Good day, ladies and gentlemen. And welcome to the Insteel Industries' Second Quarter 2019 Earnings 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, this conference call 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 Insteel and welcome to our second 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 for new information. I'll now turn it over to Mike to review our second quarter financial results and outlook for our construction markets and then 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 this morning, the second quarter fiscal 2019 proved to be a disappointing period for Insteel in a highly challenging business environment. Our results for the quarter were unfavorably impacted by adverse weather conditions across many of our markets and low priced import competition in addition to the usual seasonal all-in demand, together with the consumption of higher cost inventory purchased in prior period. Excluding the non-recurring gain related to the proceeds on an insurance claim, earnings per share for the quarter came in at $0.01 compared with $0.31 a year ago. Shipments for the quarter rose 11.2% sequentially from the depressed level of Q1, but fell 13.9% year-over-year primarily due to weather-related construction delays and the resulting inventory rebalancing measures taken by many of our customers, which have stretched out over an extended period. Shipping volumes are also adversely affected by low priced import competition in our PC strand and standard welded wire reinforcement businesses resulting from the Section 232 tariff program. As we've discussed on recent calls, the tariffs have provided offshore competitors with a significant cost advantage relative to domestic producers by driving US prices for hot-rolled steel wire rod, our primary raw material, substantially higher than world market levels. Not surprisingly the steepest drop off in shipments for the quarter occurred in those markets that are the most susceptible to import competition, which on a combined basis were down almost 30% from a year ago and accounted for 85% of the overall year-over-year reduction in shipments, while the rest of our business was down 3.5%. Average selling prices for the quarter were up 21% from a year ago, reflecting the series of increases we implemented over the course of the…

Thank you. As Mike indicated, we're disappointed with our second 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 Q2 results, we continue to believe that the underlying market fundamentals are reasonably strong and should support a significant rebound in demand during the second half of our year. As we've mentioned on our last few earnings calls, our financial performance for 2019 should be viewed in the context of the administration's Section 232 tariff program initiated in March 2018, which imposed a 25% tariff on imports of certain steel products, including our primary raw material hot-rolled steel wire rod that did not affect imports of most downstream steel products including PC strand and welded wire reinforcement. In the aftermath of the tariff implementation, hot-rolled wire rod prices in the US rose to levels that were 25% to 30% higher than the world market price, a gap which has persisted. Because of the hot steel content of many downstream products, including those produced by Insteel, the disparity between world market and US steel prices has increasingly eroded the competitiveness of US producers relative to offshore competitors. The imposition of the tariffs created chaotic conditions in our raw material markets as domestic suppliers implemented allocation policies which proved to be highly disruptive to customers. In response, steel consumers who were concerned about inadequate domestic availability, including Insteel, were forced to contract for offshore material that was frequently at higher prices than domestic levels in order to fulfill their requirements. Market conditions stabilized during our second quarter, reflecting the availability of import volumes and softer order books for domestic suppliers due to seasonally lower levels of activity in construction and…

Thank you, gentlemen. [Operator Instructions] Our first question comes from Phil Gibbs with KeyBanc Capital. Your line is open.

Hey, thanks for taking my questions. Good morning, gentlemen.

Morning.

Morning.

I appreciate your candid commentary, and it sounds like you're expecting 232 to last a bit longer, and this is clearly hurting your business and end user demand. I mean, how do you think this resolves itself assuming there's no further downstream tariffs put on, on some of your products and customers, and I think new tariffs would definitely level the playing field for you. But this whole thing seems counterproductive, I think, for you and your clients, and this seems to me like - somewhere. So where does this end?

Well, I mean, I think you've posed the $64 question for sure. And there's considerable empathy for our position among the administration contacts that we've made. It's just very difficult to project whether that empathy will result in action or whether it won't. And if we could hazard a reasonable guess at that we would, but we really - we really just - we don't know, but I would say as I mentioned in the comments I made that most people would tell you these tariffs will be in place for as long as this administration is in place. And if that's the case, then I can't see how we wouldn't be successful on it at some point in time in making the very reasonable case that our industry is fundamentally threatened and that good paying, skilled manufacturing jobs are at risk and that action must be taken. So, we will continue to press our case and make our argument which is highly logical. And the optimist in me says that at some point, we will get this matter resolved. And if we don't, then in all adversity comes opportunity and we will find where that opportunity lies for Insteel and we'll take advantage of it.

