Good morning, and welcome to the Insteel Industries' Third Quarter 2023 Earnings Call. My name is Carla, and I will be the operator of today's call. I would now like to pass the conference over to our host H. Woltz, President and Chief Executive Officer. Please go ahead when you're ready.

Thank you. Good morning and thank you for your interest in Insteel, and welcome to our third quarter 2023 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, which could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. The first three quarters of fiscal 2023 have 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. As stated in the release, we believe these headwinds have about run their course and we continue to be optimistic about the underlying level of demand for our products and the margin environment. 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 off to discuss our business outlook.

Thank you, H, and good morning to everyone joining us on the call. As reported in our release earlier today, Insteel's net earnings for the third quarter of fiscal 2023 fell to $10.6 million or $0.54 a share from $38.6 million or $1.96 per diluted share a year ago. As has been the case through the first two quarters of the year, we were once again faced with a difficult challenge of comparing the current period results against the record financial performance of 2022. Our results continue to be unfavorably impacted by the narrowing in spreads between selling prices and raw material costs combined with higher unit conversion costs and lower shipments. However, we have seen some positive developments. As we progress through the third quarter, the spread has improved and widened sequentially from the lows we experienced during the second quarter as we began to benefit from the consumption of lower-cost inventory. Additionally, we have benefited from the seasonal turn in shipping volume that typically occurs during the third quarter as the weather-related headwinds subside. Nonetheless, we still fell short of our internal shipment forecast and competitive pricing pressures and a fall in steel scrap values have continued to erode our average selling prices. We reported net sales for the quarter of $165.7 million, reflecting a 27.1% decline from the prior year. Shipments fell 3.2% year-over-year but rose 11.3% sequentially from Q2. Despite the seasonal upturn in construction activity during the quarter, we did not experience the expected boost in shipments following the cycle of customer destocking that has suppressed demand in the first half of the year. Average selling prices fell 24.7% from a year ago. Sequentially ASPs declined for the fourth straight quarter, falling 6.4% from Q2. Competitive pricing pressures and the drop-off of steel scrap prices continue to negatively impact our ASPs with the more severe drops for products most exposed to the residential construction markets. As conveyed during our second-quarter call, price increases were implemented across most of our product lines in April following four straight months of scrap price increases. However, scrap values dropped in May and June by a combined $95, once again providing downward pressure on ASPs. Gross profit for the quarter fell $37.7 million from a year ago, and gross margin narrowed to 12.3% from 25.6% due to a combination of lower spreads, the reduction in shipments, and higher overall unit conversion costs resulting from lower production levels. On a sequential basis, gross profit increased $7.1 million from the second quarter, and gross margin expanded 400 basis points. Gross profit for the quarter benefited from widening spreads, as a reduction in raw material costs exceeded the decrease in average selling prices, and gross margins improved each month within the quarter, rising to a high point in June. As we head into our fourth fiscal quarter, we anticipate the positive trend to continue as lower-cost inventories are consumed, assuming that average selling prices for our products remain flat or decline to a lesser extent. Unit conversion costs for Q3 improved sequentially from the second quarter, but were higher than the prior year as a result of lower than expected operating volumes. As we move into our fourth quarter, we expect to make further progress in reducing our conversion cost assuming that operating volumes increase to anticipated levels. SG&A expense for the quarter decreased by $7.9 million, or 4.8% of net sales from $8.2 million, or 3.6% of net sales last year. The dollar decrease primarily resulted from a relative year-over-year change in the cash surrender value of life insurance policies, partially offset by higher compensation expense. Our effective tax rate for the quarter was 22%, down slightly from 22.7% last year. Looking ahead to the balance of the year, we expect our effective rate will remain steady at around 22%, 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 for the quarter generated $23.8 million of cash due to a working capital reduction that was driven mainly by a $6.7 million increase in accounts payable and accrued expenses, and a $3.4 million reduction in inventories. Our inventory position at the end of the quarter represented 3.2 months of shipments on a forward-looking basis calculated off of forecasted Q4 shipments compared with 3.1 months at the end of the second quarter. Additionally, our inventories at the end of the third quarter were valued at an average unit cost that was lower than our third quarter cost of sales, which should favorably impact margins during the fourth quarter as the lower-cost materials consumed and reflected in cost of sales provided a greater extent. We incurred $11.2 million in capital expenditures in the quarter for a total of $26.6 million through the first nine months of our fiscal year. Based on our forecasted expenditures for the fourth quarter, we have raised our full-year target to $35 million from the previously communicated target of $30 million. H will provide more detail on this topic in his remarks. From a liquidity perspective, we ended the quarter with $91.7 million of cash on hand, and we're debt-free with no borrowings outstanding on our $100 million revolving credit facility. Finally, during the third quarter, we continued our share buyback program repurchasing $403,000 of common equity, which equals approximately 14,000 shares. Going forward, our capital deployment strategy will remain focused on three objectives: one, reinvesting in the business for growth and to improve our cost productivity; two, maintaining the appropriate financial strength and flexibility; and three, returning capital to shareholders in a disciplined manner. As we move into the fourth quarter, the outlook for our construction end markets remains mostly positive. The most recent reports for the Architectural Billings and Dodge Momentum Indexes, leading indicators for non-residential building construction, reflect softening activity levels, but relatively stable conditions that are expected to continue for the near term. In June, the ABI remained mostly steady at a score of 50.1, which marked the first time since last fall that the score has stayed above the growth threshold of 50 for two consecutive months. The Dodge Momentum Index, which tracks non-residential building projects going into planning, declined 2.5% in June, down to 197.3. However, year-over-year, the index is still 25% higher. The drop in the June reading resulted from a decline in the institutional component which fell 10.5%, while the commercial component rose 3.1%. However, in the June 4th report, Dodge noted that the continued growth in the commercial segment may be impacted in the second half of the year by the higher interest rate environment and tighter lending standards. The monthly construction spending data continues to remain strong, with the latest May report showing total construction spending, on a seasonally-adjusted annual basis, up 2.4% from last year, with non-residential construction up over 17% and public highway and street construction—one of the largest end-use applications for our products—up 14%. Finally, this week, the AIA released the semiannual construction forecast for non-residential building construction for 2023 and 2024, reflecting continued strong growth for the current year. Spending on non-residential building is projected to increase 19.7% for 2023, driven by strong gains in the industrial sector. However, the forecast also indicates that spending growth is expected to cool in 2024, with only a 2% increase in overall spending projected. This concludes my prepared remarks. I will now turn the call back over to H.

