Insteel Industries Inc (IIIN) Q1 2026 Earnings Call Transcript

Hello and welcome everyone to the Instill Industries first quarter 2026 earnings call. My name is Becky and I will be your operator today. All lines will be muted throughout the presentation portion of the call with a chance for Q&A at the end. If you wish to ask a question in this time, please press start followed by one on your telephone keypads. I will now hand over to your host, H. Waltz, CEO to begin. Please go ahead.

Good morning and welcome to our first quarter 2026. which will be conducted by Scott Gifruti, our vice president. Before we begin, let me remind you that some of the comments made in our presentation are considered to be forward-looking to various rules projected. These risk factors are described in our periodic filings with the SEC. The upturning business activity we reported previously continued during our first quarter, and our fiscal 2025 acquisitions continue to perform well. While our ability to forecast future activity is limited, we are encouraged by the level of optimism in our markets, as well as brisk order entry up to this point in January, that causes us to believe that 2026 will be a strong year for the company. While the relative strength of our markets is real, we are aware of uncertainties created by the administration's trade policies, the nation's fiscal conditions, and by the economic cycle. I'm going to turn the call over to Scott to comment on our financial results, and following Scott's comments, I'll take the call as our business outlook.

Thank you, H, and good morning to everyone joining us today. As highlighted in this morning's press release, we deliver a strong start to the year. First quarter results benefited from improved demand for our concrete reinforcing products, which supported wider spreads between selling prices and raw material costs. Net earnings for the quarter rose to $7.6 million, or $0.39 per share, compared with $1.1 million, or $0.06 per share in the same period last year. It's also worth noting that last year's first quarter results included $1 million of restructuring charges and acquisition related costs which collectively reduce earnings per share by four cents first quarter shipments which are typically our softest period due to winter weather conditions and holiday schedules increased 3.8 percent year over year on a sequential basis shipments declined 9.7 percent from the fourth quarter which is consistent with normal seasonal patterns the year of year growth in shipments reflect improved demand across our commercial and infrastructure commercial markets, along with incremental buying from the acquisitions we completed early last year. As we move forward, our year-over-year buying comparisons will normalize now that these acquisitions are fully integrated into our run rate. Turning to pricing, average selling prices increased 18.8% year-over-year. This reflects the pricing actions we took throughout fiscal 2025 to offset higher steel wire rod costs, which were driven by tight domestic supply conditions, and increased Section 232 steel tariffs, as well as to address rising raw operating costs. Sequentially, average selling prices were essentially unchanged from the fourth quarter as we did not take additional pricing actions during the current period. However, with scrap and wire rod prices now moving higher again, we implemented our own price increases across most product lines, which took effect earlier this month. Gross profit for the quarter improved to $18.1 million from $9.5 million a year ago, with gross margin expanding to 400 basis points to 11.3% from 7.3%. This improvement was driven by widening spreads, higher shipment volumes, and lower unit manufacturing costs. On a sequential basis, gross profit declined by $10.5 million from the fourth quarter and gross margin narrowed by 480 basis points, driven primarily by the consumption of higher cost inventory. As I just mentioned, the price increase implemented in January are expected to benefit second quarter spreads and margins as higher selling prices begin to align with the consumption of lower cost inventories under the first-in, first-out accounting methodology. As G&A expenses for the quarter rose by approximately $900,000 to $8.8 million or 5.5% of net sales compared with $7.9 million or 6.1% of net sales in the prior year, the year-over-year increase was driven primarily by an $800,000 rise in compensation expense under our return on capital-based incentive plan, reflecting stronger financial performance in the current year. As you may recall, we did not incur