CSW Industrials Q1 2025 Earnings Call Transcript

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July 31, 2024

There are 6 speakers on the call.

Operator

As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Alexa Huerta, CSWI's Vice President of Investor Relations and Treasurer. Thank you. You may begin.

Speaker 1

Thank you, Michelle. Good morning, everyone, and welcome to the CSW Industrials fiscal 2025 Q1 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 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.cswindustrials.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 and 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, everyone. I'm proud to report that once again our team has delivered record results in the 1st fiscal quarter of 2025 and has outperformed the markets we serve. This morning, we reported all time highs for each of our quarterly revenue of $226,000,000 EBITDA of 65,000,000 dollars earnings per diluted share of $2.47 net income of 39,000,000 dollars and cash flow from operations of $63,000,000 Our gross profit margin expanded an additional 220 basis points to 47.5 percent as a result of pricing, favorable product mix, cost containment and operational efficiency. Our EBITDA margin also expanded by 210 basis points to 28.9 percent in the quarter.

Speaker 2

Our sharp focus on cash flow from operations drove a fiscal first quarter record of $63,000,000 or 24.7 percent growth over the prior year. Our strong cash flow will continue to fund our capital allocation strategy and we remain focused on building our pipeline of inorganic investment opportunities with returns that will grow shareholder value. During the fiscal Q1, we utilized our strong cash flow to pay down the outstanding debt on our revolving credit facility by $51,000,000 We ended the quarter with a balance of $115,000,000 outstanding on our $500,000,000 facility, allowing us to further reduce our interest expense and to maximize the capital available to us, which will fund future opportunities as they arise. Our balance sheet strength, liquidity and increasing cash flows give us the luxury of being able to quickly act on business opportunities of size. Once again, each of the 3 business segments impressed during the quarter with their execution, resilience and ability to deliver results.

Speaker 2

I will let James provide more details on the performance of each segment during the quarter. CSWI has a demonstrated 9 year track record of increasing long term shareholder value. We continue to maintain a strong balance sheet, grow revenue meaningfully and efficiently allocate capital using a rigorous risk adjusted returns analysis to guide us. The power of our product distribution model is one key of our one key to our success, allowing us to grow faster than our markets served and our acquisitions benefit greatly from this model. At CSWI, we also care about how we succeed.

Speaker 2

So we prioritize investing in our team members' well-being and focusing on our customers, which positions us for sustainable long term growth and profitability. At this time, I will turn the call over to James for a closer look at our results and following that, I will return and conclude our prepared remarks.

Speaker 3

Thank you, Joe, and good morning, everyone. As Joe mentioned, our consolidated record revenue during the fiscal Q1 of 2025 was $226,000,000 a $23,000,000 or 11% increase when compared to the prior year period and a record all time quarterly high for CSWI. $16,000,000 of the growth was organic, mainly through increased volumes and some pricing initiatives. The remaining $7,000,000 of growth came from the acquisition of Dust Free in February of this year. Consolidated gross profit in the fiscal Q1 was $107,000,000 representing nearly 17% growth over the prior year period.

Speaker 3

As Joe mentioned, our gross profit margin improved by 220 basis points to 47.5% compared to 45.3% in the prior year period. Our record consolidated EBITDA for the Q1 increased by $11,000,000 to $65,000,000 which was 20% growth when compared to the prior year period. Our EBITDA margin improved by 210 basis points to 28.9% as compared to 26.8% in the prior year quarter, driven by the gross margin expansion. As we mentioned on our fiscal year end call in May, we will continue to strive for additional EBITDA leverage as we grow revenue and manage expenses. However, we are very proud of our recent EBITDA margins and our team works hard to maintain these levels.

