On Thursday, Insteel Indus (NYSE:IIIN) discussed third-quarter financial results during its earnings call. The full transcript is provided below.

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Summary

Insteel Industries Inc reported a decline in Q3 net earnings to $9 million from $15.2 million the previous year, despite higher selling prices and improved shipment volumes.

Shipments increased 1.7% year-over-year, aided by strong infrastructure activity, though non-residential construction markets remained soft, partly due to project delays.

Average selling prices rose 8.1% from the previous year, but higher costs led to a gross margin decline of 690 basis points to 10.2%.

The company anticipates stable to modestly improved gross margins in Q4, contingent on successful pricing actions to offset inflationary pressures.

SGA expenses declined due to reduced compensation expenses, with the effective tax rate expected to run close to 23% for the rest of the year.

Insteel ended the quarter with $22.9 million in cash and no outstanding borrowings, continuing share repurchases and maintaining a strong balance sheet.

Capital expenditures for the year are forecasted at $15 million, reduced from $20 million due to project timing, not changes in investment plans.

Market conditions for key end markets are mixed, but the company sees strong infrastructure demand supporting its outlook.

The company is navigating challenges from tariff policies affecting raw material costs and is pursuing pricing strategies to mitigate these impacts.

Insteel is focused on growth in the engineered structural mesh business and remains well-positioned for potential acquisitions and cost optimization.

Full Transcript

OPERATOR (Operator)

We will host a 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. I will now hand the conference over to H. Woltz, President and Chief Executive Officer. H, please go ahead.

H. Woltz, President and Chief Executive Officer

Thank you. Good morning. Thank you for your interest in Insteel Indus and welcome to our third 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. 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.

Scot Jafroodi, Vice President, Chief Financial Officer and Treasurer

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 46 cents per share compared with 15.2 million or 78 cents per share in the prior year quarter. Despite the decline in earnings, underlying demand trends remain generally favorable.

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 remained soft, wet weather in certain regions, together with scheduling and delivery delays on several customer projects, including data center-related projects, moderated the 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 continues 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 a 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 steady demand and improved manufacturing efficiency from higher production volumes and operating rates. However, significant margin expansion will depend on our ability to realize additional pricing increases sufficient to offset ongoing inflationary pressures in raw material, freight, and other operating expenses.

SGA expense for the quarter declined to 8.5 million or 4.3% of net sales, compared with 10.6 million or 5.9% of net sales in the prior year period. The decrease was driven primarily by a $2.1 million reduction in compensation expense associated with our return on capital to base incentive plan, reflecting lower financial performance relative to the prior year. Our effective tax rate for the quarter fell to 22.8% from 23.3% a year ago. Looking ahead to the balance of the year, we expect our effective rate to run close to 23% subject to the level of pre-tax earnings, 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 inventory is reflecting continued wire rod purchasing activity and higher average raw material cost 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 cost reflected in the third quarter cost, associated sales, and current replacement cost. 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.

Turning to the macro indicators for construction end markets, recent data suggests conditions remain uneven. In May, the Architectural Billing 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 reflects the 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 Momentum 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 with 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. I'll now turn the call back over.

H. Woltz, President and Chief Executive Officer

Thank you, Scott. Despite our relatively weak financial performance in Q3, I'm glad to report that we believe market conditions are holding up reasonably well and certainly well enough to support better financial performance from our company. In a nutshell, I would characterize infrastructure markets as reasonably strong and private non-residential construction absent data centers as quite weak. As reported last quarter, we've experienced schedule delays with respect to data center projects that are unavoidable under prevailing circumstances.

These delays are related to later than anticipated start times for projects that necessarily back up delivery schedules for materials and equipment. I would reiterate comments from last quarter and from Scott that we're not seeing cancellations, just delays. We expect shipments to private non-residential markets, including our data center projects, to accelerate during the current quarter and to remain strong through the end of the calendar year.

Another obstacle adversely affecting our financial performance has been the impact of inflation on nearly every product or service we acquired to operate our plants. We've struggled to get in front of costs that are rising substantially in every aspect of the business. With that in mind, we announced a price increase that was recently effective to recover these rising costs. Turning to another subject, the steel industry may have been more affected by the Administration's tariff policy than any other industry.

