Good day, and thank you for standing by. Welcome to the Insteel Industries Second Quarter 2021 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. H. Woltz, President and CEO. Please go ahead.

Thank you. Good morning, and thank you for your interest in Insteel, and welcome to our second quarter 2021 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. The risk factors are described in our periodic filings with the SEC. We're pleased with our second quarter performance that was driven by strong underlying demand for our reinforcing products and escalating steel prices. We expect both trends to continue through our third quarter and likely through the end of the fiscal year. Here in environments of strong demand and escalating pricing, the company's results are typically favorably impacted by the implementation of price increases sufficient to recover the higher replacement costs for our raw materials, together with the consumption of lower-cost inventories under the first-in, first-out accounting method. 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 today. As we reported earlier this morning, Insteel posted exceptionally strong results, driven by continued robust demand for its concrete reinforcing products, which has remained resilient over the last 4 quarters, and a widening of spreads between selling prices and raw material costs. Net earnings for the quarter more than tripled from a year ago, rising to $14.9 million or $0.76 per diluted share from $4.4 million or $0.23 per share. Shipments for the quarter increased 5% from last year and 3.1% sequentially from Q1. Volume growth for the quarter was broad-based across our footprint and consistent during all 3 months of the quarter despite very minor disruptions from the inclement weather in Texas and much of the middle of the United States. Average selling prices increased 15% from last year and 12.7% sequentially from Q1 due primarily to price increases implemented in the latter half of the first quarter and throughout the second quarter to offset the rapidly escalating raw material costs. The supply of wire rod in the U.S. market has become progressively more constrained during the quarter, given strong overall demand leading to substantial price increases. To add some perspective to this, steel scrap, the primary input in production of wire rod has increased in price by more than 60% over the last 6 months relative to the benchmark Chicago shredded index. Gross profit for the quarter increased $15 million from a year ago, and gross margin expanded to 21.7% due primarily to widening in spreads as average selling prices outpaced rod cost increases during the period. Gross margin remained consistently above 20% during each month of the second quarter, reflecting the underlying strength of demand for our reinforcing products and our success in passing rising costs…

Thank you, Mark. As reflected in the release, our strong second quarter results were driven by robust nonresidential construction markets and escalating steel prices. We're pleased with the solid underlying demand for our products and our financial performance, and we thank our Insteel teammates for their focus on execution excellence and working safely. Looking out through the end of our fiscal year, we expect continued market strength driven by significantly improved public finances at the state and local levels together with elevated activity in the distribution, e-commerce segment of the private nonresidential construction market. We are particularly gratified by the growth of our engineered structural mesh products and cast-in-place applications, where we have expanded our technical capabilities and are serving markets nationwide. Increasingly, we expect our markets to be favorably impacted by significant federal COVID recovery expenditures, and we expect the administration in Congress to agree on an infrastructure initiative although it's difficult to project its scale and the timing for any impact on our markets. While robust demand for our reinforcing products has stretched lead times significantly, steel wire rod prices have also escalated sharply over the last 6 months, and supplies are extremely tight. We expect to experience scheduling-related inefficiencies during the third and fourth quarters related to the uncertain timing of wire rod deliveries, and we expect pricing to continue to rise, driven by strong demand in practically all end markets and potential supply constraints due to planned maintenance and facility upgrade outages at several steel mills during this period. Additionally, our market is experiencing a chronic shortage of flatbed truck capacity and sharply escalating transportation costs. Until we develop more competitive sourcing opportunities, we expect the robust demand we are experiencing to support passing escalating costs throughout the supply chain. Turning to CapEx. We continue to…

[Operator Instructions] First question, we have Julio Romero.

First question is just going to be on demand trends. Can you maybe speak to the demand trends you're seeing in the horizontal market? I think you mentioned e-commerce in your prepared remarks. And does that continue to be robust? And then secondly, could you also speak to what you're seeing on the vertical structure portion of non res?

Yes. The distribution and not just e-commerce, but distribution as a larger category has been extremely robust over -- really over the last year. While it's difficult to know how it's going to pan out going forward, our research indicates that it has a long run in front of it. So we're optimistic and we're well organized to continue to prosper from that market and the robust demand that we see there. And when you say vertical structures, Julio, exactly what are you referring to?

Yes. I'm referring to like office, hotels, et cetera.

Okay. Well, okay. We're seeing a lot of work. We're looking at high-rise projects now. It continues to be robust, probably not as robust as some of the distribution and e-commerce, which I'll point out is also multistory.

Got it. I think you mentioned sharply increasing transportation costs due to maybe lack of some trucks out there. And you spoke of your ability to kind of pass through those costs along the value chain. Is there any concern in terms of availability of trucking on your side? Or would it just be a concern of kind of passing those costs through?

No. I mean, I think the 2 go together, Julio. The cost is driven by the availability and it's extremely tight, and we're leaving loads on the ground that we need to ship. So yes, so it's -- the availability is extremely tight. There's insufficient capacity, and that's driven the cost up considerably.

Okay. And on the Strand-Tech acquisition from a year ago, I think you've just lapped a year of having that under your belt. Can you just maybe talk about how that's progressing? And I think you mentioned there was a COVID-related impact on maybe getting some folks involved in that. If you could give us a little more into that, please?

