Insteel Industries - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 net sales rose 6.6% year over year to $129.7M, while diluted EPS was flat at $0.06; gross margin expanded 210 bps YoY to 7.3% as spreads improved, offset by higher SG&A.
• Sequentially, shipments fell 4.5% due to normal seasonality, average selling prices increased 1.1%, and gross margin compressed versus Q4 2024 (9.1%) as purchase accounting on acquired inventory weighed on margin by ~110 bps.
• Company executed and rapidly integrated two acquisitions (EWP for adjusted $67.0M; OWP for adjusted $5.1M) and paid a $1.00/share special dividend alongside its $0.03 regular dividend; ended quarter with $36.0M cash and no debt.
• Management implemented price increases and expects Q2 2025 margin tailwinds as higher selling prices meet lower-cost inventories under first-out methodology; headwinds persist from low-priced PC strand imports and tighter domestic wire rod supply.

What Went Well and What Went Wrong

What Went Well

• Demand recovery: “We are encouraged by recovering order activity we experienced during the first quarter, which is typically seasonally weak” — H.O. Woltz III.
• Integration execution: “Within two weeks of closing, the legacy systems of the acquired companies were disabled and Insteel systems were up and running…integration risk is substantially behind us” — H.O. Woltz III.
• Pricing actions/margin setup: Management raised prices in Q1 and early January; expects Q2 spreads/margins to benefit as higher ASPs align with lower-cost inventories (first-out accounting).

What Went Wrong

• Margin pressure vs prior quarter: Gross margin of 7.3% in Q1 2025 vs 9.1% in Q4 2024, with ~110 bps drag from inventory revaluation on acquisitions.
• Import competition: Ongoing low-priced PC strand imports continue to pressure selling prices, volumes, and spreads; management is pursuing trade remedies and Section 232 fix.
• Costs and restructuring: SG&A increased YoY; recorded $0.7M restructuring (Warren, OH closure) and $0.3M acquisition costs in the quarter.

Transcript

Operator (participant)

Again, thank you for joining the Insteel Industries First Quarter 2025 earnings call. My name is Harry, and I'll be your operator today. During the presentation, you can register for questions by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two to exit the queue. I would now like to hand the conference over to H.O. Woltz III, Insteel Industries' President and CEO. Mr. Woltz, please go ahead.

H.O. Woltz III (President and CEO)

Okay, thank you, Harry. Good morning. Thank you for your interest in Insteel, and welcome to our First Quarter 2025 conference call, which will be conducted by Scot Jafroodi, 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. We're pleased to have experienced a material upturn in business activity during the first fiscal quarter relative to the same period last year. Seasonally, however, trends were normal, resulting in lower shipments sequentially.

Following the lackluster demand environment that persisted through fiscal 2024, we made two important acquisitions during our first quarter that we expect to deliver solid returns for shareholders going forward. I'm going to turn the call over to Scot to comment on our financial results for the quarter and the macro environment, and then I'll pick it up to discuss our business outlook and provide some insight on the rationale for our acquisition activity.

Scot Jafroodi (VP, CFO, and Treasurer)

Thank you, H., and good morning, everyone joining us on the call. Earlier today, we reported our results for the first quarter of fiscal 2025, which were largely in line with the same period last year. Improved spread between selling prices and raw material costs, coupled with increased demand from our concrete reinforcing products, offset the impact of higher selling general and administrative expenses. Net earnings for the quarter were unchanged at $1.1 million or $0.06 per share. However, after adjusting for the nonrecurring charges outlined in our press release, adjusted net earnings increased to $0.10 per share. Shipments for the first quarter, typically our slowest period due to winter weather and holiday schedules, increased 11.4% year-over-year. Sequentially, shipments declined by 4.5% from Q4, a considerably smaller drop than the usual seasonal decrease.