The Section 232 tariff of 50% on imports of steel has caused market prices in the US for hot rolled wire rod, our primary raw material, to rise to a level that is 50 to 100% over the global market price. Realizing that foreign companies were circumventing the 232 tariff by downstreaming hot rolled steel into finished products to which 232 did not apply in 2025, the administration applied the Section 232 tariff to downstream products derived from hot rolled steel covered by the Section 232 tariff.

While we initially questioned the effectiveness of the derivative products tariff strategy implemented by the Administration, we're glad to report a significant decline in the volume of imported PC strand that has entered the US since the tariff was increased to 50% and derivative products including PC Strand were covered for the first four months of calendar 2026, the most recent data available. PC strand imports fell 30% from the prior year, although the average unit values continue to reflect the availability of world market steel to our foreign competitors.

Despite low AUVs of imports, prices in the most import affected market have begun to recover as import volumes have declined and uncertainty and insurance and transport costs have increased. We intend to point out to trade policymakers the reality that US hot rolled steel prices have risen so high relative to world market levels that the effectiveness of the derivative tariffs is compromised. Foreign competitors can still acquire hot rolled steel at world market prices and simply pay the 232 tariff.

Their economics still work although uncertainty and other costs have risen substantially. Turning to the raw material environment, it appears that domestic producers of wire rod or primary raw material have increased margins to an extent that is satisfactory and the rapid price escalation to take full advantage of the Section 232 tariff has run its course. Markets, while priced much higher than world markets, seem reasonably stable and calm because there continues to be a deficit in domestic production relative to domestic demand.

Insteel will continue to import the portion of its requirement that cannot be sourced domestically and will continue to bear the networking capital implications. Also, there must be capital investment in the domestic wire rod business for conditions of reasonable competition to be restored to the market. The wisdom of such investment will depend on the investor's view of the longevity of Section 232 tariff today. However, unplanned downtime at any producer of steel wire rod would cause marketplace havoc and unplanned downtime has not been an unusual occurrence in this industry.

Finally, turning to CapEx, as mentioned in the release and by Scott, we expect to invest approximately 15 million in our plants and information systems infrastructure during 2026. Our investments will support the growth of our engineered structural mesh business, reduce our cash production costs and enhance the robust nature of our information systems. Consistent with past practice, we'll provide quarterly updates on our investment activities and expectations as the year progresses.

Looking ahead, we are aware of the substantial risk related to the state of the economy and the Administration's tariff and trade policies. Regardless of developments in these areas, we are 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. Jen, would you please explain one more time the procedure for asking questions?

OPERATOR (Operator)

Absolutely. 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 and A roster. Your first question comes from the line of Julio Romero with Sidoti.

Julio, your line is open. Please go ahead.

Julio Romero, Analyst at Sidoti

Great. Thanks. Hey, good morning, H. And Scott. The data center related delays that were cited on the April call. It sounds like none of those volumes were realized as of the June quarter end. Can you confirm that's correct? And if so, based on your visibility into the project, can you speak to the confidence about the acceleration in those projects occurring here in the current fourth quarter?

H. Woltz, President and Chief Executive Officer

Well, we can confirm the delay for sure, but anything we would say about expectations going forward is as of today and subject to change. But as I said in the prepared remarks, we expect those shipments to pick up during the current quarter and to remain strong through the end of the calendar year. But it is a day-to-day matter, and we're learning a lot as we go through this process.

Julio Romero, Analyst at Sidoti

Got it. Thank you for that. That is helpful and that makes sense. Just once deliveries begin for this one project or this current batch of projects you're supplying, how far do you expect that to extend? I think you said, as you said, through the end of the calendar year, but I think in the past you've said it would extend into fiscal 27. So just trying to get any finer point on the duration, if possible.

H. Woltz, President and Chief Executive Officer

Well, yeah, and that's hard for me to answer, Julio, because I don't recall. The details have been more. I've been more focused on when we start shipping than how far it goes. And we're involved in multiple projects. It's not just one. And the nature of this is that once we begin shipping, we will ship on a regular basis until the project is complete, but the material is not needed at the job site until the contractor is ready for it. That's sort of where we are.

Julio Romero, Analyst at Sidoti

Okay. No, that makes sense. Once this project or the group of projects is complete, can you talk about maybe the prospects for repeat business with the developer, the contractor, or the end user of that data center? You know, have you had that conversation with them? Just, you know, speak to that, if you could.

