Q3 2024 CSW Industrials Inc Earnings Call
Greetings and welcome to the CSW Industrials, Inc. Third quarter 'twenty 'twenty four earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero.
On your telephone keypad.
A reminder, this conference is being recorded.
It's now my pleasure to introduce your host Alexa work. Thank you Ms worthy you may begin.
Okay.
Thank you Kat good morning, everyone and welcome to the C O two industrial fiscal 2024 third 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 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.
Actual results could materially differ because of factors discussed today in our earnings release.
In our 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 good morning, everyone.
Impressively our team continues to outperform the markets, we serve despite challenging conditions and again delivered record results in the third quarter and year to date against strong prior year result.
Third quarter results demonstrate our continued ability to grow through the cycle and drive notable operating leverage in our bottom line results.
Earlier. This morning, we announced record third quarter revenue of $175 million record third quarter adjusted earnings per diluted share of $1.07 and record third quarter adjusted EBITDA of $37 million.
EPS and EBITDA were both adjusted to exclude certain nonrecurring tax items related to past acquisitions as we indicated they would be on our last earnings call.
Adjusted EBITDA grew 18% on 2% growth in revenue.
Delivering 270 basis points of adjusted EBITDA margin expansion up to 21% in the third quarter.
On the heels of two consecutive quarters of record result, we continued generating record Q3 and year to date results and revenue of $582 million or three 5% growth in adjusted earnings per diluted share of $4.97.
Or 11, 4% growth.
And then adjusted EBITDA of $144 million.
Robust 15, 7% growth.
For the third consecutive quarter, we delivered outstanding cash flow from operations was a record fiscal third quarter total of $47 million.
This led to a pay down of $20 million of borrowing under our revolving credit facility in the third quarter and an aggregate reduction of $100 million during the fiscal year.
We continue to reduce our interest expense and fortify our balance sheet to provide significant flexibility to pursue future opportunities as they arise.
[laughter].
Over the last few quarters, we've seen ocean freight returned to normal levels, we have reduced our domestic freight costs and driven additional operational efficiencies versus the prior year.
Recently, we have been monitoring issues in the Red Sea.
We have been working closely with our freight forwarders to assess the impact on pricing and transit time for all in transit and potential future shipments.
We are assessing the most efficient delivery routes and options, but there could be some temporary upward pressure on shipping rates.
We also continue to see increased compensation expense as we staff up for our continued growth and retain the highest caliber team members.
By successfully implementing new and maintaining prior pricing initiatives and increasing our gross margins through freight expense savings <unk> has been able to achieve meaningful operating leverage and expand further our already healthy margins.
We have always and will continue to prioritize capital investments based on the estimated risk adjusted returns with the ultimate goal of increasing long term shareholder value.
We evaluate or organic.
And inorganic opportunities for growth that support our generous margins and we continuously maintain a pipeline of potential acquisition opportunities.
Yeah.
I am proud of the execution within each of the three business segments. So I would like to briefly speak about the performance of each segment.
Then James will provide additional financial details around the quarter.
Third quarter is seasonally our slowest quarter of the year for our contractor solutions segment.
But our team did an excellent job.
Not only delivering another quarter of market outperformance, but also year over year growth. Despite the HVA see our industry experiencing a decline in residential volumes.
Contractor solutions delivered Q3 net revenue of $115 4 million.
An increase of 3% over the prior year period.
Our competitive advantage in this segment centers around our distribution channel.
Introducing innovative high value products and focusing on acquisition integration.
The power of our distribution model allows CSW to acquire integrate master distribute and accelerate growth on newly decide products.
This resulted in faster and more profitable sales.
Because of our strong relationships with wholesalers, our sales network logistics leverage.
Operator: Greetings, and welcome to the CSW Industrial Thank you all for joining us for the Quarter 2024 earnings call. At this time, all participants are in a listen only mode.
Credit and back office support, allowing us to focus on serving our customers well.
Yeah.
Our specialized reliability solutions segment revenue decreased $2 6 million in the quarter, driven primarily by a temporary shipment delay at the end of the quarter.
Operator: A brief question and answer session will follow the formal presentation. 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. It is now my pleasure to introduce your host, Alexa Huerta. Thank you, Ms. Huerta. You may now disconnect.
Which we expect to recover in full.
During this fiscal year.
The temporary shipment delay was offset partially by pricing initiatives.
The Srs team continues to make improvements in operational efficiency and quality.
Alexa Huerta: Thank you, Cat. Good morning, everyone, and welcome to the CFW Industrials Fiscal 2024 Third Quarter Earnings Call. Joining me today is Joseph Arms, Chairman, Chief Executive Officer, and President of CFW Industrials, and James Perry, Executive Vice President and Chief Financial Officer. We issued our earnings release, updated investor relations presentation, and Form 10-2 prior to the market's opening today, all of which are available on the Investors portion of our website at www.cswindustrials.com. This call is being webcast, and information on accessing the replay is included in the earnings release.
Strong oil and gas drilling and mining end markets showed growth.
While we saw a bit of softening in industrial end markets.
Despite passenger rail being down in the third quarter. The outlook remains good and the team continues to introduce new <unk>.
Innovative products.
Revenue in our engineered building solutions segment was up with an increase of 13% in the quarter due to the conversion of bookings into revenue.
<unk> from our record backlog as.
As well as positive pricing initiatives.
For the eighth consecutive quarter. This segment's backlog reached an all time high with our aluminum railings business continuing to drive most of the growth.
Alexa Huerta: 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, in our 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 Joe. Thank you, Alexa. Good morning, everyone.
We continue to see strong growth for multifamily housing in the Canadian market.
Project mix and a record backlog continues to skew toward larger jobs, which may take two years or more to turn into revenue.
Our sales and estimation teams continue to focus our bidding and booking on institutional and multifamily projects.
With the highest quality developers to ensure the greatest likelihood of closing.
And I'm proud of the performance of the UBS team.
