CSW - NYSE

Good day and welcome to the CSW Industrials First Quarter 2024 Earnings Conference Call. I am [indiscernible], the operator. Please note, this event is being recorded. I would now like to turn the conference over to Alexa Huerta, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Andre. Good morning, everyone and welcome to the CSW Industrials fiscal 2024 first 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 market’s opening today, which are available on the Investor portion of our website at www.cswindustrial.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.

Thank you, Alexa. Good morning, everyone, and thank you for joining our fiscal first quarter conference call. Once again, our team executed well in the face of headwinds in certain key markets. Our first quarter results reflect the tenacity, professionalism of our team members around the world. We are acutely focused on managing our costs, outperforming the categories we compete in and expanding our margins. For the quarter, we are announcing many record results with our record first quarter revenue of $203 million, a record first quarter earnings per diluted share of $1.97 per share and our record first quarter EBITDA of $54 million. We also delivered impressive operating leverage as EBITDA grew by 10% on 2% growth in revenue. But potentially, our most impressive metric is record cash flow from operations of $50 million for the first quarter. This led to a pay-down of $43 million of borrowings under our revolving credit facility and the company ended the quarter with a balance of $210 million outstanding on our $500 million facility, allowing us to reduce our interest expense and maximize our potential to secure future opportunities as they arise. During the first fiscal quarter, last fall’s Cover Guard, AC Guard and Falcon acquisitions collectively contributed $5.1 million to inorganic revenue, all of which was reported in our Contractor Solutions segment. These product line extensions expanded our offerings into our high-margin HVAC/R and plumbing end markets, reflecting the accretive nature of our capital allocation strategy and our focus on complementary product categories within our existing end markets served. As we have mentioned on our recent earnings calls, the cost of shipping containers from Asia is down quite a bit since last year. And now we are seeing a reduction in domestic freight as well as a reduction in certain raw materials over the prior year. We are, however, still experiencing increased employee expenses as well as increased amortization of intangible assets due to recent acquisitions. By successfully maintaining our pricing across all 3 segments, we have further expanded our margins. In the first 3 months of fiscal year 2024, we deployed $7.9 million of capital via dividends and capital expenditures in addition to the revolver reduction that I already mentioned. We continue to pursue both internal and external opportunities for growth, consistent with our disciplined risk-adjusted return methodology and have maintained a healthy pipeline of acquisition opportunities. I want to touch briefly on our segments, then James will provide the additional details on our performance. Overall, I remain pleased with the execution of all three business segments and in particular, with our leadership team’s ability to adapt to dynamic conditions. We are in the middle of a busy summer season for our Contractor Solutions segment, and our team is highly focused on another year of growth despite the industry currently experiencing a decline in residential HVAC/R volumes. The strength of this segment centers around leveraging our powerful distribution network, optimizing acquisition integration and delivering high-value products to our customers. We are able to quickly acquire or master distribute products, resulting in sales at a faster and more cost-effective rate due to logistics leverage, supply agreements, our network of sales representatives, credit and back-office support. This allows us to do what we have always done well, which is to focus on serving our customers well as we add new products to our portfolio. Our specialized Reliability Solutions segment continues to exceed expectations. The capacity utilization in our primary facility continues to increase, and our team there remains focused on top and bottom line growth by driving operational efficiencies and offering the optimal mix of products to our customers around the globe. Energy market growth remains solid and industrial end markets are stable. Our joint venture with Shell continues to yield financial benefits, and we expect to complete the previously announced capacity expansion project within our existing facility by the end of this fiscal year, which will allow for increased revenue and profitability in fiscal 2025. Our Engineered Building Solutions segment was down slightly, the decrease in revenue of 3% in the quarter. However, for a sixth consecutive quarter, this segment’s backlog reached another all-time high with the aluminum railing business driving most of the growth. I will remind you that a significant portion of the current backlog is coming from larger jobs that typically do not turn into revenue for 18 months to 2 years. We are highly focused on pursuing institutional and multifamily projects undertaken by the highest quality developers with the highest likelihood of completion. And our team is performing well and delivering on current projects. Before I turn the call over to James, I would like to remind everyone of the demonstrated resiliency of our business model. Strength of our business model include the diversification of our product portfolio and of the end markets we serve as well as the consumable nature of many of our products that are used either in maintenance, repair and replacement applications or to extend the reliability, performance and life span of mission-critical assets. Specific to our largest end markets, HVAC/R and plumbing, the products we sell and the value they provide are often non-discretionary fundamental necessities for both homeowners and businesses. We continue to outperform the categories in which we compete. We have continued to maintain a strong balance sheet that allows us to withstand market headwinds with ample liquidity that affords us the ability to pursue growth opportunities that arise across our entire portfolio of businesses. At this time, I will turn the call over to James for a closer look at our results, and then I will conclude our prepared remarks.

