CSW Industrials, Inc. Price & Performance (CSWI)

In comments made during the call, as well as the risk factors identified in our annual report on Form 10 ks, and other filings with the SEC.

We do not undertake any duty to update any forward looking CSW. I will now turn the call over to Joe. Thank you, Alexa.

And good morning, everyone.

I'm pleased to announce that once again our team has delivered record results For revenue, Adjusted earnings per diluted share and adjusted EBITDA for the fiscal Q3 of this CSW. This morning, we reported fiscal Q3 revenue of 100 94,000,000 as well as fiscal 3rd quarter adjusted EBITDA of 42,000,000 dollars adjusted earnings per diluted share of $1.48 And adjusted net income of $25,000,000 Our adjusted EBITDA margin expanded 70 basis [indiscernible] to 21.7 CSW in the quarter. I'm proud to note that each of our and impressive profitability during the quarter. James will provide further details on the performance of each segment during the fiscal Q3. We have continued to execute on our capital allocation strategy During the fiscal Q3, we deployed $42,000,000 of the proceeds from our follow on equity offering to fund the strategic acquisition of Waterworks CSW Through this acquisition, In the Contractors Solutions segment CSW, we expanded our product offering with eco friendly drain management CSW. These new synergistic products will be added to our current wholesale distribution network expanding CSW' historical path to the market through the retail channel.

We expect calendar year 2025 to be active from an M and A standpoint. And CSWI will remain diligent and disciplined when evaluating acquisition opportunities focusing on synergistic CSW innovative investment opportunities with attractive risk adjusted returns that will enhance shareholder value. CSWI has a long demonstrated track record of respecting capital and delivering growth and shareholder value. Our strong balance sheet together with our capital allocation CSW, been the cornerstone of success for CSWI. By aligning capital and labor, we are driving impressive results. Our commitment to our customer satisfaction and our focus on leveraging our distribution network positions us for long term growth and profitability. At this time, I will turn the call over to James for a closer look at our results And following his comments, I will return and conclude with our prepared conclude our prepared remarks. Thank you, Joe, and good morning, everyone. As Joe mentioned, our consolidated revenue during the fiscal Q3 of 2025 was a record $194,000,000 a $19,000,000 or 11% increase when compared $15,000,000 of the revenue growth came from the CSW Free, PSP products PF Water CSW acquisitions that we completed during the last 12 months. The additional $3,000,000 of growth was organic.

Primarily due to increased volumes.

Consolidated gross profit in the fiscal third quarter was $80,000,000 representing 8% growth over the prior year period. Our gross profit margin declined by 90 basis points to 41.4 [indiscernible] compared to 42.3% in the prior year period due to increased freight expenses. Our consolidated adjusted EBITDA for the 3rd quarter increased by $5,000,000 to a fiscal 3rd quarter record $42,000,000 was 14% growth when compared to the prior year period. Our adjusted EBITDA margin improved by CSW basis points to 21.7% as compared to 21% in the prior year quarter. Demonstrating our commitment to delivering operating leverage. Adjusted net income attributable to CSWI in the quarter was a fiscal Q3 record of $25,000,000 with a record $1.48 of adjusted earnings per diluted share compared to 17,000,000 or $1.07 of adjusted earnings per diluted share in the prior year period. Representing growth of 49 CSW% due to the aforementioned performance and lower interest expense, which has now become interest income. Due to the full repayment of our revolver balance in the 2nd quarter. The adjustments to EBITDA, net income and EPS in the quarter are 2 items. The release of a tax indemnification asset and uncertain tax positions related to acquisitions, and the acquisition broker fee we paid during the quarter for Waterworks CSW.

Both of these items are included in our Contractor Solutions segment results. During the Q3, our Contractor Solutions segment with $132,000,000 of revenue accounted for 67% of our consolidated revenue delivered $16,700,000 or 14.5 percent total growth.

