Insteel Industries, Inc.

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Thank you. Good morning. Thank you for your interest in InSteel, and welcome to our third quarter 2025 conference call, which will be conducted by Scott Jafuri, our Vice President, CFO, and Treasurer, and me. Before we begin, let me 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 FCC. We're pleased that the upturn in business activity we experienced over the last couple of quarters continued during our third fiscal quarter despite macro indicators that would indicate mediocre activity in the construction sector. While we're glad to see the ongoing recovery in our markets, we continue to be aware of uncertainties created by the rollout of the administration's trade policies and from the economic cycle. I'll now turn the call over to Scott to comment on our financial results. And following Scott's comments, I'll pick it back up to discuss our business outlook, and the view of the impact of tariffs on our company.

Thank you, H. And good morning to everyone joining us on the call today. As reported in this morning's press release, our strong third quarter performance was driven by higher shipment volumes, along with a significant recovery in spreads between selling prices and raw material costs. Net earnings for the quarter increased to $15.2 million, or $0.78 per share, compared to $6.6 million, or $0.34 per share, in the prior year. excluding the non-recurring restructuring charges mentioned in the release, adjusted earnings for $0.81 per share. Our results this quarter were supported by the pricing actions we have taken to manage the continued rise in raw material costs. Average selling prices rose 11.7% year-over-year and 8.2% sequentially from the second quarter, reflecting price increases implemented throughout fiscal 2025, including additional adjustments made in the third quarter to help offset the impact of higher input costs. As we mentioned on our last call, the US wire rod market remains tight, driven by reduced domestic production capacity alongside strong underlying demand. Since January, published prices for steel wire rod, our primary raw material, have increased by approximately $190 per ton. Despite these price increases, supplies remain limited. To help ease these conditions, we have supplemented our domestic purchases with significant offshore volumes. which have improved our material availability and are helping to support production levels heading into the fourth quarter. Despite these supply headwinds, shipments for the quarter increased 10.5% year-over-year and 3.5% sequentially. The growth was driven by contributions from our recent acquisitions, along with improving demand in our construction and markets. That said, we weren't able to fully meet all the market demand this quarter, limited availability, wide variety of production challenges at several of our facilities, which in turn affected our ability to maintain typical lead times. Gross profit for the quarter increased 15.4 million from a year ago to 30.8 million, while gross margin expanded by 650 basis points to 17.1%. This performance is driven primarily by an expansion in the spread, as the increase in average selling prices outpaced the rise in raw material costs during the quarter. As we've noted on prior calls, during periods of strong demand and rising steel rod prices, Our financial results tend to benefit from both the timely implementation of price increases, enabling us to offset higher replacement costs and the favorable impact of lower cost inventory flowing through under our first in, first out accounting methodology. As we move into the fourth quarter, we expect gross margin to remain near current levels, supported by strengthening demand, favorable raw material carrying values, and higher operating rates at our facilities. SG&A expense for the quarter rose to 10.6 million or 5.9% of net sales compared to 7.9 million or 5.4% of net sales in the prior year period. The increase was primarily attributable to a $2.5 million rise in compensation expense under our return on capital base incentive plan, which reflects our improved financial performance during the quarter. We also recognize an increase of $300,000 in amortization expense related to intangible assets acquired through our recent acquisitions. These increases are partially offset by $487,000 favorable year-over-year swing in the cash render value of life insurance policies, reflecting fluctuations in the value of the underlying investments. Separately, we incurred $843,000 in restructuring charges during the quarter, tied to the consolidation of our welded wire manufacturing operations. These actions follow our acquisitions of Engineered Wire Products and O'Brien Wire Products in Texas earlier in the fiscal year. While the majority of the remaining restructuring activities are expected to be completed during the fourth quarter, some related costs may extend