Q2 2022 CSW Industrials Inc Earnings Call

November 3, 2021

Yeah.

Greetings and welcome to CSW Industrials fiscal second quarter 2022 earnings call. At this time, all participants are in a listen only mode.

And the answer session will follow this fall.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Adrianne Griffin, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you Maria good morning, everyone and welcome to the CSW Industrials' fiscal 2022 second quarter earnings call. Joining me today are 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 presentation and Form 10-Q prior to the market's opening today, which are available on the investor portion of our website at Www Dot CSW industrials Dot com. This call is being webcast and information on how to access. 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 ROE.

Port on Form 10-K, and other filings with the SEC, we do not undertake any duty to update any forward looking statements I will now turn the call over to Joe Armes.

Thank you Adrian and good morning, and thank you for joining our fiscal second quarter conference call.

C S. Wi posted impressive second quarter results building on momentum from the ongoing true air integration, along with organic growth aided by disciplined price action and demand in end markets recovering from last year's general economic downturn.

In collaboration with a resilient team members around the globe. Our leadership team has managed the macro headwinds and challenging dynamics over the past 20 months, including accelerating inflation supply chain challenges and operational dislocations with extraordinary diligence professionalism.

Resolve and customer focus that are consistent with the high standards, we set for ourselves.

To provide context for our fiscal second quarter performance.

Highlight a few key metrics.

As compared to the same prior year period, which was then our strongest quarter on record, we achieved 48% revenue growth of which 15% was organic growth and 33% was inorganic growth from our true air acquisition.

EBITDA growth was 33% and quarterly earnings per share attributable to CSW are rose to $1 14, compared to $1 10 in the prior year period.

For additional perspective, if we compare this quarter's results to this quarter two years ago, which was our fiscal 2022.

Topline growth was nearly 54%, including organic growth of 19% adjusted EBITDA growth was a compelling 50% five zero and adjusted earnings per share increased 24%.

We are pleased to have achieved these results as they illustrate our success in providing high quality innovative products with excellent customer service, while limiting disruptions to our customers and partners and minimizing product outages.

In short our customers rely on us to be dependable partners from their distribution network and we have not disappointed them.

Next I would like to provide an update on our true air manufacturing operations in Vietnam.

As reported on our August earnings call in response to strict local COVID-19 protocols, we were required to reduce the number of employees on site.

Through extraordinary accomplishment by approximately 250 team members, who lived and worked on site. We continued manufacturing key products and kept all of our team members safe.

Vietnam Covid restrictions have relaxed in recent weeks and we now have approximately 1150 team members working at our facility and are in the process of returning to full production.

For perspective on average during August and September we shipped nine containers of product per week, which compares with 22 containers in the week ended October 29 2021.

We anticipate reestablishing full operations were approximately 36 containers per week by the end of November.

Strategic production decisions, we made in conjunction with our true air inventory position in the United States prove sufficient to meet customer demand and as a result, no loss of truly our revenue is expected for this fiscal year.

During the quarter, we integrated two of the five true air distribution centers.

And now ship, both rector seal and true air products from our Jacksonville, Florida, and Santa Fe Springs, California warehouses.

This co location allows us to fulfill a portion of rector seals customer orders from the southeast and the west coast significantly reducing the time between order placement and delivery.

Turning to our stated capital allocation priorities since closing the acquisition of <unk> in December 2020, we repaid $41 million of credit facility borrowings funded that acquisition.

During the first six months of this fiscal year, we paid $4 7 million in dividends and we have invested capital to implement our enterprise resource planning systems, and automation safety and efficiency initiatives.

Through our rigorous risk adjusted returns analysis, we will continue evaluating inorganic investments and we.

We have a very healthy pipeline of opportunities.

The key differentiator for our company is our distribution network and we will continue seeking to add products that exploit our distribution channels and the most profitable end markets we serve.

Our organization stands ready to capitalize on the next compelling opportunity.

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 with thoughts on the remainder of the fiscal year.

Thank you Joe and good morning, everyone.

Our consolidated revenue during the fiscal second quarter of 2022 increased 48, 3% to $155 $6 million with higher revenue across all three segments compared to the prior year period.

Consolidated gross profit in the fiscal second quarter was $63 1 million.

Representing 29, 4% growth.

With the incremental profit, resulting predominantly from the true our acquisition and increased organic sales volumes and pricing initiatives.

Gross profit margin was 45% compared to 46, 4% in the prior year period.

This margin decline is due in part to inclusion of the true air business and the $1 $2 million of incremental cost of goods sold resulting from reduced production levels at the trigger manufacturing facility in Vietnam.

