Insteel (IIIN) Q2 2026 Earnings Call Transcript

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DATE

Thursday, April 16, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — H.O. Woltz III
• Senior Vice President, Chief Financial Officer and Treasurer — Scot R. Jafroodi
• Operator

TAKEAWAYS

• Net Earnings -- $5.2 million, or $0.27 per diluted share, down from $10.2 million, or $0.52 per diluted share, in the prior-year period.
• Shipments -- Decreased 5.9% year over year but rose 6.9% sequentially from the first quarter.
• Average Selling Prices -- Increased 14.2% year over year and 1% sequentially from the first quarter, reflecting pricing actions to offset higher raw material and operating expenses.
• Gross Profit -- $16.5 million, a decline of $8 million year over year; gross margin narrowed to 9.6%.
• Operating Cash Flow -- Generated $4.8 million, versus using $3.3 million in the year-ago period, driven by positive working capital changes.
• Inventory Levels -- Inventory reduced by $13.3 million versus the previous quarter, with quarter-end inventory representing 3.4 months of forward shipments, down from 3.9 months at the previous quarter-end.
• SG&A Expense -- $9.7 million, or 5.6% of net sales, down from $10.8 million, or 6.7% of net sales, driven by a $1.1 million reduction in compensation costs.
• Capital Expenditures -- $4.4 million in the quarter, $5.9 million year-to-date, with a full-year target of $20 million reiterated.
• Liquidity -- Cash on hand of $15.1 million with no outstanding borrowings on the $100 million revolving credit facility.
• Section 232 Tariffs and Imports -- CEO H.O. Woltz III said, "PC strand imports fell by more than 50%" in the five months after tariffs increased to 50% and derivative products were included.
• Raw Material Market Conditions -- U.S. wire rod domestic production now 3.5 million tons per year, with capacity reductions of nearly 1.2 million tons, equal to almost 20% of apparent consumption now offline.
• Key Leading Indicators -- The Architectural Billing Index improved to 49.4 in February; Dodge Momentum Index increased 1.8% in March, supported by a 7% rise in commercial activity and data center construction.
• Construction Spending Trends -- January construction spending up about 1% year over year; public highway and street construction specifically up around 4%.

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RISKS

• CEO H.O. Woltz III stated, "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 expectations."
• Permanent shutdowns and curtailed output at domestic wire rod mills reduced available supply by more than 800,000 tons annually, raising concerns over future domestic supply adequacy.
• Freight costs escalated "extremely quickly" after the conflict with Iran, creating higher diesel costs and driver shortages; management confirmed that "many of our loads have been rejected by carriers who can find loads that pay more."
• Management emphasized ongoing exposure to macroeconomic risk, renewed inflation, interest rate timing uncertainty, changing tariff policies, and geopolitical developments affecting energy and shipping costs.

SUMMARY

Management reported that operating cash flow improved despite a drop in shipment volumes and earnings, linking positive cash generation to inventory drawdown and working capital actions. Larger-than-expected winter weather disruptions in key markets triggered project delays but management reiterated that delayed demand is expected to be realized later in the year. Inventory drawdown from higher offshore material purchases early in the year was cited as key to supporting future shipment growth and margin stabilization. Executives confirmed that price increases implemented in recent quarters are only partially reflected in current results, with additional price hikes in April expected to benefit future quarters as they phase through contracts. Although domestic wire rod supply tightened due to permanent mill closures, management stated the company will continue supplementing with imports and bear higher net working capital needs until domestic supply improves.

• CEO H.O. Woltz III stated, "While we continue to believe that demand will be solid during 2026, we will reduce costs if this forecast fails to materialize," highlighting a readiness to implement cost-cutting measures should the current demand outlook worsen.
• Management clarified that Section 232 tariff clarifications on April 2, 2026, "do not have much impact on us because we do not believe we were being under-assessed to begin with."
• The company will maintain CapEx investment of approximately $20 million during 2026 to expand engineered structural mesh business and strengthen IT infrastructure.
• Executives indicated that higher transportation and insurance costs due to geopolitical events are being managed with price increases rather than surcharges, and that increased inbound freight for imports is not materially higher than for domestic supplies due to plant locations.

