Insteel Industries, Inc.

Good morning and welcome to the Instil Industries third quarter 2023 earnings call. My name is Carla and I will be the operator of today's call. If you would like to register a question for the Q&A portion of today's call, please press start followed by one on your telephone keypad. When asking your question, please ensure your telephone is unmuted locally. To revoke a question, you can press start followed by two. I would now like to pass the conference over to our host, H. Waltz, President and CEO. Please go ahead when you're ready.

Good morning. Thank you for your interest in InSeal, and welcome to our third quarter 2023 conference call, which will be conducted by Scott Giafrutti, 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 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 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 54 cents 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 the 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 of 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, spreads improved and widened sequentially from the lows 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 upturn 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 fallen 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 restocking that had 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 in steel scrap prices continue to negatively impact our ASPs, with the more severe drops for products most exposed to the residential construction markets. As conveyed during our second quarter call, price increases were implemented across most of our product lines in April, following four straight months of scrap price increases. However, scrap values dropped in May and June by a combined $95, once again providing downward pressure on ASDs. Gross profit for the quarter fell $37.7 million from a year ago, and gross margin narrowed to 12.3% from 25.6% due to the combination of lower spreads, the reduction in shipments, and higher overall unit conversion costs resulting from lower production levels. On a sequential basis, gross profit increased $7.1 million from the second quarter And gross margin expanded 400 basis points. Gross profit for the quarter benefited from widening spreads as a reduction in raw material costs exceeded the decrease in average selling prices. And gross margins improved each month within the quarter, rising to a high point in June. As we head into our fourth fiscal quarter, we anticipate a positive trend to continue as lower cost inventories consumed, assuming that average selling prices for our products remain flat or decline to a lesser extent. Unit conversion costs for Q3 improved sequentially from the second quarter, but were higher than the prior year as a result of lower than expected operating volumes. As we move into our fourth quarter, we expect to make further progress in reducing our conversion costs, assuming that operating volumes increase to anticipated levels. SG&A expense for the quarter decreased $7.9 million, or 4.8% in net sales, from $8.2 million, or 3.6% in net sales, last year. The dollar decrease primarily resulted from a relative year-over-year change in the cash-to-render value of life insurance policies, partially offset by higher compensation expense. Our effective tax rate for the quarter was 22%, down slightly from 22.7% last year. Looking ahead to the balance of the year, we expect our effective rate will remain steady at around 22%, calculation. Moving to the cash flow statement and balance sheet. Cash flow from operations for the quarter generated $23.8 million of cash due to a working capital reduction that was driven mainly by $6.7 million increase in accounts payable and accrued expenses and a $3.4 million reduction in inventories. Our inventory position at the end of the quarter represented 3.2 months of shipments on a forward-looking basis calculated off our forecasted Q4 shipments. one month at the end of the second quarter. Additionally, our inventories at the end of the third quarter were valued at an average unit cost that was lower than our third quarter cost of sales, which should stably impact margins during the fourth quarter as the lower cost materials consumed are reflected in cost of sales, provided that ASTs do not fall to a greater extent. We incurred $11.2 million in capital expenditures in the quarter for a total of $26.6 million through the first nine months of our fiscal year. Based on our forecasted expenditures for the fourth quarter, we have raised our full-year target to $35 million from the previous communicated target of $30 million. H will provide more detail on this topic in his remarks. From a liquidity perspective, we ended the quarter with $91.7 million of cash on hand, and we're debt-free with no borrowings outstanding on our $100 million revolving credit facility. Finally, during the third quarter, we continued our share buyback program, repurchasing $403,000 of our common equity equals approximately 14,000 shares. Going forward, our capital deployment strategies will remain focused on three objectives. One, reinvesting in business for growth and to improve our cost and productivity. Two, maintaining the appropriate financial strength and flexibility. And three, returning capital to shareholders in a disciplined manner. As we move into the fourth quarter, the outlook for our construction and markets remain mostly positive. The most recent reports for the Architectural Building and Dodge Amendment Index's leading indicators for non-residential building construction reflects softening activity levels but relatively stable conditions that are expected to continue for the near term. In June, the ABI remained relatively steady at a score of 50.1, which marked the first time since last fall that the score has stayed above the growth threshold of 50 for two consecutive months. The Dodge Amendment Index, which tracks non-residential building projects going into planning, Declined 2.5% in June, down to 197.3. However, year over year, the index is still 25% higher. The drop in the June reading resulted from a decline in the institutional component, which fell 10.5%, while the commercial component rose 3.1%. However, in the June report, Dodge noted that continued growth in the commercial segment may be impacted in the second half of the year by the higher interest rate environment and tighter lending standards. The monthly constructive spending data continues to remain strong, with the latest May report showing total constructive spending on a seasonally adjusted annual basis up 2.4% from last year, with non-residential construction up over 17%, and public highway and street construction, one of the largest end-use applications for our products, up 14%. Finally this week, the AIA released a semiannual construction forecast for non-residential building construction for 2023 and 2024. reflecting continued strong growth for the current year. Spending on non-residential buildings projected to increase 19.7% for 2023, driven by strong gains in the industrial sector. However, the forecast also indicates that spending growth is expected to cool in 2024, with only a 2% increase in overall spending projected. This concludes my prepared remarks. I will now turn the call back over to H. Thank you, Scott.