Good day, ladies and gentlemen and welcome to the Insteel Industries' Third 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, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. H. Woltz, Insteel’s President and CEO. Sir, you may begin.

Good morning. Thank you for your interest in Insteel and welcome to our third 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 the call over to Mike to review our third quarter financial results and outlook for our markets. 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, business conditions remained challenging during the third quarter of fiscal 2019, as we continued to contend with low priced import competition, resulting from the Section 232 tariff on imported steel and unusually wet weather in many of our markets with earnings per share dropping to $0.11 from $0.67 a year ago. Shipments for the quarter fell 3.9% year-over-year, but were up 17.5% sequentially from the depressed level of Q2, as our usual busy season got off to a slow start. Our PC strand and standard welded wire reinforcement product lines continued to be adversely affected by increased low priced import competition, resulting from the Section 232 tariff program and a substantial cost advantage it has provided to offshore producers of these products. The tariffs have driven domestic prices for hot rolled steel wire rod, our primary raw material, substantially higher than world market levels. Foreign competitors have responded with underpricing tactics to capitalize on their lower costs and further their penetration of the US market. The unfavorable impact of the tariffs in our Q3 shipping volumes is apparent, considering that shipments into markets that are susceptible to import competition, which in total represented around a third of our sales for the quarter, were down 20.4% from a year ago, while the volume for the remainder of our business was actually up 7.5%. In addition to the surge in low priced imports driven by the tariffs, many of our customers remained in inventory reduction mode during the quarter to the detriment of our order book due to the excessive rainfall and resulting construction delays. The April to June period for the contiguous US was the second wettest on record, impacting a significant portion…

Thank you. As Mike indicated, our third quarter results continued to reflect disappointing shipping and production volumes that we attribute primarily to growing import competition and adverse weather conditions in certain of our markets. Despite our weak results, we continue to believe that the underlying market fundamentals are reasonably strong and should support a significant rebound in demand as weather patterns normalize. As we've mentioned on our recent 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 25% import tariffs on certain steel products, including our primary raw material, hot rolled steel wire rod, that did not apply to most downstream steel products, including PC strand and welded wire reinforcement. Consequently, US prices for hot rolled wire rod continued to be significantly elevated relative to the world market, which has created a highly attractive environment for offshore competitors seeking to capitalize on their tariff related cost advantage or circumvent the tariff by shifting production to products, which are not covered. Foreign producers have taken full advantage of these unique circumstances as reflected by the surge in PC strand imports, which through the first five months of the year were up 55% from a year ago. Average unit values for imports have fallen to levels that are only marginally above US wire rod prices, creating an unsustainable competitive environment for domestic producers. Similar trends have occurred in the market for standard welded wire reinforcement where import volumes have surged and average unit values have plummeted, particularly from Mexico. Unfortunately, we're unaware of any knowledgeable steel trade policy analyst who predicts that the 232 tariff program will be terminated in the near future, with many observers believing the program will persist for the duration of…

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

You had mentioned earlier that your customers remained in inventory reduction mode throughout the quarter. Just curious, if weather aside, are you seeing or hearing any change in the underlying demand from your customers regarding any of your end markets? And if so, where do you think they may or may not be seeing it from?

Yeah, I don't think we're detecting any evidence of a cyclical downturn in demand in our markets. It has been more purely weather related, where customers have literally run out of space to store finished goods due to their inability to ship to job sites and as always, there seem to be those who are doing better than others in certain regional markets. But as an overall statement, underlying business conditions appear to be reasonably strong and we would attribute the overwhelming preponderance of low shipments and weak activity to weather at this point.

And I just think about your last four quarters, all being affected by weather. And the fact that steel scrap has kind of flattened out from June heading into July, just how should investors think about that backdrop, heading into fiscal ‘20 of relatively lighter year-over-year comparisons ahead, along with kind of normalizing raw material prices.

Well, as we look out for the next couple of quarters, we certainly aren't forecasting a downturn in demand. We're reasonably optimistic about what we see out there, with the caveat being related to the 232 impact and the ramp up of imports that we're seeing on a couple of critical product lines. But underlying levels of demand, we believe, will be solid. In terms of scrap, there are a lot of things at work in those markets, we're really unable to make any reasonable prediction of where that market is going to go. But clearly, it's not just our spot in the supply chain that's being adversely affected by both 232 and weather related events, as we're seeing our supplier base also suffering from low demand, taking production downtime, due to just weak underlying conditions that I believe are both 232 and weather related. And of course when they take downtime, they're not buying scrap. So I think, there's been pressure on the scrap market from that perspective, at least in the long products area where we deal.

And our next question comes from Phil Gibbs with KeyBanc Capital Markets.

You all keep referencing 232 and the duration of that initiative by the administration. But the more we see it, it keeps getting watered down, either through direct country exemptions in the case of Canada and Mexico, and I know, they produce some wire rod. And Nucor also mentioned at their Investor Day a couple of weeks ago that there have been a litany of exclusions granted to buyers. And I also see that wire rod prices domestically are down quite a bit. I don't know if it's $100 a ton in the last year, but down a lot from where they were at the highs. So how do you square that all up with your own gross margins and seemingly that more favorable or more balanced supply picture on your supplier side? And probably should shift that tide to you all in terms of the downstream product?