Compared to the prior year quarter. Of the revenue growth in the quarter, $15,300,000 or 13.3 CSW came from our recent acquisitions. While the remaining $1,400,000 or 1.2 CSW was organic volume growth. During the quarter, growth was reported in the HVACR, electrical and plumbing end CSW, offset slightly by a decline in the architecturally specified building products CSW end market within Contractor Solutions. Adjusted EBITDA for this segment was $37,500,000 or 28.4 CSW of revenue. Compared to $33,000,000 or 28.6 CSW percent of revenue in the prior year period. The slight adjusted EBITDA margin decline came from lower gross margins due to increased freight expenses previously mentioned and acquisition CSW costs. As a reminder, the fiscal Q3 is our seasonally low point of the year for this segment, which impacts our top line and margins due to lower operating leverage on our fixed costs.

Our Specialized Liability segment revenue increased by 3% to $34,600,000 as compared to the prior period. Revenues increased CSW but declined in the mining and energy end markets. The increased revenue was driven primarily by an increase in unit volumes over the prior period. The segment EBITDA of $6,600,000 in the 3rd quarter represented an increase of 26% from $5,200,000 in the prior year period.

And the EBITDA margin improved by 3 CSW 60 basis points to 19.1% in the current period. Primarily by operational CSW, and the prudent management of operating expenses. Our Engineered Building Solutions segment revenue increased to $28,800,000 a 3% increase as compared to $27,900,000 in the prior year period, driven by backlog conversion to revenue. Bidding and booking trends remained solid during the fiscal Q3. With our book to bill ratio for the trailing 8 quarters [indiscernible] We continue to see favorable margin mix in bookings and the backlog with our focus on quality contractors and project estimations. Segment EBITDA grew modestly at 3% to $4,100,000 or a 14.2 CSW EBITDA margin. Compared to $4,000,000 a similar 14.2 CSW EBITDA margin in the prior year period. We continue to target a 20% EBITDA margin for this segment in the intermediate term. But keep in mind that the margin will fluctuate from quarter to quarter due to project mix and the seasonality of the construction market. [indiscernible] Transitioning to our strong balance sheet and cash flow, We ended our fiscal Q3 2025 $214,000,000 of cash and reported cash flow from operations of $12,000,000 compared to $47,000,000 in the same quarter last year.

Cash flow from operations in the fiscal 3rd quarter decreased due to a $17,000,000 tax payment deferral mentioned on our last earnings call from the fiscal first half of twenty twenty five to the fiscal third quarter. Under a temporary federal tax relief related to the severe storms, inflating in Texas in early calendar year 2024. Inventory also increased in the Q3 of 2025 compared to the prior year period. In order to strategically offset risk, from the potential port strike and other potential disruptive events, that we anticipated could occur in the 1st calendar quarter of 2025. Our free cash flow defined as cash flow from operations minus capital expenditures, was $8,500,000 in the fiscal third as compared to $43,100,000 in the same period a year ago. This resulted in free cash flow per share of $0.50 in the fiscal 3rd quarter CSW compared to $2.76 in the same period a year ago, due to the items I previously mentioned. As discussed last quarter, we repaid all of our borrowings under the revolver in [indiscernible] utilizing the cash received from our follow on equity offering and our strong cash flows. As a result, the company was able to eliminate most of our interest expense and invest the net proceeds from the equity offering in money market accounts to generate interest income since the equity offering.

During the fiscal Q3, we made a $42,000,000 capital CSW for the acquisition of PF Water Works, as Joe mentioned. Our effective tax rate for the fiscal Q3 was 13.8% on a GAAP basis. And 24.5% when adjusted. To exclude the previously disclosed release of a tax indemnification CSW, and uncertain tax position accruals for TRUARE and Falcon, as well as the acquisition broker fee I mentioned. As a reminder, our tax rate in the fiscal 3rd quarter fluctuate more than other quarters due to seasonality. We still believe we will deliver full year growth in revenue, EBITDA, and EPS along with continued strong cash flow With that, I'll now turn the call back to Joe for his closing remarks. Thank you, James. To summarize, during the fiscal Q3 of 2025, we posted record quarterly results for revenue, adjusted EBITDA, adjusted earnings per share and adjusted net income. Our strong 11% revenue growth included both inorganic growth from our recent acquisitions and organic volume growth. Looking ahead to our final fiscal quarter of 2025, we will continue to focus on delivering sustainable growth that exceeds the markets we serve We will look for opportunities to drive operating leverage. Will continue to identify and pursue accretive acquisitions of innovative companies and products that enhance Our growth I would like to take a moment to welcome the most recent group of employees join the CSWI family through our acquisition of Water CSW in November of 2024 As I mentioned earlier, Water Works provides dependable drain management performance solutions that promote self sufficiency and make life easier for homeowners contractors, property managers and builders.