This strong performance is driven by increased order activity across our commercial and infrastructure end markets, along with incremental volumes from our first quarter acquisitions of Engineered Wire Products and O'Brien Wire Products of Texas. Additionally, first quarter volumes were benefited by shipments deferred from the fourth quarter due to weather-related delays, as well as demand from customers seeking to complete projects ahead of the winter season. Average selling prices for the quarter declined 4.3% year-over- year, reflecting the competitive market conditions experienced throughout the past year and the ongoing impact of low-priced PC strand imports. However, on a sequential basis, average selling prices increased 1.1% compared to Q4, driven by the implementation of price increases during the quarter in response to rising raw material costs stemming from tightening rod supply.

Gross profit for the quarter improved to $9.5 million from $6.3 million a year ago, with gross margin expanding 210 basis points to 7.3% from 5.2%. This improvement was driven by widening spread between selling prices and raw material costs, along with higher shipment volumes, partially offset by increased conversion costs. On a sequential basis, gross profit declined by $2.7 million from the fourth quarter, and gross margin narrowed by 180 basis points. As noted earlier, in response to the recent rise in raw material costs, we implemented price increases during the quarter. Moreover, an additional price adjustment across most of our product lines went into effect earlier this month. These pricing actions are expected to favorably impact second quarter spreads and margins as higher selling prices will align with the consumption of lower-cost inventories under the first-in-first-out accounting methodology.

Finally, gross margin for the quarter was unfavorably impacted by our two recent acquisitions. The acquisitions resulted in a revaluation of acquired inventory to its fair market value, as required under purchase accounting standards. This adjustment temporarily increased the cost of goods sold when the revalued inventory was sold, which in turn put downward pressure on our gross margins during the period. We estimate that this adjustment lowered our gross margin by 110 basis points for the quarter. This impact is non-recurring and is expected to normalize as the remaining revalued inventory is sold and replaced with inventory recorded at standard cost. SG&A expense for the quarter rose by 1.5 million to 7.9 million, or 6.1% of net sales, compared to 6.4 million or 5.2% of net sales in the prior year.

This increase was primarily attributed to a year-over-year change in the cash surrender value of life insurance policies, which declined by $275,000 in the current year compared to a $675,000 gain in the prior year, reflecting fluctuations in the value of the underlying investments. Additionally, amortization expense rose by $220,000, driven by intangible assets recognized from our recent acquisitions. In addition to higher SG&A expense, we recorded $700,000 in restructuring charges during the quarter. These charges included asset impairment, severance, equipment relocation, and plant closure costs related to the recently announced consolidation of our welded wire manufacturing operations. This consolidation included the closure of our facility in Warren, Ohio, which we acquired through our purchase of Engineered Wire Products. Furthermore, we incurred $300,000 of acquisition costs during the period for legal, accounting, and other professional fees related to our acquisitions.

Our effective tax rate fell slightly to 26.1% from 27.2% a year ago. The decrease was largely driven by the effect of a discrete tax item, which had an amplified impact on the rate due to the lower pre-tax earnings. Looking ahead to the balance of the year, we expect our effective rate to run close to 23%, subject to the level of pre-tax earnings, book tax differences, and the other assumptions and estimates that compose our tax provision calculations. Moving to the cash flow statement and balance sheet, cash flow from operations provided $19 million of cash in the first quarter. This was primarily driven by the changes in net working capital, which included a reduction in receivables, reflecting the usual seasonal slowdown in sales, and a decrease in inventories resulting from lower raw material purchases after excluding the impact of the inventory acquired through our acquisitions.

Our inventory position at the end of the quarter represented 2.8 months of shipments on a forward-looking basis, calculated off of our forecast at Q2 shipments. Finally, our inventories at the end of the first quarter were valued at an average unit cost slightly lower than our first quarter cost of sales and below current replacement costs, which should favorably impact spreads and margins during the second quarter as we consume the lower-cost material. We incurred $2.7 million in capital expenditures in the first quarter and remained committed to our full-year target of $22 million. H.O. Woltz will provide more detail on this topic in his remarks. In December, we returned $19.4 million of capital to our shareholders through the payment of a $1 per share special cash dividend in addition to our regular quarterly dividend.

