Good morning, and welcome to the Insteel Industries' Third Quarter 2023 Earnings Call. My name is Carla, and I will be the operator of today's call. [Operator Instructions] I would now like to pass the conference over to our host H. Woltz, President and Chief Executive Officer. Please go ahead when you're ready.

Thank you. Good morning and thank you for your interest in Insteel, and welcome to our third 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 three quarters of fiscal 2023 have been challenging for the company in view of inventory accumulations throughout the supply chain and a significant downward reset in steel 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 continue to be 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 off to discuss our business outlook.

Thank you, H, and good morning to everyone joining us on the call. As reported in our release earlier today Insteel's net earnings for the third quarter of fiscal 2023 fell to $10.6 million or $0.54 a share from $38.6 million or $1.96 per diluted share a year ago. As has been the case through the first two quarters of the year, we were once again faced with a difficult challenge of comparing the current period results against the record financial performance of 2022. Our results continue to be unfavorably impacted by the narrowing in spreads between selling prices and raw material costs combined with higher unit conversion costs and lower shipments. However, we have seen some positive developments. As we progress through the third quarter, spread has improved and widened sequentially from the loans we experienced during the second quarter as we began to benefit from the consumption of lower cost inventory. Additionally, we have benefited from the seasonal turn in shipping volume that typically occurs during the third quarter as the weather related headwinds subside. Nonetheless, we still fell short of our internal shipment forecast and competitive pricing pressures and fall in steel scrap values have continued to erode our average selling prices. We reported net sales for the quarter of $165.7 million, reflecting a 27.1% decline from the prior year. Shipments fell 3.2% year-over-year but rose 11.3% sequentially from Q2. Despite the seasonal upturn in construction activity during the quarter, we did not experience the expected boost in shipments following the cycle of customer destocking that has suppressed demand in the first half of the year. Average selling prices fell 24.7% from a year ago. Sequentially ASPs declined for the fourth straight quarter falling 6.4% from Q2. Competitive pricing pressures and the drop-off of steel scrap prices…

Thank you, Scot. As stated in the release, Q3 order entry rates and shipments did not recover the momentum we had expected, although shipments and gross margin strengthened each month of the quarter. Weaker conditions than expected resulted in a continuation of higher operating costs at certain plants as backlogs were insufficient for efficient operations and we elected not to take significant cost reduction actions that would have longer-term implications during the continuing difficult hiring market. Most customers appear to be enjoying solid business conditions except in the Midwest where customers have holds [ph] in their schedules and DOT lettings are disappointingly light. If our observations about the level of business in other areas are correct, we should see an uptick in order entry rates during the remaining months of calendar 2023, although it's not possible to accurately predict when this may begin. For what it's worth, our shipping performance is not out of line with US cement shipments, which were down nearly 7% year-over-year for April 2023 and down 4.4% for the four-month period ending in April. Thus far in July, shipments are slightly ahead of last year and we have forecasted continued modest growth through our fourth fiscal quarter. We expect the margin environment continue -- to continue to improve except that we will be confirmed with increasing volumes of low-priced imported PC strand during Q4 and that were not present in the market earlier in the year. Private non-residential construction markets by and large continue to show strength, although light commercial work which is typically related to housing markets slowed. We also saw a deferral of speculative commercial construction projects, while owner-occupied projects seem to move forward unaffected by rising interest rates. We expect these trends to continue through the calendar year. The recent recovery of the…

Absolutely. [Operator Instructions] Our first question is from Tyson Bauer from KC Capital. Please go ahead.

Good morning, gentlemen.

Good morning.

Good morning.

It sounds like at least throughout the quarter you were trending month-over-month improvements as you went through June into July. Is the expectation that that should continue at least through the calendar months of this year? And if so what magnitude where we should start to see some year-over-year increases in shipping? And what are you looking at as far as sequential increases also?

Well, you're correct that during Q3 each month was slightly better than the prior month both from a shipping volume perspective and from a margin perspective. And it's hard to say what we expect for the rest of calendar 2023, although our Q4 forecast calls for increasing shipments. We do have some operational issues that we will have -- where we're going to have to address some finished goods levels at our plants, which will keep us from operating full out. But, nevertheless, we expect shipments to improve. And who knows what it's going to be like in August and September but through this part of July we're up mid-single digits compared to the prior year.

Yeah that's good. Looking back at shipment volumes especially for this quarter, our year-over-year other than when we did the STM acquisition in March of 2020, we haven't necessarily seen a great performance on shipping volumes really going back until 2018. And there's been unique circumstances hurricanes, shortages those things that have transpired. Given the amount of capital dollars that have been spent to improve operations, capacity and otherwise, would you anticipate you would be further ahead of this point than what you've experienced?

