Insteel Industries (IIIN) Q4 2026 earnings call transcript

Good morning. Thank you for your interest in InSteal and welcome to our fourth quarter 2026 conference call, which will be conducted by Scott Jafrudy, 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 items with the SEC. Looking back at 2026, public funding for infrastructure improvements continued to be a solid foundation for InSteal's markets, except for data center activity.

Private non-residential markets were disappointing and housing, the smallest of InSteal's 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. Good morning, 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. And earnings are 7.7 million or 40 cents per share compared to 14.6 million or 74 cents 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 3 cents per diluted share.

Before discussing sales of shipments, 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 and the third quarter of fiscal 2026. Accordingly, net sales and shipment binds benefit from the additional week. Net sales of 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% from the prior year quarter but decreased 5.4% sequentially from the third quarter.

From a demand standpoint, fourth quarter shipments remained supported by healthy infrastructure spending and ongoing data center related construction activity. Continued expansion of our engineers' structural and best 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 continued to affect the timing of certain shipments, we believe these issues reflect project-specific timing factors rather than any deterioration in underlying demand. Overall, customers said that it 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 price has increased 6.6% from the prior year 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 manage the spread between selling prices and our underlying costs to support margins and profitability. Growth profit for the quarter was 21 million compared with 28.6 million a year ago, while gross margin declined 610 basis points to 10% from 16.1%. The year over year and decreased reflect narrow spread 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.

So, essentially, growth profits increased by 0.9 million from 20.1 million in a 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 well-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 well-to-wire operation consolidation, should provide additional margin support and position us to improve profitability as we move through the year.

SG&A spent a full quarter was 10.4 million or 5% in that sales, compared with 9.7 million or 5.5% in that 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 or ender value of life insurance policies, resulting from weaker financial market performance. These increases were partially offset by $700,000 reduction in compensation expense under our return on capital and senate plans, reflecting lower financial performance relative to the prior year. Our effective tax rate for the fourth quarter was 24.2%, compared with 24.24% 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 both tax differences. Looking ahead at fiscal 2027, we expect our effective rate to run around 23%, subject to the level of pre-tax earnings, both to tax differences and the other assumptions and estimates that compose our tax revision calculation.

Turning to the cash flow statement of balance sheet, operating activities generated 18.2 million cash during the fourth quarter, compared with the use of 17 million in the prior year period. Changes in the working capital contributed 4.6 million to cash, primarily due to the 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 27 forecast, down slightly from 3.5 months at the end of the third quarter. 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, inventory is valued in average unit costs, generally consistent with the costs reflected in fourth quarter costs of sales and favorable to current replacement costs. We invested 2.7 million capital expenditures during the fourth quarter, bringing total capital spending $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. Eight will provide more details in his remarks.

While investing in business support growth and reduced costs 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 three cents 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 at a total cost of 3.2 million. We remain confident in the long-term value of our shares and you share repurchase as an effective component of our discipline capital allocation strategy.

We closely fiscal year with 37.5 million cash and no borrowing outstanding under our $100 million revolving credit facility, leading us well-positioned the fund of our operating needs and pursue investment opportunities.

Turning to the macro indicators for our construction and 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 as separates expansion from contraction with the pace of decline accelerating during the month, while increased for new projects increased newly signed contracts weakened significantly, suggesting continued pressure on future non-residential construction activity.

The Dr. Menman 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 percent increase in institutional planning supported by strengths and education health care and government projects. Commercial planning declined 1.3 percent at slower activity and data center and warehouse projects, more than offset improvement across several other commercial categories. Overall, the index continues and indicated healthy pipeline of projects, although the composition of planning activity remains uneven.

The most recent construction spending data from the U. S. as the Bureau showed that total spending increased 0.9 percent on a daily adjusted annual basis in August, but declined 1.7 percent from a year earlier. Non-residential construction spending increased 0.7 from July and 0.5 year over year, while high-laying street construction and key end market for our products, increased 0.2 percent from the month and 4.6 percent from the prior year. Taking together, these indicators suggest that non-residential construction conditions remain mixed at the end of 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 prepare remarks on our turn to 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 the 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 rip us throughout this platching. 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 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 engineered structural mesh, and shipments have grown to become a meaningful part of our business. While the general softness and 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 tariff rate rising to 50 percent 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 with 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 US 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 merely 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 captured shipment volumes and profitability in the slag dome 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, carbonic, 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 coal 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 has 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 at 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 stymie 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 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 instill 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 instills manufacturing footprint and other instills facilities have ample access capacity to handle the output here to four 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 instill. 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 will now take your questions. Melissa, would you please explain the procedure for asking questions again?

Well, as you know, it's a week-to-week business in a lot of respects, Julio. And our forecast is reflective of the conditions that we currently see for our first and second quarters. And how that all shapes out remains to be seen. In our engineered structural mesh business, I expect that we'll continue to see good growth.

In answer to your lab, we're not seeing projects again 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.

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

Committed demand estimates for anything we produce. So all 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 conversion cost that come with that, and we've substantially beefed up our internal resources to be able to understand.

Good morning.

Well, let me say first that the easiest we know that only nobody tells the market allowing the same impact.

It depends on what we see out that the project relates generally, fundamentally, there's a desirability that may be available.

It can't do that.

And the way the way it's the same for our legacy business or any other businesses is that price that we quote, period of time, and if we don't ship in that period of variability across your different regions based on demand activity, obviously certain areas are more favorable for on-shore and facilities data centers, all these things that are going on, and what facilities fulfilling them make that a little more difficult.

Let me try to answer the question this way, saying that if we go back several years, our company took a lot of money. And by the way, our athletic one product's not the way it works.

We identified, we serve out of our physical locations, and we put the equipment we can assign the work that we need.

I tell you that I positioned to do whatever we wanted to.

Okay. We appreciate your interest in instill. 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.