CSW has grown significantly through product innovation and service. Which are both wholly consistent with the CSWI ethos. Bringing these unique plumbing products CSW the new team under the CSWI umbrella allow us to expand the distribution of these products to the important pro trade channel. I would also like to congratulate our Rector Seal team for being awarded the 20 24 Voice of the Distributor Award [indiscernible] the industry leading trade group at their recent HVAC CSW conference, This is their single CSW award recognizing the supplier of the year CSW based on distributor nominations as well as a number of performance metrics. This award is a testament to the hard work of our teams and our commitment to our customers. And lastly, I want to close my prepared remarks by thanking the dedicated team here at CSWI who collectively own 4% of the company our employee stock ownership plan as well as all of our shareholders, for their interest in investment in CSWI Industrials. CSW, we are now ready for questions.

Thank you. We will now be conducting a question and answer session. Your first question comes from John Tanwanteng with CJS Securities. Please go ahead.

Hi, good morning. Thank you for taking my questions and CSW quarter. I was wondering CSW if you could address the impact of freight on the margins and CSW profit year over year. What was the exact impact, I CSW, and where do you see that trending in terms of the headwind And are you expecting to offset that at any point of your pricing or other mechanisms?

Yes, John, good morning. Thanks for being on as always. This is James. Yes, freight was certainly a headwind as you well know. And a lot of our shareholders know. There's a 4 to 6 month lag on the ocean freight. From the time a container leaves Asia, crosses the ocean and works its way through CSW of goods sold.

So this quarter saw those kind of peak freight rates we had back in the spring and summer Rates have started to come down since then to some degree, but obviously can remain volatile. It was the significant headwind we saw in the quarter. There was also we mentioned in the QA freight expense alignment, we had an amount of freight that we had accrued that CSW the Q2 didn't get pushed all the way through CSW as we trued things up in the third quarters, there was a bit of an alignment. Shift from Q2 to Q3. About 100 basis points of margin, if you look at it from that perspective would have shifted. So that kind of [indiscernible] I'll remind you that we mentioned last quarter that we have put forth our price increase earlier than normal. It went into effect January CSW. We would expect our fiscal 4th quarter to do a better job covering those freight that pricing is now in place.

Got it. So you would expect pricing offset that on one side and for rates to be coming down on the other as it seems to have peaked?

That's right. Yes, rates have started to come down again given the lag. The last few CSW, we've certainly seen rates come down. Avoidance of a port strike was certainly a positive. Rates were starting to spike ahead of that mid January deadline. That looks like that's been resolved. Rates came down. Also with the at least current ease of conflict in the Middle East, the Red Sea has started to open back up CSW forecasters see a potential decline in ocean freight but those are all those can all be somewhat temporary and there's a lot of exogenous CSW, of course, going on. But we're seeing rates start to come down, which we would see the impact of kind of in our fiscal 1st and second quarter at this point. But the pricing we put in place covers the freight that we already knows on our cost of goods sold. Got it. Okay. And then I think I heard you build inventory ahead of the potential strikes in disruptions. Just how long do you expect to be holding on to that before the risk is passed and you start to run that down?

