Hello, and welcome to the Insteel Industries Third Quarter 2022 Earnings Call. My name is Kate and I will be your call today. [Operator Instructions] I'll now hand over to your host, H Woltz, President and CEO to begin. H, please go ahead.

Good morning. Thank you for your interest in Insteel, and welcome to our third 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 third 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 in 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.

Thank you, H. And good morning to everyone joining us for the call. As we highlighted in the release earlier today, the third quarter of 2022 was another historically strong period of financial performance. Only exceeded by our record second quarter of this fiscal year. We reported quarterly revenue of $227.2 million or an increase of 41.3% from $160.8 million in the prior year and net earnings of $38.6 million, or $1.96 per diluted share, as compared to $18.4 million or $0.84 per diluted share in the prior year period, representing 109% increase in earnings per share. Our results continue to be favorably impacted by strong demand and incremental price increases to recover the continued escalation in raw material and operating costs. Average selling prices in the third quarter increased 53.9% relative to the prior year and were broad-based across all product lines. Sequentially from Q2 2022, average selling prices increased 6.3%, which represents our eighth sequential quarter of rising ASPs. These increases support an expansion of our spread between average selling prices and raw materials relative to the prior year quarter, resulting in strong profitability. Despite the robust demand environment, shipments for the quarter decreased 8.2% from last year, sequentially from Q2 2022, our shipments were essentially unchanged. This lack of shipment momentum resulted from two unanticipated challenges. First, we experienced some softness in our standard welded wire mesh product line, beginning in the latter half of the quarter following unprecedented level of demand during the first half of this fiscal year. As we highlighted in our release, this is our most commodity like product and the only one that is sold through distribution channels rather than directly to end customers. We believe a moderation in homebuilding activity over the last few months slowed demand and the distribution chain…

Thank you, Mark. As reflected in the release, our strong third 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. Over the past few quarters, we identified inadequate supplies of our primary raw material, hot rolled wire rod as a constraint to production and shipments and we indicated we had turned to offshore markets to supplement domestic supplies. By the end of the third quarter, receipts of imported wire rod had filled most of our supply gaps and we expect to avoid further operating disruptions related to raw material supplies over the next few months. Once our raw material shortfall was resolved, we experienced staffing-related difficulties in ramping up operating hours to meet market demand at certain facilities. We've responded by implementing more flexible work schedules and adjusting compensation, although it's too soon to know the extent to which our actions will result in a material increase in operating hours, production and shipments. Also during the quarter, we experienced softening conditions in the market for standard welded wire reinforcing, which is our most commodity like product line. As Mark indicated, this is the only product we produce the result -- distribution channels rather than direct to end users and it is the product which is most heavily influenced by housing construction. For the last three or four quarters, supplies of standard welded wire reinforcing have been extraordinarily tight. Prices rose sharply and purchasing behaviors were frantic. We believe that during Q3 supply began to catch up with demand, while at the same time housing starts softened. The combination of these changes caused purchasers to become ultra conservative and tightly managed inventories, which adversely affected…

Thank you. [Operator Instructions] So we take our first question from Julio -- sorry, Julio Romero from Sidoti. Please go ahead.

Hey, good morning everyone. Thanks for taking my questions.

Good morning.

Good morning.

Could you guys maybe just dig into standard welded wire? What percentage of sales is that typically make up of overall sales? And maybe secondly, what percentage of that standard welded wire usually comes from residential?

Julio, we don't disclose product line detail like that.

Okay. Well, I guess maybe asking another way on the residential side. Would it be -- I think you guys have typically talked about 15% of your overall sales comes from residential. Does that kind of fall in line with that or DBA too far from that 15%?

The residential market consumes both standard welded wire reinforcement and PC strand.

Got it. Okay, I guess maybe any way to rank order what you're seeing in terms of standard welded wire, any way to rank order distribution channel, recovery versus slowing new construction as to the impact onto that product line?

I don't think we have sufficient insight to give you a good answer to that. I think that the -- as I mentioned in my comments, the activity in that market was so frantic for so long that upon the first signs of a retreating residential market environment, I think the buying community just really slammed on the brakes and became ultra conservative. But to give you an answer for exactly the underlying drivers of why that happened, I'm not sure we can do that. We just don't have that information.

Okay. Maybe just thinking about your inventory balance $192 million. How does that compare to maybe last quarter on a unit basis? And as you guys mentioned that the average unit cost is on par with current replacement cost?

To your latter question, that's correct. And unit volumes, I would say it's up marginally from where it was last quarter. I mean, obviously, that's a dollar value that you're seeing there and prices for the product have continued to increase.

And Julio, it really was until the latter part of the third quarter that that our offshore quantities actually arrived in the volumes that we had ordered.

Okay. No that's helpful. I'll turn it over and circle back with any follow-ups. Thanks very much.

Thank you.

Here the next question comes from Tyson Bauer from KC Capital. Please go ahead, Tyson.

Good morning, gentlemen.

Good morning Tyson.

