Insteel Industries, Inc.

Thank you, Sam. Thank you for your interest in Insteel and welcome to our third quarter 2012 conference 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 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. I’ll now turn it over to Mike to review our third quarter financial results and then follow up to comment more on market conditions and our business outlook.

Thank you, H. As we reported earlier this morning, Insteel’s net earnings for the third quarter ended June 30 dropped to $0.9 million or $0.05 a share from $3.7 million or $0.20 a diluted share in the year ago period.

On a comparable basis net earnings for the prior year quarter were $0.27 a diluted share excluding the $2 million of Ivy related restructuring charges.

Our third quarter results were unfavorably impacted by the continuation of weak conditions in our construction end markets and reduced spread between selling prices and raw material cost.

Net sales for the third quarter fell 5.1% from a year ago, on a 4.5% decrease in shipments and a 0.6% decrease in average selling prices. On a sequential basis shipments for the quarter were up 9.7% from Q2 reflecting the usual seasonal improvement which was slightly higher than last year’s 7.5% increase and a 8% increase of 2 years ago.

Average selling prices fell 2% from the second quarter as a result of competitive pressures.

Gross profit for the third quarter fell to $6.4 million from $12.5 million in the year ago quarter with gross margins narrowing to 6.8% of net sales from 12.7% due to the compression in spreads, the drop off in shipments and higher unit conversion costs.

On a sequential basis gross profit rose $0.9 million from Q2 and gross margins increased 0.5% primarily due to the seasonal increase in volume.

SG&A expenses in the third quarter was relatively flat compared with the prior year, decreasing $0.1 million as lower compensation expense more than offset a reduction in the cash surrender value of life insurance policies in the current year.

Interest expense for the third quarter fell to less than half the prior year level due to lower interest rates on the borrowings on our revolving credit facility relative to the $13.5 million note related to the Ivy acquisition that was outstanding in the prior year quarter and prepaid in December.

Our effective income tax rate for the third quarter rose to 38.6 % from 32.4% a year ago primarily due to the impact of changes in book versus tax differences, which were amplified at lower levels of pre-tax earnings.

Going forward, our effective rate will continue to be subject to fluctuations based upon future earnings, changes in permanent book versus tax differences, and adjustments to the other assumptions and estimates that enter into out tax provision calculations.

Moving to the cash flow statement and balance sheet, operating activities used $10.1 million in cash for third quarter compared to $0.1 million in the year ago period primarily due to the increased investment and net working capital in the current year.

Accounts receivable rose $4.2 million during the quarter due to the sequential increase in sales, and inventories rose $8.2 million from Q2 on a 15% increase in units partially offset by a 3% decrease in average unit values while accounts payable and the crude expenses fell $1.4 million.

Our inventory position at the end of the quarter represented 98 days of shipments, or a little over 3 months, on a forward-looking basis calculated off of our forecasted shipments for Q4.

Our quarter end inventory balance was driven higher by the receipt of several import purchases during the quarter, which are typically for larger quantities due to logistics considerations. These offshore purchases were made in view of the widening gap between domestic and import prices that developed over the last 4 months.

CapEx was $4.4 million through the first 9 months of the year and we continue to expect it to come in under $10 million this year as well as in fiscal 2013. We ended the quarter with $18.6 million outstanding on our revolving credit facility, and $67.2 million of additional borrowing availability leaving us with ample liquidity and financial flexibility.

As we head into our fourth fiscal quarter, the latest construction spending data reported by the Department of Commerce reflects further signs of improvement. Total construction spending for May was up 7% from a year ago, rising to its highest level in nearly 2.5 years as increases in private sector spending more than offset the ongoing decline in public construction.

Private non-residential construction was up 19% from last year and 25% on a year-to-date basis while public construction was down 4% from a year ago as well as year-to-date. Private non-residential construction has now risen year-over-year for 12 consecutive months while public construction has fallen 20 straight months.

In contrast to these favorable spending trends, yesterday’s ABI report reflected continued weakness in design activity with the June score coming in at 45.9. After remaining above the 50 growth threshold for 5 consecutive months from November to March, the index is now just under 50 for 3 straight months following a similar pattern as last year.

The recent downturn implies future weakening in non-residential construction activity based on the usual 9 to 12 month lag time between architectural billings and construction spending.

The new Federal Highway Bill MAP-21 that was passed earlier this month provides for $105 billion of funding over a 2-year period, reflecting a modest inflationary increase over previous levels. Among its other provisions, the bill eliminates or consolidates approximately 60 highway and transit programs into 4 core programs and streamlines the environmental review and approval process for new projects, which should serve the shorten project lead times.

Although we would have obviously preferred a longer-term bill providing for a more substantive increase in funding, MAP-21 represents a considerable improvement over a series of 9 short-term extensions that have been enacted following the expiration of the previous SAFETEA-LU authorization almost 3 years ago.

At a minimum, it should serve to mitigate the downward trend for public construction spending that I alluded to earlier.

I will now turn the call back over to H.

Thank you, Mike. Our Q3 results reflect the continuation of depressed market conditions that we have experienced since the fourth quarter of fiscal 2008, together with competitive pricing pressures that have compressed spreads across all of our product lines.

Although we are encouraged by the recent improvement in product construction spending and the passage of 2-year federal transportation bill, we expect business conditions to remain challenging in the absence of a broader-based economic growth that results in significant new job creation.

Turning to our raw material markets, following the relative stability that characterized conditions in the steel scrap market between January and May, scrap prices declined sharply during June and July. Most wire rod producers responded by announcing decreases in pricing amounting to about half of the scrap price reduction.

