Good day, ladies and gentlemen, and welcome to the Insteel Industries' First Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce your host for today’s conference, Mr. H. Woltz, President and CEO. Sir, you may begin.

Good morning. Thank you for your interest in Insteel and welcome to our first quarter 2019 earnings call, which will be conducted by Mike Gazmarian, our Vice President, CFO and Treasurer, and me. Before we begin, let me remind you that some of the comments made on today's call are considered to be forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. All forward-looking statements are based on our current expectations and information that is currently available. We do not assume any obligation to update these statements in the future to reflect the occurrence of anticipated or unanticipated events or new information. I’ll now turn it over to Mike to review our first quarter financial results and outlook for our construction end markets and then I’ll follow-up to comment more on business conditions.

Thank you, H. And good morning to everyone joining us on the call. As we reported earlier today, the first quarter of fiscal 2019 proved to be a challenging period for Insteel as the usual seasonal downturn was exacerbated by the excessively wet weather across many of our largest markets and low price import competition which reduced shipments well below expected levels. Excluding the non-recurring gains referenced in our earnings release related to the disposition of fixed assets in the current year and the remeasurement of deferred tax assets and liabilities in the prior-year, net earnings came in at $0.19 a share compared with $0.23 per diluted share a year ago. Shipments for the quarter fell 17.2% from last year and 14.5% sequentially from Q4 primarily due to weather-related construction delays in Texas, our largest market, and across the southern and southeastern regions of the country. Our shipping volumes were also adversely impacted by a continued increase in low-price imports, particularly in our PC strand business, which has been facilitated by the Section 232 tariff program. As we've conveyed on previous calls, the tariff has served to provide offshore competitors with a significant cost advantage relative to domestic strand producers that are driving US prices for hot rolled steel wire rod, our primary raw material, substantially above world market levels. As you would expect, the drop off in shipments was the most pronounced in the post-tension PC strand market where the commercial segment is subject to import competition. Average selling prices for the quarter rose slightly from the fourth quarter and were up 28.7% from a year ago, reflecting the series of price increases we've implemented in response to the escalation in our raw material costs. Gross profit for the quarter fell $0.7 million from a year ago and gross…

Thanks, Mike. As Mike indicated, we’re disappointed with our first quarter results which were driven by weak shipping and production volumes that we attribute primarily to adverse weather conditions and growing import competition in certain markets. While we aren't happy with the Q1 results, we continue to believe that the underlying market fundamentals are reasonably strong and should support our forecast of another year of growth in demand for our reinforcing products. As we reported last quarter, our financial performance for 2019 should be viewed in the context of the effects of the Trump administration’s Section 232 tariff program, which is increasingly eroding the competitiveness of US producers of downstream steel products that are exposed to foreign competition. We previously reported that the combination of antidumping duties and the administration’s Section 232 tariff regime had caused chaotic conditions in the market for wire rod, our primary raw material, beginning in Q2 of 2018. These factors cause a significant disruption in the availability of imported wire rod, which domestic producers were unable to backfill, resulting in shortages during the late Q3 and early Q4. Prices rose substantially and we were required to purchase imports at premium prices relative to the domestic market to ensure that we could meet customer commitments. By the end of our fourth quarter, availability concerns had abated as speculative purchasing tapered off and the prospect of additional domestic capacity from the Georgetown, South Carolina steel mill became a reality. As we had predicted in the aftermath of the 232 tariff, US wire rod prices increased to well above the world market level. Today, according to the indices published by Fastmarkets AMM, an authoritative source for worldwide pricing trends, US wire rod prices are more than $200 per ton higher than the world marketplace. Since no tariff was…

Yes, thank you. [Operator Instructions]. Our first question comes from Julio Romero with Sidoti & Company. Your line is now open.

Hey, good morning, H. Good morning, Mike.

Good morning, Julio.

So, my first question is just given the import pressure, I think you guys are doing outstanding from a pricing standpoint, holding your ASPs here. Can you maybe just give some color on how you’re able to hold that pricing? Was it the past price increases that are kind of coming to fruition or were there any new price increases passed and maybe the full impact of maybe how you see pricing going forward?

Well, thank you for the compliment, which may or may not be deserved. The reality is that with many of the imports sources, the quote in our markets, particularly in PC strand, are quoting out three or four months. So, the impact on ASPs in our PC strand business, and particularly on spreads and margins, is likely to be more consequential as we look into Q2 and possibly Q3 than it was in Q1. So, our decision was either we compete with the imports or we curtail operations. And at this point, we’ve decided that we’re going to compete and we’re going to stay in the market and undoubtedly we’ll suffer the consequences of that from a margin point of view.

