Insteel Industries Q3 2025 Earnings Call Transcript

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Provided by Quartr
July 17, 2025

Key Takeaways

  • Positive Sentiment: Strong Q3 financials — net earnings rose to $15.2 million (or $0.78/share; $0.81 adjusted) driven by higher shipments (+10.5% YoY), an 11.7% increase in average selling prices, and gross margin expansion to 17.1%.
  • Negative Sentiment: Significant raw-material pressure and tariff uncertainty — U.S. wire-rod supply is tight (rod prices up ~$190/ton since January), the company has supplemented with imports but faces longer lead times and ambiguous Section 232 tariff treatment that raises costs and disrupted production/lead times; management says higher costs will be passed through.
  • Positive Sentiment: Working-capital and inventory position supported cash flow — operating activities generated $28.2 million in cash this quarter, inventories rose to 2.7 months of shipments but are carried below current replacement cost, which should help spreads and Q4 margins.
  • Neutral Sentiment: M&A and capital plan — recent acquisitions (Upper Sandusky and Texas) are integrating well and boosting shipments, but triggered $843k of restructuring and higher amortization; fiscal‑2025 CapEx guidance was trimmed to $11 million from $17 million while the company remains debt-free and modestly repurchasing shares.
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Earnings Conference Call
Insteel Industries Q3 2025
00:00 / 00:00

There are 5 speakers on the call.

Speaker 2

Hello and welcome everyone to the Insteel Industries' third quarter 2025 earnings call. My name is Becky, and I'll be your operator today. During the presentation, you can register a question by pressing * followed by 1 on your keypad. If you change your mind, please press * followed by 2. I will now hand over to your host, H.O. Woltz, to begin. Please go ahead.

Operator

Thank you. Good morning. Thank you for your interest in Insteel Industries, and welcome to our third quarter 2025 conference call, which will be conducted by Scot Jafroodi, 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 that are subject to various risks and uncertainties, which could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. We're pleased that the upturn in business activity we experienced over the last couple of quarters continued during our third fiscal quarter, despite macro indicators that would indicate mediocre activity in the construction sector.

Operator

While we're glad to see the ongoing recovery in our markets, we continue to be aware of uncertainties created by the rollout of the administration's trade policies and from the economic cycle. I'll now turn the call over to Scot to comment on our financial results, and following Scot's comments, I'll pick it back up to discuss our business outlook and the view of the impact of tariffs on our company.

Speaker 4

Thank you, H. And good morning to everyone joining us on the call today. As we report in this morning's press release, our strong third quarter performance was driven by higher shipment volumes, along with a significant recovery in spreads between selling prices and raw material costs. Net earnings for the quarter increased to $15.2 million, or $0.78 per share, compared to $6.6 million, or $0.34 per share in the prior year. Excluding the non-recurring restructuring charges mentioned in the release, adjusted earnings were $0.81 per share. Our results this quarter were supported by the pricing actions we have taken to manage the continued rise in raw material costs. Average selling prices rose 11.7% year-over-year and 8.2% sequentially from the second quarter, reflecting price increases implemented throughout fiscal 2025, including additional adjustments made in the third quarter to help offset the impact of higher input costs.

Speaker 4

As we mentioned on our last call, the U.S. wire rod market remains tight, driven by reduced domestic production capacity alongside strong underlying demand. Since January, published prices for steel wire rod, our primary raw material, have increased by approximately $190 per ton. Despite these price increases, supplies remain limited. To help ease these conditions, we have supplemented our domestic purchases with significant offshore volumes, which have improved our material availability and are helping to support production levels heading into the fourth quarter. Despite these supply headwinds, shipments for the quarter increased 10.5% year-over-year and 3.5% sequentially. The growth was driven by contributions from our recent acquisitions, along with improving demand in our construction and markets. That said, we weren't able to fully meet all the market demand this quarter.

Speaker 4

Limited availability of wire rod created production challenges at several of our facilities, which in turn affected our ability to maintain typical lead times. Gross profit for the quarter increased $15.4 million from a year ago to $30.8 million, while gross margin expanded by 650 basis points to 17.1%. This performance is driven primarily by an expansion in spreads, as the increase in average selling prices outpaced the rise in raw material costs during the quarter. As we've noted in our prior calls, during periods of strong demand and rising steel rod prices, our financial results tend to benefit from both the timely implication of price increases, enabling us to offset higher replacement costs, and the favorable impact of lower cost inventories flowing through under our first-in-purchase-out accounting methodology.