Speaker 3

Our focus will remain on increasing EBITDA dollars as our revenues grow. Net income attributable to CSWI in the fiscal Q1 was a record $39,000,000 or a record $2.47 per diluted share compared to $31,000,000 or $1.97 per diluted share in the prior year period, representing growth of 26%. Our Contractor Solutions segment with $160,000,000 in revenue accounted for 71% of our consolidated revenue and delivered $20,500,000 or 14.6 percent total growth when compared to the prior year quarter. Of the revenue growth in the quarter, dollars 13,300,000 or 9.5 percent was organic, while the remaining $7,200,000 or 5.1 percent came from the Dust Free acquisition. Growth for the quarter was reported in all of this segment's end markets and was a result of increased unit volumes and some pricing initiatives.

Speaker 3

Additionally, we benefited in the Q1 from a customer adding a new distribution center network that required a one time stock up of inventory. Segment EBITDA was 58 point $3,000,000 or 36 percent of revenue compared to $46,700,000 or 33 percent of revenue in the prior year period as our already market leading margins continue to expand mostly from volume leverage. Our Specialized Volatility Solutions segment revenue decreased 2% to $36,800,000 due to a slight volume decrease. During the quarter, a weather event in May at our manufacturing plant in Rockwall, Texas caused a 5 day power outage, leading to a delay in certain revenues as well as higher than normal maintenance and IT expenses. Revenue increased in the general industrial and rail transportation end markets, but declined in the mining and energy end markets.

Speaker 3

Pricing initiatives had a positive impact on revenue in the quarter, but were offset by the slight decrease in volume. The segment EBITDA of $8,500,000 in the fiscal 2025 Q1 was in line with the prior year period results. However, EBITDA margin improved 70 basis points to 23% in the current period, above our EBITDA margin target for this business of 20%. Our Engineered Building Solutions segment revenue increased to $30,900,000 a 12% increase as compared to $27,600,000 in the prior year period. Bidding and booking trends remained solid and at the end of the fiscal Q1, our book to bill ratio for the trailing 8 quarters remained unchanged from year end at 1.1:one.

Speaker 3

Segment EBITDA grew 32 percent to $6,200,000 or 20 percent EBITDA margin compared to $4,700,000 and a 17% EBITDA margin in the prior year period. We are pleased to see our EBS segment reached the 20% EBITDA margin target for the quarter. But keep in mind that this will fluctuate on a quarterly basis due to project mix. Transitioning to our strong balance sheet and cash flow, we ended our fiscal 2025 Q1 with $19,000,000 of cash and reported record fiscal Q1 cash flow from operations of $63,000,000 compared to $50,000,000 in the same quarter last year, representing 25% growth over the prior year period. The cash flow from operations in the quarter was an all time record for CSWI.

Speaker 3

Our free cash flow, defined as cash flow from operations minus capital expenditures, was $59,600,000 in the fiscal Q1 compared to $45,300,000 in the same period a year ago. That resulted in free cash flow per share of $3.82 in the fiscal Q1 as compared to $2.91 in the same period a year ago, growth of 31%. As Joe mentioned, this impressive level of free cash flow allows us to invest in growth with the goal of increasing long term shareholder value. Joe mentioned that we paid down $51,000,000 of our revolver due to our strong cash flows. As a result, our bank covenant leverage ratio at quarter end declined to 0.49 times from 0.73 times at the end of the fiscal 2024.

Speaker 3

As a reminder, the company has been in the lowest tier of our revolver pricing grid for a solid year now, reducing our interest rate spread and saving on interest expense. Our effective tax rate for the fiscal Q1 was 26.4% on a GAAP basis. We still anticipate delivering full year growth in revenue, EBITDA and EPS growth along with strong cash flow. With that, I'll now turn the call back to Joe for his closing remarks.

Speaker 2

Thank you, James. To summarize, during the 1st fiscal quarter of 2025, we posted all time record results for revenue, for EBITDA, for earnings per share, for net income and for our operating cash flow. Our 11% revenue growth included both organic and inorganic growth and resulted in higher margins due to strong operating leverage. Looking further into fiscal 2025, CSWI will continue to deliver growth that outpaces our markets served. We will continue to cultivate relationships in our strategic acquisition pipeline to complement our organic growth, while maintaining our superior margins.

