Insteel Industries Inc. (IIIN) Q1 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary presents mixed signals. While gross profit and margins showed improvement YoY, sequential declines and increased SG&A expenses are concerning. The Q&A section highlights robust demand in new markets but also emphasizes challenges such as wire rod constraints and labor cost pressures. Inventory levels and potential margin compression further complicate the outlook. Despite some positive aspects, like successful acquisitions and strong nonresidential demand, the lack of clarity and guidance on certain issues tempers enthusiasm, leading to a neutral prediction.
Key Financial Performance
Net Earnings $7.6 million or $0.39 per share, compared with $1.1 million or $0.06 per share in the same period last year. The increase was due to improved demand for concrete enforcing products and wider spreads between selling prices and raw material costs. Last year's results included $1 million of restructuring charges and acquisition-related costs, reducing earnings per share by $0.04.
Shipments Increased 3.8% year-over-year due to improved demand across commercial and infrastructure markets and incremental volume from acquisitions. Sequentially, shipments declined 9.7% from the fourth quarter, consistent with normal seasonal patterns.
Average Selling Prices Increased 18.8% year-over-year due to pricing actions taken in fiscal 2025 to offset higher steel wire rod costs driven by tight domestic supply conditions, increased Section 232 steel tariffs, and rising operating costs. Sequentially, prices were unchanged from the fourth quarter.
Gross Profit Improved to $18.1 million from $9.5 million a year ago, with gross margin expanding 400 basis points to 11.3% from 7.3%. The improvement was driven by widening spreads, higher shipment volumes, and lower unit manufacturing costs. Sequentially, gross profit declined by $10.5 million from the fourth quarter, and gross margin narrowed by 480 basis points due to the consumption of higher-cost inventory.
SG&A Expenses Rose by approximately $900,000 to $8.8 million or 5.5% of net sales, compared with $7.9 million or 6.1% of net sales in the prior year. The increase was primarily driven by an $800,000 rise in compensation expense under the return on capital-based incentive plan, reflecting stronger financial performance in the current year.
Effective Tax Rate Decreased to 21% compared to 26.1% in the prior year period. The decline was primarily driven by a reduction in the valuation allowance on deferred tax assets and a discrete tax item related to the calculation of state deferred taxes.
Cash Flow from Operations Used $700,000 in the quarter compared to providing $19 million last year. Net working capital used $16.6 million in cash, driven by a $34.5 million increase in inventories, partially offset by a $14.1 million reduction in accounts receivable. The inventory increase reflects higher raw material purchases, including offshore material, and an increase in the average carrying value of inventory.
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Operating Highlights
Concrete reinforcing products: Improved demand for these products supported wider spreads between selling prices and raw material costs.
Infrastructure Investment and Jobs Act (IIJA): Believed to be a significant driver of increased demand, though specific projects funded by IIJA are not identified.
Data center construction: Expected to remain robust into 2027, serving as a bridge during weak private nonresidential construction markets.
Pricing actions: Average selling prices increased 18.8% year-over-year due to pricing actions in fiscal 2025 to offset higher steel wire rod costs and rising operating costs.
Inventory management: Inventory levels increased due to higher raw material purchases, including offshore materials, but are expected to moderate in the second quarter.
Capital expenditures: $1.5 million spent in Q1, with a full-year target of $20 million focused on engineered structural mesh business, cost reduction, and information systems.
Acquisitions: Fiscal 2025 acquisitions are fully integrated and contributing to incremental volume growth.
Tariff policies: Section 232 tariffs on steel imports have significantly impacted raw material costs and market dynamics, leading to reliance on offshore raw material purchases.
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Risk or Challenges
Trade Policies and Tariffs: Uncertainty surrounding the administration's trade policies, including the Section 232 tariff on steel imports, creates instability in U.S. markets. The potential modification or removal of tariffs, particularly with respect to the European Union, adds to this uncertainty. Additionally, high domestic wire rod prices, driven by tariffs, are 50%-100% higher than global market prices, impacting raw material costs.
