Insteel Industries, Inc.

My name is Carla, and I will be your operator for today. To register your question for today's Q&A, please press star followed by one in your telephone keypad. If you wish to revoke your question at any point, please press star followed by two. I will now hand over to your host, H. Waltz, CEO, to begin. Please go ahead when you're ready.

Thank you. Good morning. Thank you for your interest in InSteel, and welcome to our first quarter of 2024. for a 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 recent environment has 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. 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 the call back up to discuss our business outlook.

Thank you, H. And good morning to everyone joining us on the call. As we anticipated, business conditions remain challenging during the first quarter of fiscal 2024 as we continue to navigate through the ongoing pressure of narrowing spreads between selling prices and raw material costs, coupled with elevated unit manufacturing costs. As a result, net earnings for the quarter declined to $1.1 million, or $0.06 per share, from $11.1 million, or $0.57 per share, in the prior year period. Net sales for the quarter fell 27.1% from a year ago, driven primarily by a reduction in average selling prices as shipments remained flat. The decline in ASPs for the quarter reflects the persistent competitive environment and the steep decline in steel scrap prices over the past year. Sequentially, ASPs dropped by 7.9% from the fourth quarter as pricing pressure continued during the period, driven by both ongoing domestic competition and the growing impact of low-price imported PC strands. As we move into the second quarter, there are indications that the decline in our selling prices may be ending. Steel scrap prices reversed their downward trend during the quarter and have risen by $80 since November. wire rod producers to follow, implementing price increases in December and January. In response to the rising cost of our raw materials, we have initiated our own price increases earlier this month, extending across most of our product lines. The start of an upward trend or a leveling out of prices due to these increases could put an end to a headwind that has been negatively impacting our results over the last year. Shipments for the quarter, which have historically been our slowest period of the year due to the onset of winter weather and holiday schedules, were essentially unchanged from the same period last year, but down 16.1% sequentially from Q4. Volumes during the quarter benefited from improved shipping levels within our residential construction end markets, helping offset ongoing weakness in our infrastructure and commercial markets, which continue to be impacted by project delays customer destocking, and weak demand in certain regions of the country. Gross profit for the quarter declined 11.5 million from a year ago, while gross margin narrowed 550 basis points to 5.2 percent. On a sequential basis, gross profit fell 7.7 million from the fourth quarter, and gross margin decreased 370 basis points. The continuing compression the year-over-year decrease in ASPs surpassing the reduction in our inventory carrying values. As noted earlier, in response to the recent escalation in our raw material costs, we've implemented price increases this month, which should favorably impact our second quarter spread and margin as higher selling prices will be matched against the consumption of lower cost inventories under the first-in, first-out accounting methodology. Apart from the spread compression, we also experienced higher unit conversion costs, as we continued to plan reduction of finished good inventories in certain plants. This led to operating inefficiencies and elevated unit conversion costs, which were further amplified by ongoing inflationary cost pressures. However, as we move into the second quarter, we expect a reduction in unit conversion costs as operating levels are gradually increased. SG&A expense for the quarter decreased $800,000 to $6.4 million, or 5.2% of net sales, from 7.1 million or 4.3% in net sales last year, mainly due to lower compensation expense under our return on capital base incentive plan, which was negatively impacted by weaker results in the current year period. Our effective tax rate rose to 27.2% from 22.9% a year ago. The increase was largely driven by permanent book tax differences and the effect of a discrete tax item, which had an amplified impact on our rate due to the lower pre-tax earnings. Looking ahead to the balance of the year, we expect our effective rate to run close to 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 $21.8 million of cash in the first quarter. This is primarily due to the change in working capital, driven by a reduction in receivables, reflecting the usual seasonal slowdown in sales. and a decrease in inventories due to the lower average unit carrying values. Our inventory position at the end of the quarter represented three months of shipments on a forward-looking basis, calculated off of our forecasted Q2 shipments. Finally, our inventories at the end of the first quarter were valued at an average unit cost lower than our first quarter cost of sales, and now approximate current replacement costs. which should fairly impact spreads and margins during the second quarter as we consume the lower cost material. We incurred $12.3 million in capital expenditures in the first quarter and remain committed to our full year target of $30 million. Abe will provide more detail on this topic in his remarks. In December, we returned $48.6 million of capital to our shareholders through the payment of a $2.50 per share special dividend in addition to our regular quarterly dividend marking the highest special dividend the company has paid in the seventh year. Over the last eight years, we have paid a special dividend. Also, during the quarter, we repurchased $539,000 of our common equity, equal to approximately 19,000 shares. From a liquidity perspective, we ended the quarter with $85.6 million of cash on hand and no borrowings outstanding on our $100 million revolving credit facility, providing us ample liquidity and financial flexibility going forward. As we move into the second quarter of fiscal 2024, we expect gradual improvement in our construction end markets. Leading indicators for non-residential construction spending, architectural billing, and non-demand indexes imply roughly stable conditions going forward. In November, ABI remained in negative territory for the fourth consecutive month with a score of 45.3. AIM's score below 50 indicates a decline in business conditions. However, despite the low score, There were positive signs within the report, as there's indications that credit conditions are beginning to ease, with firms noting an increase in inquiries for future projects. The Documentum Index, another leading indicator for non-residential building construction, rebounded 3% in December, rising to 186.6, with commercial planning improving 1% and institutional planning up 6.1%. On a year-over-year basis, the overall index was lowered by 2%. construction cost challenges, there are a substantial number of projects currently in the planning stages that will support construction spending into 2025. Turning to the macro indicators of our construction end markets, the monthly construction spending data continues to remain strong, with the November report showing total spending on a seasonally adjusted basis up approximately 11 percent from last year, with non-residential construction up 18 percent, with public highway and street However, while construction spending remains elevated, U.S. immense shipments, another measure that we track, continue to lag 2022 levels as shipments are down 3.6% for the month of October and 2.9% year over year. This concludes my prepared remarks. I'll now turn the call back over to H. Thank you, Scott.