Greetings, and welcome to CSW Industrials, Inc. Fiscal Third Quarter 2023 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]. Please note this conference is being recorded. I would now turn the conference over to your host, James Perry, CSWI's Executive Vice President and Chief Financial Officer. Thank you. Mr. Perry, you may begin.

Thank you, Sheri. Good morning, everyone, and welcome to the CSW Industrials fiscal 2023 third quarter earnings call. Joining me today is Joseph Armes, Chairman, Chief Executive Officer and President of CSW Industrials. 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 Web site at www.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 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, James. Good morning and thank you for joining our fiscal third quarter conference call. Once again, our team executed well in the face of economic headwinds. Our record third quarter results reflect the diligence and professionalism of our team members around the globe. Demand for our high value products remains strong. We are highly focused on managing our costs while pursuing market share growth. We have continued to deploy capital opportunistically while strengthening our balance sheet and liquidity through reducing our leverage ratio and proactively increasing our revolver capacity, thereby maximizing our ability to pursue future opportunities as they arise. We delivered impressive operating leverage, as EBITDA grew by 47% on 26% growth in revenue, while also generating $33 million in free cash flow equal to 19% of revenue. In the current quarter, all three segments contributed to organic revenue growth of $23 million, driven primarily by the numerous price actions we have taken over the last two years. While we are still experiencing inflationary cost pressure, we have been able to partially offset these with productivity gains. We have seen reduction in the cost of shipping containers from Asia, as well as lower costs for certain raw materials, but still face higher costs for certain line items such as domestic freight. We have successfully maintained our pricing, thereby expanding our margins. However, the net result of these variables is that we have not yet returned to our historical pre-pandemic margins, which remains a goal for all of us here at CSWI. During the fiscal third quarter, we consummated the previously announced acquisition of Falcon Stainless. This product line expands our offerings sold into our profitable HVAC/R and plumbing end markets. As a reminder, in our third fiscal quarter of last year, we closed the Shoemaker acquisition, which…

Thank you, Joe, and good morning, everyone. Our consolidated revenue during fiscal third quarter of 2023 was $171 million, a 26% increase as compared to the prior year period, driven by pricing actions and contributions from acquisitions. Consolidated gross profit in the fiscal third quarter was $66 million, representing 28% growth, with the incremental profit resulting primarily from revenue growth. Gross profit margin improved slightly to 38.5% compared to 37.7% in the prior year period, as strong revenue growth in the higher margin Contractor Solutions segment due in part to our recent acquisitions outpaced revenue growth in our other segments. Consolidated EBITDA increased by $31 million, or 47% as compared to the prior year period. Consolidated EBITDA margin improved 18% as compared to 16% in the prior year quarter, driven by revenue growth, which outpaced incremental expenses. Reported net income attributable to CSWI in the fiscal third quarter was $16 million, or $1.01 per diluted share, compared to $9 million, or $0.59 in the prior year period. The current quarter includes $1.5 million, or $0.10 per share of tax benefit related to the release of an uncertain tax position reserve upon the closure of certain Vietnam tax audits. Our Contractor Solutions segment with $112 million of revenue accounted for 65% of our consolidated revenue and delivered 29 million or 36% total growth as compared to the prior year quarter. This was comprised of organic revenue growth of $17 million and inorganic growth of $12 million from the Shoemaker, Cover Guard, AC Guard and Falcon acquisitions. Note that growth attributable to Shoemaker becomes organic growth starting with the current fiscal fourth quarter. Organic growth in the segment resulted from the cumulative benefit of pricing initiatives, partially offset by a slight decrease in unit volume as compared to last year. The strong…

