Ladies and gentlemen, thank you for standing by and welcome to the Insteel Industries First Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions] I would like to hand the conference over to one of your speakers today, Mr. H. Woltz. Sir, please go ahead.

Good morning. Thank you for your interest in Insteel and welcome to our first quarter 2021 earnings 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 on today's call are considered to be forward-looking statements, which 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. All forward-looking statements are based on our current expectations and information that is currently available. We do not assume any obligation to update these statements in the future to reflect the occurrence of anticipated or unanticipated events or new information. I'll now turn the call over to Mark to review our first quarter financial results and current market conditions.

Thank you, H, and good morning to everyone joining us on the call. As we reported earlier this morning, the first quarter of fiscal 2021 was another strong quarter for Insteel. Our markets continued to experience solid demand throughout the fall, as the momentum we experienced in the fourth quarter continued at a seasonally strong pace, which coupled with a rebound in spreads from their depressed levels last year restored gross margin to more normalized levels. Earnings per share for the quarter increased to $0.42 per share as compared to $0.03 per share a year ago. Shipments for the quarter were up 21.6% from last year, but down 15.2% sequentially from Q4 reflecting both the usual seasonality in our demand and as you recall, Q4 2020 benefited from the inclusion of an extra week in that quarter based on the fiscal 2020 calendar. Q1, though, was the highest first quarter shipment level in the company's history exceeding a previous first quarter high in 2018. Robust demand in our markets compared to last year led to broad-based shipment growth across virtually all our products, and it remained consistently strong across all three months of the quarter. Average selling prices increased 1% from last year and 2% sequentially from Q4, due in part to price increases implemented in the latter half of the quarter, to offset the rising cost of raw materials. Gross profit for the quarter increased $13.6 million from a year ago and gross margin expanded over 1,000 basis points to 16.6%, primarily due to the sustained recovery in spreads between selling prices and raw material costs, in addition to the impact of incremental volume and marginally lower conversion costs. On a sequential basis, gross profit increased $0.4 million and gross margin widened 250 basis points, primarily due to an…

Thank you, Mark. As reflected in the release, our strong first quarter results were driven by resilient non-residential construction markets and late in the quarter by expectations for rising steel prices. We're pleased with the solid underlying level of demand for our products and our financial performance and we thank our Insteel teammates for their focus on working safely and execution excellence. During Q1, we continued to observe CDC recommended procedures for managing exposure to COVID-19 and its transmission at our plants and administrative offices. While we had staffing disruptions during the quarter related to quarantines none of our locations was materially affected by operating restrictions and most customers also experienced normal operations subject to the same quarantine-related staffing complications that affected Insteel. As of now, we expect to continue fulfilling customer requirements and we do not expect a surge of infections to affect our operating plants. Over the course of the last three earnings calls, we have reported that Insteel along with other U.S. producers had filed anti-dumping and countervailing duty trade cases to address illegally traded imports of PC Strand and standard welded wire reinforcement. The PC Strand cases were filed in April 2020 against 15 countries that represented 89% of PC Strand imports during 2019. On January 8, the International Trade Commission issued its affirmative final injury determination with respect to Argentina, Colombia, Egypt, Netherlands, Saudi Arabia, Taiwan, Turkey and United Arab Emirates resulting in the implementation of duties ranging from 24% to 194% of value, which we believe are sufficient to address the injurious behavior of these countries. It now appears that the cases against Indonesia, Italy, Malaysia, South Africa, Spain, Tunisia and Ukraine will conclude during our third fiscal quarter. We are delighted to have prevailed conclusively with respect to eight of the 15 respondent…

Thank you. [Operator Instructions] Our first question comes from the line of Julio Romero with Sidoti. Your line is open. Please go ahead.

Hey, good morning. Happy New Year.

Good morning, Julio.

Good morning.