Joseph Arms: Impressively, our team continues to outperform the markets we serve despite challenging conditions and again delivered record results in the third quarter and year-to-date against strong prior year results. The third quarter results demonstrate our continued ability to grow through the cycle and drive notable operating leverage in our bottom line results. Earlier this morning, we announced record third-quarter revenue of $175 million, record third-quarter adjusted earnings per diluted share of $1.07, and record third-quarter adjusted EBITDA of $37 million. EPS and EBITDA were both adjusted to exclude certain non-recurring tax items related to past acquisitions, as we indicated they would be on our last earnings call.
Before I turn the call over to James I would like to take a moment to brag on our team for delivering growth through pricing initiatives and even volumes during a period when some of our end markets are declining.
The vigor of our business model includes the diversification of our product portfolio.
The resilience of the end markets we serve.
On the repeatable consumption of many of our products that are used either in maintenance repair and replacement applications or to enhance the reliability performance and lifespan of mission critical assets.
The products, we sell and contractor solutions and specialized rely on reliability solutions and the value. They provide are often non discretionary fundamental necessities for both homeowners businesses and the utility sector.
Without outperformed the markets, we serve all year long, while expanding margins strengthening our balance sheet and reducing our leverage ratio.
Joseph Arms: Adjusted EBITDA grew 18% on 2% growth in revenue, delivering 270 basis points of adjusted EBITDA margin expansion up to 21% in the third quarter. On the heels of two consecutive quarters of record results, we continued generating record Q3 and year-to-date results in revenue of $582 million, or 3.5% growth, in adjusted earnings per diluted share of $4.97, or 11.4% growth, and an adjusted EBITDA For the third consecutive quarter, we delivered outstanding cash flow from operations with a record fiscal third quarter total of $47 million. This led to a pay-down of $20 million of borrowing under our revolving credit facility in the third quarter and an aggregate reduction of $100 million during the fiscal year.
<unk> is positioned to overcome market headwinds and to pursue growth opportunities that arise across our entire portfolio.
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.
Thank you Joe and good morning, everyone.
During the fiscal year to date period, we delivered a record year to date revenue of $582 million representing growth of three 5%.
Most of the growth has come organically the $7 5 million came from the acquisitions of cover guard.
AC guard and Falcon in fiscal 2023.
Operating leverage on this revenue drove nearly 16% growth in adjusted EBITDA and over 11% growth in adjusted earnings per diluted share.
Our consolidated revenue during the fiscal third quarter of 2024 was $175 million or two 3% increase as compared to the prior year period.
This growth was driven organically through pricing initiatives and increased unit volumes.
Joseph Arms: We continue to reduce our interest expense and fortify our balance sheet to provide significant flexibility to pursue future opportunities as they arrive. Over the last few quarters, we have seen ocean freight return to normal levels. We have reduced our domestic freight costs and driven additional operational efficiencies versus the prior year. Recently, we have been monitoring issues in the Red Sea.
Consolidated gross profit in the fiscal third quarter was $74 million.
Representing more than 12% growth over the prior year period.
Gross profit margin improved to 42% compared to 38, 5% in the prior year period.
Driven by revenue growth from pricing actions increased unit volumes and lower ocean and domestic freight costs.
Joseph Arms: We have been working closely with our freight forwarders to assess the impact on pricing and transit Time for all in-transit and potential future shipments. We are assessing the most efficient delivery routes and options, but there could be some temporary upward pressure on shipping rates. We also continue to see increased compensation expense as we staff up for our continued growth and retain the highest caliber team members. By successfully implementing new and maintaining prior pricing initiatives and increasing our gross margins through freight expense savings. CSWI has been able to achieve meaningful operating leverage and expand our already healthy margin. We have always and will continue to prioritize capital investments based on estimated risk-adjusted returns with the ultimate goal of increasing long-term shareholder value.
As mentioned on our last earnings call. As a reminder, we are presenting the fiscal third quarters profitability figures on an adjusted basis due to the $8 5 million or <unk> 48 per share.
Please a tax indemnification assets related to <unk>, and Falcon acquisitions, and the related uncertain tax position accrual for Falcon.
This amount is in the contractor solutions segment and consolidated results as other expense.
Our consolidated adjusted EBITDA for the third quarter increased by $6 million to $37 million or 18% growth when compared to the prior year period.
Our adjusted EBITDA margin improved to 21% as compared to 18% in the prior year quarter, driven by revenue growth and gross margin expansion, partially offset by incremental employee expenses and increased travel to drive revenue growth.
We continue to strive for additional EBITDA leverage as we grow revenue and prudently manage expenses.
Joseph Arms: We evaluate organic and inorganic opportunities for growth that support our generous margins, and we continuously maintain a pipeline of potential acquisition opportunities. I am proud of the execution within each of the three business segments, so I would like to briefly speak about the performance of each segment. Then James will provide additional financial details about the quarter. The third quarter is seasonally our slowest quarter of the year for our Contractor Solutions segment.
Net income attributable to <unk> in the fiscal third quarter was $17 million is adjusted or $1 <unk> per diluted share compared to $16 million or $1 <unk> per diluted share in the prior year period, representing growth of 6%.
Our contractor solutions segment was $115 million in revenue accounted for 66% of our consolidated revenue and deliver $3 5 million or 3% total growth as compared to the prior year quarter.
Joseph Arms: But our team did an excellent job by not only delivering another quarter of market-leading performance but also year over year growth despite the HVACR industry experiencing a decline in residential volume. Contractor Solutions delivered Q3 net revenue of $115.4 million, an increase of 3% over the prior year period. Our competitive advantage in this segment centers around our distribution channel, introducing innovative, high-value products, and focusing on acquisition integration. The power of our distribution model allows CSWI to acquire, integrate, master distribute, and accelerate growth on newly designed products. This results in faster and more profitable sales because of our strong relationships with wholesalers, our sales network, logistics leverage, credit, and back office support, allowing us to focus on serving our customers well. Our Specialized Reliability Solutions Segment revenue decreased $2.6 million in the quarter, driven primarily by a temporary shipment delay at the end of the quarter, which we expect to recover in full during this fiscal year.
All growth in the quarter was organic came from all end markets. It was a result of pricing actions and increased unit volumes.
Segment, adjusted EBITDA was $33 million or 29% of revenue.
Compared to $28 million or 25% of revenue in the prior year period as our margin growth continues.
The increasing margins resulted from the company's ability to maintain and even increase some pricing while leveraging the lower year over year freight costs.