Thank you, James. During the fiscal year-to-date period, we delivered record revenue of $562 million representing growth of 24%. Operating leverage on this growth drove 30% growth in EBITDA and 39% growth in adjusted EPS. In light of the strength of our fiscal year-to-date results, we expect year-over-year revenue growth of approximately 20% with an EBITDA margin of over 22% for the full year. These full year expectations imply fourth quarter revenue growth of approximately 9% as compared to the same period last year, with an EBITDA margin of approximately 23% in the fourth quarter. We are currently working through our budget process for our fiscal 2024, which begins on April 1. While there are headwinds in certain end markets, we expect to deliver consolidated revenue and earnings growth for CSWI. We are focused on efficiency gains and cost reductions, but we plan to accomplish these objectives without involuntary reductions in our level of employment. We are committed to providing our customers with the high quality products and service that they expect from CSWI, and we will rely on the dedication of our team members to accomplish that goal. We are expanding margins and driving cash flow conversion. We are confident in our near-term and long-term opportunities with disciplined capital allocation, which is enabled by the strength of our balance sheet. We remain committed to enhancing sustainable growth and shareholder value, even in the face of economic uncertainty. By doing this in the past, we have consistently delivered outstanding financial results and we will utilize that same approach for the remainder of 2023 and beyond. I'm pleased to share that for the third year in a row, Cigna has selected CSWI as a recipient of their gold level healthy workplace designation for demonstrating a strong commitment to improving the health and well being of our employees through our workplace wellness program. This reinforces our distinctive employee-centric culture and affirms our intention to be an employer of choice. My colleagues here at CSWI hear me say this often. At CSWI, we must and we will succeed. There's no other option. But here at CSWI, how we succeed matters. Achieving these outstanding year-to-date results demonstrates our commitment to be good stewards of your capital and to our goal of driving long-term shareholder value. As always, I want to close by thanking all of my colleagues here at CSWI who collectively own approximately 5% 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. 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. Thank you for taking my questions and congrats on the nice results. My first question is, I was wondering if you could talk about how much change you've seen or discussed or experienced just in terms of your overall macro expectations and visibility over the last two or three months? It seems we've got [indiscernible] a bit by pretty much negative macro sentiments earlier in Q4, and things started to improve since then. Has that translated to any changes in your internal forecasts or discussions with customers as you go forward and heading into fiscal '24? Just help us think about your visibility in today's environment.

Yes, John, as you know, visibility is tough these days. And so our goal is be prepared for whatever eventuality. We think the strong balance sheet, the diversification of our business, the strength of our brands and the low cost, high value kind of products that we provide to our customers are going to be popular and profitable and great products to offer and a great business model, regardless of the economic backdrop. March is a really important month for us, late February, March for the pre-sale season in the HVAC business. And so we've got our eyes focused on that. But we'll know more then. At this point, we don't have any indications of any major changes in our expectations. But that's a very important timeframe for us when the pre-market, pre-summer sales to the distributors who are stocking up will give us our best indication. So I would just say stay tuned.

Got it. And then assuming industry have blended, do you expect revenue and margin growth in the next fiscal year?

This is James, Jon. Good morning. Thanks for being on. As Joe said, we do expect revenue and EBITDA growth next year. We're certainly working to continue to push margins. As we mentioned in the call, we focused a lot in the last couple of years on container rates. They've certainly come down, and for now they stayed down. We know how quickly that can move. Some of the other costs are still high, obviously; raw material costs, domestic freight, shipping freight out between our facilities and the customers, those costs remain high. But we've done a good job with our pricing, been able to retain that. As we said, we're not back to our pre-pandemic margins. That's always a goal. That goal is tougher, because obviously when costs are higher and you have to move pricing higher, margins are more challenging. So we don't have a firm view yet on margin guidance yet, per se. But we certainly -- Joe and I and our business leaders have a goal to continue to push margin in the type of pace we've been able to recover so far.

Understood. Thank you. You mentioned a little bit of a slowdown in the bidding markets and in architectural. Can you just talk about where you're seeing that? Number one. And two, is it expected to continue? And kind of the impact -- when you might see that in the P&L?

Yes, it's a good question. As you know, that market, we've been through almost a couple of mini cycles in the last few years. COVID hit and things really slowed down. So we were kind of taking some lower margin projects. Then we had a period where things opened up again and things looked good. And now we're producing some of the lower margin projects, again, because with interest rate spiking and some economic uncertainty, some of the projects have been put on hold. Despite that, as we said, our backlog has grown. Biddings are very geographic, I'll say. We were talking to the leadership in that group just in the last couple of days and the Sunbelt remains pretty solid, as you would imagine. Toronto where we have a nice presence has some good construction going on. The California market, especially in Northern California, has been a little softer. And as you know our Smoke Guard part specifically, we have a good opportunity there, because we're the distributor and the manufacturer. So we kind of have that double dip when we fell into that market, and that's been a little softer. So there's geographic pockets here and there. So we've seen bidding slow down just a little because I think funding for these projects has taken a little longer to firm up because of where interest rates are and equity expectations are. But our team is doing a really good job, as Joe mentioned in his comments, focused on those high quality developers or projects with a high likelihood that they're going to get done. We know that our backlog right now is solid. The projects in there are out of the ground. And as you know, our parts are at the backend. So what's in the backlog now that we've been taking orders for the last quarter or two, that's 9, 12, 18 months out. So I think as we get deeper into fiscal '24, the back half and then even to fiscal '25, which is hard to say out loud, but that's a little over a year away for us, we'll really start seeing these newer entries into the backlog come through the revenue. But in the meantime, the group's doing a good job keeping busy, keeping the projects going. The margins are just a little softer, given the nature of those products.

Okay, great. And do you expect bidding to continue slowing from where you are today?