This marks the eighth time in the last nine years that we have issued a special dividend. Also, during the first quarter, we continued our share buyback, repurchasing $670,000 of common equity equal to approximately 22,000 shares. From a liquidity perspective, after funding two acquisitions during the quarter and paying the $1 per share special dividend, we ended with $36 million in cash on hand and no borrowings outstanding under our $100 million revolving credit facility. This strong financial position provides us with significant flexibility and the capability to pursue additional growth opportunities as they arise. Turning to the macro indicators for our construction end markets, the latest reports for the Architecture Billings and Dodge Amendment Indexes, which are leading indicators for non-residential building construction, offer an improving view of the market conditions going forward.

In November, ABI remained in negative territory with a score of 49.6, any score below 50 in the case of declining business conditions. However, despite finishing below 50, billings at architectural firms stabilized after nearly two years of decline. In addition, inquiries into new projects are increasing, an encouraging sign moving forward. The Dodge Momentum Index, another leading indicator for non-residential building construction, rebounded 10.2% in December, with commercial planning increasing over 14%, driven mainly by data center and warehouse planning activity. On a year-over-year basis, the overall index was higher by 19%. Dodge noted that the strong performance of the index this past year is expected to support non-residential construction spending throughout calendar 2025. The monthly construction spending data from the U.S.

Department of Commerce continued to remain fairly strong, with the November report showing total spending on a seasonally adjusted basis of approximately 3% from last year, with non-residential construction up 2.8%. However, public highway and street construction, one of the larger end uses for our products, was down 3.6%. Finally, U.S. cement shipments, another measure that we monitor, showed signs of recovery compared to last year, as October 2024 shipments were up 3.5% from the prior year. However, year-to-date shipments were still down 5%. This concludes my prepared remarks. I'll now turn the call back over to H.

H.O. Woltz III (President and CEO)

Thank you, Scot. As we commented consistently, the operating environment during fiscal 2024 was difficult as we faced headwinds, including declining steel prices, inventory liquidations by customers, the need to align our finished goods inventories to reflect lower shipments, and finally, the normal seasonal downturn in construction activity. The result, of course, was lower operating rates at our plants, price competition from competitors experiencing the same weak conditions as in steel, and inadequate utilization of the capital investments that we've made over the past few years. While it's too early to know whether the positive trend will continue, we noted a material uptick in demand during our first quarter. We're mindful that the trend must be sustained to justify ramping up operating hours, but it is nonetheless welcome.

The first few weeks of our second quarter have not provided much additional insight into the underlying state of demand in our markets, as we've been affected by the usual seasonal weather trends that have resulted in curtailed operating hours at multiple facilities and at customer facilities. I think when we look back at the winter of 2025, however, we will call it normal. The weak demand environment during 2024 for wire products, both construction-related and non-construction-related, was confirmed by the announced curtailment of domestic capacity to produce steel wire rod, steel's primary raw material, by two producers affecting three steel facilities. It's likely that production at one facility will resume sometime during the first half of 2025, although there's no assurance of this. The other two closures are probably permanent.

Meanwhile, the domestic raw material supply has tightened, sending prices higher and creating a void that is likely to be filled by imported wire rod beginning late in the current quarter. As we stated on several occasions, the Section 232 tariff structure that is in place has caused hardship to purchasers of hot-rolled wire rod like Insteel because imported wire rod is subject to a 25% tariff, but many downstream products, such as PC strand, enter the U.S. market tariff-free. It should surprise no one that offshore producers shifted exports to downstream products to avoid the Section 232 tariff. Ironically, as demonstrated by the shutdown of three domestic wire rod production facilities, the dysfunctional Section 232 tariff structure is also harming our suppliers, hot-rolled producers, the very industry it was meant to protect. We are working with our supplier community and the administration to resolve this anomaly.

Meanwhile, however, we're forced to compete with offshore PC strand that is entering the U.S. market at prices lower than the domestic hot-rolled wire rod price. I would point out that about 30% of our PC strand market and about 10% of our total revenue is directly affected by import competition. We have consciously positioned the company to avoid markets that are dominated by imports, recognizing the unique economic considerations that drive exporters to the U.S. market and the vagaries of U.S. trade policy. It's worth mentioning that the overcapacity problems that plague the steel market worldwide and certainly the U.S. market are of Chinese origin. Mammoth Chinese overcapacity and exports and the resulting price pressure they cause have disrupted normal patterns of commerce across the entire world, leaving developed economies in a quandary about how to deal with the situation.