Got it. And just as a follow-up to that, I guess, can you maybe talk about the mix in the quarter of welded wire versus PC strand? I assume it was a little bit more weighted to welded wire relative to the historical split?

Yeah, that's accurate. The drop-off in shipments was the most pronounced in that segment of the strand market that’s susceptible to import competition. So, it was more severe in strand than welded wire.

Okay. And then, maybe just one more before I hop back in queue is, appreciate the color you gave on federal funding impact with the shutdown here, would you expect any impact on volumes to become – is there going to be a ramp up of it becoming more material if it drags out past maybe the end of January here?

Yeah. I think the longer it drags out, the more downside risk there is as we move towards – it’s typically the busiest time of the year from a construction standpoint. So, we’re obviously hopeful it gets resolved sooner rather than later, but if it continued out for a few more months, then I think it could begin to have a more severe impact just due to the resulting uncertainty.

Okay. Got it. Appreciate the answers and taking my questions.

Sure.

Thanks.

Thank you. And our next question comes from Philip Gibbs with KeyBanc Capital Markets. Your line is now open.

Yeah. Good morning. Thanks for taking my questions, gentlemen. I have just a question around the comment you made on the speculative purchasing tapering off into 2019 for wire rod. And, H, you had to hedge yourself with some foreign buys. Are you starting to see – with the new mill on the East Coast, up to now on the rod side, are you starting to see pricing soften up a little better? Is that something that you haven't seen yet?

No, I think maybe there's been some softening, as you know. Scrap has tailed off some, which is a primary driver of our suppliers’ cost structure. And I think as you saw with Insteel shipments for Q1 softening up considerably, I think that that trend certainly has not been limited to Insteel. I think it is a trend that has occurred across many of the wire rod consuming markets and I think [indiscernible] and wire rod producers are feeling that. And it’s probably become a little more competitive. But relative to the distinct disadvantage that we have incurred relative to world market, it really hasn't made any real change in that circumstance.

Just for our education, because I think a lot of the points you're making are very important to manufacturing, can you give us any sense in terms of how much you think some of these foreign producers have taken share over the last 6 to 12 months? I don't know your market share – your domestic versus foreign on some of these downstream products. But any way you could put into perspective how you feel that’s shifted?

Well, I guess, first, I would tell you that our data is affected by the government shutdown. So, we’re not all the way current on exactly what has happened up through the most recent reporting periods. And I would also tell you that I think a lot of the advantages [indiscernible] retrospective because this pressure has been building through the last six months. And I think we will continue to see imports ramping up going forward and they're probably the most significant impact as yet to be seen.

That's helpful. And just the last question here if I could. I appreciate what you guys have said. Volumes are obviously down a staggering amount in the first quarter. And I know that you said that there is some catch-up to come over in the next several quarters. What does your crystal ball today tell you in terms of how much volume weakness, I guess, you may see this year because it's going to be hard to catch up off of a 17% comp. Thanks.

Yeah. Well, I think if you get back and just look at expectations for the underlying level of demand for our products, that story is positive. That's not negative. And as we have come back from holiday period after the new year, we've seen shipments reasonably robust coming into the new year. So, I think we will make up part of the deficit that we've run through the first quarter. But as Mike pointed out in his comments, I think there is a significant limit to what contractors can do in terms of accelerating their progress on jobsites because, I believe, most are really labor constrained at this point.

But I think we could see more improvement in the second half of the year during the busy season, especially from a comp standpoint where we saw some softening in the fourth quarter 2017 of 2018.

Thanks, gentlemen.

Sure.

Thank you. And the next question comes from Tyson Bauer with KC Capital. Your line is now open.

Good morning, gentlemen.

Good morning, Tyson.

Good morning, Tyson.

Mike, could you give us a little more color on some of the margin impacts that would be associated with incomplete cost recoveries versus the reduced volume and which one is easier to get back depending on how the market plays out and as you get into the seasonally stronger quarters?

Yeah. I think from a year-over-year standpoint, it was primarily a volume issue which was largely weather-related. Our spreads were actually up from last year. We did see some compression from the fourth quarter, but, overall, I would attribute the reduction in gross profit primarily to the volume-related impact, both in terms of the contribution effect and then just the impact on our production volumes, which has an unfavorable cost impact as well.

So, all things equal, you'll still have the effect of the imports and those pressures. But as you begin to increase those volume throughputs and like operations efficiencies, that should provide some relief?