Jon, again, I think that interest rates rising will slow parts of the market. We have been focused on institutional projects. We've been focused on high quality projects that may have a little less entrepreneurial speculation in them. And so we're still a relatively small player. We think we can grow kind of in every market. But we do think that the interest rates remaining high will continue to have an impact on some of the more speculative projects. And so our focus on institutional, our focus on the healthier portions of that market I think is going to pay dividends for us.

Got it. Thank you. James, do you have any more color on just price versus volume trends in the past quarter and kind of where you expect that mix to go as you continue growing into the future?

Yes, Jon, the growth this quarter was really based on the acquisitions that we talked about, the four acquisitions over the last 12 months, and then pricing. Volume, overall, on a consolidated basis was pretty flat. Contractor Solutions down just a bit. Then we had a little offset with the other segments that helped, certainly in Specialized Reliability Solutions. But pricing is really the driver here in the organic growth. Where that's going from here? As Joe said, we're going to continue to have some year-over-year pricing pickup for the fourth quarter here and into the first fiscal quarter. The pricing kind of slowed down the increases the back half of last calendar year. So that will start lapping, so to speak. So you won't have that pick up, so to speak, opportunity, unless we see another step up in cost. And we need to take action outside of just our normal annual price increases which we implement this time of year. So pricing is going to continue to be a tailwind for us for a couple of quarters on the year-over-year. The volume, as Joe said, it's a little bit of a wait and see. The team is doing a great job talking to customers, understanding what their stocking levels are across segments. I think our distributors are being careful in overstocking. There's been a little bit of destocking, and I think that slowed down volume a little bit. And I think inventories continue to be right-sized. So as Joe said, the February and especially into March ordering and buying season for Contractor Solutions will tell us a lot. And on the call we have in May with our fiscal year results, we'll have a much better sense of how that looks, of course.

Got it. Last for me just the working capital improvements as supply improves. How much excess are you carrying right now? What kind of cash can you throw off, assuming you get to your optimized levels?

Yes, it's a great question, Jon. This is still James. It's hard to put a specific number on it, because it's going to vary week-to-week and month-to-month. Our teams do a really good job. When you look back, you use things like days on hand. And we know what those metrics look like. And they bump around a little bit. Part of that, like I said, is seasonality and just stocking down and up for the seasons. But we really have a forward look, and our businesses do a good job looking product-by-product, how much they think they need to hold, especially that product that comes from overseas. While shipping times have slowed down or have gotten shorter, I'm sorry, it still takes a while to get product. So you can't produce a lot of this overnight. So it's a few million dollars. How much that is, is probably hard to identify and get real precise. We certainly have some goals and metrics. And as we go through our budget season, we're going to work hard on what those goals need to be given a little easing of the supply chain constraints that we have. So I wouldn't put a hard dollar number out there. But there's still a few million dollars out there that we think we can turn into cash, kind of in a quarter-over-quarter basis. Again, this quarter, you start stocking back up. But when we think about days forward and days on hand, we have opportunity.

Got it. Thanks, guys. I'll let someone else ask a question.

Thanks, Jon.

Our next question is from Julio Romero with Sidoti & Company. Please proceed.

Hi. Thanks very much. Good morning. Maybe to start off, if you could just talk about on Contractor Solutions, just talk about what's working well in this segment? I know you mentioned strong pricing gains and the inorganic growth as well. But just hoping for a little more detail on the strong segment profit, especially given that this is usually your seasonally weakest quarter for that segment?

Yes, Julio, thanks. We got strength across the board. I would say that we're selling more of the ductless mini-split products than maybe we did a few months ago. There were some shortages by the OEM manufacturers that were slowing some of that down. That provides a good mix impact for us; and so strength across the board really. I don't know that I'd note anything in particular. I would say that we continue to be able to grow wallet share with our customers. There are particular customers that are continuing to grow. We're growing our GRD business. As you recall, after we bought TRUaire, we had kind of production slowdown in Vietnam because of the pandemic shutdown and all of that. We've had to rebuild inventory. And so some of the kind of wallet share gain that we had planned on for that acquisition were delayed a little bit. And now we're beginning to see some of that. And so there's positive things across the entire portfolio. The acquisitions, I think as much as anything, have really just performed well and the integration has gone well. And so we're very pleased with those new products that we can put through our distribution channels. Our customers like that. The end users, the professional trade likes to have new different products to sell. And that's an important part of our kind of increase, or our strong organic growth rate is to continue to bring new products into the market.

And I would add just briefly, Julio, Joe mentioned TRUaire briefly. The Vietnam operations are performing at tremendous levels. The leadership team there that we've brought in has done a great job. Our people have been able to get over there now. Shoemaker and TRUaire are working really well together. So really pleased with -- from this commercial side to an operation side and everything in between.

Okay, that's very helpful. That's good color there. Maybe just staying on the segment, just talk about how you're balancing your inventory reduction initiatives with kind of being ready for the busy season within the Contractor Solutions segment?

