Q2 2023 CSW Industrials Inc Earnings Call

November 3, 2022

Good morning, and welcome to the CSW Industrials, Inc. Cisco.

Second quarter 2023 earnings conference call.

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I'd now like to turn the conference over to address Griffin. Please go ahead.

Thank you Laura good morning, everyone and welcome to the CSW Industrials' fiscal 'twenty to 'twenty three 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 issue.

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 accessing the replay is included in the earnings release during this call.

All we will make forward looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties.

Actual results could materially differ because of factors discussed today in our earnings release and the comments made during this call as well as the risk factors identified in our annual report on Form 10-K, and other filings with the SEC, we do not undertake any duty to update any forward looking statements I will now turn the call.

<unk> to Joe Armes.

Thank you Adrian.

Good morning, and thank you for joining our fiscal second quarter conference call.

Our record fiscal second quarter and record fiscal first half results demonstrate our successful efforts to drive topline growth expand margins and increase earnings per share.

Comparing our fiscal second quarter year over year performance, we reported 23% revenue growth.

29% EBITDA growth.

37% growth in EPS.

These metrics clearly demonstrate our ability to generate leverage on incremental sales as gross margin growth outpaced revenue growth operating income growth outpaced gross margin growth and this trend continued through the income statement to EPS.

Against the backdrop of macroeconomic uncertainty our team continues to perform exceptionally well combining operational excellence disciplined capital allocation and a keen focus on customer service.

In the current quarter, all three segments contributed to organic revenue growth of $25 million driven.

Driven primarily by the numerous price actions in the current and prior fiscal year periods.

Due to the high value nature of the products that we bring to market, we are able to realize positive pricing of our products.

Our story this quarter is one of building on commercial momentum created in prior periods founded upon our highly differentiated products and leading positions in the end markets that we serve.

During the fiscal second quarter, we closed the previously announced acquisitions of cover guard and AC Guard and subsequent to quarter end, we consummated the acquisition of Falcon stainless.

The acquired product lines expand our offerings sold into our profitable HVA C R and plumbing end markets.

Through these bolt on acquisitions, we deployed $58 1 million of capital at evaluation of six six times EBITDA.

Which was funded through cash on hand.

And borrowings under our existing credit facility.

As a reminder, in December we closed the shoemaker acquisition, which expanded our giardi offerings sold into our HVA or end market.

During the fiscal second quarter, the Shoemaker cover guard and AC Guard acquisitions collectively contributed $11 million in revenue all of which was reported in our contractor solutions segment.

The Falcon acquisition will be included in our results beginning with this quarter.

Yes.

These acquisitions reflect the highly accretive nature of our completed acquisitions and our focus on complementary product categories and our existing end markets.

And reviewing the first two quarters of the fiscal year material and freight costs and freight delays improves sequentially, providing early signs of supply chain recovery.

While the persistence of this recovery is not yet known supplier on time delivery has meaningfully improved.

And we are proactively diversified sourcing for critical components.

Our leadership team continuously evaluates inventory at the product and category levels to ensure that we can meet customer demand for our products, while optimizing working capital investments.

I'll transition now to a discussion of our segments.

Our contractor solutions segment reported sales of $130 million or $27 million or 26% increase.

Including organic growth of $16 million.

The strength of this segment wise and leveraging our distribution network opt.

Optimizing acquisition integration and selling high value products.

The acquired cover Guard AC Guard and Falcon products were swiftly relocated to our existing distribution centers and.

And sales of these products have transitioned to our team.

Our success in integrating acquisitions reflects a process that we've honed through multiple transactions that is predicated upon adding value to our customers consistent with our accretive growth goals.

We expect to consider.

We expect to continue to deliver growth that exceeds the end market served supported by price actions.

And recent acquisitions.

Our engineered building solutions segment continued to grow reporting revenue of $26 million, an increase of 8%.

Due to multi year initiatives to professionalize, our commercial team.

Our focus on high growth geographies and introduce new products.

For a third consecutive quarter. This segment's backlog reached an all time high as we continued to be awarded high quality jobs and multifamily residential.

Institutional.

<unk> and commercial categories.

Several leading construction indicators continue to show signs of health.