Speaker 4

As we move into the fourth quarter, we expect gross margin to remain near current levels, supported by strengthening demand, favorable raw material carrying values, and higher operating rates at our facilities. SG&A expense for the quarter rose to $10.6 million, or 5.9% of net sales, compared to $7.9 million, or 5.4% of net sales in the prior year period. The increase was primarily attributable to a $2.5 million rise in compensation expense under our return on capital-based incentive plan, which reflects our improved financial performance during the quarter. We also recognize an increase of $300,000 in amortization expense related to intangible assets acquired through our recent acquisitions. These increases are partially offset by a $487,000 favorable year-over-year swing in the cash surrender value of life insurance policies, reflecting fluctuations in the value of the underlying investments.

Speaker 4

Separately, we incurred $843,000 in restructuring charges during the quarter tied to the consolidation of our welded wire manufacturing operations. These actions follow our acquisitions of Engineered Wire Products and O’Brien Wire Products of Texas earlier in the fiscal year. While the majority of the remaining restructuring activities are expected to be completed during the fourth quarter, some related costs may extend to the first quarter of fiscal 2026. Our effective tax rate for the quarter fell to 23.3% from 24.7% the year ago. Looking into the balance of the year, we expect our effective rate to run close to 23.4%, subject to the level of pre-tax earnings, tax differences, and other assumptions and estimates that compose our tax provision calculation.

Speaker 4

Turning to the cash flow statement and the balance sheet, operating activities generated $28.2 million cash during the quarter, driven primarily by higher net earnings and a reduction in net working capital. Working capital improvement was largely attributed to a $36 million increase in accounts payable and accrued expenses, reflecting elevated rod purchases and an increase in average rod costs. This benefit was partially offset by a $23.1 million increase in inventories, which was also tied to the rod purchasing activity and the higher average carrying value of raw materials. Our inventory position at the end of the quarter represented 2.7 months of shipments on a forward-looking basis, calculated off of forecasted Q4 shipments, which is up from 2.2 months at the end of the second quarter.

Speaker 4

Finally, our inventories at the end of the third quarter were valued at an average unit cost that was higher than our third quarter cost of sales, but remained favorable relative to current replacement costs, which will have a positive impact on spreads and margins as we move through the fourth quarter. We incurred $1.6 million in capital expenditures in the quarter for a total of $6.5 million through the first nine months of our fiscal year. Based on forecasted expenditures for the remainder of fiscal 2025, we reduced our full-year target to $11 million from the previously communicated target of $17 million. H.O. Woltz III will provide more detail on this topic in his remarks. We continued our share buyback program during the quarter, repurchasing $200,000 of common equity, equal to approximately 6,000 shares.

Speaker 4

From a liquidity perspective, we ended the quarter with $53.7 million of cash on hand, and we're debt-free with no borrowings outstanding on our $100 million revolving credit facility, providing us ample financial flexibility and the ability to pursue any attractive growth opportunities that may develop. Turning to the macro indicators for our construction and markets, recent data continues to reflect a mixed and uncertain outlook. The latest readings from key leading indicators for non-residential construction suggest that market conditions could remain challenging over the near term. In May, the Architectural Billing Index increased to 47.2, reflecting a modest easing in the rate of decline. While this uptick suggests some early signs of stabilization, particularly with an increase in new project inquiries, the index remains below the 50 threshold that indicates growth.

Speaker 4

Meanwhile, the Dodge Amendment Index, which tracks non-residential projects entering the planning stage, offered a more encouraging outlook in June. The index rose 6.8% month over month to 225.1, and is now approximately 20% higher than it was in June of last year. Much of the gain was in the commercial segment, which climbed 7.3% from May and is up 11% year-over-year. This pickup in activity planning activity suggests a growing pipeline that could support future non-residential construction demand. U.S. mixed shipments and other proxy for construction activities showed modest improvement in March, rising 1.4% year-over-year. However, on a year-to-date basis through March, shipments remained down 7.5% compared to the same period in 2024. Construction spending data from the U.S. Department of Commerce also reflects a softer demand environment.

Speaker 4

In May, total construction spending declined 0.3% from April on a sequence-adjusted annual basis and was down 3.5% compared to the prior year. Non-residential spending fell 0.2% month over month and 1.1% year-over-year. Within that category, highway and street construction, a key end-use market for our products, was down 0.7% versus May of last year. The broader macroeconomic environment is also contributing to the uncertainty moving forward. While the Federal Reserve has indicated a possible shift towards lower interest rates later in the year, persistent inflationary pressures and uneven economic data could delay or limit the extent of easing. At the same time, the evolving U.S. trade and tariff landscape, particularly around steel, presents further uncertainty, with potential implications for both input costs and our long-term demand forecast.

