CSW Industrials, Inc. (NASDAQ:CSWI) Q1 2024 Earnings Convention Name August 3, 2023 10:00 AM ET

Firm Individuals

Alexa Huerta – Vice President, Investor Relations and Treasurer

Joseph Armes – Chairman, Chief Govt Officer and President

James Perry – Govt Vice President and Chief Monetary Officer

Convention Name Individuals

Lee Jagoda – CJS Securities

Alex Hantman – Sidoti & Firm

Operator

Good day and welcome to the CSW Industrials First Quarter 2024 Earnings Convention Name. I’m [indiscernible], the operator. Please observe, this occasion is being recorded. I might now like to show the convention over to Alexa Huerta, Vice President of Investor Relations and Treasurer. Please go forward.

Alexa Huerta

Thanks, Andre. Good morning, everybody and welcome to the CSW Industrials fiscal 2024 first quarter earnings name. Becoming a member of me in the present day is Joseph Armes, Chairman, Chief Govt Officer and President of CSW Industrials, and James Perry, Govt Vice President and Chief Monetary Officer.

We issued our earnings launch, up to date Investor Relations presentation and Kind 10-Q previous to the market’s opening in the present day, which can be found on the Investor portion of our web site at www.cswindustrial.com. This name is being webcast and data on accessing the replay is included within the earnings launch. Throughout this name, we are going to make forward-looking statements. These statements are based mostly on present expectations and assumptions which can be topic to numerous dangers and uncertainties. Precise outcomes may materially differ due to elements mentioned in the present day in our earnings launch and the feedback made throughout this name in addition to the danger elements recognized in our annual report on Kind 10-Ok and different filings with the SEC. We don’t undertake any responsibility to replace any forward-looking statements.

I’ll now flip the decision over to Joe.

Joseph Armes

Thanks, Alexa. Good morning, everybody, and thanks for becoming a member of our fiscal first quarter convention name. As soon as once more, our workforce executed nicely within the face of headwinds in sure key markets. Our first quarter outcomes replicate the tenacity, professionalism of our workforce members around the globe. We’re acutely centered on managing our prices, outperforming the classes we compete in and increasing our margins.

For the quarter, we’re saying many document outcomes with our document first quarter income of $203 million, a document first quarter earnings per diluted share of $1.97 per share and our document first quarter EBITDA of $54 million. We additionally delivered spectacular working leverage as EBITDA grew by 10% on 2% progress in income. However doubtlessly, our most spectacular metric is document money stream from operations of $50 million for the primary quarter. This led to a pay-down of $43 million of borrowings below our revolving credit score facility and the corporate ended the quarter with a stability of $210 million excellent on our $500 million facility, permitting us to scale back our curiosity expense and maximize our potential to safe future alternatives as they come up.

In the course of the first fiscal quarter, final fall’s Cowl Guard, AC Guard and Falcon acquisitions collectively contributed $5.1 million to inorganic income, all of which was reported in our Contractor Options section. These product line extensions expanded our choices into our high-margin HVAC/R and plumbing finish markets, reflecting the accretive nature of our capital allocation technique and our give attention to complementary product classes inside our current finish markets served.

As we’ve talked about on our latest earnings calls, the price of transport containers from Asia is down fairly a bit since final yr. And now we’re seeing a discount in home freight in addition to a discount in sure uncooked supplies over the prior yr. We’re, nevertheless, nonetheless experiencing elevated worker bills in addition to elevated amortization of intangible belongings resulting from latest acquisitions. By efficiently sustaining our pricing throughout all 3 segments, we’ve additional expanded our margins.

Within the first 3 months of fiscal yr 2024, we deployed $7.9 million of capital through dividends and capital expenditures along with the revolver discount that I already talked about. We proceed to pursue each inside and exterior alternatives for progress, in line with our disciplined risk-adjusted return methodology and have maintained a wholesome pipeline of acquisition alternatives.