into the first quarter of fiscal 2026. Our effective tax rate for the quarter fell to 23.3% from 24.7% a year ago. Looking ahead to the balance of the year, we expect our effective rate to run close to 23.4%, subject to the level of pre-tax earnings, tax differences, and other assumptions and estimates that compose our tax revision calculation. In terms of the cash flow statement and balance sheet, operating activities generated $28.2 million cash during the quarter, driven primarily by higher net earnings and a reduction in net working capital. Working capital improvement was largely attributed to a $36 million increase in accounts payable on accrued expenses, reflecting elevated rod purchases and an increase in average rod costs. This benefit was partially offset by a $23.1 million increase in inventories, which was also tied to the rod purchasing activity. and the higher average carrying value of raw materials. Our inventory position at the end of the quarter represented 2.7 months of shipments on a forward-looking basis, calculated off of forecasted Q4 shipments, which is up from 2.2 months at the end of the second quarter. Finally, our inventories at the end of the third quarter were valued at an average unit cost that were higher than our third quarter cost of sales, but remained favorable relative to current replacement costs. which will have a positive impact on spreads and margins as we move through the fourth quarter. We incurred $1.6 million in capital expenditures in the quarter for a total of 6.5 through the first nine months of our fiscal year. Based on forecasted expenditures for the remainder of fiscal 2025, we reduced our full-year target to $11 million from the previously communicated target of $17 million. Age will provide more detail on this topic in his remarks. We continued our share buyback program during the quarter, repurchasing $200,000 of common equity, equal to approximately 6,000 shares. From a liquidity perspective, we ended the quarter with $53.7 million of cash on hand, and we're debt-free with no borrowings outstanding on our $100 million revolving credit facility, providing us ample financial flexibility and ability to pursue any attractive growth opportunities that may develop. Turning to the macro indicators for our construction and markets, recent data continues to reflect a mix and uncertain outlook. The latest readings from key leading indicators for non-residential construction suggest that market conditions could remain challenging over the near term. In May, the architectural building index increased to 47.2, reflecting a modest easing in the rate of decline. While this uptick suggests some early signs of stabilization, particularly with an increase in new project inquiries, the index remains below the 50 threshold that indicates growth. Meanwhile, the Dodge Amendment Index, which tracks non-residential projects entering the planning stage, offered a more encouraging outlook in June. The index rose 6.8% month-over-month to 225.1. It is now approximately 20% higher than it was in June of last year. Much of the gain was in the commercial segment, which climbed 7.3% for May and is up 11% year-over-year. This take-up and planning activity suggests a growing pipeline that could support future non-residential construction demand. U.S. cement shipments, another proxy for construction activity, showed modest improvement in March, 4% year-over-year. However, on a year-to-date basis, through March, shipments remained down 7.5% compared to the same period in 2024. Construction spending data from the U.S. Department of Commerce also reflects the software demand environment. In May, total construction spending declined 0.3% from April on a seasonally adjusted annual basis and was down 3.5% compared to the prior year. Non-residential spending fell 0.2% month-over-month. and 1.1% year-over-year. Within that category, highway and street construction, a key end-use market for our products, was down 0.7% versus May of last year. The broader macroeconomic environment is also contributing to the uncertainty moving forward. While the Federal Reserve has indicated a possible shift towards lower interest rates later in the year, persistent inflationary pressures and uneven economic data could delay or limit the extent of easing. At the same time, the evolving U.S. trade and tariff landscape, particularly around steel, presents further uncertainty with potential implications for both input costs and our long-term demand forecast. While market conditions remain competitive, and visibility beyond the near term is limited, we believe in steel is well positioned to capitalize on improving demand trends as we close out fiscal 2025. By staying disciplined in our operations, closely managing working capital, and maintaining strong customer relationships, we aim to navigate near-term challenges while building long-term value for our shareholders. This concludes my prepared remarks.