Probably so. Tyson, keep in mind that 2021 and 2022 shipments were constrained by many factors including a steel shortage, including our inability to adequately staff our facilities. Both of those problems seem to have ameliorated, although to some extent the labor situation is still extremely tight for us. And as I mentioned in my comments, we elected not to take cost-reduction actions during Q3 that would exacerbate the hiring problem that we're continuing to experience. So, yeah, I mean there's some frustration internally that the shipments haven't improved to a greater extent but there are also some meaningful constraints that we're up against. And I think when you view Q3 relative to the information that we have on cement shipments I don't -- as I said in my comments, I don't think the shipping performance is out of line.

Okay. And the last one for me, where do you see inventory volumes or inventories right now at the customer level at the distributor level? You said lead times to normalize. Do you see it fairly balanced? Have they gone the pendulum swing to being a little bit short? And given that conservatism going into the next seasonally slower winter months, would you anticipate them purposely being short in inventory going into the slower months?

I think that in the distributor market, which we estimate to be in the range of 15% of our volumes not a major driver. I think the destocking is certainly complete, and I don't think there will be any restocking. Delivery horizons from producers such as in steel are short. And I think customers were sufficiently burned by higher prices and then falling prices so that they see no reason to take that risk. In the make-to-order segment of our business, I would say that, we have customers who had extremely high levels of finished goods inventory. Most of that inventory is sold, but different problems and different constraints in different regions have prevented them from shipping at the rates that they probably expected to ship, and we still have customers who have high levels of reinforcement inventories. Unfortunately, there's no good source of objective data for us to really get our arms around the extent of this problem, which would allow us to forecast when they work through these inventories. But I think clearly that's a play in our markets.

All right. Thank you gentlemen.

Thank you.

Our next question comes from Julio Romero from Sidoti & Co. Please go ahead.

Thanks. Hey, good morning, H and Scot.

Good morning.

Maybe thinking about your – good morning. Maybe thinking about your capital projects that are expected to be fully commissioned this quarter just any sense as to how we should think about the benefit or the accretion to earnings and kind of the same question for the remaining project that's expected to come online in the first quarter of fiscal 2024?

Well, Julio, I mean, I think the big picture answer to that is we wouldn't have made any of these investments, if we didn't think that they would return to greater than our cost of capital. So I think you can think of it like that, but we also need a market to sell into and you don't get to pick your timing for starting these lines up. So we'll start some of the lines up in an environment that is a little softer than we would like to see, but we're not making these investments for this quarter or next quarter. These are long-term investments. And over time we will realize returns on the investments that exceed our cost of capital.

Got it. No, that's helpful. Maybe if you could speak to unit conversion costs and how those are trending sequentially?

Sequentially, unit conversion costs went down from Q2, but we're still operating at lower than anticipated production levels. So they were not where we had forecasted them to be.

Okay. Got it. And…

Just Julio, one other thing affecting unit conversion cost is just a general inflationary environment that we have experienced and we're -- except for certain commodities that we purchase we're not seeing that any of these prices are coming down. So I'll tell you that, the industry has experienced a recent -- and the cost profile of all of the various services and spare parts and you name it electricity, there's been a definite reset in cost levels. And I'm not exactly sure that we're through that yet. But none of these costs are coming back down to where they were pre-inflationary days.

Understood. When I think about the comments you guys made about the shipments in July being up mid single-digit, I believe you said through this point in July. Have you seen any weather impact given the flooding we've seen across much of the Atlantic seaboard?

I don't think so yet. We might see it, but we've not seen that yet.

Okay. Got it. And then maybe just last one staying on that topic. As I thought about that flooding, it's highlighted a need for greater infrastructure for drainage and sewer systems. Can you maybe talk to, or give a refresher on some of your product lines, such as the concrete pipe reinforcement, and how that can be able to help improve the nation's drainage and sewer systems?

Yes. I think, there's no question, but the need for water management is ubiquitous. If in fact there are rising sea levels that result in coastal flooding, that will be a stimulant for demand for all kinds of ways to manage those waters and by and large concrete products are used for that purpose. So I think it's all -- it all is positive for the demand outlook for our products.

Very helpful. Thanks very much for taking the questions.

Thank you, Julio.

[Operator Instructions] We have no further questions at this time. So I will now hand back to the management team for final remarks.

Okay. Thank you. We appreciate your interest in Insteel. We welcome your calls, and we look forward to talking to you as we wrap up our fourth quarter. Thank you.

This concludes today's call. Thank you for joining. If you have missed any part of this call, or would like to hear again, a recording will be available shortly. Have a lovely day.