Q2 2025 Insteel Industries Inc Earnings Call
Becky: Hello and welcome everyone to the Insteel Industries second quarter 2025 earning school. My name is Becky and I'll be your operator today.
Speaker Change: During the presentation, you can register a question by pressing stuff followed by one on your keypad. If you change your mind, please press stuff followed by two. I will now hand over to your host, HWOLT, CEO , to begin. Please go ahead.
H. Woltz: Thank you, Becky. Good morning and thank you for your interest in Insteel. Welcome to our second quarter of 2025 conference call which will be conducted by Scot Jafroodi, our Vice President, CFO and Treasurer and me.
H. Woltz: Before we begin, let me remind you that some of the comments made in our presentation are considered to be forward-looking statements that are subject to various risks and uncertainties which should cause actual results to differ materially from those projected.
H. Woltz: These risk factors are described in our periodic filings with the SEC.
H. Woltz: We're pleased to experience some material upturn and business activity during the second fiscal quarter relative to the same period last year.
H. Woltz: While we're glad to see the UNCO and recovery in our markets, the tumultuous events that follow the rollout of the administration's tariff strategy created new uncertainties for the company.
Scott Jafroodi: And before I turn the call over to Scott to come in on our financial results, we again thank all of our people for the effective integration of our acquired assets during the first fiscal quarter.
Scott Jafroodi: Following Scott's comments, I'll take the call back up to discuss our business outlook and the impact of tariffs on our company.
Scott Jafroodi: Thank you, H. In good morning, everyone joining us on the call. As reported earlier today, the second quarter of fiscal 2025 proved to be a strong quarter for Insteel and marked the second consecutive quarter of favorable shipment trends following the weaker volumes we experienced in the prior year.
Scott Jafroodi: to prove demand in our construction end markets in addition to lower manufacturing costs and higher production volume, where the key drivers in our Q2 performance
Scott Jafroodi: Net earnings for the quarter rose to 10.2 million, from 6.9 million a year ago, and earnings per share increased to 52 cents per diluted share from 35 cents per diluted share in the prior year.
Scott Jafroodi: Excluding the non-recurring or structuring charges referenced in our release, net earnings rose to $0.55 per share.
Scott Jafroodi: Shipments for the quarter increased 28.9% from last year and 17.9% sequentially from Q1. The improved shipping performance in the second quarter was driven by increased activity across most of our construction and markets, along with the additional tonnage generated from our first quarter acquisitions.
Scott Jafroodi: Buying, Grunth remained roughly consistent throughout all three months of the quarter, despite disruptions caused by adverse winter weather conditions in various regions of the country.
Scott Jafroodi: On a Euro year basis, average selling prices decline, 2.2%, but rose 5.1% sequentially from the first quarter. Driven by price increases implemented in the first and second quarters, the offset escalating raw material costs.
Scott Jafroodi: The supply of wire rod in the US market has become progressively more constrained during the quarter, leading the price increases.
Scott Jafroodi: To add some perspective to this, published prices for steel wire rod, our primary raw material, have increased the approximately $150 per ton during calendar Q1.
Scott Jafroodi: Despite these price increases, availability remains limited, and our primary focus moving forward is on securing an adequate supply to minimize potential disruptions to our operations.
Scott Jafroodi: This grows with German primarily by higher sales volume and to a lesser extent a reduction in conversion costs per ton due to increased production levels.
Scott Jafroodi: On a sequential basis, Gross Proper rose 15 million from the first quarter, accompanied by 800 basis point expansion in Gross Martin. This approval will support by the same quarter over quarter drivers, as well as higher spreads tied to selling price increases mentioned earlier.
Scott Jafroodi: Additionally, margins recovered from the temporary pressure in Q1 were related to the fair value accounting of inventory acquired in our first quarter acquisitions. That inventory was fully depleted early in Q2 and replaced with inventory value that standard costs, which allowed gross margins to normalize.
Scott Jafroodi: As we move into the third quarter, we anticipate that combination of strengthening the man, improving spread supported by recent price increases, current raw material carrying values, and higher operating levels at our facilities will continue to restore gross margin to more attractive levels.
