Insteel Industries, Inc.

which will be conducted by Scott Giafrutti, 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 should cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. We're pleased to have experienced a material upturn in business activity during the second fiscal quarter relative to the same period last year. While we're glad to see the ongoing recovery in our markets, the tumultuous events that followed the rollout of the administration's tariff strategy created new uncertainties for the company. And before I turn the call over to Scott to comment on our financial results, We again thank all of our people for the effective integration of our acquired assets during the first fiscal quarter. Following Scott's comments, I'll pick the call back up to discuss our business outlook and the impact of tariffs on our company.

Thank you, H. And good morning to everyone joining us on the call. As we reported earlier today, the second quarter of fiscal 2025 proved to be a strong quarter for Enfield. and marked the second consecutive quarter of favorable shipment trends following the weaker volumes we experienced in the prior year. Improved demand in our construction end markets, in addition to lower manufacturing costs and higher production volume, were the key drivers in our Q2 performance. Net earnings for the quarter rose to 10.2 million from 6.9 million a year ago, and earnings per share increased to 52 cents per diluted share from 35 cents per diluted share in the prior year, Excluding the non-reincurring restructuring charges referenced in our release, net earnings rose to 55 cents per share. Shipments for the quarter increased 28.9% from last year and 17.9% sequentially from Q1. The improved shipping performance in the second quarter was driven by increased activity across most of our construction and markets, along with the additional tonnage generated from our first quarter acquisitions. Buying growth remained relatively consistent throughout all three months of the quarter, despite disruptions caused by adverse winter weather conditions in various regions of the country. On a year-over-year basis, average selling prices declined 2.2%, but rose 5.1% sequentially from the first quarter, driven by price increases implemented in the first and second quarters to offset escalating raw material costs. The supply of wire rod in the U.S. market has become progressively more constrained during the quarter, leading to price increases. To add some perspective to this, published prices for steel wire rod, our primary raw material, have increased approximately $150 per ton during calendar Q1. Despite these price increases, availability remains limited, and our primary focus moving forward is on securing an adequate supply to minimize potential disruptions to our operations. Gross profit for the quarter increased $8.8 million from a year ago to $24.5 million while gross margin expanded to 15.3% from 12.3%. This growth was driven primarily by higher sales volume and to a lesser extent, a reduction in conversion costs per ton due to increased production levels. On a sequential basis, gross profit rose 15 million from the first quarter, accompanied by 800 basis point expansion in gross margin. This improvement was supported by the same quarter over quarter drivers as well as higher spreads tied to selling price increases mentioned earlier. Additionally, margins recovered from the temporary pressure in Q1 related to the fair value accounting of inventory acquired in our first quarter acquisitions. That inventory was fully depleted early in Q2 and replaced with inventory valued at standard costs, which allowed gross margins to normalize. As we move into the third quarter, we anticipate that a combination of strengthening demand Improving spread supported by recent price increases, current raw material carrying values, and higher operating levels at our facilities will continue to restore gross margin to more attractive levels. SG&A expense for the quarter increased to 10.8 million or 6.7% of net sales compared to 7.9 million or 6.2% of net sales in the prior year period. The increase was primarily driven by A $1.4 million rise in compensation costs tied to our return on capital to base incentive plan, reflecting stronger financial performance this year. As a reminder, no incentive compensation expense was recorded in the second quarter of last year. Additionally, SG&A