Insteel Industries Inc (IIIN) Q4 2025 Earnings Call Transcript

Good morning and thank you for attending the InSteel Industries fourth quarter 2025 earnings call. My name is Bricka and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Mr H. Waltz, Chairman, President and Chief Executive Officer at InSteel Industries. Thank you, you may proceed.

Thank you, Bradcomb. Thank you for your interest in in-spiel, and welcome to our fourth quarter 2025 conference call, which will be conducted by Scott Gifruti, 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. The upturning business activity that we reported previously continued during our fourth quarter, and our fiscal 2025 acquisitions performed well. While our ability to forecast future activity is limited, we see no evidence of a broad-based slowdown in our markets, although housing continues to lag significantly, as it has all year. While the ongoing recovery of our markets is real, we are aware of uncertainties created by the administration's trade policies and from the economic cycle. I'll turn the call over to Scott to comment on our financial results and following Scott's comments, I'll pick the call back up to discuss our business outlook.

Thank you, H, and good morning to everyone joining us today. As noted in this morning's press release, we delivered a strong fourth quarter performance supported by higher shipment volumes and a continued recovery and spreads between selling prices and raw material costs. Our net earnings rose to $14.6 million or $0.74 per diluted share compared to $4.7 million or $0.24 per share during the same period last year. Quarterly shipments increased 9.8% year over year driven by contributions from our recent acquisitions and stronger demand across non-residential construction markets. On a sequential basis, shipments declined 5.8 percent from the third quarter. Supply constraints for steel wire rod, which we discussed during our third quarter call, ease gradually during the quarter, allowing us to better align production with customer demand and begin reducing lead times as we close out the quarter. That said, residential construction continues to be a headwind for volumes, with activity levels remaining subdued and has yet to show any meaningful signs of recovery. Average selling prices for the quarter rose 20.3% year-over-year and 4.7% sequentially from Q3, reflecting continued pricing momentum. As we discussed in our prior calls, the U.S. steel wire rod markets have remained tight through much of 2025, and the increase in Section 232 tariffs have added further upward pressure on raw material costs. As a result, wire rod prices have moved meaningfully higher since the start of the year in response we have implemented a series of price increases throughout fiscal 2025 including further adjustments at the beginning of the fourth quarter to help offset these higher costs and support our margins gross profit for the quarter rose 16.3 million year over year to 28.6 million with gross margin improving by 700 basis points to 16.1 the increase was largely attributed to wider spreads as higher average selling prices more than offset the rise in raw material costs as we discussed on previous calls our results typically benefit during periods of strong demand and increasing steel rod prices both from the timely execution of price adjustments to recover higher replacement costs and from the flow-through effect of lower cost inventory under our first in first out accounting method on a sequential basis gross profits fail 2.2 million from the third quarter and gross margin narrowed 100 basis points reflecting lower shipment and a slight decline in spreads The SG&A expense for the quarter increased to 9.7 million or 5.5% of net sales compared to 7.5 million or 5.6% of net sales in the prior year period. The year-over-year increase was driven primarily by a $1.3 million rise in compensation expense under our return on capital base incentive plan, reflecting stronger financial performance in the current year. We also recorded an additional $300,000 in amortization expense related to intangible assets from our recent acquisitions, along with a $200,000 unfavorable year-over-year swing in the cash-rended value of life insurance policies. Our effective tax rate for the fourth quarter was 24.4%, up from 23% in the same period last year. The increase was mainly driven by changes in both tax differences and the true of the state apportionment percentages. For the full year, our effective tax rate was 23.8%. Looking at the next year, we expect our effective rate will run around 23.5%, subject to the level of pre-tax earnings and other tax-related assumptions and estimates that compose our tax provision calculation. Moving to the cash flow statement and balance sheet. Cash flow from operations used $17 million in a quarter, compared to providing $16.2 million last year. Networking capital used $37.4 million in cash in the fourth quarter, primarily reflecting an $18.6 million increase in inventories and a $23.4 million decrease in accounts payable and accrued expenses. The increase in inventories was driven by the timing of raw material purchases and an increase in the average carrying value of inventory. The reduction in accounts payable and accrued expenses primarily reflect the timing of supplier payments. At the end of the quarter, our inventory position represented 3.5 months of shipments on a forward-looking basis, calculated off of our forecasted Q1 shipments, compared with 2.7 months at the end of the third quarter. As you may recall, inventories have fallen below desired levels in Q3 due to stronger shipment activity and limit wire rod availability from domestic suppliers. To address this, we supplemented supply in Q4 with offshore rod purposes, which allowed us to increase production and rebuild inventories. Looking ahead, we expect inventory to rise in the near term as additional import shipments are received before gradually normalizing as raw material purchasing volumes moderate in the coming months. Additionally, it's worth noting that our inventories at the end of the fourth quarter were valued at an average unit cost that was both higher than our beginning inventory balance and our Q4 cost of sales. As such, we could experience a margin of compression during the first quarter as the higher cost of materials consumed, depending on our ability to push through additional price increases. We incurred $1.7 million in capital expenditures in the fourth quarter for a total of $8.2 million for the year, which is down $10.9 million from last year. Looking ahead to fiscal 2026, we expect capital expenditures to total $20 million. H will provide more detail on this topic in his remarks. In addition to our ongoing investments in the business, our financial strength has enabled us to continue returning capital with shareholders. In fiscal 2025, we returned $24 million through a combination of dividends and share repurchases. This included a $1 per share special cash dividend and four regular quarterly dividends, marking the eighth year out of the last 10 that we have paid a special dividend. We also repurchased approximately 76,000 shares of our common stock during fiscal 2025, representing $2.3 million under our share buyback program. From a liquidity perspective, we ended the quarter of $38.6 million of cash on hand, and we're debt free with no borrowing house spending on our 100 million dollar evolving credit facility going forward our capital deployment strategy will remain focused on three objectives one reinvesting in the business to drive growth and to improve our cost and productivity two maintaining the appropriate financial strength and flexibility and three returning capital to shareholders in a disciplined manner looking at the broader economic picture as we enter fiscal 2026 conditions remain mixed raw material availability has improved and demand across most non-residential markets is generally strong so residential construction continues to lag at the same time macroeconomic uncertainty remains and while potential rate cuts from the federal reserve could provide some support we're approaching the year cautiously on the demand side we continue to monitor leading measures of non-residential construction activity in august the architectural billing index rose slightly to 47.2 from 46.2 in july but remained below the 50 threshold signaling growth although fewer architectural firms reported declining billings compared to the prior month the overall trend continues to point downward meanwhile the dodge amendment index showed continued strength in a healthy part project pipeline rising 34 percent september and now up 33 year-to-date driven by strong commercial construction planning activity particularly in the data center's development in contrast U.S. mentioned as another proxy for construction activity declined 2.2 percent year over year in June and are down 5.3 percent year to date, reflecting some underlying softness in the sector. Finally, the most recent available construction spending data from the U.S. Department of Commerce shows that through July, total spending on a seemingly adjusted basis was down about three percent from last year. Non-residential construction held relatively steady. public highway and street construction one of our major end markets was essentially flat compared to a year ago even with a mixed demand backdrop we're entering fiscal 2026 with solid momentum the actions we took during the past year including completing two acquisitions consolidating our well-to-wire operations and maintaining pricing discipline have strained our position and improved our ability to adapt to changing market conditions while we remain mindful of broader economic a concern team. Our focus on serving customers and executing on our key priorities give us confidence in our ability to manage near-term challenges and continue building long-term value for our shareholders. This concludes my prepared remarks. I'll now turn the call back over to H. Thank you, Scott.

