Greetings and welcome to CSW Industrials Fiscal Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Adrianne Griffin, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Maria. Good morning, everyone and welcome to the CSW Industrials fiscal 2022 second quarter earnings call. Joining me today are Joseph Armes, Chairman, Chief Executive Officer and President of CSW Industrials; and James Perry, Executive Vice President and Chief Financial Officer. We issued our earnings release, presentation and Form 10-Q prior to the market's opening today which are available on the Investor portion of our website at www.cswindustrials.com. This call is being webcast and information on how to access the replay is included in the earnings release. During this call, we will make forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results could materially differ because of factors discussed today in our earnings release and the comments made during this call, as well as the risk factors identified in our Annual Report on Form 10-K and other filings with the SEC. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Joe Armes.

Thank you, Adrianne. Good morning and thank you for joining our fiscal second quarter conference call. CSWI posted impressive second quarter results, building on momentum from the ongoing TRUaire integration, along with organic growth aided by disciplined price actions and demand in end-markets recovering from last year's general economic downturn. In collaboration with our resilient team members around the globe, our leadership team has managed the macro headwinds and challenging dynamics for the past 20 months, including accelerating inflation, supply chain challenges and operational dislocations, with extraordinary diligence, professionalism, resolve and customer focus that are consistent with the high standards we set for ourselves. To provide context for our fiscal second quarter performance, I'll highlight a few key metrics. As compared to the same prior year period which was then our strongest quarter on record, we achieved 48% revenue growth, of which 15% was organic growth and 33% was inorganic growth from our TRUaire acquisition. EBITDA growth was 33% and quarterly earnings per share attributable to CSWI rose to $1.14 compared to $1.10 in the prior year period. For additional perspective, if we compare this quarter's results to this quarter two years ago which was our fiscal 2020, top line growth was nearly 54%, including organic growth of 19%; adjusted EBITDA growth was a compelling 50%, 5-0 and adjusted earnings per share increased 24%. We are pleased to have achieved these results as they illustrate our success in providing high-quality, innovative products with excellent customer service while limiting disruptions to our customers and partners and minimizing product outages. In short, our customers rely on us to be dependable partners for their distribution network and we have not disappointed them. Next, I would like to provide an update on our TRUaire manufacturing operations in Vietnam. As reported on our August earnings…

Thank you, Joe and good morning, everyone. Our consolidated revenue during the fiscal second quarter of 2022 increased 48.3% to $155.6 million, with higher revenue across all three segments compared to the prior year period. Consolidated gross profit in the fiscal second quarter was $63.1 million, representing 29.4% growth, with the incremental profit resulting predominantly from the TRUaire acquisition and increased organic sales volumes and pricing initiatives. Gross profit margin was 40.5% compared to 46.4% in the prior year period. This margin decline is due in part to inclusion of the TRUaire business and the $1.2 million of incremental cost of goods sold resulting from reduced production levels at the TRUaire manufacturing facility in Vietnam. The reduction in profitability was also impacted by ongoing material and freight cost inflation that outpaced instituted price increases in some mid-markets served and a shift to lower-margin projects in the engineered building solutions segment. Consolidated operating income increased by 16.7% to $25.9 million, equating to a 16.6% margin, a 450 basis-point decrease over operating margin in the prior year period as the decline in gross profit was partially offset by an improved operating expense margin. Consolidated EBITDA increased 33.3% to $33.8 million as compared to the prior year period. Consolidated EBITDA as a percent of revenue was 21.7% and 24.2% in the current and prior year periods, respectively. As a reminder, we are very focused on profitability comparisons utilizing EBITDA due to the amount of intangible amortization resulting from the TRUaire acquisition last year. Reported net income attributable to CSWI in the fiscal second quarter of 2022 was $18 million, or $1.14 per diluted share compared to $16.4 million, or $1.10 in the prior year period. There were no adjustments in either period. And in the current period, there were 969,000, or 6.5% more…

Thank you, James. The first half of fiscal 2020 was marked by 62% top-line growth, driven across all reporting segments and all end-markets served. Nearly 27% of this growth was organic, achieved through a combination of price and volume. Adjusted EPS grew by 36% to $2.60. So you can understand why our team is proud of this performance. We are seeing real-time improvements in our supply chain. Our end-markets have strong underlying fundamentals. Specific to our contractor solutions segment, as people continue to work from home, they are investing in their comfort via home renovations at a rate higher than before the pandemic. These are financed by rising home equity and low interest rates. We remain optimistic about fiscal 2023 as our EBS segment bidding activity remains robust. Our recent bookings are strong and new construction activity is regaining pre-pandemic momentum. At the end of September, the Architectural Billing Index was well into expansionary territory at 56.6% which is higher than the August reading of 55.6%. And this is similar to the double-digit improvement indicated in the bidding and construction starts data provided by Dodge in the second quarter. These are strong indicators for future growth in the markets served by our EBS segment. Our new SRS segment leadership has introduced a multifaceted operational effort focused on reduced complexity and increased production accuracy. Prioritizing product innovation, we recently introduced four new products into the market while simultaneously evaluating adjacent markets for organic sales growth and market expansion. Our current month production run rate results in much improved plant utilization and the joint venture with Shell has begun investing capital to expand production capacity at our Whitmore facility. So we are well-positioned to serve our SRS customers through the upcoming cycle. At CSWI, we recognize that our success begins with our…

[Operator Instructions] Our first question comes from John Tanwanteng with CGS Securities. Please proceed with your question.

