Hello, everyone, and welcome to Insteel Industries Fourth Quarter 2023 Earnings Call. My name is Runo, and I will be your operator for the call today. I will now hand over to your host and CEO, H. Woltz. Please go ahead.

Good morning. Thank you for your interest in Insteel and welcome to our fourth 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 and which could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. 2023 was 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. We believe these headwinds have about run their course and we continue to be optimistic about the underlying level of demand for our products. 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 everyone joining us on the call. As highlighted in our press release earlier today, our performance in the fourth quarter of fiscal 2023 reflects the continued pressure of narrow spreads between selling prices and raw material costs, alongside elevated unit conversion costs. As a result, net earnings for the fourth quarter fell to $5.6 million, or $0.29 a share, from $24.3 million, or $1.24 per diluted share a year ago. Our net sales for the quarter faced headwinds, declining 24.3% from last year on a 27.8% decrease in average selling prices, although this was partially offset by a 4.9% increase in shipments. On a sequential basis, average selling prices declined 6.6%, while shipments were 1.8% higher. The ongoing challenges of the competitive pricing environment, the persistent downward trend in steel scrap prices and the growing influence of low-priced imported PC strand all contributed to a decline in our average selling prices during the fourth quarter. As I've mentioned in previous calls, our product is most exposed to the residential construction market and has experienced the largest decline in average selling prices, a trend that continued throughout our fourth quarter. Despite the weakening in our ASPs, our shipping volume exhibited modest improvement during the fourth quarter. Many customers are currently experiencing favorable or improving business conditions, and the majority have normalized their inventory levels following their destocking efforts that suppressed demand for much of fiscal 2023. However, it is important to highlight that our shipments came in below our internal forecast, primarily due to project delays, weakness in the non-residential construction market and the negative effect of adverse weather conditions in certain markets during the quarter. Gross profit for the fourth quarter fell by $25.8 million from a year ago, and gross margin narrowed to 8.9% from 19.1% due to a combination of lower spreads and higher overall unit conversion costs partially offset by a year-over-year increase in shipments. On a sequential basis, gross profit decreased $6.4 million from the third quarter and gross margin decreased 340 basis points as the drop-off in average selling prices exceeded the reduction in our raw material costs. Throughout fiscal 2023, our spreads have been consistently pressured by the steady decline in average selling prices, which has more than offset the benefit realized from the consumption of lower-priced rod inventory. As we're looking ahead to the first quarter of fiscal 2024, margins are likely to remain under pressure in the near term due to the current competitive landscape that continues to exert downward pressure on selling prices. During our fourth quarter, we experienced an increase in our unit conversion costs compared to both the previous year and the third quarter due to reduced operating volumes at select plants as we implemented inventory reduction measures during the quarter. This resulted in weakened cost absorption and an overall increase in unit conversion costs. As we move into our first quarter, we expect unit costs to remain elevated based on anticipated operating levels which will be impacted by the onset of the seasonal downturn in demand as well as a continuation of the general inflationary trends that we have experienced throughout 2023. SG&A expense for the quarter decreased to $8.1 million or 5.2% of net sales from $8.3 million or 4% of net sales last year. The dollar decrease primarily resulted from the relative year-over-year change in the cash surrender value of life insurance policies along with lower depreciation expense, partially offset by higher compensation costs. Our effective tax rate for the quarter was largely unchanged at 22.5%, down slightly from 23% last year. Looking ahead to next year, we expect our effective rate will remain steady at around 22%, subject to the level of pretax earnings, book tax differences and other assumptions and estimates that compose our tax provision calculation. Moving to the cash flow statement and balance sheet. We are pleased to report cash flow from operations generated $38.6 million of cash for the quarter and $142.2 million for the year, primarily due to our working capital reduction driven by a planned decrease in inventories. Our inventory position at the end of the quarter represented 3.3 months of shipments on a forward-looking basis calculated off of our forecasted Q1 shipments, compared with 3.2 months at the end of the third quarter. Additionally, it's worth noting our inventories at the end of the fourth quarter were valued at an average unit cost that was lower than our fourth quarter cost of sales. We incurred $4.1 million in capital expenditures in the fourth quarter for a total of $30.7 million for the year, primarily targeted at broadening our product offering, expanding capacity, and reducing operating costs. Looking ahead to fiscal 2024, we expect capital expenditures to total $30 million. H will provide more detail on this topic in his remarks. From a liquidity perspective, we ended the quarter with a record $125.7 million of cash on hand and we're debt-free with no borrowings outstanding on our $100 million revolving credit facility, providing us ample liquidity and financial flexibility. Along with our focus on making ongoing investments in the business, our financial strength has allowed us to continue to return capital to shareholders. In fiscal year 2023, we returned $43.6 million to shareholders through a combination of dividends and share buybacks. This included a $2 per share special dividend as well as our regular quarterly dividend, making the third consecutive year that we have paid a special dividend of at least $1.50 per share. Moreover, we repurchased approximately 8,000 shares of our common equity equivalent to $2.3 million through our share buyback program. Turning to the macro indicators of our construction end markets, the most recent construction spending data continues to show strength. For the first 8 months of the calendar year, total construction spending on a seasonally adjusted annual basis is up 7.4% from last year. Non-residential construction spending was up almost 18%, with public highway and street construction, one of the larger end uses for our products up over 12%. However, while construction spending remains elevated, U.S. cement shipments and other measures that we track continue to lag 2022 levels as shipments were down 1.8% for July and 2.2% for the first 7 months of the calendar year. The most recent reports for the Architectural Billing and Dodge Momentum Indexes, leading indicators for non-residential building construction, implied softening business conditions in the coming year as high interest rates and tighter lending standards appear to have an impact on construction markets. In September, the ABI dropped to 44.8%, the lowest score reported since December 2020. The score is well below the growth threshold of 50% that would indicate a significant decline in billings and marked a downturn in business conditions at architectural firms. The Dodge Momentum Index, which tracks non-residential building projects going into planning, rose 3% in September up to 182.5%. However, year-over-year, the index is 5% lower. Dodge noted that the year-to-date trends would indicate an overall decline in commercial planning and that going into 2024, planning levels will depend on the improvement of financial conditions. In Dodge's August report, it was noted that weaker market fundamentals continue to undermine planning growth as tightening lending standards and the higher interest rate environment are beginning to impact both the commercial and institutional segments. This concludes my prepared remarks. I will now turn the call back over to H.