Our specialized reliability solutions segment revenue decreased 7% to $34 million, primarily due to a temporary delay in shipments at quarter end.
We expect to fully recover this missed revenue in our current fiscal fourth quarter.
We were able to leverage the segment EBITDA and EBITDA margin of $5 $2 million and 15% respectively in the fiscal 2024 third quarter.
Compared to $5 $1 million, 14% in the prior year period.
Managing expenses and driving operating efficiencies.
Our Srs team remains focused on top and bottom line growth as well as offering the right mix of high value products to our customer base around the world.
Our engineered building solutions segment revenue increased to $28 million, a 13% increase as compared to $25 million in the prior year period.
Joseph Arms: The temporary shipment delay was offset partially by pricing initiatives. The SRS team continues to make improvements in operational efficiency and quality. Strong oil and gas drilling and mining in markets showed growth.
Bidding and booking trends remained solid.
In fact, we ended December with our eighth consecutive quarter of record backlog in this segment.
Joseph Arms: But we saw a bit of softening in the industrial and market sectors. Despite flight passenger rail being down in the third quarter, the outlook remains good. And the team continues to introduce new innovative products. Revenue in our engineered building solutions segment was up by 13% in the quarter due to the conversion of bookings into revenue, benefiting from our record backlog, as well as our Positive Pricing Initiative. For the eighth consecutive quarter, this segment's backlog reached an all-time high, with our aluminum railings business continuing to drive most of the growth. We continue to see strong growth from multifamily housing in the Canadian market. Project Mix and our record backlog continue to skew toward larger jobs, which may take two years or more to turn into revenue.
At the end of the fiscal third quarter, our book to Bill ratio for the trailing eight quarters was about one two to one.
Segment, EBITDA grew 49% to $4 million or 14% EBITDA margin in the third quarter compared to $2 7 million and an 11% EBITDA margin in the prior year period.
Transitioning to the continuous strengthening of our balance sheet and cash flow.
We ended our fiscal 2024 third quarter with $25 million of cash and reported record fiscal third quarter cash flow from operations of $47 million compared to $37 million in the same quarter last year.
For the current year to date periods in fiscal 2024, the company had a record cash flow from operations of $142 million or 69% growth compared to $84 million in the first three quarters of the prior fiscal year.
Joseph Arms: Our sales and estimation teams continue to focus on institutional and multifamily projects with the highest quality developers to ensure the greatest likelihood of closing, and I'm proud of the performance of the EBS team. Before I turn the call over to James, I'd like to take a moment to congratulate our team for delivering growth through pricing initiatives and even volumes during a period when some of our end markets are declining. The vigor of our business model includes the diversification of our product portfolio, the resilience of the end markets we serve, and the repeatable consumption of many of our products that are used either in maintenance, repair, and replacement applications or to enhance the reliability, performance, and lifespan of mission-critical assets. The products we sell and contract are solutions and specialized reliability solutions, and the value they provide is often non-discretionary, fundamental necessities for both homeowners, businesses, and the utility sector.
Our free cash flow defined as cash flow from operations minus capital expenditures grew 31% to $43 million in the fiscal third quarter.
As compared to $33 million in the same period a year ago.
That resulted in free cash flow per share of $2 76 in the fiscal third quarter as compared to $2 13 in the same period a year ago.
This impressive level of free cash flow fuels, our capital allocation strategy and ultimately enhances shareholder value.
As Joe mentioned as part of our broad capital allocation strategy.
During the quarter, we paid down $20 million of our outstanding debt.
We ended the fiscal third quarter with $153 million outstanding on our $500 million revolver.
Our bank Covenant leverage ratio at quarter end was six nine times an improvement from one three times at the end of fiscal 2023 due to our strong EBITDA growth and the $100 million pay down of our revolver in that timeframe.
James Perry: We have outperformed the markets we serve all year long while expanding margins, strengthening our balance sheet, and reducing our leverage ratio. CSWI is positioned to overcome market headwinds and to pursue growth opportunities that arise across our entire portfolio. At this time, I'll turn the call over to James for a closer look at our results, and then I will conclude our prepared remarks. Thank you, Joe, and good morning, everyone.
As a reminder, at the end of the fiscal 2024 second quarter, our bank coverage leverage leverage ratio was <unk> 85 times as the company has been the lowest tier of our revolver pricing.
Reporting our fiscal 2024 first quarter, reducing our interest rate spread and creating interest expense savings.
We continue to maintain strong liquidity and a tough financial environment.
James Perry: During the fiscal year-to-date period, we delivered record year-to-date revenue of $582 million, representing growth of 3.5%. Most of the growth has come organically. The $7.5 million came from the acquisitions of Cover Guard, AC Guard, and Falcon in fiscal 2023. Operating leverage on this revenue drove nearly 16% growth in adjusted EBITDA and over 11% growth in adjusted earnings per diluted share. Our consolidated revenue during the fiscal third quarter of 2024 was $175 million, a 2.3% increase as compared to the prior year period. This growth was driven organically through pricing initiatives and increased unit volume. Consolidated gross profit in the fiscal third quarter was $74 million, representing more than 12% growth over the prior year period.
To remind everyone once more in February of 2023, we entered into an interest rate hedge from the first $100 million of borrowings under our revolver.
During the fiscal third quarter and the first three quarters of the year the interest rate hedge saved us approximately $400000 and $1 $1 million, respectively and interest expense.
Our effective tax rate for the fiscal third quarter was 43, 2% on a GAAP basis and 32, 5% as adjusted.
The higher than normal 32, 5% effective adjusted tax rate was driven by the Finalization of the international tax deduction and credits for the fiscal 2023 U S. Federal tax return and the effect of seasonality of revenue on our fiscal third quarter.
We expect our adjusted effective tax rate to be between 27% and 28% for fiscal 2024.
As we look out to the rest of fiscal 2024, we anticipate delivering full year record revenue growth with continued meaningful operating leverage.