We noted a substantial acceleration of demand for concrete reinforcing products early in fiscal 2025 and commented that we expected the demand recovery to continue through the fiscal year. We're glad to confirm that positive trend continued through our fourth fiscal quarter, giving us confidence that we should perform well for the balance of the calendar year. The accelerated pace of business we experienced over the past few months is not reflected in the broader macroeconomic indicators that are general to measure the strength of the construction industry, but the demand recovery is nonetheless real. The confidence level of most customers and interactions between our salespeople and customers leads us to believe business conditions should remain reasonably robust into calendar 2026. As most people on this call are aware, housing is not a major driver of demand for in-steel. We estimate that about 15% of our revenues are derived directly from housing construction with standard welded wire reinforcement and PC strand intended for slab-on-grade post-tension applications being the product lines most affected by this sector. Demand for new housing continues to be weak, and inventory of both materials and finished housing units are too high. As we hear from customers that builders are affordability problem resources, understanding the administration's tariffs. With any conversation about tariffs, tariffs, we can speak about what we know now, which may or may not be true tomorrow. But, as of now, we are affected by tariffs in two ways. First, the most significant tariff exposure we have is the Section 232 tariff on steel and aluminum, which is 50% of the value on all, as a point of interest, the 50% Section Section 232 tariff has caused domestic sale quantities will be delivered in Q1, 2026. These purchases were made because domestic sale assurances that you may recall last quarter, the second wave were affected by the administration's tariff, all of our production, which are not disgraced and reciprocal tariffs. Administration of the tariff regime largely falls on our suppliers who must sort through the exposure to Section 232 and reciprocal tariffs for each part shipped to the U.S. I want to reiterate that only about 10% of InSteel's 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. Moving to acquisition activity, we continue to be pleased with the operation and results of our Upper Sandusky, Ohio facility that was acquired during Q1. Our Texas acquisition, while considerably smaller, has also yielded the expected benefits. While improvements are ongoing, we consider the integration of these operations to be complete and successful. Turning to CapEx, as mentioned in the release, we expect to invest approximately $20 million in our plants and information systems infrastructure during 2026. You can expect our investments to broaden our product offering, reduce our cash production costs, and enhance the robust nature of our information systems. Consistent with past practice, we will provide quarterly updates on our investment activities and expectations as the year progresses. Looking ahead, we're aware of the substantial risk 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 pursue attractive growth opportunities, both organic and through acquisition. This concludes our prepared remarks and we'll now take your questions. Rika, would you please explain the procedure for asking questions?

