Q2 2025 CSW Industrials Inc Earnings Call
Greetings and welcome to the CSW Industrials second quarter 2025 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.
Speaker Change: As a reminder, this conference is being recorded it is now my pleasure to introduce your host Alex Ware, Vice President of Investor Relations and Treasurer. Thank you you may begin.
Thank you Maria good morning, everyone and welcome to the CSW Industrials' fiscal 2025 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.
Speaker Change: And Chief Financial Officer.
Speaker Change: 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 Dot com. This call is being webcast and information on accessing.
Speaker Change: The replay is included in the earnings release.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: We do not undertake any duty to update any forward looking statements I will now turn the call over to Jeff.
Jeff: Thank you Alicia and good morning, everyone.
Jeff: I'm proud to report that once again, our team has delivered record results for the second quarter of this fiscal year.
Jeff: Outperforming the markets we serve.
Jeff: This morning, we reported all time high for quality for quarterly revenue of $228 million and cash flow from operations of $67 million in fiscal second quarter Records for EBITDA of 61 million earnings per diluted share of $2 20.
Jeff: Six cents and net income of $37 million.
Jeff: As compared to the prior year period, our gross profit margin expanded an additional 90 basis points to 45, 6% as a result of volume leverage.
And pricing.
Jeff: Our EBITDA margin also expanded by 70 basis points to 26, 7% in the quarter.
Jeff: During the second fiscal quarter, CSW I issued equity to the public for the first time in our history, we saw strong investor demand for the shares offered.
Jeff: Allowing the company to issue a total of one point to six 5 million common shares and the successful follow on equity offering ultimately raising $347 million of proceeds.
Jeff: Further strengthening our balance sheet.
Jeff: Also in September we were pleased to be added to the S&P 600 small cap index.
Jeff: We are already a member of the Russell 2000, and other indices, but this new index inclusion is a testament to our long term growth and overall strength as a company.
Our sharp focus on cash flow from operations drove our fiscal second quarter record of $67 million or 49, 5% growth over the prior year.
Our continued strong cash flow now combined with proceeds from the follow on equity offering.
We will continue to fund our capital allocation strategy.
We remain focused on our pipeline of innovative inorganic investment opportunities with returns that will enhance shareholder value.
Jeff: During the fiscal second quarter, we paid down all of the outstanding borrowings under our revolving line of credit utilizing the cash received from our follow on equity offering and our record quarterly cash flows from operations of $67 million.
Jeff: As a result, we ended the quarter with no debt outstanding.
Jeff: Our balance sheet strength liquidity and increasing cash flows enables CSW Ida swiftly act on business opportunities of any size.
Jeff: I am pleased to announce that each of the three business segments delivered impressive results.
And growth and profitability during the quarter marked by resilience.
Jeff: And execution.
I'll, let James provide more details on the performance of each segment during this quarter.
Jeff: CSW I as a proven track record as a compound or of long term shareholder value and the success of our follow on equity offering proved that both existing and new shareholders believe in our ability to continue to perform.
Jeff: Our approach to allocating capital meaningfully growing revenue and profits while maintaining a strong balance sheet has been the foundation for the success of the company.
Jeff: At CSW, our arm, yes W. Ay, our employee centric culture helps to drive these results and the health and safety of our team members truly matter.
Jeff: We also focus on serving our customers well by being their partner of choice in managing our supply chain effectively to position us for long term growth and profitability.
Speaker Change: At this time I'll turn the call over to James for a closer look at our results and following James I will return to conclude our prepared remarks.
Thank you Joe and good morning, everyone.
James: As Joe mentioned, our consolidated revenue during the fiscal second quarter of 2025 was a record $228 million or $24 million or 12% increase when compared to the prior year period and a record all time quarterly high for CSW eye.
James: $13 million of the growth was organic through increased volumes and pricing initiatives the.
James: The remaining $12 million of growth came from the dust free and P. S P acquisitions.
James: Consolidated gross profit in the fiscal second quarter was $104 million, representing 14% growth over the prior year period.
James: As Joe mentioned, our gross profit margin improved by 90 basis points to 45, 6% compared to 44, 7% in the prior year period due to operating leverage.
James: Our consolidated EBITDA for the second quarter increased by $8 million to a record $61 million, which was 15% growth when compared to the prior year period.