The latest <unk> data demonstrate demonstrates overall growth in the construction market with supportive outlooks for our primary subcategories.

AIA billings have remained positive and above 50 for 20 months in a row.

We are mindful of rising interest rates flattening and modest declines in some categories and geographies.

But our team has defied actionable goals to maintain performance.

Exceeds the broad construction industry.

Our specialized reliability solutions segment continues to exceed expectations, delivering a second consecutive record quarter of.

Of $37 million in revenue.

This was the fourth consecutive quarter for mid to high Teen segment EBITA margin as capacity utilized utilization increased.

Operational practices improved.

Our material cost inflation moderated.

We expect continued strength in this segment, albeit at a moderating growth rate as compared to these exceptional results.

Before I turn the call over to James I would like to acknowledge the resiliency of our business model.

Important attributes include the diversification of our product portfolio and of the end markets we serve.

And the consumable nature of our products that are used either in maintenance repair and replacement applications.

Or to extend the reliability performance and lifespan of critical assets.

Specific to our largest end markets HVA C R and plumbing the.

The products, we sell and the value we provide are often non discretionary fundamental necessities for homeowners and businesses.

Over the past two years, our leadership team embraced the opportunity to successfully manage through uncertainty.

We've strengthened our supply chain.

We remained focus on profitable growth and confirmed our commitment to our customers and our employees.

Now at this time I would like to turn the call over to James for a closer look at our results and then I'll conclude the prepared remarks.

With the strategic outlook.

Thank you Joe and good morning, everyone.

Our consolidated revenue during our fiscal second quarter, 2023 was $191 million or 23% increase as compared to the prior year period.

Driven by price and contributions from acquisitions.

<unk> gross profit in the second fiscal quarter was $81 million representing.

Representing 28% growth with the incremental profit, resulting primarily from sales growth.

Gross profit margin improved to 42% compared to 41% in the prior year period due.

Due to the cumulative benefit of price actions and tour Vietnam, Covid expenses of $1 $2 million incurred in the prior year period that did not recur.

I'll note that we did not call out any adjustments to our reported earnings in the current fiscal quarter.

Consolidated EBITDA increased 29% to $44 million as compared to the prior year period.

Consolidated EBITDA margin improved to 23% as compared to 22% in the prior year quarter, driven by sales growth, which outpaced incremental expenses.

Reported net income attributable to <unk> in the fiscal second quarter was $24 million.

Or $1 57 per diluted share compared to $18 million or $1 15 in the prior year period.

Our contracts our solutions segment.

With $130 million of revenue accounted for 68% of our consolidated revenue and deliver $27 million or 26% total growth as compared to the prior year quarter comprised of organic revenue growth of $16 million in inorganic growth of $11 million from the <unk>.

<unk> maker cover guard and AC Guard acquisitions.

Organic growth resulted from the cumulative benefit of implemented pricing initiatives, partially offset by a slight decrease in unit volumes as compared to last year.

Strong net revenue growth as compared to the prior year period.

It was driven by the HVAC, our architecturally specified building products and plumbing end markets.

Segment, EBITDA was $39 million or 30% of revenue.

Compared to $32 million or 31% of revenue in the prior year period as our margins continue to recover from the inflationary environment.

Due to the growth of this segment, both organically and through acquisitions, we have recently added people and process infrastructure needed to support continued growth.

Its created a bit of margin pressure in the second quarter.

In the fiscal second half of the year unit volumes could be impacted by distributors desired inventory levels and declining residential construction trends.

Despite these potential headwinds, we foresee that our prior pricing actions and improving cost dynamics will support strong fiscal full year margins.

Our engineered building solutions segment, EBITDA improved to $4 million, a 15% margin compared to $3 million, a 13% margin in the prior year period.

Bidding and booking trends remain strong in fact, our fiscal first half bookings and backlog increased by approximately 54% and 29% respectively as compared to last year's fiscal first half.

As of the end of the fiscal second quarter, our book to Bill ratio for the trailing eight quarters was 114 to one.

As Joe mentioned in his opening remarks, we ended September with a third consecutive quarter of record backlog in this segment.

