Insteel Industries, Inc.

Good morning and a warm welcome to the InSteel Industries fourth quarter 2022 earnings conference call. My name is Candice and I will be your moderator for today's call. All lines have been placed on mute during the presentation portion of the call, with an opportunity for question and answer at the end. If you'd like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, H. Waltz, President and CEO of Steele Industries, please go ahead.

Thank you, Candice. Good morning. Thank you for your interest in InSteel, and welcome to our fourth quarter 2022 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're pleased with InSteel's record financial performance in fiscal 2022, generating net earnings of $125 million and return on capital of 36%. During much of the year, we experienced substantially rising costs, both in raw materials and plant operating costs, including labor, energy, and consumables. While the rising price environment produced a tailwind for earnings as average selling prices rose, it also created considerable operational and customer service challenges for our people, including shortages of nearly every input into our process, which created uncertainty surrounding production schedules. I'm particularly proud of our people for the discipline they showed in this environment as they generally avoided over-commitments that would result in customer disappointment. While lead times extended, by and large we understood the impact of the environment on our ability to deliver to customers, and we fulfilled the customer commitments we made, which speaks highly of the professionalism of our people, our focus on customer needs, and the effectiveness of our information systems. As we enter fiscal 2023, we believe the outlook for our markets is positive and has been materially enhanced by the passage of the Infrastructure Investment and Jobs Act. 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 for the call. As we highlighted in the release, the fourth quarter of 2022 was a historically strong period of financial performance. We reported revenue of $208 million, or an increase of 21.4%, from $171.3 million in the prior year, and net earnings of $24.3 million, or $1.24 per diluted share, as compared to $25.2 million, or $1.28 per diluted share, in the prior year. Our results benefited from incremental price increases to recover the continued escalation in raw material and plant operating costs. Average selling prices in the fourth quarter increased 26.1% relative to the prior year. Sequentially, from the third quarter of 2022, average selling prices decreased 2.6%. This decrease in average selling prices was driven by weakness in our product line most exposed to the residential construction markets. Excluding the impact of that product line on average selling prices would have resulted in a 1% increase sequentially, reflecting the resilience of our non-residential construction markets. Despite the robust demand environment, shipments for the quarter decreased 3.7% from last year. Sequentially, from the third quarter of 2022, shipments declined 6%. The lack of shipment momentum resulted primarily from three issues. Ongoing weakness in the residential construction markets relative to historically robust conditions last year weighed on demand, much like we highlighted in the third quarter of 2022. Our customer base began managing their inventory on hand to more normalized levels as availability constraints for many of our product lines subsided from the unprecedented shortages earlier in the fiscal year. And labor availability across our plant footprint, which we highlighted in the third quarter of 22, remains an issue. While we experienced modest signs of improved labor recruiting and retention during the fourth quarter, our plant's ability to increase production to a capacity level consistent with customer demand continued to be a challenge. Gross profit for the quarter was $39.8 million, or effectively unchanged from the same period last year at $39.9 million. Gross margin declined 420 basis points to 19.1%. This decrease was due to the decline in shipment volumes for the quarter, in addition to the impact of higher overall plant operating costs, which offset the benefit of widening spreads between average selling prices and raw material costs. Specifically, inflation in labor rates and energy have negatively impacted our overall plant operating costs. On a sequential basis, gross profit decreased 18.3 million from a record level in the third quarter of 22 due primarily to the same drivers previously stated, in addition to a modest reduction in spreads. FG&A expense for the quarter increased 1 million to 8.3 million, but as a percentage of sales, it decreased marginally to 4%. The dollar increase was primarily the result of the relative quarterly change in the cash surrender value of life insurance policies. which from an accounting perspective is reflected as an increase in SG&A expense. Our effective tax rate for the quarter was largely unchanged at 23%, which is up minimally from 22.7% last year. Looking ahead to the balance, looking ahead to next year, we expect our effective rate will remain steady at around 23%, subject to the level of pre-tax earnings, book tax differences, and other assumptions and estimates that compose our tax provision. Moving to the cash flow statement and balance sheet, cash flow from operations for the quarter used $9.4 million, increased working capital due to a $29.2 million reduction in accounts payable and accrued expenses, and a $5.2 million increase in inventories offset the impact of strong earnings. You may recall we ended the third quarter of 22 with an elevated accounts payable balance of $77.2 million due to the timing of raw material deliveries. Based on our sales forecast for Q1, our quarter end inventories represent 4.3 months of shipments compared with 3.4 months at the end of the third quarter. These raw material purchases, along with the weaker than anticipated shipments in the fourth quarter, increased inventories moderately above normalized levels of approximately three months. And finally, our inventories at the end of the fourth quarter of 22 were valued at an average unit cost marginally lower than the beginning of the quarter. We incurred $3.6 million in capital expenditures in the fourth quarter for a total of $15.9 million for the fiscal year in support of our expansion of the engineered structural mesh business, as well as cost and productivity improvements. H will provide more details on these important efforts in his prepared remarks. While investing in the business to enhance its growth and reduce costs remains our top priority, we continue to return capital to shareholders throughout the course of the fiscal year. The combination of a special dividend of $2 per share in the first quarter and the four regular quarterly dividends of 3 cents per share amounted to $2.12 per share in dividends for fiscal year 22. Also during the quarter, we repurchased $1.2 million of common equity equal to approximately 41,000 shares. From a liquidity perspective, we ended the quarter with $48.3 million of cash on hand and no borrowings outstanding on our revolving credit facility. Looking ahead to fiscal 23, we remain optimistic about the state of our markets. Shipments and average selling prices in the beginning weeks of the first quarter are trending above forecasted levels, which is an encouraging sign in what is our historically lowest shipment volume quarter of any fiscal year. Customer backlogs remain robust across both the private and public non-residential construction markets, with no meaningful signs of concern today. and third-party leading indicators and forecasts for non-residential construction reflect a steady and positive outlook for demand in our markets. Construction employment levels continue to rebound, with a majority of states reporting construction unemployment levels that are now on par with the low levels recorded immediately preceding the pandemic. And overall, construction employment, as measured by the Bureau of Labor Statistics, was 3.4% in September 22. and is approaching the lowest levels recorded over the last 10 years. And finally, the market has yet to layer in any meaningful funding from the Infrastructure Investment and Jobs Act, which should begin to materialize over the next 12 months. We are, though, closely monitoring the heightened uncertainty regarding the direction of the overall U.S. economy, particularly as certain areas, like the residential construction market, remain weak. This concludes my prepared remarks. I will now turn the call back over to H. Thank you, Mark.