I wish to contact briefly on our segments, then James will present the extra particulars on our efficiency. General, I stay happy with the execution of all three enterprise segments and particularly, with our management workforce’s potential to adapt to dynamic circumstances. We’re in the course of a busy summer time season for our Contractor Options section, and our workforce is extremely centered on one other yr of progress regardless of the trade presently experiencing a decline in residential HVAC/R volumes. The energy of this section facilities round leveraging our highly effective distribution community, optimizing acquisition integration and delivering high-value merchandise to our prospects.

We’re in a position to shortly purchase or grasp distribute merchandise, leading to gross sales at a sooner and less expensive fee resulting from logistics leverage, provide agreements, our community of gross sales representatives, credit score and back-office help. This enables us to do what we’ve all the time completed nicely, which is to give attention to serving our prospects nicely as we add new merchandise to our portfolio. Our specialised Reliability Options section continues to exceed expectations. The capability utilization in our major facility continues to extend, and our workforce there stays centered on prime and backside line progress by driving operational efficiencies and providing the optimum mixture of merchandise to our prospects across the globe.

Vitality market progress stays stable and industrial finish markets are secure. Our three way partnership with Shell continues to yield monetary advantages, and we anticipate to finish the beforehand introduced capability enlargement mission inside our current facility by the tip of this fiscal yr, which can enable for elevated income and profitability in fiscal 2025. Our Engineered Constructing Options section was down barely, the lower in income of three% within the quarter.

Nonetheless, for a sixth consecutive quarter, this section’s backlog reached one other all-time excessive with the aluminum railing enterprise driving a lot of the progress. I’ll remind you that a good portion of the present backlog is coming from bigger jobs that usually don’t flip into income for 18 months to 2 years. We’re extremely centered on pursuing institutional and multifamily tasks undertaken by the very best high quality builders with the very best probability of completion. And our workforce is performing nicely and delivering on present tasks.

Earlier than I flip the decision over to James, I want to remind everybody of the demonstrated resiliency of our enterprise mannequin. Energy of our enterprise mannequin embody the diversification of our product portfolio and of the tip markets we serve in addition to the consumable nature of lots of our merchandise which can be used both in upkeep, restore and alternative functions or to increase the reliability, efficiency and life span of mission-critical belongings. Particular to our largest finish markets, HVAC/R and plumbing, the merchandise we promote and the worth they supply are sometimes non-discretionary elementary requirements for each owners and companies. We proceed to outperform the classes during which we compete. We’ve got continued to take care of a robust stability sheet that enables us to face up to market headwinds with ample liquidity that affords us the flexibility to pursue progress alternatives that come up throughout our complete portfolio of companies.

At the moment, I’ll flip the decision over to James for a more in-depth take a look at our outcomes, after which I’ll conclude our ready remarks.

James Perry

Thanks, Joe, and good morning, everybody. Our consolidated income throughout fiscal first quarter 2024 was $203 million, a 2% improve as in comparison with the prior yr interval, pushed by pricing actions and inorganic contributions from latest product acquisitions.

Consolidated gross revenue within the fiscal first quarter was $92 million, representing 7% progress with the incremental revenue ensuing from income progress and decreased prices from sure uncooked supplies in addition to decrease inbound and outbound freight prices. Gross revenue margin improved to 45.3% in comparison with 43.2% within the prior yr interval. From income progress within the higher-margin Contractor Options section resulting from pricing initiatives and acquisitions in addition to progress within the vitality finish market inside specialised reliability options, mixed with the decrease freight prices as in comparison with a yr in the past and robust operational execution. Consolidated EBITDA elevated by $5 million to $54 million or 10% progress when in comparison with the prior yr interval. Consolidated EBITDA margin improved to 27% as in comparison with 25% within the prior yr quarter, above income progress that outpaced incremental bills.