I'll now turn the call back over to H. Thank you, Scott. We noted a substantial acceleration of demand for concrete reinforcing products in Q1 and Q2, and commented that we expected the demand recovery to continue through fiscal 2025. We're glad to confirm that the positive trend continued through our third fiscal quarter and into the strongest seasonal period for our company, giving us confidence that we should perform well for the balance of the calendar year. As stated in the release, the brisk pace of business we experienced over the past few months is not reflected in broader macroeconomic indicators that are generally used to measure the strength of the construction industry. but the demand recovery is nevertheless real. The confidence level of most customers, interactions between our salespeople and customers, and favorable seasonal trends lead us to believe business conditions should remain reasonably robust for a balance of the calendar year. The administration's tear-up strategy continues to be a work in process and affects our industry in unpredictable ways. Before updating listeners on our view of tariffs and how they may affect InSteel, let me reiterate that only about 10% of InSteel's revenue base is directly affected by imports and therefore potentially subject to unintended consequences of the administration's tariff policy. This is not coincidental, as we've recognized the futility of competing in markets where imports constitute a major source of competition. The objectives and disciplines driving offshore competitors and offshore investors are fundamentally different from those influencing domestic producers and domestic investors. While we're committed to retaining our position in import-effective markets going forward, it's unlikely that InSteel would materially increase its exposure to import competition. With those comments as context, let me provide our current view of the tariff landscape while acknowledging that my comments are valid today and may not be valid tomorrow, depending on the actions the administration may take. Everyone probably knows that the Section 232 tariff, which has been in effect since March of 2018, was doubled to 50% of value effective in June following a determination by the administration that the 25% tariff was insufficient to protect the domestic steel industry. While we welcomed the increase to 50%, which would further level the playing field with respect to imports of PC strands, we were surprised to learn that the increased Section 232 tariff would apply only to the steel value of imports. The executive order increasing the Section 232 tariff was ambiguous enough to give rise to a variety of interpretations with respect to the value that was actually tariffed. While PC Strand is a product that is 100% steel, the steel value subject to the tariff is reported to U.S. Customs by the importer of record. Not surprisingly, some parties have elected to interpret the executive order in accordance with their interests. While we have no visibility into the tariff actually paid by PC Strand importers of record, we understand that some importers of record are reporting steel values equal to wire rod value. And in the case of vertically integrated producers that produce wire rod, may be reporting steel values equal to the value of steel scrap that they purchase, melt, and roll into wire rod. Prior to the increase in the tariff to 50%, it was clear that the tariff was imposed on the full value of the imported PC strand. We understand, however, that U.S. Customs is meticulous in requiring thorough documentation of tariff values, and we believe that this matter will be resolved appropriately. Erroneous interpretations of the tariff undermine the administration's intent with respect to the section 232 tariff and we're working with the department of commerce to raise the visibility of this matter and to seek corrections that may be warranted meanwhile the uncertainty surrounding the issue is sufficient to induce caution in the importing community since there is a prospect for retroactive truing up and intentional violations could cause offense. Aside from the impact on PC strand imports, the administration's tariff policy is affecting our purchase of spare parts and our primary raw material, hot-rolled carbon steel wire rod. Concerning spare parts, most are imported primarily from Europe and are subject to the Section 232 tariff on steel and aluminum as well as to reciprocal tariffs on any non-steel or non-aluminum content. This creates a substantial administrative challenge because US Customs will not clear a part until confirming its steel content, its aluminum content, its non-steel or aluminum content, and the country of origin for non-steel or non-aluminum content. Only then can Customs apply the relevant tariffs to and higher costs. The tariff regime also affects our purchases of offshore raw materials. As a reminder, imports of wire rod are essential for in-steel today as there is insufficient domestic wire rod production capacity to supply domestic demand. Our choice is to pursue offshore sourcing or to scale back operations to the point that our ability to support customers is threatened. With this trade-off in mind, we've elected to import sufficient volumes of wire rod to assure we can support our markets. We were surprised by the administration's June action to increase the Section 232 tariff, which will affect the undelivered portion of our offshore wire rod purchases. Inasmuch as there is no supply alternative, we elected to proceed with the offshore transactions, and we will pass through the higher costs. We're convinced that competitors are similarly situated, although some may find themselves short of raw materials. The reality of wire rod supply in the U.S. required us to make commitments to import substantial quantities. While we entered into these transactions reluctantly due to the inherent higher risk of longer lead times, there was no alternative available except to take downtime at our manufacturing facilities. We believe the bullish domestic pricing trajectory for wire rod 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 temporarily, although any such spike would be short lived. Moving to acquisition activity. We continue to be pleased with the operation and results of the Upper Sandusky, Ohio facility that we acquired during Q1. Our Texas acquisition, while considerably smaller, has also yielded the expected benefits. I again compliment and thank our people, including those at the acquired facilities, for their professional and effective integration efforts. Turning to CapEx, as mentioned in the release, we now estimate 11 million expenditures for fiscal 2025. The resources consumed by integration activities related to our acquisitions impacted our investment programs at our manufacturing facilities, which we expect to rebound in coming years as we execute on our commitment to lower our cash cost of production and expand our product offering. No projects have been canceled, and we are evaluating a number of attractive opportunities. We'll provide a view of 2026 CapEx next quarter. 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 are well positioned to 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 the procedure for asking questions?