The reduction in profitability was also impacted by ongoing material and freight cost inflation that outpaced instituted price increases.

Mid market served.

And a shift to lower margin projects and the engineered building solutions segment.

Consolidated operating income increased by 16, 7% to $25 $9 million.

Waiting to a 16, 6% margin of 450 basis point decrease over operating margin in the prior year period as.

As the decline in gross profit was partially offset by an improved operating expense margin.

Consolidated EBITDA increased 33, 3% to $33 $8 million as compared to the prior year period.

Consolidated EBITDA as a percent of revenue was 21, 7% and 24, 2% in the current and prior year periods respectively.

As a reminder, we are very focused on profitability comparisons used utilizing EBITDA due to the amount of intangible amortization, resulting from the <unk> acquisition last year.

Reported net income attributable to <unk> in the fiscal second quarter of 2022 was $18 million or $1 14 per diluted share compared to $16 4 million or $1 10 in the prior year period.

There were no adjustments in either period and in the current period, there were 969000 or six 5% more weighted average outstanding shares primarily due to the shares issued to the sellers of truly our last December.

Transitioning to a discussion of our segments.

As compared to the prior year quarter, our contractor solutions segment accounted for 66, 4% of our consolidated revenue and delivered $40 million or <unk> 63, 1% total growth.

Comprised of organic revenue growth from pricing initiatives or $4 8 million or seven 6% and inorganic growth from the <unk> acquisition.

Segment, EBITDA was $32 4 million.

Our 31, 3% of revenue compared to $23 1 million or <unk> 36, 4% of revenue in the prior year period.

Providing additional context for these results.

In April of calendar year, 2020, which marked the beginning of our fiscal 2021 year traditional HVAC car demand shifted out of our fiscal first quarter due to early Covid restrictions and then rebounded quickly as initial restrictions were relaxed in the early summer of 2020.

This demand shift resulted in our fiscal 2021 second quarter significantly outperforming our fiscal 2021 first quarter.

Due to this dynamic we believe fiscal 2022 first half to fiscal 2021 first half is a compelling comparison.

With this year to date comparison, our contractor solutions segment delivered $103 million or 88, 6% total revenue growth comprised of 27, 9% organic growth due to increased sales volumes and implemented pricing initiatives and inorganic growth from the true our app.

Acquisition of $68 8 million.

This organic growth rate exceeds same period category growth for our largest end market served and is in part driven by four pricing actions the latest of which occurred earlier this week and we will take effect in January.

During the fiscal first half of 2022 strong segment revenue growth was partially offset by significantly accelerated inflation in material and freight costs $1 4 million of costs associated with the reduced production at our truly our Vietnam facility as.

As well as the increased head count depreciation and the optimization of expenses related to our ERP system.

Segment adjusted EBITDA in the fiscal first half was $71 8 million or 33, 6% of revenue compared to $40 4 million or.

435, 7% of revenue in the prior year period as the increased expenses discussed above and the inclusion of Trulia outpaced revenue growth.

Continuing to our engineered building solutions segment.

The air Pocket, we've mentioned on previous calls has materialized and while current quarter revenue is roughly flat to the prior year period. This has been achieved by adding lower margin shorter cycle projects to the mix, which is negatively impacting current period profitability metrics.

Segment, EBITDA was $3 million.

Our 12, 6% of fiscal 2022 second quarter revenue.

When evaluating fiscal 2022 first half performance revenue improved $3 6 million or seven 9% as compared to the prior year period and this segment has accounted for approximately 16% of consolidated fiscal 2022 first half revenue.

During the most recent period of a decline in construction starts our team actively salt backlog diversification that allowed this segment to stabilize top line revenue.

Grow our market share in institutional education and commercial projects.

<unk>, our exposure to multifamily projects and expand geographically.

Fiscal 2022 first half bookings increased 17% over fiscal 2021 second half.

With fiscal 2022 second quarter bookings up 18% over the fiscal 2022 first quarter, demonstrating an improving trend.

As of the end of the fiscal 2022 second quarter.

Our book to Bill ratio for the trailing eight quarters was just below one to one.

Our specialized reliability solutions segment posted another solid quarter of organic revenue growth of $10 4 million or 58% due to incremental sales volumes as the end markets. We serve continue recovering from the Covid driven lows of last fiscal year.

And price initiatives, the fourth of which we successfully implemented last week.

Considering fiscal first half growth. This segment reported increased sales of $16 9 million or 45, 6% all of which was organic.