Scott Jafroodi: S.GNA extends for the quarter, increased to 10.8 million or 6.7% of net sales, compared to 7.9 million or 6.2% of net sales in the prior year period. The increase was primarily driven by its full.
Scott Jafroodi: A $1.4 million rise in compensation costs tied to our return on capital-based incentive plan, reflecting stronger financial performance this year, as a reminder, no incentive compensation expense was recorded in the second quarter last year.
Scott Jafroodi: Additionally, FGNA expense was impacted by $414,000 unfavorable Eurobeer swing in the cash render that I would like to share with the policies.
Scott Jafroodi: Wistacon by $31,000 in the current quarter versus a $383,000 gain in the prior year, reflecting fluctuations in the value of the underlying investments.
Scott Jafroodi: Lastly, Amorization Expans rose by $297,000, driven by intangible assets recognized from our recent acquisitions.
Scott Jafroodi: In addition to the increase in SGNA expense, we recorded $662,000 in restructuring charges during the quarter. These charges reflect costs associated with the previous announced called the solidation or a will that warrant manufacturing operations.
Scott Jafroodi: following the Q1 acquisitions of engineered wire products and overlying wire products of Texas.
Scott Jafroodi: Our effective tax rate for the quarter was 23.2%, which is up slightly from 22.5% last year.
Scott Jafroodi: Looking ahead to the bounce of the year, we expect to affect the rate more being steady at around 23% slotted to the level pre-tax earnings of tax differences and the other assumptions and estimates that compose our tax provision calculation.
Scott Jafroodi: Move it to the cash flow statement of Valchee. Cash flow from operations used $3.3 million in a quarter compared to providing $1.4 million last year.
Scott Jafroodi: Networking Capital to Use Approximately 21.9 million cash in the second quarter due to a 30.4 million dollar increase in receivables.
Scott Jafroodi: Resulting from higher sales and an increase in average selling prices, which was far too offset by a $5.8 million increase in accounts payable and a $2.6 million decline in image
Scott Jafroodi: Our inventory position at the end of the quarter represented 2.2 months of shipments on a forward-looking basis, calculated off a forecast at Q3 shipments.
Scott Jafroodi: Compared with 2.8 months at the end of the first quarter, finally our inventory is at the end of the second quarter we're valued at an average unit cost that approximates our second quarter cost of sales and remains favorable relative to current replacement costs, which will have a positive impact on spreads and margins as we move through the third
Scott Jafroodi: We incurred 2.2 million capital dispensers in court for a total of 4.9 million through the first half of our fiscal year. Based on four capital expenditures for the remainder of fiscal 2025, we reduced our full year target to 17 million.
Scott Jafroodi: for the previous Communicated Target, 22 million. Eight will provide more detail on the topic in his remarks.
Scott Jafroodi: Additionally, in the second quarter, we continued our share of buy-back program, repurchasing 1.1 million of our common equity equal to approximately 4,000 shares.
Scott Jafroodi: Finally, from a liquidity perspective, we entered the court of 28.4 million cash on hand, and no bar on depth standing on our $100 million revolving credit facility, providing a ample liquidity and financial flexibility going forward.
Scott Jafroodi: As we enter a third quarter of fiscal 2025, we are cautionally optimistic about our market outlook for the remainder of the year, supported by the continued strength and demand across our markets.
Scott Jafroodi: Recent shipment trends in overall market sentiment reinforces this view. Although we are still early in the third quarter, our order book has remained strong, its shipments in April have exceeded the levels from the previous year. However, there are still uncertainties that support or cost of that load.
Scott Jafroodi: The long-term demand forecast remains clouded by shifting U.S. trade policies and the potential economic fallout from the Trump administration's tarot strategy.
Scott Jafroodi: Turns to the macro economic indicators for our construction and markets, the latest reports for the architectural billing index, and the dodging minimum index, suggest the channels outlook for business conditions moving forward.
Scott Jafroodi: In February , the ABI registered a score of 45.5, remaining well below the growth threshold of 50, signaling that most firms continue to experience declining buildings.