Thank you, Scot. We're pleased to have experienced an uptick in shipments year-over-year during the fourth quarter. Most of the improvement originated with shipments into our housing-related markets, which was unexpected. Shipments into infrastructure and other commercial applications were weak in a continuation of the phenomenon we've experienced throughout the year, where customers seem to be busier than their suppliers. Inventory liquidations by customers of both finished goods and reinforcing material would explain market conditions, although we lack objective data to support such a claim. We believe, however, that consumption of reinforcing products is at an attractive level and that we're maintaining market share; and the base of softer order entry rates was our best course of action. Declining prices for metals have likely had a negative impact on the motivation of our customers to rebuild inventories. While Insteel is not a price setter, we recognize the need to be consistently competitive. The fact remains, however, that lower prices do not stimulate demand, so the tactic is questionable from a business perspective. We've mentioned before that declining steel prices create a headwind for Insteel earnings, which has clearly been the case over the last year during a period of significant reductions in steel scrap and hot-rolled pricing. We believe the downward slide has about run its course finally and that steel prices are likely to rise in coming months. Weaker-than-expected demand in Q4 caused us to continue reducing finished goods inventories, inventory levels, and we incurred the associated negative impact on operating costs. Our plants experienced the unfavorable impact of lower volume while also feeling substantial inflationary pressures for all purchases, including energy, labor, spare parts, and operating supplies. We believe that internal inventory corrections should be complete during the first quarter and that we should resume operations at a rate more in line with the incoming orders. Nevertheless, Q1 will be another lackluster quarter as we complete inventory liquidations and contend with growing imports of low-priced PC strand. Our expectations for the balance of fiscal 2024 are for a much stronger performance. We're optimistic about the impact on our markets of the Infrastructure Investment and Jobs Act, although it is difficult to point to specific projects that have affected demand. There are indications that implementation of IIJA and traditional federal transportation spending may not focus so much on our infrastructure and mobility network as the administration targets its funding toward green priorities. According to DOT data, only 35% of traditional fiscal 2022 federal highway funding has been obligated and just 11% has turned into outlays. With respect to IIJA, the Secretary of Transportation has acknowledged 'the delays of one, two, three or more years between when funding is appropriated and authorized and when those dollars are assigned to a project.' Meanwhile, inflation is impacting project costs and high costs are jeopardizing the viability of some projects. Despite these obstacles, we believe that IIJA funds will ultimately be allocated to projects and spent as intended with a beneficial impact on our industry. The question is when, not if. 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. We ended fiscal 2023 with $30.7 million of CapEx and invested in three new production lines as well as upgrades to our information systems and maintenance of our facilities. Because of component shortages related to supply chain problems, only one of the three production lines was in operation at the end of the fourth quarter. We expect the other two to come online during Q1 and Q2 of 2024. The investments we are making in state-of-the-art technology will expand our product capabilities and favorably impact our cash cost of production. We expect CapEx for 2024 to come in at approximately $30 million as we continue to modernize our facilities and information systems, invest for growth, and reduce our cash cost of production. As pointed out in the release, the company completed fiscal 2023 debt-free with more than $125 million of cash on hand. Consistent with the actions taken by the Board of Directors in recent years, we will evaluate the capital needs of the company and we'll have information about any return of capital to shareholders following our November Board meeting. Looking ahead, 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, in addition to elevated interest rates, 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 to maximize shipments, optimize our costs, and pursue attractive growth opportunities, both organic and through acquisition. This concludes our prepared remarks, and we'll now take your questions. Bernard, would you please explain the procedure for asking questions?