Yes. So all of the major equipment refurbishment and relocations have been accomplished. The equipment's in the ground at our legacy plants. And in 3 or 4 cases, we are awaiting commissioning technicians to help us start that equipment up because it's on -- it is very important that it's done right. And there are COVID-related travel restrictions that have hampered our ability to bring technicians into the U.S., primarily from Italy, to help us get that equipment started up. We're now expecting those technicians to be in our plants during the month of May, and we should be running the remaining pieces of equipment before the end of June. I would say that overall, we are thrilled with the result of the STM transaction of a year ago. It's going to be meaningful in almost every respect that we thought it would be meaningful. We have maintained the customer base that we inherited. The equipment refurbishment has gone according to plan, both schedule and budget. So the remaining piece that we need to take care of is selling the real estate in Summerville, South Carolina, which we are very focused on getting done.

Okay. And I guess my last question here would just be on, you're obviously executing very well and demand trends are very strong. The proof is in the pudding with your results here this quarter. But maybe if you could just talk about the -- any risks. How do you see the risks in this environment with elevated steel, lack of supply in steel and how that -- what risks do you see here?

Well, we've been through these cycles on a number of occasions where steel prices run up dramatically, as they have now. The thing that would be different about this, and I would add, in those past cycles, they've never ended well with prices actually collapsed, I think, at some point. The thing that's different this time is both Section 232 tariffs and in wire rod, the existence of 16 or 18 dumping waters against countries that were primary suppliers to the U.S. market over time, those dumping cases are in place as of about 2018. So the combination of 232 and the dumping orders would lead me to believe that it's unlikely that we see a surge of imported material that changes the balance of supply and demand significantly and quickly, which we have seen in the past when domestic prices ran up so high so quickly. So I'm hoping for a smoother landing than some of those that we've experienced over time, but I would tell you our view of the risk is quite high and that our approach to manage that risk is going to be through managing the quantities of steel that we purchase. Otherwise, I don't know of a hedging mechanism or I don't know another business practice that will allow us to fulfill the commitments we have to our customers, which is our very first priority. But I don't know of another tactic that we could employ other than quantity management on to minimize and manage the risk that is definitely out there.

Next question, we have Tyson Bauer.

Would you consider the rulings on the trade actions probably as good as you could have hoped for or as you expected?

Yes. I mean I think they're basically in line with the margins that we alleged. I mean there's some individual companies that are lower in the single-digit level. We would like to see those in the double-digit level. But just obtaining an order against those countries is really quite a success because, as I pointed out in my comments, a dumping order is -- just really raises the risk for exporters to the U.S. market exponentially because they never really know what their actual exposure is until the end of the year. So yes, I mean, I would say we're very happy with the results of the cases. And we, as I said, got orders against every company and every country that we targeted. So yes, I consider it a solid B+ or A.

Okay. Given your position in a lot of the markets you serve, other than maybe some isolated ones where you're competing against, say, something like a Nucor, your ability to manage through these prices and inventory risk are probably far better than some of your smaller customers. Has it gotten to a point where we're almost at a cost-plus basis because everyone is dealing with the freight issues, the steel wire rod issues, where given your scale that you can -- obviously, it's not a true cost plus, but in essence, you can kind of manage that through your sales and deliveries?

I mean -- so let me give you this perspective. If you think back to 2019, we found ourselves on the other side of this phenomenon where we saw extreme weakness in steel prices and during that rather painful period, we saw our margins and spreads contract to unsustainable levels. So I would tell you that the current environment we're using to try to restore our spreads and margins to reasonable levels. And in that respect, it is not a cost-plus environment at all. It is, let's try to put these products where they need to be for sustainability purposes. And up to this point, I think we're having some reasonable success in doing that. But there's still a lot of competition out there, and that fact certainly hasn't gone away.

Okay. We've seen in peak times -- of course, it's been quite a while ago that you've gone all the way up to, say, a 24-type gross margin, which is probably for a week or a blink of an eye. As things kind of settle through, are you -- with the trade, with the seasonality, are you looking at -- we're kind of in a normalized range, maybe toward the upper end, but high-teens, low 20s is nothing that is abnormal for your business, especially in this environment?

Yes. I mean, I think that's a fair statement. And I think when -- as we pointed out a couple of times in our comments that there's definitely a tailwind that's created by FIFO in this environment. But we've stated previously, and I still think it's accurate that a normalized -- more normalized gross margin in the high-teens to 20% is not an unrealistic expectation out of this business at all.

And would you anticipate an even stronger seasonal impact this year? We got 23 states that have big budgets, surpluses from a year ago. A lot of attention, of course, on residential, some of the other government spending programs that they're trying to enact. Should we see a more amplified effect?

I don't know how quickly the government stimulus will actually find its way into our markets and into the order books of our customers on -- in a way, it would somewhat surprise me if we saw that in our third and fourth quarters, but we might. The states and local governments are already reasonably flush financially relative to past periods. I intend to view the dollars coming out of Washington as more of an extender and creating longevity for that pipeline rather than a quick pop. Otherwise, seasonality, I would expect it to be similar to what we've seen historically. Absent any sort of weather issues that may develop that slowdown progress on job sites and our customers' plants, we don't anticipate that. But as you know, you never know.

Would you agree that states and local municipalities have been conditioned over the past several years that they're going to have to flip more of the bill and fund a lot of these projects through the bonding markets and municipality bonds, that anything that should, if it does happen, come from the federal side as increase, is purely incremental?

Well, I would definitely agree that states and local governments have given up on Washington carrying the biggest part of the load for infrastructure kinds of expenditures. Those will always be important dollars. But there are many, many examples where the states are taking the initiative to fund their own requirements, which I think was inevitable and certainly is positive for our business.

There are no more questions. Presenters, please continue.

Okay. Well, we appreciate your interest in the company, and we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.