Price actions have addressed some of the inflationary pressures and as such segment EBITDA margin was eight 9% in the second quarter of fiscal 2022 for 160 basis point improvement compared to fiscal 2020 to first quarter.

Transitioning to the strength of our balance sheet.

We ended fiscal second quarter was $17 3 million of cash and reported cash flow from operations of $42 $8 million.

Eight decrease over the prior year, primarily due to increased investment in working capital to support growing sales.

This resulted in higher accounts receivable and higher inventory levels.

During the quarter, we reduced the amount outstanding under our $400 million revolving credit facility by $17 million.

<unk> and approximately $200 million of availability as of the end of the fiscal second quarter.

As of quarter end, our leverage ratio was approximately one five times well within our stated range of one to three times.

These metrics leaves us extremely well positioned for the continued disciplined allocation of capital as Joe discussed.

The company's effective tax rate for the fiscal second quarter was 25, 2% on a GAAP basis and the company continues to expect a 25% tax rate for fiscal year 2022.

Yeah.

In light of current economic volatility due to persistent rapidly rising material and freight costs combined with the lag and the effectiveness of some of our pricing initiatives.

<unk> is providing consolidated guidance for the fiscal 2022 third and fourth quarters as follows.

For the third quarter, we expect an EBITDA range of 17 million to $18 $5 million in.

And an EPS range of 40 to 45.

For the fourth quarter, we expect an EBITDA range of $33 million to $35 million.

And an EPS range of $1 10 to $1 20.

We're providing this guidance due to the unusual circumstances that we have discussed on this call today.

And to address the current external estimates for the remainder of our fiscal year, we do not necessarily expect to provide guidance in future quarters.

With that I'll now turn the call back to Joe for closing remarks.

Thank you James.

The first half of fiscal 2020 was marked by 62% topline growth driven across all reporting segments and all end markets served.

Nearly 27% of this growth was organic achieved through a combination of price and volume.

Adjusted EPS grew by 36% to $2 60.

So you can understand why our team is proud of this performance.

We are seeing real time improvements in our supply chain, our end markets have strong underlying fundamentals.

Specific to our contractor solutions segment as people continue to work from home. They are investing in their comfort by home renovations at a rate higher than before the pandemic. These are financed by rising home equity and low interest rates.

We remain optimistic about fiscal 2023 is our EES segment bidding activity remains robust.

Our recent bookings are strong and new construction activity is regaining pre pandemic momentum.

At the end of September the architectural billing index was well into an expansion neary territory.

At 56, 6%, which is higher than the August reading of 55, 6%.

And this is similar to the double digit improvement indicated in the bidding and construction starts data provided by Dodge in the second quarter. These.

These are strong indicators for future growth in the market served by our EES segment.

Okay.

Our new Srs segment leadership has introduced a multifaceted operational effort focused on reduced complexity and increased production accuracy.

<unk> product innovation, we recently introduced four new products into the market, while simultaneously evaluating adjacent markets for organic sales growth and market expansion.

Our current month production run rate results and much improved plant utilization and.

And the joint venture with shell has begun investing capital to expand production capacity at our Whitmore facility. So.

So we are well positioned to serve our srs customers through the upcoming cycle.

At <unk>, we recognize that our success begins with our team members, who have who have demonstrated strength.

William C and an outstanding leadership response to Covid and its many ramifications.

We take seriously our responsibility to care for employees and their families.

And as a reminder, we did not have any pandemic related layoffs last fiscal year.

Our objective is to compensate our people fairly to treat them extravagantly to focus on recognition of excellence excellent performance and facilitate their professional development.

We know firsthand that this is a great business and community benefits.

We believe this is translated directly into employee loyalty and higher engagement.

Courted by a lower than industry average turnover.

We recently completed an employee engagement survey with our team members in North America, Australia, and the United Kingdom.

This was the third such survey in our six year history and this year, we achieved a 93% response rate, which is our highest ever.

We are currently analyzing the results, but early indications are quite positive and we will develop action plans to address key findings.

While labor and wage pressures dominate business media, we have avoided the workforce shortages that have been widely experienced throughout the economy.

I would like to extend my sincere thanks to our true air team members in Vietnam, and welcome them back to work our commitment to our employees in Vietnam, including fair wages, and a safe and dignified work environment is reflected in the fact that over 80% of our team members chose to return to work in our facility when we can.

<unk>.

We will certainly benefit from the continuity of knowledge this experienced workforce provides.

As always I would like to close by thanking all my colleagues here at CSW, I, who collectively own 5% of the company through our employee stock ownership plan as well as all of our shareholders for their continued interest in and support of our company.