Scott Jafroodi: Additionally, the dog's amendment that was tracked non-residential billing projects entering the planning set saves, so a decrease of 6.9% in March was commercial planning activity dropping by 7.8%
Scott Jafroodi: U.S. Amendment ship is another key metric lead monitor. Reflected ongoing weakness with January 2025 shipments down 3.1 percent of the year over year.
Scott Jafroodi: Finally, the monthly construction spending data from the U.S. Department of Commerce continues to indicate modest growth. The latest February data revealed a total construction spending on a seed we adjusted annual basis increased by approximately 3% compared to last year.
Scott Jafroodi: Non-residential construction spending rose by the ground 4%. However, spending a public highway and street construction in major end use application for our products remained relatively flat with an increase of less than 1%.
H: This concludes my preparatory marks. Now now I'll turn the call back over to age.
Thank you, Scott.
Speaker Change: Yeah, our first quarter conference call, and then the earnings are these.
Speaker Change: We noted a substantial acceleration of demand for concrete reinforcing products and commented that we expected the demand recovery to continue into calendar 2025.
Speaker Change: We're glad to confirm that the positive trend continued through our second quarter, which takes us past the risk of seasonal influences on our business and gives us confidence that we should perform well for the balance of the year.
Speaker Change: As stated in the release, the brisk pace of business we've experienced over the past few months is not reflected in the broader macroeconomic indicators that are generally used to measure the strength of the construction industry, but it is nonetheless real.
Speaker Change: The confidence level of most customers, interactions between our salespeople and customers, and favorable seasonal trends, lead us to believe business conditions should remain robust at least through the end of our fiscal year.
for several quarters in earnings releases and conference calls.
Speaker Change: We have lamented the unreasonable impact on Insteel of the 2018 Section 232 Steel Tera that was applied to most imports of our raw material, hot-rolled steel, but not to imports of finished
Speaker Change: We worked for years with multiple administrations to correct this obvious mistake, without any success until recently.
Speaker Change: While there may be reasons to object to the administration's tariff strategy, I'm glad to report that one provision of the new tariff regime is the application of the 25% Section 232 steel tariff to imports of PT strand and other derivative products of hot-rolled steel wire
Speaker Change: This precludes the easy circumvention of the Terra by offshore companies.
Speaker Change: that elected the ship, Bench PC's brand into the U.S. rather than hot-rolled steel wire rod.
Speaker Change: and it eliminates the inequity of our incurring high U.S. costs for raw materials while competing with world market steel prices used to produce imported PC strand.
Speaker Change: This tariff anomaly cost Insteel millions of dollars over the course of seven years.
Speaker Change: We're also relieved to see that the reciprocal tariffs announced and subsequently paused by the President would not apply to steel products that are covered by the Section 232 steel tariff.
This means that with one notable exception.
Speaker Change: The world's raw material marketplace for Insteel remains as it has been since 2018.
Speaker Change: That is, the Section 232 steel tarot affects imports of hot-rolled steel wire rod.
Speaker Change: The exception, I mentioned, relates to the reimposition of Section 232 on Mexico and Canada, whereas both countries had been exempted from 232 until March 12.
Speaker Change: This could impact Insteel marginally in as much as severe US supply constraints had required us to purchase from Canada on a regular basis.
Speaker Change: We do not expect the Canadian Section 232 tear-up impact to be material, although we have serious concerns about adequate domestic supplies of wire-ride going forward.
Speaker Change: I should note that reciprocal tariffs, if they come to pass, could affect Insteel with respect to purchases of capital equipment, spare parts, and certain operating supplies, all of which are imported.
Speaker Change: At this point, it's impossible to know whether the reciprocal tariffs will become reality or if so, so what extent Insteel might be affected?
Speaker Change: While we would take advantage of all opportunities to manage our exposure to Terrace, if forced to incur higher costs, we would plan to pass them through the form of higher selling prices.
Speaker Change: In our last call, I mentioned that domestic supplies of our primary raw material, hot rolled steel wire rod, were typed due to two permanent mill closures that occurred were been announced, and the absence of a third mill from the market for an indefinite
Speaker Change: As of today, the third mill has communicated plans to restart production, but it could not be considered a source of supply today. And we wonder what changes might make the environment for it more hospitable today than last fall when it shut down.
