Insteel Industries Q2 Earnings Call Highlights

Key Points

• Insteel reported a weaker-than-expected Q2 as severe winter weather and project timing pushed shipments into later quarters, with net earnings down to $5.2 million (vs. $10.2M a year earlier) and shipments falling 5.9% year‑over‑year.
• Average selling prices rose 14.2%, but rising wire-rod costs and higher unit conversion costs compressed spreads and drove gross margin down to 9.6%; management expects margins to recover in Q3 as recent price increases, higher operating rates, and favorable raw‑material carrying values take effect.
• Section 232 tariffs and domestic mill curtailments have forced Insteel to import more wire rod, raising working capital roughly $45 million over the last 12 months; the company ended the quarter with $15.1 million in cash and no borrowings on its $100M revolver.

Insteel Industries NYSE: IIIN reported weaker-than-expected second-quarter fiscal 2026 results, as management pointed to widespread winter weather disruptions, project delivery delays, narrowing spreads, and higher unit conversion costs as key headwinds during the period.

Weather and project timing weighed on quarter

Chief Executive Officer H.O. Woltz III said the company “fell well short of our expected financial performance in Q2,” but maintained that the “upturn in business activity we reported previously is still intact.” Woltz attributed much of the shortfall to “severe and prolonged” winter weather across many geographies, along with project delays that pushed shipments out of the quarter.

“We’re confident that short-term weather conditions and project delays neither create nor destroy demand, and that postponed demand will be evident during the balance of fiscal 2026,” Woltz said.

In Q&A, Woltz described the delayed work as typical timing issues on construction projects, emphasizing it was a “delay of business” rather than a cancellation. He said the delayed project should begin shipping in the current quarter and is expected to run through fiscal 2026 and into 2027.

Financial results declined year over year

Vice President, CFO and Treasurer Scot Jafroodi said the quarter’s results reflected the combined impact of “winter weather disruptions, lower spreads, and higher per unit conversion costs.” Net earnings were $5.2 million, or $0.27 per share, compared with $10.2 million, or $0.52 per diluted share, in the prior-year period.

Shipments declined 5.9% year over year, though they increased 6.9% sequentially from the first quarter. Jafroodi noted the second quarter typically has seasonal softness, but said conditions this year “were significantly more severe.” After a solid January, extended winter weather “across most of our markets” reduced construction activity and disrupted schedules for both customers and Insteel, weighing on order flow and shipments. He also cited certain projects deferred to later in the year for non-weather reasons.

Jafroodi said early third-quarter activity had improved, with “recent order activity” described as solid and April shipments “trending above forecasted levels.” During Q&A, Woltz added that the stronger April shipping performance was not related to the still-delayed project, and said pricing was rising “as we expected them to.”

Pricing rose, but spreads and margins tightened

Average selling prices increased 14.2% from the prior year, which Jafroodi attributed to pricing actions taken throughout fiscal 2025 and into 2026 to offset higher rod costs, increased Section 232 tariffs, and rising operating expenses. Sequentially, average selling prices increased 1% from the first quarter, even as wire rod costs continued to rise. Jafroodi said published steel wire rod prices rose $90 per ton during the quarter.

While Insteel implemented additional price increases during the second quarter, Jafroodi said the limited sequential benefit was influenced by product mix, contractual pricing, and softer volumes. He said recent pricing actions, including an additional price increase implemented in April, are expected to provide more benefit as they are “more fully reflected” in realized pricing.

Gross profit fell $8 million year over year to $16.5 million, and gross margin narrowed to 9.6%. Jafroodi attributed the decline primarily to lower shipment volumes, reduced spreads between selling prices and raw material costs, and higher unit conversion costs tied to lower production and weather-related inefficiencies. Sequentially, gross profit declined $1.6 million and gross margin contracted by 170 basis points, as shipment slowdown delayed price tailwinds and extended the lag between raw material cost increases and realized pricing.

Looking to the third quarter, Jafroodi said the company expects a recovery in gross margin supported by:

• Improving demand during the seasonally stronger part of the year
• Recent price increases gaining traction
• More favorable raw material carrying values
• Higher operating rates supporting fixed-cost absorption

Costs, cash flow, and liquidity

SG&A expense decreased to $9.7 million, or 5.6% of net sales, from $10.8 million, or 6.7% of net sales, a year earlier. Jafroodi said the decline was driven primarily by a $1.1 million reduction in compensation costs under the company’s return-on-capital incentive plan, reflecting weaker performance. SG&A was also affected by a $203,000 unfavorable year-over-year change in the cash surrender value of life insurance policies, which he tied to the downturn in financial markets.

