Insteel Industries, Inc.

Hello and welcome everyone to the Instil Industries second quarter 2026 earnings call. My name is Becky and I will be your operator today. All lines will be muted throughout the presentation portion of the call with a chance for Q&A at the end. If you wish to ask a question in this time, please press star followed by one on your telephone keypads. I will now hand over to your host, H. Waltz, CEO, to begin. Please go ahead.

Thank you, Becky. Good morning and thank you for your interest in InSteel and welcome to our second quarter of 2026 conference call, which will be conducted by Scott Giafrutti, 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 Despite falling well short of our expected financial performance in Q2, we believe the upturn in business activity we reported previously is still intact. Winter weather is a fact of life in our business, and it happens that during Q2, conditions were severe and prolonged in many geographies, particularly compared to recent years. And project delays, while undesirable, are rather common in the industry. We regret that we experienced both of these phenomena during Q2, but we're confident that short-term weather conditions and project delays neither create nor destroy demand, and that postponed demand will be evident during the balance of fiscal 2026. I'm going to turn the call over to Scott to comment on our financial results, and then following his comments, I'll take the call back off to discuss our business outlook.

Thank you, H, and good morning to everyone joining us on the call. As we reported earlier this morning, our second quarter results were weaker than expected, reflecting the combined impact of winter weather disruptions, lower spreads, and higher unit conversion costs. Debt rates for the quarter were $5.2 million, or $0.27 per share, compared with $10.2 million, or $0.52 per diluted share, in the same period last year. Shipments for the quarter declined 5.9% from the prior year, but increased 6.9% sequentially from the first quarter. While the second quarter typically reflects some seasonal softness, conditions this year were significantly more severe. Following a solid start in January, we experienced extended periods of winter weather across most of our markets, which reduced construction activity and disrupted operating schedules for both our customers and infield, which weighed on water flow and shipments. In addition, certain projects originally scheduled for delivery during the quarter were deferred to later in the year for reasons unrelated to weather. Although we are still early in the third quarter, recent order activity has been solid, with April shipments trending above forecasted levels. With that backdrop on volumes, let me turn to pricing. Average selling prices were up 14.2% year-over-year, driven by the pricing actions we put in place throughout fiscal 2025 and into the current year to offset IRR costs, increase Section 232 tariffs, and rising operating expenses. Sequentially, AFPs were up, 1% from the first quarter, even as wire rod costs continued to move higher. For context, published prices for steel wire rod, our primary raw material, rose $90 per ton during the quarter. Although we implemented additional price increases during Q2, the limited sequential improvement in ASPs was influenced by product mix, existing contractual pricing, and softer volumes. We expect these recent pricing actions, along with the additional price increase implemented in April, to provide further benefit in the coming periods as they are more fully reflected in our realized pricing. Gross profit declined $8 million year-over-year to $16.5 million and gross margin narrowed to 9.6%. The decline primarily reflects lower shipment volumes, reduced spreads between signed prices and raw material costs, and higher unit conversion costs resulting from lower production levels and weather-related operational inefficiencies. Sequentially, Gross profit declined $1.6 million, and gross margin contracted by 170 basis points. As the slowdown of shipments delayed the tailwinds of recent pricing increases and extended the lag between raw material cost increases and realized pricing. As we enter the third quarter, we expect several factors to support a recovering gross margin. Demand is improving as we move into the seasonally stronger portion of the year. Recent price increases are beginning to gain traction, and our current raw material carrying values are more favorable. In addition, higher operating rates across our facility should enhance fixed cost absorption. Taking together these factors, we expect to support a gradual improvement in margin performance as the quarter progresses. SG&A expense for the quarter decreased to $9.7 million, or 5.6% in net sales, compared to $10.8 million, or 6.7% in net sales in the prior year period. The decline was primarily driven by a $1.1 million reduction in compensation costs tied to our return on capital to base incentive plan, reflecting weaker financial performance this year. SG&A expense was also affected by a $203,000 unfavorable year-over-year change in cash-granted value of life insurance policies, reflecting the downturn in financial markets and its effect on the underlying investments. Our effective tax rate for the quarter was 23.3%, which is up slightly from 23.2% last year. Looking ahead, we expect our effective tax rate for the remainder of the year to be approximately 23%, subject to the level of pre-tax earnings, book-to-tax differences, and the other assumptions and estimates underlying our tax revision calculation. Turning to the cash flow statement and balance sheet, operating cash flow provided $4.8 million in the current quarter, compared with using $3.3 million of cash in the prior year period, driven primarily by the change in networking capital. Networking capital used $1.4 million in cash in the second quarter, reflecting a $16.8 million increase in receivables, resulting from higher sales and average selling prices, partially offset by a $13.3 million reduction in inventory as we scale back raw material purchases. Our quarter-end inventory position represented approximately 3.4 months of shipment on a forward-looking basis, calculated off of our third-quarter forecast. That's down from 3.9 months at the end of the first quarter. As we mentioned on our Q1 call, we increased inventory levels early in the year as we supplemented domestic wire rot with offshore material, and that build naturally eased as we moved through the second quarter. Looking ahead, we expect a modest increase in inventory as we move into the seasonal busy period, positioning us to support higher shipment volumes. Additionally, our inventories at the end of the second quarter were valued at an average unit cost that approximates our second quarter cost of sales and remains favorable relative to current replacement costs, which will have a positive impact on spreads and margins as we move through the third quarter. We incurred $4.4 million in capital expenditures in the quarter for a total of $5.9 million through the first half of our fiscal year, and we remain committed to our full-year target of $20 million. Finally, from a liquidity perspective, we ended the quarter with $15.1 million of cash on hand and no borrowings outstanding on our $100 million revolving credit facilities, providing us ample liquidity and financial flexibility going forward. Turning to the macroeconomic indicators for our construction and markets, the latest reading from our two leading measures, the Architectural Billing Index and the Dollar Commandment Index, point to an environment that remains uneven but generally stable. The Architectural Billing Index was typically lead Non-residential construction activity by approximately 9 to 12 months improved to 49.4 in February from 43.8 in January. While the index remained below the break-even level of 50, the improvement indicates that the rate of contraction moderated with fewer firms reporting declining dealings compared with the prior year. Additionally, the Dodge Amendment Index of TRACS non-residential building projects entering the planning phase increased 1.8% in March. The gain was driven by a 7% improvement in commercial planning activity, which continues to be supported by strong data center construction. Monthly construction spending from the U.S. Department of Commerce suggests only modest growth in overall activity. In January, total construction spending on a seasonally adjusted annualized basis increased approximately 1% year over year. Non-residential spending was essentially flat during the period, but public highway and street construction, one of our key end-use markets, remained comparatively stronger. increasing around 4% from the prior year. As we close out the second quarter, we remain encouraged by the demand trends we're seeing across our core end markets. While the broader macroeconomic backdrop continues to evolve, including the risk of renewed inflation, uncertainty around the timing of interest rate cuts, potential changes in tariff policy, and the geopolitical developments affecting energy and shipping costs, our customers remain engaged and project activity continues to move forward. ongoing dialogue with customers, combined with recent improvements to several leading indicators, support our confidence in the direction of the business. At the same time, we recognize that these external factors could influence the pace of activity in the near term. Even so, underlying demand conditions remain healthy, and we believe we are well positioned as we move through the second half of the fiscal year. That concludes my prepared remarks. I'll now turn the call back over to H. Thank you, Scott.