Speaker 4

While market conditions remain competitive and visibility beyond the near term is limited, we believe Insteel Industries is well positioned to capitalize on improving demand trends as we close out fiscal 2025. By staying disciplined in our operations, closely managing working capital, and maintaining strong customer relationships, we aim to navigate near-term challenges while building long-term value for our shareholders. This concludes my prepared remarks. I'll now turn the call back over to H.

Operator

Thank you, Scot. We noted a substantial acceleration of demand for concrete reinforcing products in Q1 and Q2 and commented that we expected the demand recovery to continue through fiscal 2025. We're glad to confirm that the positive trend continued through our third fiscal quarter and into the strongest seasonal period for our company, giving us confidence that we should perform well for the balance of the calendar year. As stated in the release, the brisk pace of business we experienced over the past few months is not reflected in broader macroeconomic indicators that are generally used to measure the strength of the construction industry, but the demand recovery is nevertheless real. The confidence level of most customers, interactions between our salespeople and customers, and favorable seasonal trends lead us to believe business conditions should remain reasonably robust for the balance of the calendar year.

Operator

The administration's tariff strategy continues to be a work in process and affects our industry in unpredictable ways. Before updating listeners on our view of tariffs and how they may affect Insteel Industries, let me reiterate that only about 10% of Insteel Industries' revenue base is directly affected by imports and therefore potentially subject to unintended consequences of the administration's tariff policy. This is not coincidental, as we've recognized the futility of competing in markets where imports constitute a major source of competition. The objectives and disciplines driving offshore competitors and offshore investors are fundamentally different from those influencing domestic producers and domestic investors. While we're committed to retaining our position in import-affected markets going forward, it's unlikely that Insteel Industries would materially increase its exposure to import competition.

Operator

With those comments as context, let me provide our current view of the tariff landscape while acknowledging that my comments are valid today and may not be valid tomorrow, depending on the actions the administration may take. Everyone probably knows that the Section 232 tariff, which has been in effect since March of 2018, was doubled to 50% of value effective in June, following a determination by the administration that the 25% tariff was insufficient to protect the domestic steel industry. While we welcomed the increase to 50%, which would further level the playing field with respect to imports of PC strand, we were surprised to learn that the increased Section 232 tariff would apply only to the steel value of imports. The executive order increasing the Section 232 tariff was ambiguous enough to give rise to a variety of interpretations with respect to the value that was actually tariffed.

Operator

While PC strand is a product that is 100% steel, the steel value subject to the tariff is reported to U.S. Customs by the importer of record. Not surprisingly, some parties have elected to interpret the executive order in accordance with their interests. While we have no visibility into the tariff actually paid by PC strand importers of record, we understand that some importers of record are reporting steel values equal to wire rod value, and in the case of vertically integrated producers that produce wire rod, may be reporting steel values equal to the value of steel scrap that they purchase, melt, and roll into wire rod. Prior to the increase in the tariff to 50%, it was clear that the tariff was imposed on the full value of the imported PC strand. We understand, however, that U.S.

Operator

Customs is meticulous in requiring thorough documentation of tariff values, and we believe that this matter will be resolved appropriately. Erroneous interpretations of the tariff undermine the administration's intent with respect to the Section 232 tariff, and we're working with the Department of Commerce to raise the visibility of this matter and to seek corrections that may be warranted. Meanwhile, the uncertainty surrounding the issue is sufficient to induce caution in the importing community, since there is a prospect for retroactive truing up, and intentional violations could constitute customs fraud, which is a criminal offense. Aside from the impact on PC strand imports, the administration's tariff policy is affecting our purchase of spare parts and our primary raw material, rolled carbon steel wire rod.

Operator

Concerning spare parts, most are imported primarily from Europe and are subject to Section 232 tariff on steel and aluminum, as well as to reciprocal tariffs on any non-steel or non-aluminum content. This creates a substantial administrative challenge because U.S. Customs will not clear a party until confirming its steel content, its aluminum content, its non-steel or aluminum content, and the country of origin for non-steel or non-aluminum content. Only then can Customs apply the relevant tariffs to the party. The result, of course, is longer lead time for spare parts and higher costs. The tariff regime also affects our purchases of offshore raw materials. As a reminder, imports of wire rod are essential for Insteel Industries today, as there is insufficient domestic wire rod production capacity to supply domestic demand.