Thank you, Scot. As stated in the release, Q3 order entry rates and shipments did not recover the momentum we had expected, although shipments and gross margin strengthened each month of the quarter. Weaker conditions than expected resulted in a continuation of higher operating costs at certain plants as backlogs were insufficient for efficient operations, and we elected not to take significant cost reduction actions that would have longer-term implications during the continuing difficult hiring market. Most customers appear to be enjoying solid business conditions except in the Midwest where customers have holds in their schedules and DOT lettings are disappointingly light. If our observations about the level of business in other areas are correct, we should see an uptick in order entry rates during the remaining months of calendar 2023, although it's not possible to accurately predict when this may begin. For what it's worth, our shipping performance is not out of line with U.S. cement shipments, which were down nearly 7% year-over-year for April 2023 and down 4.4% for the four-month period ending in April. Thus far in July, shipments are slightly ahead of last year, and we have forecasted continued modest growth through our fourth fiscal quarter. We expect the margin environment to continue to improve, except that we will be confronted with increasing volumes of low-priced imported PC strand during Q4 that were not present in the market earlier in the year. Private non-residential construction markets by and large continue to show strength, although light commercial work, which is typically related to housing markets, has slowed. We also saw a deferral of speculative commercial construction projects, while owner-occupied projects seem to move forward unaffected by rising interest rates. We expect these trends to continue through the calendar year. The recent recovery of the housing market is welcome and somewhat unexpected. We believe housing-related markets will continue to strengthen in the coming months, although customers are highly conservative in view of the volatility of this market during the most recent cycle. We expect minimal restocking of the supply chain now that lead times are normalized. We continue to be optimistic about the impact on our markets of the Infrastructure Investment and Jobs Act and believe it will positively impact markets, although it's difficult to point to specific projects that have affected demand at this time. We are aware that funds have been released at the federal level for projects that consume our reinforcing products, and we expect the trend to accelerate. We're also aware that permitting delays are affecting the deployment of IIJA funds. The need for infrastructure investment in the U.S. has been obvious for decades, and 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 the new funding provided by the Infrastructure Investment and Jobs Act. Turning to CapEx, we indicated in prior calls and press releases that our CapEx would step up in 2023 reflecting investments in three new production lines as well as recurring expenditures to maintain our facilities and information systems. Through Q3, CapEx totaled almost $27 million and we expect to invest approximately $35 million during the fiscal year. The investments we are making in state-of-the-art technology will expand our product capabilities and favorably impact our cash cost of production. As we mentioned in earlier calls, new production lines will be installed at the Missouri, Kentucky, and Arizona plants to better address market needs. The Missouri production line is being commissioned, the Kentucky production line is being erected, and should be commissioned before the end of September. And it now appears that the Arizona line will be commissioned during the first quarter of fiscal 2024. We're evaluating additional projects that would have similar beneficial impacts on our market position and our cost profile. Going forward, we're aware of rising risks related to the future performance of the U.S. economy and we're monitoring the environment. We believe that heightened conservatism among customers that are concerned about the macro environment could be contributing to the slow market recovery. In any event, we're well-positioned to aggressively pursue actions that maximize shipments and optimize our cost and pursue attractive 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?