Hey, good morning, everybody. Thanks for taking my questions. James, I was wondering if you could help me better bridge the sequential decline in the profitability. I think you called out the specific TRUaire disruption but I was wondering if you could help me quantify the rest between the increased investments you're making, the inflation and whatever else may have been in the bucket.

Yes. John, it's James. Yes. We mentioned specifically the $1.2 million of cost of goods sold because of the under-absorption and some extra wages that we paid the employees that were working in that facility at the cost of goods sold line. So the drop in gross profit of about 5%, that's maybe 1% of it or so. The rest is really that inflationary pressure we see from materials and freight costs. We did mention there's a little bit of increased headcount here and there, some of those things. Most of those type things that we mentioned, the ERP expenses and other would be below the gross profit line; so I'll get to that in a minute. But the gross profit line, beyond the one callout we had, it's really the fact that we've been raising prices as quickly as we can and as quickly as kind of market conditions allowed. We mentioned, for example, we just this week in our contractor solutions business announced a price increase that's effective at the beginning of January. So that gives us good line of sight into our fiscal fourth quarter but we've had now four price increases this calendar year in that segment and it takes a while to get them in, just given industry standards and competition and those kind of things. It's about a 60-day lag usually is kind of what we're looking at, for the most part. And for example, the last price increase was right at the beginning of August, right about the time we had the earnings call. In the last couple of months since we had that price increase, freight costs took another step up. We've started to see that stabilize. Some material prices have taken a step up. And of course, you have the lag…

Yes, it does. I guess the obvious follow-up to all of that is, as you go through Q3 and Q4 and I understand the drivers that you're seeing, when you get to Q4 and your profitability jumps back up, is that your margins getting back to historical levels? Or is it more of a little bit more catch-up from maybe volume that you might have missed earlier this year? Just help me understand what gets you to that level and if there's still more catch-up to do after that as you head into the next fiscal year.

Sure. Yes, this is James again. I'll continue. And I appreciate you mentioned the guidance. As we mentioned, that's temporary for now. We'll see but we thought it would really help, given how unusual conditions are today. So I appreciate you take a note of that. As we look at fourth quarter, you're looking at a quarter that, with the guidance we gave you, looks a lot like the second quarter from that perspective, from an EBITDA and EPS perspective. I think margins are still recovering back to somewhat normal levels. I think we're going to continue to have a guide path to that. But what we've really focused on is recovering our profit dollars with our price increases. We would like to be able to recover the profit margin. I think, in time, we have that opportunity. But for now, recovering those profit dollars and seeing that EBITDA and EPS return to our more like second quarter type levels, I think you're seeing us achieve that first goal of profit dollars. The margin is a little tougher just because of the math. As you raise prices that match costs, your numerator denominator may get you to the earnings number but the profit margin is still going to be a little bit pressured. I think, as we see a return to somewhat normalized costs in time and as we see pricing continue to be rather sticky over time, I think we have the opportunity for margins to continue to recover to historical levels. We're just now starting the process of really getting deep into what our fiscal 2023 that start April 1 look like. So it's a little early for us to talk too much about that other than to say, given the order visibility we had, given the market conditions we have, we think we've got a nice tailwind moving into the fourth quarter and then into fiscal '23.

And then, last one for me. You gave good color, I guess, on the orders on the architectural side. I was wondering how that squares with what you see in the P&L in the next one or two quarters. Have we hit the trough there yet?

I think as we mentioned, in the back half, you're going to see some pressure. The orders that we've been taking here this fiscal year, as you all know, we've talked about an air pocket for a while and it didn't appear as much on the revenue line as we talked about but more as you work your way down the income statement and you look in the 10-Q at the operating income line. You're going to see that pressure continue for a little bit. That is one reason that you see the Q3 profitability down a bit. That segment did a really nice job with profitability in the third and fourth quarter last year. You see some pressure this year because the team has done a good job of finding orders but they're the shorter cycle, lower margin projects. The orders that we're taking now, as you well know, generally, those project-based orders for the bigger projects are longer-term in nature. We see those really helping us return to the higher levers of margin and profitability as we begin fiscal year '23.

[Operator Instructions] Ladies and gentlemen, we've reached the end of the question-and-answer session and I would like to turn the call back over to Joe Armes for closing remarks.

Great. Thank you very much. We really appreciate everyone joining us this morning and appreciate your interest and support of our company. And we look forward to speaking to you again next quarter. So, thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.