James Perry: Gross profit margin improved to 42% compared to 38.5% in the prior year period, driven by revenue growth from pricing actions, increased unit volumes, and lower ocean and domestic freight costs. As mentioned on our last earnings call, as a reminder, we are presenting the fiscal third quarter's profitability figures on an adjusted basis. Due to the $8.5 million, or $0.48 per share, release of tax and demonization assets related to the True Air and Falcon acquisitions and the related uncertain tax position accrual for Falcon, this amount is in the Contractor Solutions Segment and Consolidated Results as Other Expenses.
We also expect the current full fiscal year to closer to record adjusted EBITDA and adjusted EPS as well as record cash flow.
With that I'll now turn the call back to Joe for closing remarks.
Thank you James.
Summarize during the third fiscal quarter of 2024, we continued to deliver on our commitments by posting record results across the board highlighted by organic revenue growth.
<unk> margins and robust cash flow.
While there has been uncertainty in certain key end markets all year long, we still expect to outperform versus the end markets we serve.
James Perry: Our consolidated adjusted EBITDA for the third quarter increased by $6 million to $37 million, or 18% growth when compared to the prior year period. Our adjusted EBITDA margin improved to 21% as compared to 18% in the prior year quarter, driven by revenue growth and gross margin expansion, partially offset by incremental employee expenses, and increased travel to drive revenue growth. We continue to strive for additional EBITDA leverage as we grow revenue and prudently manage expenses. Net income attributable to CSWI in the fiscal third quarter was $17 million, as adjusted, or $1.07 per diluted share, compared to $16 million, or $1.01 per diluted share, in the prior year period, representing growth of 6%.
We will focus on leveraging our strong distributor relationships and delivering earnings growth through expense optimization, we will continue to demonstrate capital discipline drive cash flow conversion.
And deliver sustainable growth and shareholder value.
Because how we succeed matters <unk>.
<unk> will continue to focus on our most important asset which is our people.
I would like to share one safety metric that is extremely important to our management team.
That is our T. Our IR the total reportable incident rate.
Final tier IR for the entire enterprise for calendar year, 2023 was 0.9 down significantly compared to one nine for the calendar year 2022.
Our continued commitment to keeping our team members safe on a daily basis has reduced our TR IRR by over 50% for the calendar year.
James Perry: Our Contractor Solutions segment, with $115 million in revenue, accounted for 66% of our consolidated revenue and delivered $3.5 million, or 3% total growth, as compared to the prior year quarter. All growth in the quarter was organic, came from all end markets, and was a result of pricing actions and increased unit volume. Segment-adjusted EBITDA was $33 million, or 29% of revenue, compared to $28 million, or 25% of revenue, in the prior year period, as our margin growth continues. The increasing margins resulted from the company's ability to maintain and even increase some prices while leveraging lower year-over-year freight costs. Our Specialized Reliability Solutions segment revenue decreased 7% to $34 million, primarily due to a temporary delay in shipments at quarter end.
I want to thank everyone at <unk>.
<unk> to our continued success at achieving this meaningful milestone for the company and all of our employees.
Continuing with our theme of people you may have seen in a separate news release. This morning, we announced the appointment of Jeff Underwood to senior Vice President of CSW eye and general manager of the contractor solutions segment.
Jeff will succeed Dan Sullivan and his current role as the head of contractor solutions.
Don will remain with CSW as an executive Vice President and assumed a new role at corporate of Chief strategy Officer.
And ensure a smooth transition of leadership.
Very happy to welcome Jeff to the executive leadership team and.
And especially pleased that Don and I will continue to work closely together.
As we approach the end of a record fiscal 2024, we expect a solid fourth quarter and we're off to a good start with what appears to have been a strong January for our businesses.
We are now preparing our budget for fiscal 2025, and while there's still much work to be done as we finalize the budget. We recognize there are variables that can change throughout the year, we do expect to show revenue growth and maintain or expand our operating margins.
James Perry: We expect to fully recover this missed revenue in our current fiscal fourth quarter. Additionally, we were able to leverage the segment EBITDA and EBITDA margin of $5.2 million and 15%, respectively, in the fiscal 2024 third quarter, compared to 5.1 million dollars and 14% in the prior year period of managing expenses and driving operating efficiency. Our SRS team remains focused on top and bottom line growth, as well as offering the right mix of high-value products to our customer base around the world. Our engineer building solution segment revenue increased to $28 million, a 13% increase as compared to $25 million in the prior year period.
We also expect to pursue attractive acquisition opportunities that would supplement our organic growth.
We believe that the future is very bright while we do have temporary headwinds from time to time.
The fundamental investment thesis for our business remains firmly intact. We remain focused on the long term growth of the company, while delivering year over year growth in revenue and profits.
In our largest end market HVA CR, we offer innovative high value products that our customers prefer.
And we remain focused on the products and sub categories that are growing faster than the overall industry.
We continue to experience rising temperatures high.
James Perry: Bidding and booking trends remain solid. In fact, we ended December with our eighth consecutive quarter of record backlog in this cycle. At the end of the fiscal third quarter, our book-to-bill ratio for the trailing eight quarters was about 1.2 to 1.
Higher homeowner expectations for comfort and a growing installed base driven in part by a housing shortage.
We believe these dynamics provide a backdrop, where we can deliver long term value for our shareholders.
James Perry: Segment EBITDA grew 49% to $4 million, or a 14% EBITDA margin in the third quarter, compared to $2.7 million and an 11% EBITDA margin in the prior year period. Transitioning to the continuous strengthening of our balance sheet and cash flow. We ended our fiscal 2024 third quarter with $25 million of cash and reported record fiscal third quarter cash flow from operations of $47 million, compared to $37 million in the same quarter last year. For the current year-to-date period in fiscal 2024, the company had a record cash flow from operations of $142 million, or 69% growth, compared to $84 million in the first three quarters of the prior fiscal year. Our free cash flow, defined as cash flow from operations minus capital expenditures, grew 31% to $43 million in the fiscal third quarter, as compared to $33 million in the same period a year ago. That resulted in free cash flow per share of $2.76 in the fiscal third quarter as compared to $2.13 in the same period a year ago.
Now as always I want to close by thanking all of my colleagues here at CSW, who collectively own approximately 5% of <unk> through our stock.
Our employee stock ownership plan as well as our shareholders.
For their continued interest in and support of our company.
With that operator, we're now ready to take questions.
