Insteel Industries, Inc.

All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Mr. H. Waltz, Chairman, President, and Chief Executive Officer at Insteel Industries. Thank you. You may proceed.

Thank you, Braco. Thank you for your interest in Insteel, and welcome to our fourth quarter 2025 conference call 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 could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. The upturning business activity that we reported previously continued during our fourth quarter, and our fiscal 2025 acquisitions performed well. While our ability to forecast future activity is limited, we see no evidence of a broad-based slowdown in our markets, although housing continues to lag significantly, as it has all year. While the ongoing recovery of our markets is real, We are aware of uncertainties created by the administration's trade policies and from the economic cycle. I'll turn the call over to Scott to comment on our financial results, and following Scott's comments, I'll take the call back up to discuss our business outlook.

Thank you, H, and good morning to everyone joining us today. As noted in this morning's press release, we delivered a strong four-quarter performance, supported by higher shipment volumes, and a continued recovery in spreads between selling prices and raw material costs. Our net earnings rose to $14.6 million, or $0.74 per diluted share, compared to $4.7 million, or $0.24 per share, during the same period last year. Quarterly shipments increased 9.8% year over year, driven by contributions from our recent acquisitions and stronger demand across non-residential construction markets. On a sequential basis, Shipments declined 5.8% from the third quarter. Supply constraints for steel wire rod, which we discussed during our third quarter call, each gradually during the quarter, allowing us to better align production with customer demand and begin reducing lead times as we close out the quarter. That said, residential construction continues to be a headwind for volumes, with activity levels remaining subdued and has yet to show any meaningful signs of recovery. Average selling prices for the quarter rose 20.3% year-over-year and 4.7% sequentially from Q3, reflecting continued pricing momentum. As we discussed on our prior calls, the U.S. steel wire rod markets have remained tight through much of 2025, and the increase in Section 232 tariffs have added further upward pressure on raw material costs. As a result, wire rod prices have moved meaningfully higher since the start of the year. In response, we have implemented a series of price increases throughout fiscal 2025, including further adjustments at the beginning of the fourth quarter to help offset these higher costs and support our margins. Gross profit for the quarter rose 16.3 million year-over-year to 28.6 million, with gross margin improving by 700 basis points to 16.1%. The increase was largely attributed to wider spreads, as higher average selling prices more than offset the rise in raw material costs. As we discussed on previous calls, our results typically benefit during periods of strong demand and increasing steel rod prices, both from the timely execution of price adjustments to recover higher replacement costs and from the flow-through effect of lower cost inventory under our first-in, first-out accounting method. Sequential basis, gross profit fell 2.2 million from the third quarter and gross margin narrowed 100 basis points, reflecting lower shipment and a slight decline in spreads. SG&A expense for the quarter increased to $9.7 million or 5.5% of net sales compared to $7.5 million or 5.6% of net sales in the prior year period. The year-over-year increase was driven primarily by $1.3 million rise in compensation expense under our return on capital base incentive plan, reflecting stronger financial performance in the current year. We also recorded an additional $300,000 in amortization expense related to intangible assets from our recent acquisitions. along with a $200,000 unfavorable year-over-year swing in the cash-rendered value of life insurance policies. Our effective tax rate for the fourth quarter was 24.4%, up from 23% in the same period last year. The increase was mainly driven by changes in both tax differences and a true up-of-state apportionment percentages. For the full year, our effective tax rate was 23.8%. Looking at the next year, we expect our effective rate will run around 23.5%, subject to the level of pre-tax earnings and other tax-related assumptions and estimates that compose our tax provision calculation. Moving to the cash flow statement and balance sheet. Cash flow from operations used $17 million in the quarter compared to providing $16.2 million last year. Networking capital used $37.4 million in cash in the fourth quarter, primarily reflecting an $18.6 million increase in inventories and a $23.4 million decrease in accounts payable and accrued expenses. The increase in inventories was driven by the timing of raw material purchases and an increase in the average carrying value of inventory. The reduction in accounts payable and accrued expenses primarily reflect the timing of supplier payments. At the end of the quarter, our inventory position represented 3.5 months of shipments on a forward-looking basis, calculated off of our forecasted Q1 shipments, compared with 2.7 months at the end of the third quarter. As you may recall, inventories have fallen below desired levels in Q3 due to stronger shipping activity and limit wire rod availability from domestic suppliers. To address this, we supplemented supply in Q4 with offshore rod purchases, which allowed us to increase production and rebuild inventories. Looking ahead, we expect inventory to rise in the near term as additional import shipments are received before gradually normalizing as raw material purchasing volumes moderate in the coming months. Additionally, it's worth noting that our inventories at the end of the fourth quarter were valued at an average unit cost that was both higher than our beginning inventory balance and our Q4 cost of sales. As such, we could experience a margin compression during the first quarter as the higher cost materials consumed, depending on our ability to push through additional price increases. We incurred $1.7 million in capital expenditures in the fourth quarter for a total of $8.2 million for the year, which is down $10.9 million from last year. Looking ahead to fiscal 2026, we expect capital expenditures to total $20 million. H will provide more detail on this topic in his remarks. In addition to our ongoing investments in the business, our financial strength has enabled us to continue returning capital to shareholders. In fiscal 2025, we returned $24 million through a combination of dividends and share repurchases. This included a $1 per share special cash dividend and four regular quarterly dividends, marking the eighth year out of the last 10 that we have paid a special dividend. We also repurchased approximately 76,000 shares of our common stock during fiscal 2025, representing $2.3 million under our share buyback program. From a liquidity perspective, we entered the quarter with $38.6 million of cash on hand, and we're debt-free with no borrowing outstanding on our $100 million revolving credit facility. Going forward, our capital deployment strategy will remain focused on three objectives. One, reinvesting in the business to drive growth and to improve our cost and productivity. Two, maintaining the appropriate financial strength and flexibility. And three, returning capital to shareholders in a disciplined manner. Looking at the broader economic picture as we enter fiscal 2026, conditions remain mixed. Raw material availability has improved and demand across most non-residential markets is generally strong, so residential construction continues to lag. At the same time, macroeconomic uncertainty remains, and while potential rate cuts from the Federal Reserve could provide some support, we're approaching the year cautiously. On the demand side, we continue to monitor leading measures of non-residential construction activity. In August, the architectural billing index rose slightly to 47.2 from 46.2 in July, but remained below the 50 threshold signaling growth. Although fewer architectural firms reported declining billings compared to the prior month, The overall trend continues to point downward. Meanwhile, the Dodge Amendment Index showed continued strength in the Healthy Project Pipeline, rising 3.4% in September and now up 33% year-to-date, driven by strong commercial construction planning activity, particularly in the data center development. In contrast, U.S. Dimension is another proxy for construction activity, climbed 2.2% year-over-year in June and are down 5.3% year-to-date, reflecting some underlying softness in the sector. Finally, the most recent available construction spending data from the U.S. Department of Commerce shows that through July, total spending on a seemingly adjusted basis was down about 3% from last year. Non-residential construction held relatively steady. Public highway and street construction, one of our major end markets, was essentially flat compared to a year ago. Even with a mixed Demand backdrop, we're entering fiscal 2026 with solid momentum. The actions we took during the past year, including completing two acquisitions, consolidating our well-to-wire operations, and maintaining pricing disciplines have strengthened our position and improved our ability to adapt to changing market conditions. While we remain mindful of broader economic uncertainty, our focus on serving customers and executing on our key priorities give us confidence in our ability to manage near-term challenges. continue building long-term value for our shareholders. This concludes my comparative remarks. I'll now turn the call back over to H. Thank you, Scott.