Maybe to start on selling prices. You'd mentioned a number of factors that affected pricing during the quarter—competitive pressures, scrap pricing trending downward, and the import pressure on the PC strand side. Could you maybe rank order those factors for us in terms of what was most impactful during the quarter?

Julio, I would tell you, it's just mainly competitive pricing pressures pretty much across the board. If you were to take a snapshot of contemporaneous purchases and sales, we don't have a margin collapse on our hands. What we have is a significant reset in pricing throughout the supply chain, and the inventory impact and flows of inventory through the cost of sales has been something we've just been unable to get ahead of.

Understood. And the competitive pressure, would that be both on the domestic and the imported side?

Yes. I would tell you it's pretty much across the board.

Okay. No, that's helpful. Maybe just on the import competition on the PC strand side, can you maybe just talk about that a little bit? And how much more of the recent growing influence of those imports have been to freight costs coming down versus other factors?

Yes. I don't know that we can quantify it for you. We've seen this coming, and now it's here. There were a few factors that insulated our market from lower-priced imports, including freight rates that skyrocketed during the '21, '22 period. All of that is normalized, and we're now seeing significant import action. Keep in mind that we do get a forward look at this because customers purchasing import materials generally do so 2, 3, 4 months ahead of taking receipts. We know what's going on in that market. That of the imports is actually hitting the U.S. market; so that's what we're seeing. It certainly began in earnest towards the end of Q4. We'll see it in Q1 and pursue additional trade cases sometime in 2024.

Very helpful. And then just I'll squeeze one in on demand, if I could. Just speak to what you're hearing or seeing from your customers in terms of maybe what they're seeing on the private non-residential demand side.

Well, we don't necessarily know whether it's private, non-residential, or whether it's public non-residential. If you wrap those two families together and let's say non-residential construction, our customers are busy. Regionally, there are always some winners and losers, but it's remarkable that the level of quotations and the level of shipments and backlog that our customers had is generally positive. There are definitely some regional differences, but as a general statement, I think consumption of our products is better than the market indicators would suggest at this point.

