Good morning, all. Thank you for joining us for the Insteel Industries Third Quarter 2024 Earnings Call. My name is Carly, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, H. Woltz, CEO of Insteel Industries, to begin.

Good morning. Thank you for your interest in Insteel, and welcome to our third quarter of 2024 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 on 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. During Q3, we experienced a continuation of sluggish market conditions, although momentum increased steadily to the point that we began ramping up operating hours to manage lead times, primarily in our welded wire reinforcement business. While we're not pleased with our Q3 results, patience is the only viable strategy for us since we're unable to create demand and competitors who believe that reducing prices will stimulate demand or result in market share gains are simply mistaken. We've noted that market lethargy is not limited to reinforcing markets following reduced estimates for producers of cement, steel, aggregates and other construction materials. The better news is that we believe market conditions are recovering and that the longer term outlook for demand is quite positive. We look forward to attaining higher operating rates, lower costs, improved revenue and margins that we believe will be supported by market conditions. 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 everyone joining us on the call. As reported in our release earlier today, our third quarter results were negatively affected by the narrowing of spreads between selling prices and raw material costs relative to the prior year quarter. The reduction in spread has more than offset the favorable impact of higher shipments in the current year. As a result, Insteel's net earnings for the third quarter of fiscal 2024 fell to $6.6 million or $0.34 per share from $10.6 million or $0.54 per share a year ago. Net sales for the quarter declined 12% to $145.8 million, driven by a 16.3% decrease in average selling prices, partially offset by a 5.1% increase in shipments. On a sequential basis, average selling prices fell by 5.3% while shipments rose 20.8%. Competitive pricing pressures within our welded wire reinforcing markets and the growing impact of low price PC strand imports continue to pressure selling prices. Furthermore, steel scrap prices trended down during the quarter, which has created additional headwinds for AFPs. Despite the decline in selling prices, our shipments benefited this quarter from a strengthening demand environment for our products and increased activity across our construction end markets. Throughout each month of the quarter, our year-over-year shipments were higher than the prior year. However, we did experience several challenges as unfavorable weather conditions and the growing influence of low price imports in certain of our PC strand markets negatively impacted shipments. Furthermore, we actively worked throughout the quarter to ramp up operating schedules at certain of our facilities to fully meet an improving order book and reduce delivery lead times. Gross profit decreased to $15.4 million from $20.4 million in the prior year quarter and gross margin narrowed to 10.6% from 12.3%, primarily due to lower…

Thank you, Scott. As we commented last quarter, the operating environment during fiscal 2024 has been difficult as we face headwinds, including declining steel prices, inventory liquidations by customers, the need to align our finished goods inventories to reflect lower shipments, and finally, the normal seasonal downturn in construction activity. We're glad to report that these adverse conditions seem to have run their course, and we are experiencing rising demand driven by market fundamentals as well as the capital investments made by the company in recent years. As we reported in Q2, shipments for Q3 were not impressive, but each month showed improvement as inventory positions through the supply chain improved and construction spending and employment telegraphed improving market conditions. We believe the slow and steady demand improvements we've experienced recently will continue into our fourth quarter. Backlogs in our welded wire reinforcement business have lengthened to an uncomfortable degree due to compressed operating schedules that were dictated by weak order entry and shipments earlier in the year together with more robust order entry activity. And we're ramping up operating hours at several facilities to respond to more robust demand. Hiring continues to be difficult in view of low unemployment rates in most markets, but conditions have improved considerably since hiring challenges peaked. As Scott mentioned and as we stated in the last couple of earnings calls, we are increasingly affected by low priced imported PC strand from producers in a variety of countries that appear to be circumventing the Section 232 tariff on hot rolled steel by downstreaming. Continuing the trend that began last year, the average unit value of imported PC strand is lower than the domestic market price for wire rod, the raw material from which we produce PC strand. The industry is carefully scrutinizing strand imports…

[Operator Instructions] Our first question comes from Julio Romero of Sidoti. Julio, your line is now open.

Thanks. Hey, good morning, H and Scott. Maybe just to start on demand, you sound much more optimistic about improving conditions. You talked about trying to ramp up operating hours. Just maybe talk about what you're seeing across your end markets, either from inquiries or orders that kind of gives you optimism that demand is indeed improving.

Well, both our forecast and our order entry rate cause us to be optimistic about where we see things going. But as I stated in my remarks, we've seen a steady and slow improvement in our order intake and in conditions in the market. I don't mean to imply that we expect to see a big pop. It's more slow and steady. And as you know, we had scaled back operating hours pretty substantially to reflect earlier business conditions, which is partly a way of explaining why our backlog and lead times have expanded. It's partly due to the curtailed and truncated operating hours that we implemented earlier in the year and partly due to increasing order entry rates.

Yeah, understood. You talked about scaling hours back. You talked about the challenge of kind of retaining and attracting qualified folks. Talk about maybe how you're tackling the challenge at this point?

