Insteel Industries Inc (IIIN) Q4 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us and welcome to the InSteel Industries fourth quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to H. Waltz, President and Chief Executive Officer. H, please go ahead.

Good morning. Thank you for your interest in instill and welcome to our fourth 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. Looking back at 2026, public funding for infrastructure improvements continued to be a solid foundation for in-steels markets. Except for data center activity. Private and non-residential markets were disappointing, and housing, the smallest of in-steals markets, was weak and adversely affected by a host of unfavorable developments. I will turn the call over to Scott to comment on our financial results, and following his comments, I'll pick the call back up to discuss our business outlook.

Thank you, H, and good morning to everyone joining us on the call. As reported in our earnings release this morning, our fourth quarter results reflected the challenging cost environment that persisted throughout fiscal 2026. Net earnings were $7.7 million, or $0.40 per share, compared with $14.6 million, or $0.74 per diluted share in the prior year quarter. This quarter results included $700,000 of restructuring charges related to consolidation of our welded wire operations announced in August. These charges reduced net earnings by three cents per diluted share. Before discussing sales and shippings, I'd like to note that fiscal 2026 was a 53-week year, resulting in a 14-week fourth quarter compared with 13 weeks in both the prior year fourth quarter in the third quarter of fiscal 2026. Accordingly, net sales and shipment volumes benefited from the additional week. Net sales for the quarter were $209.3 million, up 17.9% from $177.4 million in the prior year period. Total shipments increased 10.6% year-over-year and 2.5% sequentially from the third quarter, with both comparisons benefiting from the additional week in the current year quarter. On a comparable 13-week basis, shipments increased 2.2 percent from the prior year quarter, but decreased 5.4 percent sequentially from the third quarter. From a demand standpoint, fourth quarter shipments remain supported by healthy infrastructure spending and ongoing data center related construction activity. Continued expansion of our engineered structural mesh business also contributed to shipment activity and helped offset softness across much of the broader private non-residential construction market during the quarter we began shipping on several projects that had previously been delayed although scheduling and delivery delays continue to affect the timing of certain shipments we believe these issues reflect project-specific timing factors rather than any deterioration and underlying demand Overall, customer sentiment remains generally positive, supporting our confidence in the demand outlook across our key end markets as we enter fiscal 2027. Moving from shipment activity to pricing, average selling prices increased 6.6% from the prior quarter and increased 3.3% from the third quarter, reflecting pricing actions implemented to recover higher steel wire rod, freight, and other operating costs. We continue to closely managed to spread between selling prices and our underlying costs to support margins and profitability. Gross profit for the quarter was 21 million compared with 28.6 million a year ago, while gross margin declined 610 basis points to 10 percent from 16.1 percent. The year-over-year decrease reflect narrow spreads between selling prices and raw material costs, higher freight and manufacturing expenses and elevated unit conversion costs due to lower than expected production volumes. Pricing actions partially offset these pressures, but the increase in average selling prices was not sufficient to fully recover the higher costs. Sequentially, gross profit increased by 0.9 million from 2021 million in the third quarter, while gross margin edged down to 10% from 10.2%. Looking ahead to the first quarter of fiscal 2027, we expect to see increasing benefits from the closure of our upper Sandusky facility and the consolidation of our weld-to-wire operations, which should contribute to lower costs and improve operating efficiency. Elevated input costs and seasonally lower demand are expected to continue pressuring margins in the near term. However, our recently announced price increase, together with the savings and efficiency gains from the upper Sandusky closure and weld-to-wire operations consolidation, should provide additional margin support and position us to improve profitability as we move through the year. SG&A expense for the quarter was $10.4 million, or 5% of net sales, compared with $9.7 million, or 5.5% of net sales in the prior year period. The year-over-year increase primarily reflected higher payroll and other labor-related costs associated with the additional week in the current year quarter, as well as a $666,000 year-over-year unfavorable change in the cash surrender value of life insurance policies, resulting from weaker financial market performance. These increases were partially offset by a $700,000 reduction in compensation expense under our return