Yes. It's really just what we would have brought in probably more January, February, March John, CSW the stock up for the busy season. As we saw, you always bring in a little bit before the Lunar New CSW, obviously, given our heavy reliance on Vietnam. So we always bring a little extra in, but a little more this year. CSW, with that port strike, we obviously saw scare of that in the fall and got through that. We didn't want that to disrupt our stock up CSW. So we brought some in ahead of the ports strike it's inventory we were going to sell anyway. Secondly, with potential CSW, on certain parts of the world, that's kind of what we allude to when I mentioned other disruptive events. So far, we've not seen any new action on that. CSW some of our product obviously comes from Asia. Given that's out there, we wanted to get ahead of that. And so we've already decent amount in early. That's really what you see that was affecting cash flow in the fiscal Q3. But again, we didn't bring in anything above and beyond what we would need to bring in. So now have the couple of weeks that not a whole lot comes in because of Lunar New Year, at least not much gets shipped the next 2 weeks. [indiscernible] now we'll ease that a little bit and it'll work its way through inventory very, very normally.

If you look at the balance sheet year over year CSW, we'll remind people that about half of the inventory growth year over year from December to December was just from the acquisitions. But then flow through cash flows the way acquisitions are accounted for from a balance sheet standpoint acquisitions alone are going to add your inventory balance.

Got it. That's helpful. Could you also address organic growth in the quarter, 1.8 CSW% Just wondering how much volume and pricing was a component of that? And what CSW thoughts are going forward for organic growth CSW, sure, John. I think we continue to expect mid to high single digit organic growth over a cycle. Year to date organic growth is up 5.5%, 6%. So we're kind of in that zone from an organic perspective on year to date. And obviously, we look over a 12 month period more importantly. The acquisitions we made will start feeding organic growth next year. So we'll see that that we always talk talk about that's key to that vitality. During the quarter, there were a couple of things. We mentioned a slight offset to the growth in HVAC, Electrical and Plumbing by architecturally specified building products. That's our fire stopping product. That was just a little bit softer industry wide in the quarter. That was a bit of a headwind in the quarter. We mentioned that in our 10 Q and in my script. We also kind of as we end the calendar year have some true ups on rebates and that CSW some of the pricing impact.

So yes, we did have favorable [indiscernible] Volume was up a relatively normal amount.

Again quarter to quarter things have moved around a little bit. The last thing I would mention is The OEMs, you've certainly seen talked about a lot of pull forward on getting the old equipment could be produced through December 31 out the door well as the new equipment getting ready for the new CSW. So distributors are holding a lot of both. So while it wasn't a major headwind necessarily, there was certainly a minor headwind in CSW holding a lot of the OEM inventory which obviously takes a lot of working capital dollars and probably put a bit of a headwind in the quarter on holding the parts and accessories but we're seeing normal demand as we enter the 4th fiscal quarter and as we look into 2025, we're Got it. That's helpful. And then last of all, just an update on the acquisition pipeline. What are you seeing out there? 5. I know you did Water Works, which seems very nice. But I was just wondering about the scope and aperture and the opportunities that you're CSW, especially after you raise the equity and added cash on your balance sheet now.

Yes, John. Thanks for asking. This is Joe. If you recall back in September when we did the equity offering, we said we didn't really need [indiscernible] To do these smaller bolt on acquisitions that we could do that out of our free cash flow. [indiscernible] we entered 2025 in a spectacular position to take advantage of what we hoped would be an opening of the M and A pipeline. And at this point, we're not at all disappointed in that. We see opportunities in not only small acquisitions, but also [indiscernible] That are coming to market And for us, it's really an exercise of maintaining our rigor, maintaining our discipline there are opportunities there We just need to wait for the right pitch to swing. So very optimistic and we like what we're CSW. We like the position we're in.

Okay, great. Thank you.

CSW, John.

CSW question is Susan Maklari with Goldman Sachs. Please go ahead. Thank you. Good morning, everyone.

Good morning, Susan. Welcome. Good morning. Thank you. CSW, it's good to be here.

My first question is on share gains. You've obviously seen a lot of that over the course of the last several quarters in the business. As you look out and any [indiscernible] opportunities and how should we think about that potentially coming together?

