H. Woltz - Chairman, President and CEO Mike Gazmarian - VP, CFO and Treasurer.

Chris Olin - Rosenblatt Securities Tyson Bauer - KC Capital Management Michael Conti - Sidoti Steve Morfea - Capital Securities Arthur Winston - Pilot Advisors.

Good day ladies and gentlemen, and welcome to Insteel Industries’ First Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. After the prepared remarks, there will be a question-and-answer session and instructions will follow at that time [Operator Instructions].

As a reminder, to our audience, this conference is being recorded. Now, I would like to turn the conference over to H. Woltz, Insteel’s President & CEO. Sir, you have the floor..

Thank you, Bryan. Good morning. Thank you for your interest in Insteel and welcome to our first quarter 2016 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 the macro indicators for our construction end markets. Then I will follow up to comment more on market conditions and our business outlook..

Thank you, H. As reported in this morning’s press release, Insteel posted strong results for the first quarter of fiscal 2016 driven by continued margin expansion.

Net earnings grew 62% from a year ago to $6.7 million or $0.36 per share from $4.2 million or $0.22 per diluted share rising to the second highest level in our history for the first quarter. Net sales for the quarter fell 16.5% from last year on a 9% decrease in shipments and an 8.3% reduction in average selling prices.

On a sequential basis, net sales were down 21.8% from the fourth quarter due to a 19.9% drop off in shipment and a 2.3% decrease in average selling prices. Around half of the year-over-year and sequential shipment decreases were driven by our fiscal calendar and the inclusion of an extra week in our fourth quarter, which last occurred in fiscal 2009.

The addition of a week had the effect of extending the end of the first quarter from December 26th to January 2nd and eliminating the week ended October 3rd in effect adding one of the seasonally slowest weeks of the year and dropping a stronger week that fell within our busy season.

On a pro forma basis, adjusting both quarters to reflect the same dates and duration as the prior years, the year-over-year shipment decrease was 4.6% instead of 9% that was reported and a sequential decrease from Q4 to Q1 was 8.9% rather than 19.9%, which is actually lower than the seasonal reduction we typically experience between the periods.

Over the past few weeks, our order book has strengthened and shipments have trended above expected levels. Although, I would caution that we’re still early in the second quarter and our volume over the remainder of the period can be significantly impacted by the relative severity of the winter weather as we’ve seen in prior years.

Gross profit for the quarter improved to $16.4 million from $12 million a year ago with gross margins widening 690 basis points to 17.8% from 10.9% due to higher spread as the continued reduction in raw material costs exceeded a smaller decrease in average selling pricing and more than offset the impact of the lower shipments.

As we’ve indicated on prior calls, considering that we’re typically carrying around three months of inventory valued on a FICO basis, the raw material costs reflected in cost of sales for any given quarter are largely associated with purchases made in the previous quarter.

And the declining price environment as we’ve experienced over most of the past year, this time lag has the effect of deferring the favorable impact of a reduction in raw material costs until the higher cost inventory purchased in earlier periods is sold.

At the end of the first quarter, our inventory position represented around 3.5 months of shipments on a forward-looking basis calculated off of our Q2 forecast.

So as we move in to our second quarter, our spreads and margins should be favorably impacted as the more recent lower cost purchases are gradually reflected in cost of sales, assuming that the selling prices remain flat or fall to a lesser extent.

For those of you that may have noticed, we elected to drop the capacity utilization metric that was previously reported in our earnings release as it was subject to misinterpretation when there’re changes in our product mix. We believe the percentage change in shipment serves as a more accurate indicator of our volume trends.

SG&A expense for the quarter rose $0.7 million from a year ago to $6.3 million primarily due to higher accrued incentive compensation expense driven by the improvement in our results over last year. As a result of the strong operating cash flow for the quarter, our cash balance increased by $12.4 million to $45.6 million.

Following the end of the quarter, we paid the special cash dividend of $1 per share that we had declared in December which totaled $18.6 million. We ended the quarter debt free with no borrowings outstanding in our credit facility, providing us with the liquidity to meet our funding needs and the flexibility to pursue additional growth opportunities.

