Q2 2024 CSW Industrials Inc Earnings Call
Good day and welcome to the CSW Industrials second quarter 2024 earnings Conference call.
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I'd now like to turn the conference over to Vice President of Investor Relations. Please go ahead ma'am.
Thank you Rocco good morning, everyone and welcome to the CSW Industrials' fiscal 2024 second quarter earnings call.
Joining me today is Joseph Armes, Chairman, Chief Executive Officer, and President of CSW Industrials.
And James Perry Executive Vice President and Chief Financial Officer.
We issued our earnings release updated Investor Relations presentation and Form 10-Q prior to the market's opening today all of which are available on the investors portion of our website at www Dot CSW industrials dotcom.
This call is being webcast and information Unaccepted. The replay is included in the earnings release.
During this call we will make forward looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties actual results could materially differ because of factors discussed today in our earnings release.
And the comments made during this call as well as the risk factors identified in our annual report on Form 10-K, and other filings with the SEC.
We do not undertake any duty to update any forward looking statements.
I will now turn the call over to Jeff.
Thank you Alexia.
Morning, everyone.
Our team continues to outperform the markets we serve and.
And deliver impressive result against strong prior year period results.
Our second quarter results demonstrate our ability to leverage our robust distributor relationships drive operational execution.
And prudently manage expenses.
This morning, we announced record second quarter revenue of $204 million.
Record second quarter earnings per diluted share of $1 93.
And record second quarter EBITDA of $53 million.
We also continued to deliver outstanding operating leverage as EBITDA grew 21% or 7% growth in revenue with.
Equally impressive EBITDA margin expansion of 300 basis points to 26%.
We also announced record first half results and revenue of $407 million and earnings per diluted share of $3 95, and an EBITDA of $107 million.
For the second quarter in a row, we delivered outstanding cash flow from operations was a record fiscal second quarter total of $45 million.
This led to a pay down $37 million of borrowings under our revolving credit facility in the second quarter, and an $80 million pay down through the first half of this fiscal year, reducing our interest expense and providing us significant flexibility to pursue future opportunities.
As they arise.
As we mentioned on our recent earnings calls the cost of Ocean.
<unk> has returned to more normal levels in the last few quarters.
Since the beginning of fiscal 2024, we have also reduced our domestic freight expense.
And driven additional operational efficiencies versus the prior year.
As we continue to staff for growth and retain our exceptional employees.
Spirits increased compensation expenses.
The amortization of intangible assets has also increased as a result of recent acquisitions.
By successfully implementing a solid pricing strategy across all three segments.
It was our gross margin savings from freight expenses.
<unk> been able to achieve operating leverage and further expand our margins.
We continue to prioritize capital allocation decisions on a risk adjusted return space.
Ultimate goal of enhancing long term shareholder value.
We are often asked about our approach to M&A and our strategy has not shifted.
We will continue to pursue both internal and external opportunities for growth.
For our healthy margins.
And we will continue to maintain a pipeline of acquisition opportunities.
I want to touch briefly on our segments and then James will provide the additional details on our performance.
Overall, I'm pleased with the execution of all three business segments.
Yeah.
We are now approaching the slower season for our contractor solutions segment, but our team is highly focused on delivering another year of market outperformance. Despite the HV AC our industry currently experiencing a decline in residential volumes.
The strength of this segment's centers around leveraging our robust distributor relationships optimizing acquisition integration and.
Delivering high value products to our customers.
We are able to quickly acquire or master distribute products, resulting in sales at a faster and more cost effective rate due to our strong relations relationships with our suppliers. Our network of sales represented representative logistics leverage and back office support.
This allows us to do what we've always done with excellence, which is to focus on serving our customers well.
A great partner as we add new products to our portfolio.
Our specialized reliability solutions segment revenue was relatively flat in the quarter.
The capacity utilization in our primary facility continued to improve over the prior year.
And our team there remains focused on top and bottom line growth.
The Srs team has made notable improvements in operational efficiencies and quality.
Which gives us confidence in our ability to reach our EBITDA margin goals for the full fiscal year.
Industrial end markets are relatively stable, but we have seen some softening in energy mining and rail.
As an update on the shelf joint venture we have elected to defer a portion of the planned capital expenditures as we assess the timing of production needs we.
We continue to work with shell on forecasting their production requirements.
On the engineered building solutions or our engineered building solutions segment was up with an increase in revenue of 13% in the quarter due to timing of project completions.
And a fitting from our record backlog as well as positive pricing initiatives.
For the seventh consecutive quarter. This segment's backlog reached an all time high with Greco our aluminum railing business continuing to drive most of the growth.
