Greetings and welcome to CSW Industrials, Inc. Fiscal Third Quarter 2022 Earnings Call. [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.

Thank you, Joe. Good morning, everyone and welcome to the CSW Industrials fiscal 2022 third quarter earnings call. Joining me today are Joe 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 cswindustrials.com. This call is being webcast and information on accessing 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, in 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 third quarter conference call. In our fiscal third quarter, we saw the benefit of our diversified business model and our strong results as all three segments contributed to our growth. We achieved Q3 year-over-year revenue and adjusted EBITDA growth of 52% and 25%, respectively. In comparing the year-to-date results with the prior year period, revenue and adjusted EBITDA grew 59% and 55% respectively. On December 15, we celebrated the 1-year anniversary of our TRUaire acquisition and simultaneously closed on the Shoemaker acquisition. Shoemaker represents another accretive acquisition in the highly attractive HVAC/R end markets served by our Contractor Solutions segment. I am also very pleased to report that our TRUaire manufacturing facility in Vietnam returned to full production in the fiscal third quarter as in-country COVID restrictions eased. Taking a moment to expand upon our strong year-to-date performance as compared to the prior year period, sales increased in all segments due to volume growth and price increases. In addition to the inorganic growth from the TRUaire and Shoemaker acquisitions, the Contractor Solutions segment drove $42.8 million of organic revenue growth, primarily into the HVAC/R and plumbing end markets. Our Engineered Building Solutions segment grew by $1.8 million or 2.6% from dedicated efforts to promote existing and newly developed products and to maintain market share gains due to competitive lead times despite a downturn in the largest construction categories that we serve. Our Specialized Reliability Solutions segment achieved $28.4 million of organic revenue growth as demand returned in the energy, mining, rail and general industrial end markets. In fact, in the year-to-date period, Specialized Reliability Solutions revenue exceeded its revenue in the same period in fiscal 2020 of 2 years ago by 7.3% or nearly $6 million. Diversity in…

Thank you, Joe and good morning everyone. Consolidated revenue during our fiscal third quarter 2022 was $136.3 million, a 51.5% increase as compared to the prior year period. Consolidated gross profit in the fiscal third quarter was $50 million, representing 27.2% growth with the incremental profit resulting predominantly from the TRUaire and Shoemaker acquisitions, increased organic sales volumes and pricing initiatives. Gross profit margin was 36.7% compared to 43.7% in the prior year period. This margin decline is due in part to inclusion of the TRUaire business, material and freight cost inflation that outpaced instituted price increases, and a shift in sales to lower margin projects in the Engineered Building Solutions segment. The reduction in profitability was also negatively impacted by $0.5 million of under absorption cost resulting from reduced production levels and incremental compensation expense incurred at the TRUaire manufacturing facility in Vietnam to maintain operations in accordance with COVID-19 restrictions. As Joe noted in his opening remarks, this facility returned to full production during the fiscal third quarter. I will note that we did not make any adjustments to our reported earnings in the current fiscal quarter. Consolidated operating income was $12.1 million, equating to an 8.9% margin, a 450 basis point decrease as compared to adjusted operating margin in the prior year period as the decline in gross profit margin was only partially offset by an improved operating expense margin. Fiscal 2022 third quarter operating income margin was also negatively impacted by the $0.5 million of Shoemaker transaction expenses. Consolidated adjusted EBITDA increased 25.4% to $19.9 million as compared to the prior year period. Consolidated adjusted EBITDA margin was 14.6% and 17.7% in the current and prior year periods respectively due to the decline in gross profit margin as well as the Shoemaker and TRUaire costs mentioned…