INDUSTRY GLOSSARY

• Section 232 Tariff: A United States trade policy imposing duties on specific steel and aluminum imports under the Trade Expansion Act of 1962 to protect national security, directly affecting steel market prices and import flows.
• Architectural Billing Index: A leading monthly indicator measuring nonresidential construction activity, where a reading below 50 signals contraction.
• Dodge Momentum Index: Tracks nonresidential construction projects entering the planning stage, serving as a future indicator for the commercial building sector.
• PC Strand: Prestressed concrete strand, a high-strength seven-wire steel product used to reinforce concrete structures.
• Engineered Structural Mesh (ESM): A custom-manufactured welded wire reinforcement product engineered for primary reinforcement in concrete construction.

Full Conference Call Transcript

Despite falling well short of our expected financial performance in Q2, we believe the upturn in business activity we reported previously is still intact. Winter weather is a fact of life in our business; it happens that during Q2, conditions were severe and prolonged in many geographies, particularly compared to recent years. Project delays, while undesirable, are common in the industry. We are confident that short-term weather conditions and project delays do not create or destroy demand, and that postponed demand will be realized during the balance of fiscal 2026. I will now turn the call over to Scot to comment on our financial results, and then following his comments, I will return to discuss our business outlook.

Scot R. Jafroodi: Thank you, H. 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. Net earnings for the quarter were $5.2 million, or $0.27 per diluted share, compared with $10.2 million, or $0.52 per diluted share, in the same period last year. Shipments for the quarter declined 5.9% year-over-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 customers and Insteel Industries, Inc., weighing 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 raw material cost increases, Section 232 tariffs, and rising operating expenses. Sequentially, average selling prices were up 1% from the first quarter even as wire rod costs continued to move higher. For context, published prices for steel wire rod, our primary raw material, rose $90 per ton during the quarter. Although we implemented additional price increases during Q2, limited sequential improvement in average selling prices 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 points 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 recovery in 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 facilities should enhance fixed cost absorption. Taken together, these factors are expected to support a gradual improvement in margin performance as the quarter progresses. SG&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 expense was also affected by a $203,000 unfavorable year-over-year change in the cash surrender value of life insurance policies, reflecting the downturn in financial markets and its effect on the underlying investments. Our 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 pretax earnings, book-to-tax differences, and the other assumptions and estimates underlying our tax provision calculation.

Turning to the 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 net working capital. Working capital used $1.4 million of cash in the second quarter, reflecting a $6.8 million increase in receivables resulting from higher sales and average selling prices, partially offset by a $13.3 million reduction in inventory as we scaled back raw material purchases. Our quarter-end inventory position represented approximately 3.4 months of shipments on a forward-looking basis, calculated off of our third quarter forecast, 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 bar rod with offshore material, and that build naturally eased as we moved 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 shipment 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 cost, which will have a positive impact on spreads and margins as we move through the third quarter.

We incurred $4.4 million in capital expenditures in the 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 of cash on hand and no borrowings outstanding on our $100 million revolving credit facility, providing us ample liquidity and financial flexibility going forward. Turning to the macroeconomic indicators for our construction end 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 nonresidential 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 of 50, the improvement indicates that the rate of contraction moderated, with fewer firms reporting declining billings compared with the prior month. Additionally, the Dodge Momentum Index, which tracks nonresidential building projects entering the planning phase, increased 1.8% in March. The gain was driven by a 7% 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 seasonally adjusted annualized basis increased approximately 1% year-over-year. Nonresidential spending was essentially flat during the period, with public highway and street construction—one of our key end-use markets—remaining comparatively stronger, increasing around 4% from the prior year. As we close out the second quarter, we remain encouraged by the demand trends we are 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 geopolitical developments affecting energy and shipping costs. Our customers remain engaged, and projects continue to move forward.

Our ongoing dialogue with customers, combined with recent improvements in several leading indicators, supports 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 will now turn the call back over to H.

H.O. Woltz III: Thank you, Scot. 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 expectations. 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. 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 caused market prices in the U.S. for hot-rolled wire rod, our primary raw material, to rise to a level that is 50% to 100% over the global market price.

While last summer we questioned the effect 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 50% and derivative products, including PC strand, were covered. From August to December, the five-month period following the changes the administration made to the Section 232 tariff regime, PC strand imports fell by more than 50%. The application of the Section 232 tariff to PC strand, together with global uncertainty and higher transportation and insurance costs related to the conflict with Iran, clearly works in favor of domestic industry.