We continue to especially see strength in our Canadian market.
Project mix and a record backlog skews more towards larger jobs, which can take more than two years to turn into revenue.
The vast majority of the backlog has at a minimum broken ground.
We're still highly focused on pursuing institutional and multifamily projects undertaken by the highest quality developers with the highest likelihood of completion.
Our ABS team continues to perform well.
Before I turn the call over to James I would like to remind everyone of the demonstrated resiliency of our business model.
Strength of our business model include diversification of our product portfolio and of the end markets we serve.
As well as the consumable nature many of our products that are used either in maintenance repair and replacement applications or to extend the reliability performance and lifespan of mission critical assets.
Specific to our largest end markets HVAC R and plumbing the products, we sell and the value. They provide are often non discretionary fundamental necessities for both homeowners and businesses.
We continue to outperform in the categories. We compete we maintain a strong balance sheet that allows us to withstand market headwinds with ample liquidity.
Towards us the ability to pursue growth opportunities that arise across our entire portfolio of business.
At this time I'll turn the call over to James for a closer look at our results and then I will.
I'll conclude our prepared remarks.
Thank you Joe and good morning, everyone.
During the fiscal year to date period, we delivered a record first half revenue of $407 million representing growth of four 1%.
Operating leverage on this growth drove a 14, 9% growth in EBITDA and 12, 9% growth in earnings per diluted share.
Our consolidated revenue during the fiscal second quarter of 2024 was $204 million of six 5% increase as compared to the prior year period.
This growth was driven by pricing actions, a slight increase in unit volumes due to the late summer heat wave in certain markets across the U S and the inorganic revenue contribution from the Falcon acquisition last year.
Consolidated gross profit in the fiscal second quarter was $91 million, representing 12, 8% growth with.
With the incremental profit, resulting from revenue growth from pricing actions and lower inbound and outbound freight costs.
Gross profit margin improved to 44, 7% compared to 42, 2% in the prior year period from revenue growth in the higher margin contractor solutions segment due to pricing initiatives combined with lower freight costs as compared to a year ago.
Consolidated EBITDA increased by $9 million to $53 million or 21% growth when compared to the prior year period.
Our EBITDA margin improved to 26% as compared to 23% in the prior year quarter, driven by revenue growth and gross margin expansion, partially offset by incremental employee expenses.
This margin growth demonstrates the operating leverage we strive for as we focus on managing expenses, while we grow revenue.
Net income attributable with C. S. Wi in the fiscal second quarter was $30 million or $1 93 per diluted share.
Impaired to $24 million or $1 57 per diluted share in the prior period.
Presenting a growth of 23%.
The current quarter included increased amortization expense from intangible assets as a result of last fiscal year's acquisitions in contracts for solutions.
Our contractor solutions segment with $140 million of revenue accounted for 69% of our consolidated revenue and delivered $9 $6 million or 7% total growth as compared to the prior year quarter.
The $7 2 million or 6% of organic revenue growth was driven by the plumbing and HVAC ACR end markets and a result of pricing actions with a slight increase in unit volume after the late summer heatwave experienced in certain portions of the U S.
Inorganic growth was $2 $4 million in the quarter from the Falcon acquisition last fall.
Segment, EBITDA was $47 million or 33% of revenue compared to $39 million or 30% of resident in the prior period as our margins continue to expand.
The increasing margins result from the company's ability to maintain pricing and achieve operating efficiency opportunities even as some but not all costs. In this segment have come down over the prior year.
Our specialized reliability solutions segment revenue of $37 million was flat in the quarter due to the continued benefits from pricing initiatives.
By software energy mining and rail markets.
Segment, EBITDA and EBITDA margin were $6 $3 million, 17%, respectively in the fiscal 2024 second quarter <unk>.
Impaired to $6 $1 million and 16% in the prior year period.
As Joe mentioned our team in this segment remains focused on top and bottom line growth, while driving operational efficiencies and offering the right mix of products to our expanding customer base around the world.
Our engineered building solutions segment revenue increased to $29 million, a 13% increase as compared to $26 million in the prior year period.
Bidding and booking trends remain solid and in fact, we ended September with our seventh consecutive quarter of record backlog in this segment.
At the end of the fiscal second quarter, our book to Bill ratio for the trailing eight quarters was over one one to one.
Our focus on profitability in this segment as visible as we delivered a record EBITDA of $5 $7 million with a healthy 19, 5% EBITDA margin in the second quarter.
Yeah.
Transitioning to the strength of our balance sheet and cash flow. We ended our fiscal 2024 second quarter was $14 million of cash and reported record cash flow from operations of $45 million.
