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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View the webcast at https://events.q4inc.com/attendee/427023510
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 …
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