Turning to the raw material environment, investors should understand that Insteel Industries, Inc. 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. By our calculation, capacity equal to nearly 20% of apparent domestic consumption is offline, most of it permanently. These capacity curtailments, together with changes to the Section 232 tariff, caused the U.S. market for wire rod to tighten significantly and created serious questions about the adequacy of domestic supply. Insteel Industries, Inc. 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 net working capital requirements as reflected on our balance sheet. Net working capital rose approximately $45 million over the last twelve months. We will continue to import a portion of our raw material requirements until such time as domestic availability improves, and we will incur excess net working capital requirements as compared to purchasing domestically, although we have some options 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 production costs, and enhance the robustness 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 are aware of the substantial risks related to the state of the economy and the administration's tariff policies. Regardless of developments in these areas, we are well positioned to pursue growth-related activities, both organic and through acquisition, and to pursue actions to optimize our costs. We will now open the call for questions. Becky, would you please explain the procedure for asking questions?

Operator: Of course. If you would like to ask a question, please press star 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 star followed by two. When asking your question, ensure your device is unmuted locally. Our first question comes from Julio Alberto Romero from Sidoti.

Julio Alberto Romero: Thanks. Hey, good morning, H and Scot. Good morning. Could we start on volumes a bit and talk about the projects originally scheduled for the quarter that were delayed into later quarters? Any way you can help us better understand how much of this may have weighed on your shipments? And secondly, could you expand on the drivers of the project delays? I think you mentioned they were unrelated to weather. Just hoping you could elaborate a little.

H.O. Woltz III: If you can envision a construction project, 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 do not want to open up the site months ahead of having all of their other needed materials and suppliers in line. Therefore, the project that we are involved in was delayed, and we should begin shipping it in the current quarter. The delays are unfortunate, but they are not surprising at all. As we have emphasized, this is a delay of business; it is not a cancellation.

We will sit tight and see that come to fruition in the current quarter, and this project will go through our fiscal year and end in 2027.

Julio Alberto Romero: Okay, great. Very helpful. You talked about April shipments trending above forecasted levels. How much are those shipments related to project delays pushed to the right—maybe some catch-up from the February weather delays—or any other underlying demand trends at play?

H.O. Woltz III: I do not think any of it is related to the project delay because it is still delayed, and we should see some benefits later in the quarter from that. The current shipping performance is solid relative to our expectations, and our pricing actions are taking effect as we expected them to.

Julio Alberto Romero: Last one for me: you talked about project mix impacting the average selling price and maybe the spread. Can you talk about whether engineered structural mesh is playing a factor in that at all and, broadly, where ESM mix stands at the moment?

Scot R. Jafroodi: Please ask that question again, Julio.

Julio Alberto Romero: Sure. You have noted project mix impacting ASP and spreads. Is engineered structural mesh affecting that, and where does ESM mix stand now?

H.O. Woltz III: Let me start at the beginning so you understand the difficulty we have in trying to quantify some of these things and why we do not spend a lot of time dissecting the reality of the market. In February, the adverse winter weather began in Texas and ended up in New England. It affected 9 of our 11 facilities, which is unfortunate, but that is how it happened. We had issues in various geographies of various types. In some cases, roads were not passable or stayed hazardous for extended periods. Setting aside road conditions, when it is very cold, you cannot pour concrete.

People have various opinions about the temperature at which hydration becomes a concern, but at low temperatures, pouring concrete becomes not feasible. In North Carolina, for instance, we had multiple weeks of cold weather where the temperature did not break freezing. While roads were unpassable for a period, the sustained low temperature was probably of more significance. We did not go through every customer and every plant and try to quantify the impact; we are more concerned about getting our plants operating and covering the eventual demand that comes back as weather conditions improve.

Operator: Our next question comes from Tyson Lee Bauer from KC Capital.

H.O. Woltz III: Good morning, Tyson.

Tyson Lee Bauer: Good morning. When you talk about freight expenses, are there two considerations? Increased freight costs to get your imported supplies in on the inbound side that you have to absorb, as opposed to making shipments from your facilities where you can do surcharges and recoup those freight costs, even if it may be at zero margin but recovered on the revenue line? In other words, is there one bucket you must absorb and another you can pass along?

H.O. Woltz III: I would not look at it that way, Tyson. In terms of the raw materials we are importing, we are very well located for inbound freight cost purposes compared to our locations relative to domestic supplies, so I do not think we incur excess inbound freight cost because we are importing. Freight costs, whether inbound or outbound, have risen substantially following the conflict with Iran, and it happened extremely quickly. It coincided with other factors that reduced driver availability. The practical impact is much higher diesel costs and fewer drivers, which means our costs have gone up, and many of our loads have been rejected by carriers who can find loads that pay more. We are working through those issues.