Yes, absolutely. Really, as James said, it was a focus -- we've had a focus on a product-by-product looking at the weeks of inventory that we wanted to have on hand, not just historically but looking forward trying to forecast sales in each and every product type and trying to calibrate our inventory levels to make sense really for that March timeframe. And we talked about that I think at the last quarterly call is that you don't really want to measure that at the end of December, because that's a seasonally slowest time. And some products, if you buy them -- if they're manufactured in China, you may be getting some of those shipments even in December, getting ready for the February-March timeframe. And so inventories can look a little odd at that period of time. But boy, in the March high season for us, the selling opportunity is there. We want to have product on the shelves. We want to be the reliable vendor for our customers. And we don't want to miss sales, especially early on in the season like that. So we're making sure we have the right products on the shelves, the right amounts and just trying to properly calibrate that. At the same time, we've got a real focus on working capital reduction. But we're trying to do that in a very cautious, careful way so that we don't miss sales, we don't offend customers by not having product on the shelves and we don't take good care of our customers, which is our commitment to do. So it is a balancing act, no question about it. As interest rates rise, it becomes even more important. And so that's why we've been focused on that. But at the end of the day, we've got to take good care of our customers. Interest rates are not so high that we cannot afford to have the products on the shelves. And again, that's another benefit of a strong balance sheet. Our interest costs are not that high compared to the opportunity on the customer side.

Okay, that's helpful. Maybe one follow up on Jon's previous question on the EBS segment. You mentioned some geographies, particularly northern California that's slowing, and you mentioned Sunbelt and Toronto is still solid. I guess any other geographies or product lines that you can point to that are either slowing or still holding solid, just any additional granularity there?

Yes. I would say Florida got hit by weather recently. We felt that a little bit. And again, in Florida, like in Toronto, we not only fabricate but we install product there. And so some of the construction sites were shut down for a while. But now I think it really is kind of a Sunbelt story for the most part, and then plus Toronto. Southern California has been strong all the way across to Florida. So those are not surprising, the stronger growth areas for us. We're doing some nice work and picking up some business in New York, which has always kind of been a big target for us. But I would call it the Sunbelt plus in Toronto kind of a story at this point.

How are bidding trends for the railings product line performing?

Yes, it's interesting, very strong overall but that's geographic as well. Toronto has been very, very strong. There are some -- a ton of multifamily residential being built in the Toronto area and we're getting our fair share, that plus some at this point, and so very, very pleased with that. Backlog is very strong there and that bodes very well. Again, Florida has been a little more spotty with some of the weather issues and some other things. But yes, the bookings in the backlog on Greco are up I think the most as a percentage just because obviously it's off a smaller base, but their backlog has been very impressive.

Really helpful. I appreciate you guys taking the questions.

Thanks, Julio.

And we do have a follow-up question from Jon with CJS Securities. Please proceed.

Just wondering what you think is the most effective place to be putting your cash to work at the current moment.

The most, I'm sorry, attractive? Yes. It's interesting, Jon. As I think about it, repaying debt is kind of our risk free rate, right. We can save 5%, 6% on an annual basis, just by paying down debt. And so everything else is, as you know, calibrated off of that on a risk-adjusted returns basis. So all the return hurdles have gone up. And so it's become a little more challenging. Each opportunity has to be assigned a risk premium. And we think about everything from integration risk and all the other things that go into an acquisition. CapEx has got some execution risk, but less. And so we've always said that organic investments are going to likely be higher risk adjusted returns. So we would always prefer those over inorganic. But as James noted, our high level of free cash flow generation says that we can do a lot of investing and capital has not been a constraint for us. Opportunities have been a constraint. Every once a while, we're constrained by management bandwidth. But capital has not really been a constraint for us. And our cost of capital is low enough that when we find attractive returns, we're willing to pull the trigger.

Got it. Thank you for that. Just another follow up. In the current guidance for Q4, just wondering what you're expecting to be the contribution from acquisitions you've closed?

Yes. So as a reminder, Shoemaker won't be acquisitions anymore as we look year-over-year. That will become organic now, because that was bought on December 15, 2021. So your acquisitions are the Falcon, Cover Guard and AC Guard, and those are smaller, so you have a little contribution from that. So majority of the 9% kind of fourth quarter growth that we talked about in the release and Joe's comments is going to be organic. And how much of that is price versus volume, you're still going to lean towards more being price at this point the way we see things. But as Joe said, as we get to the back end of the quarter, we'll see what that brings us. But as we said here on February 2, we see that 9% growth with EBITDA of about 23% or so.

Okay, great. Thank you, guys.

Thank you, Jon.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Great. Thank you, Sheri. And thanks everyone for joining us today. Very pleased with the results and pleased to have the opportunity to visit with you about this. And look forward to talking again at the end of our fiscal year in May. So thank you very much.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.