expense was impacted by a $414,000 unfavorable year-over-year swing in the cash and render value of life insurance policies, which declined by $31,000 in the current quarter versus a $383,000 gain in the prior year. reflecting fluctuations in the value of the underlying investments. Lastly, amortization expense rose by $297,000, driven by intangible assets recognized from our recent acquisitions. In addition to the increase in SG&A expense, we recorded $662,000 in restructuring charges during the quarter. These charges reflect costs associated with the previous announced consolidation of our welded wire manufacturing operations following the Q1 acquisitions of engineered wire products. and O'Brien Wire Products of Texas. Our effective tax rate for the quarter was 23.2%, which is up slightly from 22.5% last year. Looking ahead to the balance of the year, we expect our effective rate will remain steady at around 23%, subject to the level of pre-tax earnings, both tax differences, and the other assumptions and estimates that compose our tax provision calculation. Moving to the cash flow statement and balance sheet, cash flow from operations used $3.3 million in quarter compared to providing $1.4 million last year. Networking capital used approximately $21.9 million of cash in the second quarter due to a $30.4 million increase in receivables resulting from higher sales and an increase in average selling prices, which was partially offset by a $5.8 million increase in accounts payable and a $2.6 million decline in inventory. Our inventory position at the end of the quarter represented 2.2 months of shipments on a forward-looking basis calculated off of forecasted Q3 shipments compared with 2.8 months at the end of the first quarter. Finally, 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 $2.2 million in capital expenditures in the quarter for a total of $4.9 million through the first half of our fiscal year. Based on forecasted expenditures for the remainder of fiscal 2025, we reduced our full-year target to $17 million from the previous communicated target of $22 million. H will provide more detail on this topic in his remarks. Additionally, in the second quarter, we continued our share buyback program, repurchasing $1.1 million of our common equity, equal to approximately 40,000 shares. Finally, from a liquidity perspective, we ended the quarter of $28.4 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. As we enter the third quarter of fiscal 2025, we are cautiously optimistic about our market outlook for the remainder of the year, supported by the continued strength and demand across our markets. Recent shipment trends and overall market sentiment reinforces this view. Although we are still early in the third quarter, our order book has remained strong, and shipments in April have exceeded levels from the previous year. However, there are still uncertainties that support our cautious outlook. The long-term demand forecast remains clouded by shifting U.S. trade policies and the potential economic fallout from the Trump administration's tariff strategy. Turning to the macroeconomic indicators for our construction and markets, the latest reports for the Architectural Billing Index And the Dodge Amendment Index suggests a challenging outlook for business conditions moving forward. In February, the ABI registered a score of 45.5, remaining well below the growth threshold of 50, signaling that most firms continue to experience declining billings. Additionally, the Dodge Amendment Index was tracked non-residential billing projects entering the planning phase, saw a decrease of 6.9% in March, with commercial planning activity dropping by 7.8%. U.S. cement shipments, another key metric we monitor, reflected ongoing weakness with January 2025 shipments down 3.1% year-over-year. Finally, the monthly construction spending data from the U.S. Department of Commerce continues to indicate modest growth. The latest February data revealed that total construction spending on a seemingly adjusted annual basis increased by approximately 3% compared to last year. Non-residential construction spending rose by around 4%. However, spending on public highway and street construction, a major end-use application for our products, remained relatively flat with an increase of less than 1%. This concludes my prepared remarks. I'll now turn the call back over to H. Thank you, Scott.