James: Our EBITDA margin improved by 70 basis points to 26, 7% as compared to 26% in the prior year quarter driven by the gross margin expansion.
James: We will continue to strive for additional EBITDA leverage as we grow revenue and manage expenses.
James: However, we're very proud of these margins and our focus will remain on increasing EBITDA dollars as we grow revenue.
James: Net income attributable to CSW eye in the fiscal second quarter was a record $36 million or a record $2 26 per diluted share compared to $30 million or $1 93 per diluted share in the prior year period, representing growth of 20%.
James: Our contractor solutions segment with $159 million in revenue accounted for 70% of our consolidated revenue and delivered $18 $9 million or 13, 5% total growth when compared to the prior year quarter.
James: Of the revenue growth in the quarter $7 $3 million or five 2% was organic.
James: While the remaining $11 $6 million or eight 3% came from recent acquisitions.
James: Growth for the quarter was reported in the HVA see our electrical and plumbing end markets and was the result of increased unit volumes as well as a slight increase from normal pricing initiatives as compared to a year ago.
James: Segment, EBITDA was $53 7 million or 34% of revenue compared to $46 6 million or 33% of revenue in the prior year.
EBITA margin expansion, mostly came from volume leverage in gross margins.
James: Our specialized reliability solutions segment revenue increased by 5% to $38 5 million as compared to the prior period.
James: Revenue increased in the energy rail transportation and mining end markets, but declined in the general industrial end market.
James: The increased revenue was driven primarily by the increase in unit volumes the.
James: Segment EBITDA of $7 $1 million in the second quarter represented an increase of 13% from $6 $3 million in the prior year periods results and the EBITDA margin improved by 120 basis points to 18, 4% in the current period, driven primarily by manufacturing efficiencies.
James: Our engineered building solutions segment revenue increased to $32 7, million% to 12% increase as compared to $29 2 million in the prior year period driven.
James: Driven by strength in the backlog conversion to revenue.
James: Bidding and booking trends remained solid in the fiscal second quarter, and we have seen a favorable margin mix in bookings and the backlog.
James: Segment, EBITDA grew 15% to $6 $6 million or a 20% EBITDA margin.
James: <unk> to $5 $7 million and a 19, 5% EBITDA margin in the prior year period.
James: We are pleased to see our EPS segment reached the 20% EBITDA margin target for the second quarter in a row, but keep in mind that this will fluctuate on a quarterly basis due to project mix.
James: Transitioning to our strong balance sheet and cash flows we ended our fiscal 2025 second quarter with $273 million of cash and reported all time record quarterly cash flow from operations of $67 million compared to $45 million in the same quarter last year representing.
James: 50% growth over the prior year period.
James: The cash flow from operations in the quarter was an all time record for CSW are.
James: Cash flows from operations in the quarter benefited from a $16 $8 million tax payment deferral from fiscal first half 2025 under a temporary federal tax relief related to the vir the severe storms and flooding in Texas in early calendar 2024.
James: These taxes will be paid in the fiscal third quarter.
James: Our free cash flow defined as cash flow from operations minus capital expenditures was $61 $3 million in the fiscal second quarter compared to $41 9 million in the same period a year ago.
James: That resulted in free cash flow per share of $3 85 in the fiscal second quarter as compared to $2 69 in the same period, a year ago growth of 43%.
James: This impressive level of free cash flow allows us to invest in growth with the goal of increasing long term shareholder value.
Speaker Change: You also mentioned earlier that during the second quarter and for the first time in <unk> history, The company issued equity into the public market.
Speaker Change: On September 4th we announced the commencement of an underwritten public offering of 1 million shares of common stock.
Speaker Change: The next day, the company announced the upsize and pricing of the registered public offering of common stock to one 1 million shares.
Speaker Change: If the price of $285 per share with an option for the underwriters to purchase up to an additional 165000 shares.
Speaker Change: All one to six 5 million shares will ultimately issued and sold resulting in proceeds of approximately $347 million net.
Speaker Change: Net of the underwriting discount and expenses directly related to the offering.
Speaker Change: During the second quarter, we were able to pay off all of our borrowings under the revolver due to the cash received from our follow on equity offering and our strong cash flows.