Operator

Our choice is to pursue offshore sourcing or to scale back operations to the point that our ability to support customers is threatened. With this trade-off in mind, we've elected to import sufficient volumes of wire rod to assure we can support our markets. We were surprised by the administration's June action to increase the Section 232 tariff, which will affect the undelivered portion of our offshore wire rod purchases. In as much as there is no supply alternative, we elected to proceed with the offshore transactions, and we will pass through the higher costs. We're convinced that competitors are similarly situated, although some may find themselves short of raw materials. The reality of wire rod supply in the U.S. required us to make commitments to import substantial quantities.

Operator

While we entered into these transactions reluctantly due to the inherent higher risk of longer lead times, there was no alternative available except to take downtime at our manufacturing facilities. We believe the bullish domestic pricing trajectory for wire rod reduces the pricing risk normally associated with importing, but that risk has not been eliminated. Depending on actual deliveries, we could see raw material inventory levels spike temporarily, although any such spike would be short-lived. Moving to acquisition activity, we continue to be pleased with the operation and results of the Upper Sandusky, Ohio, facility that we acquired during Q1. Our Texas acquisition, while considerably smaller, has also yielded the expected benefits. I again compliment and thank our people, including those at the acquired facilities, for their professional and effective integration efforts. Turning to CapEx, as mentioned in the release, we now estimate $11 million expenditures for fiscal 2025.

Operator

The resources consumed by integration activities related to our acquisitions impacted our investment programs at our manufacturing facilities, which we expect to rebound in coming years as we execute on our commitment to lower our cash cost of production and expand our product offering. No projects have been canceled, and we are evaluating a number of attractive opportunities. We'll provide a view of 2026 CapEx next quarter. Looking ahead, we're aware of the substantial risks related to the administration's tariff policies and the future performance of the U.S. economy. Regardless of developments in these areas, we are well positioned to pursue actions to maximize shipments and optimize our costs and to pursue attractive growth opportunities, both organic and through acquisition. This concludes our prepared remarks and will now take your questions. Becky, would you please explain the procedure for asking questions?

Speaker 2

Thank you. To ask a question, please press * followed by 1 on your telephone keypad now. If for any reason you want to remove your question, please press * followed by 2. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Julio Romero from Sidoti & Company. Your line is now open. Please go ahead.

Speaker 3

Great, thanks. Good morning, H. and Scot.

Operator

Good morning.

Speaker 3

Good morning. You talked about the strong business activity you saw in April that you called out last quarter on your call, continuing into the third quarter. I'm curious if you've also seen quoting levels for newer projects follow that same trajectory.

Operator

Keep in mind that we really operate with minimal backlogs. Raw material constrictions have actually caused our backlogs to grow, and I think it's difficult to compare this year with prior years because circumstances have changed. Our backlogs are lengthy enough to concern me at this point from just the perspective of providing the requisite level of service that our customers expect. In more project-oriented markets, we're seeing that data centers and the like have clearly filled the gap that the slower commercial construction has created. Overall, we're pretty optimistic about what we see out there.

Speaker 3

Okay. Very helpful. You know, when thinking about Section 232 and the first implementation of Section 232 back in 2018, the resolution to include downstream steel did not get resolved until about seven years later. Just thinking about that historical context, I wanted to ask, what's your sense of the potential timeline to resolve the most recent Section 232 disconnect between the metal value of the import versus the full value of the import?

Operator

Keep in mind that we don't know that importers of record are not actually declaring the full value of PC strand. We believe that it is the administration's intent that the tariff should be on the full value of the product. Therefore, by implication, anyone who is acknowledging the steel value as wire rod value or steel scrap value is playing outside of the rules. We don't think that that will be allowed to persist on an ongoing basis. We are, as you might expect, very vocal with the Department of Commerce about this. It would be nice, but I guess it's not unexpected that there's a considerable amount of ambiguity in this thing the way it was rolled out.

Speaker 3

Gotcha. Understood. Thank you for that. Just the last one for me would just be thinking about the integration of Engineered Wire Products. You know, how is that going? Can you maybe speak to any synergies you may be seeing on the freight cost per ton side of things from that acquisition?

Operator

Keep in mind that we competed with this group for a lot of years. We could tell from a competitive point of view that the facility was a good facility, and the people knew what they were doing. Certainly, our view has not changed. We're learning as much as we teach, and we feel real solid about where we are with the acquisition. We've moved a lot of products around, so there's no real comparable performance between last year and this year. It's just a fundamentally different operating approach. They obviously know what they're doing, they're productive, and we know how to quantify those things.

Speaker 3

Very helpful. I'll pass it on. Thanks very much.