Speaker Change: and, as mentioned, Canada and Mexico are now subject to the Section 232 Tera, which is affected their competitiveness and further tighten supplies available to U.S. purchasers.
Speaker Change: Uncertainty surrounding adequate supplies of wire ride there on our third and fourth fiscal quarters resulted in our making commitments to imports of substantial quantities.
Speaker Change: While we entered into these transactions we love family due to the inherent higher risk of longer lead times, there was clearly no alternative available except to take downtime at our manufacturing facilities.
Speaker Change: Additionally, the bullish domestic pricing trajectory greatly reduces the pricing risk normally associated with importing, but that risk has not been eliminated.
Speaker Change: Depending on actual deliveries, we can see raw material inventory levels spike next quarter. Any increase would be short-lived unless we conclude that a higher proportion of offshore supply is required one forward.
Speaker Change: As you know, during our first quarter we acquired two manufacturing facilities and production equipment from a third facility.
Speaker Change: While we close one manufacturing facility, the integration of the remaining assets is complete and successful.
Speaker Change: We're pleased with the operations of the Upper Sandesky Ohio Facility and with the operational and great synergies we've been able to realize today and that we expect to realize in the future.
Speaker Change: We could not have accomplished the integrations as quickly or efficiently without sophisticated information systems and diligent professionals at the Upper Sandesky Plan and throughout the Insteel organization who made it happen. I'm grateful to everyone involved.
Speaker Change: Turning to CAPEX, as reported in the release, for six months CAPEX took total 4.9 million
Speaker Change: which is well off the pace of our initial forecast for fiscal 2025 of 22 million due primarily to the resources devoted to acquisitions, equipment relocations and integration activities.
Speaker Change: We had canceled no projects and continued to seek opportunities to expand our product offering and reduce our cash cost of production.
Speaker Change: given that we're now in the third quarter of fiscal 2025. We have lowered our CAPEX at Estimate to 17 million and will update expectations during our next call.
Speaker Change: Looking ahead, we're aware of the substantial risk related to the administration's terror policies and the future performance of the US economy.
Regardless of developments in these areas, we're well positioned to...
Speaker Change: to maximize shipments and optimize our costs and to pursue attractive growth opportunities both organic and through acquisitions.
Speaker Change: This concludes our prepared remarks and will now take your questions. Becky, would you please explain again the procedure for asking questions?
Speaker Change: Of course, if you wish to ask a question, please press star followed by one on your telephone keypad. If for any reason you want to remove your question, please press star followed by two. When preparing to ask your question, please ensure that your device is unmuted locally.
Speaker Change: Our first question comes from Julio Romero from Sidity and Company. Your line is now open. Please go ahead.
Great, thanks. Morning H, morning Scott.
Giulio Romero: I wanted to start on how you are viewing, hey, good morning guys, I wanted to start on how you guys are viewing and managing the broader operating environment. It sounds like the March quarter for Insteel.
Speaker Change: That is the improving business conditions. Sounds like the the order of broken April is good, but was hoping you could maybe speak specifically to conditions.
Speaker Change: You know, April to date in terms of the changing terror policy, the overall level of uncertainty and just, you know, it provides some color to what you're hearing from your conversations with customers, suppliers and the overall value chance to how to manage through this level of uncertainty.
Speaker Change: Well, I would tell you, Julio, that we saw it distinct.
Acceleration of our business beginning in the first quarter.
Speaker Change: So I would view our second quarter as continued momentum that was first evident during our first quarter.
Speaker Change: I see no reason at this point that we would expect our third or fourth quarters to be different that businesses is robust.
Speaker Change: Our year-over-year shipping comparable to April are really solid and the limiting factor probably in what our company can do at this point is going to be the availability of raw material.
So as I mentioned in my prepare comments
Speaker Change: The bullish conditions that we see in the market really aren't reflected in the broader macroeconomic indicators that we normally refer to. So, something else is responsible for the pickup, but the pickup's real, the customers are optimistic.
Speaker Change: They have good backlogs, they're quoting a lot of business, and I readily acknowledge that all that is subject to change based on people's perception of the impact of the Trump administration's trade policies.