Of course. We will now begin the question and answer session. And if you would like to ask a question, please press star, followed by the number one on your telephone keypad if for any reason you would like to remove that question please press star followed by the number two and again to ask a question please press star then the number one and as a reminder if you are using a speakerphone please remember to pick up your handset before asking a question the first question we have comes from julio romero with Sidoti and company. Your line is open.

Thanks. Hey, good morning, Agent Scott. To start on demand. Hey, good morning, guys. To start on demand, it sounds like the confidence level of customers continues to be positive. And then the last quarter, you mentioned your view that data center construction and infrastructure projects were kind of filling the gap from commercial and residential. Does that still stand the same today?

And is there any incremental kind of data points or anecdotal uh points that have materialized since the last quarter that can better support that view well i think it continues to be the fact that the data center construction is filling a hole that that has existed in other markets um but consistent with with what we've said for many quarters um our view is not several months long it's only several weeks long so we see the activity out there we think it will continue um but but our lead times remain um compressed just just by the nature of the industry got it that's helpful and um

on the raw material front um it sounds sounds like the end of the quarter with three and a half months of shipments of inventory um how would you describe the current supply of raw material Would you describe it as normalized at this point, or is there still improvement to come?

Well, I mean, the first thing we want to do, Julio, is operate our plants effectively. And during our fourth quarter, particularly at the beginning of our fourth quarter, we were unable to do that because of supply constraints. So the quantities that we imported, we imported for a distinct reason, for distinct applications and at plants that were deficient in domestic supply. And so we're not surprised at all by where we stand, and we're not disappointed by where we stand, that we have what we need. And the market, the import market has changed somewhere 3,000 or 4,000 tons at a time. Those quantities have moved up just based on the origin and shipping costs that are associated with imports. So all things considered, we're exactly where we thought we would go.

Okay. Got it. And with a year under your belt for the engineered wire products deal, I believe this month, any way you could have us think about the year one contribution from EWP, whether it's on an earnings or margin or mixed basis. And then secondly, H, as you've mentioned in the past, that acquisitions are made, not really for year one, but with the longer term in mind, do you feel like the true synergies from EWP are still to come?

Well, we can't really calculate the exact impact of EWP site itself, and that's because a considerable amount of Sandusky has been moved to other in-field production facilities that are better located to customers and suppliers than Upper Sandusky. With that said, the financial performance of Upper Sandusky has been solid and exactly where we thought it would be. It's a very effective manufacturer, and we're pleased as punch with that transaction.

Very helpful. Last one, and I'll pass it on after this. You mentioned residential still remains soft, and I think historically you've described it. as comprising you know around the 15 percent of sales uh range um but you know you've acquired ewp and you know it's obviously made up less of a of a portion of sales i guess just if you could give us a sense of where that stands as a as a percentage of your mix yeah keep it keep in mind that it's it's really difficult for us to pinpoint the the um exact end markets you'll look back at my comment a few minutes ago the indirect impact is infrastructure and if it goes

into infrastructure in a in a development so it's good i'll leave it there thanks very much just as a quick reminder it's star followed by one if you would like to register for a question and we now have a question from tyson viewer with kc capital please go ahead

good morning gentlemen good morning just going to follow up on that last question in general with your comments on demand for 26 and obviously that's a for fiscal 26 it sounds like you're not baking in any real meaningful recovery and residential you're treating that as something that is a wait and see portion of your end markets you're looking at strength and demand in other areas in the non-residential really being the lead dog here and residential you're just you're you're going to wait until you actually see some evidence of any kind of recovery.