I guess my first question is just on the very impressive tonnage and shipment data you reported. Mark, I think you talked about this, some of the sub-categories of non-residential highway and street was up 4% for last few months, what revised [ph] has been strong switch has been okay. But, can you just talk about that relative to the 20% year-over-year increase in shipments you're seeing? Are you seeing kind of -- and just talk about what areas maybe you're seeing some strength.

Yes, Julio. I mean the strength is actually pretty broad-based across all our end markets. We haven't seen any particular weakness. Highway and street construction is one area that we follow closely just because it's a large market for us, and as I mentioned that stayed level throughout the year. And then over the last three months, it's actually up over where it was over that same period last year, but there really wasn't a particular market that jumped out as being stronger than usual or weaker than usual.

Yes. And Julio, I would add that, I think you're aware that we have a very difficult time actually demonstrating causal linkage between any of those components of construction spending that are reported and our shipments. It's very difficult for us to point to definitive drivers.

Yes. I guess maybe taking another stab at that. I mean maybe instead of drilling into the sub-sectors, is maybe public construction making up a bigger percentage than a driver relative to past years, or probably -- is residential maybe outperformed? I don't know if you can give me any color on that.

I would tell you, we don't detect any ships in the drivers of our order entry. As Mark indicated, the business has been strong across the board. There are no laggards.

Got it. And just 20% was really impressive there. And I guess, H, you talked about you do expect strength in the end markets just to kind of support through at least your third quarter. Does that expectation kind of factor in the same kind of backdrop you've seen in this quarter and in the last two quarters in that public construction continues to be robust kind of those projects are previously funded and that all kind of dries up potentially in maybe third or fourth quarter of the year?

Well, as you know, we're notorious for our lack of visibility out beyond a few weeks in the business. And so, I would say no. There are no specifics that would cause me to suggest that our fourth quarter is not going to be strong, but just in view of the overall uncertainty that's present all around us, I would just be hesitant to make any observation past what we can see pretty clearly, which is through this quarter and into third quarter.

Yes. No, understood. I guess, maybe just last one for me is can you talk about the ability of the industry to kind of absorb, any further price increases if steel prices kind of continue on current trajectory?

It's a good question. And I would tell you that what we're seeing in the last few weeks is probably unprecedented. We have back-to-back triple-digit price increases per ton. And historically, these things don't have long runs, but there are differences that are at work in the market today relative to past cycles, where we've seen price run-ups. So, as you know, we've been asked many times what really drives our ability to pass cost increases through to the market, and we have consistently replied that it is strength and demand for our products. And certainly, we see that today. And while I would not welcome further raw material cost or scrap cost increases that necessitate our raising prices further, I do expect that if that were to happen, that the market is strong enough for us to pass these through and that the risk of inability to do that is really quite low. The other factor at work today is that hot-rolled steel wire rod is in very tight supply, and you may know that in the past, we have also commented that tight supply conditions tend to have the same impact on pricing ability in our markets as does a strong order book for our products. And that is that wire rod is not available in unlimited quantities, and that adds further strength to our ability to collect increases in the marketplace. So, I would just repeat that we really don't want to see this continue, but as with many things that's beyond our control and if the price run-up does continue, I certainly believe the market is strong enough, so that it would -- we would not see any adverse impact on our margins.

That’s helpful. I'll hop back into the queue. Good start to the year. Thanks.

Thank you.

Thank you.

[Operator Instructions] And our next question comes from the line of Tyson Bauer with KC Capital. Your line is open. Please go ahead.

Good morning, gentlemen.

Good morning, Tyson.

Just to add on to what you're saying H, given your position within your markets being either the top or the second manufacturer as far as market share and prominence, do you not get a competitive advantage when you do see some tight supply or the growing demand that you're able to react and push through more favorable actions than your competitors? So, in this environment, are you not strengthening your competitive advantage in showing that might over your smaller competitors?