During our first quarter conference call and in the earnings release, we noted a substantial acceleration of demand for concrete reinforcing products and commented that that we expected the demand recovery to continue into calendar 2025. We're glad to confirm that the positive trend continued through our second quarter, which takes us past the risky of seasonal influences on our business and gives us confidence that we should perform well for the balance of the year. As stated in the release, the brisk pace of business we've experienced over the past few months is not reflected in the broader macroeconomic indicators that are generally used to measure the strength of the construction industry, but it is nonetheless real. The confidence level of most customers, interactions between our salespeople and customers, and favorable seasonal trends lead us to believe that business conditions should remain robust at least through the end of our fiscal year. For several quarters in earnings releases and conference calls, we have lamented the unreasonable impact on InSteel of the 2018 Section 232 steel tariff that was applied to most imports of our raw material, hot rolled steel, but not to imports of finished PC strand. We worked for years with multiple administrations to correct this obvious mistake without any success until recently. While there may be reasons to object to the administration's tariff strategy, I'm glad to report that one provision of the new tariff regime is application of the 25% Section 232 steel tariff to imports of PC strand and other derivative products of hot-rolled steel wire rod. This precludes the easy circumvention of the tariff by offshore companies that elected to ship finished PC strand into the U.S. rather than hot-rolled steel wire rod and it eliminates the inequity of our incurring high U.S. costs for raw materials while competing with world market steel prices used to produce imported PC strand. This tariff anomaly cost InSteel millions of dollars over the course of seven years. We're also relieved to see that the reciprocal tariffs announced and subsequently steel products that are covered by the Section 232 steel tariff. This means that, with one notable exception, the world raw material marketplace for in-steel remains as it has been since 2018. That is, the Section 232 steel tariff affects imports of hot-rolled steel wire rod. The exception I mentioned relates to the re-imposition of Section 232 tariff on Mexico and Canada, whereas both countries had been exempted from 232 until March 12. This could impact in steel marginally in as much as severe U.S. supply constraints had required us to purchase from Canada on a regular basis. We do not expect the Canadian Section 232 tariff impact to be material although we have serious concerns about adequate domestic supplies of wire ride going forward. I should note that reciprocal tariffs, if they come to pass, could affect Ensteel with respect to purchases of capital equipment, spare parts, and certain operating supplies, all of which are imported. At this point, it's impossible to know whether the reciprocal tariffs will become reality, or if so, to what extent in steel might be affected. While we would take advantage of all opportunities to manage our exposure to tariffs, if forced to incur higher costs, we would plan to pass them through in the form of higher selling prices. In our last call, I mentioned that domestic supplies of our primary raw material, hot rolled steel wire rod, were tight due to two permanent mill closures that occurred or been announced and the absence of a third mill from the market for an indefinite period. As of today, the third mill has communicated plans to restart production, but it could not be considered a source of supply today. And we wonder what changes might make the environment for it more hospitable today than last fall when it shut down. And as mentioned, Canada and Mexico are now subject to the Section 232 tariff which has affected their competitiveness and further tightened supplies available to U.S. purchasers. Uncertainty surrounding adequate supplies of wire rod during our third and fourth fiscal quarters resulted in our making commitments to import substantial quantities. While we entered into these transactions reluctantly due to the inherent higher risk of longer lead times, there was clearly no alternative available except to take downtime at our manufacturing facilities. Additionally, the bullish domestic pricing trajectory greatly reduces the pricing risk normally associated with importing, but that risk has not been eliminated. Depending on actual deliveries, we could see raw material inventory levels spike next quarter. Any increase would be short-lived unless we conclude that a higher proportion of offshore supply is required going forward. As you know, during our first quarter, we acquired two manufacturing facilities and production equipment from a third facility. While we closed one manufacturing facility, the integration of the remaining assets is complete and successful. We're pleased with the operations of the Upper Sandusky, Ohio facility, and with the operational and freight synergies we've been able to realize today and that we expect to realize in the future. We could not have accomplished the integrations as quickly or efficiently without sophisticated information systems and diligent professionals at the Upper Sandusky Plant and throughout the InSteel organization who made it happen. I'm grateful to everyone involved. Turning to CapEx, as reported in the release, Through six months, CapEx totaled $4.9 million, which is well off the pace of our initial forecast for fiscal 2025 of $22 million, due primarily to the resources devoted to acquisitions, equipment relocations, and integration activities. We have canceled no projects and continue to seek opportunities to expand our product offering and reduce our cash cost of production. Given that we're now in the third quarter of fiscal 2025, we have lowered our CapEx estimate to $17 million and will update expectations during our next call. Looking ahead, we're aware of the substantial risk related to the administration's tariff policies and the future performance of the U.S. economy. Regardless of developments in these areas, we're well positioned to We pursue actions to maximize shipments and optimize our costs and to pursue attractive growth opportunities, both organic and through acquisition. This concludes our prepared remarks and we'll now take your questions. Becky, would you please explain again the procedure for asking questions?