Thank you we will now be conducting a question and answer session. One moment. Please while we poll for questions.
Our first question comes from John Tong Wang Peng from CGS Securities. Please proceed.
Hi, Good morning, everyone. Thank you for taking my questions and really nice job on the margins, especially given that missed shipment I was wondering if you could tell us what was actually delayed and what was the actual impact in the quarter.
Number one and number two.
You've already seen that ship out in January or if that's still on the comm and when you expect to make that up.
Hey, Jon it's Joe It wasn't one shipment it was it was.
A series of shipments just.
Missed opportunity at the end of the quarter there were some packaging shortages there were some.
Staffing shortages and things that did that yes, we are already seeing that flow through in January and as James and I, both mentioned that should be fully realized in <unk>.
The final quarter here, so the back half of the year the full year is still completely intact.
Got it okay and was it in.
The Srs segment or was that in multiple segments.
Only in Srs.
Got it okay.
Could you also quantify the strength youre seeing in January is that because of the shipment push outs or is that on an organic basis.
James Perry: This impressive level of free cash flow fuels our capital allocation strategy and ultimately enhances shareholder value. As Joe mentioned, as part of our broad capital allocation strategy, during the quarter, we paid down $20 million of our outstanding debt. We ended the fiscal third quarter with $153 million outstanding on our $500 million revolver.
Excluding that effect.
I would say excluding that effect.
Okay got it.
And then you mentioned shipping costs going up even despite all the the freight improvements you've made in the last year I was wondering one how much do you shift to the Red Sea today.
Image at all.
How much do you expect to see inflation in that shipping and freight for you guys. This year.
Yes, John Good morning, it's James Thanks for being on as always yes, we do have some shipments from our Vietnam facility that will travel through the Suez Canal normally those shipments have all been rerouted so theyre all going south around around the south tip of Africa as most shipments are.
James Perry: Our bank covenant leverage ratio at quarter end was 0.69 times, an improvement from 1.3 times at the end of fiscal 2023 due to our strong EBITDA growth and the $100 million pay-down of our revolver in that time frame. As a reminder, at the end of the fiscal 2024 second quarter, our bank coverage leverage ratio was 0.85 times, as the company has been in the lowest tier of our revolver pricing since reporting our fiscal 2024 first quarter. Reducing our interest rate spread and creating interest expense savings. We continue to maintain strong liquidity in a tough financial environment. To remind everyone once more, in February of 2023, we entered into an interest rate hedge for the first $100 million of borrowings under our revolver. During the fiscal third quarter and the first three quarters of the year, the interest rate hedge saved us approximately $400,000 and $1.1 million, respectively, in interest expense. Our effective tax rate for the fiscal third quarter was 43.2% on a gap basis and 32.5% as adjusted.
We have other shipments that go different directions of course, but those have been rerouted.
You have seen an increase in pricing as you know pricing was down a couple of thousand dollars. A few years ago, we got up to 20000 plus back to a couple thousand.
We're seeing rates out there.
<unk> 4000, or so you see things pop we expect that this is rather temporary for now we'll say, it's only been a few weeks, but number one our cargo is safe, it's being rerouted things take a little longer to get here.
This is also the time that we've spent the last couple of weeks at a lot is a lot of manufacturers have been stocking up because you have the Tet holiday when all production shuts down for 10 or 12 days in Asia Us being no exception that starts I think on Saturday in fact, so so we kind of get ahead of that so we've had some shipments come through so you really have a couple of week.
Zero or things you won't see that impact.
In that respect there was a lot of media in the last couple of days around the seems to be somewhat temporary it's not fully.
Baked into supply and demand. So we will see I'll remind you however that when we do put something on a boat as you.
We shipped a few dozen containers over every week from our facility. It takes several months for that to flow through our cost of goods sold so youre still seeing this last quarter Q3, the current quarter of Q4 still working off of the lower freight rates. So we're still experiencing that year over year Delta and the pick up this fourth quarter last year at this time.
Rates had come down so that delta is starting to minimize so youll see this temporary pop more in the first part of next year. We're monitoring it closely working hard on efficient rates alternative routes and those kind of things with our our shipping partners, but still feel good where we are but thats one of the elements as Joe talked about as we go through our budget, how that will impact things than most.
Joseph Arms: The higher-than-normal 32.5% affected adjusted tax rate was driven by the finalization of the International Tax Deduction and Credits for the fiscal 2023 U.S. federal tax return and the effect of seasonality of revenue in our fiscal third quarter. We expect our adjusted effective tax rate to be between 27% and 28% for fiscal 2024. As we look out to the rest of fiscal 2024, we anticipate delivering full-year record revenue growth with continued meaningful operating leverage. We also expect the current full fiscal year to close with a record adjusted EBITDA and adjusted EPS, as well as record cash flow. With that, I'll now turn the call back to Joe for his closing remarks. Thank you, James.
Importantly, we want to be sure. We preserve margin. So we'll take the actions we need to do to be sure that we stay intact from our expectations.
Got it.
Kind of a follow up what do you expect to do on pricing I guess to reflect these rates is going to be like a surcharge is it just part of your normal price increases as you go through the year.
And does it also incorporate.
<unk> retention compensation that you were talking about earlier.
Yes, that's dynamic we've already put through our normal annual seasonal price increases we announced those a few weeks ago and those go into effect here pretty soon.
And so thats normal and we achieved the normal kind of back back to normal prior to hyperinflation.
Pricing increases that we would normally see do we need to adjust things to account for shipping rates, we will see.
If this becomes a permanently higher rate than our team is certainly.
Ready to look at that and what the market will bear and what's appropriate we always like I said maintain our margins do a good job with that I think we assume labor costs are going to be up that's already baked into our expectations those kind of things, but the dynamic around shipping rates, how long that last and what the impact is really it looks like it will be will determine if we need to take action going forward.
