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

Chris Olin - Longbow Research Tyson Bauer - KC Capital Lance James - RBC Global Asset Management Fran Okoniewski - Friess Associates Rohit Seth - SunTrust Robinson Humphrey Julio Romero - Sidoti & Company.

Good day, ladies and gentlemen, and welcome to the Insteel Industries' Third Quarter 2017 Conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, H. Woltz, President and CEO of Insteel Industries' Incorporated. You may begin..

Thank you. Good morning. And thank you for your interest in Insteel and welcome to our third quarter 2017 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 third quarter financial results and the macro indicators for our end markets. And then I will follow-up to comment more on market conditions and our business outlook..

Thank you, H. And good morning to everyone joining us on the call. As we reported earlier today Insteel's net earnings for the third quarter fiscal 2017 fell to $6.9 million or $0.36 a share from $13.5 million or $0.71 to diluted share last year.

Our results for the quarter were adversely affected by unusually weak shipments during what is typically one of the seasonally stronger periods of the year together with narrower spreads due to higher raw material cost.

Shipments for the quarter were down 20.8% year-over-year and 7.5% sequentially from Q2, as compared to an 8.8% increase between the second and third quarter last year reflecting the higher variability and demand we've experienced this year, due to fluctuations in weather conditions and the timing of large projects.

We believe the volume drop off was driven by a combination of the unusually wet weather in many regions of the country. Involve [ph] a new project activity and competitive pricing pressure that were compounded by the weak demand.

Rainfall in the Southeast, Midwest and Northeast regions of the country was up 36% to 63% year-over-year for the quarter which offset the more favorable weather in our largest market Texas. The resulting deferral business from the construction delay should benefit us in future periods although there is no way we can estimate the impact at this time.

Many of our customers were also negatively impacted by a significant slowdown in business during the quarter, due to a reduction in new projects relative to work that was in process or completed.

The weakness appeared to be more prevalent in the publicly funded infrastructure segment of the market and should subside in the coming months as a higher spending levels that have been authorized by numerous states and cities began to have an impact.

Average selling prices for the quarter rose 3.5% sequentially from Q2 as a result of the price increases we implemented to offset the recent escalation in our raw material cost. The amount realized was sufficient to provide for a slight sequential improvement in spread that fell short of our announced increases due to competitive pressures.

Gross profit for the quarter fell $10.9 million from a year ago to $16.7 million while gross margin decreased 660 basis points on the lower sales to 17.2%.

More than half of the reduction was due to the drop off in shipments about a third was driven by the narrowing in spreads relative to the prior year and the balance was from higher unit manufacturing cost and the lower production volume.

On a sequential basis gross profit fell $1.6 million from the second quarter and gross margin narrowed 90 basis points primarily due to the reduction in shipments and to a lesser extent higher unit manufacturing cost which were partially offset by the improvement in spreads.

SG&A expense for the quarter fell $0.6 million from a year ago to $6.2 million on lower compensation expense primarily related to reduce incentive comp under our return on capital plan. Excluding the incentive comp expense our SG&A costs were down $0.1 million or 4.7% from last year.

Our effective income rate for the quarter was essentially unchanged to 33.9% versus 33.8% a year ago and 33.8% year-to-date compared to 34% for the same prior year period. Moving to the balance sheet and cash flow statement.

Our inventory position rose $24.5 million from the second quarter and was primarily responsible for the year-over-year reduction and cash flow from operations for the quarter.

Most of the increase was planned in response to the trade cases that were initiated by domestic rod producers as well as the potential tariffs and quotas that could result from the Section 232 investigation with the balance resulting from the weaker than expected demand.

Based in our forecasted shipments for Q4, we ended the quarter with close to four months inventory on hand, valued in an average unit cost that was below the current market level, but above the beginning average for the quarter as well as Q3 cost to sales.

