CSW Industrials Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 25, 2023

There are 5 speakers on the call.

Operator

Greetings, and welcome to CSW Industrials 4th Quarter and Full Year Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I'd like to turn the conference over to your host, Alexa Huerta.

Operator

Thank you. You may begin.

Speaker 1

Thank you, Rob. Good morning, everyone, and welcome to the CSW Industrials fiscal 2023 4th 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, presentation and Form 10 ks prior to the markets opening today, which are available on the Investor portion of our website at www.csw windustrials.com. This call is being webcast and information on accessing the replay is included in the earnings release.

Speaker 1

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 the Comments made during this call as well as the risk factors identified in our annual report on Form 10 ks 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.

Speaker 2

Thank you, Alexa. Good morning, and thank you for joining our fiscal Q4 conference call. I'm pleased to report that in fiscal 2020 We continued our successful track record of delivering exceptional performance. Our commitment to treat our employees well, To serve our customers well and to manage our supply chains effectively drove exactly the kind of growth in revenues and profitability that we had hoped for. Fiscal 2023 represented another record year of revenue, EBITDA and earnings per share.

Speaker 2

Today, we reported record revenue of $758,000,000 21% growth over the prior year. Organic growth represented 15.3% of the total growth with the balance coming from our recent acquisitions, all of which are reported on our Contractor Solutions segment. EBITDA reached a record $174,000,000 or 31% growth over the prior fiscal year. Finally, our record EPS was $6.20 an increase of 41% compared to $4.39 as adjusted in the prior fiscal year. These record results are attributable to our diversified business model, disciplined capital allocation and commitment to operational excellence, which drove impressive operating leverage despite global and financial market uncertainties.

Speaker 2

As compared to the prior year, sales increased in all three segments driven by positive pricing actions and Growth from our acquisitions. Our Contractor Solutions segment achieved record sales of $514,000,000 including record HVACR end market sales of $418,000,000 an $83,000,000 or 25 in unit volume. Our Contractor Solutions team deserves recognition for exceeding our expectations again this year, while successfully integrating multiple acquisitions and managing significant challenges presented by inflation and supply chain constraints. I want to congratulate and thank Don Sullivan and his team, including Jeff Underwood, the segment's Senior Vice President for Sales and Marketing, for their extraordinary performance in fiscal 2023. In recognition of this team's hard work, I'm pleased to share that we were recently named Supplier of the Year by Johnstone and Supply, which is their only external vendor award that is given each year.

Speaker 2

Our Engineered Building Solutions segment grew by $7,000,000 or 7%. Scott Stratton and his team effectively promoted existing and newly developed products and maintained market share gains due to competitive lead times, successfully overcoming the commercial construction end market declined during our fiscal 2021 2022. As a result of the EBS team's productive commercial efforts, This segment's backlog as of the end of 2023 achieved an all time high and then reached another all time high by the end of April, signaling a tailwind into fiscal 2024. Our Specialized Reliability Solutions segment achieved record revenue of $147,000,000 which represents 31,000,000 Of organic revenue growth were 27% as demand strengthened in all end markets served And commercial and operational execution improved significantly. In fact, segment revenue in the current fiscal year Exceeded fiscal 2021 by an impressive 88% or $69,000,000 Since Mark Bass joined CSWI in June of 2021, he and his team have enhanced our competitive position within the marketplace and have In fiscal 2023, we remain confident in our ability to achieve further growth and strong margins in fiscal 2024.

Speaker 2

During the last fiscal year, we executed on all aspects of our Capital allocation strategy investing $58,000,000 in acquisitions, including Falcon, CoverGuard and ACGuard as well as $14,000,000 in capital expenditures. We returned an aggregate of $46,000,000 of cash to for shareholders through our share repurchase program and dividends. Subsequent to fiscal year end, the Board approved a 12% increase in our quarterly dividend to $0.19 per share, signaling our confidence in the business and in our ability to generate cash. On the M and A front, I'm pleased to report that all of our acquisitions during fiscal 2023 are progressing well. I'm impressed with the efficient integration of all of our acquisitions and our ability to offer these new products to our broad base of distribution customers, adding vitality to our portfolio of products.