I was reading that in the flatbed sector, more than 40% of loads tendered to carriers have been rejected across the economy. We are dealing with something out of our control, but it is our responsibility to manage it from a cost point of view. We debated surcharges versus price increases, and we have elected to increase our prices.

Tyson Lee Bauer: So you are recovering those now?

H.O. Woltz III: I would not say we have recovered them retroactively. We absorb some of those costs until the effective date of price increases that will, among other things, serve to recover those higher costs.

Tyson Lee Bauer: Regarding price increases, you did some early in Q1 and announced another in April. Any idea of the magnitude, and are we expecting additional price increases to get you whole?

H.O. Woltz III: Our price increases are implemented to reflect what is happening in our marketplace, both with our raw material costs and with other operating costs. While official inflation statistics may look modest, the impact on our operations has been much more significant. Everything we consume—labor, chemicals, electricity, natural gas—has gone up substantially. Wire rod has continued to increase substantially as well. We are primarily looking to recover our costs by implementing price increases, and we have implemented three since the first of the year. When volume falls, as it did in Q2, we honor the commitments we have made to customers; we are not operating on the basis of price in effect at time of shipment.

The next orders are affected by price increases. That is the way the business is done, and that is how Insteel Industries, Inc. is operating.

Tyson Lee Bauer: On April 2, there was clarification on Section 232 for steel and aluminum. Would you provide your view on whether that provided clarity regarding foreign content, U.S. content, and different baskets that imports fall into at different rates?

H.O. Woltz III: We are affected by two different types of tariffs. Section 232 is the primary effect on our business. There was confusion created by the administration's inclusion of derivative products last summer, and that confusion related to how you calculate the tariff on the product. To know for sure how the tariffs were being calculated, we went back to the entry documents and confirmed that in practically all cases, PC strand that was entering was being assessed a 50% tariff rate. We did not pick up that many importers of record were minimizing their tariff exposure, so the recent clarifications do not have much impact on us because we do not believe we were being under-assessed to begin with.

So now any questions about how the values are calculated have been put to rest; we were not really a victim of that. On the other side, over the AIBA tariffs, the AIBA tariffs would have affected any capital equipment that we purchased as well as, primarily, our purchases of spare parts. Purchases of spare parts are not discretionary; we have to do it. The importer of record declares the value of that part and applies the tariff rate to it. In most cases, the tariff was a line item on our invoices.

We are studying now the implications of the Supreme Court’s action on AIBA tariffs and the Court of International Trade requirement that those tariffs are rebated to the importers of record. That is not Insteel Industries, Inc., so we will be talking with our vendors about, first, their obligation to recover those tariffs, and second, what to do with any refunds that they obtain, because we actually paid those tariffs but will not be rebated by the government; that goes to the importer of record. All of that is overlaid by the question of where the money will come from.

I understand that they have collected $160 billion of AIBA tariffs, and ostensibly all that has to go back to the people who paid it. I would bet a lot that it will not happen that simply. We will not be booking any receivables for tariff collections because it is highly improbable that it will happen in a simplistic way.

Tyson Lee Bauer: Understood. Last question: data centers are a headline catalyst for nonres, but they seem prone to delays due to transformers, switches, and power-related components. There are a lot of announcements and expectations, but many have been pushed to the right for permitting and supply issues. Is this a great opportunity that may still be ripe for ongoing delays?

H.O. Woltz III: I would look at it from a broader perspective. The good news is that we do not think the data center phenomenon goes away in 2026 or 2027. I think you have five solid years of data center activity. As we pointed out in our last earnings release and conference call, it is really good that it is here because the rest of the private nonres market seems to be weak. A delay is a delay. My guess is that, when we look back at it, it will be reasonably insignificant. The better news is that this will be a solid marketplace for a while.

While we are doing business on-site with some of these projects, it is hard to tell how much data center business is included in our legacy business. We sell reinforcing products to customers who make wall panels or double tees, but we do not always know where those are going. There are more references in call reports to data centers that are consuming products out of our legacy business as well as from our cast-in-place business.

Tyson Lee Bauer: That sounds good. Thanks a lot, gentlemen.

H.O. Woltz III: Thank you, Tyson.

Operator: Just as a reminder, if you would like to ask a question, please press star followed by one. We currently have no further questions, so I will hand back over to H for closing remarks.

H.O. Woltz III: Thank you. We appreciate your interest in Insteel Industries, Inc. We look forward to talking to you next quarter and encourage you to call us if you have questions in the meantime. Thank you.

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

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