On Thursday, Insteel Indus (NYSE:IIIN) discussed second-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
Insteel Industries Inc reported weaker-than-expected Q2 financial results due to severe winter weather disruptions, lower shipment volumes, and higher unit conversion costs.
Net earnings for the quarter were $5.2 million or $0.27 per share, a decrease from $10.2 million or $0.52 per share in the same period last year.
Average selling prices increased by 14.2% year-over-year due to pricing actions to counter rising costs and tariffs, although the impact was tempered by product mix and softer volumes.
The company experienced a 5.9% decline in shipments year-over-year but saw a sequential increase of 6.9% from Q1.
Management remains optimistic about a recovery in demand and margins in the third quarter, driven by seasonal factors, recent price increases, and improved operating rates.
The company ended the quarter with $15.1 million in cash and no outstanding borrowings, maintaining strong liquidity.
Strategic initiatives include a focus on the growth of the engineered structural mesh business and continued investments in plants and information systems.
The impact of the Section 232 tariffs and global supply chain challenges continue to affect operations, necessitating reliance on offshore raw materials.
Management is confident in the demand outlook for 2026, with expectations for robust activity in data centers and other core markets.
Full Transcript
OPERATOR
Hello and welcome everyone to the Interstell 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 for Q and 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 HBolt CEO to begin. Please go ahead.
HBolt
Thank you, Becky. Good morning and thank you for your interest in Insteel Industries Inc and welcome to our second quarter 2026 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. 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, 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 experienced 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 over to Scott to comment on our financial results and then following his comments, I’ll pick the call back up to discuss our business outlook.
Scott Gifruti (Vice President, CFO and Treasurer)
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. Net earnings for the quarter were 5.2 million or $0.27 per 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% 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 Insteel Industries Inc, 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, our 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, 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 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 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. FGA 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 $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 pre tax earnings book to tax differences and the other assumptions and estimates underlying our tax provision calculation. Turning to cash flow Statement of 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. Net working capital to use $1.4 million of 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 end inventory position represented approximately 3.4 months of shipments on a 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 ease 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 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 costs 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 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 borrowing outstanding on our $100 million revolving credit facility, providing us ample liquidity and financial flexibility going forward. Turning to the macroeconomic indicators for 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 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 break even level of 50. The improvement indicates that the rate of contraction moderated with fewer firms reporting declining buildings compared with the prior year. Additionally, the Dodge Momentum Index, which tracks non residential 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. Non residential spending was essentially flat during the period with public highway and street construction. One of our key end use markets remained 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, 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
HBolt
to H. 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 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. So we carry 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 US for hot rolled wire rod, our primary raw material, to rise to a level that’s 50 to 100% over the global market price. While last summer we questioned 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 US 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, insurance and insurance costs related to the conflict with Iran, clearly work in the favor of the domestic industry. Turning to the raw material environment, investors should understand that INSTEEL 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 US 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 reduce 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. So, 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 US 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 the resulting impact on inventories and networking capital requirements. As reflected on our balance sheet, net working capital rose approximately 45 million over the last 12 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 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 risk related to the state of the economy and the Administration’s tariff policies. Regardless of developments in these areas, we 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?
OPERATOR
Of course. If you would like 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. When asking your question, please ensure your device is unmuted locally. Our first question comes from Julia Romero from Sudoti. The line is now open. Please go ahead.
Julia Romero (Analyst)
Thanks. Kay. Good morning, Agent Scott. Good morning. Good morning. Good morning. Can we start on volumes a bit and talk a bit about the projects originally scheduled for the second quarter that were delayed into later quarters? Any way you could help us better understand, Excuse me. How much of this was weighed on May? It 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. Was hoping you could elaborate there a little bit.
HBolt
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 two months ahead of having all of their other needed materials and suppliers in line. And so therefore, the project that we’re involved in was delayed and we should begin shipping it in the current quarter. The delays are unfortunate, but I don’t think they’re surprising at all. And as we tried to emphasize, this is a delay of business. It’s not a cancellation. So we just have. We’ll have to sit tight and see that come to fruition in the current quarter, and this project will go through our fiscal year and into 2027.