Thank you, Joe, and good morning, everyone. Our consolidated revenue during fiscal first quarter 2024 was $203 million, a 2% increase as compared to the prior year period, driven by pricing actions and inorganic contributions from recent product acquisitions. Consolidated gross profit in the fiscal first quarter was $92 million, representing 7% growth with the incremental profit resulting from revenue growth and decreased costs from certain raw materials as well as lower inbound and outbound freight costs. Gross profit margin improved to 45.3% compared to 43.2% in the prior year period. From revenue growth in the higher-margin Contractor Solutions segment due to pricing initiatives and acquisitions as well as growth in the energy end market within specialized reliability solutions, combined with the lower freight costs as compared to a year ago and strong operational execution. Consolidated EBITDA increased by $5 million to $54 million or 10% growth when compared to the prior year period. Consolidated EBITDA margin improved to 27% as compared to 25% in the prior year quarter, above revenue growth that outpaced incremental expenses. This margin growth demonstrates the operating leverage that we strive for as we focus on managing expenses as we increase revenues. Net income attributable to CSWI in the fiscal first quarter was $31 million or $1.97 per diluted share compared to $29 million or $1.88 per diluted share in the prior year period. The current quarter includes increased amortization expense from intangible assets as a result of last fall’s acquisitions and contractor solutions as well as higher interest expense due to higher interest rates over the prior year. Our Contractor Solutions segment was $140 million of revenue, accounted for 69% of our consolidated revenue and delivered $2 million or 2% total growth as compared to the prior year quarter. The revenue growth was driven by the plumbing and architecturally specified building products end markets. Inorganic growth was $5.1 million in the quarter from the Cover Guard, AC Guard and Falcon acquisitions, offset by a 2% decrease in organic revenue. The organic revenue decrease was driven by a reduction in unit volumes, partially offset by pricing actions we have taken over the last couple of years. Segment EBITDA was $47 million or 33% of revenue compared to $43 million or 31% of revenue in the prior year period as our margins continue to expand. The increasing margins are from the company’s ability to maintain pricing even as certain costs in this segment have come down over the prior year. Our Specialized Reliability Solutions segment achieved another impressive quarter of organic revenue growth of $2 million or 6% due to the continued benefits from pricing initiatives, solid end-market demand, including energy and mining, and improvements in our operational execution. Segment EBITDA and EBITDA margin were $8 million and 22%, respectively, in the fiscal 2024 first quarter compared to $7 million and 19% in the prior year period. As Joe mentioned, with the ongoing addition of equipment in our Rockwall, Texas facility to support the Selwood more joint ventures, we are in a position to continue to post-compelling growth in this segment as we progress through the rest of our current fiscal year and into the next fiscal year. Our Engineered Building Solutions segment revenue declined slightly to $28 million, a 3% decrease compared to $29 million in the prior year period. Bidding and booking trends remain strong. In fact, our quarter end backlog increased by approximately 6% over the fiscal 2023 backlog close. At the end of the fiscal first quarter, our book-to-bill ratio for the trailing 8 quarters was almost 1.2 to 1. We ended June with the sixth consecutive quarter of record backlog in this segment. Transitioning to the strength of our balance sheet and cash flow. We ended our fiscal 2024 first quarter with $15 million of cash and reported record cash flow from operations of $50 million compared to $17 million in the same quarter last year. Our free cash flow, defined as cash flow from operations minus capital expenditures, was $45.3 million in the fiscal first quarter as compared to $14.8 million in the same period a year ago. That resulted in free cash flow per share of $2.91 in the fiscal first quarter as compared to $0.95 in the same period a year ago. This impressive level of free cash flow fuels our risk-adjusted returns, capital allocation strategy, which, in turn, enhances shareholder value. As part of our broad capital allocation strategy, during the quarter, we paid down $43 million of our outstanding debt. We ended the fiscal first quarter with $210 million outstanding on our $500 million revolver. Our bank covenant leverage ratio as of the current quarter end was approximately 1.1x, an improvement from 1.3x at the end of fiscal 2023 due to our strong EBITDA growth. This leverage ratio now places us in the lowest tier of our revolving pricing grid, reducing our interest rate spread, which creates interest expense savings. As a reminder, in February of 2023, we entered into an interest rate hedge for the first $100 million of borrowings under our revolver. During the fiscal first quarter, this saved us $300,000 in interest expense. Our effective tax rate for the fiscal first quarter was 25.2% on a GAAP basis. We still expect a tax rate of approximately 25% for fiscal 2024. As we look out to the rest of fiscal 2024, we still anticipate revenue growth for the full year, which when coupled with meaningful operating leverage, we expect will result in strong year-over-year EBITDA and EPS growth as well as strong cash flow generation. We expect to continue to benefit from stability in our raw material and freight costs as well as operational efficiencies. With that, I will now turn the call back to Joe for closing remarks.