Well, it makes sense to me. I mean, I think it's pretty easy - I think it's a pretty easy case given the fact that construction activity is pretty much at a cyclical high and you're talking about plants being idled. It doesn't really make much sense. You did talk a little bit about the FAST Act funding for infrastructure on the state level starting to come through. What's your opinion on the administration rekindling that trillion dollars of new multiyear spending that they outlined during the election time? Is this pie in the sky in your mind? Or is this realistic at some point?

Yes. I mean, there seems to be a clear consensus for increased infrastructure spending, whether it's $1 trillion or $2 trillion, but in the end, it always gets back to the funding solution. And I think there are pretty substantial differences in views between the administration and Congress as far as where that increased funding would come from, how it would be generated. So, I think that continues to be the biggest question.

Thanks very much.

Thank you.

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

Good morning, gentlemen.

Good Morning, Tyson.

Morning, Tyson.

Mike, you talked about a 400 basis point differential for use, kind of the last end or the inventory turn cost basis adjustments, as you increase volume in your seasonally stronger quarters, are there any other incremental improvements that would be created from those operating efficiencies?

Yes, we would expect to see improved manufacturing costs during the quarter as we benefit from the usual seasonal pickup in demand, as well as any deferral business from earlier in the year. So we should get a dual benefit both from the lower raw material costs as well as the operating leverage benefit.

Would that improve and be equivalent to that cost basis improvement or unable to say at this time?

I'd say unable to say at this point. I don't believe it would be quite as substantial.

Okay.

But depending on the magnitude of the volume increase that we experienced.

Well, that leads into the next question, volume expectations, is there a difference in your expectations now going forward between coastal and inland, given the differential that you gave on the 30% decline on coastal versus 3%, I would assume, inland?

I'm not so sure. It's as easy to categorize as coastal and inland. Let's just say, import affected and not so import affected. But our strategy, our plan is, we are going to compete with the imports and we'll keep a close look on our cash cost of production, but we are not projecting significant deterioration in our volume as we look through the next couple of quarters.

And in fact I believe you mentioned significant rebound in the second half, which in part comes just normally as your seasonal effect comes into this. Now, in years past when we had weather events not only has your second half, but it typically bleeds into your first quarter of your next fiscal year. Is that kind of what you're looking at the next three quarters should have a positive impact as these deferral revenues work their way back into the system?

I think you can definitely make that case although we're notoriously poor predictors of the future.

Assuming we can go through an extended stretch of more normalized weather conditions because I mean this began early back in the first fiscal quarter or the December quarter where there is record rainfall on a nationwide basis and that led to loaded inventory levels that have - so that continued into the second quarter and has just taken an extended period to work its way out.

Mike, as you look at the cash management situation because of the inventory levels ballooning up relative to a year ago, how does that work its way through these last - next couple of quarters? Will we see that work its way down and will it get a benefit these next few quarters?

Yes, we'd expect to see that net working capital balance gradually decline over the course of the year with inventory dropping down. And we will see - with the increase in shipments, we will see a rise in receivables. But we believe it will be more than offset by that impact from the inventory reduction where we should be in borrowing mode just for a short stretch and debt free by the end of the year for sure.

Okay. Last question. It seems like PC strand obviously has affected more than your other products. If we were to strip out that PC strand, how effective is it or give us a sense on your other products? Are they really as bad off as the overall numbers suggest or are we looking at a very weighted negative impact because of PC strand?

Well, certainly PC strand, because of its share of our total shipments, is the primary driver but our standard welded wire reinforcement is also being affected significantly by imports from Canada, imports from Mexico, and for the first time in my 40 year career imports of standard welded wire reinforcing from Turkey if you can believe that. So, these imports are definitely circumventing the 232 tariff, that's what's happening, and the standard welded wire reinforcement part of our shipments is smaller than PC strand, but the impact is no less noticeable on those - on that market.

Okay. Thank you, gentlemen. And one last thing since it's in my backyard, was the St. Joe affected by the floods in the Midwest? Or would you expect some increased activity due to that reconstruction effort in I-29 in the area of bridges in those?

We were not adversely affected although our people were on standby through that entire episode, and these disasters frequently result in some stimulative impact for demand for our products. And I would guess that this will also - although I can't tell you, I'm personally knowledgeable of any specific job that has come out of it at this point.

Okay. Thank you, gentlemen.

