Insteel Industries, Inc.

Good day, and thank you for standing by. Welcome to the Instill Industries third quarter 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Waltz. Please go ahead, sir.

Thank you. Good morning, and thank you for your interest in InSteel. Welcome to our third quarter 2021 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 are pleased with our third quarter performance that was driven by surging demand for our reinforcing products and escalating steel prices. We expect both trends to continue through the end of the calendar year. During environments of strong demand and escalating pricing, the company's results typically are favorably impacted by the implementation of price increases sufficient to recover higher costs, together with the consumption of lower-cost inventories under first-in, first-out accounting. 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. As we reported in our press release earlier today, InSteel posted another quarter of exceptionally strong results, In fact, it was the highest net revenue quarter achieved in the company's history. Net earnings for the quarter increased to $18.4 million or $0.94 per diluted share from $6.7 million or $0.34 per diluted share. Average selling prices increased 32.9% from last year and 14.2% sequentially from Q2, reflecting the price increases we implemented in response to both strong demand across all our concrete reinforcing products and continued escalation in manufacturing costs. Two elements provide some additional context with respect to this increase relative to the comparable period. First, since the second quarter of 2021, steel scrap, the primary input in the production of wire rod, increased in price by 11 percent relative to the benchmark Chicago shredded index and has now increased 79 percent since the beginning of our current fiscal year. And second, as you may recall, the third quarter of 2020 represented a three-year low in average selling prices. During that period, those products susceptible to import competition, which represented about a third of our revenue in that quarter, were experiencing pronounced pricing pressures as imports were surging while our trade case efforts in the PC strand and standard welded wire markets were underway. Shipments for the quarter decreased 1% from last year but increased 1.2% sequentially from Q2. The largely flat volume growth as compared to last year and sequentially resulted from a tight global rod supply environment that restrained our ability to meet fully the market demand. Gross profit for the quarter increased $16.7 million from a year ago and gross margin expanded to 19.6% due primarily to widening in spreads as average selling prices outpaced rod cost increases during the period. On a sequential basis, gross profit was largely flat, but gross margin declined 210 basis points. This was due to increased manufacturing costs resulting from supply chain driven operating inefficiencies at several of our plants. SG&A expense for the quarter decreased $0.5 million to $6.2 million. As a percentage of sales, it decreased 210 basis points to 3.8%. The decrease was a result of $0.8 million in lower compensation expense under a return on capital-based incentive plan. As a result of our strong results to date, that plan has now achieved the maximum plan benefit allowable. The decrease in incentive plan costs was partially offset by an unfavorable $0.4 million change in the cash surrender value of life insurance policies relative to the prior quarter. Our effective tax rate for the quarter increased marginally to 22.4 percent from 21.9 percent last year due to changes in permanent book tax differences. Looking ahead to the remainder of the year, we would expect our effective tax rate will run around 23 percent, subject to the level of pre-tax earnings, book tax differences, and other assumptions and estimates that compose our tax provision calculation. Moving to the balance sheet and cash flow statement, cash flow from operations for the quarter generated $36.2 million due primarily to net earnings, but also due to a reduction in net working capital. The net working capital reduction was driven by an increase in accounts payable of $15.7 million, which resulted from the timing of raw material deliveries late in the month of June. We would expect working capital balances to increase moderately as we complete our fourth quarter and fiscal year. Based on our sales forecast, as of the end of the third quarter of 2021, our quarter end inventories represented 1.9 months of shipments compared with two months at the end of the second quarter. The tight rod supply market referenced earlier continues to suppress our inventory levels, which are trending below normalized levels of forecasted shipments at the end of the third quarter. And finally, our inventories at the end of the third quarter of 2021 were valued at an average unit cost that was higher than our second quarter cost of sales but remains favorable relative to current replacement cost. We concluded the quarter with $89.8 million of cash on hand and no borrowings outstanding on our $100 million revolving credit facility. As we look ahead to the fourth quarter, market conditions remain encouraging as the strong demand environment for our products we referenced in the second quarter continued throughout our third quarter. Confidence in the outlook from our non-residential construction customer base continues to gain momentum across all our sales regions. This perspective is supported by widely monitored leading indicators, which are now recording positive metrics on par with levels before the financial crisis of a decade ago and approaching all-time highs in their recorded history. While they are leading indicators of future project activity, usually 12 to 18 months out, the optimism embedded in these levels seems to be translating into sustained activity levels today that has shown no sign of abating. Concurrently, public non-residential construction demand has remained durable and, in fact, never really slowed despite the concern of financial challenges with state-level budgets. Many today are in a stronger position than they were pre-pandemic, thanks to federal support and less dire budget outcomes than were originally forecasted a year ago. Ongoing discussions for a potential long-term infrastructure package, while encouraging, remain mired in the politics and complexity of the budget process in Washington. That said, the bipartisan proposal under consideration would provide, relatively speaking, a substantial boost to annual federal infrastructure spending. Supply chain challenges, including both product availability and logistics issues, continue and are resulting in escalating manufacturing costs and operational inefficiencies at several of our plants. Unfortunately, we believe this dynamic will continue to be an issue for at least the remainder of the calendar year. H will provide some additional context on these dynamics in his prepared remarks. And lastly, with respect to the uncertainties of COVID-19, our markets and operations continue to see no negative impact We hope this risk will remain contained and soon no longer pose any mentionable risk. I'll now turn the call back over to H. Thank you, Mark.