Domestic Wire Rod Supply Constraints: The permanent closure of two wire rod mills and reduced output from a third have significantly tightened the U.S. wire rod market. Domestic production capacity has decreased by nearly 25% of apparent domestic consumption, forcing the company to rely on offshore markets for raw materials, which increases inventory and working capital requirements.
Economic Uncertainty: Broader economic conditions remain uncertain, which could impact demand for the company's products. This includes risks tied to the economic cycle and fiscal conditions of the nation.
Seasonal and Market Demand Variability: First-quarter results are typically weaker due to seasonal weather patterns and holiday shutdowns. Additionally, while demand from data center construction is strong, other private nonresidential construction markets remain weak, creating reliance on specific sectors for growth.
Inventory and Working Capital Challenges: The company has experienced a $50 million increase in working capital over the past year due to higher inventory levels, driven by offshore raw material purchases. This creates financial strain and ties up resources.
Regulatory and Funding Risks: While the Infrastructure Investment and Jobs Act (IIJA) has driven demand, its funding expires in 2026, and future bipartisan support for replacement funding remains uncertain. This could impact long-term demand for the company's products.
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Guidance & Outlook
2026 Outlook: The company expects 2026 to be a strong year, supported by optimism in markets and brisk order entry in January.
Infrastructure Investment and Jobs Act (IIJA): Funding from the IIJA is believed to be driving increased demand, with projects expected to continue into 2027 and beyond. There is bipartisan support for replacement infrastructure funding mechanisms.
Data Center Construction: Demand from data center construction is expected to remain robust into 2027, serving as a bridge while waiting for recovery in traditional private nonresidential projects.
Tariff Policy Impact: Uncertainty around the administration's tariff policy, including potential modifications to Section 232 tariffs, could impact market stability and raw material costs.
Raw Material Supply: The company plans to continue importing raw materials due to tight domestic supply, with expectations for working capital impacts to moderate as market conditions normalize.
Capital Expenditures: The company plans to invest approximately $20 million in 2026 in plant and information systems infrastructure, focusing on growth in engineered structural mesh business, cost reduction, and system robustness.
Effective Tax Rate: The effective tax rate for the remainder of the year is expected to be approximately 23%, subject to pretax earnings and other factors.
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Shareholder Return Plan
Special Cash Dividend: In December, the company returned $19.4 million to shareholders through a $1 per share special cash dividend. This marks the ninth time in the last 10 years that a special dividend has been issued.
Regular Quarterly Dividend: The company continued its regular quarterly dividend payments in addition to the special dividend.
Share Buyback Program: During the first quarter, the company repurchased $745,000 worth of common equity, equivalent to approximately 24,000 shares.
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Key Q&A
Q:Can you provide more details on the commitments from customers on the data center side that run through calendar '26? Are these new commitments in your pipeline, and have they been accelerating?
A:The data center business is relatively new for Insteel, starting significantly in 2025. The company is now seeing repeat opportunities and robust demand from customers in this market.
Q:How was the 4% volume growth in the quarter affected by constraints of wire rod, both in this quarter and on a go-forward basis?
A:Insteel faced challenges acquiring sufficient quantities of wire rod domestically due to mill closures and reduced capacity. The company has turned to offshore markets to fill gaps and will continue to do so until domestic availability improves.
Q:Are you beginning to realize SG&A leverage from your acquisitions of EWP and OWP, or is that leverage still to come?
A:The company has realized the expected synergies from the acquisitions, which, along with increased shipments and sales volume, have contributed to its performance.
Q:What has allowed Insteel to grow shipments and perform well despite industry headwinds and macroeconomic challenges?
A:Internal factors such as work in the cast-in-place market and acquisitions have helped Insteel diverge from macroeconomic indicators and grow despite industry challenges.
Q:Are you being spec'd into designs for data centers as you were with distribution centers in the past?
A:No, Insteel is not spec'd into designs. Instead, the company converts rebar applications to engineered structural mesh applications, offering speed as a significant value proposition for data center construction.