This margin progress demonstrates the working leverage that we try for as we give attention to managing bills as we improve revenues. Web earnings attributable to CSWI within the fiscal first quarter was $31 million or $1.97 per diluted share in comparison with $29 million or $1.88 per diluted share within the prior yr interval. The present quarter consists of elevated amortization expense from intangible belongings on account of final fall’s acquisitions and contractor options in addition to increased curiosity expense resulting from increased rates of interest over the prior yr. Our Contractor Options section was $140 million of income, accounted for 69% of our consolidated income and delivered $2 million or 2% complete progress as in comparison with the prior yr quarter. The income progress was pushed by the plumbing and architecturally specified constructing merchandise finish markets. Inorganic progress was $5.1 million within the quarter from the Cowl Guard, AC Guard and Falcon acquisitions, offset by a 2% lower in natural income. The natural income lower was pushed by a discount in unit volumes, partially offset by pricing actions we’ve taken during the last couple of years.

Phase EBITDA was $47 million or 33% of income in comparison with $43 million or 31% of income within the prior yr interval as our margins proceed to broaden. The growing margins are from the corporate’s potential to take care of pricing at the same time as sure prices on this section have come down over the prior yr. Our Specialised Reliability Options section achieved one other spectacular quarter of natural income progress of $2 million or 6% because of the continued advantages from pricing initiatives, stable end-market demand, together with vitality and mining, and enhancements in our operational execution. Phase EBITDA and EBITDA margin have been $8 million and 22%, respectively, within the fiscal 2024 first quarter in comparison with $7 million and 19% within the prior yr interval. As Joe talked about, with the continued addition of kit in our Rockwall, Texas facility to help the Selwood extra joint ventures, we’re able to proceed to post-compelling progress on this section as we progress by means of the remainder of our present fiscal yr and into the subsequent fiscal yr.

Our Engineered Constructing Options section income declined barely to $28 million, a 3% lower in comparison with $29 million within the prior yr interval. Bidding and reserving developments stay robust. Actually, our quarter finish backlog elevated by roughly 6% over the fiscal 2023 backlog shut. On the finish of the fiscal first quarter, our book-to-bill ratio for the trailing 8 quarters was virtually 1.2 to 1. We ended June with the sixth consecutive quarter of document backlog on this section.

Transitioning to the energy of our stability sheet and money stream. We ended our fiscal 2024 first quarter with $15 million of money and reported document money stream from operations of $50 million in comparison with $17 million in the identical quarter final yr. Our free money stream, outlined as money stream from operations minus capital expenditures, was $45.3 million within the fiscal first quarter as in comparison with $14.8 million in the identical interval a yr in the past. That resulted in free money stream per share of $2.91 within the fiscal first quarter as in comparison with $0.95 in the identical interval a yr in the past. This spectacular stage of free money stream fuels our risk-adjusted returns, capital allocation technique, which, in flip, enhances shareholder worth. As a part of our broad capital allocation technique, throughout the quarter, we paid down $43 million of our excellent debt.

We ended the fiscal first quarter with $210 million excellent on our $500 million revolver. Our financial institution covenant leverage ratio as of the present quarter finish was roughly 1.1x, an enchancment from 1.3x on the finish of fiscal 2023 resulting from our robust EBITDA progress. This leverage ratio now locations us within the lowest tier of our revolving pricing grid, decreasing our rate of interest unfold, which creates curiosity expense financial savings. As a reminder, in February of 2023, we entered into an rate of interest hedge for the primary $100 million of borrowings below our revolver. In the course of the fiscal first quarter, this saved us $300,000 in curiosity expense.

Our efficient tax fee for the fiscal first quarter was 25.2% on a GAAP foundation. We nonetheless anticipate a tax fee of roughly 25% for fiscal 2024. As we glance out to the remainder of fiscal 2024, we nonetheless anticipate income progress for the complete yr, which when coupled with significant working leverage, we anticipate will end in robust year-over-year EBITDA and EPS progress in addition to robust money stream era. We anticipate to proceed to profit from stability in our uncooked materials and freight prices in addition to operational efficiencies.

With that, I’ll now flip the decision again to Joe for closing remarks.

