modest change for you?

Let me address it this way, Tyson. First, the first quarter is always our lowest volume quarter. I believe this is mainly due to holiday schedules rather than weather, as October and November usually have favorable weather for construction. Holiday schedules significantly reduce operational days. This year is similar to past years in this regard, except we are seeing some inventory liquidation by our customers as the supply environment shifts from highly constrained to more normalized levels. In terms of inventory, the excess inventory situation we are facing is primarily in our residential standard welded wire reinforcing market. Since we purchase based on forecasts, when we don't meet those forecasts, the inventory pipeline extends unexpectedly, which is what happened to us, and we will be addressing this through the second quarter. The residential markets appear to have stabilized at levels higher than we anticipated in our last forecast, and overall, we are cautiously optimistic about the future of those markets. The non-residential markets continue to perform well. Inventory reductions in this area may not be completely finished yet, but the underlying demand for the product remains strong enough that it shouldn't pose a significant challenge for us going forward.

Okay. And we've seen mortgage rates drop 100 basis points recently from its peak over 7% on the 30-year. So that obviously doesn't hurt our cause going forward. The 3.9 month turns you mentioned, are we targeting a certain level of getting it back down towards 3, which implies a $30 million, $40 million benefit from the reduction in inventories? Or just give us a little more color on where you want to be at your inventory levels by the end of Q2.

Well, of course, that is highly dependent on whether we meet our shipment forecast. But whether it is February, March, or April, about 3 months, I think is a more reasonable level for the business than close to 4. And that assumes that service levels from the steel producers that we do business with remain reasonable, which appears will be the case.

Okay. Are you anticipating then by the second half of this year that we will get to more historical margin levels in those high double digits on a stabilized...?

Yes. We don't forecast margins for these purposes.

Yes. Last question for me. Obviously, there wasn't an accrual for incentive comp in Q1. Should you hit targets, what's kind of that maximum level that would be taken this year if you hit those incentive comp levels for the overall year that we'll have to true up later this year?

The review will be conducted on a quarterly or monthly basis, and there should be no major unexpected changes. Additionally, as we analyze the business and the spreads indicated by current product purchases and sales, we see that the business has not been affected by any macroeconomic challenges. We are satisfied with our position, except for the slight increase in inventory.

Okay. You mentioned that the overall average price is down 8.8%. We haven't been able to achieve the shipment levels we aimed for over the past year due to supply constraints and other factors across various product categories, such as PC strand compared to standard welded wire that is more residentially focused. Can you provide an overview of the pricing environment? Has PC strand been performing more favorably than standard welded wire, thus contributing significantly to the decrease in your average price?

Well, I think what we've said was that ASPs fell pretty significantly in the standard welded wire reinforcing product line and not so much in other product lines. Just reflect on the state of supply and demand in those various markets.

Thank you for your question. Our next question comes from the line of Julio Romero with Sidoti. Mr. Romero, your line is now open.

Good morning, everyone. My first question is, what is your sense for how much of the weakness you realized in non-residential shipments during the quarter was due to customer destocking versus easing supply chain constraints?

In the residential-related markets, Julio, began in last May when interest rates began to really affect that market, we saw a significant reduction in shipments relative to our forecast to the tune of around 40%. Subsequently, those markets seemed to have recovered and stabilized, although at lower levels than they were running prior to the downturn, but have taken the brunt of the weakness in that marketplace.

Thank you. My second question is, how do you expect price to change sequentially over the next few quarters?

It's unknown and not forecastable. But typically, when demand for our products is strong, then we don't see significant price competition. Our order book and our competitors' order books are such that pricing is not so much of an issue.

All right. Thank you for your question, Julio. There are currently no further questions registered. There are no further questions waiting at this time, so I will pass back for any final remarks. Thank you.

Okay. Thank you, Faram. We appreciate your interest in Insteel. And as always, we welcome your contacts and your calls for any follow-up questions that you have. Thanks and we'll look forward to talking to you next quarter.

This concludes today's Insteel Industries first quarter 2023 earnings call. Thank you for your participation. You may now disconnect your lines.