Speaker 2

Our M and A strategy remains active with many of the best ideas and opportunities generated organically from within our organization. Our capital allocation decisions remain focused on maximizing shareholder value on a risk adjusted returns basis. This disciplined approach favors our current platforms, serving the same customers and end markets through our extensive distribution channels. Inorganic growth remains a key strategic initiative and we continue to maintain an active pipeline of acquisition opportunities. The strength of our balance sheet and access to capital provides ample capacity to act decisively and quickly on acquisitions as opportunities arise.

Speaker 2

Each quarter, we provide an update on our commitment to treat our employees well. This quarter, I would like to focus on our pay for performance culture. For fiscal year 2023, our Board of Directors These are eligible participants in our employee stock ownership plan or ESOP, which results in direct alignment of interest with our shareholders. Our profit sharing programs in fiscal 2023 included an 8% ESOP contribution, plus a 3 discretionary 401 contribution, which is in addition to our standard 401 participant match of 6%. Of note, our 401 plan also boasts a 96% participation rate, which is significantly higher than the recognized industry benchmark.

Speaker 2

Providing for a safe, secure and dignified retirement along with aligning interest Attracting and retaining quality talent. In fact, as a result of maintaining a consistent focus on our employee centric culture, We continue to exceed industry standards and retention rates. Recently approximately 79% of our employees participated And our fiscal 2023 engagement survey conducted through Great Place to Work, which showed That our engagement scores remain high and we were pleased to announce in January of this year that we received the Great Place to Work certification. Our products remain in high demand and our team is working diligently to treat our employees well, serve our customers well and manage our supply chains effectively. And I truly believe that our collective efforts have positioned the company for long term sustainable growth and profitability.

Speaker 2

At this time, I'll turn the call over to James for a closer look at our results. Thank you, Joe, and good morning, Our consolidated revenue during fiscal Q4 2023 was $196,000,000 a 13% increase compared to the prior year period. Consolidated gross profit in the fiscal 4th quarter was $85,000,000 representing 18% growth with the incremental profit resulting predominantly from pricing initiatives and the multiple acquisitions that we made during the year. Gross profit margin was 44% as compared to 42% in the prior year period. The gross profit margin increase resulted predominantly from positive pricing actions across our three segments.

Speaker 2

The operating expense margin defined as operating expense as a percentage of revenue was 23%, an improvement of 180 basis points compared to the prior year period. Fiscal 4th quarter EBITDA increased 33 percent to $49,000,000 as compared to the prior year period. Our Our EBITDA margin was 25% as compared to 21% in the prior year 4th quarter, with the improvement due primarily to the higher gross profit margin and discipline around operating expenses. Reported net income attributable to CSWI in the fiscal 2023 4th quarter increased $27,000,000 or $1.74 per diluted share compared to $18,000,000 or $1.17 in the prior year period. Now I will transition to a discussion of our segments.

Speaker 2

Our Contractor Solutions segment with $134,000,000 of revenue accounted for 68% of our consolidated total and delivered $14,000,000 or 11 percent of growth as compared to the prior year quarter comprised of organic revenue growth of $9,000,000 and inorganic growth of $4,000,000 from our recent acquisitions. Quarterly segment EBITDA was $43,000,000 A 32% margin compared to $35,000,000 a 29% margin in the prior year period. This margin growth is a testament to the disciplined pricing actions and strong operating management in the segment. Our Engineered Building Solutions segment revenue grew to $25,000,000 a 5% increase compared to $24,000,000 in the prior year period. EBITDA was $3,100,000 or 12 percent of fiscal 2023 4th quarter revenue, a 43% increase from $2,200,000 were 9% of fiscal 2022 Q4 revenue as a favorable project mix was further supported by a reduction in operating expenses.