In the back half of this fiscal year, we expect slightly slower revenue growth over the prior year period, and moderate segment EBITDA margin pressure as the remaining legacy lower margin backlog projects are completed.

In early fiscal year 2024, we expect the quality of our current backlog to result in improved segment profitability.

Our specialized reliability solutions segment achieved another very impressive quarter of organic revenue growth of $8 million or 30% due to continued benefits from pricing initiatives strong end market demand, especially in the energy market and improvements in our operations and execution.

Segment, EBITDA, and EBITDA margin were $6 million and 16% respectively. In the fiscal 2023 second quarter compared to $3 million and 10% in the prior year period.

For the remainder of this fiscal year and as compared to the prior year period. We expect continued strong revenue growth, albeit at a lower pace and modestly lower margins due to the timing impacts of material and freight cost increases previously implemented pricing initiatives and a shift in mix towards the shell with more joint venture as volte.

<unk> ramp up.

With the ongoing addition of equipment in our Rockwell, Texas facility to support the growth of the show with more joint venture we are in a position to post a compelling exit rate as we complete this fiscal year.

Yeah.

Transitioning to the strength of our balance sheet and cash flows.

We ended our fiscal 2023 second quarter with $14 million of cash and reported cash flow from operations of $47 million in the first half of our fiscal year compared to $43 million in the prior year period.

Of the $47 million of operating cash flow in the current fiscal first half.

$30 million was generated in the fiscal second quarter as compared to $17 million in the fiscal first quarter.

On our fiscal 2023 first quarter call, we affirmed our commitment to strong free cash flow generation.

Working capital management, and sufficient liquidity to support our strategic objectives.

By the end of this fiscal year, we expect to deliver cash flow conversion metrics that reflect meaningful progress toward historic norms.

As Joe mentioned in his opening remarks, our leadership team continues to evaluate appropriate inventory levels and by the end of this fiscal year, we expect inventory investment to decline as a use of working capital corresponding with the improvement in our supply chain.

We ended the fiscal second quarter with $260 million outstanding on our $400 million revolver, and a $4 million decrease compared to the prior fiscal quarter end.

As a reminder, during the fiscal second quarter, we acquired cover guard NAC guard and with the intra quarter operating cash flow generation, we're able to reduce the borrowed amount.

Leverage ratio as of the current quarter was approximately one six times an improvement from one seven times as of the preceding quarter and due to the increased EBITDA and decrease borrowing amount.

Pro forma for the Falcon acquisition, which was closed in the fiscal third quarter, our leverage ratio was below one eight times well within our stated range of 1% to three times our strong.

<unk> balance sheet continues to provide flexibility for capital allocation that enhances shareholder value.

As part of our broad capital allocation strategy, we remain committed to opportunistic share repurchases guided by our intrinsic value model.

During the fiscal 2023 first half were purchased over 335000 shares for an aggregate purchase price of $35 $6 million under our current $100 million share repurchase authorization.

Our effective tax rate for the fiscal second quarter was 24, 6% on a GAAP basis, we continue to expect a 25% tax rate for the full fiscal 'twenty three year.

As we look to the remainder of fiscal 2023, we continue to expect to have strong revenue growth across all three segments and at the consolidated level, which when coupled with meaningful operating leverage will result in strong year over year, EBITDA and EPS growth.

We expect to benefit from continued stability in our raw material and freight costs.

As we look at our cadence of earnings across the remaining quarters of this fiscal year, we expect the third quarter to remain our seasonally lowest quarter that we do not expect as much variability between quarters as we have historically produced due to the acquired <unk> businesses demonstrating less seasonality.

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

Thank you James.

In the first half of fiscal 2023, we delivered record revenue of $391 million.

Representing growth of 23%.

Operating leverage on this growth drove 25% growth in EBITDA and 31% growth in EPS.

In light of the strength of our fiscal first half and including our recent acquisitions. We now expect a year over year revenue growth rate of approximately 20% with an EBITDA margin of approximately 22% for the full year.

We remain committed to operating discipline that will maintain our profitability and we will assess opportunities for potential cost reductions as well as further pricing options.

This quarter I began reviewing all new and replacement hires to ensure that the position is warranted in the current environment.

And we are maintaining our disciplined approach to monitoring our costs across the company.