Speaker Change: As a result, the company was able to eliminate interest expense and invest the net proceeds from the equity offering and money market accounts to generate interest income.
Speaker Change: For the fiscal second quarter, our weighted average share count was $15 9 million shares due to the timing of the equity offering in early September.
Speaker Change: The third fiscal quarter will include the full amount of the new shares issued.
Speaker Change: As shown on the cover of our Form 10-Q, the shares outstanding as of October 24th was $16 8 million.
Speaker Change: Our effective tax rate for the fiscal second quarter was 26, 1% on a GAAP basis.
Speaker Change: As a reminder, our tax rate in our fiscal third quarter may be lower due to the potential release of uncertain tax positions related to prior acquisitions.
There may also be a potential favorable impact on net income in the fiscal third quarter as a result.
Speaker Change: We will detail this impact when we announce our third quarter results.
We still anticipate delivering full year growth in revenue EBITDA and EPS, along with continued strong cash flow.
With that I'll now turn the call back to Joe for his closing remarks.
Joe: Thank you James.
Joe: To summarize during the second fiscal quarter of 2025, we posted all time record quarterly results for revenue and operating cash flow and record second fiscal quarter results for EBITDA earnings per share and net income or.
Joe: Our strong 12% revenue growth included both organic and inorganic growth and resulted in higher margins due to strong operating leverage.
Joe: Looking into the second half of fiscal 2025, CSW I will remain focused on delivering growth that outpaces the markets we serve.
Joe: We will continue to pursue strategic acquisition pipeline of innovative companies and products that complement our organic growth.
Joe: I would like to take a moment to welcome. The most recent group of employees to join the CSW I family through our acquisition of PSP products in August PSP.
Joe: PSP brings a family of superior surge protection and load management products to CSW eye.
Joe: In recent years, our teams have partnered together to develop an industry leading series of HVA see electrical products.
Joe: Bringing this new team under the CSW I umbrella will allow our contractor solutions segment to continue our pace of innovation and the electrical end market by further expanding our product offering.
Joe: Okay.
Joe: Lastly, I want to acknowledge that on October <unk>, we marked our ninth anniversary as an independent public company now.
Joe: And as we enter the 10th year I always want to close my prepared remarks by thanking the dedicated team here at C. S. Wi.
Joe: Collectively own approximately 4% of our company through our employee stock ownership plan.
Joe: As well as all of our long term and our new shareholders for their interest in and investment in CSW eye.
Joe: We want to thank you for your time and operator, we're now ready for your questions.
Speaker Change: Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
Speaker Change: You May press star two if he would like to remove your question from the queue.
Speaker Change: All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please while we poll for question.
Speaker Change: Our first question comes from John Penguin Pain with GF Securities. Please proceed with your question.
Speaker Change: Hi, good morning, congratulations on another really nice results.
Speaker Change: I was wondering if you guys could talk about the sustainability of the strength that you've seen.
Speaker Change: In the first half of this year, maybe as we come to the next the same period next year or do you think you can keep those margins.
Speaker Change: Close to 28% EBIT level.
Speaker Change: What were the sustainable versus the one X drivers of what you saw.
Speaker Change: Yes, good morning, John and thanks for being on and your coverage of US as always we appreciate the support yeah. I don't think we see anything that tells US that there was anything unusual in the quarter or in the first half necessarily theres always some ins and outs, we don't give guidance. So we've not started talking about next fiscal year quite yet, but demand has been good across the board.
Speaker Change: Our teams have really responded well to that we've picked up market share across the portfolio. We're booking good projects in Evs, our Srs team continues to benefit from higher volumes and absorption in the manufacturing facility and continuing to improve and operations there and of course the contract our solutions team continues to find good acquisition.
Speaker Change: <unk>, which as we always say acquisitions will fuel future organic growth. So as we get those products into more storefronts across the country into more of our distributors' hands, we continue to have great distribution relationships.
Speaker Change: And we're picking up operating leverage as we grow the top line. So while we always say that we want to caution people of assuming the margins will continue to grow given the strong levels that are at there is nothing unusual about the first half of the year or the quarter that we would see that would change. This time next year and John This is Joe the only thing I would add to James's remarks is.
Joe: That we're highly confident in our pricing power, we have seen historically the ability to pass along input costs and we don't we don't see any reason why we couldnt continue to do that.