Our next question comes from Lance James with RBC Global Asset Management. Your line is open.

Thank you. Good morning. A couple of questions. You've always been really top notch operator, solid balance sheet, et cetera. And telling you about the 232 tariffs, have you seen others of your domestic competition, either shutter their factories or have some distressed? I'm just wondering whether out of all this pain there may be some additional acquisition opportunities for you.

It's a good question. And the answer is yes, we have seen the facilities idled. Yes, we are aware of layoffs and likely more layoffs that are coming. And yes, we are aware of people who have going concerns or have concerns about the ongoing concerns if this tariff issue persists. And I guess that's what I was alluding to when I said that if we're unsuccessful in gaining coverage for our products in the 232 tariff regime, then I think it's inevitable that there are other opportunities for us to grow even in the face of the 232 adversity. We're here to stay and we're solid, and we can weather this for however long that we have to, but some opportunities should come out of it even in a worst case scenario.

Great. And my other question is kind of more general, but it's - what are your avenues of communication to - because one would think that the administration would be very interested in your pain and job losses in the industry. But are your avenues of communication through the senators in the state that you operate or is there an industry lobbying organization, how exactly are you able to communicate to try to get this resolved favorably?

Well, because our industry has overtime been so enormously affected by government policies, regulations and trade issues, we're highly organized as an industry to represent our concerns to Washington. So we definitely use that infrastructure in interacting with all of the relevant administration officials of USTR, Department of Commerce, White House itself. And I would mention that we have had significant support from our steel producing vendors for solving this anomaly that exist that is causing the pain in the downstream steel intensive product industry. So, we have organized effectively and we have had good access to the right people. It's just impossible to say whether it has been sufficient to get the problem solved.

Great. Well, thank you for your answers. You really are tremendous operators, and good luck getting it resolved.

Thank you.

Thanks.

Thank you. [Operator Instructions] Our next question comes from John Koller with Oppenheimer. Your line is open.

Good morning, gentlemen. How are you today?

Good morning.

Good morning, John. How are you doing?

I'm all right. Thanks. Sort of along the same lines, I'm curious, since you continue to invest in PPD and improving efficiencies, if the tariffs were to stay in place and not be resolved at this point for downstream, how do you see your competitive position beyond this? Do you see a significant improvement or do you think it would be quickly - the moat might be quickly filled in once things improve? Thanks.

I mean, I think that our view of that would be, we will continue to make the investments that have clear attractive returns and that over time the 232 tariff impact of this probably won't loom as a major factor in where Insteel positions, sorts out relative to competitors. We're going to strengthen the core manufacturing part of our business on an ongoing basis, and I would emphasize also invest in our information systems which help us toward that objective and that we intend to continue to increase the gap in operational effectiveness with our competitors.

Okay. Thanks.

Thank you. The next question comes from Julio Romero with Sidoti & Company. Your line is open.

Hey, good morning, everyone.

Good morning.

I appreciate you breaking out the pricing affected by imports versus non-import affected. Certainly the tariff pressure continues to pressure your overall ASP, but you've been able to hold pricing relatively steady for the rest of your business. Just given where scrap prices have trended, how should we think about pricing going into the seasonally stronger summer months?

Well, in terms of the way that Insteel approaches pricing its product, it's going to be a factor of the way we see demand and our backlogs and our service levels. And that hasn't changed, it's always the same. In terms of our hot-rolled steel prices, it's really difficult to project at this point whether those change as scrap changes or whether the disconnect that all of the steel producers have pursued with respect to scrap prices whether they're successful and maintain that. I really don't - I don't have the answer to that, Julio.

Okay. And can I ask if the regions that were affected by weather have seen any catch up over the first few weeks of April at all?

Yes. I mean, the shipment activity has definitely rebounded, but I wouldn't tell you that it's any astonishing degree. But it has rebounded significantly from where we saw ourselves in the second quarter.

Okay, I'll hop back into queue. Thank you.

Yes.

Thank you. And our next question is a follow-up from Phil Gibbs with KeyBanc Capital Markets. Your line is reopened.

Hey, guys, I appreciate the follow-up opportunity, but I'm all set. Thank you.

Okay.

And I'm not showing any further questions in the queue gentlemen. I will now hand the call back to Mr. Woltz for any closing remarks.

Okay. Thank you. We appreciate your interest in Insteel and encourage your follow-up during the quarter, and we look forward to talking to you at the next earnings call. 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.