Joseph Arms: Summary, during the third fiscal quarter of 2024, we continue to deliver on our commitments by posting record results across the board, highlighted by organic revenue growth, expanded margins, and robust cash flow. While there has been uncertainty in certain key end markets all year long, we still expect to outperform versus the end markets we serve. We will focus on leveraging our strong distributor relationships and delivering earnings growth through expense optimization. We will continue to demonstrate capital discipline, drive cash flow conversion, and deliver sustainable growth in shareholder value. Because how we succeed matters, CSWI will continue to focus on our most important asset, which is our people. I would like to share one safety metric that is extremely important to our management team. That is our TRIR, the Total Reportable Incident Rate. The final TRIR for the entire enterprise for calendar year 2023 was 0.9, down significantly compared to 1.9 for the calendar year 2022.
Okay, great. Thanks, guys I'll jump back in queue I appreciate it thank you John.
Our next question comes from Julio Romero from Sidoti and company. Please proceed.
Thank you and good morning, Joe James and Alexa.
Maybe to start on contractor solutions nice job once again growing unit volumes there.
I wanted to ask what the first month of calendar 'twenty four has kind of told you about how the remainder of the calendar year will shape up in regards to two HVAC or demand what youre hearing from customers and what your boots on the ground Youre seeing.
Sure Julio this is James good morning, Thanks for being on the call as always.
We wanted to give you a little peek into January to give you a sense of what Q4 looks like it's just one month, where literally starting to close the books today, but but across the board. We felt really good about January and as Joe mentioned earlier to Jon.
That's not just on the heels of making up for the lost shipments in Srs in December right now we feel good.
The very beginning of the early buying season for contractor solutions that HVAC market will start really stocking up for next couple of months a lot of us were at the industry show just last week.
People reported it was record attendance.
A lot of mixed conversations when you talk to folks, but we continue.
Joseph Arms: Our continued commitment to keeping our team members safe on a daily basis has reduced our TRIR by over 50% for the calendar year. I want to thank everyone at CSWI for contributing to our continued success in achieving this meaningful milestone for the company and all of our employees. Continuing with our theme of people, you may have seen in a separate news release this morning that we announced the appointment of Jeff Underwood, the Senior Vice President of CSWI and General Manager of the Contractor Solutions Segment. Jeff will succeed Don Sullivan in his current role as the head of Contractor Solutions.
To outperform the market, we are indexed to the subcategories as Joe mentioned that grow faster than the unitary ducting HVAC OEM market.
Some expectations that can be down this year, some relatively flat, but like we said we expect growth.
Ductless market continues to grow as a percent of share and the number of products as you and our shareholders know that we have tied to that ductless market continues to grow areas like search protection continue to grow and were indexed to that space more and more as we go along so our commercial team continues to find products to introduce and innovate.
That will outperform the market. So it's hard to say that January the strength that we've seen.
Joseph Arms: Don will remain with CSWI as an executive vice president and assume the new role at corporate of chief strategy officer, and ensure a smooth transition of leadership. Very happy to welcome Jeff to the executive leadership team, and especially pleased that Don and I will continue to work closely together. As we approach the end of a record fiscal 2024, we expect a solid fourth quarter, and we're off to a good start with what appears to have been a strong January for our business. We're now preparing our budget for fiscal 2025. And while there's still much work to be done, we, as we finalize the budget, recognize there are variables that can change throughout the year. We do expect to show revenue growth and to maintain or expand our operating margin. We also expect to pursue attractive acquisition opportunities that would supplement our organic growth. We believe that the future is very bright, and while we do have temporary headwinds from time to time, the fundamental investment thesis for our business remains firmly intact.
As a precursor to an entirely great season, but we will certainly take a good January one thing I will say without getting too deep into it. We will report back in May when we have a good sense of how the start of the year looked out we can never predict the weather, but we talked a lot. The last couple of quarters that Destocking and we've said that generally it feels like thats behind us and I think the <unk>.
<unk> that we saw in contract our solutions are nice January tells us that folks are stocking up for what we anticipate to be agency.
Yes.
Thanks, very much that's really helpful color, there and you talked about your efforts to outperform the market on the DH back side.
Some of that's related to your efforts to increase sales of some previously acquired product lines taken them nationwide.
Can you just speak to that and maybe how much more runway you have with that.
I still think there is runway it's a great question.
You go back to even true are over three years ago now, we're still introducing that product to some new customers because we weren't really sure that when we introduce a product and theyre going to displace a competitor that we're going to give them the highest level of customer service the highest availability of inventory and the pricing that makes sense for us and them. So we're still <unk>.
Operator: We remain focused on the long-term growth of the company while delivering year-over-year growth in revenue and profit. In our largest end market, HVACR, we offer innovative, high-value products that our customers prefer. And we remain focused on the products and subcategories that are growing faster than the overall industry. We continue to experience rising temperatures, higher homeowner expectations for comfort, and a growing installed base driven in part by a housing shortage. We believe these dynamics provide a backdrop where we can deliver long-term value for our shareholders. Now, as always, I want to close by thanking all my colleagues here at CSWI, who collectively own approximately 5% of CSWI through our stock, our employee stock ownership plan, as well as our shareholders for their continued interest in and support of our company. With that operator, we're now ready to take, and Peter Lukas. Thank you. Thank you.
Customers from true are Anne Shoemaker from three in two years ago, respectively. One example, I'll give you though of a recent one as Falcon, that's now organic because falcon is more than a year.
So we call that organic that was a west coast centric product for the most part under marketed under commercialized because of the ownership team did a great job innovating on the product, but they were somewhat limited and it is a great example of our model of shipping that out to more distributors that was a slow introduction, we got the product in our catalog <unk>.
<unk> moved the inventory over it is literally a couple of hundred mile move.
But we now have introduced that nationwide now listen all of our warehouses now the customers are more aware of the product. So our ability to now kind of own the water heaters, so to speak and have a full package of things around the water heater that the Falcon connectors attached to is now a full product we had a whole part of our booth at the show last week in fact around the water.
Falcons prominent so it takes time. So there are certainly runway for those acquisitions, we made about 18 months ago as well as still runway for true Aaron Shoemaker. So I. Appreciate you recognizing that you don't get all of that day, one you don't get it all quarter Wonder year. One it is a long cycle of introduction and continued opportunity for growth.
Operator: We will now be conducting a question and answer session. One moment, please, while we pull for questions. Our first question comes from John Tan-Wan Tang from CGS Security. Hi, good morning, everyone. Really nice job with them.