Compared to $30 million in the same quarter last year.
The first half of fiscal 2024, we had record cash flow from operations of $95 million compared to $47 million in the first half of last year.
Our free cash flow defined as cash flow from operations minus capital expenditures was $41 $9 million in the fiscal second quarter as compared to $28 million in the same period a year ago.
That resulted in free cash flow per share of $2 69 in the fiscal second quarter as compared to $1 81 in the same period a year ago.
This impressive level of free cash flow fuels, our risk adjusted returns capital allocation strategy, which in turn enhances shareholder value.
As Joe mentioned as part of our broad capital allocation strategy during the quarter, we paid down $37 million of our outstanding debt.
We ended the fiscal second quarter with $173 million outstanding on our $500 million revolver.
Our bank covenant leverage ratio at quarter end with 0.85 times, an improvement from one three times at the end of fiscal 2023 due to our strong EBITDA growth and the $80 million of pay down of our revolver.
As a reminder, at the end of the fiscal first quarter of 2020 for our bank coverage leverage ratio was one one times, which moves the company into the lowest tier of our revolver pricing grid, reducing our interest rate spread and crude.
<unk> interest expense savings.
As a further reminder, in February of 2023, we entered into an interest rate hedge for the first $100 million of borrowings under our revolver.
During the fiscal second quarter and the first half of the year the interest rate hedge saved us approximately $400000 $700000, respectively interest expense.
Our effective tax rate for the fiscal second quarter was 25, 7% on a GAAP basis, we still expect our adjusted effective tax rate to be between 25% and 26% for fiscal 2024.
With the third quarter tax rate elevated due to normal Q3 tax activities.
The tax rate in the third fiscal quarter will be adjusted for the $8 6 million noncash other expense.
Partially offset by the related $1 $1 million income tax benefit that will result from the tax indemnification assets related to the truer in Falcon acquisitions that will expire as detailed in our 10-Q.
We expect to report adjusted earnings in our fiscal third quarter due to these large non recurring items.
<unk> adjustment in the fiscal third quarter for these items is expected to be approximately 48 at this time.
As we look out to the rest of fiscal 2024, we anticipate revenue growth for the second half of the year, which when coupled with meaningful operating leverage. We expect will result in strong year over year, EBITDA and EPS growth as well as strong cash flow.
With that I'll now turn the call back to Joe for closing remarks.
Thanks James.
To summarize during the second fiscal quarter of 2024, we once again delivered record results highlighted by both organic and inorganic revenue growth.
Spanned in margins and robust cash flow.
While there is uncertainty in certain key end markets, we still expect to outperform the markets, we serve and to deliver consolidated revenue and earnings growth in the second half of fiscal 2024 against strong prior year period results.
We remain focused on leveraging our strong distribute distributor relationships gaining efficiencies through operational excellence and prudently managing costs.
Have and will continue to work to expand margins and to drive cash flow conversion.
Consistent with our demonstrated track record, we will allocate capital according to our risk adjusted returns discipline enabled by the strength of our balance sheet.
This approach has led to consistent outstanding financial results and we do not intend to deviate from that strategy.
Our stated goal is to be the partner of choice for our oil customers, making it easy as possible to do business with CSW OE.
In October we were named Hvac's supplier of the year by affiliated distributors, which is one of the largest customer organizations and our contractor solutions segment.
This award is given to only one out of one hundreds of suppliers based on direct feedback regarding availability of product delivery times ease of doing business product innovation and other important metrics gathered from actual customers.
This award is the latest in a series of such awards. Our team has received this year and demonstrates our commitment to serving our customers well.
I am extremely extremely proud of the contractor solutions team for their continued success.
As always I want to close by thanking all my colleagues here at CSW, who collectively own approximately 5% of CSW I through our employee stock ownership plan.
As well as all of our shareholders for your continued interest in and support of our company.
With that Rocco, we're ready to take questions.
Thank you if you'd like to ask a question. Please press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two today.
Today's first question comes from Jon <unk> with CJS Securities. Please go ahead.
Hi, Good morning, it's Pete Lucas for Jon.
Just wondering if you could talk a little bit about what you're seeing in terms of HVAC distributor destocking in the quarter, if you've seen any and do you think that inventories in the channel are right sized at this point or is your sell through in line within demand.
Yes. Good morning, it's James I appreciate you being on the call.
We obviously have a lot of <unk>.
Customer conversations and contact the Destocking continued probably some the Oems and the distributors had mentioned some of the same I think it is certainly decelerated.
We had our fiscal first quarter. The April may June quarter, with the slow start to the summer.