on capital incentive plan, reflecting lower financial performance relative to the prior year. Our effective tax rate for the fourth quarter was 24.2% compared with 24.4% a year ago. For the full fiscal year, our effective tax rate was 22.8% compared with 23.8% in fiscal 2025. The decrease was mainly driven by changes in book-to-tax differences. Looking ahead to fiscal 2027, we expect our effective rate to run around 23%, percent, subject to the level of pre-tax earnings, book-to-tax differences, and the other assumptions and estimates that compose our tax revision calculation. Turning to the cash flow statement and balance sheet, operating activities generated $18.2 million of cash during the fourth quarter, compared with a use of $17 million in the prior year period. Changes in networking capital contributed $4.6 million of cash, primarily due to lower inventory levels, partially offset by an increase in accounts receivable. For the full year, cash provided by operating activities increased $36.6 million from $27.2 million in fiscal 2025. Our inventory position at year end represented approximately 3.4 months of shipments on a forward-looking basis calculated from our first quarter fiscal 2027 forecast down slightly from 3.5 months at the end of the third quarter. The inventory remained elevated throughout fiscal 2026 as we supplemented constrained domestic ride availability with imported material to meet customer demand and reduce supply risk. We expect inventory balances to remain near current levels through the first quarter as we continue to offset limited domestic supply with offshore purchases. At the end of the fourth quarter, the inventory is valued at an average unit cost generally consistent with the cost reflected in fourth quarter costs of sales and favorable to current replacement costs. We invested $2.7 million in capital expenditures during the fourth quarter, bringing total capital spending to $11.8 million for the year compared with $8.2 million in fiscal 2025. Looking ahead, we expect fiscal 2027 capital expenditures to total approximately $30 million. H will provide more details in his remarks. While investing in business to support growth and reduced cost remains our top priority, we continue to return capital to shareholders throughout the course of the fiscal year. The combination of a $1 per share special dividend paid in the first quarter and four regular quarterly dividends of $0.03 per share resulted in total dividends of $1.12 per share for the year. We also continue to repurchase shares under our existing buyback program, acquiring approximately 15,000 shares during the fourth quarter and approximately 114,000 shares for the full year as a total cost of $3.2 million. We remain confident in the long-term value of our shares and view share repurchases as an effective component of our disciplined capital allocation strategy. We closed the fiscal year with $37.5 million in cash and no borrowings outstanding under our $100 million revolving credit facility, leaving us well positioned to fund our operating needs and pursue investment opportunities. Turning to the macro indicators for our construction end markets, recent data continues to present a mixed picture for the outlook. In September, the architectural billing index declined to 44.7 from 47.2 in August, indicating a further deterioration of business conditions at architectural firms. the index remains below the 50 threshold that separates expansion from contraction with the pace of decline accelerating during the month while inquiries for new projects increase newly signed design contracts weakened significantly suggesting continued pressure on future non-residential construction activity the Dodge Amendment Index which measures non-residential building projects entering the planning stage increased 2.4 percent in September the gain was driven by a 9.4% increase in institutional planning supported by strength and education, healthcare and government projects. Commercial planning declined 1.3% and slower activity in data center and warehouse projects more than offset improvement across several other commercial categories. Overall, the index continues to indicate a healthy pipeline of projects, although the composition of planning activity remains uneven. The most recent construction spending data from the U.S. Census Bureau show that total spending increased 0.9% on a saline adjusted annual basis in August but declined 1.7% from a year earlier. Non-residential construction spending increased 0.7% from July and 0.5% year-over-year while highway and street construction, a key end market for our products, increased 0.2% for for the month and 4.6% from the prior year. Taken together, these indicators suggest that non-residential construction conditions remain mixed as we enter fiscal 2027. Public infrastructure spending and data center investment continues to support demand while activity across much of the broader private non-residential market remains soft. Against this backdrop, we remain focused on the factors within our control, managing costs, improving operating efficiencies, and allocating capital on a disciplined manner. This concludes my prepared remarks. I'll now turn the call back over to H. Thank you, Scott.

