Insteel Industries, Inc.

Good morning. Thank you for attending today's In-Steel Industries first quarter 2023 earnings call. My name is Forum and I will be your moderator for today's call. All lines will remain muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. It is now my pleasure to pass the conference over to our host, H. Waltz, President and Chief Executive Officer of InSteel Industries. Mr. Waltz, please proceed.

Thank you, Form. Good morning. Thank you for your interest in InSteel, and welcome to our first quarter 2023 conference call, which will be conducted by Scott Giuffruti, our Vice President, CFO, and Treasurer, and me. While Scott has only recently been named CFO, He is a longtime InSteel employee who is intimately familiar with company markets and operations. We congratulate Scott on his elevation to CFO and we're confident he will add value to the company. 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. Beginning in Q3 of 2022, residential-related markets began to weaken as interest rates rose, and those markets remained weak through the first quarter of 2023. We do not expect significant recovery of residential markets until there's signs that the interest rate environment is changing. Unlike residential markets, we believe the shipment weakness we experienced in non-residential markets is related to customer inventory management and destocking rather than impaired demand for our products. Following several quarters of extended lead times and inadequate supplies, customers found that excessive inventory levels and purchase commitments could be safely curtailed as lead times normalized. Notwithstanding the weakness that is apparent in Q1 results, we believe that 2023 will be a good year for our non-residential markets and for the company. I'm going to turn the call over to Scott 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 everybody joining us on the call. I'm pleased to be here participating in my first earnings call as the CFO of InSteel. As we reported earlier today, our results for the quarter were unfavorably impacted by decline in shipments and the narrowing of spreads between selling prices and raw material costs. Net earnings for the first quarter fell to $11.1 million from record earnings of $23.1 million a year ago, and earnings per share dropped to 57 cents from $1.18 per diluted share in the prior year. As referenced in our release, earnings for the current year quarter benefited from a $3.3 million or 13 cents per share gain on the sale of property, plant, and equipment. Net sales for the quarter fell 6.5% from last year on a 10% decrease in shipments, partially offset by a 3.9% increase in average selling prices. Our shipping volume for the first quarter, which has historically been our slowest period of the year due to the onset of winter weather and holiday schedules, was adversely impacted by the previous noted inventory management and destocking measures pursued by our customers, along with the continued weakness in the residential construction market that first began in the second half of fiscal 2022. On a sequential basis, net sales were down 19.8% from the fourth quarter due to a 12% drop off in shipments and an 8.8% decrease in average selling prices. Falling raw material costs and competitive pricing pressures eroded ASPs during the quarter. with the largest decline in average selling prices from Q4 within our product line most exposed to the residential markets. Gross profit for the quarter fell $24.6 million from a year ago, and gross margin narrowed to 10.7% from 23.7% due to lower spreads between average selling prices and raw material costs, along with a reduction in volume and higher overall plant operating costs resulting from lower production levels. On a sequential basis, gross profit fell $22 million from the fourth quarter and gross margin decreased 840 basis points. As we have highlighted throughout the prior year, during environments of strong demand and escalating steel prices, our results are favorably impacted by both the implementation of price increases sufficient to recover the higher replacement costs for our raw material and the consumption of lower cost inventories under first in, first out accounting methodology. However, during periods of declining steel prices as we had during our first quarter, we experienced the opposite effect under FIFO and our gross margins narrowed due to the consumption of higher cost inventories matched against lower average selling prices for our products. As we have noted in our fourth quarter earnings call, we finished fiscal 2022 with 4.3 months of inventory on hand valued on a FIFO basis. As such, our first quarter spreads and margins have been adversely impacted by the matching of higher-cost inventory purchased in fiscal 2022 against lower average selling prices for our products. Going forward, we should benefit from a gradual reduction in these costs as more recent lower-priced raw material purchases are consumed from inventory, assuming our selling prices remain flat or fall to a lesser extent. SG&A expense for the quarter decreased $5.2 million to $7.2 million, or 4.3% of net sales, from 12.3 million or 6.9% of net sales last year, mainly due to lower compensation expense under our return on capital base incentive plan, which was driven by weaker results in the current year. To note, our return on capital base incentive plan was fully expensed in the first quarter of the prior year, given the record financial performance. As we've highlighted in the release, other income for the quarter includes a $3.3 million net gain on the sale of property, plant, and equipment. Our effective tax rate was virtually unchanged at 22.9%, which is down from 23% last year. Looking ahead to the balance of the year, we expect our effective rate will remain steady at 23%, subject to the level of pre-tax earnings, book tax differences, and the other assumptions and estimates that compose our tax provision calculation. Moving to the cash flow statement and balance sheet. Cash flow from operations provided $33 million of cash in the first quarter, due to our working capital reduction that was driven by a $26.5 million decrease in inventories, along with a $12.9 million decrease in accounts receivable. You may recall we had ended the previous quarter with an elevated inventory balance, largely due to the increase in raw material purchases as we replenished our inventories from depressed levels earlier in 2022. Over the course of the first quarter, we scaled back our inventory purchases, particularly during December. As of the end of the first quarter, our inventory position represented 3.9 months of shipments on a forward-looking basis, calculated from our Q2 sales forecast. Finally, our inventories at the end of the first quarter were valued at an average unit cost lower than the beginning of the quarter, but still unfavorable relative to current replacement costs. We incurred $8.2 million in capital expenditures in the first quarter and remain committed to our full-year target of $30 million, given the many initiatives that we have underway. H will provide more detail on this topic in his remarks. In December, we returned $39.5 million of capital to our shareholders through the payment of a $2 per share special cash dividend in addition to our regular quarterly dividend, marking the sixth year over the last seven years we have paid a special dividend, and the second year in a row we paid a $2 per share special dividend. Also during the quarter, we repurchased $916,000 of our common equity. equal to approximately 32,000 shares. From a liquidity perspective, we ended the quarter with $42.6 million of cash on hand and no borrowings outstanding on our $100 million revolving credit facility. As you move into the second quarter of fiscal 2023, our market outlook for the remainder of the year remains positive as we are encouraged by continued strong demand and backlog in our non-residential construction markets. The most recent reports from the third-party leading indicators for non-residential construction spending, ABI and Dodge, have been somewhat mixed. In November, ABI remained in negative territory for the second straight month, falling to 46.6. However, the Dodge Amendment Index, another leading indicator for non-residential building construction, has rebounded over the last several months, rising to 222.3 in December. On a year-over-year basis, the overall index was up 40% driven by strength in both the commercial component, which was up 51%, and the institutional projects that was 20% higher. Finally, last week, the AIA released a semiannual construction forecast for non-residential building construction for 2023 and 2024, reflecting continued growth for the current year. Spending on non-residential building was projected to increase 5.8% during 2023. driven by gains in the industrial, institutional, and commercial sectors. This concludes my prepared remarks. I'll now turn the call back over to H. Thank you, Scott.