Thank you, James. During the fiscal year-to-date period, we generated 59% top line growth, with increases across all reporting segments. Nearly 25% of our total growth was organic achieved through a combination of price and volume. Adjusted EPS grew by 25% to $3.12 in the current year-to-date period. Looking at a few metrics with a longer term perspective, our revenue CAGR from fiscal years 2016 through 2021 was 9.4%, and we are well on our way to outpacing that performance in fiscal 2022. Our adjusted EBITDA margin during the fiscal year period was 20.1%. We expect fiscal 2022 adjusted EBITDA margin to be in line with prior fiscal years. Our success is rooted in our commitment to serve our customers well across the diverse end markets we serve. We offer products upon which our customers rely with a considerable focus on adding innovative products into our existing distribution channels. We seek to develop niche product categories that grow in excess of the end markets we serve. We understand that innovation and customization lend themselves to higher margins. In short, our customer focus, operational excellence and our highly engaged workforce whose interest are directly aligned with our shareholders through our employee stock ownership plan is how we win. I want to note that I’m extremely pleased to welcome Bobby Griffin, who joined our Board of Directors in December. Bobby currently serves as Chief Diversity, Equity and Inclusion Officer at Rockwell Automation. Previously, he served in leadership roles with CBRE Group, Flowserve Corporation and other industry-leading companies, including Coca-Cola Enterprises and Merck & Company. Bobby adds experience, independence and diversity to our Board and will bring tremendous insight and a fresh perspective to our company. And as always, I want to close by thanking all my colleagues here at CSWI, who collectively own 5% or so of CSWI through our employee stock ownership plan as well as all of our shareholders for their continued interest in and support of our company. And with that, operator, we’re now ready to take questions.

Thank you. [Operator Instructions] Our first question is from Jon Tanwanteng with CJS Securities. Please proceed.

Hi, good morning, everyone. Thanks for taking my question and nice quarter. It’s nice to see the outperformance, number one, and the guidance reaffirmed in a tough environment. I guess my first question is, if you take the midpoint of the – I guess, the reaffirmed second half guidance, it implies slightly weaker fiscal Q4 than what you had previously saw. I get you pulled in some revenue. I get the taxes were a little bit lower and maybe you’re seeing some port congestion. Is there any other incremental headwind that you’re seeing in the fiscal fourth quarter that maybe you hadn’t anticipated when you gave the guidance out last quarter?

Yes. Jon, it’s James. Appreciate you being on the call. And thanks for the feedback. Yes, as we mentioned, there were certainly some pull forward, a little more in the specialized reliability solutions segment at the end of December. So you had a little bit of that. When we gave guidance back in November, we’ve not given guidance before and don’t plan to necessarily continue that. You’re trying to look at the back half of the year, and we split it up in quarters because that’s how everybody thinks about it. So that’s why we feel comfortable maintaining the aggregate guidance. A little bit of pull forward. You have a little bit of timing of when we were able to get price increases through. I think as we look at the fourth quarter and we kind of reaffirm the guidance to your point, which we feel good about based on our reforecasting of what the fourth quarter looks like. There is a couple of things I’d note. One is, yes, and you mentioned it, we continue to see port congestion that leads to some freight costs staying pretty high. A little bit of a headwind there. We’d like to see that alleviate, but we’ve got to continue to work on price actions and use the opportunities we have with the value of our products to get pricing where it needs to be to cover those costs if that persists. And then secondly, just the timing of receiving materials, as we’ve talked about in prior years, we’re kind of hitting that buying season, February, March, April, May time frame, people start stocking up and March is a pretty key month for that. And with the port congestion and timing, I think we want to be careful not getting too far ahead of ourselves and raising that guidance necessarily, not knowing exactly when some of that product will get off the boats, get onto trucks and then our distributors take delivery of the product. So there is a little bit of – being a little bit careful and cautious and not getting ahead of ourselves. Our businesses are certainly working hard. What I will note is across the board, demand remains very high in virtually all of our businesses right now as we look at wrapping up this fiscal year and starting the next fiscal year, so we feel optimistic about that. But we felt right now it was probably best to keep the guidance where it was for the aggregate back half of the year. Hopefully, that helps.

Yes, that does help, thank you. I was wondering is there any incremental Omicron risk at all? I know that you had the TRUaire shutdown in Vietnam in the past, I don’t know if cases rising there now poses a similar risk at all?

Yes, Jon, we have not seen any impact yet. As we noted during the call, our production is back to normal levels. We are not getting any reports on the ground of our folks having excess absenteeism or anything like that. So certainly, we’ve all learned not to predict the future as it relates to these things. But we’ve seen normal levels of absenteeism over there currently. But we’re going to keep a close eye on it for sure.

