Insteel Industries, Inc. 2026 Q4 Earnings Call

Good morning. Thank you for your interest in Insteel, and welcome to our fourth quarter 2026 conference call, which will be conducted by Scot R. Jafroodi, 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 Insteel's markets. Except for data center activity, private non-residential markets were disappointing, and housing, the smallest of Insteel's markets, was weak and adversely affected by a host of unfavorable developments.

I will turn the call over to Scot to comment on our financial results, and following his comments, I will pick the call back up to discuss our business outlook.

Thank you, H. Woltz, 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 $0.03 per diluted share. Before discussing sales and shipments, I would 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 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% 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 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 in 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 year quarter, and an increase 3.3% from the third quarter, reflecting pricing actions implemented to recover higher hot-rolled 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. 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% from 16.1%.

The year-over-year decrease reflects narrower 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 $20.1 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 welded 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 welded wire operation 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 $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%, subject to the level of pre-tax earnings, book to tax differences, and the other assumptions and estimates that compose our tax provision 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 net working 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. Inventory remained elevated throughout fiscal 2026 as we supplemented constrained domestic rod 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 the average unit cost, generally consistent with the cost reflected in fourth quarter cost 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 reduce 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 $0.03 per share result in a total dividend 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 view share repurchase as an effective component of our disciplined capital allocation strategy. We closed the fiscal year with $37.5 million of 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 Architecture Billings 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 increased, newly signed design contracts weakened significantly, suggesting continued pressure on future non-residential construction activity.

The Dodge Momentum Index, which measures non-residential building projects entering the planning stage, increased 2.4% in September. The gain was driven by a 9.4% increase in institutional planning, supported by strength in education, healthcare, and government projects. Commercial planning declined 1.3%, as 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 US Census Bureau show that total spending increased 0.9% on a seasonally 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 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, allocating capital in a disciplined manner. This concludes my prepared remarks. I'll now turn the call back over to H.

Thank you, Scot. 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 ARTBA, among others. Concerning private non-residential construction markets, we believe the data center momentum will continue through 2027. 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.