Good morning. Thank you for attending today's Insteel Industries First Quarter 2023 Earnings Call. My name is Faram [ph] and I will be your moderator for today's call. All lines will remain muted during the presentation portion of the call, with an opportunity for questions and answers at the end. [Operator Instructions] It is now my pleasure to pass the conference over to our host, H. Woltz, President and Chief Executive Officer of Insteel Industries. Mr. Woltz, please proceed.

Thank you, Faram [ph]. Good morning. Thank you for your interest in Insteel and welcome to our first quarter 2023 conference call which will be conducted by Scot Jafroodi, our Vice President, CFO and Treasurer and me. While Scot has only recently been named CFO, he is a long-time Insteel employee who is intimately familiar with company markets and operations. We congratulate Scot on his elevation to CFO and we're confident he will add value to the company. 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. Beginning in Q3 of 2022, residential-related markets began to weaken as interest rates rose and those markets remained weak through the first quarter of 2023. We do not expect significant recovery of residential markets until there are signs that the interest rate environment is changing. Unlike residential markets, we believe the shipment weakness we experienced in non-residential markets is related to customer inventory management and destocking rather than impaired demand for our products. Following several quarters of extended lead times and inadequate supplies, customers found that excessive inventory levels and purchase commitments could be safely curtailed as lead times normalized. Notwithstanding the weakness that is apparent in Q1 results, we believe that 2023 will be a good year for our non-residential markets and for the company. 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, everybody, joining us on the call. I'm pleased to be here participating in my first earnings call as the CFO of Insteel. As we reported earlier today, our results for the quarter were unfavorably impacted by a decline in shipments and the narrowing of spreads between selling prices and raw material costs. Net earnings for the first quarter fell to $11.1 million from record earnings of $23.1 million a year ago and earnings per share dropped to $0.57 from $1.18 per diluted share in the prior year. As referenced in our release, earnings for the current year quarter benefited from a $3.3 million or $0.13 per share gain on the sale of property, plant and equipment. Net sales for the quarter fell 6.5% from last year on a 10% decrease in shipments, partially offset by a 3.9% increase in average selling prices. Our shipping volume for the first quarter, which has historically been our slowest period of the year due to the onset of winter weather and holiday schedules, was adversely impacted by the previous-noted inventory management and destocking measures pursued by our customers along with the continued weakness in the residential construction market that first began in the second half of fiscal 2022. On a sequential basis, net sales were down 19.8% from the fourth quarter due to a 12% drop-off in shipments and an 8.8% decrease in average selling prices. Falling raw material costs and competitive pricing pressures eroded ASPs during the quarter, with the largest decline in average selling prices from Q4 within our product line most exposed to the residential markets. Gross profit for the quarter fell $24.6 million from a year ago and gross margin narrowed to 10.7% from 23.7% due to lower spreads between average selling prices…

Thank you, Scot. While we're not pleased by our first quarter results, we do not think our markets are deteriorating under pressure of macroeconomic weakness that jeopardizes performance for fiscal 2023. Rather, we think underlying demand from residential markets have stabilized at a lower level and that demand is robust in non-residential markets. Under these circumstances, inventory corrections should be expected, following an extended period of constrained supply conditions when customers make purchases and commitments just in case rather than following more typical demand pool purchasing tactics. Our view of the market is formed by conversations with many customers focusing on their projected operating rates, backlogs and overall expectations for business conditions during the year. Also, recovering customer activity and internal order entry levels support the hypothesis that the inventory correction is running its course. Scot mentioned in his comments that we have 3.9 months of inventory on hand which is more than is required, based on business conditions. Insteel's inventory imbalance is centered primarily in residential-related markets, while inventories for non-residential construction markets are much more appropriate relative to business levels. Recall that we turned to offshore wire rod markets last year beginning in fiscal Q2 when domestic sources were unable to assure us of adequate supplies for our third and fourth fiscal quarters. As is our normal practice, we targeted imported volumes toward our housing-related markets which are generally make-to-stop products that rarely require certification of compliance with by America regulations. Our plan to supplement domestic supplies was upended when housing markets turned down sharply beginning in May 2022. Subsequent deterioration of ASPs in these markets created significant margin pressure, exacerbated by lower production volumes that extended the time horizon for resolving the inventory imbalance. We continue to be optimistic about the impact on our markets of the…

My pleasure. [Operator Instructions] Our first question comes from the line of Tyson Bauer with Kansas City Capital.

