Insteel Industries, Inc.

Hello, everyone, and welcome to InSteel Industries' fourth quarter 2023 earnings call. My name is Bruno, and I'll be operating your call today. During this presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. I will now hand over to your host and CEO, H. Woltz. Please go ahead.

Good morning. Thank you for your interest in InSteel, and welcome to our fourth 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. 2023 was 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. We believe these headwinds have about run their course, and we continue to be optimistic about the underlying level of demand for our products. 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 highlighted in our press release earlier today, our performance in the fourth quarter of fiscal 2023 reflects the continued pressure of narrow spreads between selling prices and raw material costs combined with elevated unit converting costs. As a result, net earnings for the fourth quarter fell to $5.6 million, or $0.29 a share, from $24.3 million, or $1.24 per diluted share a year ago. Our net sales for the quarter also faced headwinds, declining 24.3% from last year on a 27.8% decrease in average selling prices, although this was partially offset by a 4.9% increase in shipments. On a sequential basis, average selling prices declined 6.6%, while shipments were 1.8% higher. The ongoing challenges of the competitive pricing environment, the persistent downward trend in steel scrap prices, and the growing influence of low-price imported PC strand all contributed to a decline in our average selling prices during the fourth quarter. As I've mentioned in previous calls, our products most exposed to the residential construction market have experienced the largest find in average selling prices, a trend that continued throughout our fourth quarter. Despite the weakening in our AFPs, our shipping volume exhibited modest improvements during the fourth quarter. Many customers are currently experiencing favorable or improving business conditions, and the majority have now normalized their inventory levels following dirty stocking efforts that suppressed demand for much of fiscal 2023. However, it is important to highlight that our shipments came in below our internal forecast, primarily due to project delays, weakness in the non-residential construction market, and the negative effect of adverse weather conditions in certain of our markets during the quarter. Gross profit for the fourth quarter fell $25.8 million from a year ago, and gross margin narrowed to 8.9% from 19.1% due to a combination of lower spreads and higher overall unit conversion costs, partially offset by year-over-year increase in shipments. million from the third quarter and gross margin decreased 340 basis points as a drop off in average selling prices exceeded the reduction in our raw material costs. Throughout fiscal 2023, our spreads have been consistently pressured by the steady decline in average selling prices that have more than offset the benefit realized from the consumption of lower priced rod inventory. As we look ahead to the first quarter of fiscal 2024, margins are most likely to remain under pressure in the near term due to the current competitive landscape that continues to exert downward pressure on selling prices. During our fourth quarter, we experienced an increase in our unit conversion costs compared to both the previous year and the third quarter. This was due to reduced operating volumes at select plants as we implemented inventory reduction measures during the quarter. This resulted in weakened cost absorption and overall increase in unit conversion costs. As we move into our first quarter, we expect unit convert cost to remain elevated based on anticipated operating levels, which will be impacted by the onset of the seasonal downturn in demand, as well as the continuation of the general inflationary trends that we experienced throughout 2023. SG&A expense for the quarter decreased to 8.1 million, or 5.2% of net sales, from 8.3 million, or 4% of net sales last year. The dollar decrease primarily resulted from the relative year-over-year change in the cash-rendered value of life insurance policies, along with lower depreciation expense, partially offset by higher compensation costs. Our effective tax rate for the quarter was largely unchanged at 22.5%, down slightly from 23% last year. Looking ahead to next year, we expect our effective rate will remain steady at around 22%, subject to the level of pre-tax. and the other assumptions and estimates that compose our tax provision calculation. Moving to the cash flow statement and balance sheet, we are pleased to report cash flow from operations generated $38.6 million of cash for the quarter and $142.2 million for the year, primarily due to a working capital reduction driven by a planned decrease in inventories. Our inventory position at the end of the quarter represented 3.3 months of shittiness on a forward-looking basis calculated compared with 3.2 months at the end of the third quarter. Additionally, it's worth noting our inventories at the end of the fourth quarter were valued at an average unit cost that was lower than our fourth quarter cost of sales. We incurred 4.1 million in capital expenditures in the fourth quarter, for a total of 30.7 million for the year, and was primarily targeted at broadening our product offering, expanding capacity, and reducing operating costs. Looking ahead to fiscal 2024, We expect capital expenditures to total $30 million. H will provide more detail on this topic in his remarks. From a liquidity perspective, we ended this quarter with a record $125.7 million of cash on hand, and we're debt-free with no borrowings outstanding on our $100 million revolving credit facility, providing us with ample liquidity and financial flexibility. Along with our focus on making ongoing investments in the business, our financial strength has allowed us to continue to return capital to shareholders. In fiscal year 2023, we returned $43.6 million to shareholders through a combination of dividends and share buybacks. This included a $2 per share special dividend as well as our regular quarterly dividends, making a third consecutive year that we have paid a special dividend of at least $1.50 per share. Moreover, we repurchased approximately 80,000 shares of our common equity equivalent to $2.3 million through our share buyback program. Turning to the macro indicators of our construction end markets, the most recent construction spending data continues to show strength. For the first eight months of the calendar year, total construction spending on a seasonally adjusted annual basis is up 7.4% from last year. Non-residential construction spending was up almost 18%, with public highway and street construction, one of the larger end uses for our products, up over 12%. However, while construction spending remains elevated, U.S. cement shipments, another measure that we track, continues to lag 2022 levels as shipments are down 1.8% for July and 2.2% for the first seven months of the calendar year. The most recent reports for architectural building and dive momentum indexes, leading indicators for non-residential building construction, imply softening business conditions in the coming year as high interest rates and tighter lending standards appear to be having an impact on construction markets. In September, the ABI dropped to 44.8. the lowest score reported since December 2020. The score is well below the growth threshold of 50 and would indicate a significant decline in billings and mark a downturn in business conditions at architectural firms. The Dodge Amendment Index, which tracks non-residential building projects going into planning, rose 3% in September, up to 182.5. However, year-over-year, the index is 5% lower. Dodge noted that the year-to-date trends would indicate an overall decline in commercial planning, and that going into 2024, planning levels will depend on improvement of financial conditions. In Dodge's August report, it was noted that weaker market fundamentals continue to undermine planning growth as tightening lending standards and the higher interest rate environment are beginning to impact both the commercial and institutional segments. This concludes my prepared remarks. I will now turn the call back over to H. Thank you, Scott.