We are expanding margins and driving cash flow conversion we.

We are confident in our near term and long term opportunities for disciplined capital allocation.

Which are enabled by the strength of our balance sheet.

We remain committed to enhancing sustainable growth and shareholder value even in the face of economic uncertainty.

By doing this we are consistent in the past we've consistently delivered outstanding financial results and we will utilize that same approach for the remainder of 2023 and beyond.

With respect to our acquisition pipeline and plans as we sit here today, we are focused on integrating the four acquisitions that we've completed in the last 12 months on working capital efficiency and operational excellence.

We do not currently expect to close any acquisitions in the next few months and thus we expect to delever through the repayment of debt.

By growing our EBITDA.

Earlier this month, we welcomed Danielle guard, who joined our executive leadership team in a newly created Chief people officer role.

Danielle brings extensive experience building teams and a demonstrated track record of organizational development.

The creation of this role recognized as the global growth that we have realized and will continue to pursue.

Daniel is personally dedicated to CSW is distinctive employee.

Centric culture.

And she affirms our intention to be an employer of choice.

Yes.

My colleagues hear me say this often at CSW, why we must and we will succeed there is no other option.

But at CSW, our how we succeed matters.

Achieving these outstanding year to date results demonstrates our commitment to being good stewards of your capital.

And our goal of delivering long term shareholder value.

As always I'd like to close by thanking all of my colleagues here at CSW, who collectively own approximately 4% of our company.

Through our employee stock ownership plan.

As well as all of our shareholders.

And for your continued interest in and support.

Support of our company.

With that operator, we're now ready to take questions.

Sure.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

Speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at.

At this time, we will pause momentarily to assemble our roaster.

The first question is from John Tom One thing from CJS Securities. Please go ahead.

Hi, Good morning, everyone. Thank you for taking my question.

My first one is.

Could you talk a little bit more about demand in each of your end markets and where you're continuing to see areas of strength and maybe where you're starting to see areas of weakness you mentioned inventory reductions.

And your contracted solutions business.

Maybe that is that it.

Is that based on sell through is it purely inventory management, just a little more color there would be helpful.

Yes, John Good morning. Thanks, This is James and I'll, let Joe chime in as well, but I'll start with the question.

Looking across our segments you look at contractor solutions, we continued to see good demand. Obviously, we're entering kind of the seasonality where things are a little bit lighter so.

A couple of months, it's normal that we would see that we're seeing a little bit of Destocking out there I think everybody is feeling more confident about the supply chain. So we.

We see and hear distributors talked about a little bit of Destocking.

We're in the same mode, obviously with more confidence in the supply chain things are getting here a little more quickly we feel better about that.

See a little bit of Destocking ourselves.

As Joe mentioned, we always have prudent working capital management, but with higher interest rates theres, a higher carrying cost as well. So we've got an intense focus on that.

Higher cost of carrying carrying goods is important to us and meaningful so we're watching that carefully. So we do anticipate in the coming months seeing inventory come down a bit in terms of kind of days on hand, and what we call weeks in stock now obviously as you get into the busy season kind of that March timeframe youre going to need to start back up so we have to really play in <unk>.

<unk> some of what we're going to be selling in March is already on the water. It takes a few months for things to get from our facilities.

Far east over to where they need to be to sell so so it's a moving target, but we've spent a lot of time with our teams. In fact, just yesterday, we were talking about inventory with the contractor solutions seem they are doing a good job managing inventory and it's a product by product analysis. It's easy just to look at one big number and say, let's bring it down or we need to take it up but that team is doing a good job there.

All of our business are going product by product understanding the demand dynamics, what customers are telling them where that product comes from what might be back ordered we had some back orders for example in one product that they've got a big shipment of a few days ago and got it right out the door almost immediately so that can happen when you're waiting on products. So we're managing that carefully as we've always said with the.

Margins that we have especially in that segment, we don't want to Miss a sale. So you carry a little extra inventory, but we have more confidence that we don't need to carry as much in terms of demand. We continue to see good demand as we mentioned, obviously residential new constructions coming down a little bit. So you watch that that has an indirect impact on us we're not selling the.

