Good day, ladies and gentlemen, and welcome to the Insteel Industries' Fourth Quarter 2018 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 turn this conference call to H. Woltz, Insteel’s President and CEO. You may begin, sir.

Good morning. Thank you for your interest in Insteel and welcome to our fourth quarter 2018 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 the fourth quarter financial results and outlook for our markets, and 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, Insteel posted solid results for the fourth quarter of fiscal 2018, despite a drop-off in shipments. Earnings per share came in at $0.49, which is more than double the prior year level, but down $0.18 from the third quarter. Shipments for the quarter fell 13.9% sequentially from Q3, due to the factors referenced in our earnings release; increased pricing pressure, particularly in those markets susceptible to import competition; operational issues largely due to tight labor markets that restrained production volumes at certain locations; raw material supply constraints early in the quarter, resulting from the Section 232 tariffs on imported steel; and customer inventory rebalancing related to pre-buying activity during the previous quarter, driven by availability concerns and the likelihood arising prices. On a year-over-year basis, shipments were down 1.6%. From a geographic standpoint, shipments into Texas, our largest market were unfavorably impacted by the unusually wet weather, particularly in September, which was the wettest month on record for the state as a whole. Average selling prices rose another 11.3% from the third quarter, following Q3s 12% sequential increase, reflecting the series of price increases we’ve implemented in response to the escalation in our raw material costs. As we indicated on our previous call, these cost pressures have been spurred by the imposition of the Section 232 tariffs on imported steel and subsequent tightening in the availability of our primary raw material, hot-rolled steel wire rod, which has driven U.S. prices above world market levels. On a year-over-year basis, Q4 ASPs were up 27.3% from 2017. Gross profit was up $7.7 million from year-ago and gross margin rose 390 basis points driven by the widening in spreads. On a sequential basis, gross profit…

Thank you. As Mike indicated, construction markets continue to grow during our fourth quarter creating solid demand for our products on construction sites and at our customers manufacturing facilities. The favorable demand environment was overshadowed, however by the impact of the Trump Administration’s Section 232 tariff program, which has distorted our markets since its imposition early in our third quarter. As we reported last quarter, uncertainties surrounding the availability of our primary raw material, hot-rolled steel wire rod resulted in speculative purchasing throughout the supply chain and sharp price increases reflecting the 25% tariff that was applied to practically all imports of carbon steel products. These supply concerns were exacerbated by the Antidumping and Countervailing Duty Orders entered in April, following the conclusion of trade cases that have been filed by domestic producers in January 2017. Based on customer purchasing patterns over the second half of the year, we believe that concerns about inadequate supply and rising prices drove many of our customers to accumulate excess inventories during Q3 that began to be liquidated later in our fourth quarter depressing shipments and obscuring healthy demand for our products. We believe the impact from this inventory rebalancing is largely behind us. We reported last quarter that the supply problems we experienced with certain domestic wire rod producers caused production interruptions at several of our facilities. While these disruptions continued into Q4, they were much less severe and by August inventories had been sufficiently replenished to where operating schedules returned to nearly normal. While the return of the steel mill in Georgetown, South Carolina should further alleviate supplier concerns, its restart had a minimal impact during Q4 as the initial ramp up of the mill appeared to proceed slower than expected. In addition to market distortions caused by the Section 232 tariff…

[Operator Instructions] Our first question comes from Julio Romero with Sidoti & Company.

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

Good morning.

Good morning.

So if we could start on Section 232. Can you just remind us which of your product lines would be susceptible to the import competition? As I understood, it was – it’s mostly PC strand, but there maybe some products in welded wire rod that can be affected as well?

Yes. That's correct. You could generally say it, it's our make-to-stop products on PC strand and then standard welded wire reinforcement has also experienced an import competition from Mexico primarily. Most of that product is coming into the Texas market, where we are not active in standard welded wire reinforcing. But we do see its impact in Florida and permeating up through the eastern part of the States. But the situation for us is probably not as dire as it is for producers of that product in Texas.

Got it. And can you give us a sense of how much U.S. prices are compared to world market levels?

Are you speaking wire rod?

Correct, yep.

Yes, 25% to 30% about the amount of the tariff.

Got it. That's helpful. And then maybe how receptive has the Commerce Department been to implementing tariffs to downstream products. I know H., you’ve been working at it for – since 2016, but it really hasn't seemed to be much of a priority for them up to this point? Is that fair?