Thank you. To ask a question, please press star followed by one on your telephone keypad now. If for any reason you want to remove your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Julia Romero from Sidoti and Company. Your line is now open. Please go ahead.

Great. Thanks. Good morning, Agent Scott. Good morning. Good morning. You talked about – hey, good morning. You talked about the strong business activity you saw in April that you called out last quarter on your call continuing into the third quarter. I'm curious if you've also seen quoting levels for newer projects follow that same trajectory.

Keep in mind that we really operate with minimal backlogs. Raw material constrictions have actually caused our backlogs to grow, and I think it's difficult to compare this year with prior years because circumstances have changed. But our backlogs are lengthy enough to concern me at this point from just the perspective of providing the requisite level of service that our customers expect. And in more project-oriented markets, we're seeing that data centers and the like have clearly fill the gap that the slower commercial construction has created. So, overall, we're pretty optimistic about what we see out there.

Okay. Very helpful. You know, when thinking about Section 232 and the first implementation of Section 232 back in 2018, The resolution to include downstream steel didn't get resolved until about seven years later, and just thinking about that historical context, I wanted to ask what's your sense of the potential timeline to resolve the most recent Section 232 disconnect between the metal value of the import versus the full value of the import?

Well, keep in mind that we don't know that importers of record are not actually declaring the full value of PC strand. We believe that it is the administration's intent that the tariff should be on the full value of the product. And therefore, by implication, anyone who is acknowledging the steel value as wire rod value or steel scrap value is playing outside the rules. And we don't think that that will be allowed to persist on an ongoing basis. And we are, as you might expect, very vocal with commerce about this. And it would be nice, but I guess it's not unexpected that there's a considerable amount of ambiguity in this thing, the way it was rolled out.

Gotcha. Understood. Thank you for that. And then just last one for me would just be thinking about the integration of engineered wire products. How is that going? And can you maybe speak to any synergies you may be seeing on the freight cost per ton side of things for that acquisition?

Well, keep in mind that we competed with this group for a lot of years. And we could tell from a competitive point of view that the facility was a good facility and the people knew what they were doing. And certainly our view has not changed. We're learning as much as we teach, and we feel real solid about where we are with the acquisition. We've moved a lot of products around, so there's no real comparable performance between last year and this year. It's just a fundamentally different operating approach. But they obviously know what they're doing, and they're productive, and we know how to quantify those things.

Very helpful. I'll pass it on. Thanks very much.

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

Good morning, gentlemen, and well done. Good morning, Tyson. I'm just going to piggyback on that last question since you opened up the door. H, you think that EWP acquisition is probably the best one you've done as CEO as far as timing, impact, and benefit for shareholders?

