Insteel Industries Inc Q1 FY2026 Earnings Call

Hello and welcome everyone to the Instill Industries second 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 of Q&A at the end. If you wish to ask a question in this time, please press star followed by one on your telephone keypads. I will now hand over to your host, H. Vault, CEO, to begin.

Please go ahead. thank you becky good morning and thank you for your interest and instill and welcome to our second quarter 2026 conference call which will be conducted by scott jeffruti 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. Despite falling well short of our expected financial performance in Q2, we believe the upturning business activity we reported previously is still intact. Winter weather is a fact of life in our business, and it happens that during Q2, conditions were severe and prolonged in many geographies particularly compared to recent years and project delays while undesirable are rather common in the industry we regret that we experience both of these phenomena during q2 but 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 i'm going to turn the call comments i'll pick the call back off to discuss

our business outlook thank you h and good morning to everyone joining us on the call as we reported earlier this morning our second quarter results were weaker than expected reflecting the combined impact of winter weather disruptions lower spreads and higher unit conversion costs the earnings for the quarter were 5.2 million or 27 cents per share compared with $10.2 million, or $0.52 per diluted share in the same period last year. Shiftness for the quarter declined 5.9% from the prior year, but increased 6.9% sequentially from the first quarter. While the second quarter typically reflects some seasonal softness, conditions this year were significantly more severe. Following a solid start in January, we experienced extended periods of winter weather across most of our markets, which reduced construction activity and disrupted operating schedules for both our customers and in-steel, which weighed on order flow and shipments. In addition, certain projects originally scheduled for delivery during the quarter were deferred to later in the year for reasons unrelated to weather. Although we are still early in the third quarter, recent order activity has been solid, with April shipments trending above forecasted levels. With that backdrop on volumes, let me turn to pricing. Average selling prices were up 14.2% year over year, driven by the pricing actions we put in place throughout fiscal 2025 and into the current year to offset higher rod costs, increased Section 232 tariffs, and rising operating expenses. Sequentially, ASPs were up 1% from the first quarter, even as wire rod costs continued to move higher. For context, published prices for steel wire rod are primary raw material, rose $90 per ton during the quarter. Although we implemented additional price increases during Q2, the limited sequential improvement in ASPs was influenced by product mix, existing contractual pricing, and softer volumes. We expect these recent pricing actions, along with the additional price increase implemented in April, to provide further benefit in the coming periods as they are more fully reflected in our realized pricing. Gross profit declined $8 million year-over-year to $16.5 million, and gross margin narrowed to 9.6%. The decline primarily reflects lower shipment volumes, reduced spreads between selling prices and raw material costs, and higher unit conversion costs, resulting from lower production levels and weather-related operational inefficiencies. Sequentially, gross profit declined $1.6 million, and gross margin contracted by 170 basis this point, as the slowdown in shipments delayed the tailwinds of recent price increases and extended the lag between raw material cost increases and realized pricing. As we enter the third quarter, we expect several factors to support a recovering gross margin. Demand is improving as we move into the seasonally stronger portion of the year. Recent price increases are beginning to gain traction, and our current raw material carrying values are more favorable. In addition, higher operating rates across our facility should enhance fixed cost absorption. Taken together, these factors are expected to support a gradual improvement in margin performance as the quarter progresses. FG&A expense for the quarter decreased to 9.7 million, or 5.6% of net sales, compared to 10.8 million, or 6.7% of net sales in the prior year period. The decline was primarily driven by a $1.1 million reduction in compensation costs tied to our return on capital-based incentive plan, reflecting weaker financial performance this year. SG&A expenses also affected by a $203,000 unfavorable year-over-year change in the cash-prender value of life insurance policies, reflecting the downturn in financial markets and its effect on the underlying investments. The effective tax rate for the quarter was 23.3%, which is up slightly from 23.2% last year. 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 revision calculation. Turning to cash flow statement and balance sheet, operating cash flow provided $4.8 million in the current quarter, compared with using $3.3 million of cash in the prior year period, driven primarily by the change in networking capital. net working capital to use 124 million cash in the second quarter reflecting a 16.8 million increase in receivables resulting from higher sales and average selling prices partially offset by a 13.3 million reduction in inventory as we scale back raw material purchases our quarter rent inventory position represented approximately 3.4 months of shipments on the forward-looking basis calculated off of our third quarter forecast that's down from 3.9 months at the end of the first quarter as we mentioned on our q1 call we increased inventory levels early in the year as we supplemented domestic wire rod with offshore material and that build naturally eased as we move through the second quarter looking ahead we expect a modest increase in inventory as we move into the seasonal busy period positioning us to support higher shipping volumes additionally our inventories at the end of the second quarter were 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 quarter we incurred 4.4 million dollars in capital expenditures in quarter for a total of 5.9 million through the first half of our fiscal year and we remain committed to our full year target of 20 million finally from a liquidity perspective we ended the quarter with 15.1 million cash on hand and no borrowing got standing under 100 million dollar revolving credit facilities regarding of ample liquidity and financial flexibility going forward turning to the macroeconomic indicators for construction in markets the latest readings from our two leading measures the architectural billing index and the Dodge momentum index point to an environment that remains uneven but generally stable the architectural billing index which typically leads non-residential construction activity by approximately 9 to 12 months improved to 49.4 in february from 43.8 in january while the index remained below the breakeven level 50 the improvement indicates that the rate of contractions moderated with fewer firms reporting declining buildings compared with the prior year additionally the dodge amendment next which tracks non-residential building projects entering the planning phase increased 1.8 in march the game was driven by a seven percent improvement in commercial planning activity which continues to be supported by strong data center construction monthly construction spending from the u.s department of commerce suggests only modest growth in overall activity in january total construction spending on a seemingly adjusted analyzed basis increased approximately one percent year over year non-residential spending was essentially flat during a period with public highway and street construction one of our key and use markets remain comparably stronger, increasing around 4% from the prior year. As we close out the second quarter, we remain encouraged by the demand trends we're seeing across our core end markets. While the broader macroeconomic backdrop continues to evolve, including the risk of renewed inflation, uncertainty around the timing of interest rate cuts, potential changes in tariff policy, and the geopolitical developments affecting energy and shipping costs, our customers remain engaged and project activity continue to move forward. Our ongoing dialogue with customers, combined with recent improvements and several leading indicators, support our confidence in the direction of the business. At the same time, we recognize that these external factors could influence the pace of activity in the near term. Even so, underlying demand conditions remain healthy, and we believe we are well positioned as we move through the second half of the fiscal year. That concludes my prepared remarks.

