Hello, and welcome to today's In-steel 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. [ Operators Instructions] I would now like to pass the conference over to H.O. Woltz, President and C.E.O H.O, please go ahead.

Thank you. Bally. Good morning and thank you for your interest in In-steel and 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 which 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 financial performance. We reported quarterly revenue of $213.2 million or an increase of 53.4%, from a $139 million in the prior year, and net earnings of $39 million or a $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 of 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. But the inadequate supply of domestic steel wire rod remained a challenge in the quarter, restraining our ability to meet fully our customer demand in generating plant operating inefficiencies and increase 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 was particularly acute at the beginning of the quarter, and 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 receipted in the latter half of the quarter. In addition to the usual benefit from a seasonal…

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 2Q -- in 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 similar market impact as the 232 tariff and are largely ineffective in increasing available 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 inner state highway system was conceived. At its core is 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…

[ Operators Instructions] 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 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 the cycle peak and then come right back down that this really does have legs for that period you talked about to five years given that the supply constraints still looked like there'll be an 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.

Yeah. Even theoretical peak earnings calculations that we have had since covering you, you've just shattered and blown all those out of the water. This is all without really meaningful shipment volume increases. Once -- if you have the ability to secure better supply and shipment volume can follow through with pricing, do you think you can maintain that kind of margin profile because of the demand profile is there to be able to accept any kind of improvement in your capacity to produce?

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've been up double-digits on, 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. And up to this point on, there has been little pricing pressure and that's what we would expect going forward. The demand is what drives this and what sets the economics for our business. And as I mentioned, we've never seen it a strong.

Right. Previously what's of the two main segments Engineered mash and then Pc strand. Pc strand had had the lower margin profile because you still have some imports situations, quote-on-quote, QP honest. I suppose. With the sanctions on Russia and Russia being an export for Pc strands of 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 large global supplier of Pc iron and scrap and those -- 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 cost 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 domestic steel prices that are elevated beyond world market prices give rise to the potential for rising imports of PC strand into that market segment. And we've seen some of that. However, offsetting that or 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 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?

I think as we mentioned in the past, right. We're always our board in conjunction with management is looking at the best methods to return capital to shareholders and the options available to us, while also retaining that flexibility to support the business to the extent that there's both [indiscernible].

That's 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, [ Operator 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 and does the change in sourcing come with any new risks and or benefits?

Yeah. Good morning, Julio. Thank you for participating in the call. I would tell you that, 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 on horizons for offshore steel on and up until this, chronic shortage in the domestic market developed. We were very, very heavily, if not almost entirely, on sourcing domestically. And that just is no longer possible. And I would tell you the conditions were exacerbated in 2021 by a host of unplanned and planned steel mill outages, that 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 of where the pipeline becomes a little better stopped, 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. And when I say substantial, that means probably 20% to 25% of our requirement.

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

I think it's fair for what we know today, but I would -- 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 X borders to the U.S. market. Those 10orders affected countries that exported over half of the imported wire rod to the use. So those countries are effectively out of the market going forward. And the other thing that happened just right at the same time was that the Trump administration imposed the 232 tariff. And 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. And the question is, does that, does that continue? Or is there a normalization that would cause us metal spreads to contract? And of course the conundrum for every steel producer, whether as wire rod are flat products or whatever; every steel purchaser that has import competition today is at a distinct disadvantage to offshore competitors because of the out-of-work nature of steel prices in the U.S. market relative to the rest of the world. And that is -- that is a formidable challenge for purchasers of steel. So 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 the 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 maybe efficiencies you're seeing and how much of that is maybe leverage benefit from the Strand-Tech acquisition you did a couple of years ago?

Yeah. The SG&A line really just relates to corporate-related overhead, not any other cost related to the 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. And then as I mentioned, the -- probably the second component was with respect to a drop in legal expenses, in that 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 queue. Thanks very much.

Thank you.

Thank you. There are currently no further questions registered at this time. As a reminder, [Operators Instructions]. Never no additional questions waiting at this time. So our I'll pass the conference back over to H. Woltz for closing remarks. Please go ahead.

Thank you. We appreciate your interest in Insteel. Look forward to talking to you next quarter, and we'd remind you that you're free to call us on -- 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.