It's hard for me to give you a straight answer on that, Tyson. But I would tell you that, in the current environment, we're less worried about competitors and what they're doing with their pricing than we may normally be. We understand the economics of our business, and we understand that in a market environment like this, we should be expected to perform well. And I think all the stars are aligned, so that we will.

Okay. Given your scale of economies, are you able to source better? And in the past where you've been able to bring in large quantities of imported steel that was kind of shut off to you, is that reopening, or is that an option still there, where you can get more favorable front-end cost?

Well, with respect to domestic purchases, we really don't know -- we don't know how we purchase relative to our competitors. We do the best we can and that's the sum and substance of it. One thing that is quite different in today's market as compared to other tight wire rod markets and environments where prices have run up is, there is practically no imported product available to loosen up supply. Now -- I mean, it's available, but it would be available at prices that are even higher than domestic prices today. So my belief is that that discipline on availability and supply will probably give this run legs that it may not have had in prior environments.

Okay. Given the comments it sounds like margin outlook at least in the short-term or going into Q3, we're looking at something that's fairly stable. You're able to maneuver and keep that similar to what we just saw. Then we start getting into the seasonally better quarters. Would you anticipate that what we just had in Q1 will be able to be replicated and pushed through -- through the rest of the year?

It's always hard to make a definitive statement, Tyson. But, I don't see why that would not be the case right now. Of course, things could change. But right now, I'd say that, it's pretty good.

Okay.

Pretty good chance that margins will continue strong.

Working capital needs obviously the higher input cost AR, those kind of cash conversion cycles, what are we anticipating here for working capital needs this year?

I mean, I think, Tyson, well depending on the cost of rod and this pricing environment I suspect, we'll be using working capital or building it over the period of into Q2 and the balance of the year.

Okay. Is there any given trade action that has already occurred or pending that is more beneficial to Insteel and that pendency of those actions being partially felt already? This is kind of an open-ended question but, how much benefit have we already seen? And how much more is there to be received, should things continue to be finalized in your favor?

Well, it's the case with both the standard welded wire reinforcement and PC Strand cases that just their pendency has strengthened the market to try to quantify that is impossible. But certainly the offshore, or across the border suppliers become much more cautious, due to potential adverse consequences there and the dependency of the cases. So that has helped. But what really helps is winning the cases, as we've done with eight of the 15 countries in the PC Strand arena. So, I expect that we will adequately address the illegal activity of the remaining seven PC Strand countries and Mexico, in standard welded wire reinforcement and that there will be improved market fundamentals long-term because of that. And I would hasten to say that we will see other countries come into the market, particularly in PC Strand, probably less so in welded wire reinforcement, but this is the nature of it. We've been through the cycle many times but, dealing with 15 bad actors is nothing but highly positive for the long-term fundamentals of this market.

Okay. And last question for me, we've gone through previous administrations who have controlled both, houses and the presidency. A lot of them talked about the infrastructure and the need. And we start out with hope and then we somewhat get desensitized to the continuing talks because they cannot figure out the funding mechanisms of this. Is this time any different, or are we still in that honeymoon, very hopeful that we're going to see something long-term at the federal level. And as things drag on we may get desensitized to it once again? What -- is there anything different, this go around?

Well I think the difference this time around is that, the entire country is practically immune to deficit spending and funding things seems to be no real importance to anyone Republican or Democrat. And that is largely why I expect to see a big infrastructure program approved. With that said if you think back to the Obama infrastructure program, it is also important to know what the money will be spent for. And history would tell us that infrastructure and the definition of infrastructure tends to expand to cover anything that they want to spend money on. So the details will be very important, when we start to see information on, how an infrastructure program is put together.

Got it. Thank you, gentlemen.

Thank you.

Thank you. And I'm showing no further questions at this time. I would like to turn the conference back over to the company for any further remarks.

Okay. Thank you. We appreciate your interest in Insteel. We look forward to talking to you, in the next quarterly call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.