Q:Will inventory levels see a gradual downtick in fiscal Q3 and Q4?
A:Inventory levels may decrease depending on shipment levels and business conditions. However, the company will continue sourcing from offshore markets if domestic supply-demand balance does not improve.
Q:Is the $20 million CapEx split evenly between maintenance and growth initiatives?
A:Yes, approximately 50% of the CapEx is allocated to maintenance, while the other 50% is for capacity expansion, cost reductions, and incorporating new technology to reduce labor intensity.
Q:How quickly can the residential market turn into a benefit for Insteel given potential government incentives?
A:The residential market is unlikely to have a meaningful impact on Insteel in 2026. The company’s participation in this market is primarily in slab-on-grade construction, which faces competition from imports.
Q:What is the outlook for labor costs, and how is Insteel addressing potential increases?
A:Labor costs are under upward pressure, varying by region. Insteel is also facing inflationary pressures in areas like tariffs, spare parts, and energy. The company is addressing these challenges on a case-by-case basis.
Q:Review of Unclear Management Responses
A:Management avoided providing a direct answer on how far out customer commitments extend beyond calendar '26, using vague language about robust demand and repeat opportunities without specific details.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
DMI increase
Index mix
Index signal
Inquiries project
SGA sale
account inventory
acquisition comparison
acquisition run
acquisition share
action period
action steel
activity ABI
activity month
activity normalizes
addition dividend
allowance tax
amount material
asset tax
assumption cost
backdrop construction
backdrop demand
balance remark
basis point
basis volume
billing Inquiries
build wire
buyback equity
calculation state
capital payment
charge acquisition
commercial construction
compensation expense
cost inventory
improvement
increase inventory
margin basis
market backdrop
measure
price pricing
pricing action
reading
reduction
rod supply
IIIN Transcript
Insteel Industries Inc. (IIIN) Q1 2026 Earnings Call Transcript
Unknown1-15
The earnings call summary presents mixed signals. While gross profit and margins showed improvement YoY, sequential declines and increased SG&A expenses are concerning. The Q&A section highlights robust demand in new markets but also emphasizes challenges such as wire rod constraints and labor cost pressures. Inventory levels and potential margin compression further complicate the outlook. Despite some positive aspects, like successful acquisitions and strong nonresidential demand, the lack of clarity and guidance on certain issues tempers enthusiasm, leading to a neutral prediction.
Insteel Industries, Inc. (IIIN) Q4 2025 Earnings Call Transcript
Unknown10-16
The earnings call presents mixed signals. While gross profit and margins improved, SG&A expenses and cash flow from operations were concerning. The Q&A highlighted short-term views on data center projects and unresolved synergies from acquisitions. The company faces inventory challenges and lacks clear guidance on residential recovery. Positive aspects include no debt and potential infrastructure project benefits. Overall, the sentiment is neutral, with neither strong positive nor negative catalysts evident.
Insteel Industries, Inc. (IIIN) Q3 2025 Earnings Call Transcript
Unknown7-17
The earnings call presented a mixed outlook: positive elements like strong operating cash flow, no debt, and successful integration of acquisitions were offset by challenges like raw material shortages and ambiguous tariff impacts. The Q&A section highlighted optimism in market activity but also revealed concerns about supply constraints and uncertain future comparisons. Given these factors and the lack of a clear market cap, the short-term stock price is likely to remain stable, resulting in a neutral prediction.
Insteel Industries, Inc. (NYSE:IIIN) Q2 2025 Earnings Call Transcript
Positive4-18
The earnings call summary reveals strong financial performance with increased net earnings and EPS, driven by improved demand and lower costs. The successful integration of acquisitions and a share buyback program further strengthen the outlook. Despite risks related to tariffs and supply chain challenges, the positive sentiment in the Q&A about sustained business momentum and optimistic customer backlogs supports a positive stock price movement prediction. The lowered CapEx guidance and ample liquidity also contribute to a favorable view. These factors collectively indicate a likely positive stock price movement in the short term.
IIIN Report
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