Very helpful. There and then just wanted to ask about the other press release you had this morning regarding the appointments.
Can you maybe talk a little bit about jeff's background and what he brings to the role of GM of contractor solutions in <unk>.
Joseph Arms: I was wondering if you could tell us what was actually delayed, number one and number two, about it in January or if that's... Hey, John, it's Joe. It wasn't one shipment. It was a series of shipments. Just missed opportunity at the end of the quarter. There were some packaging shortages, there were some staffing shortages and things that did that.
Question about Don and what he brings to the strategy officer role.
Yes. This is Joe we'll start I'll start with Jeff I mean, Jeff's been here for five years now charges sales and marketing and when we talk about the professionalism mission of our go to market strategy for the contractor solutions segment.
That's been Jeff's initiatives.
And the growth and the.
<unk>.
Joseph Arms: Yes, we are already seeing that flow through in January. And as James and I both mentioned, that should be fully realized in the final quarter here. So the back half of the year, the full year, is still completely intact. Okay, and was it in just the SRS segment, or was it? No, only an SRO.
Really the increase in size and scale of that business has been.
In large part attributable to those initiatives and the great work that's been done there. So real strong track record here, Jeff comes from came to us from Goodman, where he worked with Don before.
Before that Jeff had been at Bain and.
Joseph Arms: Could you also quantify the strength you're seeing in January? Is that because of the shipment push-outs, or is that on an... I would say excluding that effect.
Just a really strong background a lot of experienced well known in the marketplace and the industry.
Has been very very integral to our acquisition strategy for that business and so.
Joseph Arms: And then you mentioned shipping costs. I was wondering, one, how much do you shift through the red... today? Amen. Yeah, John, good morning. It's James.
Perfect.
Of.
<unk> from.
From Dawn to Jeff there just the way you'd like to have it internal somebody who has been here had a lot of success internally well known by our team and by our customers and really expect a just a completely seamless transition there on April one.
James Perry: Thanks for being on, as always. Yeah, we do have some shipments from our Vietnam facility that will travel through the Suez Canal. Normally, those shipments have all been rerouted. So they're all going south around the South Tip of Africa, as most shipments are.
James Perry: We have other shipments that go in different directions, of course, but those have been rerouted. You have seen an increase in pricing. As you know, pricing was down a couple thousand dollars a few years ago, got up to 20,000 plus, and now it's back down to a couple thousand. You know, we're seeing rates out there, call it 4,000 or so. You've seen things pop. You know, we expect that this is rather temporary for now. We'll see; it's only been a few weeks. But number one, our cargo is safe. It's being rerouted.
Don.
Being a big part of that as well.
Both of them to have a seamless transition.
Don has been.
The most senior operating exact that we've had around here for a while and has just a tremendous track record of success.
We.
Have leaned on him to integrate these acquisitions and to make them successful and he has done a phenomenal job with that so just expanding that.
Kind of.
The opportunity here for him to work across.
The segments.
James Perry: Things take a little longer to get here. This is also the time that we've spent the last couple of weeks, as a lot of manufacturers have, been stocking up because you have the Tet holiday when all production shuts down for 10 or 12 days in Asia, us being no exception. That starts, I think, on Saturday, in fact.
But really I think <unk> spent a lot of time looking for that next meaningful acquisition and hopefully have an opportunity to integrate.
High profile.
Scale.
Acquisition that that will be.
Really really accretive for our shareholders.
James Perry: So we kind of get ahead of that. So we've had some shipments come through. So you really have a couple weeks where things, you know, you won't see that impact in that respect.
Helpful.
That's too, Jeff and Don and I'll pass it on.
Thanks Julien.
Yes.
This concludes our question and answer session I would like to turn the floor back over to Joseph Armes for closing comments.
James Perry: There was a lot of media coverage the last couple of days around, you know, this seems to be somewhat temporary. It's not fully, you know, baked into supply and demand. So we'll see.
Great. Thank you everyone for joining us for this Q3 call. We appreciate your interest and look forward to speaking to you again in may so thank you.
James Perry: I'll remind you, however, that when we do put something on a boat, and as you know, we ship a few dozen containers every week from our facility, it takes several months for that to float through our cost of goods sold. So you're still seeing this last quarter, Q3, and the current quarter, Q4, still working off of the lower freight rate. So we're still experiencing that year-over-year delta in the pickup. In the fourth quarter, last year, this time, rates had come down.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
James Perry: So that delta's starting to minimize. So you'll see this temporary pop more in the first part of next year. We're monitoring it closely, working hard on efficient rates, alternative routes, and those kinds of things with our shipping partners. But we still feel good where we are.
Yeah.
Uh-huh.
James Perry: But that's one of the elements, as Joe talked about, as we go through our budget, how that will impact things. And most importantly, we want to be sure we preserve margins. So we'll take the actions we need to do to be sure that we stay intact from our expectations. That was kind of a follow-up question, what do you expect to do on, are charged?
Okay.
Hum.
Hum.
Hum.
James Perry: Yeah, that's dynamic. You know, we've already put through our normal annual seasonal price increases. We announced those a few weeks ago, and those go into effect here pretty soon. And so that's normal. And we achieved a normal kind of back to normal prior to hyperinflationary pricing increases that we would normally see. Do we need to adjust things to account for shipping rates?
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Yes.
Uh-huh.
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Okay.
James Perry: We'll see. You know, if this becomes a permanently higher rate, then our team is certainly, you know, ready to look at that and what the market will bear and what's appropriate. We always, like I said, maintain our margins and do a good job with that. I think we assume labor costs are going to be up. That's already baked into our expectations, those kinds of things. But the dynamic around shipping rates, how long that lasts, and what the impact really looks like it will be will determine if we need to take action going forward. Thanks guys, I'll jump back in. John.
Yes.
Okay.
Okay.
Operator: Our next question comes from Julio Romero from Sidoti and Company. Please present. Thank you and good morning, Joe, James, and Alexa. I would like to start on contractor solutions.
Okay.
Uh-huh.
Uh-huh.
Operator: Nice job once again, growing unit volumes there. I wanted to ask you what the first month of calendar 24 has kind of told you about how the remainder of the calendar year will shape up in regards to HVAC, our demand, what you're hearing from customers, and what your boots on the ground are seeing. Sure, Julio. This is James. Good morning.