Units, but obviously, we sell more when it goes into a new installation than we do in repair and maintenance kind of looking across the other segments briefly the other segments I want to point out are doing a good job with inventory and working capital management as well.

Joe and I and the business leaders of all kind of totally each other we're going to continue to work down inventory, where we can but most of the other segments inventory comes from domestic sourcing. So you have a little better sense of that youre not youre not as reliant on that overseas shipping and the time that takes in terms of the specialized reliability solutions we.

To see strong demand there John the energy sector continues to do very well the industrial rail across the board. We continue to see really good demand in this segment. So are our team is reacting very well in terms of meeting demand in terms of pricing and those kind of things working hard on focusing on the right customers and the right products and under Mark's leadership.

That continued to do a good job engineered building solutions commercial construction has slowed down some with interest rates, where they are you would imagine some projects.

Putting on are put on hold so while biddings of bookings have continued to be strong youre starting to see a little bit of a pocket of weakness in some areas.

I will say, though it's very geographic the sunbelt continues to be very strong youll have other pockets that aren't quite as strong we will say this however, and I'll, let Joe chime in if I haven't said everything because I talked for a while but our backlog as we mentioned is a record levels and Joanna specifically ask the question are those projects out of the ground and the answer is yes.

So the projects that are in our backlog, we don't see a lot of risk there in terms of those getting done timing can shift around a little bit, but it's very important that those are good high quality projects that take a while to come through it a few quarters before things, we just booked come through but those are projects out of the ground and as you know John we're at the back into projects that revenue flows through in a little while Joe what kind of possibly.

Yeah, the only thing I would say it's James.

James did a good job describing the backlog on EPS, but we have backlog in all three of our segments. Srs has maintained a very healthy very consistent backlog in their business for the last.

Six or eight months and that remains at a similar level. So no change there and contractor solutions has had a backlog now which is larger than normal and they've been able to work that down some but we still have shortages in some products.

Maybe a little bit more inventory than we want and other products, but our focus is on really.

March.

When the season begins again the high season for HV AC.

Restocking if we've got the right levels of inventory in March that's key to customer satisfaction key to making sure that we don't Miss a sale and so we'll be working very diligently highly focused on.

Right sizing the inventory both on our addition, and subtraction basis.

To get the right inventory by March because as James said, we are going into a little bit of a slower season for us and it's the right time to get those inventory levels right sized.

Great. Thank you so much for that very detailed answer guys I appreciate it.

That kind of dovetails into my next question a little bit.

So you mentioned, 20% growth, 22% EBITDA margins, how confident are you in those in those expectations or how much cushion is there maybe just given that you are seeing some slowing in some areas maybe more uncertainty than others, especially since a lot of that is going to be loaded in the end of the March quarter. When you see the restocking season.

Yeah. Traditionally we always are concerned about March that's a big month for us and it's important to.

Get the orders in and execute against those orders, but we feel good about that John that's an increase from where we started the year is an increase from where we were last quarter and so we are pretty sober about those things.

And so we feel good about those numbers, we feel like.

<unk> got good visibility for the next six months, we spent a lot of time, we do mid year reviews. We just completed those with all three business segments and I think we've got a real our teams have a really good handle on their businesses for the next six months and so.

We feel good about those those expectations.

Okay, Great and then just one housekeeping question.

The interest expense in the quarter was a little bit higher was that completely.

The underlying base rate, increasing or was there a bigger intra quarter drawdown.

Number one and number two were there any M&A expenses that maybe you didn't call out or add back just because.

Good question, yes.

Yes. Please this is James Great question I'm glad you pointed that out your interest expense, obviously rising rates.

You had another jump yesterday, a 75 basis points Youll see that again, so one of the show we continue to factor in those rates are up because we are in a variable rate with our revolver.

We were down a little.

In the quarter quarter over quarter, but the acquisition we made of AC guarding cover guard was early in the quarter. So the debt that we took down for that kind of we paid for that all quarter that higher interest rate. So that's what it is and I think the run rate that you saw this last quarter.

Need to consider rates going up a little bit more and we borrowed for the Falcon acquisition right. After quarter end, so youre going to see as we gave you a leverage number up a little bit it's a little higher that little higher interest rate. However, we have the opportunity to offset that timing will will will dictate when we can do it as we said in Joe's remarks, right now we for safety.

