Conference Operator: 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.
H. Woltz: 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.
Scott Jafroodi: 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.
H. Woltz: I'll now turn the call back over to H. 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-res 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 acquire 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 U.S. 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 U.S. 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 U.S. 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, our 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 net working capital implications. Ultimately, 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 investments 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?
Conference Operator: Absolutely. Thank you. We will now begin the 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. 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&A roster. Your first question comes from the line of Julio Romero with Sedoti. Julio, your line is open. Please go ahead.
Julio Romero: Great, thanks. Hey, good morning, H and Scott. Hey, good morning, guys. 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 that Can you speak to the confidence about the acceleration in those projects occurring here in the current fourth quarter?
H. Woltz: 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, effective shipments to pick up during the current quarter and to remain strong through the end of the calendar year. But it's a day-to-day matter, and we're learning a lot as we go through this process.
Julio Romero: Got it. Thank you for that. That is helpful, and that makes sense. 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, 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: Well, yeah, and that's hard for me to answer, Julio, because I don't recall the details. 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's ready for it. That's sort of where we are.
Julio Romero: Okay, now that makes sense. Once this project or the group of projects is complete, can you talk about maybe the prospects for repeat business with with the developer, the contractor, or the end user of that data center, how you had that conversation with them. Just speak to that if you could.
H. Woltz: 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 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. 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 Ensteel'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: 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 reshoring or onshoring facilities, other megaprojects where the benefit of accelerating construction speed would also apply?
H. Woltz: 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: 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 regard 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?
Scott Jafroodi: 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 with import of record. So we're waiting for them to file all the paperwork.
H. Woltz: 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 IEPA tariffs has a long way to run. I would say that this is not something that we or any other company should hold our breath to receive.
Julio Romero: Great. Thanks again for all the color, guys. Thank you. Thank you.
Conference Operator: Your next question comes from the line of Tyson Bauer with KC Capital. Tyson, your line is open. Please go ahead.
Tyson Bauer: Good morning, gentlemen. Good morning, Tyson. Just a quick bookkeeping one. On the SG&A, the $2.1 million that you highlighted, Scott, is part of that just, A, not having the recognition of incentive comp because of your current run rate, or is part of that that function plus a clawback from what you recognized in the first two quarters?
Scott Jafroodi: No, there's no clawback. It was just the pace of accruing that expense was a lower level due to the reduced financial results.
Tyson Bauer: So that would indicate that your anticipation for this final fiscal quarter were pretty much on this run rate that we're currently seeing?
Scott Jafroodi: Yes, and obviously that would depend on how Q4 plays out, but yes, that would be how it would work.
Tyson Bauer: Was there any other impact due to the surrender value of life insurance because of the share price?
Scott Jafroodi: Yeah, there was a $300,000 pick up in the cash render value of life insurance policies based on the market returns.
Tyson Bauer: 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: We've seen We've seen multiple increases through fiscal 2026 as we tried to recover rising wire 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 likes price increases, and we don't like having to float price increases. But when a profit 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: Well, obviously, if you're just doing it this week, you probably don't have the early returns. I was going to ask how you characterize your pricing power. It seems like freight is a fairly universal, nobody has an advantage on those costs. Everyone must be absorbing or having to push those along.
H. Woltz: 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 is 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 that our customers or even our people internally are happy about this, the answer would be we're certainly not.
Tyson Bauer: We don't like the environment. And that kind of leads into the next topic of demand concentration and are your results going to be more variable or volatile because the larger 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: 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 that a tremendous part of our revenue is coming from markets that we did not participate in two years ago.
Tyson Bauer: Okay. So it has somewhat of a similar effect as when 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: 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 U.S. 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: 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: 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 public opposition. We don't have time to chase those.
Tyson Bauer: And the 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: Yeah, 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 our big strategic focus anyway. So we wouldn't spend a lot of time trying to forecast when that recovers. All right, sounds great. Thank you, gentlemen. Okay, thank you, Tyson.
Conference Operator: There are no further questions at this time. I will now turn the call back to H. Woltz for closing remarks.
H. Woltz: 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.
Conference Operator: Thank you for attending. You may now disconnect.
