Ladies and gentlemen, welcome to the Insteel Industries' Second Quarter 2023 Earnings Call. My name is Glenn, and I will be the moderator for today's call. [Operator Instructions] I will now hand you over to the host H. Woltz, Chairman, President and Chief Executive Officer of Insteel Industries. Mr. Woltz, please go ahead.

Thank you. Good morning and thank you for your interest in Insteel. Welcome to our second quarter 2023 conference call, which will be conducted by Scot Jafroodi, our 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. The first two quarters of fiscal 2023 have been challenging for the company in view of inventory accumulations throughout the supply chain and a significant downward reset Insteel prices that occurred following several quarters of extreme supply tightness and significant market price escalations. As stated in the release, we believe these headwinds have about run their course and we're optimistic about the underlying level of demand for our products and the margin environment. 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 outlook.

Thank you, H., and good morning to everyone joining us on the call. As we reported in our release earlier today, going against difficult prior year comps, the second quarter of fiscal 2023 proved to be another challenging period for Insteel as we continue to contend with narrowing spreads between selling prices and raw material costs, lower shipments and higher unit conversion costs. Net earnings for the second quarter fell to $5.1 million from record earnings of $39 million a year ago and earnings per share dropped to $0.26 from $1.99 per diluted share in the prior year. We reported net sales for the quarter of $159.1 million, a decrease of 25.4% from the prior year. Shipments rose 5.2% sequentially from Q1 due to the normal seasonal demand upturn that fell 12.8% year-over-year. Our shipping volume during the quarter was weaker than we anticipated due to a combination of winter weather conditions in several of our markets, reducing construction activity as well as the continuation of the inventory destocking activities pursued by our customers, which has now extended out over the first half of our fiscal year. However, as we move into our third quarter, we believe most customers have largely completed their inventory management programs and are returning to a more predictable ordering pattern. Average selling prices declined during the second quarter falling 9.4% from Q1 and 14.5% from a year ago. Competitive pricing pressures triggered by the softening of shipments and the drop-off of steel prices continue to erode ASPs. Not unexpectedly, the largest decline in average selling prices from Q1 is within our product line, most impacted by the continued weakness in the residential construction markets. However, looking ahead to the third quarter, we expect gradually increasing ASPs across most of our product lines, driven by price…

Thank you, Scot. While our weak Q2 results were the result of depressed shipment volume and spread compression, 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 has stabilized over the last few months and is recovering and that demand is robust in nonresidential markets. It’s not surprising that the market is experiencing inventory corrections following an extended period of constrained supply conditions when customers made purchases and commitments just in case rather than following more typical demand pull 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. During Q2, weak incoming orders caused us to schedule four plants down for between one week and two weeks. At other plants, weak order entry caused us to curtail scheduled operating hours, but the facilities were not idled. In view of the ongoing tightness in the labor market, we paused hiring in some cases, but did not actively reduce employment levels at plants that were curtailed because our conviction was that weakness was related to inventory liquidations while the underlying level of consumption of our products was healthy and would warrant ramping up operating hours during Q3 and Q4. Currently, we are experiencing gradual improvements in demand and are comfortable with the temporary curtailments we took during Q2 to adjust operating rates. We expect our volume ramp up to continue through Q3 and provided ASPs remain stable, spreads are sufficient to support favorable financial performance. We continue to be optimistic about the impact on our markets of the Infrastructure Investment and Jobs Act and believe it will positively impact our markets during 2023.…

Thank you. [Operator Instructions] We have our first question comes from Julio Romero with Sidoti & Co. Julio, your line is now open

Good morning. Can you guys hear me?

Yes.

All right. Good. This is [indiscernible] on for Julio Romero. How are you guys doing?

Good. Thanks.

My first question is, can you speak to the trend line in pricing for your product line, most exposed to residential markets?

Well, I think, what we would tell you on residential markets is they began to swoon in April or May of 2022, probably reached what we believe to be the low point back in the fall of 2023. And subsequently, we’ve seen a recovery on those markets. Pricing matters are day to day. Suffice it and say at this point that we have announced increases in those markets and we’re collecting the increases. But it is a day-to-day situation and it’s hard to say what next week brings.

Thank you for the color. Can you talk about what you’re hearing from customers and suppliers regarding any impact of a credit crunch on commercial construction?

Yes. I mean, we certainly recognized the risk that’s out there. And we have seen some projects that have been pushed out or delayed. But it is not a trend at this point. We believe that interest rates obviously will affect the private non-res markets more than they will the public markets. And all things considered the private markets seem to be healthy. And there are a lot of projects that are underway and like I say, some have been pushed. They have probably been some that have been canceled. But it is not a trend at this point that we would say compromises on our view of the prospects for the company through the rest of fiscal 2023.

All right. And thank you very much. And the last one for me is are you seeing any benefit yet from the Infrastructure Investment and Jobs Act?