We believe that aligning the interest of our employees and shareholders through our employee stock ownership plan is a powerful driver of our collective success, which differentiates our company from those with which we compete.

And with that Maria we're now ready to take questions.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

A moment, please while we poll for questions.

Our first question comes from John <unk> with <unk>.

<unk> Securities. Please proceed with your question.

Hey, good morning, everybody. Thanks for taking my question.

James I was wondering if you could help me better bridge the sequential decline in the profitability I think you called out the specific disruption, but I was wondering if COVID-19.

Now, let me quantify the rest between the increased investments youre, making the inflation.

And then whatever else may have been in the bucket.

Yes, good morning, John as James Thanks for Thanks for being almost this this morning. Appreciate your work with US Yes, we mentioned specifically the $1 $2 million of cost of goods sold because of the under absorption in some extra wages that we pay the the employees that were working in that facility at the cost.

The goods sold line so the drop in gross profit of about 5%, that's maybe 1% of it or so the rest is really that inflationary pressure, we see from materials and freight costs. We did mentioned there is a little bit of a creative head count here and there are some of those things most of those type things that we mentioned the ERP expenses and other will be below the gross profit line, so I'll get to that.

In a minute, but the gross profit line beyond the one call out we had it is really the fact that we've been raising prices as quickly as we can and as quickly as market conditions allow we mentioned for example, we just this week in our contract our solutions business announced a price increase that's effective at the beginning of January so that gives us good.

Line of sight into our fiscal fourth quarter, but we've had now for price increases this calendar year in that segment and it takes a while to get them in just given industry standards and competition and those kind of things. It's about a 60 day lag usually is kind of what we're looking at for the most part and for example, the last price increase was right at the beginning of August right about the time, we had the earnings call.

In the last couple of months since we had that price increase freight costs took another step up we started to see that stabilize some material prices have taken a step up and of course, you had the lag of when those costs work their way through inventory and then finally hit the cost of goods sold did you sell that product as well. So it's really that inflationary pressure you saw we gave guidance for <unk>.

The third quarter, and now fourth quarter as well, we're going to see that similar type hit here in the third quarter. Thus the earnings per share and EBITDA guidance that we gave you which you can see the sharp recovery in the fourth quarter given that we now have kind of a pricing behind us and you're going to see some of that has already taken effect the biggest piece and contractor solutions.

We will take place in the fourth quarter. When we also have a return from the low point of seasonality in Q3. So we really think we're going to have a tailwind starting in fourth quarter. Then as we look into fiscal 2023 below the gross profit line you saw that we've even picked up a little bit yes, we had some expenses with ERP and head count extra depreciation with trulia or those kind of things but.

We actually picked up a little bit from the gross profit line to the operating profit line. Then of course, you look year over year, you've got a big difference as you will note now that we include true are lot more amortization depreciation which is why EBITDA is the metric we really look at does that help.

Yes, it does that sounds really detailed and helpful. Thank you and I do appreciate the guidance that you provided which I think you've ever done before so that's okay.

That's good color I guess, the obvious follow up to all of that is.

As you go through Q3, and Q4 and I understand the drivers that you're seeing when you get to Q4 and your profitability jumped back up.

Your margins getting back to historical levels or is it more of a little bit more catch up from maybe volume that you might've missed earlier this year. It just tell me.

Dan what gets you to that level.

And if there is still more catch up to do after that as you head to the.

Next fiscal year.

Sure. Yes. This is James again, I'll continue and appreciate you you mentioned in the guidance as we mentioned Thats temporary for now we will see but we thought it would really help given how unusual conditions are today. So I. Appreciate you taking note of that as we look at fourth quarter Youre looking at a quarter that with the guidance. We gave you it looks a lot like the second quarter from that perspective from an EBITDA and EPS perspective.

I think margins are still recovering.

Back to somewhat normal levels I think we're going to continue to have a guide path to that but what we've really focused on is recovering our profit dollars with our price increases we would like to be able to recover the profit margin I think in time, we have that opportunity, but for now recovering those profit dollars and seeing that EBITDA and EPS returned to our.

More like second quarter type levels, I think you're seeing us achieve that first goal of profit dollars the margins little tougher just because of the math as you raise prices that match costs. Your numerator and denominator may get you to the earnings number but the profit margin still going to be a little bit pressured I think as we see a return to somewhat normalized cost in time.

And as we see pricing continue to be rather sticky overtime I think we have the opportunity for margins to continue to recover to historical levels. We're just now starting the process of really getting deep into what our fiscal 2023 that starts April 1st look like so it's a little early for us to talk too much about that other than to say given the order the order visibility.