Well, I think it's typical of what you read in most stories about current labor markets that you hire five or six and maybe, maybe two or three of them are still with you in 60 or 90 days. And, of course, we have to train those people. And we have to teach them how to work safely. So it just -- it's just a challenging environment. I don't know that we operate in any labor market that has an unemployment rate over 4%. And so there are fewer people to choose from. There are fewer people who really appreciate or enjoy industrial kinds of work. And it's difficult and it's not just a matter -- it's not just a matter of compensation. I think it goes deeper than that.

Got it. And you gave us some preliminary fiscal '25 thoughts, which is certainly helpful and welcomed. And you mentioned it's difficult to kind of point to specific projects at this point that have boosted -- that have received a demand boost from the IIJA. Do you expect that to eventually be the case, that -- when the Infrastructure Act does benefit Insteel, the impact will be clear, that you would be able to point to specific projects? And then secondly, the big question is, when do you think that'll happen? Would fiscal '25 be that year?

The answer to the first part, Julio, is no. I don't expect that we're going to see projects fall into the marketplace with a big banner on them that says funded by IIJA. The nature of the products that we supply just is inconsistent with that. I think that we'll begin to see impact of IIJA in 2024 and 2025. But I'm not sure that we'll be able to talk to you and say 10% of our shipments were related to IIJA. I just don't think it's that transparent.

Yeah, that makes sense. I'll pass it on at this point. Thanks so much.

Thank you.

Our next question comes from Kevin Gainey of Thompson Davis. Kevin, your line is now open.

Hey, gentlemen. Congrats on the quarter. I kind of wanted to -- you guys have already kind of talked about public demand, but maybe if we could go into private demand, how you're thinking about that underlying over the next few months and maybe into '25.

I think a lot of that, Kevin, is going to be dependent on the interest rate environment that we're in. Surely, if there is cuts going forward, that could generate some demand in that private commercial segment, but it's too early to tell right now. And when you speak of private, are you also speaking of residential?

Yeah, yeah. Residential, non-res. Yeah, both.

So it seems that the outlook for residential is reasonably bullish. And I would say less uncertain than the outlook for private commercial. And if we were to get interest rate reductions, I think clearly be very supportive of both segments of private construction spending.

Since you guys kind of brought up the rate talk, have you found that any of your customers have changed the timing of projects for that anticipation of rate cuts?

Yes, we have. And it is -- it's clear in the number of times that we refloat projects that developers and owners who are on the edge about starting a project, they're looking at two things. They're looking at sharply higher costs over the last couple of years just due to the inflationary environment. And they're looking at higher financing costs. And some have elected to try to wait that out. I don't think the projects are dead. But when you re-quote a project four times, I mean, there's a clear message there, and we've seen that.

That sounds exhausting. And then maybe one final one, as you guys talk about ramping up the business, what kind of confidence do you have in the ability to keep at those higher operating levels?

Well, okay. So the business is both seasonal and it's cyclical. Okay? And I think the seasonality is certainly not going to go away. And that April through really October, November timeframe is when construction really reaches its peak level for whatever cycle we're in. So I don't see -- I don't see that we're going -- we're not expecting any change in seasonality. I think that the underlying level of demand for the products that we produce is extremely solid, although we've gone through a period of inventory correction. And unfortunately, there's no good objective data for us to look at to say that this is -- that this much of our business has been affected by inventory corrections. It's more information that comes from follow reports and from just the feel of the business than it is objective data. But the seasonality is not going to change the cyclicality. I think we've probably seen the worst of the downcycle.

Sounds good. I appreciate you guys taking my questions.

Thank you.

Thank you so much. Our next question is from Tyson Bauer of lenders KC Capital. Tyson, your line is now open.

Good morning, gentlemen.

Good morning, Tyson.

We talked about, we ran into the PC import situation in prior years where we have to try to get the trade actions and have to have people in the administration that actually are listening to you to get those trade actions to go through. Probably difficult in an election year and possible changes as we go forth, especially with some of the judgments that are placed against some of the agencies. My focus is really more on the welded wire reinforcement type products. Is that more of a domestic capacity issue within the industry, that there's too much slack capacity that is putting pressure on your ability to price? Historically, you've always kind of been a price leader. Have you -- has that diminished somewhat in which other competitors, maybe like a Nucor or somebody else has a little more influence that you have to react to?

Well, first, let me just remind you that we have multiple product lines within our welded wire reinforcement business. It probably will come as no surprise that the more commodity-like make to stock products have been under more pressure than the make to order products. The make to stock products largely are light commercial and housing related and they're highly seasonal. So the way that the business works is that producers build significant inventories of finished goods based on their outlook for demand in the busier parts of the year. And if you go through three or four months and fail to meet your shipment objectives, then there can be widespread panic in the market that results in a lot of price cutting. And that's some of what we've seen that I think some of the participants in the industry have built inventories that far exceed the needs of the market. And they've been unloading those products. That's much less a problem in the make-to-order engineered applications that we produce.

Okay. And with your new capacity lines coming online and greater automation, do you tend to focus more on your own fixed cost absorption, meaning that you're more prone to consider volume impacts and less focus on pricing yourselves?