Thank you, James. Summarize, during the first fiscal quarter of 2024, we delivered record results, highlighted by expanded margins and robust cash flow. While there are headwinds in certain key end markets, we still expect to outperform the categories we serve and to deliver consolidated revenue and earnings growth in fiscal 2024. We are focused on efficiency gains and cost reductions, and we are committed to providing our customers with high-quality products and customer service that they expect from CSWI. And we will rely on the dedication of our team members to accomplish that goal. We have expanded margins. We’ve driven cash flow conversion. We are confident in our near- and long-term opportunities for disciplined capital allocation, which is enabled by the strength of our balance sheet. We remain committed to sustainable growth and shareholder value. By doing this in the past, we have consistently delivered outstanding financial results. We will utilize that same approach for the remainder of this fiscal year and beyond. At CSWI, we must and we will succeed. There’s no other option. But we also say at CSWI how we succeed matters. And everything we do is accomplished with a focus on environmental stewardship, the health and safety of our team members, which supports the growth we have seen since inception. Of note, we are trending very well this year in terms of our safety record. And I have a couple of examples that I would like to share. During the month of July, our TRUaire factory in Vietnam celebrated a new milestone of 365 days with no lost time injuries. And that translates to over 3.6 billion hours worked based on the number of team members we have at that facility. And at our Balco facility in Wichita, Kansas, we’re currently at over 4 years with no lost time injuries. We are extremely proud of both of those teams for achieving these important and admirable milestones, which are not only keeping our team members safe and healthy, but also contributing to our bottom line results. Achieving continued exceptional results over time demonstrates our commitment to be good stewards of your capital and to our goal of driving sustainable 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 you, our shareholders, for your continued interest in and our support of our company. With that, Andre, we’re now ready to take questions.

[Operator Instructions] The first question comes from the line of Jon Tanwanteng with CJS Securities. Please go ahead.

Hi, it’s actually Lee Jagoda on for John this morning. I guess just starting with the volumes in the quarter, how much of the lower volumes are related to inventory management at the distribution network versus sell-through at retail? And how should we think about those volume expectations over the next couple of quarters?