They built up the inventory and worked through quite a bit of that with a really strong second quarter and then obviously as you in the second quarter kind of the September months people start working down the seasonality and then ramping back up and you see it in our inventory our inventory came down quite a bit from March to September as we kind of went through the summer season that will start ramping back up getting ready for the busy.
Selling season in the spring so.
Raul Destocking, our sell through we feel very good about we get good feedback on our sell through rates.
The fact that our volumes had a slight increase in the quarter, while most folks said that residential HVAC will still down low to mid single digits is it.
Very positive sign that respect and as Joe said, we continue to outperform the market.
Very helpful. Thanks, and can you just discuss maybe some of the bigger moving parts you're seeing today in terms of input costs by segment or end market and your ability to pass through those in terms of pricing.
Sure.
A lot of the costs have started to.
Stabilized we've talked a lot a year ago two years ago about ocean freight obviously, we shipped a lot of containers over here.
Our Vietnam facility and other third party outsource suppliers, we have in those rates have come back down to historical levels and have been relatively stable. They still bounce around some the ocean freight carriers look to raise rates, but the demand has been a little bit soft. So we've we've been able to stabilize that and are pleased with where that's been similarly trucking rates bounce around quite a bit.
The cost of diesel here domestically with shift things to our customers in between our own distribution centers, so that bounces around and stabilize and looks for now but with oil prices up you watch that very carefully overall raw material costs have generally been pretty stable in the contractor solutions segment, I would say things like steel aluminum and resins within the specialty.
<unk> raw ability solutions segment, however, with oil prices up around $90 a barrel, obviously base oil is a big component for a lot of the input costs. There. So we have seen some increase.
That space and in fact have raised prices recently to cover that and put through a price increase just in the last few weeks overall, though our pricing has been stable we have been able to hold onto our pricing will go through our normal annual look at pricing in the spring as we always do with our businesses and that's expected, especially in the contractor solutions segment, but we have been able to maintain.
Pricing overall, we've been able to see input cost stable. The one thing I'll mention you heard us mention a couple of times labor cost tend to be up a bit.
To attract and especially retain as Joe said, our exceptional talent, there's a cost to that as I'm sure you know we've got.
Pretty high compensation costs in terms of the benefits, we provide with our Aesop plan every employee gets company stock each year that we pay for and <unk> four one K plan every employees on an incentive plan. So we treat our employees very well that's one of our key tenets of our culture and so we have seen a rise a bit and employee costs, but to keep the talent we have available.
The demand Thats an investment book.
Perfect. Thank you and then could you also just give us a little more color on the drivers of the higher sequential corporate expense.
I think just overall I think compensation expenses part of it as I mentioned as the company grows you've got you've got to cover that that growth to some degree the acquisitions. We've done the organic growth. We've done nothing unusual in the corporate line I would say just kind of general growth with the overall.
Perfect. Thanks, and then just the last one for me you talked about your M&A strategy being unchanged and still seeing a pipeline of opportunities, but looking to allocate on a risk adjusted basis. Just wondering are you seeing just more or less opportunities given the higher cost of capital and hurdle rate or just in general.
What are you seeing out there.
Yes, Pete this is Joe I don't know that we're seeing a lot different level of activity.
Certainly our hurdle rates have risen as a result of higher cost of capital and we've always had a really high hurdle rate to begin with right from the standpoint of our margins, we really don't want to dilute our margins, we have a really high value.
Products that we offer to customers and so.
Our.
Opportunity set I think continues to be robust and we're pleased with that and.
We tend to.
Respond well in tougher markets, because we've got a stronger balance sheet than others allows us to move with speed certainty and provide that to sellers as you may recall, our largest and most successful acquisitions to date <unk> was done in the middle of the pandemic and we did that on our balance sheet because we had.
The liquidity and the.
Available capital to do that and so we're.
We're optimistic.
Extremely helpful. Thanks for your time and I'll jump back in the queue.
Thank you.
Thank you and our next question today comes from Julio Romero with Sidoti <unk> Company. Please go ahead.
Yeah.
Great. Thanks, Hey, good morning, Joe James Alexa, Thanks for taking the questions.
Maybe two.
To start on.
The contractor solutions segment, I was particularly impressed by the.
The increase in the unit volumes, there and you called out that some of that might be attributable to a warm summer.
Maybe what's what's your best guess as to what the the impact of that late summer heat wave was on the the volume in the quarter or maybe maybe thinking about it another way how our unit volumes trending in the periods not affected by that heat wave.