any incentives compensation expense in the first quarter of last year. Our effective tax rate decreased 21% compared to 26.1% in the prior year period. The decline was primarily driven by a reduction in the valuation allowance on deferred tax assets, along with a discrete tax item related to the calculation of state deferred taxes. Looking ahead, we expect our effective tax rate for the remainder of the year to be approximately 23%, subject to the level of pre-tax earnings, both to tax differences, and the other assumptions and estimates underlying our tax provision calculation. Moving to the cash flow statement and balance sheet, cash flow from operations used $700,000 in the quarter compared to providing $19 million last year. Networking capital used $16.6 million in cash in the first quarter, driven primarily by a $34.5 million increase in inventories, partially offset by a $14.1 million reduction, and the inventory increase reflects higher raw material purchases, including a meaningful amount of offshore material, along with an increase in the average carrying value of inventory. And on the receivable side, the decline was largely tied to lower shipments, which is consistent with the normal seasonal slowdown in sales we see this time of year. Per quarter in the inventory position represented approximately 3.9 months of shipments on a forward-looking basis calculated off of our forecasted second quarter volumes, compared with 3.5 months at the end of the fourth quarter. As we discussed on our prior call, we expected a temporary inventory build in the first quarter as we supplemented domestic wire rod supply with offshore purchases. Looking ahead, we expect inventory levels to moderate over the course of the second quarter as purchasing activity normalizes and shipment volumes increase. It is also worth noting that our first quarter inventories are carried at an average unit cost that is generally in line with our first quarter cost of sales and remain below current replacement levels. We incurred $1.5 million in capital expenditures in the first quarter and remain committed to our full-year target of $20 million. H. will provide more detail on this topic in his remarks. In December, we returned $19.4 million of capital to our shareholders due to payment of a $1 per share special cash dividend in addition to our regular quarterly dividend. This marks the ninth time in the last 10 years that we have issued a special dividend. And also during the first quarter, we continued our share buyback, repurchasing $745,000 of common equity, equal to approximately 24,000 shares. From a liquidity perspective, we ended the quarter with $15.6 million in cash on hand and no borrowings outstanding on our $100 million revolving credit facility. Turning to the macro indicators for our construction and markets, the latest readings from two key leading measures, the Architectural Billing Index and the Dodge Amendment Index, continue to signal a mixed and somewhat cautious outlook for non-residential commercial construction activity. In November, the ABI registered 45.3, remaining firmly in negative territory, as any readings below 50 indicates a contraction in activity. This marks the 13th consecutive month of declining buildings. Inquiries for new projects showed only modest improvement, and the value of newly signed design contracts continue to soften. In contrast, the Dodge Amendment Index said no strengthening activity, rising 7% in December and supported by more than 3.5% growth in commercial planning, driven in large part by data center construction. Year over year, the DMI was up 50% overall, including a 45% increase in the commercial segment. Turning to the broader market backdrop, the most recent construction spending data from U.S. Department of Commerce shows that through August, total construction spending on a seasonally adjusted basis was down about 1.6 percent year over year. Non-residential spending declined 1.5 percent and public highway and street construction, one of our key end markets, was down about 1 compared to the same period last year. Finally, the U.S. cement shipments, another key measure that we monitor, fell 4.3 percent in August and we're down 3.4 percent year to date. That said, as we close out the first quarter of fiscal 2026, we are encouraged by the steady demand we are seeing across our core markets. While we recognize the broader economic backdrop remains uncertain, the demand trends we are seeing and the conversations we are having with customers, this concludes my prepared remarks. I will now turn the call back over to H. Thank you, Scott.