Our first question is from Tyson Bauer from KC Capital. Please go ahead.

Good morning, gentlemen.

Good morning.

Good morning.

It sounds like at least throughout the quarter you were trending month-over-month improvements as you went through June into July. Is the expectation that that should continue at least through the calendar months of this year? And if so, what magnitude where we should start to see some year-over-year increases in shipping? And what are you looking at as far as sequential increases also?

Well, you're correct that during Q3 each month was slightly better than the prior month both from a shipping volume perspective and from a margin perspective. It's hard to say what we expect for the rest of calendar 2023, although our Q4 forecast calls for increasing shipments. We do have some operational issues where we're going to have to address some finished goods levels at our plants, which will keep us from operating full out. But, nevertheless, we expect shipments to improve. And who knows what it's going to be like in August and September, but through this part of July we're up mid-single digits compared to the prior year.

Yeah, that's good. Looking back at shipment volumes especially for this quarter, our year-over-year, other than when we did the STM acquisition in March of 2020, we haven't necessarily seen a great performance on shipping volumes really going back until 2018. There have been unique circumstances, hurricanes, shortages, those things that have transpired. Given the amount of capital dollars that have been spent to improve operations, capacity, and otherwise, would you anticipate you would be further ahead of this point than what you've experienced?

Probably so. Tyson, keep in mind that 2021 and 2022 shipments were constrained by many factors including a steel shortage, including our inability to adequately staff our facilities. Both of those problems seem to have improved, although to some extent the labor situation is still extremely tight for us. And as I mentioned in my comments, we elected not to take cost-reduction actions during Q3 that would exacerbate the hiring problem that we're continuing to experience. So, yeah, I mean there's some frustration internally that the shipments haven't improved to a greater extent, but there are also some meaningful constraints that we're up against. And I think when you view Q3 relative to the information that we have on cement shipments, I don't— as I said in my comments, I don't think the shipping performance is out of line.