Yes. Market share gain, thanks Susan, is an important part of of our organic growth rate, that mid to high single digits we talked about. CSW, the industry is kind of growing low single digits. Our ability to pick up market share gains from competition can CSW we're putting our budget together, putting the bow on that for next fiscal year, market share gain is a part of that. We would also point to obviously we're in certain markets that are over indexed like indoor air quality, surge protection, many splits, those type things. So that all kind of goes hand in hand. As we bring in these acquisitions, that also gives us market share [indiscernible] want to have fewer vendors. And so the more product we can offer them gives us that opportunity to pick up market share gain that they can get a full pallet, more of a truckload, a full truckload, whatever it may be from us. So while we don't break out the specifics, clearly building up to a mid to high single digit organic growth expectation includes a good chunk of market share gain that Jeff and his team are looking toward.

Okay. That's helpful. And then you mentioned that you closed the deal in the quarter. As you think about the synergies there, can you just elaborate a bit on that and how we should be thinking about them starting to expand within the channel as we do get into the busier CSW and summer seasons?

Yes.

This is Joe. Thanks for asking.

The really, really innovative CSW products that have traditionally been sold through the retail [indiscernible] markets. So really where we see the opportunity to accelerate the growth there will be in the professional trade, in the in the wholesale distribution side of the business, which is really our bread and butter. And so we see that as the opportunity of taking if not all of those CSW, at least a number of those products through the professional trade making those available to professional plumbers, And we see lots of opportunity there. Have the distribution for that that they just did not have.

One thing I'll mention CSW, of course that being a plumbing product CSW not necessarily a seasonal. So we're not having to ramp up for the busy HVAC season. So we'll spread that ramp up through the year and introduce that to our customers Some are the same customers with that dual trade we've talked about with HVAC and plumbing.

CSW think we're going to have real good take on that. And again, that's part of your market share gain CSW. To displace other plumbing products potentially.

CSW. Okay. That's great color. Thank you both for all of it and good luck with everything.

Thanks CSW. Thank you Susan. Next question, Natalia Baek with Citi. Please go ahead. Hi, good morning. Congrats on the quarter.

Thanks, Matti.

I CSW, first question that I want to ask is if you could elaborate on the overall CSW environment. There seems to be a lot of crosscurrents out there in terms of higher for longer rates, the still weak U. S. ISM and now increased geopolitical CSW what are your distributors telling you about the market and are you thinking about the macro as you transition towards fiscal year 2026 CSW?

Good morning, Italia. It's James. Thanks for that. Yes, I think we're still favorably inclined. Obviously, it looks like interest rates are higher for longer as you say. Inflation seems to be relatively in check. Reading kind of what the Fed is saying as recently as yesterday with Chairman Powell. And so we're watching it closely, but we're expecting a normal year of growth. The HVAC market doesn't move around quite as much as some of the other economically dependent factors. You may have a little more repair than replace at times. But again, our products are used for repair and CSW. Existing home sales and new home sales have been a little down, but some of the housing permit numbers have been up a little bit lately. So the take on new equipment replacement equipment is there. At some point, you do have to replace your unit. I think we're probably past the pull forward we saw 3, 4 years ago from COVID back into a normal cycle now. So obviously interest rates being up a little bit higher mortgage rates being up could be a bit of a headwind there. But we continue to see favorable trends in our CSW.

And again, as Wirt is so critical with these acquisitions we're making giving us the opportunity to offer more to our customers. If you look at the other couple CSW segments, clearly the commercial construction market has been challenged for EBS, but our trailing 8 quarter book to bill of 1 to 1 tells you we continue to put high quality products in the backlog. Team is really focused on the right geographies, the right projects, being sure we get that estimation right, so we can hit that 20 percent margin goal that we have. And as we put together next year's budget, we feel good about growth in that market as well. And then CSW reliability CSW, that tends to be relatively GDP with maybe a little bit of plus in it. So again, the energy market is somewhat important there. That was down this last quarter, but there's some favorable rays of light in the energy market, we think. You've got an international and domestic component within SRS. We look more at the global market in that respect. So big picture, I think the macro environment is good. Maybe it's not great per se, but given that as I mentioned earlier to Susan's question, our being over CSW to higher growth markets within the sectors that we're in give us the opportunity to exceed the macro CSW expectations.