As we look ahead to remainder of fiscal 2016, the leading indicators for nonresidential construction are pointing to continue to improvement. Yesterday, the American Institute of Architects reported that's Architectural Billings Index ended the year in positive territory rising to 50.9 in December.

Over the course of 2015 the ABI remained above the 50 growth threshold for eight of the 12 months, implying further improvement in nonresidential building construction in the coming year. The institutional sector continued to be the strongest performer as it has now posted increases for 19 straight months.

The Dodge Momentum Index another leading indicator for nonresidential building construction rebounded 4.1% in December after reflecting some softening over the prior two months.

On a year-over-year basis the overall index was up 2.4% driven by the strength in institutional projects, which were up 15.8% and more than offset a 6.7% decrease in commercial projects.

In its latest release, Dodge indicated that strong industry fundamentals should drive renewed growth in commercial project planning activities during 2016 and attributed the increase in institutional project activities to the recent passage of construction bond measures and the improved fiscal help of state and local governments.

The outlook for infrastructure construction has brightened with the recent passage of the FAST Act which provides $305 billion of funding over a five year period for our nation's surface transportation program. Of this total $207.4 billion will be targeted at the federal highway systems and apportioned among the states based on formula.

The average annual funding level of nearly $41.5 billion represents about a 10% increase in nominal dollars over the duration of the bill, reflecting a 5% increase in 2016 followed by 2% increases in the subsequent years that should essentially hold real dollar spending constant.

The longer five year duration represents a significant improvement over the 36 short-term expansions that have been passed since the last bill extending more than two years, expired in September 2009.

The higher degree of funding certainty should shift the project mix for larger, longer term projects that generally require greater usage of our concrete reinforcing products as compared to the repetitively maintenance work that consume the bulk of the funding provided by the stimulus passage of 2009.

A recent announcement by the Portland Cement Association regarding the impact of the FAST Act on cement consumption estimated that 25% of the spending authorized for given year would occur in the year appropriated, 50% in the subsequent year, 15% in the third year and 10% in the fourth year following the initial authorization.

In addition to the positive developments at the federal level since 2012, 23 states have raised new revenue to fund their transportation needs with 12 states successfully passing bill in 2015 alone. I'll now turn the call back over to H..

Thank you, Mike. During the first quarter, demand for our reinforcing products reflected the usual seasonal downturn related to winter weather conditions and holiday schedules. As we look ahead to the remainder of fiscal 2016, macro indicators and customer sentiment remain positive, point to continued growth.

We're also encouraged by the more robust rate of order entry and our shipping trends thus far in January which have exceeded expectations. We believe the normal positive seasonal influences that should begin to become evident in a few weeks will sustain a favorable market environment for Insteel as we ahead into the balance of the fiscal year.

In our last few earnings calls, we commented on the potential for expanding spreads driven by declining prices for steel scrap, our primary raw material, steel wire rod together with stable or more slowly declining selling prices resulting from the cyclical recovery in the construction sector.

Our Q3 2015 results reflected the initial impact of these favorable trends, which became more pronounced during the fourth quarter and continue to benefit us during the first quarter of fiscal 2016.

There are indications that the trend of sharply declining steel scrap and wire rod pricing may have run their course for the near term in view of the $30 per ton spike in January scrap prices.

We believe however that the seasonal factors constricting scrap supply during the winter months are primarily responsible for the uptick rather than higher demand since steel mill capacity utilization remains weak almost across the board.

Also, softening economic conditions in many regions of the world argue against the near term recovery in steel demand sufficient to reverse the weak pricing trends for iron ore, steel scrap and wire rod.

China and Russia are struggling with poor home market demand and capitalizing on the depressed metallic's market by exporting substantial volumes of finished and semi-finished steel which has depressed prices throughout the supply chain.

Fortunately demand trends in our markets are more favorable, which has allowed us to benefit from the drop off in our raw material costs. Towards the end of our second quarter or early in our third quarter we expect a competitor to start up a new PC strand production line that is being installed in South Carolina.

We expect the additional capacity will have minimal impact on our PC strand business assuming the market continues to grow.

Turning to CapEx, despite the modest level of expenditures reflected during Q1, we expect outlays to rise to approximately $20 million in 2016, which includes a $9 million investment in our Houston PC strand facility to upgrade equipment and install a new state of the art wire rod cleaning process comparable to our Gallatin and Sanderson strand plants.