Okay, great. I was just actually more wondering if there would be a government restriction on your factory attendance and something more like lockdown there?

Yes. We certainly do not expect that. All indications that we have received is that the government has decided that, that is not the best way to deal with this going forward. And I think the Vietnamese vaccination rate is actually higher than our country these days. And so they have done a really nice job getting people vaccinated. And at this point, we would not expect any serious restrictions like we had to look through last year.

Okay, great. That’s helpful. And then finally, maybe could you talk a little bit about Shoemaker and just what the opportunity is there? And I know you gave out some info in the press release, but I was wondering if you could talk about longer term growth and synergy expectations and also the conditions and timing for the $2 million earn-out to be satisfied?

Yes. Let me take the first part of that, and then I’ll let James follow-up. I mean Shoemaker is in really very similar business to TRUaire on the residential side. And so we saw high-quality products, a U.S. manufacturing base. We saw great brand recognition there. And the business has been around a long time and been really resilient. And so it fits into our thesis really well that we are putting more products through our distribution channels. The Pacific Northwest was not a particularly strong region for us, in part because Shoemaker was so strong up there. And so geographically, it’s complementary for us. And then the second piece is they have a commercial side of their business that is addition and incremental to what we had, and we think that’s an interesting foothold and gives us an opportunity on the commercial side that we didn’t have before. The last thing I would say is there is opportunities to move production back and forth a little bit. We’re not going to – not make anything in Cle Elum, Washington by any stretch. We would probably see production increase there. But having it here in the U.S., more customized items and things that maybe have a shorter lead time can be produced there and in the hands of our customers more quickly. So we think that’s an important part of the equation. With respect to the earn-out, I’ll let James address that.

Yes, sure. Shoemaker is accretive for us going forward. So we feel good about that. It certainly adds to the bottom line and helps offset some of the inflationary pressures we’re seeing. What’s exciting about bringing the Shoemaker team on board is this is really a win-win. When the family decided to sell the company and sell to us specifically, I think based on an opportunity to really accelerate their growth. Given the Pacific Northwest foothold that they have and they spread a little bit across the upper Midwest using our distribution channel, which is always a big strength for us. They saw an opportunity to really put their product in a deeper geographic reach, and that’s very complementary to what we do with TRUaire, very complementary to what we do with RectorSeal. I’ll point out there the big national show was this week out in Las Vegas. And our TRUaire team, our RectorSeal team and our Shoemaker team were all together talking to the same folks, demonstrating products, talking about the opportunity to buy the various products. What’s exciting, too, is you may recall, Jon, because I know we talked about it is there is family ownership of Shoemaker, John and Claire and they stayed with the company to run the company. They are very involved day-to-day still, of course, running the company for us and merging into our culture very smoothly. And so the opportunity to rely on their expertise and history in this space, continue to rely on the heritage TRUaire expertise and really legendary type status in this business. One plus one, I think, equals a lot more than two.

Got it. Thanks, guys. I will jump back in the queue.

Thanks, Jon.

Our next question comes from Chris Howe with Barrington Research. Please proceed.

Good morning Joe and James.

Good morning Chris.

Good morning. Just following up on one of Jon’s questions, in your remarks, you mentioned Shoemaker, the Northwest presence. Can you comment just on the business today by region? What other regions would you be attracted to that perhaps you don’t have the exposure that you would like to have someday?

Yes, Chris, I would say on the RectorSeal side, we feel like that’s a very national business. And one of the real benefits to our acquisition strategy is being able to put new products into a national distribution footprint, lots of points of sale. And so I think that was – that’s proven to be true in many circumstances. So, I think the RectorSeal business is very national. TRUaire is national as well. This has been a little bit of a soft spot for them, though, in the Pacific Northwest. I don’t know that there is any other particular area that we would identify at this point, Chris, that we are – certainly, we have reached into all of them. As we noted with the TRUaire acquisition, every single one of their customers were customers of ours. And so we have reached into those. It’s just a matter of strengths and weaknesses a little bit. So, from a competitive standpoint, I think we are fine, but I also don’t want to give away any secrets.

