Good morning and a warm welcome to the Insteel Industries' Fourth Quarter 2022 Earnings Conference Call. My name is Candice, and I will be your moderator for today's call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions] I would now like to pass the conference over to our host, H.O. Woltz, President and CEO, Insteel Industries. Please go ahead.

Thank you, Candice. Good morning. Thank you for your interest in Insteel, and welcome to our fourth 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 Insteel's record financial performance in fiscal 2022, generating net earnings of $125 million, and return on capital of 36%. During much of the year, we experienced substantially rising costs both in raw materials and plant operating costs, including labor, energy, and consumables. While the rising price environment produced a tailwind for earnings as average selling prices rose, it also created considerable operational and customer service challenges for our people, including shortages of nearly every input into our process which created uncertainty surrounding production schedules. I'm particularly proud of our people for the discipline they showed in this environment as they generally avoided overcommitments that would result in customer disappointment. While lead times extended, by and large, we understood the impact of the environment on our ability to deliver to customers, and we fulfilled the customer commitments we made, which speak highly of the professionalism of our people, our focus on customer needs, and the effectiveness of our information systems. As we enter fiscal 2023, we believe the outlook for our markets is 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.

Thank you, H. And good morning to everyone joining us for the call. As we highlighted in the release, the fourth quarter of 2022 was a historically strong period of financial performance. We reported revenue of $208 million or an increase of 21.4%, from $171.3 million in the prior year, and net earnings of $24.3 million or $1.24 per diluted share, as compared to $25.2 million or $1.28 per diluted share in the prior year. Our results benefited from incremental price increases to recover the continued escalation in raw material and plant operating costs. Average selling prices in the fourth quarter increased 26.1% relative to the prior year. Sequentially, from the third quarter of 2022, average selling prices decreased 2.6%. This decrease in average selling prices was driven by weakness in our product line most exposed to the residential construction markets. Excluding the impact of that product line on average selling prices would have resulted in a 1% increase sequentially, reflecting the resilience of our nonresidential construction markets. Despite the robust demand environment, shipments for the quarter decreased 3.7% from last year. Sequentially from the third quarter of 2022, shipments declined 6%. The lack of shipment momentum resulted primarily from three issues, ongoing weakness in the residential construction markets relative to historically robust conditions last year weighed on demand, much like we highlighted in the third quarter of 2022. Our customer base began managing their inventory on hand to more normalized levels as availability constraints for many of our product lines subsided from the unprecedented shortages earlier in the fiscal year. And labor availability across our plant footprint, which we highlighted in the third quarter of '22, remains an issue. While we experienced modest signs of improved labor recruiting and retention during the fourth quarter, our plant's ability to increase…

Thank you, Mark. Our fourth quarter results were strong by any measure despite the impact of a deteriorating housing market that we first detected last May and referenced in the Q3 earnings call. While housing weakness is likely to persist through this interest rate cycle, we fortunate that our exposure to this market is relatively low which we approximate to be 15% of the revenues. The remainder of our markets, private, non-residential, and publicly-funded infrastructure applications remains strong with customers reporting substantial backlog and a healthy pace of new quotations. Over the last few quarters, we identified inadequate supplies of our primary raw material hot rolled steel wire rod as a constraint to production and shipment. And we indicated we had turned to offshore markets to supplement domestic supplies. By the end of the third quarter, receipts of offshore raw material had filled most of our supply gaps. The unexpected downturn in housing markets together with tighter inventory management by many customers had an unfavorable impact on Q4 shipments and resulted in unplanned inventory growth. We expect excess inventories to be depleted by the end of the current quarter or early in Q2. We continue to be optimistic about the impact on our markets of The Infrastructure Investment Jobs Act and believe it will create significant demand for our products in 2023. The need for infrastructure investment in the U.S. has been obvious for decades, but funding has consistently been adequate relative to the need. 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, 2022 CapEx came in substantially lower than expectations based on actual equipment delivery…

Thank you. [Operator Instructions] So, our first question comes from the line of Julio Romero from Sidoti & Co. Your line is now open, please go ahead.

Hi, good morning. Thanks very much for taking my questions. I appreciate you guys calling out the difference in pricing excluding the product line most exposed to residential. If we could dig deeper into that one product line that has seen the price weakness, do you think you've seen the worst of the pricing pressure sequentially on that one product line? Do you see prices stabilizing, going lower? We'd just love to hear how you guys are thinking about that.