The addition of new cleaning capabilities at the Houston facility will eliminate a high cost process that constrains the capacity of the plant and adversely affects its yield and productivity.

Coincident with construction of the new cleaning operation, we’re removing antiquated PC strand production lines from the plant and replacing them with modern equipment that was previously operating at the Newnan plant, thereby increasing the capacity at Houston by approximately 40%. Construction is underway and is proceeding on schedule.

We expect to commission the cleaning facility and the relocated equipment by the end of the first fiscal quarter of 2017. As we approach the completion of the first phase of the Houston project, we expect to add a third PC strand production line at the facility to align our capacity with the requirements of the Texas market.

The addition of the third line, which would likely fall within fiscal 2017 is expected to require a $4 million to $5 million investment over and above the outlays for the current improvements.

The economies of scale that are attainable through ramping up the volume of the facility are significant and represent a considerable competitive advantage for Insteel, relative to other domestic PC strand producers.

We have reported in recent conference calls that we were commissioning a new high volume standard welded wire reinforcement production line at our Hazelton facility to replace obsolete technology and allow us to increase production of certain SKUs for which we have routinely experienced capacity constraints.

While we originally expected the line to be operational during the third fiscal quarter of 2015, our equipment vendor experienced technical difficulties that delayed the ramp up of the line which contributed to higher operating costs, poor customer service and loss sales during the second half of fiscal 2015 and the first quarter of 2016.

During the third quarter of 2015, the new line achieved approximately 40% to 50% of expected output rising to 70% to 80% of expected output during the fourth quarter of 2015. Design modifications completed during the first quarter of 2016 allowed us to ramp up production to approximately 90% of expectations during the latter part of Q1.

We have recently achieved output levels that are between 90% and 100% of expectations.

Importantly, as we head into the seasonally strong selling season of 2016, we expect to have adequate inventories and the required mix of SKUs to provide our customers with the high level of service there were accustomed to receiving from Insteel prior to the unfortunate events of 2015.

To conclude our prepared remarks, we believe the recovery in non-residential construction markets will continue through 2016. In addition, we expect to benefit from favorable business conditions created by improved demand for our products together with weaker commodities markets.

Consistent with prior periods, we’ll continue to focus on achieving further improvements in the effectiveness of our manufacturing operations and identifying additional opportunities to broaden our product offering and grow through acquisitions. This concludes our prepared remarks and we’ll now take your questions.

Bryan, would you please explain the procedure for asking questions?.

My pleasure [Operator Instructions]. Our first question comes from Chris Olin with Rosenblatt Securities. Your line is now open. Please go ahead..

I just had two follow up questions regarding non-res demand. And I guess Mike first you talked a little bit about some of the shipments were running ahead of expectations for the quarter.

I guess I was curious, how much of that would be attributed to weather versus better spending dollars flowing through?.

I don’t know that we can get that granular at this point as far as segregating those drivers, but we have seen a pretty significant rebound over the first few weeks of this quarter. Although, as I indicated this quarter is always sensitive to weather conditions as we’ve seen in prior years.

But considering the positive and macro indicators and favorable customer sentiment we are optimistic about the prospects for the remainder of the year..

Okay.

Also can you talk a little bit about what you may be seeing in the Texas market and I guess, I'm familiar with demand being good there but since the oil correction has started, there has been some talk of potential weakness in some of these regions that have benefited from that, have you seen any kind of indicator, where there could be some weakness going forward in those areas?.

I would say, we have read about the prospect for weakness in the Texas market and not to this point. The oil weakness has really not had an adverse impact on our business..

Okay, great. Thank you..

Thank you. Our next question comes from Tyson Bauer of KC Capital Management. Your line is now open. Please go ahead..

Good morning, gentlemen.

You talked about the steel costs in raw materials somewhat stabilizing or expected to remain more within the range, is that making your ability to maintain the spreads more likely to hold as we go through this fiscal year than having a volatile raw material price spiking and hitting troughs?.

It's really hard to generalize, Tyson. I think that as we pointed out previously that the primary driver of any pricing power that we may have in the market is based on demand for our products, on raw material costs or secondary consideration.