Yes. Thank you look at the last several quarters earlier. This is James again I appreciate you being on with US over the last several quarters, we've talked about volumes being slightly down we've never called out large decreases the comps have been hard after a couple of really strong years 'twenty 'twenty. One 'twenty two we're pretty strong in this fiscal year. So we're up against some tough comps the comps.
Maybe gotten a little bit better, but overall our team is doing a great job picking up new customers. So I'm picking up market share of wallet share and again, when the Oems and distributors talked about theyre still seeing residential down low single digits, and thats better than low mid teens or mid teens to high single digits.
Overall, though we feel good about that and we talked about that on the last call. We were already a month into it and and and.
And July was looking Hot August stayed hot September stayed hot.
So we certainly picked that up.
As part of that obviously, the heat sure and we call that out specifically because it was a late start to the summer and when people are on the air Conditioner 24 hours a day instead of 10 or 12 hours a day that certainly.
Creates more maintenance work more repair work and even replacement, which is a positive tailwind for us. So we're pleased to have two of a turn that from a slight negative to a slight positive, but I think as much as anything it's our team out there selling more to new customers a little bit of benefit from the acquisition as we've talked about <unk>. The only one that's considered inorganic and that will turn organic again after this.
This next quarter here in Q3 that will be organic but overall real pleased and I want to highlight to the margin growth to see the inflation. We've had the last few years to see even just slight unit volume growth, which we're very proud and pleased of that team to see margin growth like we've had a few hundred basis points year over year is really impressive.
Okay. That's good color there I appreciate that and then maybe.
Talk to the timing of the stage back residential volume normalization, how would you have a stink about how that cadence.
Kind of plays out over the next few quarters.
Well, yes, we're entering obviously the slower quarter as you all know our fiscal third quarter here through December the slower selling season, because air conditioners arent being run as much obviously.
And most of the country and then we'll start stocking up.
Our fourth quarters, when we see things ramp back up no. One can fully predict what next year looks like economically as the interest rate environment has clearly put some pressure on some of that but as we talked about earlier from the question that Peter asked and as you've seen out in the market everyone seems to think that Destocking has decelerated and the Destocking is generally kind of done by the end of this calendar year.
And like I said, we're working to start back up we would just with our contractor solutions team John <unk> and I were in the last couple of weeks looking at their inventory and what we need to stock up to be sure we're ready.
For the busy selling season that really gets going in February March again, so were optimistic about next year, we talked about second half growth overall for the company and obviously contract. Our solutions is a big engine to that we're not forecasting anything for fiscal 'twenty five yet, but I would certainly say that we're optimistic on our ability to continue to introduce innovative products continue to win more market.
Share continue to penetrate and win more customers with more of our products and then as Joe mentioned also find acquisitions that can continue to fuel the growth.
Got it really good color there, maybe just turning to the specialized reliability solutions segment.
Maybe if you could talk about the end markets that you called out that we're seeing some softening maybe give us a flavor of the magnitude of the softening in.
Do you see demand for those markets kind of continuing to trend that way or for maybe stabilizing anytime soon.
Yeah. Thanks, Thanks, Julio I think it's at the margin.
We don't see large.
Large changes interestingly the rig count domestically is down.
While production rates are not down that much the rig count is down but international rig count is up Canadian rig count is up and so mixed signals there.
Mining and rail has been a little bit slower and we're seeing some of that through the JV.
And so none of it.
The army is just.
At the margin and we would expect.
Normal variations throughout the year, there is a little bit of seasonality in some of those and some of those end markets but.
But nothing that's alarming at all.
But would you.
Maybe attribute some of that softening is it just the general.
Economic uncertainty higher interest rates are.
Okay.
I think so yes.
A lot of uncertainty.
It is.
People are not committing a lot of capital right now to larger projects.
Due to both higher interest rates and uncertainty of what the future holds and so.
I think thats, a little bit of a slowdown to be expected.
Got it and then maybe just last one for me on that segment.
With the deferral of some of the Capex Youre doing just does that change the timing of when phase III comes online.
Well it could I think that our commitment to our shareholders. All along has been to invest on a risk adjusted returns basis, and so that presupposes that we're going to have demand for that.
For that capital.
And so as we have said a couple of quarters now that the ramp up has been a little slower than anticipated and so so the capital is going to be a little slower than anticipated we need to fully utilize the existing capacity before we add more and we just think that's the prudent thing to do and good stewardship of our of our.
<unk> capital.
Very good thanks, a lot guys I appreciate it.
Julia.
Thank you and this concludes our question and answer session I would like to turn the conference back over to the management team for closing remarks.
Great. Thank you Rocco we sure appreciate everyone joining us today and look forward to our next conversation next quarter.
Thank you.
Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Yeah.