I think maybe two things are going on, Julio. First, it's well publicized that the housing market has weakened substantially, but beyond that the market has changed from one where there was a critical short supply of the product to one where it is no longer in short supply. And as a result, we uncovered which customers are multiple-ordering from suppliers to cover their needs. And as a result I think there is an inventory bulge that developed. So, there's -- consumption is off some from lower residential construction demand, but also probably more important is inventory rebalancing is going on in that market, and in others. But I think the inventory change is probably the bigger story.

Got it, that's really helpful. And I guess [that really help us] [Ph] come down to supply and demand. You also talked about, guys, on your prepared remarks the first few weeks of the first quarter you've seen shipments and ASPs trending above forecasted levels. Just a little bit more about kind of the trends you're seeing during the first few weeks of October.

Well, as we've acknowledged on multiple occasions, Julio, our vision and our ability to see beyond a few weeks is really minimal due to the low lead times that are expected by our customer base. So, I would say it's week-to-week, but on a year-over-year basis, at this point, the trends are positive and order entry is brisk. So, right now, I'd just tell you that the market looks pretty solid.

Okay, got it. And just turning to the balance sheet, I saw you guys did some repurchases, $1.2 million in the quarter. Is that something we -- could be opportunistic in your view or how should we think about potential repurchases in coming quarters?

I think the bigger question is just the expectation of free cash flow. And should free cash flow exceed the needs of the business, what do we do with it. And you know we have a history of having repurchased shares on occasion, as well as paying special dividends on occasions. And we will evaluate both of those options if we get to the point where we believe free cash flow is beyond the needs of the business you can expect us to return the cash to shareholders. But if we were to change our outlook and see that we expected a significant downturn in the economy, then we may have different consideration about returning cash to shareholders. It just depends on the circumstances and our view at the time we make the decision.

Okay, makes sense. Thanks so much for taking the questions; I'll hop back in the queue.

Thank you, Julio.

Thank you. Our next question comes from the line of Tyson Bauer from KC Capital. Your line is now open, please go ahead.

Good morning, gentlemen, and excellent year --

Morning, Tyson.

Good morning.

Thank you.

I'm going to just jump on to [what I] [Ph] said, H, and that was your policies at the Board level regarding your focus on free cash flow and what to do with it versus earnings that you may have compiled during this past year, even though, obviously, you run through a cash management cycle with your seasonality where, yes, you have 4.1 months of inventory, you're going to get that down to 3, so we should see an influx of cash coming here. You talked about a solid October starting out. Given your outlook on the infrastructure in those, are you more prone to view a return of capital to shareholders with that expectation and willing to have a little more foresight on returning some of that inventory into cash or at least not having those working capital needs going forward now that will lap and anniversary of those. So, does that come into play when you make that decision on the special dividend in the next couple weeks, and what you do with that return of capital policy that you're discussing?

Well, as is consistent with our past statements, Tyson, that the very first priority for any use of cash would be to grow the company. If we had acquisition opportunities or if we have additional organic CapEx opportunities we'll certainly deal with those first. And then, I think you're correct, there will be a working capital release over the coming months, and is likely to be pretty substantial. So, we'll just evaluate -- will revaluate the -- whether to return cash and how to return cash based on the circumstances that exist at the time, which would imply we look at our share price, we look at our cash expectations, we look at the state of the general economy and what's expected there, and then come to a conclusion about the best route for the company.

Okay. And because I think it sends a mixed message if you have such great results, your outlook, and then because of a timing issue on cash flow that, all of a sudden, you pull back a little bit on what you have normally historically done in your special dividend because of something that is more of a point in time as opposed to an overall view of what your business expectations are, so, just my little two cents on that, not that you care. The ABI data showed expansion again, in September, industry with seven months of backlog, obviously housing is the weakness there, but institutional -- other things or still remain strong. Which means your customer base for the bulk of your business is strong. In the housing segment, are we returning to an order pattern even if they're at a lower level, because they right-sized their inventories in the last quarter, which didn't slow it down, it almost stopped it. So, any return helps your ability to shipments and better efficiencies at your facilities just so we get back into a normal order pattern regardless of what level it is.