These higher costs could pressure our margins in the fourth quarter depending on the relative strength to demand and our ability to raise prices further. We ended the quarter with $37.8 million cash on hand or about $2 a share and no borrowings outstanding on our $100 million credit facility providing us with plenty of financial flexibility.

As we move into our fourth fiscal quarter, customer sentiments remains positive, project pipelines appeared to be healthy, and activity levels are expected to improve in the coming months.

The most recent reports for the Architectural Billings Index and Dodge Momentum Index reflect favorable trends that imply further improvement in non-residential building construction in the coming year.

Yesterday, the American Institute of Architects reported at the ABI remained above the 50 growth threshold for the fifth consecutive month rising to 54.2 in June from 53 to previous month. Through the first half of the year, the index has averaged 52.1 compared to 51.2 for all the last year and 51.6 for 2015.

In June, the Dodge Momentum Index rose to its highest level in 8.5 half years in the three month average, where it smooth's out the usual month-to-month volatility was up 16% year-over-year reflecting similar increases in both the commercial and institutional components.

The most recent construction spending data reflects the continuing disparity between the private and public sectors and the relative weakness in infrastructure investments. Through the first five months of the year, private construction spending was at 9% from a year ago with non-residential up 5.3% and residential up 12.4%.

Well public construction spending was down 3.5%. Public highway and street construction one of the larger end uses for our products was down 1.3% following last year's modest 1% increase.

We expect the public sector activity will begin to pick up later in the year as a recent funding increases provided for through various ballot initiatives, field tax increases and other measures at the state and local level translate into higher infrastructure spending. I will now turn it back over to H..

Thank you, Mike. As reflected in this morning's press release. Demand for our reinforcing products was weaker than expected during the quarter as well as compared to last year.

While leading indicators continue to reflect underlying strength than non-residential construction markets with the prospect for further growth adverse weather conditions in certain regions and project delays particularly in the publicly funded infrastructure segment of the market combined to have a significant unfavorable impact on shipments during Q3.

The disappointing demand coincided with our efforts to increase prices to recover raw material costs that began escalating during our first fiscal quarter. As we mentioned in the Q2 call, we expected the usual favorable seasonal factors which support these efforts.

Unfortunately, the seasonal pick up and demand fail to materialize and certain competitors elected to maintain or reduce their prices in the weaker environment. Any incremental business that competitors may have gained through these tactics should prove to be short-lived.

Looking forward, there are some indications that the seasonal uptick and demand may have gained some momentum following the July 4th, holiday period as shipments have improved to a level closer to expectations.

However, we're likely to continue to experience some margin pressure until demand picks up to the point where the industry has additional pricing flexibility.

Turning to inventories, as Mike indicated the pronounced build and during Q3 followed the initiation of wire rod trade cases targeting 10 countries that supplied the majority of imports to the US and the initiation by the Department of Commerce at Section 232, Investigation of Steel Imports.

We elected to increase our raw material inventories to bridge the transition to new offshore sources and to manage the risk of supply interruption or dislocations that may result from changing conditions in the steel market. In addition, our shipment shortfall contributed to higher inventory levels.

Based on our most recent forecast, inventory should be close to their peak level and are expected to decline through the fourth fiscal quarter. We believe the rationale behind our decision to build inventories continues to be valid and we're not uncomfortable with our position in view of this favorable carrying value relative to market.

Turning to CapEx, we previously indicated that we expected CapEx for 2017 to come in at approximately $25 million while acknowledging that our estimates have tended to be on the conservative side, while the timing of outlays is difficult to pin point due to supplier and contractor schedules, we continue to forecast the 2017 expenditures will fall between $20 million and $25 million.

The scope of the anticipated projects has not changed as we continue to aggressively pursue attractive growth and cost reduction opportunities as rapidly as our internal resources allow.

Two major projects have been completed during the year with the commissioning of new raw material, cleaning and PC strand production lines at the Houston plant and the new ESM production line at the Missouri facility.

These projects will have a beneficial impact on our operating costs as well as expand our range of products, improve our quality and service and increase our capacity to serve growing markets.