No. I think the IV acquisition in fiscal 2011 was more transformative for the company.

Okay.

I think it was a very good one, Tyson. But when you say the best, I mean, we acquired five plants without the IV acquisition.

Right. which gave you the scale of economies and really put your market share on the map at that point in time.

Yeah, I mean, and it gave us a nationwide presence.

Correct. Challenges meeting demand that you referenced, is it the challenges are trying to meet that physical demand and capacity to meet it, or are you talking more that challenges of meeting that demand while maintaining or expanding your current spreads and margins?

I think that the challenges have been, first, when we have less than about 45 days of raw material, then scheduling becomes a real problem. We run into more frequent changeovers and changeovers that logically we wouldn't make Um, under other circumstances and, and we've had, you know, we've had plants at 10 days of raw materials. We've had plants with no raw material. Um, so, so. So scheduling has been a tremendous headache for us. Um, and as we have, as we've said for many quarters, we continue to have, have concerns about. properly staffing our plants. That continues to be a problem for us. So, you know, it's a chicken and the egg question in some respects, but clearly we incurred higher costs. We lost shipments and the such due to raw material disruptions in the quarters.

Okay. Given the strength and the trances you see leading into Q4, do you anticipate being able to sustain or maintain your current margin levels?

Well, as Scott said in his comments, yeah, we expect that we're going to pass through higher costs. There's no company in the industry that can afford to absorb the tariff rates. that we're seeing. So it's difficult from a day-to-day point of view to know exactly where selling prices are going to be and where costs are. But from a big picture, I wouldn't expect our margins to deteriorate in a market such as we have now.

Okay. The benefit of these trends have all occurred with COB, Steve Armstead, Basically residential and housing as a non participant or certainly has not had any recovery of note that doesn't look like it's changing anytime soon. COB, Steve Armstead, What needs to occur to see that area improve or you satisfy that the commercial side and the infrastructure side is strong enough that you really don't need housing to be an area of strength.

Well, to say we don't need it, I think maybe going beyond what I would say. But one of the things that we talk about is the impact of the infrastructure investment in that our customers don't necessarily know the funding sources for the projects that they're shipping. And we certainly don't know. No one comes to us and says, I need five truckloads of steel because I have an IJA project. That just doesn't happen. But we can see that customers really throughout the country and throughout most of the segments of our business are busy and I suspect that finally some of those IJA funds are seeding this market and result in real demand for real products.

Okay. In housekeeping question, the cash management, obviously working capital needs, inventory costs continue to need funding. What kind of year-end outlook are we seeing for cash balance? And are we able to get that closer to that 75, 80 million?

We'll know when we get there, Tyson, but keep in mind that we put out nearly $100 million in cash during Q1 between acquisitions and our special dividend. So at $53.7 million, wherever we wound up in June, I'm not at all dissatisfied.

Okay. Last one for me. The wire rod supply shortage that you talked about domestically, any sense of the magnitude of what that is and relative to like when the COVID years occurred and that revenue slippage as a result, any way to quantify what that opportunity cost was?

I don't think we could give you an answer that would be very good, but I would say that when we rack it all up, we probably will have imported requirement, which would approximate the domestic shortfall.

OK. And are you viewing 25, 26 more favorably than 21, 22, just in the current setup being more sustainable for you to continue your success as shipment volumes have been a key component this time?

or the circumstances in 21 and 22 post-COVID were so fundamentally different than what we're seeing now that I'm not really sure I could give you an answer to that that makes any sense.

All right. Thank you, gentlemen.

Okay. Thank you, Tyson.

Thank you. As a reminder, to ask a question, please press star followed by one on your telephone keypads. That's star followed by one on your telephone keypads now. We currently have no further questions, so I'll hand back to our speaker team for closing remarks.

Okay. Well, we appreciate your interest in Steele. If questions arise later, don't hesitate to call us, and otherwise we'll talk to you next quarter. Thank you.

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