<unk>, a little bit into some of that the EBITDA growth that didn't affect interest expense. Some of that is we intend to pay down some debt in the coming months, but when that happens not sure. So I think interest rates going up in our interest expense going up as a reasonable expectation in terms of acquisition costs. Yeah, we didn't call that out it wasn't big enough to adjust earnings like we did when we did true width.

Really try not to do adjustments, if we don't need to it was about <unk> <unk> John in the quarter by $600000, which is about <unk> <unk> on the M&A expenses, we had for the cover guard AC covered gardened. The work we've done to date on Falcon during the quarter. So hopefully that helps you model a little bit.

It does thank you very much and I'll jump back in queue.

Thank you John and thanks, John .

The next question is from Julio Romero from Sidoti. Please go ahead.

Alright, just as profound on for Yoga Mary how are you.

Good Hey, Stefan good morning.

Good.

On the <unk> segment.

Are there different end markets trending.

Yes, I think I think.

We're seeing positive end market demand across the board the energy market remains very strong thats very important to us with the rig counts, where they are with oil prices, where they are and thats a very important market for us I think as we look at the industrial markets and markets continue to do well do well rail shipments continue to be to be good.

And that's an important market for us I think you look across the board Joe We're seeing good demand as Joe mentioned, we had mid year reviews with that group and had their executive team all in the room with us for a few hours last week and we really saw a lot of optimism that.

That team and faxes overseas at a Big conference. This year in our this week and that's going really well too. So we're seeing global demand, but domestically that energy market is a big driver for us and very important.

Yes.

Thank you and on the segment can you guys talk about the volume trends.

You guys are seeing.

I'm, sorry ask against Us.

Can you talk about the volume trends.

Pigment.

Okay.

In terms of volume trends.

This quarter like we said last quarter, we're down just a hair quarter over quarter.

<unk>.

That would indicate a bit of a slowdown potentially but last year you just had a really strong demand.

It was a pretty hot summer you were still working through Covid. There were still a lot of folks at home you have less of that this year as the volumes are down ever so slightly.

Again this quarter low single digit percentages. So we still feel good about that so the growth that we had year over year was the acquisitions, which obviously helps volume in general and pricing initiatives. We've had several pricing initiatives the last one being.

At the beginning of this last quarter. So you had you had the tailwind of pricing there, but the volumes have hung in there well again youre working against some pretty tough comps from last year on a same store sale basis, so to speak so down ever so slightly.

Now on your recent acquisitions within that segment can you guys talk about on our watch.

Could you could cover guard <unk> and Falcon and the strategic rationale of Barrington.

Well, let me say broadly Stefan that we have said that contractor solutions HVA and plumbing end markets has been our highest priority for M&A and so consistent with those themes these acquisition opportunities arose.

And.

We've been pursuing.

The Falcon acquisition for literally a decade, institutionally, James and I and others weren't here, but other started those conversations.

Really it's about value to the customer, which should be connoted and gross margins and.

And growth opportunity for us and so like a lot of the products that we were able to acquire and put through our distribution. We can provide broader distribution and so the accretive opportunity for us is pretty significant and so high quality products that bring significant value to our customers.

That would benefit from broader distribution is a great recipe for US and then the last thing I'll say is very attractive valuations as you saw.

Acquisition multiples oftentimes don't move in dramatic fashion, but these were very attractive valuations for us and we're very pleased to get these deals consummated.

Thank you so could you please give us.

Historical organic revenue transfer those three businesses.

No not on the acquisitions, they've had nice growth, but what would truly important as Joe talked about us being able to put their products through our distribution channel. We think accelerating the growth <unk> had in the past is a good opportunity for us because they had some.

Some regional distribution little bit nationwide, but very regional given given what they were able to do and we've got the opportunity here to really see some nice organic growth from those acquisitions.

Thank you.

Thank you Stefan.

The next question is a follow up from John ton one thing from CJS Securities. Please go ahead.

Alright, thanks for the follow up.

Just wanted to drill down a bit on the energy business.

Pun intended there.

But where is that as a percentage of revenue within <unk> today, and how does it compare to prior peak or trough levels.