We have given the market conditions, we have we think we've got a nice tailwind moving into the fourth quarter and then into fiscal 'twenty three.

Okay, Great and then last one from me just have we hit.

Good color I guess on the orders on the architectural side I was wondering.

That's of course, what you see in the P&L in the next one or two quarters have we hit the trough there yet.

I think as we mentioned in the back half youre going to see some pressure the orders that we've been taking here. This fiscal year as you all know we've talked about an air pocket for a while and it didnt appear as much on the revenue line as we talked about but more as you work your way down the income statement and you look in the 10-Q at the operating income line Youre going to see that pressure continue for a little bit.

That is one reason that you see the Q3 profitability down a bit that segment did a really nice job with profitability in the third and fourth quarter last year, you see some pressure this year because the team has done a good job of finding orders, but there are those shorter cycle lower margin projects. The orders that we're taking now as you all know generally.

Those project based orders for the bigger projects are longer term in nature, we see those really helping us return to the higher levels of margin and profitability as we begin fiscal year 'twenty three.

Yes.

Okay, great. Thank you I'll jump back in queue.

Thank you John.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

One moment, please as we poll for questions.

Okay.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to call turn the call back over to Joe Armes for closing remarks.

Great. Thank you very much we really appreciate everyone. Joining us this morning, and I appreciate your interest and support of our company and we look forward to speaking to you again next quarter. So thank you.

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

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Greetings and welcome to CSW Industrials fiscal second quarter 2022 earnings call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal part.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Adrianne Griffin Vice President of Investor Relations.

Please go ahead.

Our report on Form 10-K, and other filings with the SEC, we do not undertake any duty to update any forward looking statements I will now turn the call over to Joe Armes.

Thank you Adrian and good morning, and thank you for joining our fiscal second quarter conference call.

C S. Wi posted impressive second quarter results building on momentum from the ongoing true air integration.

Along with organic growth aided by disciplined price action and demand in end markets recovering from last year's general economic downturn.

In collaboration with a resilient team members around the globe. Our leadership team has managed the macro headwinds and challenging dynamics for the past 20 months, including accelerating inflation.

Why chain challenges and operational dislocations with extraordinary diligence professionalism resolve and customer focus that are consistent with the high standards, we set for ourselves.

To provide context for our fiscal second quarter performance I'll highlight a few key metrics.

As compared to the same prior year period, which was that our strongest quarter on record, we achieved 48% revenue growth of which 15% was organic growth and 33% was inorganic growth from our true air acquisition.

EBITDA growth was 33% and quarterly earnings per share attributable to C. S. Wi rose to $1 14, compared to $1 10 in the prior year period.

For additional perspective, if we compare this quarter's results to this quarter two years ago, which was our fiscal 2020.

Topline growth was nearly 54%, including organic growth of 19% adjusted EBITDA growth was a compelling 50% five zero and adjusted earnings per share increased 24%.

In short our customers rely on us to be dependable partners for their distribution network and we have not disappointed them.

Next I would like to provide an update on our true air manufacturing operations in Vietnam.

As reported on our August earnings call in response to strict local COVID-19 protocols, we were required to reduce the number of employees on site.

Through extraordinary accomplishment by approximately 250 team members, who lived and worked on site. We continued manufacturing key products and kept all of our team members safe.

Vietnam Covid restrictions have relaxed in recent weeks and we now have approximately 1150 team members working at our facility and are in the process of returning to full production.

For perspective on average during August and September we shipped nine containers of product per week, which compares with 22 containers in the week ended October 29 2021.

We anticipate reestablishing full operations were approximately 36 containers per week by the end of November.

During the quarter, we integrated two of the five true air distribution centers.

And now ship, both Rectocele and true air products from our Jacksonville, Florida, and Santa Fe Springs, California warehouses.

This co location allows us to fulfill a portion of rector seals customer orders from the southeast and the west coast significantly reducing the time between order placement and delivery.

Turning to our stated capital allocation priorities since closing the acquisition of true error in December 2020, we repaid $41 million of credit facility borrowings funded that acquisition.

During the first six months of this fiscal year, we paid $4 7 million in dividends, we have invested capital to implement our enterprise resource planning systems, and automation safety and efficiency initiatives.

Through our rigorous risk adjusted returns analysis, we will continue evaluating inorganic investments and we have a very healthy pipeline of opportunities.

The key differentiator for our company is our distribution network and we will continue seeking to add products that exploit our distribution channels and the most profitable end markets we serve.