We believe that it’s unlikely that scrap prices will remain at current levels, would not be surprised to see them begin to rebound in August when steel producers settle their monthly purchase commitments.

Mike mentioned that during the third quarter we had returned to the offshore market for a portion of our wire rod requirements, following several quarters where our presence in offshore markets had been minimal. 23% of our rod receipts were foreign origin during the third quarter.

As the foreign percentage of our purchasing mix rises, logistics considerations generally result in higher inventory levels due to larger order sizes. The cost associated with the additional investment in inventory, however, is more than offset by the lower prices for imported material relative to domestic.

Whether declining wire rod pricing will eventually have a favorable impact on spreads for our industry largely depends on the competitive dynamics in our markets. Also, in view of the recent indications that scrap pricing may have already bottomed out, the drop off in wire rod prices may prove to be fleeting.

Commercially, we’ll continue to provide quality products and exemplary service at competitive prices and maintain our market leadership position.

We reported last quarter that we had committed to the purchase of additional productions lines for engineered structural mesh that are expected to be commissioned in the second quarter or early third quarter of fiscal 2013. Taken together, these new lines had incremental revenue generating capacity of $15 million to $20 million.

We can report that these projects are on schedule and on budget.

In summary, although we are encouraged to see some early signs of improvement for the construction sector, we expect the balance of 2012 to be difficult, the likely continuation of weak demand in highly competitive pricing environment. While we expect modest growth in shipments of engineered structural mesh over the next few quarters, growth expectations are muted within our other product lines, pending a broader-based economic recovery or until we complete another acquisition.

This concludes our prepared remarks, and we’ll now take your questions.

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

First question is on the operator rate which declined a little bit sequentially, yet the shipments were up sequentially. What is causing that?

Is that a mix issue or maybe some capacity creep you’re getting a little bit more out of your facilities?

Tim, I think it’s mainly an anomaly there. As we continue to contend with weakness in markets, we worked on inventory control of finished goods, we have adjusted operating schedules as required.

So I think it’s more -- I think it’s just more of a working capital consideration than anything else. I wouldn’t read too much significance into it as any kind of fundamental change in the business.

Okay. And then on to the margins, you gave some color on your expectations near term, certainly a lot of moving parts with all the volatility recently in pricing, but would you expect that the margins could -- are more likely to rebound in the next say quarter or 2 rather than continue to contract, and that’s aside from once we get through the FIFO issues, what now would be -- given at least still enough time to let the FIFO lag move through the numbers?

Well I would tell you that you could paint a plausible scenario for either a continuation of the difficult margin environment that we have now or you could paint a scenario that’s plausible for somewhat expanding spreads and margins depending on what happens with wire rod pricing and with competitive pricing in our markets. But to tell you that we really had a firm handle on that I think would be misleading.

Can you discuss -- we seem to not see the same or normal seasonal impact that we’ve seen in years past, is there geographical concerns here that maybe north of the Mason Dickson line -- is just the lack of activity in the south which has been stronger in the Texas market and other areas continue to be so all year round, so we are kind of muted some of that seasonal effect. And also can you comment on kind of the geographic competition, because given your market share overall it doesn’t seem to give you the pricing authority or ability to set the market rate.

Is it really just these little pods geographically that you are facing these tough conditions?

Let me speak to the geographic part of the question first. I think there has been really no change in the way we would have responded to this question over the past few quarters that the Texas area seems to have been the most robust market environment that we have had in the last quarter and in previous quarters recently.

The west coast is probably the weakest. Florida market is also weak but about -- really with no change from previous quarters.

And Mid-Atlantic and Northeast is weak but I wouldn’t say it’s further weakening, it’s just -- I would say it’s about typical. Clearly, the only thing that stands out is -- impressive at all has been demand in Texas and even that is up and down.

When we look at your overall market share, is it somewhat not -- it doesn’t help you as much as one would think because we are really just looking at these small, say 400 mile radiuses around your plant and if there is one other guy, that could be enough to squeeze these spreads?

Well, I think there is regional competition certainly in every region. There is no region of this market that is underserved.

But the other reality is I suspect that most of our competitors are seeing capacity utilization levels that are similar to ours. So I think there is just a struggle going on out there to keep plants operating, to keep people employed at some reasonable level.

So it’s -- the conditions and fundamentals are just really difficult.

When you've commented in the past, meaning the most efficient and having the lowest cost of operations within the industry and we're looking at the margins you have been producing the last 4 quarters, is it reasonable to think -- we haven't seen it yet but the attrition, whether you guys get a little more aggressive on your M&A, whether you chose a defensive posture, how do you see that playing out in your opinion?

Well I guess I would continue to believe that Insteel is cost-competitive with any of its competitors, integrated, non-integrated, independent, small, large. I think that we have some economies of scale that we have been able to realize and I think that we have the quality of operations that will allow us to occupy a cost leadership position.

With that said, I think the industry has hunkered down and we have a lot of competitors who are efficient and actually there has never been any room in this business to hold an umbrella over inefficiency. So we have effective competitors.

So I think this thing has a way to play out and our view of the proper strategy for us going forward is really more of the same.

Okay. If you are unable to find attractive acquisition candidates, does your own shares become attractive?

Certainly. I think we have an authorization in place and if you would look at our behavior over time you would see that we have been pretty opportunistic in acquiring our shares and we would plan to be so going forward.

Okay. Well we appreciate your interest in Insteel and feel free to call us if you have follow-up questions.

Thank you.