My guess is that if demand continues to improve then we will maintain attractive margins, if demand were to substantially fall off then I think it's a different ball game..

Given the weather issues we had last year in fiscal Q2 and Q3 as far as snowfall in the Northeast and then the wet weather that followed in the Texas market in the South, it would appear you had some very favorable -- or the opportunity for some very favorable comps over the next couple of quarters.

Given that and the budgetary increases we've seen of the states in the federal level, do you have a general volume outlook or shipment outlook that you're targeting for fiscal '16?.

When we did our forecast for fiscal 2016, it included a rather modest unit shipment improvement and that actually came to pass more or less during our first quarter and as Mike pointed out we've started out the second quarter on a much healthier pace but as you know, our insight is very limited..

Last question, kind of give us a little bit of color on that PC strand market, you did have some of the protections in place from imports coming in although the dollar would suggest that's more difficult to compute against, but you have a new competitor in South Carolina.

You yourself have described putting in a third line in Houston, give us a little sense of what your position is in that Texas market for PC strand and overall why we're starting to see a recovery and people putting dollars into that area?.

Wow that was a lot. Let me start at the end and try to answer on your last question first and that just addresses the new investments and new competitors and new capacity there in the period where it's not clearly justified.

And as we've pointed out many times, this is a phenomenon that has recurred in this marketplace, really over the course of my career. Even through the 2009 and 2010 downturn we saw investments made in new capacity that really would be hard to justify from a supply and demand point of view. And so we can't explain it but it's nothing new.

In terms of Insteel's position in the Texas market and PC strand, as you know that was a driving force behind the acquisition of the American Spring Wire PC strand assets. It is the largest consuming market.

And what we saw there, was the ability to acquire the ASW assets which were high cost assets from a conversion and operating cost point of view, but we had between our market share at Insteel and ASW's market share, we had enough scale to transform that manufacturing facility into a highly cost effective facility and to effectively serve the Texas market.

So that's the plan that we're executing on.

And then finally in terms of PC strand imports, yes, we've been active over the years in pursuing antidumping and countervailing duty cases as may be warranted under the circumstances and generally in PC strand we've been successful with all the cases that we've pursued and those countries and those sources continue to be out of the U.S. market.

But as is always the case new countries replace those who have been closed out by trade actions and we see that now. We see the volume of PC strand imports ramping up. And I think it's driven largely by just the un-effective economics worldwide in terms of supply and demand and the U.S. remains an attractive spot.

So, we are accustomed to PC strand imports coming into the market and we’re accustomed to competing with them in the marketplace and to pursuing trade actions when they’re warranted..

Thank you. Our next question comes from Michael Conti with Sidoti. Your line is now open. Please go ahead..

Can you just go I guess in just a bit more detail on the declining shipments? I mean is that a function of just weaker -- I guess which one of your targeted end markets saw greater year-over-year decline? And just geographically speaking, are you seeing any pockets of weakness anywhere in the country?.

I wouldn’t say that any particular geography stands out as weak or as declining other than weather-related. Certainly, the northern tier is not very active these days and won’t be until the weather improves.

But otherwise, the volume trends that you’re seeing in our numbers I think are more a function of just holiday schedules and winter weather up to this point..

And I guess with the recent passing of the FAST Act can you just talk about how that may impact your product mix going forward? Should we start to see a greater adoption of a particular product line and then just assuming that raw materials stay flat from here, how should we think of margins going forward?.

I would say that in the infrastructure segment of our market the primary product lines that benefit for Insteel are PC strand, engineered structural mesh, and pipe reinforcing. And to the extent that FAST is simulative of infrastructure construction, you would see those three product lines benefit the most here at Insteel.

Although, it’s very difficult for us to delve down into the level of details that would allow us to quantify it..

But I am assuming the engineered structural mesh that comes at a higher selling price just given that it’s more of an engineered type product?.

Higher than what, Mike?.

Higher than some of your other product lines of pipe reinforcing of the three that you just mentioned?.

I don’t really think you can generalize that way, typically that is the case. But each job is different..

Thank you. Our next question comes from Steve Morfea with Capital Securities. Your line is now open. Please go ahead..

Just sort of more of a macro question I should say.