Speaker 2

Bidding and booking trends continue to demonstrate strength as our year to date bookings and backlog increased by approximately 20 4% 36% respectively as compared to the prior year period. As of the end of the fiscal 2023 Q4,

Operator

Our book

Speaker 2

to bill ratio for the trailing 4 quarters in this segment improved to 1.2:one leading to a record backlog. Our Specialized Reliability Solutions segment posted organic revenue growth of $8,000,000 or 25% due to incremental sales volumes from both our legacy Whitmore business and the Shell Whitmore joint venture along with pricing actions that continue to provide tailwinds. Segment EBITDA and EBITDA margin improved significantly to $8,200,000 21% in the fiscal 2023 4th quarter compared to $5,300,000 17% in the prior year period. This represented impressive $758,000,000 representing 21% growth as compared to fiscal 2022 with all segments reporting organic growth. Consolidated gross profit in the current year was $318,000,000 representing 24% growth with the incremental profit resulting predominantly from pricing initiatives and the multiple acquisitions that we made during the year.

Speaker 2

Gross profit margin of 42% was on par with the adjusted gross profit from the prior year. Despite the inflation in acquisitions, The operating expense margin of 24% showed an improvement of 170 basis points compared to the prior year period, demonstrating the discipline and effectiveness in our management of operating expenses. In the current year, we reported a 31% increase in EBITDA to a record $174,000,000 equating to a margin of 23% as compared to an adjusted 133,000,000 21% in the prior year. These results translated into record EPS of $6.20 an increase of 41% compared to an adjusted $4.39 in the prior year. Our Contractor Solutions segment With $514,000,000 of revenue, it accounted for 68% of our consolidated total and delivered $97,000,000 or 23% growth.

Speaker 2

This was comprised of organic growth of $61,000,000 and inorganic growth of $36,000,000 from our acquisitions. Segment EBITDA increased 24 percent to $153,000,000 a 30% margin compared to $124,000,000 and a margin of 30% in the prior year. Continuing to our Engineered Building Solutions segment, which accounted for approximately 14% of our consolidated total with $104,000,000 of revenue in the current fiscal year. This reflected a 7% increase over the prior year. Segment EBITDA was $14,000,000 a margin of 14%, an improvement from segment EBITDA of $13,000,000 and a margin of 13% in the prior year period.

Speaker 2

Our Specialized Reliability Solutions segment posted impressive organic revenue growth of 27% or $31,000,000 due to incremental sales volumes driven by strengthening end market dynamics, price initiatives and increased volumes through the Shell Whitmore joint venture. Segment EBITDA and EBITDA margin improved to $26,000,000 18% compared to $15,000,000 in the prior year. On our fiscal 2023 Q1 call, we affirmed our commitment to Strong free cash flow generation, prudent working capital management and maintaining sufficient liquidity to support our strategic objectives. We ended the fiscal 2023 year with $18,000,000 of cash and reported cash flow from operations of $121,000,000 a 76% increase over the prior year. This was due to increased profit and improved management of working capital as compared to the prior year.

Speaker 2

For the year, our free cash flow defined as cash flow from operations less capital expenditures was 108,000,000 or $6.91 per share as compared to $53,000,000 $3.38 per share in the fiscal 2022. Our free cash flow conversion rate, defined as free cash flows as a percentage of net income, was 111% in fiscal 2023, an improvement from the conversion rate of 79% in the prior year. At fiscal year end, we had $253,000,000 of This resulted in a leverage ratio in accordance with our credit facility of approximately 1.3 times debt to EBITDA, well within our stated range of 1 to 3 times. This provides us with ample liquidity and flexibility to execute on our organic and in In early February of this calendar year, we entered into an interest rate swap, which fixes the SOFR portion of the first $100,000,000 of our revolver borrowings at 3.85% through May of 2026. This compares favorably to the current comparable base rate of over 5.2 This swap extends to the current expiration of our revolver in May of 2026.

Speaker 2

This fiscal year, We invested $58,000,000 of acquisition capital. We returned $36,000,000 to shareholders via share repurchase, reducing our share count by approximately 336,000 shares. We did not repurchase any shares under our program during the fiscal Q4. We have $100,000,000 outstanding on our current share repurchase program at the end of the year. As part of our broad capital allocation strategy, We remain committed to opportunistic market repurchases guided by our intrinsic value based model.