Good morning, Lee, it’s James. Thanks for being a – thanks for your question. We don’t have the full sense of inventory management versus retail sales. A couple of data points though, and without giving other people’s data too much, the OEMs have talked about things being down double digits in the last quarter. We’re clearly outperforming that. So we’re outperforming the category given where we focus on the replacement, the maintenance and repair work, those kind of things. We’ve not gotten a great sense of destocking. I know a couple of the folks in the industry said that the destocking seems to be decelerating. So there may have been a little bit of that. we work through our inventory appropriately. Obviously, with more confidence in the supply chain now, you feel good about that. You saw us free up a little bit of inventory. But we would say, overall, that we’re outperforming the category despite some of those headwinds. Last thing I’ll mention and that you have more questions is it was a late start to the summer. So there may have been a little bit of the inventory management, so to speak. Again, no one called that up too much. But the summer really got going kind of late June and July. So normally kind of May, June, you start seeing things pick up in a pretty good way. If you look at the cooling days out there and the pulling degree days that are tracked each week, you were down 20%, 30% on a year-to-date basis for a while. Now your you’re down about 16% the last week that I saw. So July has made up a lot of ground. We saw early signs in July that the heat was certainly taking effect with our ability to sell product and the demand our customers had certainly picked up. But overall, I’d say there was a little bit of softness on the retail side, given the late summer in some of the regions, maybe a little bit of destocking. But overall, we feel good about our ability to continue to outperform those metrics.

Great. And then I guess you talked a little bit about on the margin cost getting better, whether it’s freight or other raw materials. How do you see that as – in terms of like, are you still able to raise prices going forward or are you getting any pushback? How does that all shake out?

Yes. Thanks, Lee. From a freight perspective, yes, we’ve certainly seen ocean freight settle in kind of a new low. It bounces around a little bit kind of sub 2,000 when you look at things from China to Long Beach in different parts at different prices. But it seems to have settled into kind of a new normal for now. Again, week-to-week, it bounces around. Domestic freight, which we haven’t talked about a whole lot in the past because ocean freight was such a big deal for a couple of years with the pandemic. Domestic freight costs have come down a little bit, too, with fuel costs lower. The price of oil, obviously, was lower over the last couple of quarters than it was a year ago. Last year, you were looking at $110, $120 per bare oil. This last quarter, you were looking more at 70% to 80%, and that’s lower diesel and gas prices as well. So that’s been a bit of a tailwind for us in terms of cost. We had our last round of normal price increases in the spring as we always do. I think our ability to hold on to that is where our focus is. I think at the current time, we will continue to watch cost. And if we see things move up, then we would take appropriate price action. But right now, I think the pricing environment across our businesses is pretty steady. We still feel confident in the ability to move things if we need to. But most importantly, what we’ve said for a couple of years, holding on to the pricing increases we got, while some costs have come down, has been important. There is still some cost pressures, things like labor. Labor is still tough, and so you see some pressure there. So we’re being careful and watching that. But again, operational leverage and margin expansion as we’ve raised the top line, some through pricing, some through acquisitions, some through unit growth in some of the key markets, while pricing come down has led to really loss margins.

Got it. And then I guess one more high-level question, and I’ll hop back in the queue. It feels like every other day, we see headlines in the news about the hottest month ever hottest year on record. And obviously, there’s some that argue it’s a cyclical issue. There’s others to argue it’s a secular issue. How much of – how much of those kind of things, I guess, one, have impacted demand positively over the last several years? And I guess, how do you think about that, whether it’s cyclical, secular, etcetera, over the next several years as a driver of demand?

Let me start, Lee and then James can add some detail. But I mean, certainly, we have seen temperatures rising and that’s a positive trend for us from a secular standpoint. Season by season will vary. As James said, we had a late start to the summer season this year, but it’s hotter now than it’s ever been. And so those things kind of come and go, and it’s – we’re not immune to that. But at the same time, the character of our products and the things that our products do, the value they add for our customers makes it more resilient than just following whatever the cycle is each year. So that gives us confidence. Our products are enhancing the performance of air conditioning systems. We’re making it easier for the technicians to do their job. We’re adding value to both the technician and to the homeowner, and we think that’s a great long-term strategy.