As we reported last quarter, infrastructure markets have been reasonably strong for the company, and we believe we will see a repeat performance from infrastructure applications in 2027. Funding at state and federal levels looks like it will be fairly flat in 2027 but will remain at healthy levels as analyzed by ARPA among others. Concerning private non-residential construction markets, we believe the data center momentum will continue through 2027 and we're evaluating many non-data center projects which gives us confidence we will see more well-rounded demand in broader market segments than in 2026. In other words, it looks like a recovery may be underway in the private non-residential market. During our Q2 and Q3 conference calls, we reported delays in shipments to data center projects which seemed to ripple throughout the supply chain. We can now report that the delays were, in fact, delays and not cancellations, as shipments have commenced on essentially the schedule originally communicated just later. Clearly, though, the delays came with minimal notice, and there was little we could do to backfill the holes created by project delays. Lower shipping performance was the result. Housing, of course, has been stuck in a trough for several quarters, and we see no reasonable prospect for a meaningful recovery in 2027. At the same time, we do not expect further deterioration in housing. It should be noted that over the last couple of years, we have dramatically expanded the market for our engineered structural mesh, and shipments have grown to become a meaningful part of our business. While the general softness in construction markets mask our progress, our performance would have lagged substantially had we not pursued new applications and new markets. We expect to continue growing in 2027 and beyond. With fewer growth paths in our traditional markets, we expect growth in those to mirror the growth in the overall construction market. Unfavorable market trends in housing and light private commercial construction together with insufficient domestic wire rod supplies led to severe margin compression during fiscal 2026 in the standard welded wire reinforcement market with the expected impact on shipments and profitability. Another obstacle adversely affecting our financial performance has been the impact of inflation on nearly every product or service we acquire to operate our plants. The situation is particularly concerning with respect to our primary raw material, hot rolled steel wire rod, following the Section 232 tear up rate rising to 50% and adding Canada and Mexico to the list of covered countries. Canadian mills, which were regularly active in our supply chain, immediately became uncompetitive relative to domestic prices and other offshore prices. Since the Section 232 tariff changes in 2025, we have been unable to source adequate volumes of wire rod in North America and have been forced to purchase significant quantities from other more remote producers. By our calculation, there is a supply deficit of steel wire rod produced in the U.S. of approximately 1.3 million tons. With few, if any, investments being made to expand domestic output of wire rod, the deficit must be imported, which has become more difficult as we navigate around anti-dumping and countervailing duty orders in addition to the Section 232 tariff. Today, it appears domestic wire rod producers have little competition in their markets and have elected to make hay while the sun shines and eschew investments in additional capacity. Domestic prices have risen to the extent that the Section 232 tariff applicable to derivative products, such as PC strand, has become nearly meaningless. Offshore competitors once again have a distinct advantage relative to domestic producers of PC strand needless to say the housing downturn together with trade policies adversely affecting domestic PC strand producers severely the pressured shipment volumes and profitability and slag down grade as tension market for PC strands where import competition is rampant. Aside from inflationary trends and trade policy obstacles affecting raw material markets, costs have also risen rapidly for labor, electricity, chemicals, carbide, copper, spare parts, and nearly every other input into our manufacturing process. Notably, diesel fuel prices have surged in recent months, dramatically increasing costs for inbound and outbound transportation. Our company has always focused intently on managing costs, but today's environment has overwhelmed all efforts to stem the tide of rising costs through internal actions. As a result, we've implemented six price increases since December 2025, and a seventh has been announced with an effective date of a few days from now. This is unprecedented in my years in this business. Turning to CapEx, as mentioned in the release, we expect to invest approximately $30 million in our plants and information systems infrastructure during 2027. Our largest investment, approximating $20 million, is focused on expanding our engineered structural mesh capacity with the addition of a new production line and an existing facility. We also plan to install new equipment to service the PC strand market, which should increase output and reduce manufacturing costs. Other investments will constitute replacements and upgrades to existing equipment and facilities that will reduce costs and or improve product quality. I would point out with respect to our engineered structural mesh investment that we know existing capacity will be consumed in the near term, which will adversely affect customer service and stymied growth if not addressed. But we do not know the market conditions that might confront us upon startup of the new line. Our judgment is that the company and its shareholders are best served by making this capacity addition now rather than a year from now. In the short term, our timing may be good or it may be bad. In the long term, however, the investment is essential. Consistent with past practice, we will provide quarterly updates on our investment activities and expectations as the year progresses. Finally, let me mention that activities surrounding the closure of the Upper Sandusky, Ohio facility and the redistribution of that demand to other in-steel facilities are proceeding on schedule and as expected. The upper Sandusky workforce is a can-do group, and we're very appreciative of their professionalism through this difficult process. As we've indicated on several occasions, the closure is not related to the people at the plant or their effectiveness. The plant is simply in the wrong location to fit well into in steel's manufacturing footprint and other in steel facilities have ample excess capacity to handle the output heretofore produced at upper sandusky this was not a close call but it was a difficult call by our management team that is committed to doing the right thing for in steel looking ahead we're aware of the substantial risks related to the state of the economy and the administration's tariff and trade policies. Regardless of developments in these areas, we're well positioned to pursue growth-related activities, both organic and through acquisition, and actions to optimize our costs. This concludes our prepared remarks and we'll now take your questions. Melissa, would you please explain the procedure for asking questions again?