The U.S. has chosen to fight this battle using tariffs. We're trying to position Insteel on the proper side of this trade policy. As mentioned in the release, we made two important acquisitions during the first quarter, actions that are consistent with our stated capital allocation strategy of using our resources first to grow our business and then to return capital to shareholders as may be appropriate. I can't say enough about the professional integration process our people completed that accelerates the financial contribution of acquisitions and reduces the risk they create. While not obvious from our first quarter results, we are well on our way to realizing the substantial operating synergies that come to us through these transactions.

To date, we have eliminated practically all of the SG&A associated with the acquired operations and identified and realized significant freight and raw material cost reduction opportunities that will become more meaningful as seasonality trends turn in our favor. We could not have accomplished the integrations as quickly or efficiently without sophisticated information systems and diligent professionals to lead the process. I'm grateful to everyone involved. Turning to CapEx, while Q1 came in at only $2.7 million, we expect to invest approximately $22 million in our business during fiscal 2025, which is consistent with the estimate we provided last quarter. Our investments will continue to be targeted toward broadening our product offering, lowering our cash cost of production, enhancing our information systems, and maintaining our facilities. As I mentioned previously, we do not try to time our investments to coincide with periods of strong demand for our products.

The market is much too volatile and the project lead times too extended for such an approach to be successful. Instead, we take advantage of technological developments and we maintain our facilities continuously. Insteel continues to be debt-free and has substantial flexibility to make decisions for the long-term best interest of its customers and shareholders. Looking ahead, we're aware of substantial risks related to the future performance of the U.S. economy and we're monitoring the environment. In any event, we believe 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 will now take your questions. Harry, would you please explain the procedure for asking questions?

Operator (participant)

Yes, of course. If you would like to ask a question, please dial star followed by one on your telephone keypad now. If you change your mind and would like to exit the queue, please dial star followed by two. And finally, when preparing to ask your question, please ensure that your device is unmuted locally. Our first question will be from the line of Julio Romero with Sidoti & Company. Please go ahead. Your line is open.

Julio Romero (Equity Analyst)

Thanks. Hey, good morning, H.O. Woltz. I wanted to start on demand trends. Hey, good morning. Could you speak to the material uptick in demand in the December quarter and any particular in-market geographies or product lines that led the uptick?

H.O. Woltz III (President and CEO)

It was generally across the board, Julio, and it's a difficult subject to address because there are so many moving parts that affect what we see in our shipments. There are our inventories, there are our customers' inventories, there are weather conditions. It's really difficult to quantify, but nevertheless, our shipments rose substantially in November and December relative to the prior year, and there seemed to be significant optimism in the market. Whether that continues, as I said in my comments, we don't know. We certainly hope so, but I think we really said all we can say about it at this point.

Julio Romero (Equity Analyst)

Understood. And then it's very nice to see your average selling prices inflect positively here in the quarter on a sequential basis, at least. You spoke to a couple of price increases that you passed, one during the quarter and a second here in January. And then obviously you mentioned wire rod domestic supply tightening, but I'm curious if you could talk about kind of the confidence you had to implement those increases, and does that imply that the pricing pressures from domestic competitors have subsided at all?

H.O. Woltz III (President and CEO)

Yeah. I think we saw this tightening of domestic supply coming well before it actually materialized, and we announced price increases prospectively, knowing that or believing that we would be more successful in taking a few bites at the apple rather than trying to eat it all at one time. There is a significant supply deficit in the U.S. market. We saw it coming, and we started raising our prices accordingly. Now, the interesting part of this is that the tight supply condition right now is related to the supply of wire rod. It is not driven by outstanding demand for wire rod among wire products producers, and I fully expect, as I've stated in my comments, that we'll see wire rod imports rise significantly toward the end of this quarter and next quarter to fill the gap.