Yes. All I would add, Lee, when you look at, as Joe said, the long-term trends, we can’t predict things, but I think it’s clear that overall, the temperatures are rising. One thing I’ll point out specifically that’s been a tailwind for us that we’ve highlighted before is our position in that Duct mini split markets. That’s a product category where you see in our investor presentation, we have a lot of products surrounding and mini split installation. And where that’s really been important is if you look in the West, the Northwest, the Northeast where they’ve historically not had air conditioning in a lot of places as temperatures have risen in the last few years and expectations is they would generally continue to reporting to the scientists. Those areas one air condition, and they’re in a lot of places where Duct work is not in those buildings. It’s not necessarily efficient to put in Duct work in certain places. So installation and mini slips, which continues to be a double-digit positive year-over-year type of unit growth over the last few years is really something we’ve leaned into, and we have a lot of products surrounding that. So that’s one thing that, as I mentioned earlier, has helped us outperform the overall just OEM ducted unitary category.

That’s very helpful. Thanks very much.

Thanks, Lee.

The next question comes from the line of Julio Romero with Sidoti & Company. Please go ahead.

Hi, good morning, Joe, James and Alexa. This is actually Alex Hantman on for Julio. Thanks for taking questions.

Thanks, Alex.

Yes. I wanted to start with the Contractor Solutions segment. I know the implications of stronger demand for new construction homes on the segment is repaired replacement driven. But with select lines such as grills, registered diffusers, would those fare better in this environment?

They do. They are a little on a little different cycle than some of our other products. So new construction is certainly can drive the GRD business. Also refurbish and remodels, which we’re seeing feels like an uptick there as well with folks investing in their homes instead of selling their homes. We’ve read quite a bit about folks who have elected to stay in their existing homes because they’ve got cheap mortgages and instead of selling and moving up. They’re just spending money on their current house. And that’s another good opportunity for the GRD to be sold into that opportunity. So yes, there’s a little bit of difference in the cycle. Of course, it adds to the diversification of our products and the broader our product portfolio, the more opportunities for a homeowner to need and use our products. So we think that’s overall healthy for the long-term.

Thank you. And on the Engineering Building Solutions segment side, can you talk about demand trends within the segment? What’s driving the strength in the backlog or the new products, focus on go-to-market. Basically, any color you could add would be helpful.

Sorry, that’s for Engineered Building Solutions, you said?

Yes.

Yes, absolutely. It’s a couple of things. One is that team has done a really nice job of introducing some new products, some product enhancements, improvements that give us a competitive advantage in the marketplace. Also, they have been hyper-focused on more resilient parts of their market. As you can imagine, everybody reads a lot about office construction being maybe driven downward. And so they have, over the last few years, focused on institutional product type. And we still do a lot of high-rise residential. And so the residential market in that particular submarket has been very strong. Institutional is very strong, schools, hospitals, airports, those types of things. And so I think it’s targeting the right markets. I think it is providing new and enhanced products to the market. And I think we’ve just improved our go-to-market strategy overall in our professionalism in the field and our ability to kind of clearly communicate the value of our products to the market.

Great context. Thank you. And last question here, still on EBS. Can you talk about the mix in the quarter of higher-margin products like railings or smoke curtains compared to last quarter.

Yes. I would say no material changes there. I would say that there are some differences in margins among some of the products. And so that’s why we have kind of really enterprise-wide really try to focus our commercial efforts on the higher margin products. We can literally increase earnings through mix. And that’s just a matter of emphasis, a matter of focus, a matter of execution on the commercial side, on the sales side to focus on those higher-margin products within each of the segments, and we’re seeing some results in that regard. And our internal reporting, folks are beginning to report on kind of byproduct line. And when you recognize and realize some of the margin differentials it really does focus you on the right products to be out selling and focusing on and really expanding your time, effort and energy on.

Thank you, very helpful.

Ladies and gentlemen, there are no more questions at this time. I would like to turn the conference back over to CSWI for any closing remarks.

Great, Andre. Thank you so much. We just want to say thank you to everyone for joining us today and appreciate your interest in CSWI.