Yes. Yeah, definitely. We should see a significant favorable cost impact as the margins move back up.

Okay. Have you've gotten any clarity in your discussions with the administration on Section 232, whether what you're asking would require a new process or whether that would just be an expansion of what's on the books which could be enacted at a quicker timeline?

It’s a good question and highly relevant. And the answer is, depending on who you ask, you can find the answer that you want. And it's not clear exactly which path would be most reasonable. So, it could be one or it could be the other. I think that's uncertain at this point.

One of the schools of thought was the immediate impact was because of the excess global capacity was then being diverted to the US and imports, especially PC strands and others, but as that excess capacity got used up, there would be a finite pressure here in the domestic market. As things slow globally, is that what you're referencing that we could see additional pressure or is there a level where we just get to a static point?

Well, I think the play here is the length of the pipeline for imports where they're quoting for delivery out 60 to 90 to 120 days. So, the margin pressure with respect to import competition will ramp up this quarter, but I don't immediately get the feeling that a global slowdown is going to create significant ramped up volumes of strand in our marketplace. I think that strand is going to be here anyway.

Okay.

Just because the pricing is attractive in the market compared to alternatives that they have elsewhere.

And, Tyson, just to provide some added perspective on the import-related impact on the quarterly results, we’d estimate that about 25% of the year-over-year drop off occurred in those portions of our business that are susceptible to import competition. Now, that business was also affected by the weather and it's difficult to segregate out how much was driven by the weather-related impact. That would be at the high-end of that 17% shipment reduction, about a quarter of it occurred in the import sensitive part of the business.

All right. Last question for me. You decided to put it in the press release. You discussed the EMS market share growth versus rebar. Does that imply that we’re finding an easier pathway to get state DoT approvals for your product and states that have been typically more union driven and labor have softened that stance that is allowing you to grow your slice of the pie regardless of what the pie itself is doing?

There are a couple of issues embedded in that question. And, first, I would say, from a DoT perspective, there haven't been a whole lot of changes there. And some DOTs are more receptive to the substitution than others, but we're not telegraphing to you there’s been a significant change there one way or the other. The primary area of growth for us with engineered structural mesh will be in the non-governmental and the product and commercial sector where we are doing conversions to ESM from rebar. And also, we’re not telegraphing to you that that has become substantially easier. It’s still a time consuming, labor-intensive process to make those conversions, but that is where we expect to see the most significant growth in that private sector. not in the public sector.

All right. Thank you, gentlemen.

[Operator Instructions]. And our next question comes from Steven Marascia with Capitol Securities Management. Your line is now open.

Thank you. Good morning, gentlemen. Just to follow-up on the government shutdown. I know the infrastructure story kind of is apparent. Can you go into a little more detail, if you can, about how it might possibly affect you guys going forward, say, if this does goes on for another three or four months?

I think it really boils down to a question of the impact of the continued uncertainty on funding decisions at the state and local level. That would be our primary concern, particularly as you move closer to the busiest time of the year from a construction standpoint because, if it moves out too far, then there's the potential that you’d miss the window to begin work on projects during the current season. So, I would say, that’s our primary concern.

Do any of your customers have dealings with federal agencies in terms of permitting of various activities?

No, typically not.

Okay. Thank you very much.

Thank you.

Thank you. And our next question comes from Adam Thalhimer with Thompson Davis. Your line is now open.

Hey, good morning, guys. Thanks for taking the question.

Good morning, Adam.

Just wanted to ask a quick one on what you said on commercial. I think you said maybe some moderation or softening late this year. And I was just curious if that's a comment from you looking at the macro data or is that more from something you're hearing from your customers?

Really a combination that – I think commercials had a long healthy run here just given where we’re at in the cycle. It’s likely here that we could begin to see some softening. That's borne out in AIA construction forecast that I referenced where the mix is changing, with some softening in commercial and a pickup in the industrial and institutional segments, as well as infrastructure as well. I think there's just more – the outlook there just appears to be more favorable at this time.

On the infrastructure side?

Yeah, yeah.

Okay.

Again, assuming that this shutdown gets resolved in a timely manner.

I think we all hope that. Okay, thank you.

Yeah, yeah.

Thank you.

Thank you. And at this time, I'm not showing any further questions. I would now like to turn the call back to our speakers for any closing remarks.

Okay. Well, we appreciate your interest in the company and we encourage you to follow up with questions if you have them and we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today’s program and you may all disconnect. Everyone, have a wonderful day.