As I noted in my opening comments, we are pleased with the acceleration of business activity that continued through our first quarter. Our first quarter performance will never be strong due to the limited number of working days in the quarter after giving effect to Thanksgiving and Christmas shutdowns through much of the industry and to seasonal weather patterns. So our first quarter results are never indicative of the level of demand for our products, but nevertheless, we're pleased with the performance for the quarter and see no indication that the level of activity in our markets is poised to subside. As we consider the drivers of demand for our products, the facts are no clearer to us today than they have been in the past. We believe, however, that funding from the Infrastructure Investment and Jobs Act is responsible for much of the uptick in demand we've experienced. We cannot that was funded. I suspect the same is true for our company. enjoy a better volume level. IJA funding expires in the fall. The consensus today is that there of course that remains to be seen. The other notable source of demand that we expect to remain robust into 2027 is from the data center construction boom that has been well publicized. While community pushback seems to be growing as the scale of data center resource intensity is more fully appreciated, we have commitments from customers for projects that have been approved and funded and that should run through calendar 2020. The timing of the data center activity is fortuitous since other sectors of the private non-residential construction market are weak. We believe the data center work will serve as a timely bridge while we wait for a recovery of more traditional private non-residential products. Turning to another subject, the steel industry may have been more affected by the administration's tariff policy than any other industry. The Section 232 tariff of 50% on imports of steel has caused market prices in the U.S., I mean raw material, to rise to a level that is 50% to 100% higher than the global market price. While we're fortunate that imports of PC strand are now subject to the Section 232 tariff under the derivative products provision, domestic wire rod prices have risen to an extent that dilutes the benefit of the Section 232 tariff on PC. Probably of more importance is the uncertainty that continues to surround the administration's tariff policy. Recently, I read that the Secretary of Commerce had speculated that the 232 tariff might be modified or removed with respect to the Europeans if the right trade deal were struck between the U.S. and European Union. It's reasonable to assume that this could be true with respect to other countries as well. Notably, negotiations surrounding USMCA comes to mind. And such speculation by the administration increases uncertainty and instability in U.S. markets. It's important for investors to understand that in-steel operates in a small segment of the domestic hot-rolled carbon steel market. Domestic production of wire rod, our primary raw material, is approximately 3.5 million tons per year, while U.S. production of all hot rolled carbon steel is roughly 100 million tons per year. Difficult economic conditions in recent years for producers of wire rod resulted in the permanent closure of two producing mills and financial struggles together with significantly diminished output for a third producer. Altogether, these curtailments reduced actual domestic production of wire rod by more than 800,000 tons per year and reduced domestic capacity to produce wire rod by nearly 1.2 million tons per year relative to apparent domestic consumption of approximately five So, by our calculation, capacity equal to nearly 25% of apparent domestic consumption is offline, most of it permanently. These capacity curtailments, together with the imposition of the Section 232 tariff, caused the U.S. wire rod market to tighten significantly and created serious questions about the adequacy of domestic supply. and still, therefore, turn to the offshore market for a portion of its supply. The economics of offshore transactions, which include substantial freight costs, require the purchase of large quantities with a resulting impact on inventories and net working capital requirements as reflected on our balance sheet. Net working capital has risen over $50 million in the last 12 months. We expect to continue importing a portion of our raw material requirement until such time as domestic availability improves. We believe, however, that the net working capital impact of importing will be more muted going forward and that we'll see significant working capital release as market conditions normalize. But it's not possible to quantify this at the present time. Finally, turning to CapEx, as mentioned in the release and by Scott, we expect to invest approximately $20 million in our plants and information systems infrastructure during 2026. You can expect our investments to support the growth of our engineered structural mesh business, to reduce our cash production costs, and to enhance the robust nature of our information systems. Consistent with past practice, we'll provide quarterly updates of our investment activities and expectations as the year progresses, and we believe our estimate is conservative in keeping with prior forecasts for Apex levels. Looking ahead, we're aware of substantial risk related to the state of the economy and the administration's tariff policies. Regardless of developments in these areas, we are well positioned to produce to pursue growth related activities both organic and through acquisition and acquisition includes our prepared remarks and we'll now take your questions.