Speaker 2

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

Speaker 1

Good morning, gentlemen, and well done.

Operator

Good morning, Tyson.

Speaker 1

I'm just going to piggyback on that last question since he opened up the door. H, you think that Engineered Wire Products acquisition is probably the best one you've done as CEO as far as timing, impact, and benefit for shareholders?

Operator

No.

Speaker 1

You go back.

Operator

I think the acquisition in fiscal 2011 was more transformative for the company.

Speaker 1

Okay.

Operator

I think it was a very good one, Tyson. When you say the best, I mean, we acquired five plants without the IV acquisition.

Speaker 1

Right. Which gave you the scale and the economies, and really put your market share on the map at that point in time.

Operator

Yeah, I mean, and it's pretty much a nationwide presence.

Speaker 1

Correct. Challenges meeting a demand that you referenced, is it the challenges are trying to meet that physical demand and capacity to meet it, or are you talking more that challenges in meeting that demand while maintaining or expanding your current spreads and margins?

Operator

I think that the challenges have been first, when we have less than about 45 days of raw material, then scheduling becomes a real problem. We run into more frequent changeovers and changeovers that logically we wouldn't make under other circumstances. We've had plants at 10 days of raw materials. We've had plants with no raw material. Scheduling has been a tremendous headache for us. As we've said for many quarters, we continue to have concerns about properly staffing our plants. That continues to be a problem for us. It's a chicken and the egg question in some respect, but clearly, we incurred higher costs. We lost shipments due to raw material disruptions in the quarter.

Speaker 1

Okay. Given the strength and the tranches you see leading in the Q4, do you anticipate being able to sustain or maintain your current margin levels?

Operator

As Scot said in his comments, yeah, we expect that we're going to pass through higher costs. There's no company in the industry that can afford to absorb the tariff rates that we're seeing. It's difficult from a day-to-day point of view to know exactly where selling prices are going to be and where costs are. From a big picture, I wouldn't expect our margins to deteriorate in a market such as we have now.

Speaker 1

Okay. The benefit of these trends have all occurred with basically residential and housing as a non-participant, or certainly has not had any recovery of note. That doesn't look like it's changing anytime soon. What needs to occur to see that area improve, or are you satisfied that the commercial side and the infrastructure side is strong enough that you really don't need housing to be an area of strength?

Operator

To say we don't need it, I think maybe going beyond what I would say. One of the things that we talk about is the impact of the infrastructure investment in tech that, you know, our customers don't necessarily know the funding sources for the projects that they're shipping. We certainly don't know. No one comes to us and says, "You know, I need five truckloads of steel because I have an IIJA project." That just doesn't happen. We can see that customers really throughout the country and throughout most of the segments of our business are busy. I suspect that finally, some of those IIJA funds are seeding this market and resulting in real demand for real products.

Speaker 1

Okay. The housekeeping question, the cash management, obviously, working capital needs, inventory costs continue to need funding. What kind of year-end outlook are we seeing for cash balance, and are we able to get that closer to that $75 million to $80 million?

Operator

We'll know when we get there, Tyson. Keep in mind that we put out nearly $100 million in cash during Q1 between acquisitions and our special dividend. At $53.7 million where we wound up in June, I'm not at all dissatisfied.

Speaker 1

Okay. Last one for me, the wire rod supply shortage that you talked about domestically, any sense of the magnitude of what that is, and relative to like when the COVID years occurred and that revenue slippage as a result, any way to quantify what that opportunity cost was?

Operator

I don't think we could give you an answer that would be very good. I would say that when we wrapped it all up, we probably will have imported 25% to 30% of our steel requirement, which would approximate the domestic shortfall.

Speaker 1

Are you viewing 2025, 2026 more favorably than 2021, 2022, just in the current setup being more sustainable for you to continue your success as shipment volumes have been a key component this time?

Operator

That's a hard one to answer. The circumstances in 2021 and 2022 post-COVID were so fundamentally different than what we're seeing now that I'm not really sure I could give you an answer to that that makes any sense.

Speaker 1

All right. Thank you, gentlemen.

Operator

Okay. Thank you, Tyson.

Speaker 2

Thank you. As a reminder, to ask a question, please press * followed by 1 on your telephone keypads. That's * followed by 1 on your telephone keypads now. We currently have no further questions, so I'll hand back to our speaker team for closing remarks.

Operator

Okay. We appreciate your interest in Insteel Industries. If questions arise later, don't hesitate to call us. Otherwise, we'll talk to you next quarter. Thank you.

Speaker 2

This concludes today's call. Thank you for joining. You may now disconnect your lines.

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