Well, you're absolutely correct that wire rod prices have fallen for a variety of reasons. But the real issue is, prices in the US relative to the world market. And as I mentioned, in my prepared comments, average unit values of imported PC strand are only marginally higher than the domestic price of US wire rod. So falling prices is not a phenomenon limited to US markets, prices have fallen worldwide. And I would argue that the delta between US pricing and world market pricing still puts companies such as Insteel at a distinct disadvantage and allows importers to have their way with our markets.

Okay, that makes sense. Have you at all tried to ask for exemptions? Have those been filed and/or denied if you've done so?

Yes, the answer is yes to that. And we're pursuing another round of exclusion requests at this time. And as is inevitable with any of these programs, there seems to be significant inconsistency in the way that the Department of Commerce has dealt with exclusion requests, with some in our industry, not directly in our space, but in our industry, some exclusions have been granted strictly based on price effects. And that is the nature of the problem that Insteel has, it's not a supply problem at this point. It's a price problem relative to world markets. And it's just hard to predict the outcome of an exclusion request, because there is a clear lack of consistency.

Okay. I appreciate that answer. And if I could just ask one more on the here and present, you gave some color around the end market dynamics. But as you look into the third quarter, the September quarter, are you expecting things to be stable in terms of your shipments, or pick up a bit and then kind of sub question is that, is that in line with typical seasonality or are we still seeing drags from weather? Thanks.

Yeah, I'm assuming we get to a period of normalized weather, we would expect a pick up in activity during Q4, usually the April to September period is the strongest of the year for us and as I indicated, we should -- just with our end markets remaining relatively strong and assuming the weather normalizes and we should see a pickup and also benefit to some extent from any push forward of activity from earlier in the year.

[Operator Instructions] Our next question comes from Tyson Bauer with KC Capital.

You talked about a potential benefit depending obviously on market prices from the inventories flowing through. Also, if we do see increase in volume, are you able to gauge what kind of improvement in margins you could see just based upon better throughput on volume or is that a little hard to gauge at this point?

We should see better throughput in our plants and lower manufacturing costs. I would tell you though, the uncertainty, the weather related deferral of business and the delay of the normal seasonal upturn has also apparently made competitors pretty nervous. And there's been significant commercial activity and pricing activity in the market due to 232 related import concerns, but also just related to -- on the obvious disappointing volumes that have materialized through this supposed seasonal upturn with other domestics. So it's -- predicting ASPs is really difficult for us at this time.

And the factors that H mentioned, I mean, that's really what drove the compression in spreads during Q3, where we benefited from a reduction in raw material cost as anticipated, but the dropoff in ASPs exceeded that cost reduction. And that was due to the combination of factors he alluded to, the 232 pressure as well as the soft demand that was primarily weather related. So to the extent that the weather normalizes and we see the usual seasonal pickup in demand and we could benefit from those lower costs going into Q4.

H, you repeated in the last couple of calls that you ought to try to protect your market share, you will compete against those imports by matching price or being competitive there. Is there a point where you start to see some pros and cons of changing that philosophy? And if so, what would cause that change at your level?

Well, I think first, we need to come to some conclusion about our view of the likely term that 232 is in place. If we were encouraged by the arguments that we're making with the administration, and if we're encouraged that we might see some action there, we could definitely going to hang in and compete and maintain our market share. If we came to the conclusion, though, that we had six more years of these conditions, then we clearly start looking really hard at our cash cost of production and begin to make some longer term decisions about whether it's in our shareholders’ best interest to continue with our current tactics. So it's just -- we're one tweet away from anything. So, it makes it difficult to plan and to strategize.

Okay. The SG&A, Mike, coming down, is that a reversal of some accrued that you took in the first half of the year or is that a level that you're trying to maintain and just being as lean as possible?

It's really more a function of the drop off in incentive comp based on our weaker results for the current year. There's a pretty substantial variable component to SG&A that's performance driven off our return on capital plan. So, this reflects the decrease. They're going into Q4, we should see it, we should see an increase just due to the timing of equity grants, which occur semi-annually, but otherwise, we would expect it to continue to trend at the reduced levels until our performance improves.

There's been rumblings that Secretary Ross could be on the outs, as you said, one tweet away from anything. Given his history with the steel industry, his pushing on 232, would his ouster be viewed favorably by you and those within your industry?

I can't say that any one person in the administration is going to be a swing factor in what happens here. I think that there is, at the very top of this administration, I think there is -- that believes strenuously that the tariffs are working and I don't think the departure of any one of four or five guys would make a big difference to how the program evolves from here.

Okay. And last question for me, if we see some of these lower rates from the Fed materialize, do you think that's enough to kick start some residential activity and to prolong the cycle on the non res?

Yeah, I think potentially, it would certainly have a favorable impact. But at the same time, I think the recent reductions in non-res fixed investments also being spurred by the uncertainty on the global economic environment as well as just these trading issues and the timeline for when they'll be resolved, I think that cloud of uncertainty is working in the other direction to some extent. Certainly, lower rates are a positive though.

And our next question comes from Julio Romero with Sidoti & Company.

Hey, thank you for taking the follow-up. Can you elaborate at all on how shipments have trended through the first few weeks of July, just relative to the prior year?

Yeah, I mean, certainly favorable relative to recent disappointing shipment rates and somewhat favorable to the prior year. It's not running away from us at this point, but it's definitely stronger and we're glad to see that.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to H. Woltz for any closing remarks.

We appreciate your interest in Insteel. We look forward to talking with you at the end of the current 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.