Speaker 2

We have 15,500,000 shares outstanding approximately the same total as when we went public over 7 years ago. This is impressive given that we have approximately tripled our EBITDA since that time and have used our shares in acquisitions and in our equity compensation programs, but have repurchased a similar number of shares to what we have used. The company's effective tax rate for fiscal 2020 was 23.3 percent on a GAAP basis, which aligned with the company's previous expectation of 23% to 24% as discussed during our fiscal 2023 Q3 call. We currently expect a tax rate of approximately 25% for fiscal 2024. As we look to fiscal 2024, we expect to have revenue growth across all three segments and at the consolidated level, which when coupled with meaningful operating leverage will result in solid year over year EBITDA and EPS growth.

Speaker 2

As we look at our cadence of earnings over the 4 quarters, we expect our normal seasonality with the fiscal Q3 ending in December being the lowest level of earnings. With higher interest rates than last year, we expect our interest expense in the 1st two quarters will be higher than the prior year periods. And the year over year comparison for that line item for the back half of the fiscal year will depend on our outstanding level of debt. Our operating teams have done a great job maintaining the pricing that we achieved during the rapid inflation of the last several quarters. As we have seen reductions in the cost of certain inputs, including ocean freight, this leads to higher margin potential.

Speaker 2

We will continue to keep a close eye on our costs and are confident in our ability to achieve the profitability and margins that we and our shareholders have come to expect. As we look at our 3 operating segments, we expect revenue and profit growth in our Contractor Solutions segment to continue outpacing the categories we serve, driven by the pricing actions we have taken and maintained as well as adding new customers and selling more of our products to existing customers. While expectations as reported by the public HVACR OEM companies are for unit volumes to decline this year, Our team is committed to deliver top and bottom line growth through strong commercial and operational execution. With the Engineered Building Solutions backlog at all time highs, our team is focused on execution and expect to outperform the construction end market, while growing revenue and improving margins. Our Specialized Reliability Solutions segment expects to deliver another year of top line growth, Although at a slower rate than the exceptional growth of the last 2 years, we're turning to our historical GDP plus growth norms while expanding the strong improved margins we achieved in fiscal 2023.

Operator

Before I

Speaker 2

turn the call back to Joe, I'd like to offer an enthusiastic welcome To our new Vice President of Investor Relations and Treasurer, Alexa Huerta, who started with CSW just this week and opened our call today. Alexa brings a tremendous background of financial and IR experience to us and I look forward to introducing her to our investment community in the coming days, weeks months as we meet with With that, I'll now turn the call back to Joe for closing remarks. Thank you, James. As we conclude 1 fiscal year And begin another, I want to take a moment to mention a few metrics with a longer term perspective. Our revenue compound annual growth rate From fiscal years 2018 through 2023 was 18%.

Speaker 2

Our adjusted EBITDA CAGR was 22% with an adjusted EBITDA margin during this period of 22% and our adjusted EPS CAGR was 24%. Revenue growth, of course, has included acquisitions and we would expect to continue to grow inorganically through acquisitions, thereby supplementing our organic growth. All of this has resulted in a total Shareholder return of 3 77% since we went public in the fall of 2015, creating tremendous value for all of our shareholders. As we look ahead, we believe that our attractive and diverse end market exposure, strong customer relationships, enviable distribution channels, best in class products with hard earned reputation for quality and innovation And a healthy balance sheet to execute on growth opportunities gives us every reason to be enthusiastic about fiscal 2024. And as always, I would like to close by thanking all my colleagues here at CSWI who collectively own 3.5% of CSWI through our employee stock ownership plan As well as all of our shareholders for their continued interest in and support of our company.

Speaker 2

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

Operator

Thank you. At this time, we'll be conducting a question and answer One moment please while we poll for questions. Our first question comes from Jon Tanwanteng with CJS Securities. Please proceed with your question.

Speaker 3

Hi, good morning everyone and thank you for taking my questions. Joe or James, just wanted to get a little bit of clarification. I think in the press release, you expected margin growth in each of the three segments Going forward, is that kind of a directional guidance for fiscal 2024? And is that off of the 23% EBITDA margins you did for the year In 2023.

Speaker 2

Hey, John, this is Joe. Thanks for being on the call today. We have a long history of not providing guidance unless there's some correction that needs to be made or some misperception in the market. So, this is very, very Conceptual, but our commitment has always been to outpace the top line growth for the markets we serve And then to always grow profits faster than revenue. So that's all the guide we're willing to give at this point.