Becky would you please explain the procedure for asking questions of course if you wish to ask a question please press start followed by one on your telephone keypad now if you feel your question has been answered or for any reason you would like to remove yourself from the queue please press start followed by two and when preparing to ask your question please ensure your device is unmuted locally we have our first question from julio romero from sudotti company your line is now open please go ahead thanks hey good morning h and scott um to begin you sounded pretty constructive on the overall demand outlook

you know particularly with with the data center at iij related projects and you mentioned the commitments you have from customers on the data center side that have been approved and funded and run through calendar 26 can you give us a little bit more color on these commitments or Are these new commitments in your pipeline? You know, have they been accelerating? And what's your sense of how far out these commitments are beyond calendar 26?

Well, I mean, the data center business is new to much of the economy. I think 2025 was the first year we had done any significant data center business. But certainly, now that we're in that market and connected with some of the customers that regularly do that business, we're seeing repeat opportunities and robust demand, which comes as no surprise based on what's been publicized about that industry and that build out.

Got it. That's helpful. And, you know, talking about the volumes in the quarter that you experienced, a growth of roughly 4%, can you talk about how that was affected, if at all, by constraints of wire rod, both on this quarter and on a go-forward basis?

Do you mean just the domestic situation?

Yeah, I think the last couple quarters you called out that, you know, raw material constraints have kind of constrained your volume output in the quarter, but it sounds like that.

Well, the reason that I went through the mill closures and sort of the macro picture with respect to wire rod supply and demand is to give readers of our release and participants on this call a sense for why our inventories have grown. Our inventories have grown of wire rod domestically, and we are forced to go offshore. And I'll point out that the situation in the wire rod market is very different than the situation that confronts purchasers of other hot roll significantly and capacity has expanded significantly in other hot roll products. So when we concluded that it was unlikely we could support our business objectives by buying solely domestically, we went to the offshore market to fill the gaps. And we'll continue doing so until such time as we see that availability improves in the U.S. and that suppliers, again, are willing to work for us. helpful context there.

Last one, if I may, and I'll pass it on, is on the SG&A front, you were able to grow sales by 23% while SG&A grew by 11%. My question is, are you beginning to realize SG&A leverage from your acquisitions of EWP and OWP at this point in time, or is that leverage still coming to you?

We've certainly realized the synergies we expected to come from the acquisition. And I would say that's really that together with the added shipments and sales volume is really what that acquisition was all about. And we're pleased with this performance and we're moving along well.

Excellent. I'll pass it on. Thanks very much. Thank you.

Just as a reminder, if you did want to ask a question, please press start followed by one on your telephone keypads now. Our next question is from Tyson Bauer from KC Capital. Your line is now open. Please go ahead.

Good morning, gentlemen. Instill has consistently been able to run counter to the industry stats as far as your ability to grow shipments, your ability to grow as a company. I think you mentioned 13 straight months of ABI billings below 50 and some of the other. to those? And are we seeing an underlying acceleration away from products and other products that would account to your ability to grow? You were going into 2000, 2001 with the distribution centers. Now we're looking at data centers, both DC, ironically. You're working with those designs as you were with some of the online retail customers before in the DCs. We'll see that develop in that industry and less source of the construction advantage based on what your product is. With that, inventory levels, it sounds like that may have peaked this past quarter. We'll see a gradual downtick. Will that downtick accelerate as we get into fiscal three and fiscal four?

Well, I think it depends on the level of shipments.

So the CapEx 20 million, is that roughly split 50-50, maintenance 10 million, 10 million for whether it be cost reductions or product line expansions, more of the growth side or improvement in margin, is that kind of the split you're looking at? The last one for me, as the administration goes to Davos, it's supposed to lay a plan about 15% of your overall. since the administration has proved the you know futile so you kind of go with what they're pushing especially in an election year how quickly can that residential market for you turn where becomes a benefit as opposed to just kind of being stuck in the mud the last couple years importantly not kids with the wage increases health costs on that side of it have you index or looked at labor cost increases for this year and what kind of offsets you have there. Thank you, gentlemen.

Thank you. We currently have no further questions, so I'll hand back over to the management team for closing remarks. ...to you next quarter.

In the meantime, if you have questions, don't hesitate to follow up with us.

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