John This: Got it that's helpful.
Speaker Change: We're flush with cash now what are the expectations for that.
Speaker Change: The pipeline for M&A looks like compared to where it was last quarter just help me understand.
Speaker Change: In a larger and more opportunities out there and if you raise that cash specifically for for a.
Speaker Change: Targeted acquisition or something else that was going on.
Speaker Change: Yeah no. Thanks, John that's a great question, Yes, obviously as a result of the successful equity offering we do have.
No debt and cash on our balance sheet.
Speaker Change: We did not raise that capital in light of any particular acquisition that we had identified it was really more of a war chest for us too.
Speaker Change: Two to be in a position so that we could.
Speaker Change: Exploit attractive opportunities that came about I would say that our.
Speaker Change: Our pipeline continues to be very robust, we're very pleased with the level of activity with.
Speaker Change: The opportunities that we're seeing.
Speaker Change: And we're pleased with the inbound calls that we are receiving now as a result of this and then I would just remind you that we found ourselves in this position of about four years ago. When we had no debt and cash on our balance sheet and that is when we were able to consummate the acquisition of <unk>, which has been our largest and most successful acquisition.
Speaker Change: To date, and so we like being in that position, we like being able to provide speed and certainty to.
Speaker Change: Two a seller and we think it helps us and actually capturing those opportunities and also have helps us and is attractive to the seller from a from a valuation standpoint that that we can move quickly and that we don't need to go to the market to raise financing so.
Speaker Change: Robust pipeline, we intend to put this capital to work, but we.
Speaker Change: We will always stick to our disciplined approach and apply the same sort of rigor that we always have on evaluating these opportunities and the risk adjusted return analysis will drive our decision making.
Speaker Change: Great could you talk a little bit more about PST and kind of what that business does it seems a little bit outside your traditional verticals, maybe talk about the financials of the business the prospects going forward and kind of.
Does that open up new pathways or doorway to M&A.
Speaker Change: M&A to add on to that type of business.
Speaker Change: Yes, John This is James Thanks, Phil mentioned, they are really pleased with the PSP acquisition, just like dust free earlier in the year. This is a company that we had partnered with him and distributing their products for a while and once again that model turned out very well for us we learn the product our sales force and folks understood the product understand the industry.
Speaker Change: We were doing a little bit in the electrical space. We've always said that kind of HVAC is obviously the big part of that plumbing is there an electrical is there in a small way this gets us much more seriously in the electrical end market. So it allows us to run through the same distribution channels that we do with our other products and now put PSP through even more distributors and <unk>.
Speaker Change: So the owner of that business is a great innovator continues to work with us and will for quite a while innovating new products. So these are first protection devices.
Speaker Change: That can protect our HVAC unit. So when the contract comes out to your house and install a new unit or desert repair literally can can add a surge protector unit for a relatively low cost. We've always said for years, we always had the surge protectors that take care of our Tvs and computers and those kind of things like HVAC systems. The most important and most expensive part of your <unk>.
So for a relatively low price a contractor can install that very quickly I've done it myself and now protect that in the event of a surge in your house and so our ability to continue to innovate with the seller of that business is doing a great job working with our team and continue to explore now more opportunities within the electrical end market and we will start talk.
Speaker Change: Talking about that more and more now people see us as a provider of electrical products as well and lastly, like I said going through the same distribution channels is always a hallmark of our strategy and acquisitions that allows us to distribute that product to more folks than was previously probably done in terms of financials. The initial press release, we did on that kind of gave you some basic details.
Speaker Change: And there is theres arnett opportunities as that business continues to grow.
Speaker Change: The business is performing very well already.
Speaker Change: Margins roughly in line with where our overall margins are so very pleased with the performance of that business and growth prospects that we're already seeing in the first few months.
Speaker Change: Great. Thank you.
Thank you John.
Speaker Change: Yes.
Speaker Change: Our next question comes from Tom Hayes with C. L. King. Please proceed with your question.
Tom Hayes: Hi, good morning, and congratulations on the quarter as well.
Speaker Change: Thank you Tom.
Tom Hayes: Yes. It was hoping I know John asked about the PSB I just wanted to dig in a little bit more briefly.
Tom Hayes: Wondering is that this is fully integrated into the <unk> network now.
Tom Hayes: And kind of how do you see acquisitions typically.