Joseph Armes

Thanks, James. Summarize, throughout the first fiscal quarter of 2024, we delivered document outcomes, highlighted by expanded margins and strong money stream. Whereas there are headwinds in sure key finish markets, we nonetheless anticipate to outperform the classes we serve and to ship consolidated income and earnings progress in fiscal 2024. We’re centered on effectivity positive factors and price reductions, and we’re dedicated to offering our prospects with high-quality merchandise and customer support that they anticipate from CSWI. And we are going to depend on the dedication of our workforce members to perform that aim. We’ve got expanded margins. We’ve pushed money stream conversion. We’re assured in our near- and long-term alternatives for disciplined capital allocation, which is enabled by the energy of our stability sheet. We stay dedicated to sustainable progress and shareholder worth. By doing this up to now, we’ve persistently delivered excellent monetary outcomes. We’ll make the most of that very same strategy for the rest of this fiscal yr and past. At CSWI, we should and we are going to succeed. There’s no different possibility. However we additionally say at CSWI how we succeed issues.

And all the pieces we do is achieved with a give attention to environmental stewardship, the well being and security of our workforce members, which helps the expansion we’ve seen since inception. Of observe, we’re trending very nicely this yr when it comes to our security document. And I’ve a few examples that I want to share. In the course of the month of July, our TRUaire manufacturing unit in Vietnam celebrated a brand new milestone of 12 months with no misplaced time accidents. And that interprets to over 3.6 billion hours labored based mostly on the variety of workforce members we’ve at that facility. And at our Balco facility in Wichita, Kansas, we’re presently at over 4 years with no misplaced time accidents. We’re extraordinarily pleased with each of these groups for reaching these vital and admirable milestones, which aren’t solely retaining our workforce members secure and wholesome, but in addition contributing to our backside line outcomes. Reaching continued distinctive outcomes over time demonstrates our dedication to be good stewards of your capital and to our aim of driving sustainable long-term shareholder worth.

As all the time, I wish to shut by thanking all of my colleagues right here at CSWI, who collectively personal roughly 5% of CSWI by means of our worker inventory possession plan in addition to all of you, our shareholders, in your continued curiosity in and our help of our firm.

With that, Andre, we’re now able to take questions.

Query-and-Reply Session

Operator

[Operator Instructions] The primary query comes from the road of Jon Tanwanteng with CJS Securities. Please go forward.

Lee Jagoda

Hello, it’s truly Lee Jagoda on for John this morning. I suppose simply beginning with the volumes within the quarter, how a lot of the decrease volumes are associated to stock administration on the distribution community versus sell-through at retail? And the way ought to we take into consideration these quantity expectations over the subsequent couple of quarters?

James Perry

Good morning, Lee, it’s James. Thanks for being a – thanks in your query. We don’t have the complete sense of stock administration versus retail gross sales. A few information factors although, and with out giving different folks’s information an excessive amount of, the OEMs have talked about issues being down double digits within the final quarter. We’re clearly outperforming that. So we’re outperforming the class given the place we give attention to the alternative, the upkeep and restore work, these form of issues. We’ve not gotten an incredible sense of destocking. I do know a few the oldsters within the trade stated that the destocking appears to be decelerating. So there could have been a little bit little bit of that. we work by means of our stock appropriately. Clearly, with extra confidence within the provide chain now, you be ok with that.

You noticed us release a little bit little bit of stock. However we might say, total, that we’re outperforming the class regardless of a few of these headwinds. Very last thing I’ll point out and that you’ve extra questions is it was a late begin to the summer time. So there could have been a little bit little bit of the stock administration, so to talk. Once more, nobody referred to as that up an excessive amount of. However the summer time actually obtained going form of late June and July. So usually form of Might, June, you begin seeing issues decide up in a reasonably great way. In the event you take a look at the cooling days on the market and the pulling diploma days which can be tracked every week, you have been down 20%, 30% on a year-to-date foundation for some time. Now your you’re down about 16% the final week that I noticed. So July has made up plenty of floor. We noticed early indicators in July that the warmth was definitely taking impact with our potential to promote product and the demand our prospects had definitely picked up. However total, I’d say there was a little bit little bit of softness on the retail aspect, given the late summer time in a number of the areas, possibly a little bit little bit of destocking. However total, we be ok with our potential to proceed to outperform these metrics.