Yeah I mean I think I think non-residential is also all we know for our potential demand and yeah we're not huge housing recovery.

In regards to the current environment and domestic supply issues should we continue to see a heavier carry or elevated levels in that inventory and if so will that then increase the variability of your margins given the fifo accounting we could see some more quarter to quarter variability where they might be domestically to a larger extent and here's the other nobody knows does that actually make your pricing strategy a little, I don't want to say easier, but a little more, you know what you need to hit, given that certainty on the inventory side, or as we go into some of these seasonally weaker quarters, pushing through those price increases, it can be a challenge.

Certain of our markets months out, huge advantage for us.

So set that shipment volume sequentially and the 5.8 decline doesn't sound like demand was the issue for you at all was a lot of that just based upon production supply issues and not being able to run efficiently and meet timelines on shipments so how much of the quarter and the shipment decline was really related to the production issue side as opposed to demand I can't tell you how much but the answer So your question is, are you able to get adequate clients? And that situation has been resolved as we've entered into the current quarter?

Yes, both domestically, there's additional...

Okay, and the last question for me, you talked about you don't know exactly what your products are used for as far as the final destination. We kind of were able to derive that when distribution centers were the hot item a few years back that was tilt up kind of construction so you kind of have an idea based on with the specs and what you were shipping out do you have that ability to have some kind of inference on what goes into data centers is that a tilt up type construction is that other that's more specific any clarity on that side that you kind of have an idea of where or how much that is helping when when we can pinpoint it.

When demand is more generic in nature, we can't necessarily pinpoint the end use. But the data center construction has been important to the company and will continue to be. And probably more than just data center, that our venture into the hold-in-place applications for our product is interesting and will be a source of growth for us. But it's not a segment of our business that we plan to disclose details on. Okay.

Thank you. That is Star followed by one to ask any further questions. And we now have a follow-up from Julio Romero with Sudoti and Company.

Okay. Thanks for taking the follow-ups. Could you guys just maybe speak a little more to demand from a geographic standpoint? You know, what areas are you seeing demand strength compared to three months ago? and in what areas may be relatively weaker?

The steady over the entire country. The cast-in-place business that we do is in Miami today and Las Vegas tomorrow. So it's not dominated by any one geographic region. Neither of the activities is.

One other question. It's about water infrastructure. I know you guys make the concrete pipe culverts that are used in water treatment facilities and sewer systems and other kind of related applications there. You know, there's states that are making initiatives to address the aging water infrastructure. Texas is talking about passing Prop 4 in November, which would add a lot of state taxes towards that initiative. You know, would that benefit you guys at all, particularly the Prop 4 in Texas?

Yeah, I think it's positive, Julio, to the extent that additional funding is available in those sorts of projects. There's going to be plastic pipe into those applications, but there'll also be box-culled concrete-related things. The demand that we've seen has been related to the Funding Providesment and Jobs Act, which is now fibrous. Those funds are beginning to find their way into the market and translate and something's responding.

And to that last point, H, you mentioned IIJ funding is, you know, several years old. But, you know, you guys are basically just kind of beginning to see that push now.

And then therefore, there is runway to when the IIJ funds, there's a multi-year runway remaining to as regards to the benefit of IIJ funding to in steel's pnl yeah i mean i have no objective data to to support my belief julio but i think the answer is yes and and if you go back to if you go back to um the department of transportation's comment on IIJ some years ago they said, this is not a stimulus program. This is a new way we're considering a funding infrastructure. And they acknowledge that the lead time is measured in years, not weeks or months between the funding being available and it translating into activity on job sites. The extent that that's the case, I think we're now seeing activity on job sites.

Very helpful. thanks very much thank you we currently have no further questions just one final reminder if you'd like to register please press star followed by one on your telephone keypad i can confirm that does conclude the question and answer session here and i would like to hand it back to the management team okay we appreciate your interest in steel uh look forward to talking to you next quarter and if you have questions don't hesitate to follow up with us thank you thank you for dialing in for the Instill Industries fourth quarter 2025 earnings call. Today's call has now concluded. Thank you all for your participation and you may now disconnect.