Yes, I mean I think -- first of all, let me say that just as a caveat, our insight into this is a little blurry in that we don't have any objective data that we can really rely on. So, we're using estimates, and we're using market knowledge, and we're using customer feedback to make our conclusions here. But we have seen a tick up in order entry in these markets, which would indicate that maybe the inventory corrections are close to having run their course. And that would be the background for my statement, that inventory imbalances may have been more responsible for the weakness than the actual rate of consumption of the product on job sites. So, yes, I think to the extent that those inventories have been dealt with, then that's very positive for us.

Okay. And we knew, coming in the fourth quarter, that you had some lower fixed inventory. And it seems like you were never able to really catch up during the quarter as you trended through. And you talked about October being stronger than expected. How did the quarter play out? How did we go from July, August, September, was that something that you were just started behind the 8 ball and could never get ahead? Or were there some trending down that created the results that we saw?

I think, Tyson, if you're asking about finished goods inventories. And as I recall, the third quarter call, we indicated we did enter that quarter, and I think it was true as we finished it with lower levels of finished goods inventory than we would typically have at that time of year. So, it's probably fair to say we're still a bit in catch-up mode with that as we work through the fourth quarter, right. Demand has been strong enough that as we made product we shipped it to the customer in that period of time, but there was an excess finished good inventory available.

And I think, Tyson, aside from just that the housing-related markets, there's been a general loosening up of supply of our products to customer base. So, I think that customers throughout our markets have had the opportunity to evaluate their inventory levels and adjust to an environment where availability is more reasonable than it had been in the prior three or four quarters. So, I think there's been some inventory management and liquidation across the whole business, but not to an alarming degree. And if I understood your question right, you're wondering whether we were trending up, or down, or flat through the quarter. I would tell you that in our view the only weakness that we're seeing is in the housing-related segment of the business, with also the caveat that there could be some inventory rebalancing going on in other markets. But the rate of order entry has been positive, customer outlooks are positive, backlogs are positive in non-housing-related sectors of the business, which would lead us to conclude that 2023 should be a good year absent any kind of curveballs that come along.

Okay. The suggestion in your comments at the start of the call was that, outside of the housing product line, that you've actually been able to maintain spread over the raw material cost part of the business, it's the structural cost items, labor, energy, those things that seem to be what's hampering. What remedies are there available or is that just something that you have to figure out how to overcome and become more automated, and maybe that's why we have the big CapEx coming forward. What do you do with that structural cost increase as opposed to just getting your spread over the wire rod?

Well, I think you need to evaluate every component of that on its own. For instance, energy, I guess everyone has his own expectation for what's going to happen to energy costs. And in some regions where we operate, that the increases that we have incurred have been dramatic, but not so much elsewhere. So, are these permanent changes or are they temporary? It's hard to say in the case of energy because there's so many outside influences, including the Texas freeze of February 2021, the Ukraine-Russia conflict, on, and on, and on, okay. So, I don't really know whether that's a permanent or whether it's a temporary impact on our cost. On the other hand, our labor costs have risen substantially. And I'd tell you that I really don't expect to see that that will back off. So, we'll have to deal with that through productivity, through investment over time, and we will. And in terms of other commodities that we purchase to operate our factories, we've seen dramatic increases in some of those costs. But I believe that most of those will moderate over time, maybe not back to the lows of pre-pandemic, but we've seen price escalations of 3 and 4 times in certain of the supplies that we procure and operate our plants. I don't expect that that will persist for long term. So, what have done in the meantime is we tried to deal with those cost increases through pricing our product. And I am not sure how else we would have done it.

Okay. And last one, so not monopolizing here, just happened to see a story on the national news regarding obviously the hurricane in Florida and how the utility companies are in essence as a de facto replacement going to be utilizing concrete poles. And they are going to try to do that statewide. And this kind of gives them opportunity accelerate those programs. Are you involved in that as far as product line at all? And is that something you see is the benefit going forward as we see some of these natural disasters in Florida or California or other areas?

Absolutely we are involved. And it's a very substantial market for us and one that has bright prospects as you point out. Those poles are pre-stressed pricing. And they use both PC strand and they use mild steel reinforcement that we supply. So, they are loaded up with our products.

And what kind of growth do you see there?

Well, I can't tell you on that product specifically. But, they are busy. The growth will be substantial.

All right. Thank you, gentlemen.

Thank you, Tyson.

Thank you. As there are no more questions registered at this time, I would like to hand over to management team for closing remarks.

Okay. We appreciate your time this morning. Feel free to call us if you have questions. And we will talk to you next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines.