Insteel Industries, Inc.

H.O. Woltz III – President and CEO Michael Gazmarian – VP and CFO

Casey Flavin – CJS Securities Robert Kelly – Sidoti & Company Nat Kellogg – Next Generation Equity Research [Walt Glazer] – Parthenon Capital

Thank you, Kim. Thank you for your interest in Insteel and welcome to our Second Quarter 2008 Conference Call which will be conducted Michael Gazmarian, our Vice President, CFO, and Treasurer, and me.

Before we begin, let me remind you that some of the comments that are made in our presentation are considered to be forward looking statements. Forward-looking statements 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. During our second quarter, we continued to face weak conditions in certain of our markets which reduced shipments and resulted in curtailed operating schedules at most of our facilities.

We also experienced unprecedented increases in our raw materials costs, a trend which has continued into our third fiscal quarter. Considering these significant challenges, we’re pleased with the Company’s strong financial performance for the quarter.

I’m going to turn the call over to Michael to comment on our financial results, and then I’ll pick it back up to discuss our business outlook.

Thank you, H. As we reported in this morning’s press release, Insteel posted strong financial results for the second quarter ended March 29th despite the continuation of soft demand in housing-related markets and unprecedented escalation in raw material costs.

Net earnings rose to $6.9 million from $4.9 million with diluted earnings per share increasing 44% to $0.39 from $0.27 a year ago. Market conditions continued to vary across product lines during the quarter, consistent with the latest construction spending data reported by the U.S.

Census Bureau. In the most recent report, which is for the month of February, the seasonally adjusted annual rate of total construction spending decreased 0.3% on a sequential basis, the fifth consecutive month it has fallen, and was down 3.5% from a year ago due to the continued weakness in the housing market.

After rising 14 straight months through last November, private non-residential construction has now fallen for three consecutive months, decreasing 0.1% from January. In spite of the recent drop off, it was still up 13.2% from the prior year while public construction was up 0.4% from January and 8.2% from a year ago.

Private residential construction dropped 0.9% from January and 18.8% from last year and has now fallen for 24 straight months. February spending was down 34% from its peak level of two years ago while spending for new single family homes fell 53% over the same period.

Insteel’s net sales for the quarter rose 3.3% from a year ago on a 10.6% increase in average selling prices which more than offset a 6.5% decrease in shipment. The reduced shipments were primarily driven by the same factors impacting us in recent quarters, our limited solicitation of PC stand business from post-tension accounts due to the impact of irrationally priced Chinese imports and weak demand from customers of greater exposure to the housing sector.

On a sequential basis, shipments are up 9.2% from the first quarter which was about in line with the 9.8% seasonal increase that we experienced between the same period as last year. Average selling prices for the quarter were up 7.2% on a sequential basis as a result of the price increases that were implemented during the quarter.

Our year-over-year product line shipment comparisons vary depending upon the extent to which they were related to non-residential versus residential construction. On a combined basis, shipments of PC strand to pre-casters and ESM shipments, which are both used almost entirely for non-residential construction applications were up 15.1% from last year due to the continuation of strong demand and the increase in contributions of our two new ESM line.

On the other hand, shipments of concrete pipe reinforcement and standard welded wire reinforcement, which have both been significantly impacted by the drop off in housing, were down a combined 20.9% from the prior year. Gross profit for the quarter rose 28% to $15.8 million from $12.4 million a year ago due to the increase in average selling prices which more than offset higher raw material costs, lower shipments, and higher unit conversion costs.

Gross margins improved to 20.4% from 16.5% a year ago and 16.1% in the first quarter. SG&A expense was up $0.6 million from a year ago, rising to $5.2 million from $4.6 million due to increases in incentive plan expense, employee benefit costs, and selling expense.

The increase in incentive plan expense was driven by the improvement in our Q2 financial results and outlook for the year from the forecast in which we had based the amount recorded for the first quarter. On a sequential basis, SG&A expense rose $1.1 million from the first quarter largely due to the same factors.

If Q1 and Q1 SG&A expense were adjusted on a pro forma basis to reflect the same amounts for incentive plan expense, the sequential increase would’ve been from $4.4 million to $4.8 million instead of $4.1 million to $5.2 million. Going forward, we expect SG&A expense to fall somewhere between the Q1 and Q2 levels in the range of $4.6 to $4.7 million per quarter; although, this line item is always subject to period-to-period fluctuations.

Interest expense which primarily consists of non-cash amortization of capital financing costs was relatively flat compared with last year, while interest income rose $0.2 million due to higher average cash balances in the current year. Our overall effective income tax rate for the quarter, including the discounts component was relatively flat at 36% versus 35.9% last year.

Moving to the cash flow statement and balance sheet: Operating activities of continuing operations provided $6.8 million of cash for the quarter while using $10 million a year as a result of the year-over-year changes in working capital and to a lesser extent the $1.9 million increase in earnings. The networking capital components of receivables, inventories, accounts payable, and accrued expenses used $3.1 million of cash during the quarter versus $15.7 million a year ago, largely due to the $14.6 million decrease in accounts payable on accrued expenses in the prior year from the reduction in raw material purchases relative to the levels earlier in the year.

The strong operating cash flow for the quarter enabled us to repurchase $6.2 million of common stock under a share repurchase authorization, fund $1.3 million of capital expenditures, pay $0.5 million of dividends, and end the quarter debt-free with $17.7 million, unchanged from the previous quarter end. Through the first six months of the year, our total outlays for share repurchases were $8.7 million for 906,000 shares which represented about 5% of shares outstanding as of the beginning of the year.

As of the end of quarter, we had $18.8 million remaining on our current repurchasing authorization which runs through December 5, 2008. Inventories at the end of Q2 were up $9.9 million from the previous quarter and $4 million from a year ago representing just under 3 months of shipments based on our forecasted run rate for Q3.

In view of the additional price increases that we plan on implementing to offset the continued escalation in raw material costs, we expect to benefit from additional widening and spread during the third quarter as these higher selling price are matched against lower cost material relieved from inventory. When we reach a period where pricing for our products as well as for wire rod flattens out, we’d expect spreads to narrow as the higher cost material and inventories gradually flows through cost of sales.

Total additions of property, plant, and equipment including the accounts payable related to PP&E reflected at the bottom of the cash flow statement were $1.5 million for the quarter compared with $5.3 million last year. The bulk of the current year outlays related to the equipment upgrades at our Florida PC strand facility, the majority of which started up late in the quarter with the remainder of the project expected to be completed during the current quarter.

Capital expenditures through the first six months of the year were $6.2 million and are currently expected to total $10 million for fiscal 2008; although, the actual amount is subject to change based on adjustments and project timelines or scope, future market conditions, our financial performance, an addition of growth opportunities that may arise. As we move further into 2008, the most recent Architectural Billings Index or ABI report for the month of February implies future softening in non-residential construction activity.

The ABI serves as a leading indicator for non-residential construction based on the typical 9- to 12-month lag time between architectural billings and construction spending with any score above 50 indicating an increase in billing from the previous month. In February, the ABI dropped by almost 9 points to 41.8 from 50.7 in January, its lowest level in more than 6 years.

In view of our debt-free balance sheet and cash position and the borrowing capacity available under our $100 million revolving credit facility, we believe that Insteel is well positioned to withstand future market downturns that may develop and capitalize on any growth opportunities that may arise. I will now turn it back over to H.

Thank you, Michael. During the quarter, we moved closer to completing our 2-year capital investment program which has been focused on the upgrading and expansion of our manufacturing facilities.

To recap: During fiscal 2007, we started up new ESM production lines at our North Carolina and Texas facilities, completed the reconfiguration and expansion of our Tennessee PC strand facility, and started up a new standard welded wire reinforcement line at our Delaware plant. The last component of this program is the upgrading of our Florida PC strand facility.

During the second quarter, we started up 2 of the wire drawing machines and one stranding line. We expect to wrap up the remainder of the project in the current quarter with the startup of a second stranding line and the relocation of remaining wire drawing equipment.

All of these projects we’ve undertaken offer dual benefits in the form of cost reductions as well as additional capacity to satisfy future growth and demand. Although the soft market environment will limit our ability to fully ramp up our new capacity in the near-term, we expect to begin realizing a portion of the expected returns on these investments to the favorable impact on our operating costs and increased sales of ESM as we further penetrate the rebar market.

Moving to market conditions, as Michael commented earlier, some of the macro indicators for non-residential construction are beginning to reflect weakness, and we believe this will begin to have an unfavorable impact on demand for our products as we move further into the year. Commercial construction, in particular, is expected to soften due to the ongoing downturn in housing and tightening in the credit markets coupled with the overall weakening in the economy.

Other categories of non-residential construction, which have remained relatively strong up to this point, could begin to be effected depending upon the duration of the economic downturn. The reduced tax revenues at all levels of government could result in budgetary constraints which curtail the availability of funding for infrastructure construction.

At this point, we expect the downturn to be much less severe and extend for a shorter duration than the meltdown that’s occurred in the housing sector. Turning to PC strand imports: During the quarter, we continued to find ourselves uncompetitive with low price Chinese imports in the post-tension PC strand market.

For calendar year 2007, total imports of PC strand into the U.S. fell 18% from the prior year, largely due to the housing downtown, representing 42% of apparent consumption versus 45% in the prior year .

Imports from China represented 89% of total imports at an average unit value that was 38% under the average for all other countries. The Chinese have yet to address the inconsistency in their export tax policy for steel products that we have alluded to on previous calls under which exports of steel wire rod are subject to a 15% tax while exports of PC strand receive the benefit of 5% VAT rebate.

This policy, which serves to promote the down streaming of Chinese hot rolled steel in value-added markets, is inconsistent with WTO rules, and our industry trade coalition is continuing to pursue remedies through the Office of the U.S. Trade Rep and the Department of Commerce.

Despite these ongoing concerns, we’re encouraged by the recent upturn in Chinese pricing and anecdotal information indicating that the supply of Chinese strand into the U.S. may be tightening up.

However, the recent surge in raw material costs in the U.S. makes it difficult to determine the extent to which the net domestic versus import price differential will narrow over the next few months, which impacts the time horizon for the domestic industry to regain competitiveness in the post-tension market.

Moving to raw materials, in addition to the challenging market environment, we also face increasing cost pressures as a result of the unprecedented escalation in raw material costs that we’ve witnessed since the beginning of the fiscal year. These increases have been driven by the upward surge in scrap in other input costs for steel producers together with the drop off in import competition as offshore suppliers of rod have redirected material from the U.S.

to other more attractive markets. This condition has been aggravated by the decline in the dollar.

Domestic wire rod producers recently announced additional price increases ranging from $150 to $190 per ton for the April/May timeframe, bringing the accumulative increase since October to more than $400 per ton or an increase of over 70% in an 8-month period. We intend to continue passing these additional costs through in our markets; although, the anticipated softening and demand could make it more challenging to do so.

At the same time, in view of the limited availability of imports, the wire rod market has tightened significantly raising the prospect for insufficient supplies as we move through the year. While a shortage of wire rod could unfavorably impact shipments depending on the strength of demand, it would tend to instill added pricing discipline on the part of our competitors, which would have a favorable impact on margins similar to the environment that we experienced in 2004.

In response to these challenges, we’ll continue to focus on the operational fundamentals of our business, closely managing and controlling our expenses, aligning our production schedules with demand as there are changes in market conditions in a proactive manner to minimize our cash operating costs and pursuing further improvements in the productivity and effectiveness of all of our manufacturing, selling, and administrative activities. This concludes our prepared remarks, and we’ll now take your questions.

Kim, would you please explain the procedure for asking questions?

Good morning, Michael and H. If I heard you correctly, I believe you mentioned that you increased your prices 10% during the quarter; however, raw materials obviously were up much more significantly than that.

Could you just clarify how you fully recovered your costs, and how much you’re going to have to increase prices going forward?

Our approach on recovering our costs up to this point has been to patch through all of the price increases that we are receiving from our wire rod vendors through to our markets. It is a fact that we were behind during the quarter that just recently closed.

Also, the momentum of price increases has picked up dramatically from the late February/March time period through now, so we have had some catching up to do and have more aggressively moved up our timeline for passing these increases through.

Can you just give us a sense of what the timing of your price increases were, and how has the customer demand been since?

Casey, there have been so many price increases, I can’t remember the date of each one. Suffice it to say that they match and mirror for the most part the wire rod increases.

Our customers are in a state of shock as we are. Many of them have commitments that extend out for a period of time and obviously the developments in the steel market were not anticipated and come as quite a shock.

So I think there is a sense of a resignation to the current environment that there’s not, it’s beyond the control of Insteel or Insteel suppliers or our customers, so there’s resignation to it and a determination to get through it. But the price increases are becoming effective at every stage of the supply chain.

Just given your outlook on widening spreads and the volume of uncertainty going forward, do you anticipate next quarter’s gross margins to be higher than the gross margins you currently just reported?

I would say it’s possible that that could occur.

Through the anticipated widening and spreads and assuming that we realize that the typical seasonal increase in volume, that should have a favorable impact.

Thank you.

Hey guys. Good morning.

Do you have a sense of how much your customers might have bought in 2Q ahead of the spring price increases?

Only in an anecdotal sense. I think that when customers return from the holiday season and so the price increase announcements that had piled up on their desks, I think that there was some accelerated purchasing in January and in February.

By March, I think fatigue had set in and we really didn’t detect too much of this hedge-type purchasing. So there was some acceleration of purchases, but it’s impossible for us to accurately identify the extent of it.

That’s helpful. You guys talked about low utilization, where are you running during 2Q?

In our strand business, probably in the vicinity of 60% of capacity. In our welded wire reinforcing business, somewhat higher than that, probably closer to 70%.

Are we fully ramped on the new ESM capacity at this point?

We are right on plan at our North Carolina production line. We have seen a weakening in the market environment in Texas that has become the constraint of the ramp up of that line.

Does it push the timeline very far out or?

It’s hard to say, Bob. It’s week-to-week environment right now that I don’t know that I can make a good estimate.

As we look at the year, we think that clearly these lines are going to have a significant positive impact on our shipments. It’s just not going to be as dramatic as we may have once forecast.

Then just a couple questions on the pricing. First, you alluded to shortage in wire possibly instilling discipline in your competitors.

I mean can we read into some improved discipline during 2Q? We’ve seen some pretty heavy cost increases thus far in fiscal ’08.

I think for the most part, our competitors have viewed this environment just as we have. The urgency and the absolute requirement to pass these costs through is out there.

So as a general statement, I think that industry is moving in one direction.

Then on the price increases that you are instituting to relieve the cost pressure, is this… I mean is the step function dollar-for-dollar as your suppliers go up $150 a ton, are you going up $150 a ton in one shot? I mean do you do it gradually ease into it?

Counter intuitively your profitability at this level of utilization and the cost increases you’re talking about, shouldn’t have been this good in 2Q, that’s what I’m just trying to reconcile.

It’s clearly the inventory phenomenon helped us in Q2; there’s no doubt about that. The price increases have come at us with such frequency that every time that we believe we have put out it into the marketplace increases sufficient to recover our increase cost yet another wire rod price increase is announced, so it’s a constant.

It’s constant activity of announcing increases and passing through the cost increases.

How about up to this point, have you recovered all cost increases?

Well no because we haven’t incurred all of the cost increases that have been announced yet.

Right.

As I mentioned, I can’t remember the effective date, but somewhere between $150 and $190 per ton of new costs increases have been pushed our way just in the last few days and those increases are effective toward the end of April, so we’re in the process of getting our increases out to recover those big jumps.

I guess up until that (inaudible)…

Your price into April.

…increase of $150 to $190 by, I guess by the end of April, I think we would’ve gone up by enough to recover the accumulative rod increase. The timing’s been a little different across product lines, but we’d be about in line as of April but now we’re looking at additional increases to recover this last announcement.

All right, great. Thanks guys.

Hi guys. Nice quarter.

A couple of questions: Just on the inventory, I mean obviously we saw inventory, you’d probably like to have more inventory than less right now, but on a quarter-over-quarter basis, how much is the increase due to price and how much is due to (inaudible). I mean you guys have more inventory on the ground or is it about the same and just increase in price?

Let me see if a breakout on that. I think it was split relatively equal between the two.

Our units are actually up slightly from the third quarter right in the 10% vicinity and then the remainder would’ve been from the valuation increase.

So units were up about 10% from Q1?

Yeah.

I got you, so about half from pricing.

Yeah, it’s about 50/50, half units and half from the valuation increase.

How do you guys feel about your inventory position right now given the pricing increases and the talk about of shortage on the wire rods? I mean are you guys happy with your inventory position, would like to have more, would like to have less?

We planned to have more. In conjunction with this rapidly rising market, we’ve seen our suppliers increasingly willing to walk away from commitments and actually that had a serious negative effect on Insteel through the March quarter.

We understand it’s a sellers’ market and that’s the way it is at this point. We would’ve liked to have been able to execute the plan that we put in place last October, but just were prevented from doing so.

Then on the numbers you guys gave for 15% increase in pre cash PC strand in the ESM lines and the 20.9% drop in welder wire and the concrete pipe enforcement, are those, is that volume or is that revenue?

Those were volume changes which were pretty consistent the latest construction spending data as far as the distinctions between non-res versus res.

No, I’m just trying to get a sense of on the ESM, 15% on the volume is pretty impressive. With a 10% price increase, obviously the volume’s less impressive.

But that’s a volume increase.

Right, it is in units.

All right. That’s helpful.

Then just one the discontinued op side, I assume that’s just the old, that’s the facility from the old industrial wire business you guys used to have?

Yes, that’s the only remaining component, the real estate associated with that facility.

Where do you guys stand on getting… You talked about selling that; where does that stand?

Actually it’s been under contract for quite a period of time. We just had extended the contract because the purchaser is having some difficulties arranging financing, as might not come as a surprise.

Great.

But we believe that the purchaser is for real and that we will be successful in moving the facility.

Then I think you guys said at the beginning of the year you expected to spend about $10 million on cap ex, and it looks like you’ve… I mean you were expecting a couple 2 million bucks a quarter for the next two quarters on cap ex or is that high or is that low?

It’s probably right in line. We have a balance left on this Florida project and then the remaining outlays will be just routine maintenance-type expenditures.

I think that’d be a good assumption just splitting equally.

That is helpful. Then I think this is now, if I look at… It was Q3 last year…Let’s just sort of year-over-year, you guys got out of the business… This is the last quarter we’re you’re basically comping against year-over-year where you were in the PC strand on the post-tensioned side, right?

That’s correct. It was in Q3 last year that we opted out of that market.

So as we move into Q3 this year, the year-over-year comparison should be on an apples-to-apples basis.

So I’m assuming you’re still done with weakness in the standard welded wire reinforcement and the concrete reinforced pipe, but you don’t have the added sort of lag or added headwind of the post-tensioners on the PC strand side?

Right.

Then just, I know you guys have sort of talked about acquisitions in the past and obviously your balance sheet’s in great shape. The issues that you guys are seeing in the market, I mean this I would assume is affecting smaller players even more so or that the spreads so good that they’re happy and that they’re making money and no ones interested in selling?

I think that environment has changed really radically to where wire rod consumers who relied almost exclusively on imports are probably feeling quite a pinch at this point and time as the domestics have really not been willing under these circumstances to take on a lot of new customers. So I suspect that there are some rod consumers in the welded wire reinforcing business particularly that are seeing a supply crunch and there could be some favorable opportunities that open up for us.

You guys really want to stick sort of either the PC strand or the welded wire businesses I assume. There’s not another product line that would make sense to fold in?

We’ve made the commitment and believe that it’s based on solid reasoning that we need to stick to our knitting; and I’m not sure that means that we wouldn’t consider any other product, but it would have to be highly comparable and compatible with the markets that we’re serving now.

Then just last question: As I look at it, I think this is the seventh straight quarter of year-over-year volume declines for you guys. Obviously there’s a lot of concern about the (inaudible) commercial construction and whatnot, but I mean if I back to sort of like 2003 when the business was just starting to pick up, can you give a sense of how much your volume levels are today versus in the businesses that you still have.

I realize that you have to strip out sort of some of the industrial wire businesses, but I mean are you guys up that substantially over sort of where you guys were in 2003 when things weren’t that great?

It’s really difficult to really get that on an apples-to-apples basis just because of the changes that have occurred in our operation through some of the investments that have been made, particularly in ESM, so to really get that on a comparable basis I don’t know that we can give you a response on this call.

All right, that’s fair enough. All right, well that’s all I get, appreciate the time and obviously nice quarter guys and good luck going forward.

Good morning. Most of my questions have been answered, but I was wondering if you could just talk a little bit about cap ex over the next two to three years?

We generally believe that the run rate based cap ex for maintenance purposes in the $3 to $5 million range. I don’t think that we’ve ever been that low except maybe in 2001 and 2002, so I wouldn’t expect that you’d see $3 to $5 million for instance in 2009.

It’s going to be $3 to $5 million plus some increment that reflects the growth or the cost reduction opportunities that we find that make sense for us, Walt. I know that’s a mushy answer, but I’m not sure we can give you a better one.

That’s helpful. So $3 to $5 million would be pure maintenance, anything above that you’d expect to get a good return on either through capacity or cost reduction.

Yeah, I think that’s a good assumption.

Just going back to your comments about whether or not there could be some similarities with ‘04, of course we’d love to see that, but I’m wondering if you could just talk a little bit about what feels the same and what feels different to that period?

Absolutely, and I think that’s a real good question. In 2004, we were basically pressed to produce and sell everything that we possibly could.

Demand was really solid and we had the tailwind of rising prices in the steel market. As we look at the environment today, it’s certainly dramatically different where business conditions as measured by demand for our products are not particularly good and the outlook is not particularly favorable in many of our market segments.

But at the same time, we do detect a shortage in the marketplace for our raw material and to the extent that that short supply is real, it will have the same impact of limit in the output of our products as favorable demand characteristics would. So I think as we look at our business plan over the next 6 months, we’re concerned about having adequate supplies of wire rod and that certainly gives us a lot of commitment to be sure that we price our products appropriately.

Great. Thanks very much.

Good morning. I just got a couple quick questions here: First, I think I missed your sequential change in volume.

Yeah, sequentially Q2 shipments are up 9.2% from Q1 and that compared to a 9.8% increase last year so pretty much in line.

Then you said that you expect the spread to widen Q3, are you looking year-over-year or sequentially or both sequentially year-over-year?

Sequentially.

Sequentially, okay. Then finally, I know that you all had some other revenue included in your revenues such as scrap sales and so forth; and with scrap prices rising so much, can you just give us an idea of how much that other revenue was as a percentage or an absolute dollar amount?

Actually it isn’t reflected in revenues. It’s netted out against our scrap costs and would be reflected in cost of sales, so it wouldn’t have impacted the top line.

Okay, it wouldn’t have impacted the top line, just cogs?

Right.

All right. Thank you.

Thank you. We appreciate your interest in the Company and look forward to the call next quarter.

Thank you.