Lee Jagoda

Nice. After which I suppose you talked a little bit bit about on the margin price getting higher, whether or not it’s freight or different uncooked supplies. How do you see that as – when it comes to like, are you continue to in a position to elevate costs going ahead or are you getting any pushback? How does that every one shake out?

James Perry

Sure. Thanks, Lee. From a freight perspective, sure, we’ve definitely seen ocean freight settle in form of a brand new low. It bounces round a little bit bit form of sub 2,000 once you take a look at issues from China to Lengthy Seashore in several elements at totally different costs. However it appears to have settled into form of a brand new regular for now. Once more, week-to-week, it bounces round. Home freight, which we haven’t talked about a complete lot up to now as a result of ocean freight was such a giant deal for a few years with the pandemic. Home freight prices have come down a little bit bit, too, with gasoline prices decrease. The worth of oil, clearly, was decrease during the last couple of quarters than it was a yr in the past. Final yr, you have been $110, $120 per naked oil. This final quarter, you have been wanting extra at 70% to 80%, and that’s decrease diesel and fuel costs as nicely. In order that’s been a little bit of a tailwind for us when it comes to price. We had our final spherical of regular worth will increase within the spring as we all the time do. I believe our potential to carry on to that’s the place our focus is. I believe on the present time, we are going to proceed to look at price. And if we see issues transfer up, then we might take applicable worth motion. However proper now, I believe the pricing setting throughout our companies is fairly regular. We nonetheless really feel assured within the potential to maneuver issues if we have to. However most significantly, what we’ve stated for a few years, holding on to the pricing will increase we obtained, whereas some prices have come down, has been vital. There’s nonetheless some price pressures, issues like labor. Labor continues to be powerful, and so that you see some strain there. So we’re being cautious and watching that. However once more, operational leverage and margin enlargement as we’ve raised the highest line, some by means of pricing, some by means of acquisitions, some by means of unit progress in a number of the key markets, whereas pricing come down has led to essentially loss margins.

Lee Jagoda

Received it. After which I suppose yet another high-level query, and I’ll hop again within the queue. It looks like each different day, we see headlines within the information in regards to the hottest month ever hottest yr on document. And clearly, there’s some that argue it’s a cyclical situation. There’s others to argue it’s a secular situation. How a lot of – how a lot of these form of issues, I suppose, one, have impacted demand positively during the last a number of years? And I suppose, how do you concentrate on that, whether or not it’s cyclical, secular, etcetera, over the subsequent a number of years as a driver of demand?

Joseph Armes

Let me begin, Lee after which James can add some element. However I imply, definitely, we’ve seen temperatures rising and that’s a optimistic development for us from a secular standpoint. Season by season will fluctuate. As James stated, we had a late begin to the summer time season this yr, however it’s hotter now than it’s ever been. And so these issues form of come and go, and it’s – we’re not proof against that. However on the similar time, the character of our merchandise and the issues that our merchandise do, the worth they add for our prospects makes it extra resilient than simply following regardless of the cycle is annually. So that provides us confidence. Our merchandise are enhancing the efficiency of air con programs. We’re making it simpler for the technicians to do their job. We’re including worth to each the technician and to the home-owner, and we predict that’s an incredible long-term technique.

James Perry

Sure. All I might add, Lee, once you take a look at, as Joe stated, the long-term developments, we are able to’t predict issues, however I believe it’s clear that total, the temperatures are rising. One factor I’ll level out particularly that’s been a tailwind for us that we’ve highlighted earlier than is our place in that Duct mini cut up markets. That’s a product class the place you see in our investor presentation, we’ve plenty of merchandise surrounding and mini cut up set up. And the place that’s actually been vital is in the event you look within the West, the Northwest, the Northeast the place they’ve traditionally not had air con in plenty of locations as temperatures have risen in the previous couple of years and expectations is they might typically proceed to reporting to the scientists. These areas one air situation, they usually’re in plenty of locations the place Duct work will not be in these buildings. It’s not essentially environment friendly to place in Duct work in sure locations. So set up and mini slips, which continues to be a double-digit optimistic year-over-year kind of unit progress over the previous couple of years is absolutely one thing we’ve leaned into, and we’ve plenty of merchandise surrounding that. In order that’s one factor that, as I discussed earlier, has helped us outperform the general simply OEM ducted unitary class.