No.

When you talk about labor increases, is that specific to certain product lines and locations or are you making a general statement company-wide?

Well, it's company wide. But company-wide is rolled up from ten separate labor markets that we compete in. So I would say that the forces that have affected labor costs are the same nationwide. But the degree to which it has affected our company varies with each labor market that we're in. But as a general statement, all labor markets have been affected and are more costly by a wide margin today than they were previously. And actually, I don't consider that a bad thing. Okay? Our position is that we're going to be competitive in every market that we operate in. And I don't think that we're going to find that we have competitors who have substantially lower labor costs. So I think the playing field is leveled.

Okay. You talked about the somewhat disappointing volume shipments. You thought it'd be even greater, especially with seasonal impact year-over-year type metrics. As we've learned through the years, you don't necessarily ever get a catch up quarter per se, things just kind of get pushed to the right. Is that what you're seeing in this scenario also? Is that we may be ramping up and better, but don't expect kind of that pig in the python situation where we're going to get an outsized quarter?

Yeah, I don't think there's a whole lot of catching up that goes on. One of the problems that we see, and again, it's very hard to quantify, but it's obvious that our customers' customers also have challenges in the labor market. We have customers who have products that have been sold to contractors, but the contractors have insufficient labor to get those products in the ground. And therefore, we have customers whose yards have filled up, and that is affecting their ability to produce and to purchase from Insteel because they have nowhere to put finished goods, although the finished goods they have on their sites are generally sold to specific projects. So I think, to every extent possible that weather allows, contractors will -- and our customers will extend the season as far as they can in order to finish up projects. But I think you're also right that what we don't ship this year will be shipped next year. It's not a question of building a big backlog that you can blow out in the down part of the year. The business just doesn't work that way.

Okay. And last question for me. Given your outlook, given improvements in your demand metrics that you're seeing currently, as management and as a Board member, how do you go about converting that outlook and those increases in demand that you're expecting with your capacity expansion and turning that into shareholder return?

Well, I think it's just as we've stated in the past, that all the new investments that we've made have a component -- a return component of cost reduction as well as capacity expansion. And I think the reality is, if there's no market or if there's an insufficient market, we're not going to realize the part of that return that is based on increased demand and increased capacity until such time as we see better market conditions. And also, as I've said on multiple occasions, you don't choose your time to start these investments off. The lead time is a year and a half to two years in some cases, to make these additions. And you have to have some confidence that you can think of the long term implications of the investments or you're probably in the wrong business.

Okay. But you still have your dividend policy. You still have your share buybacks, given the longer nature that where you think you could be within a year, two years, and operating results should then, with historical multiples, create that return on capital and -- of capital for your shareholders?

Yes. We're confident that the investments that we've made will return greater than the cost of the capital that's invested in them or we wouldn't have made the investments.

Sounds great. Thanks a lot, gentlemen.

Thank you very much. [Operator Instructions] Our next question comes from Julio Romero of Sidoti. Go ahead.

Great. Thanks, guys, for taking the follow-up question. Tyson touched on it a little bit. We are in an election year. Some investors have a potential -- change in administration is kind of top of mind, particularly when it comes to the steel industry. Just how should we be thinking about the impact from a change or no change in administration at Insteel? And any reason to maybe have optimism that either of the possible outcomes would be more amenable to expanding Section 232 to your end product?

It's hard to know what an incoming Trump administration may do with respect to Section 232, although Trump implemented 232 and his people were very sympathetic to the problem that we described to them. But when we described it to the Trump administration, it was hypothetical. Today, we can demonstrate and quantify the impact of the hypothetical problem that we described in 2019 and '20 has actually come to pass. And with the Biden administration, we actually had a group that was organized by our suppliers, and we went to Washington and we talked through the fact that this differential treatment of PC strand and hot rolled wire rod with respect to 232 was having an extremely detrimental impact on our suppliers. And it was our suppliers who were to be the beneficiary of 232. So it is -- they're very sympathetic to the problem. There is adequate data to demonstrate what's exactly happened. But the real-life fact of the matter is, it takes a presidential proclamation to add PC strand to 232. And that's a heavy lift, regardless of the underlying facts that support the addition. We believe that our current situation is the result of a mistake that was made by the administration. And we're positioning our request as you need to just fix the mistake that was made. And I have an underlying belief that we will get this fixed. It's a question of whether we can do it with the Biden administration in place or whether it's the next administration. But the underlying logic is so compelling that I find it hard to believe we won't get it fixed.

Really helpful color, H. Much appreciated. Thank you.

Thank you very much. We currently have no further questions, so I'll hand back to H. Woltz for closing remarks.

Okay, thank you, Carly. And thanks to all of you who joined the call today. We appreciate your interest in the company. And we would encourage you to give us a call back if you have any questions. And if not, we'll look forward to talking to you next quarter. Thank you.

Thank you. This concludes today's call. Thank you to everyone for joining us. You may now disconnect your lines.