As we've seen in years past, we've kind of accustomed these kind of adjustment -- inventory adjustment orders that periodically take place. And typically, the thought process and the question always becomes the duration of that adjustment to a stabilized pricing environment. And can you give us a little bit of how the quarter progressed as we got into December? And was the December impacted more materially because of weather holidays and just the slowdown destocking at the year-end for most of your customer base? And how that kind of progresses into the fiscal second quarter? Will we see a snapback basically as we get into the warmer months in the second half of the year? Or is this something more of a modest change for you?

Well, let me try to address it like this Tyson. First, Q1 is always our lowest volume quarter. I attribute it primarily to holiday schedules more so than weather because typically October and November are not bad weather months for construction. But holiday schedules just dramatically reduce operating days. And I would say, this year is not much different than any other year with respect to that, except there has been some inventory liquidation going on by our customers as the supply environment changed from more of a highly constrained to not so constrained, with lead times returning to more normalized levels. In terms of inventory levels, as I mentioned in my comments, the over-inventory situation that we're facing is primarily centered in our residential standard welded wire reinforcing market. And of course, as we purchased based on forecasts and when we don't meet the forecast, then the inventory pipeline lengthens in an unplanned way which is what happened to us and we will be through the second quarter in working that off. I would say that these markets -- residential markets seem to have stabilized at levels that are higher than we expected when we did our last forecast and that overall, we would be cautiously optimistic about where we see those markets going. In the non-residential markets, they just continue to perk along at nice levels. So maybe the inventory reductions in the non-residential area aren't completely finished at this point, but the underlying level of demand for the product, I think, is robust enough so that it shouldn't be a material factor for us going forward.

Okay. And we've seen mortgage rates drop 100 basis points recently from its peak over 7% on the 30-year. So that obviously doesn't hurt our cause of -- going forward. 3.9 month turns you mentioned, are we -- are you targeting a certain level of getting it back down towards 3, which implies a $30 million, $40 million benefit from the reduction in inventories? Or just give us a little more color on where you want to be at your inventory levels by the end of Q2.

Well, of course, that is highly dependent on whether we meet our shipment forecast. But whether it is February or March or April, about 3 months, I think, is a more reasonable level for the business than close to 4. And that assumes that service levels from the steel producers that we do business with remain reasonable which appears will be the case.

Okay. Are you anticipating then by the second half of this year that will get to more historical margin levels in those high double digits on a stabilized...?

Yes. We don't forecast margins for purpose -- for these purposes.

Yes. Last question for me. Obviously, there wasn't -- there appears no accrual for incentive comp in the Q1. Should you hit targets, what's kind of that maximum level that would be taken this year if you hit those incentive comp levels for the overall year that we'll have to true up later this year?

Well, it will be on a quarter-by-quarter or month-by-month basis. There'll be no big surprises. And let me just -- let me say this also, Tyson. As we look at the business and we look at the spreads that are implied by contemporaneous purchases and sales of product that the business has not been impaired by any kind of macroeconomic weakness or downturn that -- we like where we are but for a little extra inventory.

Okay. And your price, you talked about the overall average price being down 8.8%. We've never really gotten the shipments up like we wanted to see over the past year plus due to supply constraints and otherwise -- across different product categories like PC strand versus your standard welded wire that's more residential focus. Give us kind of the range of what you're seeing on the pricing environment. Has PC strand held much more favorably than the standard welder, so that is disproportionately lowering your average price?

Well, I think what we've said was that ASPs fell pretty significantly in standard welded wire reinforcing product line and not so much in other product lines. Just reflect in the state of supply and demand in those various markets.

Thank you for your question. Our next question comes from the line of Julio Romero with Sidoti. Mr. Romero, your line is now open.

Good morning, everyone. My first question is, what is your sense for how much of the weakness you realized in non-resi shipments during the quarter was due to customer destocking versus easing supply chain constraints?

In the residential-related markets, Julio, began in last May when interest rates began to really affect that market, we saw a significant reduction in shipments relative to our forecast to the tune of around 40%. Subsequently, those markets seemed to have recovered and stabilized, although at lower levels than they were running prior to the downturn, but have taken the brunt of the weakness in that marketplace.

How do you -- thank you. My second question is, how do you expect price to change sequentially over the next few quarters?

It's unknown and not forecastable. But typically, when demand for our products is strong, then we don't see significant price competition. Our order book and our competitors' order books are such that pricing is not so much of an issue.

All right. Thank you for your question, Julio. There are currently no further questions registered. [Operator Instructions] There are no further questions waiting at this time, so I will pass back for any final remarks. Thank you.

Okay. Thank you, Faram [ph]. We appreciate your interest in Insteel. And as always, we welcome your contacts and your calls for any follow-up questions that you have. Thanks and we'll look forward to talking to you next quarter.

This concludes today's Insteel Industries first quarter 2023 earnings call. Thank you for your participation. You may now disconnect your lines.