Our organization stands ready to capitalize on the next compelling opportunity.

At this time I'll turn the call over to James for a closer look at our results and then I'll conclude our prepared remarks with thoughts on the remainder of the fiscal year.

Thank you Joe and good morning, everyone.

Our consolidated revenue during the fiscal second quarter of 2022 increased 48, 3% to $155 $6 million with higher revenue across all three segments compared to the prior year period.

Consolidated gross profit in the fiscal second quarter was $63 1 million.

Representing 29, 4% growth.

With the incremental profit, resulting predominantly from the true to our acquisition and increased organic sales volumes and pricing initiatives.

Gross profit margin was 45% compared to 46, 4% in the prior year period.

The reduction in profitability was also impacted by ongoing material and freight cost inflation that outpaced instituted price increases and some mid market served.

And a shift to lower margin projects and the engineered building solutions segment.

Consolidated operating income increased by 16, 7% to $25 9 million equating to a 16, 6% margin.

450 basis point decrease over operating margin in the prior year period as.

As the decline in gross profit was partially offset by an improved operating expense margin.

Consolidated EBITDA increased 33, 3% to $33 $8 million as compared to the prior year period.

Consolidated EBITDA as a percent of revenue was 21, 7% and 24, 2% in the current and prior year periods respectively.

As a reminder, we are very focused on profitability comparisons used utilizing EBITDA due to the amount of intangible amortization, resulting from the true our acquisition last year.

Reported net income attributable to CSW why in the fiscal second quarter of 2022 was $18 million or $1 14 per diluted share compared to $16 $4 million for $1 10 in the prior year period.

Transitioning to a discussion of our segments.

As compared to the prior year quarter, our contractor solutions segment accounted for 66, 4% of our consolidated revenue and delivered $40 million or 63, 1% total growth.

Comprised of organic revenue growth from pricing initiatives or $4 8 million or seven 6% and inorganic growth from the <unk> acquisition.

Segment, EBITDA was $32 4 million.

Our 31, 3% of revenue compared to $23 1 million or 36, 4% of revenue in the prior year period.

Providing additional context for these results.

This demand shift resulted in our fiscal 2021 second quarter significantly outperforming our fiscal 2021 first quarter.

Due to this dynamic we believe fiscal 2022 first half to fiscal 2021 first half is a compelling comparison.

<unk> of $68 8 million.

During the fiscal first half of 2022 strong segment revenue growth was partially offset by significantly accelerated inflation in material and freight costs.

One $4 million of costs associated with the reduced production at our true our Vietnam facility as.

As well as the increased head count depreciation and the optimization of expenses related to our ERP system.

Segment adjusted EBITDA in the fiscal first half was $71 8 million or 33, 6% of revenue compared to $40 4 million or 35, 7% of revenue in the prior year period as the increased expenses discussed above and the inclusion of Trulia outpace.

Revenue growth.

Continuing to our engineered building solutions segment.

Segment, EBITDA was $3 million or 12, 6% of fiscal 2022 second quarter revenue.

During the most recent period of a decline in construction starts our team actively salt backlog diversification.

Allowed this segment to stabilize top line revenue.

Grow our market share in institutional education, and commercial projects minimize our exposure to multifamily projects and expand geographically.

Fiscal 2022 first half bookings increased 17% over fiscal 2021 second half with fiscal 2022 second quarter bookings up 18% over the fiscal 2022 first quarter, demonstrating an improving trend.

As of the end of the fiscal 2022 second quarter, our book to Bill ratio for the trailing eight quarters was just below one to one.

Fourth of which we successfully implemented last week.

Considering fiscal first half growth. This segment reported increased sales of $16 9 million or 45, 6% all of which was organic.

Price actions have addressed some of the inflationary pressures and as such segment EBITDA margin was eight 9% in the second quarter of fiscal 2020 to a 160 basis point improvement compared to fiscal 2020 to first quarter.

Transition to the strength of our balance sheet.

We ended fiscal second quarter was $17 $3 million of cash and reported cash flow from operations of $42 8 million.

A slight decrease over the prior year, primarily due to increased investment in working capital to support growing sales, which resulted in higher accounts receivable and higher inventory levels.

During the quarter, we reduced the amount outstanding under our $400 million revolving credit facility by $17 million.

Resulting in approximately $200 million of availability as of the end of the fiscal second quarter.

As of quarter end, our leverage ratio was approximately one five times well within our stated range of one to three times.

These metrics leaves us extremely well positioned for the continued disciplined allocation of capital as Joe discussed.