First first of all and then second I guess, what is the expectation there going forward assuming that OPEC is cutting production you can't keep releasing from the PR forever just help us think about what that business looks like going forward.

Yes, John .

I'll defer to James but I don't think we have been providing those kind of end market data points like we used to but I would say that.

Certainly <unk> seen a meaningful increase here from the lows I don't know certainly the rig count which is a great proxy is not anywhere close to where it was a few years ago. It may never get there there's fewer rigs being used for multiple wells now and the whole math on that has changed.

I would say demand is really strong both.

Domestically and internationally.

And we think that it could even get stronger and so.

We're very positive on that business it doesn't always move in sync with our other end markets at this time it is.

Moving in sync and so all of our end markets are on the uptrend as James said energy is a little bit of that swing.

And market that really makes the difference here for us and Thats.

The important part of the profitability.

But.

The increased volumes overall and the increased volume from the shell JV are also contributing nicely for overhead absorption and as we've talked about the.

That's <unk>.

Higher fixed cost business than our others and so volume really matters, there and so as we continue to see strength in the energy market. We expect to see continued outstanding results out of that business.

For all of those for all of those reasons.

Got it thank you could.

Could you break out the expected contribution from the three acquisitions in the second half of this year on a revenue or EBITDA.

Yes.

We're not providing that now as we go through each quarter. We will give you the inorganic growth I think we said in the second quarter was $11 million of revenue Shoemaker was obviously, a part of that which has been with US since last mid December and then cover guard in AC Guard came in early in the quarter as I said, so they added a little bit.

These are on the smaller side in total was $57 million of acquisitions, but youre going to see contribution youre going to see immediate accretion and youre going to see revenue contribution because we go through each quarter, we'll give you the inorganic growth and youll be able to look back and see what that is as we enter the January February March quarter Shoemaker won't be inorganic anymore, we will remind you of.

So youll get a good sense of that as we go along but we're not prepared to give a pro forma of that but I will say to Joe's comment and kind of raise in guidance so to speak of 20%.

Revenue growth for the year and 22% EBITDA margin for the year the strength of the first half and the acquisitions contribute to that so that tells you that these acquisitions are accretive obviously contribute to growth in a very positive for us and full fiscal year context.

Got it thank you.

Just a question on the supply chain and inflation and shipments.

One did you Miss any shipments in the quarter and are expecting to close that gap going forward.

And number two just with supply improving are you seeing that cost coming down as well.

Its freight or components or other inputs interesting.

Yes. Good question, John I would say the raw materials and those things have come down a little not dramatically.

As I mentioned earlier, the time on the water, especially and that's what's most important to us.

With that question has come down your 12 weeks before nagger anywhere from 6% to 10, depending on which Portugal into the West Coast is obviously getting things a little more quickly, but as we shift things to Houston or the east coast, It's a little longer and that's always going to be the case.

I'm sure you've seen freight rates declined dramatically.

We saw freight rates in the 20000, plus a container for a while now youre seeing things in the low thousands to the West Coast. What you see published is kind of that Shanghai to long beach rate and were coming from China, and Vietnam into long Beach, and then other parts and obviously as you get further around the states as I mentioned earlier, Houston or the other ports herein.

Counted the mid to a little bit higher single digit. So a blended rate there is not that public straight you see whats important, though and I know we've talked about this before John but is your question Tees up a great reminder, to you in our investment community.

Is when you see that rate, if we put something on a boat and a few thousand dollars, it's not going to flow through the cost for several months say three or four months because the time on the water and the time in our warehouse to the time, we turn it into revenue. It's at three four maybe even five month lag depending on the product so those rates coming down dramatically in the last couple of months you are now going to start.

That tailwind here kind of end of this quarter and into our fiscal fourth quarter, which again to Joe's point gave us confidence in that 22% EBITDA margin, because we see cost coming down but it takes a while to flow through from when you see that CNBC headline about freight rates coming down this week.

Great. Thanks, so much again.

Thank you John I appreciate it.

That was the last question.

I would like to turn the conference back over to see starting dose just for any closing remarks.

Great. Thank you Mara Thank you everyone for joining us for our conference call today, we look forward to talking to you again soon take care.