Yes. One thing I will mention, just to repeat, when we bought TRUaire, we acquired the five distribution facilities they have California, Houston, Indiana, Florida and Maryland. And as we talked about on the last call, we started to put RectorSeal products in those distribution centers. As we switch TRUaire over to our ERP system here in the next couple of months, that’s going to increase that opportunity to co-locate product and make it easier for the customer to order, to receive shipments, all those types of things. It’s going to make that easier. So, I think to Joe’s point, we already covered the nation pretty well. But I think we are going to be able to have even deeper penetration in some regions because we are going to be able to have inventory closer to where it needs to be and deliver that product more quickly.

Okay. That’s great. Actually it led me to another question. In the past, you commented on different regions and how with easing of restrictions in those regions would be beneficial to your business. I think you may have mentioned the West Coast as it relates to that. Can you talk about the easing of restrictions and how that may impact construction activity and growth in your Engineered Building Solutions segment?

Yes. Thanks. And that is the segment that I will highlight, and that’s a good point to bring up. As we look at – we have got a significant operation in Canada, where there is obviously been some restrictions but California especially. What’s important about California for us especially with our Smoke Guard business, with the smoke curtains for elevators and buildings and atriums and those type of things. We not only sell the product there, but we have the kind of the double dip, so to speak, of having the distribution ourselves. We are not just selling to distributors. So, you really get the sales of the product and the other pieces as well and then growing as a parts business for us and the service business for us. And so California is an important market for that. That’s where we really have the foothold for that double-dip model, so to speak. As California has opened and closed and opened and closed and those type things, you have had fewer projects, you have had fewer people being able to get into buildings with restrictions and those type of things. So, as we have seen in the last couple of years, those openings, then you see a little opportunity. We do have really good bidding and booking in that space. So, I think that folks in the State are optimistic that they are going to be able to get those projects going and now on a more extended period of time, given the current variant and prognosis for what we see there. So, it’s an important market for us. The businesses continue to do well, but we have a lot of optimism as California specifically reopens to your West Coast point that, that business will be able to continue to grow and really see some nice uptick.

That’s great. And I will throw one more and then I will jump back in the queue. If you could comment just on what you are seeing in the M&A environment. Obviously, we are entering into a rising rate environment. There is different scenarios out there that could play out from a macro perspective. But given your balance sheet, and then it’s always remained strong. Do you feel we are going into this with CSWI in perhaps a better position than companies that are more strained?

Yes, Chris, thanks for noting that. We think so. I mean that’s been part of our – if you remember, we issued a capital allocation strategy several years ago and point number one is that we will always maintain a strong resilient balance sheet, maintain liquidity so that we can be opportunistic when necessary. We did that during the pandemic. It was a perfect example with the TRUaire acquisition of being decisive and making an acquisition despite some of the macro headwinds and other folks who are worrying about their existence, we were able to grow and be aggressive. We feel the same way today. I mean as you said, really strong results, strong balance sheet, dry powder capital available to be decisive and make acquisitions. Pipeline is strong. So, we do feel like it’s a competitive advantage to maintain the balance sheet strength and – so that’s exactly why we do that. On the other hand, discipline has always been an important part of our story as well. And so it’s a balancing act every single day. But if we remain disciplined and the right opportunity does come along, we absolutely have the capital base and the flexibility to do that kind of acquisition.

Perfect. Thanks Joe. Thanks James.

Thank you, Chris.

Our next question comes again from the line of Jon Tanwanteng with CJS Securities. Please proceed.

Hi guys. Thanks for the follow-up. I was wondering if you could comment on inflation versus pricing in fiscal Q4, and that spread has gotten worse or better, just as you see it today.