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Mhm.
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Uh-huh.
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Yes.
Okay.
Uh-huh.
Uh-huh.
Mhm.
[music].
James Perry: Thanks for being on the call as always. Yeah, you know, we wanted to give you a little peek into January to give you a sense of what Q4 looks like. It's just one month.
Hum.
Uh-huh.
Okay.
James Perry: We're literally starting to close the books today, but across the board, we felt really good about January. And as Joe mentioned earlier to John, that's not just on the heels of making up for the lost shipments in SRS in December. You know, right now, we feel good.
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Okay.
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James Perry: You know, we're at the very beginning of the early buying season for contractor solutions. That HVAC market, you know, will start really stocking up in the next couple of months. A lot of us were at the industry show just last week. A lot of people reported record attendance.
Hum.
Uh-huh.
[music].
James Perry: You know, a lot of mixed conversations when you talk to folks. But, you know, we continue to outperform the market. We are indexed to the subcategories, as Joe mentioned, that grow faster than the unitary, ducted HVAC OEM market. There are some expectations that could be down this year, some relatively flat.
Hum.
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Yeah.
Uh-huh.
Uh-huh.
Okay.
Uh-huh.
[music].
James Perry: But like we said, we expect growth. You know, the ductless market continues to grow as a percent of share. And the number of products, as you and our shareholders know, that we have tied to that ductless market continues to grow. Areas like surge protection continue to grow, and we're indexed to that space more and more as we go along. So our commercial team continues to find products to introduce and innovate that will outperform the market. So it's hard to say that January, the strength that we've seen, is a precursor to an entirely great season. But we will certainly take a good January.
Okay.
Hum.
Uh-huh.
Uh-huh.
Uh huh.
Hum.
Uh-huh.
James Perry: One thing I will say without, you know, getting too deep into it, we'll report back in May when we have a good sense of how the start of the year looks out. We can never predict the weather, but we talked a lot in the last couple of quarters about destocking. And we've said that, generally, it feels like that's behind us. And I think the fact that we saw in Contractor Solutions a nice January tells us that, you know, folks are stocking up for what they anticipate to be a good season. Thanks very much. That's a really helpful color there.
Okay.
Mhm.
Hello.
Uh-huh.
[music].
Okay.
No.
Yes.
James Perry: And you talked about your efforts to outperform the market on the DHVAC side. Some of that's related to your efforts to increase sales of some previously acquired product lines, taking them nationwide. Can you just speak to that and maybe how much more runway you have with that? I still think there's room for growth.
Uh-huh.
[music].
Okay.
James Perry: It's a great question. You know, we, you know, you go back to TrueWear, over three years ago now, you know, we're still introducing that product to some new customers because we want to be really sure that when we introduce a product, and they're going to displace a competitor, that we're going to give them the highest level of customer service, the highest availability of inventory, you know, the pricing that makes sense for us and them. So we're still converting customers from TrueWear and Shoemaker from three and two years ago, respectively. One example I'll give you, though, of a recent one is Falcon, which is now organic because Falcon is more than a year old.
Okay.
James Perry: So we call that organic. You know, that was a West Coast-centric product, for the most part, under-marketed, under-commercialized because of, you know, the ownership team did a great job innovating and selling the product, but they were somewhat limited. And it's a great example of our model of shipping that out to more distributors. That was a slow introduction, you know; we got the product in our catalog immediately and moved the inventory over; it was literally a couple hundred mile move. But we have now introduced that nationwide.
James Perry: Now it's in all of our warehouses, and now our customers are more aware of the product. So our ability to now kind of own the water heater, so to speak, and have a full package of things around the water heater that the Falcon connector is attached to is now a complete product. We had a whole part of our booth at the show last week, in fact, around the water heater, and Falcon was very prominent. So it takes time.
Joseph Arms: So there is certainly runway for those acquisitions we made about 18 months ago, as well as still runway for TrueWear and Shoemaker. So yeah, I appreciate you recognizing that you don't get all that on day one; you don't get all of it in quarter one or year one. It is a long cycle of introduction and continued opportunity for growth. Very helpful there. And then, you know, just wanted to ask about the other press release you had this morning regarding the appointments. Can you maybe talk a little bit about Jeff's background and what he brings to the role of GM of contractor solutions? And same question about Don and what he brings to the strategy officer role? Yeah, this is Joe.
Joseph Arms: We'll start. I'll start with Jeff. I mean, Jeff's been here for five years now, in charge of sales and marketing. And when we talk about the professionalization of our go-to-market strategy for the contractor solutions segment, you know, that's been Jeff's initiatives, and the growth and the, really, increase in size and scale of that business have been, in large part, attributable to those initiatives and the great work that's been done there. So a really strong track record here.
Joseph Arms: Jeff came to us from Goodman, where he'd worked with Don before. Before that, he had been at Bain, and just a really strong background, a lot of experience, well-known in the marketplace, in the industry, has been very, very integral to our acquisition strategy for that business. And so a perfect kind of transition from Don to Jeff there, just the way you'd like to have it, internal. Somebody who's been here, had a lot of success internally, well-known by our team and by our customers, and really expect just a completely seamless transition there on April 1. Don will be a big part of that as well. It takes both of them to have a seamless transition. Don has been the most senior operating exec that we've had around here for a while and has just a tremendous track record of success. We have leaned on him to integrate these acquisitions and make them successful, and he has done a phenomenal job with that. So just expanding that, you know, kind of the opportunity here for him to work across the segments, but really, I think Dantzke spent a lot of time looking for that next meaningful acquisition and hopefully having an opportunity to integrate, you know, another high-profile, large acquisition that will be really, really creative for us here.
Joseph Arms: Helpful. Well, congrats to Jeff and Don, and I'll pass it on. Thanks, Julia. This concludes our question and answer session. I would like to turn the floor back over to Joseph Arms for closing comments. Great, thank you everyone for joining us for this q3 call. We appreciate your interest and look forward to speaking to you again in May. So, thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and Peter Lukas. Bye! Hmm, please like, share, and subscribe to Peter Lukas.
Operator: No! No! No!