Looking forward to 2018, we expect to make additional investments in our ESM product line to further upgrade our technology, expand our product range and reduce operating costs.

We plan to pursue a number of other cost reduction and modernization opportunities as well and we'll provide additional guidance on 2018 CapEx during our next conference call. This concludes our prepared remarks and we'll now take your questions.

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

Thank you. [Operator Instructions] And our first question comes from Chris Olin of Longbow Research. Your line is now open..

I'm wondering if you can extract the weather impact and maybe tell us, what the volumes would have looked like if we had kind of normalized season..

I don't know if there's any way that we could make a real valid estimation of that, it's - I think beyond our capability..

Okay, how about in terms of you're talking about some project delays and some of these new projects not breaking ground yet.

Is there a region where you're seeing slower activity versus your previous expectations?.

I wouldn't call it regional as much as it is, focused on the publicly funded sector.

We saw a slowdown and highway lettings that was on reasonably widespread and as you know, we've also hit the end of fiscal years for governmental entities which frequently come with funding lapses or funding slowdowns and anecdotally we believe that those factors were at work, during this quarter..

Okay and then just lastly. I think I heard you say July is trending closer to expectations and I guess I'm just curious exactly what that means.

Are we now seeing positive volume growth? Have you seen these project delays break ground now?.

Well I would say really it means is exactly what we said, that it's closer to expectations but that doesn't necessarily imply that it's robust..

Does it imply volumes are positive when you look at it year-over-year start going to some easy comps, right?.

No..

Okay, thanks..

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

Couple of quick questions, as we've seen in the past quarters or years when you've had weather events or other delays in the projects. Is everything kind of get pushed to the right of the calendar? We don't necessarily recoup in the subsequent quarters, we just kind of get back to more expected a normalized situational of [ph] shipments..

It's typically a timing issue, where the works deferred and we see a benefit at a later time. Although it's always difficult to predict the timing or magnitude of the impact.

Especially in the current environment just with many of our customers dealing with labor constraints that makes them more challengingly to immediately ramp up, so it could take some time for that benefit to work its way through..

So given the history, would you say we kind of get back to a normal situation on shipments and for your fiscal Q4 and then we may see some upside potential in your first fiscal quarter for 2018 as things kind of go into those early winter months, where they try to catch up what was delayed in this current quarter..

That's probably a fair expectation..

The talk of the tariffs got a lot of bluster that's kind of come in a little bit with the new section that they're trying to get in, where you would limit some of the comment period for a public and in acting some of those tariffs, the decision looked like it was, management was in response to those kind of concerns that it also have an impact in the industry on how they acted not knowing whether or not we would have steel tariffs enacted and now that it's more uncertain today than maybe it was 30 days ago.

Does that change the sentiment within the industry?.

I would say the biggest impact of the looming Section 232 is in combination with the trade cases that are being pursued on wire rod. I think that there is a sense among the wire rod producers that they're going to gain some relative power through strengthening markets that they're driven by these factors.

I would say that probably hasn't happened at this point, but that would be the biggest impact on that [ph] I see on our business at this point..

Okay.

In regards to the increased spending especially at the federal and state levels, just the passage of a federal budget hopefully on time - we quantify what increase and spending that implies along with some of these states that have already passed theirs in the spring and summer timeline as opposed to isolating out a separate infrastructure build that may or may not occur.

You do have growth coming to you just from passing the budget as it stands now along with those states, correct.

And could you have any idea of what that is?.

There would definitely be a benefit from the budget being resolved in a timelier manner this year, you may recall last year, there were couple of short-term continuing resolutions that just created some uncertainty in terms of the FAST Act funding so ideally the Congress would be able to land on an annual measure this year.

In terms of the impact, the FAST Act provided from relatively modest annual increases in the 2% range, so just in terms of the impact on our business. It would be relatively modest.