I find it interesting that we have a record year that you’ve reported in earnings in six months and it's viewed negatively with $4 in EPS for the last six months. But that's how the market goes. Residential 8% or 15% you've made that comment a couple times already. Infrastructure, I think typically historically has been around 40%. Do we have a little timing issue where we haven't really seen that increase in spending in the infrastructure that should more than offset any current weakness that we may be experiencing on the residential that backfill as we get into ’23 should be more than adequate to overcome any kind of softness in the housing market?

Yes. I mean, we don't view the outlook negatively at all. We view the outlook as extremely bullish for reasons that you cite given the balance of our revenue stream split between res and non-res. And even today without the incremental spending that should come from the infrastructure investment and JOBS act, business is extremely strong in those sectors. So I guess I would have a hard time spending a negative yarn on this at all.

Yes. I mean, when we report -- you guys report, the second highest margin ever. And all is -- it sounds like just because the froth has been taken off similar to what we saw in the lumber market, a year ago that all the time that's viewed as negative when maybe relatively it's a little softer, but absolute terms you're still in a very robust multiyear situation that should be very strong for results and cash flow?

I would agree with the statement.

The shipments down 8.2% you talked about labor, is that very regional? And are you -- do you have any remedies to solve a regional shortage by overcoming that with -- as freight eases up a little bit from your other facilities? Or is this something you have to work your way through?

It is regional, but I mean, but every plant location has its own labor market and they're all in different states, but they're all strong. Nationally, I think unemployment is well under 4% and our localities and it ranges -- unemployment ranges from a low of around 2% to 4%. And in some respects, it appears that work has become optional in some of these markets and it's really difficult. And as I said in my prepared remarks, we've responded by trying to adjust our work schedules to become more flexible and more innovative and we've had success with that. We can expect to see some more of those activities. But I think we are experiencing the same problems that most manufacturers are experiencing.

Okay. It is one of the unintended benefits, the margin level, because the product mix, if that standard welded wire has some softness that you have some flexibility and can gear some of that manufacturing toward some of those end customer, high demand items with the better margins?

There's some opportunity to do that. But in certain respects, the product is unique and the capacity is may or may not be transferable to other product lines.

Did the -- was the timing of getting the raw materials in along with the staffing shortage? Does that contribute to just kind of the back of the napkin numbers, about $20 million to $30 million of revenue loss that you potentially could have done? Had you been able to fully staff?

Yes, it's hard for me to comment Tyson on the fly as to that exact calculation you've got. I will tell you that we entered, we kind of mentioned, we entered the third quarter obviously with low finished goods inventories. And in a normal operating environment, we would have entered that third and fourth quarter with much, much higher finished goods inventories. So some of that was driven by the lack of raw materials and the timing of those arriving late in the quarter if you recall from the second quarter.

Typically at the end of a calendar year, you have a big increase your fiscal Q1 on your cash balances just the way the net working capital typically works out? Will we see that again this year or are you gearing up to maintain higher inventory levels. So you're well stocked as you enter in or you come out of next year's slower seasonal quarters. So you have that finished inventory available and ready to go. What's the mindset of that? How you're going to play that cash management? And also have adequate inventories?

Well, let me start by saying we don't want to put ourselves in the position we were in last year this time. That it was on -- the operations were extremely ragged, because of inadequate raw material supplies. So and -- when you think of the deficiency in units that we experienced last year, and the inflation in unit pricing, you can expect to see inventory balances remain higher certainly than they have been driven by a combination of more units and substantially higher values. But as I said, we're not uncomfortable with our inventory levels. And I don't think that we would be able to rely on domestic suppliers for the current quarter or solely domestic class for the current quarter or the first quarter of 2023. So the necessary tactic is to bring it in from offshore, and when you do that, you bring it in reasonably large quantities, which causes a rather lumpy move in working capital. So inventory balances are going to remain higher, but we would expect to see a working capital release in 2022 calendar.

And as you walk in your fiscal Q4 with the distribution adjustments from distributors adjusting some of their inventories. The impact on pricing, obviously it doesn't show up this quarter, you have a very favorable outlook being provided by one of your competitors Nucor this morning is doing well. Are we just talking in relative terms that yes, we may see some softness as far as not these, we'll take whatever product at whatever price we can get, but the pricing is still at a level that historically is extremely favorable to Insteel?

And are you referring to overall, Tyson?

Right.

Absolutely.

I mean, the vast majority of your products -- your products, everything are still at great pricing. We have this one segment that may be experiencing some adjustments on the end markets. But we're going off of an extremely top level that even had an adjustment lower is still favorable, especially compared to previous years?

Yes. I mean, and we've made the point for the last several quarters that there has been a FIFO tailwind that we've had, although we've not trying to quantify on the end and inevitably when pricing begins to level out the tailwind dissipates. And so if that's where we are, then the tailwind will subside. But the fundamentals’ of the business now with spreads and volumes, I think is still extraordinarily favorable. And as I said in my comments, our mission is to get our operating hours on and to meet the demand that's available to us.

All right. Thank you, gentlemen, and keep doing it.

Thanks, Tyson.

Thank you.

[Operator Instructions] We currently have no further questions registered. So H, I will hand it back to you.

Okay. Thank you, Kate. We appreciate your interest in Insteel. We look forward to talking to you next quarter and in the meantime don't hesitate to contact us if you have questions. Thank you.

Thank you all for joining. This now concludes today's call. Please disconnect your lines.