Speaker 2

James, do you want to add anything to that? I agree. Yes, yes. We wanted to be clear that we do expect to grow revenue across the segments in my remarks and grow the margin. We've seen some nice momentum from a couple of years ago, as you all know, John, we've done a great job in our businesses keeping up with inflation through pricing and you took a bit of a margin There for a year or so as we were kind of catching up to that given the math as we've talked about quite a bit.

Speaker 2

But we've kind of turned that corner and now we We started expanding margins again and we expect that

Speaker 3

momentum to continue. Okay, great. That's helpful. Can you just talk about the macro assumptions Underlying your outlook as we go forward, I know several economists and other firms have called for recession. There's obviously a risk of default coming.

Speaker 3

What are the thoughts on how broader demand could affect your business and if you're planning for that at all?

Speaker 2

Sure, John. We always keep an eye on that obviously. The best thing is not necessarily TV and newspapers, but talking to our customers and And suppliers and understanding on the ground and our commercial and operating teams do a tremendous job of that across the segments. We continue to see nice demand. Orders have been good the last few months across Ward, you look at Contractor Solutions, we talked about kind of the public OEMs and those companies in that HVAC space are looking for unit volume slowdown this year.

Speaker 2

You're coming off a couple of years of pretty tough comps. You had tremendous couple of years of unit volume growth, so that's expected. We expect to outperform that. They've generally talked about single The high or mid to high single digit declines and we expect to outperform that on a unit volume perspective. And then as I say, grow revenue through the pricing we have And other methods and certainly grow profit at a higher rate.

Speaker 2

So you're seeing a little bit of headwind there. One thing you're seeing is Existing home sales have slowed down a bit because people don't want to give up their good mortgage rates they have. We've seen that anecdotally lately. There's some good numbers in new housing starts. And But the good thing about our business is we're not as tied to the OEM market.

Speaker 2

So whether it's a repair or maintenance or replacement or a new HVAC unit, Our products are going into that and we're continuing to penetrate with the acquisitions we've made into having more of the water heater, more of the HVAC system and those type of things

Operator

in the home. You look

Speaker 2

at Engineered Building Solutions, we've really worked hard, Scott and his commercial team, pinpointing those areas that do have Institutional construction is important to us, your hospitals, your airports, your education, they're less dependent on Equity returns and those type things, a little less dependent on interest rates. Multifamily, especially in Canada, continues to be a nice place for us with our Greco business up in Ontario. So we continue to focus on those bright spots and been able to grow backlog as a result and we'll continue to lean into those Areas and be sure that we're going after the right sectors. In Specialized Riability Solutions, again, Mark and his commercial team have done a great job doing the exact same thing, leaning into those energy markets. Our joint venture with Shell with Moore continues to gain momentum in the rail and mining sector in North America.

Speaker 2

The The teams made some good international strides where they see opportunities across the globe. So I would tell you that while we always have an eye out on the efforts on those areas that have the most opportunity for growth. And John, this is Joe. The only thing I'd add to that, you raised the R word recession and that is we can't predict, but We are absolutely prepared, diversified in end markets, diversified across our product portfolio, diversified businesses. We have a really strong balance sheet, just real strong cash generation.

Speaker 2

And so those are the kinds And we have a lot of consumable type products and non discretionary. And so those are the attributes that our business Has. That makes us more resistant to cycles. And so certainly what Just to add to what James said, I think our business is especially resilient. And so we're prepared almost regardless of what the economic cycles are.

Speaker 3

Great. Thank you. Last one for me, I'll jump back in queue. Just could you have a snapshot of 1, the pricing versus input Spread that you have in the fiscal Q1 compared to where you were in Q4 and kind of Supplement to that, do you still have high priced inventory coming through? And is that going to be a tailwind as you come off of that going forward?

Speaker 2

Yes. I think if you look at the margins in each segment as you go through the cadence of last year's earnings, you kind of see that come into fruition with the margin improvement. You had some to your point, you have a lag on inventory, especially that inventory that comes across the ocean. So that could be a couple of quarter lag. So I think as you went through the calendar year last year and then our fiscal year late in the year, some of that was still coming through.