Julia Romero (Analyst)
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?
HBolt
I don’t think any of it is related to project delays because it’s still delayed and we should see some benefits later in the quarter of that. But the current performance and current shipping performance is pretty solid relative to our expectations. And, and our prices are coming up as we. As we expected them to.
Julia Romero (Analyst)
Okay, perfect. And maybe last one for me here is you talked about project Mix A little bit, you know, impacting the ASP numbers, the other numbers within your release. Can you talk a little bit about where ESM mix stands today?
HBolt
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 ASP number and maybe the spread number. 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 stance 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 that the adverse winter weather began in Texas and ended up in New England, that means that it affected nine of our 11 facilities, which is pretty unfortunate, but it’s just the way it happened. 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. But suffice it to say, at low temperatures, pouring concrete becomes not feasible. So in North Carolina, for instance, we had multiple weeks of cold weather where I don’t think the temperature ever broke freezing. And while the roads were unpassable for a period of time, the temperature staying low were probably of more significance. So. So I guess the reality is we didn’t go through every customer and every plant and try to quantify the impact. We’re more concerned about getting our plants operating and covering the eventual demand that would come back as weather conditions improved.
OPERATOR
Thank you. Our next question comes from Tyson Bauer from KC Capital. Your line is now open. Please go ahead.
Tyson Bauer (Analyst)
All right, thank you. And good morning, gentlemen. Tyson, when you talk about the freight expenses, are there two considerations there? The increased freight cost to get your inputted supplies in on the imported side, as far as the inventories that you’re looking, where you have to absorb per se, as opposed to making shipments from your facilities, that maybe you’re able to do surcharges and recoup those freight costs, even though it may be at zero margin, but you’re getting 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.
HBolt
I wouldn’t look at it that way, Tyson. In terms of the raw materials that we’re importing, we’re very well located for inbound freight cost purposes, if you were to compare that to our locations relative to domestic supplies. So I don’t think we incur any excess inbound freight costs because we’re importing now. Freight costs, whether inbound or outbound, have risen substantially following the conflict in Iran, and it happened extremely quickly. And it coincided with the immigration efforts of the administration that took thousands of truck drivers off the road who couldn’t speak English. And without commenting on good, bad or indifferent, the practical impact of those two things are much higher diesel cost and far fewer drivers has meant that our costs have gone up. And it also means that many of our loads have been rejected by carriers who we could count on in the past. And they reject loads because they can find one that pays more. And certainly we’re working through those issues. But I was reading just recently that in the flatbed sector of the freight market, more than 40% of loads tendered to carriers have been rejected. And that’s not just in our industry, that’s overall in the entire economy. So we’re dealing with something there that is out of our control. But certainly it’s our responsibility to deal with it from a cost point of view. And we debated surcharges or we debated price increases, and we’ve elected just to increase our prices. Okay, so you are recovering those as of now? Well, I wouldn’t say we recovered them prospectively, but certainly we certainly absorb some of those costs until the effective date of price increases that will, among other things, serve to recover those higher costs. Okay. And regarding price increases, you’ve done some early in your fiscal year in Q1, you’ve done some, you announced in April. Any idea of magnitude of those? And are we expecting additional price increases? To try to get yourself whole, me answer the last part of the question. First, our price increases are implemented to reflect what’s happening in our marketplace, both with our raw material costs and with the other costs that we incur in our operations. And addressing the operating costs, we see these rather rosy inflation numbers that are published by the federal government. But I would tell you that the impact on our operations has been much more significant than you might think. By looking at official government statistics. Everything from labor to chemicals to everything that we consume, electricity, natural gas, it’s all, everything has gone up substantially. And Wire rod has continued to increase substantially as well. So we’re primarily looking to recover our costs by implementing price increases. And we’ve implemented three since the first of the year. And, you know, when volume falls, as it did in Q2, we honor the commitments that we’ve made to customers. And let us say we’re not operating on the basis of price and effect at time of shipment. We’re honoring the commitments that we’ve made. And it would be the next orders that are affected by price increases. So that’s the way the business is done and that’s the way insteel’s operating.