Up to this point, our company and I think a lot of other companies have not felt the need to import significant quantities just due to the economics of importing, as well as the long lead times that come with importing. And all of those factors create risk that we didn't want to take and that I think many of our competitors and other producers of wire products didn't want to take. But now, with supplies domestically being in question, it's a matter of, "This is what you have to do," so we're doing it.

Julio Romero (Equity Analyst)

Very helpful context. And then obviously, congratulations on the acquisitions of Engineered Wire Products and O'Brien as well. You mentioned two weeks and you were up and running on both. Can you just talk about how has the first couple of months of integration post-close gone and how has the reception been from employees, customers, suppliers, etc.?

H.O. Woltz III (President and CEO)

Yeah. As I stated in my prepared comments, the integrations were fantastic. And the Engineered Wire Products integration was actually a really big project due to some of the fundamental differences in the way Engineered Wire Products and Insteel deal with data. So it was a big project. But our people put their noses to the grindstone. They got it done. We never utilized the legacy systems at the acquired companies. We brought those companies up on our own systems. It was not necessarily graceful in the first few days, but we got past that relatively quickly. And as I've stated continuously in these calls, the state of our information systems and the professional people that we have on staff are something that's just not common to find in our industry. And they certainly proved their mettle in the first fiscal quarter.

In terms of the acceptance or the customer view of our acquisitions, I think it's been generally positive. It was no secret to anyone that Engineered Wire Products was not in a position of stability, and I think that there's actually some relief in the marketplace that the company is in those production assets or in stable hands now, and it's up to us to be good stewards of that going forward, which we fully intend to be.

Julio Romero (Equity Analyst)

Got it. Very nice job. I'll pass it on. Thanks very much.

Operator (participant)

Our next question will be from the line of Tyson Bauer with KC Capital. Please go ahead. Your line is open.

Tyson Bauer (Senior Analyst)

Good morning, gentlemen.

Scot Jafroodi (VP, CFO, and Treasurer)

Morning, Tyson.

H.O. Woltz III (President and CEO)

Hey, Tyson.

Tyson Bauer (Senior Analyst)

Kind of follow up on one of the previous questions. Are you then looking at your revenue growth in 2025 to be more driven by favorable pricing or shipment volume growth as you see that demand pick up? How do you kind of split the two?

H.O. Woltz III (President and CEO)

Yeah. Well, I mean, there'll obviously be a positive revenue impact from the acquisitions. But as you've seen in the last couple of years, selling prices make a big difference in our top line. And I would tell you right now that as we're looking at tight supplies of wire rod, that it's likely that we see our selling prices rise, our revenues rise. We'll also see that our cost of raw material rises. But through and beyond our second fiscal quarter, I honestly don't know how to respond to the question except to tell you that we'll definitely benefit from increased shipments due to the acquisitions. But it's hard to say whether market recovery in our legacy business is for real or whether we revert to some of the 2024 trends. I don't know.

Tyson Bauer (Senior Analyst)

Okay. You talked about cost synergies from your acquisitions, M&A activity. Obviously, you have the one big plant shutdown and absorbing that into your existing facilities. What were the annual direct savings from that action? And how would you monetize kind of that centralizing the process to your systems? What kind of savings does that provide annually?

H.O. Woltz III (President and CEO)

Let me answer the question that you didn't ask. The plant that we closed was running at a marginal or negative EBITDA level. And the reason for that was just an inadequate throughput, an inadequate demand to run the plant efficiently. So once we understood the underlying nature of the financial disappointment there, we determined that those products would be best made at the legacy Insteel facilities, most appropriately positioned geographically to take those products. And that's what we did. We will wind up with a considerable amount of surplus equipment following the acquisitions that we made during the first quarter. And we've arranged to, as well as some real property, we've arranged to sell that surplus equipment outside of North America. And once we have a better focus on the timing of the full wind down at the Warren, Ohio plant, we'll liquidate that real estate.

Tyson Bauer (Senior Analyst)

So we should see a gain on sale of assets in future quarters?

H.O. Woltz III (President and CEO)

I mean, I don't know whether it'll be a gain or a loss, Tyson. It all depends on what we realize for the assets relative to what they went on our balance sheet at, but they're also in a restructuring.