Congratulations on doing your part to fight against inflation and pricing. So the Fed appreciates that, and hopefully, as the shareholders stay with us and work our way through this as we get toward the end of it. When we have price pressures on imports, sometimes that can also lead to advantages for you and purchasing supply of wire rod from foreign sources. Has that not presented itself as an opportunity this go around? Or are you seeing opportunities in that regard?

Well, keep in mind that all of our raw material purchases are subject to the Section 232 tariff of 25%, which has made offshore purchases less attractive. The other reality of offshore purchases is extraordinarily long lead times, creating risk for us that is not particularly appealing at the present time. So I would say that our offshore material purchases are probably at a low ebb at this point.

Okay. You talked about the competitive pricing. The supply seems to be adequate within the domestic marketplace. Yes, we're spending $60 million over a 2-year period to expand capacity through 3 more production lines and other—we're sure there's maintenance included in that and other things. Can you break down what your return expectations are for that $60 million in regards to increased opportunities of revenue versus maybe just getting a better handle on your costs and the cost per unit as production going forward?

Well, I can't quantify those components, but you have correctly identified that the investments that we are making have both the potential for increasing revenue and significantly reducing the cash cost of production for products that we're currently producing. As a general return expectation, I can tell you that we would expect these investments to return in excess of our cost of capital. As I also mentioned, we don't get to choose the timing for starting these investments. There's a 1.5-year to 2-year lead time to get these things done. The projects that we have undertaken are critical to the future of the company and I would argue deserve these investments regardless of the market outlook because they're critical going forward.

Right; especially given the equipment timeline and suchforth. Your balance sheet obviously supports a $2 special dividend, what we've seen here recently. The question is, does your general outlook or, as you exhibited a year ago, even though the cash used for working capital drains some of that balance, you were able to look on a 3-, 4-year horizon to justify that special dividend. Are the same parameters applicable this go-around? You have the cash; the outlook may be a little weaker for Q1. But overall, you're generally positive in an outlook that would be supportive.

Yes. I mean, you well know because you're familiar with the company that we've never claimed to have great insight into what happens 2, 3, or 4 quarters out. But we don't see a train wreck coming our way in 2024 or 2025. We think that while there may be a downturn, there are a lot of countervailing factors that would support the non-residential construction market. So we don't feel like the sky is falling.

Do you have a point where you're reviewing operational adjustments and whether we should be really protecting market share versus margin protection? Or are you looking at the margins potentially settling themselves out with the inventory adjustments, thus it's more important to protect your market share?

No. As I stated in my prepared comments, we expect to be competitive in the market on a consistent basis and we will be. Our customers expect that of us. We expect that of ourselves and we're not going to hold an umbrella over the market. I think we have the cost structure to compete with anyone. As I said, we don't want to be price setters. We think the tactic of lowering prices is naive to say the least. But nevertheless, there's a market out there, and we're going to compete and let the results fall where they may, but we're not going to hold an umbrella over the market.

Okay. And last question for me; probably directed to Scot, the monthly trends in the last two quarters. We've had the front-end month show a good recovery from the previous quarter. And then the rest of the quarter kind of falls below expectations. We had a good April. We had a good July, and then all of a sudden, we have this rapid decline for various reasons that you've explained. Anything unique you can see that would have created that impact, or is that just how the numbers worked out?

There's nothing unique there. That's just how it worked out for the quarter.

But the anticipation is for the rest of this year. We're going to start out kind of as we ended and probably just kind of stay tight or stable until we get into the next year's seasonally stronger quarters.

But I think the influences that we're dealing with right now, Tyson, are related to reducing inventory and the impact on our plants. Certainly, I mean, the level of volume that's out there isn't particularly impressive anyway. But we have exacerbated that impact with our inventory reduction after which are clearly called for but nevertheless, they're painful. So I think that, that's a big driver of what you're seeing.

We currently have no further questions. So I would like to hand the call back to H. Woltz for closing remarks.

Okay. Thank you. We appreciate your interest in the company. We look forward to talking to you next quarter and we encourage you to follow up with us if you have continuing questions. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.