Yes. This is James. Thanks, Jon. In terms of inflation, we are generally seeing most of the raw material prices stabilizing. We certainly keep an eye on oil prices. The base oil input in the Specialized Reliability Solutions segment as oil prices rise, and that has the potential to rise. I will say there is a tailwind at the same time as oil prices rise, and we sell more products to the energy markets as well. So, there is a bit of an offset there to some degree. That segment has done a good job of raising prices pretty quickly as they need to. So, we are able to, I think match that pretty well and have done a real good job catching up and staying ahead of that as we need to. Steel, those type things, input costs, plastic resins, those type things, they have stabilized. We do continue though, to see elevated prices on the freight side, and that’s obviously will become a significant cost for us, both for what we see coming over from TRUaire as well as other off-shoring that we do and importing some products. So, we are working to stay in line or ahead of that as we have talked about. Our goal is to react as quickly as we can, really rely on the value of our products. And we have said numerous times that our goal is that the investors and the shareholders don’t bear the brunt of that, but the eventual end customer that will get passed through the system through that standpoint. So, we are continuing to work hard on that. There are some lead times for some pricing increases. So, you can have a headwind at times and a tailwind at others. We will say this that as those costs start to come down, there is some stickiness, so to speak. So, you have got a bit of a tailwind at times on the pricing. So, the team is I think doing a really nice job of that, but we are keeping a very close eye on it. Obviously, every container we contract for, we are seeing the shipping rates are and they have stayed elevated. But as Joe talked about, the Lunar New Year, there is an opportunity for some of that to alleviate, and we will see what that does for pricing and right now availability of the containers as well.

Got it. Okay. And then two questions on the reliability solutions, the first one, just can you comment on how big the pull-in was and kind of what product it was related to? And two, I was wondering if you could provide an update on the JV with Shell and kind of where you are and how that’s performing compared to where you thought it would be?

Yes, happy to. I wouldn’t really quantify what the pull forward was. I will say it was enough to mention, not enough to call out specifically. So, when we are talking about beating guidance by a pretty healthy margin, but some of that got pulled forward in what you see fourth quarter, it was enough to where it made sense to mention, but nothing significant. Really, that was we were able to arrange some logistics for some customers. They needed the product. We are able to get it out sooner than we expected, and that’s a really good thing. And when you are looking at it in November, you are not sure what’s going to happen in the last couple of weeks of December. So, a little bit of pull forward, but still looking at a good opportunity there, and that business continues to see good demand, continues to see margin opportunity, and we are very optimistic in the recovery of that business off the trough they came from. In terms of the joint venture with Shell, we continue to see growth there. You can see when you look at the press release and the 10-Q, when you look at the bottom of the income statement, you saw profitability again. We talked about it being marginally accretive this year. It continues to be. I will say this. The team is doing a good job getting through – getting the product kind of recipe so to speak from Shell, getting the blending correct, getting that approved, the testing, you can imagine there is a lot of steps in that. We are getting more and more products approved that we are ready to produce. We continue to install equipment in the next couple of phases of that JV growth within our facility out in Rockwall, Texas, that will allow us to produce that volume at a bigger level. I will also say we continue to see some really nice opportunity in our Oil Safe and Air Sentry, our reliability products. And those are products that weren’t specifically part of when we called out rail and mining, but Shell has always had an interest in those products. Those are very nice products for us to sell. Shell’s distribution and sales network is obviously bigger than ours. They have got a lot of demand for those products now that they can sell and we are very optimistic that we can see some nice growth and uptick in those products, and that’s good for the joint venture and certainly good for our segment.

Okay, great. And then finally, we have been anticipating this like air pocket in the engineering – engineered building products business for a while now. Does that mean the next quarter should be sequentially up or is there a pocket maybe a little bit more than a quarter long?

Yes. I think we look at the air pocket kind of Q3 that we just finished and into this quarter as well in Q4. And when we talked about the biddings and bookings and backlog are up, most of that is as we get into fiscal ‘23. So, I think as we get into our fiscal first and second quarter, we are going to start seeing a tailwind with those larger, better margin construction projects, the best we can see right now. Whereas Q3 and Q4, there is some of that, but a little more of that has been in the shorter term to be sure to keep our folks busy and fill in the blank. I mentioned it briefly the leadership team there has done a good job really focusing on the commercial side of things and then obviously on the operational excellence side of things, and that’s starting to bear fruit. But it’s probably more of a fiscal year ‘23 story.

Got it. Thank you so much.

Thank you, Jon.

Thanks Jon.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Joe Armes for any closing remarks.

Great. Thank you. It’s our privilege each quarter to be able to address those assembled, and we appreciate your interest in our company and look forward to doing this again next quarter. So, thank you.

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