The comments that you hear today are as of today.
and we know that conditions could change.
Speaker Change: and our outlook for continued robust conditions in the market. But as of right now I'll tell you that we're trying to operate more hours at every facility and it continues to be difficult to hire people.
So that's where we are.
Okay, very helpful there.
Speaker Change: I'm tempted to ask you, what are your thoughts on that disconnect between the macro indicators and what you're seeing on the ground?
What do you think that is?
Over time, we have mentioned...
on numerous occasions.
that the lack of objective data
Speaker Change: Connected with consumption of our products or even with our customers products is frustrating, which has caused us to take a step up the chain and look at more macro factors.
Clearly somewhere in this hole.
Speaker Change: scheme, inventories have to have a bearing on what's going on, but it's not simply that our customers and their customers are wanting to get product into ground and get project started.
Speaker Change: I would tell you that the quotation activity that our customers are seeing and the quotation activity, we are seated.
It's solid.
Speaker Change: So does it mean that the macro factors lag, or does it mean that there's an anomaly in the market that we really can't name? I don't know which it is.
I need you.
Speaker Change: and we'll continue trying to analyze those factors going forward, but right now, we're going to go on.
Speaker Change: I'm very hopeful, but one more and I'll pass it on is obviously congratulations on the Section 232 Extension, you know, finally to downstream products, including your PC strength product lines, just if you could speak to how you're thinking about.
Speaker Change: You know pricing in this environment, you know, given you're likely going to have to...
Speaker Change: C continued rising input costs, you talked about sourcing wire rod from imports, but you're also likely going to benefit from the supply demand dynamics that your domestic suppliers were in back in 2018 during the first kind of implementation of 232.
Speaker Change: So, we did suffer since 2018, but if you think back to what happened in 2018, 1920,
Speaker Change: We were somewhat insulated from the full impact of the 232 anomaly.
When Ocean Freight Rates
from Asia Rose, Malvator of TEDx.
Speaker Change: It really had on the impact of raising the cost of the imported PC strand and it kept that problem sort of in a bad throw while.
Speaker Change: Okay, and in the last three years, when ocean rates, ocean freight rates fell back and normalized, the imported PC strand has been a major problem to us.
Speaker Change: There's no way that the extension of 232 PC strand can be interpreted as bad news. It is good news.
But it's not a panacea.
Speaker Change: The fact of the matter is that the world market price...
of Hat Road Steel.
It's three or four hundred dollars a ton.
Lower than...
Speaker Change: the U.S. price of a comparable product. And that means that our offshore competitors continue to have a substantial advantage.
but no longer did they have.
Speaker Change: the Section 232 Advantage as well. So clearly this extension to PC Strand is a positive thing for Insteel. We hung in those markets that are affected by imports for seven years. Wow.
Speaker Change: Wow, we were not covered by Section 232 and it has become more tenable for us to hang in going forward, but, but, but...
Until U.S. Steel Prices and World Market Steel Prices
Speaker Change: somehow become more equal on us will still be in a disadvantage position relative to import and I would not.
Speaker Change: as I have before, that only about 10% of Insteel's revenues are subject to direct import competition, and there is no accident about that. It is exactly these kinds of anomalies.
Great, thanks for all the color agents got, I'll pass it on [inaudible]
Thank you.
Speaker Change: Thank you. Our next question is from Tyson Bauer from KC Capital. Your line is now open. Please go ahead.
Good morning, gentlemen, and congratulations.
Thank you.
Uh-uh.
Speaker Change: A lot of the growth is based upon shipment growth, volume growth, better health of the end markets as opposed to just having a benefit from pricing capabilities.
Speaker Change: How do you view or how do you differentiate what we saw in COVID that had the high inflation and the pricing versus now with the tariffs but you still have strong underlying growth which is evident by your shipment growth?
Speaker Change: Yeah, I mean, I would tell you that it could have been created from artificial conditions.
Speaker Change: in the supply chain particularly related to inventories and with the shut down part of the economy that ran supply chains dry, the rebuilding of the supply chains when it happened was sort of manic.