Speaker 2

I think Most of that's through the system now. There's always some that's out there in the inventory. But generally speaking, we have a good level of inventory turns. So you would have a little bit of that, but ocean freight has been down for a while now. So that's working its way through the system.

Speaker 2

Our last round of significant price increases We're inflation related last summer, so we saw a few more months before we start lapping the pricing. And then we had our usual seasonal Annual type price increases earlier this calendar year. But I think in terms of a high cost inventory there may be a little in the system, but most of that's worked its way through. Thus, the confidence we provided with that tailwind with margin improvement that you asked about at the beginning.

Speaker 3

Great. Thank you very much.

Speaker 2

Thank you, John.

Operator

Our next question is from Alex Hanthman with Sidoti and Company. Please proceed with your question.

Speaker 4

Good morning, Joe, James and Alexa. This is Alex on for Julio Romero. Thank you for taking questions and congrats on the results.

Speaker 2

Thank you very much.

Speaker 4

My first of 2 questions yes, of course. My first two questions is about operating leverage and the joint venture. Could you talk to the operating leverage that you've seen come to fruition so far and what your expectations are going forward?

Speaker 2

Yes, this is James and welcome to the call, Alex. Appreciate you being on. Yes, as we've talked about, we continue to Pickup volume through the Shell Whitmore joint venture. It's been a nice partnership. And as we said, it would take a while to get the formulations and get the strategy together and we're a couple of years into that and I think we're seeing some nice momentum.

Speaker 2

You're seeing some profitability over the last few quarters, which is coming through. And we've always said that that facility has room to grow and the Shell joint venture has certainly helped us with the absorption and that contributes to the overall margins So the joint venture and Whitmore as we can add equipment there and add volumes to that base then you continue to see the joint venture Have good profitability opportunity through absorption of the volume.

Speaker 4

Thank you. Thank you for the context. My second question is regarding the Contractor Solutions segment. Can you talk about how much of a driver maintaining price versus benefiting from lower costs were For this quarter and then if you can see that continuing?

Speaker 2

Yes, sure. It's hard to quantify exactly and break it up, but maintaining price Very important to us and we had our kind of annual price increase during the fiscal quarter, but that's just normal as that goes through in the late winter, early spring. Yes, our team has done a tremendous job of maintaining pricing where it needs to be and we've talked about where we sit in the value chain and our ability to do that Maintain our customer base and really strengthen that. So pricing maintenance has been important. Yes, we've seen some input costs come down.

Speaker 2

The biggest we've talked about a lot the last couple of years obviously is the container rates, which are now down back to where we were a couple of years ago. And we rely a lot on ocean Right from our own facilities and third parties. So it's I think it really has you've hit on it well, Alex, it's been a good combination between maintaining that price And seeing costs coming down that led to margin expansion. Hard to break those out necessarily because there are so many moving parts and each product and each kind of product Category has its own dynamics, but overall the team has really done a nice job with those 2, which obviously then adds to a really nice gross profit and with operating expense leverage as to an even better EBITDA margin.

Speaker 4

Great. Thank you for the color there. And my last of three questions is on the financials. I think you touched on this a little bit with inventory, but Would love to hear more about some of the efforts to reduce working capital and how much more runway you think you have for improvement there?

Speaker 2

Yes, this is James again. I'll tell you, I'm really proud and pleased with the team. There's been a concerted effort in All three components of that. With accounts receivable, the team has done a really nice job getting their teams together and focused on collections and being sure that we work with our customers To have them pay the invoices timely and a lot of that is on our end, being sure that we get those bills out timely and accurately and working with our customers and the relationships we have. So the team has done a nice job shaving some days off of that.

Speaker 2

You only get a point in time at the end of the quarter when you look at a balance sheet. As we go through the months and the quarters, We're seeing some really nice momentum there in shaping some important capital dollars off by improving accounts receivable efforts Accounts payable too, we want to treat our vendors fairly and pay the bills when we're supposed to, but where we see opportunity to Then some terms then we've been able to leverage that a little bit. And then obviously, inventory is the big piece. And we continue to hold Strategic inventory in certain products that we rely on overseas production, both our own and third party, because as we've often said, things can happen with delays and those kind of things and we've seen what that like over the last couple of years, holding a little more than we did before is appropriate. And obviously, you go back a few years before we acquired TruAir, We didn't have an internal operation overseas that we have now in Vietnam, which is a lot of our production in the Contractor Solutions space.