Yes.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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Good morning, and welcome to the CSW Industrials, Inc. Fiscal second quarter 2023 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after.

After todays presentation, there will be an opportunity to ask questions.

Asked a question you May press Star then one on your telephone keypad.

To withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Audrey Griffin. Please go ahead.

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 accessing the replay is included in the earnings release.

During this call we will make forward looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties.

Over to Joe Armes.

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

Our record fiscal second quarter and record fiscal first half results demonstrate our successful efforts to drive topline growth.

Span margins and increase earnings per share.

Comparing our fiscal second quarter year over year performance, we reported 23% revenue growth.

29% EBITDA growth and 37% growth in EPS.

Against the backdrop of macroeconomic uncertainty our team continues to perform exceptionally well combining operational excellence.

Disciplined capital allocation and a keen focus on customer service.

In the current quarter, all three segments contributed to organic revenue growth of $25 million driven.

Driven primarily by the numerous price actions in the current and prior fiscal year periods.

Due to the high value nature of the products that we bring to market, we are able to realize positive pricing of our products.

Our story this quarter is one of building on commercial momentum created in prior periods founded upon our highly differentiated products and leading positions in the end markets that we serve.

During the fiscal second quarter, we closed the previously announced acquisitions of cover guard and AC Guard and subsequent to quarter end, we consummated the acquisition of Falcon stainless.

The acquired product lines expand our offerings sold into our profitable HVA CR and plumbing end markets.

Through these bolt on acquisitions, we deployed $58 1 million of capital at evaluation of six six times EBITDA.

Which was funded through cash on hand.

And borrowings under our existing credit facility.

As a reminder, in December we closed the shoemaker acquisition, which expanded our giardi offerings sold into our HVA or end market.

During the fiscal second quarter, the Shoemaker cover guard and AC Guard acquisitions collectively contributed $11 million in revenue all of which was reported in our contractor solutions segment.

The Falcon acquisition will be included in our results beginning with this quarter.

Sure.

These acquisitions reflect the highly accretive nature of our completed acquisitions and our focus on complementary product categories and our existing end markets.

In reviewing the first two quarters of the fiscal year material and freight costs and freight delays improved sequentially, providing early signs of supply chain recovery.

While the persistence of this recovery is not yet known supplier on time delivery has meaningfully improved.

And we are proactively diversified sourcing for critical components.

Our leadership team continuously evaluates inventory at the product and category levels to ensure that we can meet customer demand for our products, while optimizing working capital investments.

I'll transition now to a discussion of our segments.

Our contractor solutions segment reported sales of $130 million or $27 million or 26% increase.

Including organic growth of $16 million.

The strength of this segment wise and leveraging our distribution network opt.

Optimizing acquisition integration and selling high value products.

The acquired cover Guard AC Guard and Falcon products were swiftly relocated to our existing distribution centers and.

And sales of these products have transitioned to our team.

Our success in integrating acquisitions reflect the process that we've honed through multiple transactions that is predicated upon adding value to our customers consistent with our accretive growth goals.

We expect to consider.

We expect to continue to deliver growth that exceeds the end market served supported by price actions.

And recent acquisitions.

Our engineered building solutions segment continued to grow reporting revenue of $26 million, an increase of 8%.

Due to multi year initiatives to professionalize, our commercial team.

Focus on high growth geographies and introduce new products.

For a third consecutive quarter. This segment's backlog reached an all time high as we continue to be awarded high quality jobs and multifamily residential.

Institutional.

<unk> and commercial categories.

Several leading construction indicators continue to show signs of health.

The latest <unk> data demonstrate demonstrates overall growth in the construction market with supportive outlooks for our primary subcategories.

AIA billings have remained positive and above 50 for 20 months in a row.

We are mindful of rising interest rates flattening and modest declines in some categories and geographies.

But our team has defined actionable goals to maintain performance.

Exceeds the broad construction industry.

Our specialized reliability solutions segment continues to exceed expectations, delivering a second consecutive record quarter of.

Of $37 million in revenue.

This was the fourth consecutive quarter for mid to high Teen segment EBITA margin as capacity utilization utilization increased.

Operational practices improved.

The material cost inflation moderated.