Okay. And the last one for me, where do you see inventory volumes or inventories right now at the customer level at the distributor level? You said lead times to normalize. Do you see it fairly balanced? Have they gone to the pendulum swing to being a little bit short? And given that conservatism going into the next seasonally slower winter months, would you anticipate them purposely being short in inventory going into the slower months?

I think that in the distributor market, which we estimate to be in the range of 15% of our volumes, is not a major driver. I think the destocking is certainly complete, and I don't think there will be any restocking. Delivery horizons from producers such as Insteel are short. And I think customers were sufficiently burned by higher prices and then falling prices, so they see no reason to take that risk. In the make-to-order segment of our business, I would say that we have customers who had extremely high levels of finished goods inventory. Most of that inventory is sold, but different problems and different constraints in different regions have prevented them from shipping at the rates that they probably expected to ship. We still have customers who have high levels of reinforcement inventories. Unfortunately, there's no good source of objective data for us to really get our arms around the extent of this problem, which would allow us to forecast when they work through these inventories. But I think clearly that's a play in our markets.

All right. Thank you, gentlemen.

Thank you.

Our next question comes from Julio Romero from Sidoti & Co. Please go ahead.

Thanks. Hey, good morning, H and Scot.

Good morning.

Maybe thinking about your capital projects that are expected to be fully commissioned this quarter, just any sense as to how we should think about the benefit or the accretion to earnings and kind of the same question for the remaining project that's expected to come online in the first quarter of fiscal 2024?

Well, Julio, I mean, I think the big picture answer to that is we wouldn't have made any of these investments if we didn't think that they would return greater than our cost of capital. So I think you can think of it like that, but we also need a market to sell into, and you don't get to pick your timing for starting these lines up. So we'll start some of the lines up in an environment that is a little softer than we would like to see, but we're not making these investments for this quarter or next quarter. These are long-term investments, and over time we will realize returns on the investments that exceed our cost of capital.

Got it. No, that's helpful. Maybe if you could speak to unit conversion costs and how those are trending sequentially?

Sequentially, unit conversion costs went down from Q2, but we're still operating at lower than anticipated production levels. So they were not where we had forecasted them to be.

Okay. Got it. And…

Just Julio, one other thing affecting unit conversion cost is just the general inflationary environment that we have experienced, and we're—except for certain commodities that we purchase—we're not seeing that any of these prices are coming down. So I'll tell you that the industry has experienced a recent—and the cost profile of all of the various services and spare parts, and you name it, electricity, there's been a definite reset in cost levels. And I'm not exactly sure that we're through that yet. But none of these costs are coming back down to where they were pre-inflationary days.

Understood. When I think about the comments you guys made about the shipments in July being up mid-single digits, I believe you said through this point in July. Have you seen any weather impact given the flooding we've seen across much of the Atlantic seaboard?

I don't think so yet. We might see it, but we've not seen that yet.

Okay. Got it. And then maybe just last one, staying on that topic. As I thought about that flooding, it's highlighted a need for greater infrastructure for drainage and sewer systems. Can you maybe talk to, or give a refresher on some of your product lines, such as the concrete pipe reinforcement, and how that can be used to help improve the nation's drainage and sewer systems?

Yes. I think there's no question that the need for water management is ubiquitous. If in fact there are rising sea levels that result in coastal flooding, that will be a stimulant for demand for all kinds of ways to manage those waters, and by and large, concrete products are used for that purpose. So I think it's all positive for the demand outlook for our products.

Very helpful. Thanks very much for taking the questions.

Thank you, Julio.

Our next question comes from another analyst. We have no further questions at this time, so I will now hand back to the management team for final remarks.

Okay. Thank you. We appreciate your interest in Insteel. We welcome your calls, and we look forward to talking to you as we wrap up our fourth quarter. Thank you.

This concludes today's call. Thank you for joining. If you have missed any part of this call, or would like to hear again, a recording will be available shortly. Have a lovely day.