The bigger question marks, the status of the additional infrastructure package where the level of uncertainty on that is, is obviously is risen just with what's going on with the Health Care Bill and Tax Reform and so on and so, the timing and end result on that's probably a little more uncertain than it was, this time last quarter..

Okay. Thank you gentlemen..

Thank you. And our next question comes from Lance James of RBC Global Asset Management. Your line is now open..

Couple questions on your competition.

First off, is the bulk of it domestic and would you characterize it is local/regional or do you have other national competitors that you're dealing with, as you try to get better pricing?.

In answer to the first part of the question, yes it's primarily domestic competition. We compete with imports and one segment of our PC strand business but it's a fairly narrow and targeted segment. So the overwhelming majority is domestic competition.

Our markets are regional and even local in nature and while we have competitors who are active in multiple geographies generally we would take a view that these markets are local and regional..

Okay and I guess my second question would be, maybe a broader question. How do you view relative to the competition what your competitive advantages are and what gives you the confidence that as demand comes back, that you're going to able to again get the type of margins or even better than you've been able to achieve in the past.

So I guess it's sort of a broader question on what you view as your competitive advantages..

Well, I would say first that no one should underestimate the competitive nature of this market place.

Our business is a highly competitive business and our focus to gain advantage has been really on execution, in our manufacturing opportunities and providing our people with the best possible technology both in our factories and through our information systems.

And as for what the future holds for margins, it's difficult to say but I would point to looking over the last many years absent the period of the great recession that I don't think that there is any reason that we can't expect to continue to generate margins that are consistent with past history and as we continue to move our products up the value chain and add more value in markets, where we can retain that value then we would expect to see favorable margin results from that pursuit.

So despite the rather ugly comps that were reported today, we believe the future is good for the company and that we're positioned to execute and compete very effectively, in our markets..

That's great and that kind of leads into my last question, what you may have already partially answered there, which is; the increase in the CapEx, is that tied to again maintaining your competitive advantages.

Is it tied into your confidence that final demand is going to lift up, so that you can really get operating leverage? I guess what gives you the confidence to keep on, let's not say aggressive but certainly a good strong CapEx program?.

We're going to take advantage of the technological developments that will give us the operating edge and our manufacturing facilities as well as to support our growth in our engineered structural mesh marketplace where there have been, they're ongoing considerably important developments that will provide us the ability to lower cost and improve the range of products that we offer and then the other, of course the other major part of CapEx that we've had during 2017 has been the expansion of our Houston facility, which is a one-time investment that will bring the cost of that facility in line with Insteel expectations.

So we have every confidence that our markets will continue to grow and support the CapEx that we need to make to maintain our competitive edge..

Terrific. Thank you very much..

Thank you. And our next question comes from Fran Okoniewski of Friess Associates. Your line is now open..

I'm just a little curious, if you kind of go into a little bit more detail on the PC strand versus the welded wire reinforcement.

Did you see more weakness in one of those divisions than the other? Is there any sort of mix just to maybe a temporary sort of pause and demand for whatever reason in either type product?.

No, I would say that the weakness we saw was across the board in all our product lines and within welded wire reinforcing, we have three different product families each of which displayed weakness as well as our PC strand displayed weakness..

And then you guys have some new competition on the PC strand side, I guess Wire Mesh Corp is starting or has started up a new South Carolina facility.

I think you guys have talked about that on previous conference calls and I can't remember the name of the other company or maybe it's the same one that's supposedly starting at PC strand competitive type product in Texas sometime in 2017.

Can you talk a little bit about those, are they sort of adding to the supply to the market, maybe taking away a little demand or what's happening with those folks?.

The Wire Mesh Corporation expansion into South Carolina was about 15 months ago, so when they started up.

And certainly they've had an impact on the market and the other expansion that is starting up as we speak in Dayton, Texas part [ph] assuming in the wire products and yes it definitely will have an impact on the market particularly at a point in time when there is a lulling demand as we've seen.