Speaker 2

So you're going to have More inventory. So you're not going to get all the way back to where we were pre acquisition, but we continue to look strategically at where to produce our products, where to procure our products. And as we said on the last call, while our days continue to improve, there may be a little bit of improvement left, but I'm really pleased and proud of how the teams have done Managing working capital, so we have those dollars and cash flow to put to work and good returns, but organically and inorganically. But at the same time making sure as Joe has often said that we've got the product with the type of margins that we achieve for our shareholders in stock to sell. We don't want to be out of stock of

Operator

Our next question is from Jon Tanwanteng with CJS Securities. Please proceed with your question.

Speaker 3

Hi, guys. Thanks for the follow-up. Just a question on the Whitmore facility and the joint venture with Shell. Where are you in filling that And what is the margin limit for the segment if utilization continues to go up there?

Speaker 2

John, we talked about I appreciate asking that question. This is James. We talked about we're kind of in what we call Phase 3 of the capital expenditures. You'll see that flow through the year over the next few quarters. And then we'll have the equipment fully ramped up and get that in production over the course of the fiscal year.

Speaker 2

We'll provide updates as we go along because it will be a bit of An increase to our normal CapEx, but obviously we pay half and Shell pays half. So we'll point to that on the statement of cash flows as appropriate. So we're still on that journey. The first All phases are through the CapEx and we're, as I said, increasing volumes month to month and quarter to quarter. And that Phase 3 will allow us over the next Full year and even into fiscal 2025 continue to ramp that up to where we expected to model this when we started that literally just over 25 months ago now.

Speaker 2

In terms of margin Potential for the segment, which is inclusive of that, we've guided to reaching 20%. As you recall very well, John, As a veteran with us, we were down in the single digits in the depth of the pandemic. We got over the 20% mark this fiscal Q4 And for the year we were in the high teens. So we think seeing that margin now at or above 20% in the current fiscal year is certainly achievable. It may bounce around 3rd quarter and the joint venture is an important part of that.

Speaker 3

Okay, great. Thanks for that color. Could you talk a little bit more about the seasonal restocking At your HVAC and then plumbing distributors, what are they buying this year compared to last year if there's any The strength of weakness, whether it's mini splits or things from recent acquisitions. And I don't know if you have this kind of data, but if there's more MRR OEM products They're being pushed through. Just help us understand the size and shape of what you're seeing this year.

Speaker 2

Yes, sure, John. It's a great question. When you talk about Morgan Gasior:] Stocking, clearly you've heard the OEMs and the distributors more importantly to us talk about the level of inventories they have And your revenue to inventory levels are a little different than they were a couple of years ago, of course. But I think they've reached generally a nice equilibrium, it sounds like. There may still be a little destocking Certain products, but we continue to see nice order volume.

Speaker 2

Just as we manage our inventory, they do as well and they don't want to miss a sale either. They've got attractive margins like we do. So it's a really nice partnership and dynamic that we have in working together. And again, Jeff Underwood and his Commercial team, as Joe pointed out, specifically really work closely with our customers on a daily basis to be sure they've got what they need. And our ability now with the 7 distribution With Rector Seal and Shoe Air combined and then Shoemaker with their facility in Washington, we can really supply our customers what they need very quickly and very, Very pinpointed.

Speaker 2

In terms of the areas, I won't get overly detailed, but you mentioned mini splits. I'll say you recall that last year There were some shortage on the mini split OEM side. They had some production delays, so that led to a little less mini split product demand last year. They seem like they've caught up What we've seen and heard and so that leads to a little more for us and that's a product area that we excel in. It's a product area where we have a lot of things that go into of the mini split and those products carry nice aggregate margins for us as we make those sales.

Speaker 2

So I'd highlight that area maybe, but I wouldn't say I'd point to anything. I wouldn't distinguish Between MRO versus pure replacement or new, as you know, a lot of that's pretty fungible. Our products go into All applications. So I don't think I'd point to just repair or just replacement or just new necessarily. Ours, as we often say, we don't know exactly where it goes.