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Julio Romero with Cidotti and Company. Your line is now open. Please go ahead.

Thanks. Hey, good morning, H and Scott. Good morning. Good morning. H, good to hear that the shipments began on several of the delayed projects. And in the last call, you said you expected those shipments to pick up in the September quarter and remain strong through calendar year end um i think you also mentioned some potential continued scheduling delays if i'm not mistaken uh just help us think if if the strength through the end of the calorie calendar year is still the right expectation and then also could you help us you know size how meaningful the the shipments were in the quarter well as you know it's um a week-to-week business in a lot of respects julio and um and our forecast is um reflective of the conditions that that we currently see for our first and second quarters and and how that all shakes out remains to be seen um in our engineered structural mesh business i expect that we'll continue to see good growth on the engine engineering structural mesh business you mentioned you're evaluating many non-data center projects as the engineered structural mesh wins those projects can you help us think about who who drives the decision there is it the owner the engineer or the contractor and are you increasingly seeing it designed from the start rather than substituted for rebar at the mid stage in answer to your last question that is no we're not seeing

projects begin to be designed with our material. We have to convert them all. And with respect to previous two questions, I'd really rather not get into detail about how we identify these projects and where we're going.

Got it. I guess maybe to ask a different way, just, you know, help us kind of understand, you know, to the extent that you can, you how durable the demand might be on the non-data center project side?

Well, so in the project-oriented sector of our business, we're looking at a lot of not data center related. We're also looking at a lot of data center projects, but I would tell you that as an early sign of what's happening in the market, we may be seeing a recovery in non-residential markets that were woefully in 2026. It's not like we have a big backlog of business in our pocket that we can talk about.

But before we get an order, we've got to see that the project's out there and we are seeing that now understood um last one for me before i pass it on is just on the capex of 30 million that caught my attention uh and then you mentioned the 20 million committed to the uh for esm capacity for engineering structural mesh capacity uh how much does that add to your current capacity to the extent that you could tell us when do you expect it to be in service and and i think i know the answer to the the second part of my question but is that is that size to any committed demand from your customers or is that kind of

uh more line of sight that you that you currently have but not formalized thank you committed demand from our customers for anything we produce so so all of our actions are based on our knowledge of the market and our expectations now i can tell you that we've committed to the 20 million And I can't tell you what we'll get out of that, except we wouldn't have made the commitment had we not expected to need the capacity. And in terms of volumes, it all depends on what goes across the equipment, that the nature of the product is that we can produce a huge number of tons across a piece of equipment or only a few. just depending on what the mix looks like. So we're very well cognizant of that. We're very well cognizant of the wide range of conversion costs that come with that fact. And we've substantially beefed up our internal resources to be able to understand.

Thanks for taking my questions. I'll pass it on.

Your next question comes from the line of Tyson Bauer with Casey Capital. Your line is now open. Please go ahead.

Good morning, gentlemen. Good morning, Tyson. You talked about six price increases since last December, one more coming in the coming weeks. When you do your cost accounting and you're looking through these price increases of what you need to do or want to do, when you're identifying recoverable costs versus non-recoverable cost what exactly is that looking like and what's in those categories where you're looking at we can recover some of that wire rod freight pass through those areas but is there just this onslaught of increase in cost in general that has you bailing water as fast as you can but you're just not catching up let me say first that the easiest thing we know that only nobody tells market

and the same impact, the market will not.

Okay. You talked about two areas of strength, the infrastructure and also data centers, kind of the highlight area. Total sales, are you moving more toward large project activity versus smaller projects, or how has that trended over the last 12 months?

It depends on what we see out there. The project-related work generally, fundamentally, terms of desirability that may be available and in terms of okay so you have enough available

capacity that it's just an add-on that helps out your overall cost per unit but you see it as purely incremental as going forward it is it costs have risen and when looking at these large projects i'm guessing you're having to rebid as these delays occur with price increases or adjustments as you go through that process that you're seeing if you have a delay or otherwise and all of a sudden wire rods up fifty dollars a ton or more in a month you've got those escalators already factored in. Now I mean the way the way it's the same for our legacy business or any other business is that a price that we quote period of time and if we don't ship the product in that period of variability across your different regions based on demand activity obviously certain areas are more favorable for on-shoring facilities data centers other things that are going on and what facilities fulfilling them

make that a little more difficult let me let me try to answer the question this way saying that if we go back several years our company took a couple years and a lot of money. And by the way, our equipment, one product is not the way it works. So we identified the markets that we serve out of each of our physical locations, and we put the equipment we can assign the work that we do.

And last question for me. You talked about the 20-cell philosophy, when they will be paid this year.

I think we've already taken the working capital hit. I wouldn't expect it to be nothing in 2027 that's extraordinary.

And regarding the special dividend philosophy, you feel, given your outlook and where you're at, that that's still something you expect to continue?

I tell you that I expect to be in the position to do whatever we want to do.

Great.

Thank you, gentlemen. there are no further questions at this time i will now turn the call back to h waltz for closing remarks okay we appreciate your interest in instill um we thank you for your time today and encourage you to follow up with us if you have questions going forward with that we'll we'll conclude the call and look forward to talking to you next quarter thank you This concludes today's call.

Thank you for attending. You may now disconnect.