The companys effective tax rate for the fiscal second quarter was 25, 2% on a GAAP basis and the company continues to expect a 25% tax rate for fiscal year 2022.

In light of current economic volatility due to persistent rapidly rising material and freight costs combined with the lag and the effectiveness of some of our pricing initiatives.

<unk> is providing consolidated guidance for the fiscal 2022 third and fourth quarters as follows.

For the third quarter, we expect an EBITDA range of $17 million to $18 $5 million.

And an EPS range of 40 to 45.

For the fourth quarter, we expect an EBITDA range of $33 million to $35 million.

And an EPS range of $1 10 to $1 20.

Okay.

We are providing this guidance due to the unusual circumstances that we have discussed on this call today and to address the current external estimates for the remainder of our fiscal year, we do not necessarily expect to provide guidance in future quarters.

With that I'll now turn the call back to Joe for closing remarks.

Thank you James.

The first half of fiscal 2020 was marked by 62% topline growth driven across all reporting segments and all end markets served.

Nearly 27% of this growth was organic achieved through a combination of price and volume.

Adjusted EPS grew by 36% to $2 60.

So you can understand why our team is proud of this performance.

We are seeing real time improvements in our supply chain, our end markets have strong underlying fundamentals.

Specific to our contractor solutions segment as people continue to work from home. They are investing in their comfort by a home renovations at a rate higher than before the pandemic. These are financed by rising home equity and low interest rates.

We remain optimistic about fiscal 2023 is our EES segment bidding activity remains robust.

Our recent bookings are strong and new construction activity is regaining pre pandemic momentum.

At the end of September the architectural billing index was well into the expansion Mary territory.

At 56, 6%, which is higher than the August reading of 55, 6%.

And this is similar to the double digit improvement indicated in the bidding and construction starts data provided by Dodge in the second quarter. These.

These are strong indicators for future growth in the market served by our EES segment.

Okay.

Our new Srs segment leadership has introduced a multifaceted operational effort focused on reduced complexity and increased production accuracy.

Priority <unk> product innovation, we recently introduced four new products enter the market, while simultaneously evaluating adjacent markets for organic sales growth and market expansion.

Our current month production run rate results and much improved plant utilization and.

And the joint venture with shell has begun investing capital to expand production capacity at our Whitmore facility. So.

So we are well positioned to serve our srs customers through the upcoming cycle.

At <unk>, we recognize that our success begins with our team members, who had who had demonstrated strength.

Lilian fee and an outstanding leadership response to Covid and its many ramifications.

We take seriously our responsibility to care for our employees and their families.

And as a reminder, we did not have any pandemic related layoffs last fiscal year.

Our objective is to compensate our people fairly to treat them extravagantly to focus on recognition of excellence excellent performance and facilitate their professional development.

We know firsthand that this has a great business and community benefits.

We believe this is translated directly into employee loyalty and higher engagement supported by a lower than industry average turnover.

We recently completed an employee engagement survey with our team members in North America, Australia, and the United Kingdom.

This was the third such survey in our six year history and this year, we achieved a 93% response rate, which is our highest ever.

We are currently analyzing the results, but early indications are quite positive and we will develop action plans to address key findings.

While labor and wage pressures dominate business media, we have avoided the workforce shortages that have been widely experienced throughout the economy.

I would like to extend my sincere thanks to our true air team members in Vietnam, and welcome them back to work.

Our commitment to our employees in Vietnam, including fair wages, and a safe and dignified work environment is reflected in the fact that over 80% of our team members chose to return to work in our facility when we call.

We will certainly benefit from the continuity of knowledge this experienced workforce provides.

So with that Maria we're now ready to take questions.

Okay.

May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Yes.

Okay.

Our first question comes from John <unk> with <unk>.

CGS Securities. Please proceed with your question.

Hey, good morning, everybody. Thanks for taking my question.

James I was wondering if you could help me better bridge the sequential decline in the profitability I think you called out the specific disruption, but I was wondering if COVID-19.

Now, let me quantify the rest between the increased investments youre, making the inflation.

And then whatever else may have been in the bucket.

Yes, good morning, John It's James Thanks for thanks for being almost this this morning appreciate your work with us.

We mentioned, specifically the $1 $2 million of cost of goods sold because of the under absorption and some extra wages that we pay the employees that were working in that facility at the cost of goods sold line. So the drop in gross profit of about 5%, that's maybe 1% of it or so the rest is raw.