The effective tax rate was 23.3%, slightly above 23.2% last year. Jafroodi said the company expects an effective tax rate of about 23% for the remainder of the year, subject to pretax earnings and other factors.

Operating cash flow was $4.8 million in the quarter, compared with using $3.3 million in the prior-year period, driven primarily by changes in working capital. Net working capital used $1.4 million in cash, reflecting a $16.8 million increase in receivables from higher sales and selling prices, partially offset by a $13.3 million reduction in inventory as the company scaled back raw material purchases.

Quarter-end inventory represented approximately 3.4 months of shipments on a forward-looking basis, down from 3.9 months at the end of the first quarter. Jafroodi reiterated that inventory had been built earlier in the year as the company supplemented domestic wire rod with offshore material. He said Insteel expects a modest inventory increase as it enters the seasonal busy period and added that inventory was valued at an average unit cost approximating second-quarter cost of sales, “favorable relative to current replacement costs,” which he said should benefit spreads and margins in the third quarter.

Capital expenditures totaled $4.4 million in the quarter and $5.9 million for the first half, with the company maintaining a full-year target of $20 million. Jafroodi said the company ended the quarter with $15.1 million of cash and no borrowings on its $100 million revolving credit facility.

Tariffs, raw material supply, and end-market indicators

Woltz devoted part of his remarks to tariffs and raw material dynamics. He said the Section 232 tariff of 50% on steel imports has lifted U.S. market prices for hot-rolled wire rod to “a level that’s 50%-100% over the global market price.” However, he said the inclusion of derivative products such as PC strand under Section 232 has coincided with a sharp drop in imports. Woltz said that from August to December—described as the five-month period following the changes—PC strand imports fell by more than 50%.

Woltz also outlined structural constraints in domestic wire rod supply, citing permanent mill closures and reduced output at another producer. He said these curtailments reduced actual domestic production by more than 800,000 tons per year and reduced domestic capacity by nearly 1.2 million tons per year, relative to apparent domestic consumption of about 5 million tons per year. As a result, he said Insteel was “forced to turn to the offshore market for a portion of its supply,” which requires larger purchases and increases inventories and working capital. Woltz said net working capital rose approximately $45 million over the last 12 months, and the company expects to continue importing until domestic availability improves.

In response to a question on freight, Woltz said he did not view the situation as separate “pots” of recoverable versus absorbed freight costs. He said Insteel is “very well located for inbound freight cost purposes” and does not believe it incurs excess inbound freight costs due to importing. However, he said freight costs have risen substantially since the conflict in Ukraine, citing higher diesel costs and fewer drivers, and said load rejections by carriers have increased. He added the company debated surcharges but elected to raise prices instead, noting it has implemented three price increases since the start of the year and is seeking to recover higher operating and raw material costs.

On end-market signals, Jafroodi said the Architectural Billings Index improved to 49.4 in February from 43.8 in January but remained below 50, suggesting contraction moderated. He said the Dodge Momentum Index increased 1.8% in March, driven by a 7% improvement in commercial planning activity supported by data center construction. He also cited U.S. Department of Commerce data showing total construction spending up about 1% year over year in January, with non-residential spending essentially flat and public highway and street construction up around 4%.

Asked about data center construction and potential delays, Woltz said he does not believe the “data center phenomenon goes away in 2026 or 2027,” adding, “I think you have five solid years of data center activity.” He said delays are possible but may be “reasonably insignificant” in hindsight, and added that data center demand appears to show up not only in projects Insteel can identify directly, but also through customers in its legacy business where end-use isn’t always visible.

About Insteel Industries NYSE: IIIN

Insteel Industries, Inc is a leading manufacturer of steel wire reinforcing products used in concrete construction. The company specializes in the design, fabrication and distribution of welded-wire reinforcement, cut-and-bent reinforcement and related accessories for concrete walls, floors and columns. Its products are employed across residential, commercial and infrastructure projects, providing structural strength and dimensional stability in poured concrete applications.

Key product lines include truss mats—prefabricated, ladder-like assemblies of welded wire designed for rapid placement—and custom cut-and-bent wire assemblies that meet specific engineering requirements.

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