Lee Jagoda

That’s very useful. Thanks very a lot.

Joseph Armes

Thanks, Lee.

Operator

The following query comes from the road of Julio Romero with Sidoti & Firm. Please go forward.

Alex Hantman

Hello, good morning, Joe, James and Alexa. That is truly Alex Hantman on for Julio. Thanks for taking questions.

Joseph Armes

Thanks, Alex.

Alex Hantman

Sure. I wished to begin with the Contractor Options section. I do know the implications of stronger demand for brand new development houses on the section is repaired alternative pushed. However with choose strains comparable to grills, registered diffusers, would these fare higher on this setting?

Joseph Armes

They do. They’re a little bit on a little bit totally different cycle than a few of our different merchandise. So new development is definitely can drive the GRD enterprise. Additionally refurbish and remodels, which we’re seeing looks like an uptick there as nicely with of us investing of their houses as an alternative of promoting their houses. We’ve learn fairly a bit about of us who’ve elected to remain of their current houses as a result of they’ve obtained low-cost mortgages and as an alternative of promoting and transferring up. They’re simply spending cash on their present home. And that’s one other good alternative for the GRD to be offered into that chance. So sure, there’s a little bit little bit of distinction within the cycle. After all, it provides to the diversification of our merchandise and the broader our product portfolio, the extra alternatives for a house owner to wish and use our merchandise. So we predict that’s total wholesome for the long-term.

Alex Hantman

Thanks. And on the Engineering Constructing Options section aspect, are you able to speak about demand developments inside the section? What’s driving the energy within the backlog or the brand new merchandise, give attention to go-to-market. Principally, any colour you might add can be useful.

Joseph Armes

Sorry, that’s for Engineered Constructing Options, you stated?

Alex Hantman

Sure.

Joseph Armes

Sure, completely. It’s a few issues. One is that workforce has completed a very nice job of introducing some new merchandise, some product enhancements, enhancements that give us a aggressive benefit within the market. Additionally, they’ve been hyper-focused on extra resilient elements of their market. As you’ll be able to think about, all people reads quite a bit about workplace development being possibly pushed downward. And they also have, over the previous couple of years, centered on institutional product kind. And we nonetheless do plenty of high-rise residential. And so the residential market in that exact submarket has been very robust. Institutional may be very robust, colleges, hospitals, airports, these forms of issues. And so I believe it’s concentrating on the fitting markets. I believe it’s offering new and enhanced merchandise to the market. And I believe we’ve simply improved our go-to-market technique total in our professionalism within the area and our potential to form of clearly talk the worth of our merchandise to the market.

Alex Hantman

Nice context. Thanks. And final query right here, nonetheless on EBS. Are you able to speak in regards to the combine within the quarter of higher-margin merchandise like railings or smoke curtains in comparison with final quarter.

Joseph Armes

Sure. I might say no materials adjustments there. I might say that there are some variations in margins amongst a number of the merchandise. And in order that’s why we’ve form of actually enterprise-wide actually attempt to focus our industrial efforts on the upper margin merchandise. We are able to actually improve earnings by means of combine. And that’s only a matter of emphasis, a matter of focus, a matter of execution on the industrial aspect, on the gross sales aspect to give attention to these higher-margin merchandise inside every of the segments, and we’re seeing some ends in that regard. And our inside reporting, of us are starting to report on form of byproduct line. And once you acknowledge and understand a number of the margin differentials it actually does focus you on the fitting merchandise to be out promoting and specializing in and actually increasing your time, effort and vitality on.

Alex Hantman

Thanks, very useful.

Operator

Women and gents, there aren’t any extra questions right now. I want to flip the convention again over to CSWI for any closing remarks.

Joseph Armes

Nice, Andre. Thanks a lot. We simply wish to say thanks to everybody for becoming a member of us in the present day and respect your curiosity in CSWI.

Operator

The convention is now concluded. Thanks for attending in the present day’s presentation. Chances are you’ll now disconnect your strains. Goodbye.