Got it. Helpful color. And then just curious, how, if at all, is the new administration impacting your CSW? Any impact from concerns regarding rollbacks of the IRA, for example? Impacting heat pumps?

I think it's early. We're certainly tracking what's going on out there. The IRA itself, we've heard some of the OEMs CSW, not much of that had come through. So they don't see that that was much of a tailwind yet. And that going away, I don't think it's going to change things much. Clearly have products that go into the heat pump market. We have products that go into the traditional market. So we're rather agnostic in that respect. So it doesn't seem like that's been a big factor in the success we've had or the industry has had. So I don't think that going away is much of an impact. Obviously, we're watching things like CSW. And if we need to push through pricing to offset some of those tariffs, then we would take that opportunity. One thing I'll mention or note in that respect that's a little more near term potentially, we watch the news closely as you do obviously.

As a reminder, we don't have any product coming out of Mexico. We have no product that comes out of Canada, very, very little within our EBS CSW. So Mexico and Canada, which may have some near term tariff headwinds don't really affect us. We have a little bit of product that goes into Canada. CSW if there's a cyclical tariffs, then we'll look at what we need to do there. As we've mentioned before, our China CSW, low teens these days within Contractor Solutions and virtually nothing in the other businesses. So single digits as an overall company. Vietnam is our biggest exposure. And Vietnam is on good relations right now and has not been talked about as much. So we watching those things closely. We'll react as we need to. As a reminder, we already have tariffs on Chinese products and we were able to pass that through last time. So your point, we're watching things closely. I'm sure when we talk again in May at the end of the fiscal year, there will be more things to respond to. But to date, we don't see a whole lot that would affect us directly, but we're watching that very carefully, of course, CSW more we react appropriately and think we have good opportunity to do that.

Got it. Helpful. And CSW one more final question for me. What about the I mentioned just very briefly in response to John that we could have seen a little headwind in our CSW [indiscernible] of people stocking up on both the old refrigerant equipment and the new refrigerant equipment, so they could offer both to their CSW. And OEMs can't produce the old equipment anymore as of January CSW. We may have seen a little headwind because the distributors have a lot of working capital tied up in capital equipment and our parts and accessories may have seen that. So we would expect that now that our price increases in effect January CSW and anything we sell this fiscal Q4 and into the first quarter as people stock up got a little extra tailwind on price as well, which is helpful. The refrigerant change itself is a reminder, doesn't affect us at all. We're agnostic to that. The one potential tailwind is if people upgrade their systems to the new refrigerant to get better efficiency with SEER ratings that that popped up a couple of years ago and more environmentally sound as well as potentially offsetting future repairs having new equipment new replacement unit is going to be positive for us overall.

But may have seen a little headwind in Q3 as we look back on it, but nothing dramatic. But that would have tempered our organic growth a little bit. Natalia, this is Joe. On your earlier questions, I think James did a great job talking about the operational effects. I think that was really the crux of your question. But as you zoom out you think about the new administration, the regulatory scheme there, and the enforcement of regulations around M and A and you think about higher interest rates for longer, Both of those are good for our acquisition CSW, because I think we might have a competitive advantage with a pristine balance sheet that we have, the dry powder that we have we're in a much better position from an M and A standpoint than some of our competitors for those CSW. You may already have leverage and looking at interest payments that we don't have to look at.

Got it.

Super helpful color. Thank you so much and congrats on the quarter again.

Thank you.

We'd like to turn the floor over to Joe Arm for closing remarks.

Yes. Thank you so much everyone for joining us for the 3rd quarter conference call. We look forward to speaking to you again soon. Take care. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation. [indiscernible]