I'll now turn the call back over to age thank you scott as i noted in my opening comments we were affected during q2 by weather related and non-weather related circumstances that resulted in our operating rate shipments and financial performance falling short of making matters worse we had staffed up at certain facilities ahead of the seasonally more active part of our year in anticipation of expanding operating hours which would reduce lead times and result in increased shipments so we carried the cost of ramping up through the quarter but were unable to operate at expected levels while we continue to believe that demand will be solid during 2026 we will reduce costs if this forecast fails to materialize at this point however we do not expect to be in a cost reduction mode driven by demand related concerns 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 called market prices in the u.s for 100 over the global market price question the effectiveness of the derivative products tariff strategy implemented by the administration, we are glad to report a significant decline in the volume of imported PC strand that has entered the U.S. since the tariff was increased to 32 with the RAND, clearly working in favor of the domestic industry. Turning to the raw material environment, investors should understand that in-steel operates in a small segment of the domestic hot rolled carbon steel market domestic production of steel 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 hot rolled 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 wire rod of approximately 5 million tons per year, capacity equal to nearly apparent domestic consumption is offline, most of it permanently. These capacity curtailments, together with changes to the Section 232 tariff, caused the U.S. wire rate significantly and created serious questions about the adequacy of domestic supply. In Steel, therefore, was forced to 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 resulting impact on inventories and networking capital requirements as reflected. Networking capital rose approximately $45 million over the last 12 months. We'll continue to import a portion of our raw material requirements until such time as domestic availability improves. And we will incur excess networking capital requirements as compared to purchasing domestically to mitigate this adverse impact. Finally, turning to CapEx, as mentioned in the release, we expect to invest approximately $20 million in our plants and information systems infrastructure during 2026. Our investments will support the growth of our engineered structural mesh business, reduce our cash and enhance the robust nature of our information systems. Consistent with past practice, we'll provide quarterly updates on our investment activities and expectations as the year progresses. Looking ahead, we're aware of the substantial risks related to the state of the economy and the administration's tariffs and developments in these areas. is we are well positioned to pursue growth-related activities, both organic and through acquisition, and to pursue actions to optimize our costs. This concludes our prepared remarks and we'll now take your questions. Becky, would you please explain the procedure for asking questions?

If you would like to ask a question, please press start followed by one on your telephone keypad 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 when asking your question please ensure your device is unmuted locally our first question comes from julio romero from sudoti the line is now open please go ahead thanks hey good morning agent scott good morning good morning start on hey good morning can we start on volumes a bit and talk a bit about the the projects of originally scheduled for the sec for the quarter that were delayed into later quarters

anyway you could help us better understand excuse me how much of this was uh was weighed on uh may have weighed on your shipments and secondly if you could expand on the drivers of the project delays i think you mentioned they were unrelated to weather just hoping you could elaborate there a little bit well well so if you can envision a construction project that the owner and contractor would like to start the project and operate continuously until the finish of the project or a portion of the project but they don't want to open up mother earth uh two months ahead of having all of their their other needed materials um and in suppliers in line and so uh therefore the project that that um we're involved in was delayed and and um should we should begin shipping it in the current quarter um the delays are unfortunate but i don't think they're they're surprising at all and as we try to emphasize um this is a delay of business it it's not a cancellation so um so we'll just have we'll have to sit tight and and um see that come to fruition in the current quarter. And this project will go through our fiscal year and end of 2027.