Given what’s going on in China, where China keep themselves whatever moving forward on a positive direction, whatever the numbers maybe, what do you anticipate their movements might do to various prices in the metals going forward, if any?.

I think they’re largely responsible for disruptions that you’re seeing in the steel market worldwide, not to mention other markets. But the Chinese have been somewhat out of control for years.

And I think as their markets have turned down, their steel production has not turned down proportionately and it actually flooded the entire world with unrealistically priced finished product and semi-finished product. And I think they are the driver of most of this weakness.

And I see nothing on the horizon that would cause me to believe there is going to be a significant change..

Thank you. [Operator Instructions] Our next question comes from Arthur Winston with Pilot Advisors. Your line is now open. Please go ahead..

What percentage of your sales would nearly come from the business of the new legislation the FAST program that you alluded to?.

We’ve estimated that around 35% of our revenues are infrastructure related for roads and bridges. When you consider the funding sources historically federal funding is represented around 50% of the spending at the state level..

So it's about 20%, 15% to 20%, okay, that’s good. My next question is from what you said, no particular customer could result in having a lower spread because the spread is a function as you put the demand -- the aggregate demand and then what’s going on with the question of raw materials.

So that basically if demand and raw materials continue at the rate they are what's your best guess and your best estimate of field that the spreads will more or less stay the same, is what you are saying?.

Selling prices and steel wire rod prices are correlated over the longer term but a spike in raw material costs doesn't entitle us to raise our selling prices nor does a collapse in raw material prices obligate us to reduce our selling prices.

Our selling prices are really more a function of conditions of supply and demand at our level of the supply chain..

Okay. And I just want to -- understood. I have one other question, which I don’t know if you want to comment.

But can you give any color on why the Board of Directors chose to give out this $1 dividend rather than store it for future acquisitions, actually raise the quarterly dividend, what do you think -- what were they thinking in your mind?.

I can give you a pretty good idea. We had accumulated a cash balance that was above and beyond the needs of the business. As we're looking forward, we have unused credit facility. We've plenty of liquidity.

We can grow our business the way that we want to without the cash that was paid out and we have a history of returning excess cash to our shareholders and it was as simple as that. That was the motivation behind it..

Thank you for answering all my questions..

Thank you. Our next question comes from [indiscernible]. Your line is now open. Please go ahead..

Thanks for taking my question. I just wanted to circle back on the shipment.

Just curious where the shipment came in the quarter relative to your internal plan and would the distribution channel be a factor in the shipment decline or any of the utilizations at any your facilities, I'm just curious about the decline in shipments in the quarter?.

Yes, I'd say that the shipments were softer than we had anticipated for the quarter, but the Q4 has been notoriously difficult for us to forecast due to the seasonal factors that are applied between the weather and holiday schedules and I guess we're hopeful that the weakness that we experienced will prove to be short lived considering that the rebound that we've seen so far in January.

In the past we've gone through similar stretches where there maybe lows in demand that appear to be out of sync with some of the macro indicators.

But over the longer term it intends to be a closer correlation, so it's difficult for us to really -- when you go through a short stretch like that where demand is falling, it's difficult to really pinpoint what's driving it and you generally have to look out over a longer period as well as find some conclusions..

So we should expect to see some improvement here in your fiscal second quarter perhaps?.

Well, we are off to a strong start, which is encouraging but again there is a caution that weather is a pretty significant factor. Last year, it was to the negative and it can obviously go in the other direction but we're encouraged by what we've seen so far..

And what are the inventories in terms of the distribution channel [indiscernible]?.

At our customers?.

Yes..

We don't sense that there has been any movement in either direction. I think just in the current environment customers have planned it generally close and not speculating in either direction..

Yes, I'd to add that customer sentiment is almost for us a positive. So, I don't detect that there has been any unplanned inventory build in the supply chain of downstream from us..

Okay. Terrific. Nice quarter. Thanks..

Thank you. There are no further questions. I would now like to turn the call back to H. Woltz, Insteel's President and CEO for closing comments..

Thank you, Bryan. We appreciate your interest in Insteel and we'd encourage you to call and check in with us if you have further questions. Thank you..

Ladies and gentlemen, this does conclude today's program. And you may all disconnect. Everybody have a wonderful day..