I don’t think that we’ve seen tangible results of that on our order book at this point. But we are aware that billions of dollars has been released at the federal level for both bridge and for water infrastructure projects and those applications are directly in Insteel’s wheelhouse.

Thank you very much guys.

Thank you.

Thank you. [Operator Instructions] We have our next question comes from Tyson Bauer from KC Capital. Tyson, your line is now open.

Good morning, gentlemen.

Good morning, Tyson.

Good morning.

It sounds like some of these additional costs incurred in your fiscal second quarter where strategic in nature with the expectation that as we get into the seasonally stronger quarters, that capacity that trained workforce was going to be needed. And so you took some of that pain in the second quarter to get the benefit as we go forward. Do you anticipate that as it was accentuated in Q1 and then Q2, the downside that the flip side of this, as you do price increases, as scrap steel increases and the demand and shipments increase that the reverse will be as accentuated, thus our seasonal pattern is really going to be pretty market this year?

Well, I think, it’s a good question. And in anticipating this conversation I thought back more to 2023 versus 2022. And in 2022, of course, we were shipping everything that we could produce and the constraint was really steel availability as well as people availability, and those constraints seemed to have moderated for 2023. As we look to the balance of 2023 for our Q3 and Q4 we do expect that that we're going to see the volume ramp up, but whether it mirrors – whether it mirrors the downside it's hard to say. As of today, we are still running unfavorable volume comps with last year, although momentum is accelerating and we see customers that are busy and as Scot mentioned in his comments, are returning more normal ordering patterns. So, I think there may not be a panic buying surge that results in significant increases in volume, but I think, the underlying level of demand is certainly good and that we'll see favorable momentum through Q3 and Q4.

And just to fortify that comment, when you put in these price increases, you haven't gotten really any pushback. They have been accepted for the most part. And would you anticipate further increases as needed?

Well, Tyson, we almost always get pushback on price increases, so I wouldn't agree that that's the case. We do get – we do get pushback, but I think, as Scot mentioned the underlying level of scrap increases and wire rod increases will mandate that our industry collect these increases. But it could take time to do it. And as we look out, I don't think anyone can predict what's going to happen on steel scrap prices, but there are many moderating influences in the global market right now, and I don't see – I would be surprised if scrap ran away from us in the next few months. I think it's going to be a little softer than that.

Okay. So you are talking about increased shipments maybe not to the same degree as we had seen before, but yet we're doing a lot of capital projects that expand capacity. What is the end goal there as far as the net impact for revenue generation, or is it more of a sustainability on maintaining a more consistent revenue pattern by having more product skews available and offerings and allow you to a little more automation to have little better cost controls?

Yes, for sure the technology reduces the labor content of our product. Most of these investments are also expanding our product capabilities so that we can profitably produce products that we only reluctantly produce up to this point. And that obviously implies that we will solicit these products rather than produce an amount of duress as a customer accommodation. So those are very positive developments for us. And I mean I wouldn’t want to overstate their impact on overall revenues, but incrementally, they’re very important to us.

Are you willing to share a dollar number on those costs where idling those plants for certain weeks and the labor force that may not necessarily be working, but you’re still paying them for when the business comes back? Just to give us a sense of what the low-hanging fruit is as we go forward on a normal operating schedule?

No, we’re not prepared to do that, Tyson.

Well, I figured I’d try. And the last question – the last question for me, are you feeling more confident in the residential markets’ recovery this year or more confident in the nonres remaining strong and continuing to be robust, especially as we get more federal dollars into the system, hopefully? What’s kind of your general outlook that we’re fairly certain that residential bottomed out in 2022, we’re going to see some recovery of some sort? Is that more applicable as opposed to the nonres?

I would tell you that personally, I’m pleasantly surprised with the recovery that we’re seeing in the residential markets. And keep in mind that our view is relatively short-term in nature. That in June, we might have a different outlook than we have today. But customers in that segment rapidly destocked beginning in last April and May. And I think they dealt with that problem and they’re back to purchasing. And I think they’re reasonably pleased and surprised by the rebound in residential demand. On the nonres side, as you know, it’s split into the private and to the public sectors. And I think it’s hard to make an argument that the public sector is going to be anything other than strong. On the private sector, certainly, interest rates are a huge risk out there on not just – I mean, to the whole economy. But the lagging nature of our business would tell me that we’re going to be solid through 2023 and into 2024. And if there is a – if there is a downturn that we may see late in 2024.

All right. That sounds wonderful, and we’ll be ready for the bounce back in the summer months.

Yes. Thank you.

Thank you. [Operator Instructions] We have no further questions on the line.

Okay. Thank you. We appreciate your interest in Insteel and look forward to talking to you next quarter. In the meantime, we would invite your follow-ups. Call us as you may be interested in doing so. Thank you.

Thank you. Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.