Greetings, and welcome to the CSW Industrials, Inc. Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Alexa Huerta. Thank you, Ms. Huerta. You may begin.

Thank you, Kat. Good morning, everyone, and welcome to the CSW Industrials Fiscal 2024 Third Quarter Earnings Call. Joining me today is 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, updated Investor Relations presentation and Form 10-Q prior to the markets opening today, all of which are available on the Investors portion of our website 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, in our 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.

Thank you, Alexa. Good morning, everyone. Impressively, our team continues to outperform the markets we serve despite challenging conditions and again, delivered record results in the third quarter and year-to-date against strong prior year results. The third quarter results demonstrate our continued ability to grow through the cycle and drive notable operating leverage in our bottom line results. Earlier this morning, we announced record third quarter revenue of $175 million, record third quarter adjusted earnings per diluted share of $1.07, and record third quarter adjusted EBITDA of $37 million. EPS and EBITDA were both adjusted to exclude certain nonrecurring tax items related to past acquisitions, as we indicated they would be, on our last earnings call. Adjusted EBITDA grew 18% on 2% growth in revenue, delivering 270 basis points of adjusted EBITDA margin expansion up to 21% in the third quarter. On the heels of two consecutive quarters of record results, we continued generating record Q3 and year-to-date results in revenue of $582 million or 3.5% growth, an adjusted earnings per diluted share of $4.97, or 11.4% growth and an adjusted EBITDA of $144 million, a robust 15.7% growth. For the third consecutive quarter, we delivered outstanding cash flow from operations with a record fiscal third quarter total of $47 million. This led to a paydown of $20 million of borrowing under our revolving credit facility in the third quarter and an aggregate reduction of $100 million during the fiscal year. We continue to reduce our interest expense and fortify our balance sheet to provide significant flexibility to pursue future opportunities as they arise. Over the last few quarters, we have seen ocean freight return to normal levels. We have reduced our domestic freight costs and driven additional operational efficiencies versus the prior year. Recently, we have been monitoring issues…

Thank you, Joe, and good morning, everyone. During the fiscal year-to-date period, we delivered record year-to-date revenue of $582 million, representing growth of 3.5%. Most of the growth has come organically, but $7.5 million came from the acquisitions of Cover Guard, AC Guard and Falcon in fiscal 2023. Operating leverage on this revenue drove nearly 16% growth in adjusted EBITDA and over 11% growth in adjusted earnings per diluted share. Our consolidated revenue during the fiscal third quarter of 2024 was $175 million, a 2.3% increase as compared to the prior year period. This growth was driven organically through pricing initiatives and increased unit volumes. Consolidated gross profit in the fiscal third quarter was $74 million, representing more than 12% growth over the prior year period. Gross profit margin improved to 42% compared to 38.5% in the prior year period, driven by revenue growth from pricing actions, increased unit volumes, and lower ocean and domestic freight costs. As mentioned on our last earnings call, as a reminder, we are presenting the fiscal third quarter's profitability figures on an adjusted basis due to the $8.5 million or $0.48 per share release of tax indemnification assets related to TRUaire and Falcon acquisitions and the related uncertain tax position accrual for Falcon. This amount is in the Contractor Solutions segment and consolidated results as other expense. Our consolidated adjusted EBITDA for the third quarter increased by $6 million to $37 million or 18% growth when compared to the prior year period. Our adjusted EBITDA margin improved to 21% as compared to 18% in the prior year quarter, driven by revenue growth and gross margin expansion partially offset by incremental employee expenses and increased travel to drive revenue growth. We continue to strive for additional EBITDA leverage as we grow revenue and prudently manage…

Thank you, James. To summarize, during the third fiscal quarter of 2024, we continued to deliver on our commitments by posting record results across the board, highlighted by organic revenue growth, expanded margins and robust cash flow. While there has been uncertainty in certain key end markets all year long, we still expect to outperform versus the end markets we serve. We will focus on leveraging our strong distributor relationships and delivering earnings growth through expense optimization. We will continue to demonstrate capital discipline, drive cash flow conversion, and deliver sustainable growth in shareholder value. Because how we succeed matters, CSWI will continue to focus on our most important asset, which is our people. I would like to share one safety metric that is extremely important to our management team. That is our TRIR, the Total Reportable Incident Rate. The final TRIR for the entire enterprise for calendar year 2023 was 0.9, down significantly compared to 1.9 for the calendar year 2022. Our continued commitment to keeping our team members safe on a daily basis has reduced our TRIR by over 50% for the calendar year. I want to thank everyone at CSWI for contributing to our continued success and achieving this meaningful milestone for the company and all of our employees. Continuing with our theme of people, you may have seen in a separate news release this morning that we announced the appointment of Jeff Underwood to Senior Vice President of CSWI and General Manager of the Contractor Solutions segment. Jeff will succeed Don Sullivan in his current role as the Head of Contractor Solutions. Don will remain with CSWI as an Executive Vice President and assume the new role at Corporate of Chief Strategy Officer and ensure a smooth transition of leadership. Very happy to welcome Jeff to…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Jon Tanwanteng from CJS Securities. Please proceed.