Okay, great. Very helpful. And then you talked about April shipments trending above forecasted levels. Just what's your sense of how much those shipments are related to the project delays pushed to the right? Maybe some catch up from the February weather delays or any other underlying demand trends that are afoot there?

I don't think any of it is related to project delays because it's still delayed um and and we should see some benefits later in the order of that but by um the the current performance and current shipping performance is is um is pretty solid relative to our expectations and our prices are coming up as we as we expected them to perfect and um maybe last one for me here is you talked about project mix a little bit um you know impacting the the the ASP numbers the the other numbers um within your release can you talk a

little bit about um where ESM mix stands today ask that question again Julio yep just just talk a little bit about you know this is the second quarter where we're talking about project mix kind of impacting the the the ASP number and and maybe the the spread number um if you could just talk a little bit about, you know, whether ESM is playing a factor in that at all, and just broadly where ESM mix kind of stands at the moment.

Let me start at the beginning so you'll understand the difficulty that we have in trying to quantify some of these things, and also why we don't spend a lot of time on trying to dissect the reality of the market but if you'll recall in february the that the adverse winter weather began in texas and ended up in new england that means that it that it affected nine of our 11 facilities which which is pretty unfortunate but um it's just it's just the way it happened um So we had issues in various geographies of various types. In some cases, we had roads that were not passable or stayed hazardous for extended periods of time. But the other reality, setting aside road conditions and moving around, is that when it's very, very cold, you can't pour concrete. Various people have various opinions about the level or the temperature at which hydration becomes a big concern. At low temperatures, pouring concrete becomes the temperature. The temperature staying low will probably have more significance. So I guess the reality is we didn't go through more concerned about and actual demand that would have other conditions improved.

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

And good morning, gentlemen. When you talk about the freight cost to get your inputted supplies in on the imported side, as far as your inventories, that you're looking where you have to absorb, per se, as opposed to that maybe you're able to do surcharges and recoup losses, even though it may be at zero margin, but you're getting it on the revenue line there. So is there two different pods here on the freight charges, one you have to absorb and the other that you can pass along?

I wouldn't look at it that way, Tyson. In terms of the raw materials that we're importing, located for inbound freight cost purposes, locations relative to domestic supply. And it coincided with the efforts of the administration that took the practical impact, higher diesel costs that are caught some of those costs until serve to to recover

those higher costs and regarding price increases you've done some early in your fiscal year in q1 you've done some you announced in April magnitude of those and are we expecting additional price increases to try to get yourself whole well let me answer the last part of Reese's looking at and soon eventually

continue to increase substantially as well by implementing price increases and we've implemented threes so that we've made increases businesses done and

that's the way in steel I don't know if you want to take a stab at this one or not but on April 2nd supposedly there was clarification on section 232 for steel and your two cents whether that did and there's foreign content US content and different baskets that some of these imports fall into at different rates so we're affected by two different types of tariffs the section 232 tariff um is there was

confusion that was that was created by the administration's inclusion of derivative product last summer and that confusion was related to and isolated we went back pc strand that was entering was being assessed to 50% tariff. We did not pick up that a lot of importers of record were playing games with this and trying to minimize their tariff expectations. Really don't have the recent qualification of values to begin with. By the government, that will go to the importer of record. Where's the money going to come from? I understand that they've collected 160 billion people who paid it, but here we certainly will not be booking any kinds of receivables for tariff collections because I think it's a line item off the model for, well, ever.

The last question for me, data center gets a lot of attention, delays, it sounds like, from reports, not necessarily due to anything that you specifically do, but because of transfer the actual operations of the data centers, especially have been announced, have been getting pushed to the right for permitting reasons, supply issues, opportunity, but it's going to be ripe for these kinds to continually get pushed to the right.

026 or 027, I think you have a data center active, a really good thing is here who makes wall panels or double T's, but we don't necessarily know where those are going. And there are more and more references in call reports in the business as well as from our...

Okay, that sounds good.

Thank you. Just as a final reminder, if you did want to ask a question, please press star followed by one on your telephone keypad now. Just as a reminder, that is star followed by one. We currently have no further questions, so I'll hand back over to H for closing remarks.

Okay, thank you. we appreciate your interest in in in steel we look forward to talking to you next quarter and encourage you to call if you have questions in the meantime thank you this concludes today school thank you all for joining you may now disconnect your lines