Insteel Industries, Inc.

Hello everyone. Thank you for joining us, and welcome to the InSteel Industries third 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. Woltz, President and Chief Executive Officer. H., please go ahead.

Thank you. Good morning. Thank you for your interest in InSeal, and welcome to our third quarter 2026 conference call, which will be conducted by Scott Jafroodi, our vice president, CFO, and treasurer. 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. Despite falling short of our expected financial performance in Q3, we believe the upturn in business activity we reported previously is still intact. I'll 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, third quarter results benefited from higher average selling prices and improved shipment activity. However, those benefits were more than offset by higher costs, resulting in net earnings of $9 million or $0.46 per share compared with $15.2 million or $0.78 per share in the prior year quarter. Despite the decline in earnings, underlying demand trends remain generally favorable. The third quarter shipments increased 1.7% from the prior year quarter, supported by healthy infrastructure activity, although conditions across much of the broader private non-residential construction market remain soft. Wet weather in certain regions together with scheduling and delivery delays on several customer projects, including data center related projects, moderated pace of shipments during the quarter. We continue to view these project delays as timing related rather than indications of weakening underlying demand. Overall, customer sentiment remains positive and activity across our key markets continue to support our outlook. Turning to pricing. Average selling prices increased 8.1% from the prior year quarter and 2.3% sequentially from the second quarter, reflecting the continued benefit of pricing actions implemented over the past year in response to higher steel wire rod, freight, and other operating costs. Gross profit for the quarter declined 20.1 million from 30.8 million in the prior year period, and gross margin contracted by 690 basis points to 10.2% from 17.1%. The year-over-year decline was driven primarily by narrow spread between selling prices and raw material costs, as well as higher freight and manufacturing costs. In addition, lower production volumes resulted in higher unit conversion costs, which further pressured margins. On a sequential basis, gross profit increased by $3.6 million from the second quarter and gross margin improved by 60 basis points, reflecting higher shipment volumes and improved spreads. Looking ahead to the fourth quarter, we expect gross margins to remain near current levels, with the potential for modest improvement. Our outlook is supported by J.J. J.J. J.J. and the rest of the state. Subject to the level of pre-tax earnings, both 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 $13.7 million of cash during the quarter, driven primarily by net earnings. Changes in net working capital had a minimal impact on cash flow, providing a half a million dollars during the quarter. A $7.9 million increase in inventories reflecting continued wire rod purchasing activity and higher average raw material costs was mostly offset by a $7.8 million increase in accounts payable and accrued expenses related to those purchases. Our inventory position at the quarter end represented approximately 3.5 months of shipments on a forward-looking basis, calculated off of our fourth quarter forecast, up slightly from 3.4 months at the end of the second quarter. As discussed on prior calls, inventory levels have remained elevated in fiscal 2026 as we supplemented domestic wire rod purchases with offshore material to support customer demand and mitigate supply risk. Looking ahead, we expect inventories to decline modestly during the fourth quarter as shipment activity progresses through the seasonal busy period. Finally, inventories at the end of the third quarter were valued at an average unit cost that was generally consistent with both the costs reflected in the third quarter cost of sales and current replacement costs. We invested $3.2 million in capital expenditures during the quarter, bringing total capital spending to $9.1 billion for the first nine months of fiscal 2026. Based on our updated forecast for the remainder of the fiscal year, we now expect full-year capital expenditures to total approximately $15 million, down from our previous estimate of $20 million. The revised outlook reflects the timing of certain projects rather than any changes in our underlying investment plans. with a portion of the related spending now expected to shift into fiscal 2027. Our strong balance sheet continues to provide significant financial flexibility. We ended the quarter with $22.9 million of cash and no borrowings outstanding on our $100 million revolving credit facility. During the quarter, we increased share repurchase activity under our existing authorization, repurchasing 75,000 shares for $1.9 million. We continue to believe our shares represent an attractive long-term investment and view share repurchases as an effective means of creating shareholder value when valuation levels are appropriate. Our capital allocation priorities remain unchanged. We will continue to invest in the business to support growth initiatives and improve operating efficiency, maintain a strong balance sheet, and return excess capital to shareholders through a balanced approach of dividends and disciplined share repurchases. Turn to the macro indicators for construction and markets. Recent data suggests conditions remain uneven. In May, the architectural building index declined to 44.5, its lowest reading since January, and remained well below the 50 threshold that separates expansion from contraction. According to the AIA, the decline reflected continued uncertainty related to geopolitical tensions in the Middle East and higher energy costs, together with elevated interest rates Rising material prices and persistent labor shortages. The Dodge Amendment Index, which measures non-residential projects entering the planning stage, also pointed to some moderation in June. The index declined 1.9% for May, with the commercial component down 6.8%. While data center planning continues to be a key source of activity, Dodge noted that the pace moderated from the elevated levels seen in recent months. Construction spending data from the U.S. Department of Commerce also reflected mixed conditions. In May, total construction spending on a seasonally adjusted annual basis increased just 0.1% from April and declined 1.5% from last May. Total non-residential construction spending was essentially unchanged from April and was 3.8% below the prior year level. However, highway and street construction, a key end market for our products, increased 3% from May of last year. reflecting continued strength of publicly funded infrastructure activity. Taken together, these indicators support our view that the near-term environment remains mixed, but the underlying drivers of demand across our key end markets remain supportive. Looking ahead, shipment levels have improved from the weather-impacted second quarter, and customer activity remains favorable across many of the non-residential markets we serve. Although certain projects continue to move through the system more slowly than originally expected, We believe these delays are primarily timing-related and do not reflect weakening underlying demand. At the same time, we continue to navigate uncertainty related to raw material costs, freight expense, and trade policy. While we are monitoring these developments closely, we believe the company remains well-positioned as we move through the remainder of fiscal 2026. Our debt-free balance sheet and strong liquidity provide the financial flexibility to invest in the business, pursue growth opportunities, and continue returning capital to shareholders. This concludes my prepared remarks.