H. Woltz, President and Chief Executive Officer

Well, where we're going with this and the way we think about it is that there's 9 or 10 million tons of rebar used in this market on an annual basis. And based on the capacity additions that you're seeing in that market, certainly producers of rebar expect that number to rise substantially in the coming years. Our needs and our aspirations are really a very small part of the rebar market. But we have a valid value proposition that is important to customers and we intend to exploit that.

So this is a new undertaking for our company relatively. And as I said a few minutes ago, we're learning a lot. But we expect this to ramp up to be a substantial contributor to Insteel's revenue base over time, data centers notwithstanding. If it doesn't go to data centers, it goes somewhere else. We're beginning to see some signs of life in other private non-residential applications. But that'll be a 2027 or 2028 recovery in my view.

Julio Romero, Analyst at Sidoti

Perfect. And thank you for going into that and excuse me for trying to get ahead of myself and thinking about that part of the story, but just the valid value proposition beyond data centers, would that apply to like large reshore or onshoring facilities, other mega projects where the benefit of accelerating construction speed would also apply?

H. Woltz, President and Chief Executive Officer

Well, yeah. I think what we're learning is that we need to target applications where the speed of construction is important to the owner and the contractor, which would imply maybe not so much speculative building as strategic building. And in those applications, we have a distinct advantage and, as I said, intend to exploit it. We need repetition. We don't need small cut-up structures because it's harder for us to be, or it's harder for our value proposition to be realized in that kind of structure.

So we're looking at larger buildings.

Julio Romero, Analyst at Sidoti

Okay, perfect. One more for me and I'll turn it over if I could just. Last quarter you cited an expectation to kind of not book any sort of receivable with regards to the IPA tariffs. Just curious if there's any change on that stance and where do vendor conversations kind of stand on recovery and passing through any of those IPA tariffs you paid last year?

H. Woltz, President and Chief Executive Officer

We're going to record them when we receive them. And it's limited as far as the tariffs that we were the importer of record on. A vast majority of the tariffs that we paid someone else was importer of record. So we're waiting for them to file all the paperwork.

Scot Jafroodi, Vice President, Chief Financial Officer and Treasurer

And the other reality is that this repayment scheme was mandated by the Court of International Trade. And at the end of June, the Trump administration appealed that ruling. So the adjudication of the legality of the IPA tariffs has a long way to run. I would say that this is not something that we or any other company should hold our breaths to receive.

Julio Romero, Analyst at Sidoti

Great. Thanks again for all the color guys.

H. Woltz, President and Chief Executive Officer

Thank you.

OPERATOR (Operator)

Your next question comes from the line of Tyson Bauer with KC Capital. Tyson, your line is open. Please go ahead.

Tyson Bauer, Analyst at KC Capital

Good morning gentlemen.

H. Woltz, President and Chief Executive Officer

Good morning, Tyson.

Tyson Bauer, Analyst at KC Capital

Just a quick bookkeeping one on the SGA. The 2.1 million that you highlighted, Scott, as part of that just a not having the recognition of incentive comp because of your current run rate or as part of that that function plus a clawback from what you recognized in the first two quarters.

Scot Jafroodi, Vice President, Chief Financial Officer and Treasurer

No, there's no clawback. It was just the pace of accruing that expense was at a lower level due to the reduced financial results.

Tyson Bauer, Analyst at KC Capital

So that would indicate that your anticipation for this final fiscal quarter, we're pretty much on this run rate that we're currently seeing. Yes.

Scot Jafroodi, Vice President, Chief Financial Officer and Treasurer

And obviously that would depend on how Q4 plays out. But yes, that would be how it worked.

Tyson Bauer, Analyst at KC Capital

Was there any other impact due to the surrender value of life insurance because of the share price?

Scot Jafroodi, Vice President, Chief Financial Officer and Treasurer

Yeah, there was a three hundred thousand dollar pickup in the cash surrender value of life insurance policies based on the market returns.

Tyson Bauer, Analyst at KC Capital

Okay, you talked about price increases. Is that a one-time price increase that you're pushing through and what was the effective date? Or are you looking at this at multiple increases through this current quarter?