I think there's a genuine interest in the situation that exists now and there's a genuine desire not to injure downstream producers. However, the mechanics of those issues are difficult for the Department of Commerce and the administration to deal with. And that doesn't mean that they're impossible to deal with, but there are certain complexities there that are – that just exist and have to be dealt with.

Got it. That's helpful. Maybe if we could just turn to shipments. Can you maybe give us a breakdown of how much of the year-over-year decrease was – I know you called it a couple of different maybe whether, destocking by customers and operational issues, was one of those factors maybe a bigger factor than the others?

It's really hard to drill down and quantify by reason, Julio. But I would tell you that significantly less than half was a result of any operational issues and the balance was whether inventory rebalancing and that type of driver.

Got it. And then maybe in regards to weather, I know that Texas had a rough September, but I believe the prior year still had a pretty – if I believe the wettest August on record for Texas. So maybe you can talk about the weather impact specific to Texas? And maybe quantify if you can or to the best that you can the shipment impact there?

Yes. It’s really – I don't know whether it’s possible, but precisely quantify it on a year-over-year basis just due to the difference between, I guess, we have the wet weather in September this year versus the hurricane last year, I don't know that we could normalize both amounts to come up with a precise comparison. But I mean generally that from a geographic standpoint, the softening was across the Board is due to those factors that we mentioned. I don't know that there are any other areas, any other regions that really stood out.

Got it. And then if I could just ask you about the CapEx, $22 million. How much of that would you say is related to the productivity improvements that are planned versus maybe just maintenance CapEx?

No, our run rate on just basic maintenance CapEx is in the range of $10 million to $11 million. So the balance of it would be related to productivity projects, expanding product capabilities and that sort of thing.

Got it. That’s helpful. I’ll hop back in queue. Thank you.

Our next question comes from Tyson Bauer with KC Capital.

Good morning, gentlemen.

Good morning, Tyson.

Good morning, Tyson.

Just a couple of follow-ups also, on the 232 impact, do you believe you've seen the full extent of that impact? Or is this something that could continue to erode your ability within the market of your competitors as we go through the subsequent quarters here?

If you're referring to the impact of low-price import competition, we have seen that steadily through the last few months. I would tell you, it's probably increasing in magnitude in the PC strand market, but with respect to standard welded wire reinforcement, I think it has probably hit its run rate at this point.

Okay. And on PC strand, what percentage – what kind of magnitude impact does it have on the overall? So these are probably more on the coastal areas that you're feeling a bigger impact?

Well, we would like to think so, but that's not correct. We're actually seeing the importers pushing to Portland to a certain extent. And you can see the import statistics are probably rising, prices are depressed. So – and you get to the point, there's a Buy America component to this market, and what we’ve referred to is our commercial component or segment to the market. And when the importers take enough of the commercial segment, it begins to impact domestic producers who are scrambling more over the Buy America segment of the market and so the imports are really affecting the entire market.

Okay. And just as a procedural question if you know, what you're asking for in the downstream products being protected, is that something that could be an addendum to the existing tariffs that are in place? Or is this something that would be treated separately where you've got to go through the 90-day public comment period and you're looking at six plus months before you could ever get to the implementation?

Well, I think that's a matter of your interpretation of the law, but we do not believe that an extensive on waiting period would be required.

Okay. And last year when you announced your Q4, you have the special dividend included in that announcement, this year you end the year with $12 million more in cash, generally still positive end market outlooks. Obviously, you've got the competitive pressures, but you're still in good position, good margins still. Any reason we do not see that dividend in this announcement and is that something that's still on the table before the end of this calendar year?

I'm sure we'll discuss it in our upcoming Board meeting in November and we will have something to say then.

Okay. In Q1 just as we look forward, you’ve had – you talked about weather impacts has been wider geographic range of weather impact. Last year, you had the hurricanes, as I said, in Texas and the Houston area, more widespread throughout Texas, up the Midwest all the way to Canada, Carolina is obviously. Is that creating a slower start to fiscal Q1 here?

Yes. I mean certainly Michael and Florence both have had an impact on shipments into the regions that were affected. I mean the flooding and the devastation certainly affects consumption of the product. But as I've stated before, these are matters of timing. Ultimately the hurricanes typically generate some demand for our product in the long run, but they don't destroy demand in the long run. So we may see shipments shifted from one period to another, but overall they generally create demand.

All right. Thank you, gentlemen.

Thank you. End of Q&A

And I'm not showing any further questions at this time. Would you like me to repeat the instructions?

We appreciate your interest in the Company and don't hesitate to call with any follow-ups. Thank you.