INSTEEL INDUSTRIES INC Q3 FY2025 earnings call

• Strong third quarter performance driven by higher shipment volumes and recovery in spreads between selling prices and raw material costs.
• Average selling prices rose 11.7% year-over-year and 8.2% sequentially.
• U.S. wire rod market remains tight with published prices for steel wire rod up ~$190 per ton since January.
• Shipments increased due to acquisitions and improving demand in construction end markets, though limited wire rod availability caused production challenges.
• SG&A expense rose due to compensation and amortization, partially offset by favorable swing in cash surrender value of life insurance policies.
• CapEx for the quarter was $1.6 million, with full year target reduced to $11 million from $17 million.
• Continued share buyback, ending quarter with $53.7 million cash and debt-free.

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 nonrecurring restructuring charges, adjusted earnings were $0.81 per share. Shipments for the quarter increased 10.5% year-over-year and 3.5% sequentially. Gross profit increased $15.4 million from a year ago to $30.8 million, while gross margin expanded by 650 basis points to 17.1%.

• Expect gross margin to remain near current levels supported by strengthening demand, favorable raw material carrying values, and higher operating rates.
• Full-year CapEx target reduced to $11 million from $17 million.
• Confidence in performing well for the balance of fiscal 2025 due to continuing demand recovery.

• Uncertainty from administration's trade policies and tariffs, particularly impact on PC strand imports, spare parts, and raw material purchases.
• Supply chain challenges with limited wire rod availability creating production and lead time issues.
• Macro indicators for construction end markets mixed and uncertain, with potential delays in interest rate cuts and inflationary pressures.

Q: You talked about strong business activity continuing into the third quarter. Curious if quoting levels for newer projects follow that trajectory.

A: Keep in mind minimal backlogs, raw material constrictions causing backlogs to grow. Backlogs are lengthy, data centers filling gap from slower commercial construction.

Q: Sense of timeline to resolve Section 232 disconnect between metal value of import versus full value.

A: Believe administration intends tariff on full value of product, working with Commerce to address ambiguity.

Q: Integration of Engineered Wire Products. How is it going?

A: Competed with them for years, facility is good, learning from each other, moved products around.

Q: Thoughts on EWP acquisition being best done as CEO.

A: ABI acquisition in 2011 was more transformative, gave nationwide presence.

Q: Challenges meeting demand, is it capacity or maintaining spreads/margins?

A: Challenges include less than 45 days raw material causing scheduling issues, staffing problems.

Q: Year-end cash balance outlook, can it get closer to $75-80 million?

A: Not dissatisfied with $53.7 million in June, had ~$100 million cash out in Q1.

Q: Magnitude of wire rod supply shortage and opportunity cost vs COVID years.

A: Imported ~25-30% of steel requirement approximating domestic shortfall.

Q: View on '25, '26 vs '21, '22 being more sustainable.

A: Hard to answer as circumstances in '21-'22 post-COVID were fundamentally different.