H. Woltz, President and Chief Executive Officer

We've seen, we've seen multiple increases through fiscal 2026 as we tried to recover rising ride costs as well as rising costs for everything else. And the most recent price increase that we announced was to be effective July 13, which as you know is this week. And nobody, nobody likes price increases. And, and we don't like having to float price increases. But when a prop that costs $1,500 to send to a destination now costs $3,000, somebody's got to pay the bill.

And when I read about the inflation rate as reported by the administration, I can promise you it bears no reality to what we're seeing in the industrial sector.

Tyson Bauer, Analyst at KC Capital

Well, obviously if you're just doing it this week, you probably don't have the early returns. I was going to ask if how you characterize your pricing power. It seems like freight is fairly universal. Nobody has an advantage on those costs. Everyone must be absorbing or having to push those along.

H. Woltz, President and Chief Executive Officer

Yeah, yeah. And that's only one of the costs that we're trying to recover, Tyson. And we're doing this in a market that, as we characterize it, it's reasonably okay, but we're not doing it in a market that is bullishly strong, so it's difficult to collect it. But at the same time, you have two choices. You either absorb these costs or you pass them along. And our choice is to pass them along and not absorb them. So we'll just have to see how it goes.

But to say that our customers or even our people internally are happy about this, the answer would be, we're certainly not like the environment.

Tyson Bauer, Analyst at KC Capital

And that kind of leads into the next topic of demand concentration. And are your results can be more variable or volatile because the larger product or projects are included in your revenue streams. So just based on industry and geography, that kind of concentration that we're seeing. And also, you know, I was going to ask about data centers being more of a backfilling function as opposed to incremental. But if you're truly not shipping and they're delayed and we're not recognizing data center revenue currently to what you think you will be, it really can't be much of a backfill operation. It must be incremental as we go forward.

H. Woltz, President and Chief Executive Officer

No, I would consider it a key part of our market going forward. And as we have acknowledged forever, this is a volatile, cyclical, seasonal business. So what happens in any one quarter, I can't really say. But if you give us two to five years, you're going to see that a tremendous part of our revenue is coming from markets that we did not participate in two years ago.

Tyson Bauer, Analyst at KC Capital

So has somewhat of a similar effect as one we saw in 2021, 22, the distribution center boom that went through and then kind of waned off. This is just the next iteration of a different industry segment that's picked up that.

H. Woltz, President and Chief Executive Officer

That boom, you know, Is it. Yes, it is. I mean, the distribution centers have tailed off dramatically. But I would just say again that whether it's data centers or whether it's distribution centers or some other application, there's still 9 or 10 million tons of rebar used in the US every year, and that must be going to 11 or 12, and we're going to be there taking part of it in whatever applications happen to be robust at the time.

Tyson Bauer, Analyst at KC Capital

Okay. When you see the headlines on data center moratoriums and all the angst, do you kind of write that off as just election politics? And once we get beyond that season, we'll start to get into a more regular flow, and that doesn't make the headlines like it currently is in New York or other places.

H. Woltz, President and Chief Executive Officer

You know, our, our guys are pretty savvy about this, and we're only talking to people who are pursuing projects that are permitted and funded. So I wouldn't expect to have to tell you guys that projects that we believe we're going to participate in were deferred or canceled because they couldn't be permitted or because of, of public opposition. We just, we don't have time to chase those.

Tyson Bauer, Analyst at KC Capital

Okay. And last one, I guess in the same vein as you'll report it when it happens on tariff refunds, residential construction activity, a turn in that industry. When it happens, we'll believe it as opposed to trying to forecast it.

H. Woltz, President and Chief Executive Officer

Yeah, that is, it's certainly residential applications are on their back right now. There's a lot of price competition in products for residential applications, and it's just not, it's not our big strategic focus anyway, so we wouldn't spend a lot of time trying to forecast when that recovers.

Tyson Bauer, Analyst at KC Capital

All right, sounds great. Thank you, gentlemen.

H. Woltz, President and Chief Executive Officer

Okay. Thank you, Tyson.

OPERATOR (Operator)

There are no further questions at this time. I will now turn the call back to H. Wolts for closing remarks.

H. Woltz, President and Chief Executive Officer

Okay, thank you. We appreciate your interest in the company and your participation on the call today and are glad to hear from you. If you want to give us a call during the coming quarter. And we look forward to talking with you at the end of the fiscal year. Thank you.

OPERATOR (Operator)

This concludes today's call. Thank you for attending. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.