Speaker 2

But I would tell you, hopefully that's Too overly vague that we are seeing nice demand. We're seeing things as we expect and that leads us to the confidence we provided in revenue and margin growth in that segment. The other thing I would add John is Part of your question really goes to mix and we are highly focused on selling more of our higher margin products. The last couple of years just keeping up with demand obviously was job number 1, but in a slower growth environment, I think it's really important to focus on the higher margin products. If we can grow those faster than Overall growth rate, many splits has been a great example of that.

Speaker 2

Those are really great products for us and that growth being faster than The category growth, that's been a key to our success and broadening that concept throughout the company and making sure that we are highly focused on selling More of our higher margin products, that mix will show up in our results over the course of time.

Speaker 3

Great. Thanks for that color. And then the last one because I always have to ask, just update us on the relative attractiveness of places to deploy capital. Do you see any really good M and A opportunities right now? Or does it make more sense to be doing other things for your cash?

Speaker 2

Yes, John, we appreciate you're asking that. It's an important focus for us as well. Our allocation of capital Philosophy has not changed and that means we're going to do everything on a risk adjusted returns basis. We think about our cost of capital, which has Obviously, gone up. Interest rates up.

Speaker 2

Now we're mitigating some of that through our swap, but cost of capital has gone up and so hurdle rates have gone up. Having said that, as you've seen in the past, our ability to buy Really attractive, accretive businesses at reasonable valuations, I think We continue to see a nice active pipeline, and that continues to be a focus for us. The hurdle rate has been raised. There's no question about that. Paying down debt on a relative basis is more attractive than it was A year or 2 ago, but acquisition growth is an important part of our strategy and continuing to leverage our distribution Annals is going to be an important part of our success.

Speaker 3

Great. Thank you, guys.

Speaker 2

Great. Thanks, John.

Operator

Our next question is from Alex Antman with Sidoti and Company. Please proceed with your question.

Speaker 4

Thank you. I wanted to follow-up on something you mentioned earlier. You spoke to the demand for residential HVAC. And I wanted to hear a little bit more about what you're seeing around non residential. Are you seeing any sort of trends Today compared to 3 months ago and how you see that playing out?

Speaker 2

Alex, that's Really, really small part of our business, 1st and foremost. And so I don't know that I would comment on that On those trends at this point, really the residential piece is by far the largest piece of our business. A handful of products that Can be used in either residential or commercial and then only a very few products that really address the commercial market. So having said that, we haven't seen anything that's out of the ordinary for us. As James said, our order pattern seems Normal and consistent with what we would expect.

Speaker 2

So nothing really to note there for you.

Speaker 4

Great. Thank you for clarifying.

Operator

Thanks, Alex. We have reached the end of the question and answer session. I would now like to turn the call back to management for closing comments.

Speaker 2

Great. Thank you very much. We really appreciate everyone joining us for this conference call. And we will

Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

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Key Takeaways

  • Record FY23 results: Revenue grew 21% to $758 M, EBITDA rose 31% to $174 M, and EPS increased 41% to $6.20 per share, driven by pricing, acquisitions, and operational excellence.
  • All segments delivered growth: Contractor Solutions achieved record sales of $514 M (including $418 M in HVACR with 25% volume growth), Engineered Building Solutions backlog reached an all-time high, and Specialized Reliability Solutions generated record $147 M revenue.
  • Robust free cash flow & capital returns: Fiscal 2023 operating cash flow was $121 M (+76%), free cash flow $108 M, with $46 M returned to shareholders via buybacks and dividends and a 12% dividend hike.
  • Disciplined capital allocation & liquidity: Invested $58 M in acquisitions, maintained a 1.3× debt/EBITDA leverage, secured an interest rate swap at 3.85%, and have an active M&A pipeline supported by a strong balance sheet.
  • FY24 outlook assumptions: Anticipates continued revenue and margin growth but notes potential headwinds from expected HVACR unit volume declines and higher interest expense in early quarters.
AI Generated. May Contain Errors.
Earnings Conference Call
CSW Industrials Q4 2023
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