Scot Jafroodi (VP, CFO, and Treasurer)

Yeah. Tyson, we fair valued all those assets at the acquisition purchase accounting. So they should be close to their realizable value they have at the moment.

Tyson Bauer (Senior Analyst)

Okay. But you will monetize it?

H.O. Woltz III (President and CEO)

Absolutely.

Tyson Bauer (Senior Analyst)

What do you anticipate? SG&A full year, are we still kind of in that $32-$35 million range as a target range?

Scot Jafroodi (VP, CFO, and Treasurer)

The impact SG&A is going to be on the intangible amortization from these assets that were generated from the acquisition. And for the remainder of the year, we're probably looking at another $900,000 additional amortization expense over the last year for the next nine months.

Tyson Bauer (Senior Analyst)

Okay. When you look at some of the macro things that affect the industry and the business directly, the priorities or what really has a true material impact, are you looking more that you need to see a better environment on the interest rate side, or are you looking that the tariffs would be more impactful and beneficial for the company if they were to break favorably towards you? Between interest rates and tariffs, how do you weight those?

H.O. Woltz III (President and CEO)

What's your projection for the tariff environment? I mean, we know what the Section 232 tariff has done, but we don't know what Trump's promised broad-based tariff regime is going to look like. But I would tell you that I don't see a way that that significantly hurts us because we've already been harmed by 232. And a broader-based tariff system, in my view, would help us at least in the short term, whether it's the right economic policy. Longer term, I guess, is debatable. And as for interest rates, as I mentioned during some of our prior calls, I think the spike in interest rates could have affected some speculative projects, but I don't think interest rates ever were high enough to really deter strategic investments by companies. So I think tariffs are bigger news in our world than interest rates.

Tyson Bauer (Senior Analyst)

Okay. You made a comment about emerging opportunities in your prepared press release. You also mentioned in your comments warehousing, which I guess is back in vogue after a little bit of a pause when we had the big run-up in the COVID years. And a lot of that's tilt-up construction that's favorable to you. You mentioned data centers. Anything unique on that construction and any color you can provide on other emerging opportunities that maybe we're less aware of?

H.O. Woltz III (President and CEO)

I don't think that the basic business has changed, Tyson. The same construction markets that drove the business prior to these acquisitions will continue to drive it. Post-acquisition, we've been pretty focused on our core markets and continue to be. And these acquisitions are consistent with that focus. So I think you'll see us doing more of the same things that we've been doing.

Tyson Bauer (Senior Analyst)

Okay. Last question. In the states you primarily have as end markets or you do more business in that you're approved your products, what kind of granular look on just those that you focus on, those DOT budgets for 2025, 2026, the kind of growth that you anticipate in spending in those areas?

H.O. Woltz III (President and CEO)

I don't know that we have any better insight into that than the forecast that we read from various places, from the cement industry, from the construction industry, from Engineering News-Record. I don't think that we can really forecast what the market's going to look like, Tyson.

Tyson Bauer (Senior Analyst)

But you are anticipating a trend toward accelerated expenditures that should be favorable to yourself?

H.O. Woltz III (President and CEO)

So yeah. I mean, I think there will come a time when the Infrastructure Investment and Jobs Act actually creates some demand on the ground. I think there's been precious little of that up to this point. But when it does happen, we'll certainly be a beneficiary. There's no question about it. But I don't know how anyone would forecast it or project it.

Tyson Bauer (Senior Analyst)

All right. Thank you, gentlemen.

H.O. Woltz III (President and CEO)

Thank you, Tyson.

Operator (participant)

We currently have no further questions on the line. But if you would like to ask a question, please dial star followed by one now. We'll pause here briefly for any final questions. With no further questions on the line at this time, I'd now like to hand the call back to H.O. Woltz for some closing remarks.

H.O. Woltz III (President and CEO)

Okay. Thank you, Harry. We appreciate your interest in Insteel and your participation on the call today. Encourage you to give us a call if you have questions during the quarter, and we look forward to talking to you next quarter. Thank you.

Operator (participant)

This will conclude the Insteel Industries' first quarter 2025 earnings call. Thank you for your participation. You may now disconnect your lines.