Speaker Change: and so I would agree with you that the underlying fundamentals
of what we're seeing today.
Speaker Change: should it continue are much more solid than what we saw as the economy recovered from COVID. And I don't think we've ever been under an illusion that solid supply and demand.
Speaker Change: Relationships are really essential for our business to do well and today we have that.
In 24 and 23, we didn't have it.
Speaker Change: And our results reflected that. So I don't think any of this should really come as a surprise except that I don't know that anyone forecast the strength of the marketplace that we're seeing today. Certainly we didn't.
Speaker Change: Would you anticipate, obviously, with 232 Expansion PC Strand, the very timely acquisition as is turning out to be allowing you that pricing ability within the industry, along with going into the seasonally strong second half of the year.
Speaker Change: Are you really seeing any pushback at all to your price increases as you push them through? And are you seeing other competitors just following your lead?
to fully serve our market, our sensitivity to competitive.
Speaker Change: Conditions in the market is lessened but right now I think
Speaker Change: I think every consumer of steel wire rod is feeling the same
impacts of tight supplies and uncertainties about availability.
Speaker Change: so that the natural reaction is that prices are elevating from the hot-rolled product, they're elevating from our products.
and how long that continues is unknown.
That...
Speaker Change: I certainly see it going through our third quarter, does it carry over into our fourth quarter? It's hard to say. I would tell you that Insteel is not the only company out there that has turned to the offshore markets.
supplement.
Speaker Change: Domestic Supplies, which are clearly inadequate. So I think in the fourth quarter that our suppliers in our market will look around at conditions and we'll just...
Speaker Change: will just analyze the impact of hot roll prices and downstream prices and hopefully make the appropriate decisions at the town.
OK.
Speaker Change: I've just given those comments, was that imply that we will see ASP growth year over year next quarter and really for the second half, along with that shipment and growth.
Speaker Change: Better Utilization, which should create a favorable environment for your spreads. Are all those three things aligning?
at least for the next couple of quarters.
Speaker Change: Well, I mean, I think it would be hard to see a deterioration in those factors during our third fiscal quarter. I can't comment on our fourth quarter.
Okay.
Speaker Change: from looking at state budgets as they're in that process, the federal budget to continue a resolution, what may or may not be in tap going forward.
Speaker Change: It doesn't appear to be any lowering of spending, especially on your key markets in the public spending, which should be favorable for you.
Speaker Change: and because we are starting off such a low base on residential construction are all those things favorable as we go forward.
Speaker Change: that maybe planning, maybe lower confidence, maybe lower, but things that are in the pipeline or things that are imminent to begin construction, all those are really just on schedule as they were intended to be.
Speaker Change: Our product has been pretty consistent. We've seen some of the commercial guys with really weak order books.
Speaker Change: over the past couple of years, but that's starting to turn around. The warehouse people, the wall panel people, they're beginning to build backlogs that are on.
that are certainly encouraging. [inaudible]
Speaker Change: From our perspective of the world, it appears that that part of the market is showing signs of life which have been rare over the last couple of years.
Speaker Change: Okay, bookkeeping question last one for me. On the instead of a cruel, did we have any catch-up in the quarter or pull forward based upon your, now your ongoing trend line here that we get back to a more normalized, a cruel and third and fourth quarter scot?
Speaker Change: I don't know if you can say there's a normalized or crawler, it's surely going to be dependent on performance, so the better we do, the higher that expense is going to be the better.
Speaker Change: But we didn't have any catch up in the quarter based on where we were in the first quarter.
Not necessarily if the quarter expansion reflects.
What happened in the quarter?
Speaker Change: It builds on itself throughout the year so obviously there was some build in Q1 that got triggered in Q2 as we continued moving higher but I wouldn't say there was any carryover.
All right. Thank you, gentlemen.
Okay, thank you, Tyson.
Speaker Change: Thank you. We currently have no further questions, so I'll hand back to H for closing remarks.
H: Thank you, Betty. We appreciate your interest in the company. I look forward to talking to you next quarter and encourage you to contact us in the meantime if you have questions. Thank you.
H: This concludes today's call. Thank you for joining us. You may now disconnect your lines.
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