Hi. Good morning, everyone. Thank you for taking my questions and really nice job on the margins, especially given that missed shipment. I was wondering if you could tell us what was actually delayed and what was the actual impact on the quarter. Number one. And number two, if you've already seen that ship out in January, or if that's still in the common, and when you expect to make that up.

Hey, Jon. It's Joe. It wasn't one shipment. It was a series of shipments. Just missed opportunity at the end of the quarter. There were some packaging shortages. There were some staffing shortages and things that did that. Yes, we are already seeing that flow through in January. And as James and I both mentioned, that should be fully realized in the final quarter here. So the back half of the year, the full year, is still completely intact.

Got it. Okay. And was it in just the SRS segment or was that in multiple segments?

No, only in SRS.

Got it. Okay. Could you also quantify the strength you're seeing in January? Is that because of the shipment pushouts or is that on an organic basis excluding that effect?

I would say excluding that effect.

Okay. Got it. And then you mentioned shipping costs going up even despite all the freight improvements you made in the last year. I was wondering, one, how much do you ship through the Red Sea today, if that much at all? And how much do you expect to see inflation in that shipping and freight for you guys this year?

Yeah. Jon, good morning, it's James. Thanks for being on as always. Yeah, we do have some shipments from our Vietnam facility that will travel through the Suez Canal normally. Those shipments have all been rerouted so they're all going south around the south tip of Africa as most shipments are. We have other shipments that go in different directions, of course, but those have been rerouted. You have seen an increase in pricing. As you know, pricing was down a couple thousand dollars a few years ago, we got up to $20,000 plus back to a couple of thousand. We're seeing rates out there, call it $4,000 or so. You've seen things pop. We expect that this is rather temporary for now. We'll see. It's only been a few weeks. But number one, our cargo is safe. It's being rerouted. Things take a little longer to get here. This is also the time that we've spent the last couple of weeks as a lot of manufacturers have been stocking up because you have the Tet holiday when all production shuts down for 10 or 12 days in Asia, us being no exception. That starts, I think on Saturday in fact. So we kind of get ahead of that. So we've had some shipments come through. So you really have a couple of weeks here where things -- you won't see that impact in that respect. There was a lot of media in the last couple of days around this seems to be somewhat temporary. It's not fully baked into supply and demand. So we'll see. I'll remind you, however, that when we do put something on a boat and as you know, we ship a few dozen containers over every week from our facility, it takes several months for that to flow through our cost of goods sold. So you're still seeing this last quarter, Q3, the current quarter Q4, still working off of a lower freight rate. So we're still experiencing that year-over-year delta in the pickup. This fourth quarter, last year this time rates had come down, so that delta is starting to minimize. So you'll see this temporary pop more in the first part of next year. We're monitoring it closely, working hard on efficient rates, alternative routes, and those kind of things with our shipping partners, but still feel good where we are. But that's one of the elements, as Joe talked about as we go through our budget, how that will impact things. And most importantly, we want to be sure we preserve margins so we'll take the actions we need to do to be sure that we stay intact from our expectations.

Got it. That was kind of a follow-up. What do you expect to do on pricing, I guess to reflect these rates? Is it going to be like a surcharge? Is it just part of your normal pricing increases as you go through the year? And does that also incorporate the increased retention compensation that you were talking about earlier?

Yeah, that's dynamic. We've already put through our normal annual seasonal price increases. We announced those a few weeks ago, and those go into effect here pretty soon. And so that's normal. And we achieved the normal kind of back-to-normal prior to hyperinflation pricing increases that we would normally see. Do we need to adjust things to account for shipping rates? We'll see. If this becomes a permanently higher rate, then our team is certainly ready to look at that and what the market will bear and what's appropriate. We always, like I said, maintain our margins. Do a good job with that. I think we assume labor costs are going to be up. That's already baked into our expectations, those kind of things. But the dynamic around shipping rates, how long that lasts, and what the impact really looks like it will be, will determine if we need to take action going forward.

Okay. Great. Thanks, guys. I'll jump back in queue. Appreciate it.

Thank you, Jon.

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

Thank you, and good morning, Joe, James and Alexa. Maybe to start on Contractor Solutions. Nice job. Once again, growing unit volumes there. I wanted to ask what the first month of calendar ‘24 has kind of told you about how the remainder of the calendar year will shape up in regards to HVAC/R demand, what you're hearing from customers, and what your boots on the ground are seeing.