Really that inflationary pressure, we see from materials and freight costs. We did mentioned, yes. There is a little bit of increased head count here and there are some of those things most of those type things that we mentioned the ERP expenses and other will be below the gross profit line. So I'll get to that in a minute, but the gross profit line beyond the one call out we had it's always the fact that we've been raising prices as quickly as we can.

As quickly as kind of market conditions allow we mentioned for example, we just this week in our contract our solutions business announced a price increase that's effective at the beginning of January so that gives us good line of sight into our fiscal fourth quarter, but we've had now for price increases this calendar year in that segment and it takes a while to get demand just given.

Industry standards and competition and those kind of things. It's about a 60 day lag usually is kind of what we're looking at for the most part and for example, the last price increase was right at the beginning of August right about the time, we had the earnings call in the last couple of months since we had that price increase freight costs took another step up we started to see that stabilize some material prices.

Taking a step up and of course, you had the lag of when those costs work their way through inventory and then finally hit the cost of goods sold did you sell that product as well. So it's really that inflationary pressure you saw we gave guidance for the third quarter and now fourth quarter as well, we're going to see that similar type hit here in the third quarter and thus the earnings first.

Sure and EBITDA guidance that we gave you which you can see the sharp recovery in the fourth quarter given that we now have kind of a pricing behind us and you're going to see some of that has already taken effect. The biggest piece and contractor solutions will take place in the fourth quarter. When we also have a return from the low point of seasonality in Q3. So we really think we're going to have a tailwind starting in fourth quarter.

Then as we look into fiscal 2023 below the gross profit line you saw that we have even picked up a little bit yes, we had some expenses with ERP and head count extra depreciation with trulia or those kind of things, but we actually picked up a little bit from the gross profit line to the operating profit line. Then of course, you look year over year, you've got a big difference as you will know.

We include through are lot more amortization depreciation, which is why EBITDA is the metric we really look at does that help.

Yes, it does that sounds really detailed and helpful. Thank you and I do appreciate the guidance that you provided which I don't think you've ever done before so that's good.

That's good color I guess, the obvious follow up to all of that is.

As you go through Q3, and Q4 and I understand the drivers that you're seeing when you get into Q4 on your profitability jumped back up.

And your margins getting back to historical levels or is it more of a.

Little bit more catch up from maybe behind that you might've missed earlier this year to tell me.

Dan will get you to that level.

And if there is still more catch up to do after that if you add to that the.

Next fiscal year.

Sure. Yes. This is James again, I'll continue and appreciate you you mentioned in the guidance as we mentioned Thats temporary for now we will see but we thought it would really help given how unusual conditions are today and I. Appreciate you've taken note of that as we look at fourth quarter Youre looking at a quarter that with the guidance. We gave you it looks a lot like the second quarter from that perspective from an EBITDA and EPS perspective.

I think margins are still recovering.

More like second quarter type levels, I think you're seeing us achieve that first goal of profit dollars the margins a little tougher just because of the math as you raise prices that match costs. Your numerator denominator may get you to the earnings number but the profit margin still going to be a little bit pressured I think as we see a return to somewhat normalized cost in time.

And as we see pricing continue to be rather sticky over time I think we have the opportunity for margins to continue to recover to historical levels. We're just now starting the process of really getting deep into what our fiscal 2023. The start to April force look like so it's a little early for us to talk too much about that other than to say given the order the order visibility.

We have given the market conditions, we have we think we've got a nice tailwind moving into the fourth quarter and then into fiscal 'twenty three.

Yes.

Okay, Great and then last one from me just have we hit you gave good color I guess on the orders on the architectural side I was wondering.

Thats, what you see in the P&L in the next one or two quarters have we hit the trough there yet.

I think as we mentioned the back half youre going to see some pressure the orders that we've been taking here. This fiscal year as you all know we've talked about an air pocket for a while and it didnt appear as much on the revenue line as we talked about but more as you work your way down the income statement and you look in the 10-Q at the operating income line Youre going to see that pressure continue for a little bit.

That is one reason that you see the Q3 profitability down a bit that segment did a really nice job with profitability in the third and fourth quarter last year, you see some pressure this year because the team has done a good job of finding orders, but they are the shorter cycle of lower margin projects. The orders that we're taking now as you all know generally.

Those project based orders for the bigger projects are longer term in nature, we see those really helping us return to the higher levels of margin and profitability as we begin fiscal year 2003.

Yes.

Okay, great. Thank you I'll jump back in queue.

Thank you John.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

One moment, please as we poll for questions.

Ladies and gentlemen, we have reached the end of the question answer session and I would like to call turn the call back over to Joe Armes for closing remarks.

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

Q2 2022 CSW Industrials Inc Earnings Call

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