This is not unexpected, it's unwelcome, but it's not unexpected and we'll work through it and assuming that the PC strand market grows as it has in the past and that there is a recovery and demand. We have every expectation that the market will absorb that capacity..

Okay, all right. Thank you..

Thank you. And our next question comes from Rohit Seth of SunTrust. Your line is now open..

Could you maybe talk about some of the geographic trends and where you're seeing any strengths or weakness, maybe Texas and talk about the Southeast and compare contrast [ph] thanks..

Well I think to the extent that weakness is been driven by weather it's probably not as much Texas as it has been, the rest of the country during the previous quarter. But I wouldn't single out any particular region as an outlier. The weakness has been somewhat across the board..

The comparisons for the quarter are all significantly impacted by the weather. In Texas the weather conditions were actually more favorable than a year ago, when we were dealing with slowdown relating to the excessive rainfall and flooding, so that actually moved to the positive this year and then, and other regions of the country.

It swung in the other direction in the Southeast in particular. The heavy rainfall, even up in the Pennsylvania, the Northeast, we had a pretty significant impact during stretches of the quarter..

Got you.

And can you remind us what the breakout is and geography, the percentage of revenue?.

Yes, I think in the past yes we've kind of limited that disclosure to Texas being our largest market right in the vicinity at 20% of our shipments..

Got you, all right. All right, that's fair and I guess that's all I had. Thank you so much..

Thank you. [Operator Instructions] And our next question comes from Julio Romero of Sidoti and Company. Your line is now open..

Yes, so just regarding weather. So in fiscal 2015, we saw a similar weather backdrop, in that we saw some localized flooding in some of your key areas albeit in different geographical regions this time around. But we didn't see the sequential decline in shipments that we saw this quarter.

So that being said, is there something structurally different on the demand side that you've seen this quarter or is it just the combination of weather along with the lull in public, non-res spent..

Julio, I would have to say it's the latter. We haven't seen customers lay off employees and reduce operating hours during our third fiscal quarter in a long time and we did see some of that, during the current quarter.

So and of course while, we can all agree the weather statistics and we know what's going on, so much of this anecdotal that it's difficult to quantify except, we talked to our customers and we see what they're doing and we see, we're aware of what they're bidding or what they're not bidding at the time.

So I think that certainly weather has exacerbated the situation for our third quarter, but there is also just been a lull in demand and I think it has been focused mostly in the publicly funded sector and would probably have its origins around funding questions..

Okay and you mentioned project pipelines appear to be healthy, what gives you confidence that lull that you're seeing in public non-res should be subsiding in the second half of this calendar year versus say early calendar 2018 or even further out than that..

Again it would be - the discussions with customers and then you have the backdrop of some improved funding on the parts of states, who have taken the funding matter into their own hands to address their shortfalls and we've seen over the last couple of months that the level of momentum in our markets has actually begun recovering.

So if we take all of those factors and assessing as a whole, it appears that we're seeing a recovery in those markets..

In terms, just in terms of the sequential trends. May was clearly the low point for us during the quarter in terms of the year-over-year reductions. In that, it fell off some, in June we're still down from the prior year but it fell off from what we experienced in May and the same holds true for July, so far.

So I mean it's moving in the right direction, but it's still not all the way back to what you would expect for this time of year..

Understood. And just to lastly to piggyback on earlier callers question. Can you quantify at all and provide some color on how much of an impact tropical storm Cindy had at the very tail end of the quarter? I know it went through Louisiana, Arkansas some of your South Central areas..

No other than - it's difficult to precisely quantify, I mean other than just looking at the comparisons between the rainfall levels and the change in shipments and then have to adjust for any customer specific issues in either direction.

So I mean in the case of that region, we did see a reduction in shipments overall, but I don't know that we can parse it down to that level, though..

Understood. Thank you..

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back over to H. Woltz for any further remarks..

Thank you for your participation in the call today. We appreciate your interest and don't hesitate to call us back, if you have follow-up questions. Thank you..

Ladies and gentlemen. Thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day..