Sure, Julio. This is James. Good morning. Thanks for being on the call, as always. Yeah, we wanted to give you a little peak into January to give you a sense of what Q4 looks like. It's just one month. We're literally starting to close the books today. But across the board, we felt really good about January. And as Joe mentioned earlier to Jon, that's not just on the heels of making up for the lost shipments in SRS in December. Right now we feel good. We're at the very beginning of the early buying season for Contractor Solutions. That HVAC market will start really stocking up the next couple of months. A lot of us were at the industry show just last week. A lot of people reported it was record attendance. A lot of mixed conversations when you talk to folks. But we continue to outperform the market. We are indexed to the subcategories, as Joe mentioned, that grow faster than the unitary ducted HVAC OEM market. There's some expectations that could be down this year, some relatively flat. But like we said, we expect growth. The ductless market continues to grow as a percent of share and the number of products, as you and our shareholders know that we have tied to that ductless market continues to grow. Areas like search protection continue to grow and we're indexed to that space more and more as we go along. So our commercial team continues to find products to introduce and innovate that will outperform the market. So it's hard to say that January, the strength that we've seen, is a precursor to an entirely great season. But we will certainly take a good January. One thing I will say without getting too deep into it. We'll report back in May when we have a good sense of how the start of the year looked out. We can never predict the weather, but we talked a lot the last couple of quarters about destocking. And we've said that generally it feels like that's behind us. And I think the fact that we saw in Contractor Solutions and nice January tells us that folks are stocking up for what they anticipate to be a good season.

Thanks very much. That's really helpful color there. And you talked about your efforts to outperform the market on the HVAC side. Some of that's related to your efforts to increase sales of some previously acquired product lines, taking them nationwide. Can you just speak to that and maybe how much more runway you have with that?

I still think there's runway. It's a great question. We -- you go back to even TRUaire over three years ago now. We're still introducing that product to some new customers because we want to be really sure that when we introduce a product and they're going to displace a competitor, that we're going to give them the highest level of customer service, the highest availability of inventory, the pricing, that makes sense for us and them. So we're still converting customers from TRUaire and Shoemaker from three years and two years ago, respectively. One example I'll give you, though, of a recent one is Falcon. That's now organic because Falcon is more than a year old. So we call that organic. That was a West Coast centered product for the most part under marketed, under commercialized, because of -- the ownership team did a great job innovating and selling the product, but they were somewhat limited. And it's a great example of our model of shipping that out to more distributors. That was a slow introduction. We got the product in our catalog immediately and moved the inventory over. It was literally a couple of hundred-mile move. But we now have introduced that nationwide. Now it's in all of our warehouses. Now the customers are more aware of the product. So our ability to now kind of own the water heater, so to speak, and have a full package of things around the water heater that the Falcon connectors attach to is now a full product. We had a whole part of our booth at the show last week, in fact, around the water heater, and Falcon is prominent. So it takes time. So there is certainly runway for those acquisitions we made about 18 months ago, as well as still runway for TRUaire and Shoemaker. So, yeah, I appreciate you recognizing that. You don't get all that day one, you don't get it all quarter one or year one. It is a long cycle of introduction and continued opportunity for growth.

Very helpful there. And then just wanted to ask about the other press release you had this morning regarding the appointments. Can you maybe talk a little bit about Jeff's background and what he brings to the role of GM of Contractor Solutions? And same question about Don and what he brings to the Strategy Officer role.

Yeah. This is Joe. I'll start with Jeff. I mean, Jeff's been here for five years now, charge of sales and marketing. And when we talk about the professionalization of our go-to-market strategy for the Contractor Solutions segment, that's been Jeff's initiatives and the growth and really the increase in size and scale of that business has been in large part attributable to those initiatives and the great work that's been done there. So a real strong track record here. Jeff comes from -- came to us from Goodman, where he'd worked with Don before. Before that, Jeff had been at Bain. And just a really strong background, a lot of experience, well known in the marketplace, in the industry, has been very, very integral to our acquisition strategy for that business. And so a perfect kind of transition from Don to Jeff there, just the way you'd like to have it internal. Somebody who's been here had a lot of success internally, well known by our team and by our customers, and really expect just a completely seamless transition there on April 1, Don being a big part of that as well. It takes both of them to have a seamless transition. Don has been the most senior operating exec that we've had around here for a while and has just a tremendous track record of success. We have leaned on him to integrate these acquisitions and to make them successful, and he has done a phenomenal job with that. So just expanding the opportunity here for him to work across the segments. But really, I think Don's going to spend a lot of time looking for that next meaningful acquisition and hopefully having an opportunity to integrate another high-profile scale acquisition that will be really, really accretive for our shareholders.

Helpful. Well, congrats to Jeff and Don, and I'll pass it on.

Thanks, Julio.

Thanks, Julio.

This concludes our question-and-answer session. I would like to turn the floor back over to Joseph Armes for closing comments.

Great. Thank you everyone for joining us for this Q3 call. We appreciate your interest and look forward to speaking to you again in May. So, thank you.

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