Tyson Bauer (Analyst)
Okay. And I don’t know if you want to take a stab at this one or not, but on April 2, supposedly there was clarification on Section 232 for steel and aluminum. Would you want to provide your $0.02 whether that did indeed provide some clarity as far as foreign content, US content, and different baskets that some of these imports fall into at different rates?
HBolt
Yeah. So we’re affected by two different types of tariffs. The section 232 tariff is the primary effect on our business. And there was confusion that was created by the administration’s inclusion of derivative products, which occurred last summer. And that confusion was related to how do you calculate the tariff on the product? And so to know for sure how the tariffs are being calculated, we went back to the entry documents and could confirm that in practically all cases, PC strand that was entering was being assessed a 50% tariff rate. We did not pick up that a lot of importers of record were playing games with this and trying to minimize their tariff exposure. So because of that, the recent clarifications really don’t have on 232, the recent clarifications don’t have a whole lot of impact on us because we don’t believe we were being nickeled and dimed on falsification of values to begin with. So now I guess any questions about how the values are calculated have been put to rest. But we weren’t really a victim of that on the other side, or the IEA tariffs and IEBA tariffs would have affected any capital equipment that we purchased, as well as primarily our purchases of spare parts. And I’ll point out that purchases of spare parts are not really discretionary there. We just have to do it. And the importer of record declares the value of that part and applies the tariff rate to it. And 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 AIPA Terrace and the Court of International Trade’s requirement that those tariffs are rebated to. Well, actually the tariffs are rebated to the importers of record, but that’s not in steel. So we’re going to be, we’re going to be in the position of talking with our vendors about first, their obligation to recover those tariffs and second, what do you do with any refunds that you obtain? Because we actually paid those tariffs but we’re not going to be rebated by the government, that’ll go to the importer of record. So and then all of that, all of that is overlaid by the question of where’s the money going to come from. I understand that they’ve collected 160 billion of IPA tariffs and I guess ostensibly all that has to go back to the people who paid it. But I would bet you a lot that it won’t happen that simply. And as we’ve discussed it here, we certainly will not be booking any kinds of receivables for tariff collections because I think it’s highly improbable that it will happen in any simplistic kind of way.
Tyson Bauer (Analyst)
Yeah, I kind of figured we’ll leave the refund line item off the model for, well, ever. The last question for me, Data centers is kind of a headline catalyst for non res and that obviously gets a lot of attention. Those are the most prone to do delays, it sounds like from reports, not necessarily due to anything that you specifically do, but because of transformers, switches, anything that relates to power and the actual operations of the data center. So a lot of announcements, a lot of expectations, especially in out years, but the reality is those that have been announced have been getting pushed to the right for permitting reasons, supply issues, those things. Is this one of those that it’s a great opportunity but it’s going to be ripe for these kind of scenarios where things continually get pushed to the right.
HBolt
Well, you know, I think I would look at it from a broader perspective that from our point of view the good news is that we don’t think that the data center phenomenon goes away in 20, 26 or 27. I think you have five solid years of data center activity and as we pointed out in our last earnings release and conference call, it’s a really good thing it’s here because the rest of the private non res market seems to be on its back. So the delay is a delay, but my guess is when we look back at it, back at it, it’s reasonably insignificant. The better news is that this is going to be a solid marketplace for a pretty good while. And while we’re doing business on site with some of these projects, when I recall reports from our salespeople who are dealing with our legacy business, it’s hard to tell how much data center business is really included in the legacy business. You know, we’ll sell a guy reinforcing products 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 to data centers that are consuming products out of our legacy business as well as from our cast and place business.
Tyson Bauer (Analyst)
Okay, that sounds good. All right. Thanks a lot, gentlemen.
HBolt
Thank you, Tyson.
OPERATOR
Thank you. Just as a final reminder, if you did want to ask a question, please press star followed by one on your telephone keypads. 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.
HBolt
Okay, thank you. We appreciate your interest in insteel. We look forward to talking to you next quarter and encourage you to call if you have questions. In the meantime, thank you.
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