Tom Hayes: Ramp up is there is there a kind of a slower.
Tom Hayes: Start or are they kind of start.
Tom Hayes: At different speeds, just to kind of help me out with that.
James: Yes sure. Tom This is James the first thing I'll say in terms of integration is getting it through our sales channel and given the fact that we were already selling this product that was very smooth. So this was not new some acquisitions. We do the day, we bought the company is the first time, we've ever sold the products. So it takes a while to get through the system dust free we did back in February and then PSP in August where the.
James: Model, where we already knew the product. So we were already buying product from PSP and selling it through our channels. So that was very very smooth. So in terms of commercial integration very smooth now like I said in response to John's question, our ability to continue to blow that out through more of our distribution channels introduce it to more folks educate folks on the utility of that.
<unk> will continue as we go along in terms of systems integrations that's in process.
James: Some of these acquisitions get get done in a matter of a few months some take a couple of years, depending on the need to do that.
James: <unk> is in the process of doing that but not holding us back in any way from an accounting or financial standpoint, our team has really developed the muscle now within contractor solutions, specifically with the numerous acquisitions. We've done in the last five or six years to make this a very repeatable process. So yes. Eventually all these get on our ERP system.
James: <unk>, which makes it even smoother and cleaner, but our team has done a great job getting these products on the shelves getting them.
James: And our portfolio and then from a back office financial and integration standpoint that comes in due time, but no hiccups there nothing is holding us back in that respect.
Speaker Change: Great I appreciate it that's great color that's really helpful.
Maybe just kind of shifting gears a little bit I think last time, we spoke I think was on Q1 you indicated that.
Speaker Change: In the back half of FY 'twenty five there could be higher Cogs, if you will coming in from from higher shipping rates for products that you're bringing into the country was just wondering is that still the case.
Tom Hayes: It is Tom Yes, we've talked obviously over the years about ocean freight.
Tom Hayes: <unk> freight has been higher than it was a year ago and even then it was seven or eight months ago and those costs on the crossing the ocean.
Tom Hayes: Rates are pretty much baked in the system now and that'll be our second half Cogs. So we have a pretty good sense now through March what that's going to look like they started to come down. So as we enter the next fiscal year. We may have an opportunity for that to come back a little bit, but it's a headwind for us. So you do have things a little higher than we would have originally thought.
Speaker Change: Back in budget season back in the March April timeframe at the beginning of our fiscal year. We know what those costs are as Joe said, if those costs remain elevated.
Have the opportunity to raise prices and push those through it because there that makes sense and theyre justified and that pricing power that we've always talked about is real and that's something that we've alluded to in the past I will say that there had been some other costs that have offset some of that that have come down a bit that's natural.
Speaker Change: And all but yeah, we will exercise pricing.
Speaker Change: Action as we need to but yes, we still see that second half Cogs for the ocean freight higher than it was in the first half.
Speaker Change: Okay I appreciate that and then maybe just lastly.
Speaker Change: Obviously, you guys spent a lot of time talking to your customers and I was just wondering specific excuse me specifically on the contractor solutions business. Just wondering if theres been any change in the sentiment or their outlook given.
Speaker Change: With somebody maybe call it a mixed economic outlook I appreciate the color.
Speaker Change: Tom I would not say as it relates to our products I know that there have been inventory issues for the Oems over some of the <unk>.
Tom: And pending changes the fact that we're agnostic to OEM, we're agnostic to refrigerants were agnostic to seer rating all of those things really benefit us in those in those times. So I think the answer is no I think that.
We've seen.
Tom: Unit contraction over the last two years or so and some inventory issues. It feels like most of those are in the rearview mirror now so.
Tom: We see the prospects as bright and do not have any overriding concerns at this point from the overall HVAC market.
Speaker Change: Great. Thank you very much.
Tom Hayes: Thank you Tom.
Speaker Change: Okay.
Okay.
Speaker Change: There are no further questions at this time I would now like to turn the floor back over to Joe Armes for closing comments.
Great. Thank you Maria Thank you everyone for joining us on this on this fiscal.
Speaker Change: Second.
Joe Armes: Quarter of fiscal 2025 call. We look forward to our next time to visit together and in the meantime, we will continue to be good stewards of your capital. So thank you very much.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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