Speaker 2

At CSWI, we are focused on recruiting and retaining great talent, offering rewarding careers and recognizing team members who excel, while providing them with the opportunity for a safe, secure and dignified retirement. Partnering with our employees to drive success is a very important part of our strategy. And one way that we affect this is through our employee stock ownership plan. I'm proud to announce that last month, $4,200,000 to our ESOP. This marks the 9th consecutive year of contributions and CSWI has now contributed an aggregate of $26,500,000 to the plan since 2016 at 0 cost to our team members.

Speaker 2

With the growth of our stock price, these ESOP contributions since 2016 have grown to well over $100,000,000 of value today. And together with our 401 match have helped facilitate retirements for many of our long tenured team members. So lastly, I just want to close my prepared remarks by thanking the dedicated team here at CSWI who collectively own 4% of the company through our employee stock ownership plan as well as all of our oil shareholders for their continued investment in, commitment to and support of CSW Industrials. Michelle, we're now ready for questions.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Speaker 4

Hi, it's Charlie Straub with something for John. Good morning.

Speaker 2

Morning, Charlie.

Speaker 4

Hey, Joe. Joe, James, can you talk a little bit more about the sustainability of sales and margin and momentum going into Q2? And looking at Q1, were there any pull forwards or unusual items that we should take into account?

Speaker 3

Yes. Good morning, Charlie. It's James. Let me just, first of all, say this was an exceptional quarter. Really proud of the work the team did, prepared well for the demand that was there.

Speaker 3

Think if you look at our EBS and SRS segments, Q1 and Q2, you should see continued type growth opportunities that we saw year over year. Margins will fluctuate as always given product mix and timing. We talked about the little bit of revenue delay in May in Specialized Rawability Solutions. They pretty much made that up, but obviously that affects you a little bit. But overall, those two segments, we do feel good about that.

Speaker 3

Contractor Solutions, just truly exceptional. You asked specifically about pull forward. I mentioned in my comments, we have one customer that's a large customer of ours that opened a new distribution network and they had to stock up those distribution centers and our team did a great job of doing that. Of that could have been a little bit of pull forward. The demand may come a little sooner than we expected.

Speaker 3

Q1 versus Q2, another customer placed some large orders near the back part of Q1. So you could say there's a little pull forward from Q1 to Q2. So I don't know if I'd say I would expect a repeat performance from a revenue perspective, but we have had a hot summer most places around the country, so demand has been solid. From a margin perspective, we said on our Q4 year end call that to maintain the type of margins we had last year would be our expectation. We obviously exceeded that this quarter.

Speaker 3

I think looking at the margins we've had over the last several quarters is more realistic and on a generally go forward basis, they'll move around some. But when you had a Q1 at Contractor Solutions with the type of volume pull through that the team was able to accomplish, especially those couple of larger orders that again may have been a little bit of pull forward, that's going to help margins. So to see that business beat its margin number kind of year over year by several 100 basis points, a lot of that's volume driven. There's some good mix in there, you've just got a set of kind of fixed overhead costs that don't need to move a lot to push more volume through the system. So long way of saying really proud of the Q1, looking forward to a solid rest of the year.

Speaker 3

We talked about growing at roughly last year's growth rates plus the acquisitions. We obviously exceeded that Q1. That's a seasonally strong quarter, but we're still optimistic for the year in total.

Speaker 4

Great. Thanks. And thoughts on the OEM HVAC companies kind of increasing their forecast and if that flows through you guys versus the base kind of MRO demand?

Speaker 3

Yes, we're encouraged by that. Clearly to see all the OEMs, one even this morning, talk about nice year over year order volume pickups. The residential OEM market has been soft for the last couple of years. There were some pull forward from COVID, obviously higher interest rates and inflation caused a bit of a headwind for residential HVAC. But I think they've a couple of things I'd mentioned.

Speaker 3

They've all talked about kind of the destocking is behind them. We've said that for a while. They've said that pretty emphatically here recently. But clearly, residential HVAC volumes being up is a good thing for us. We're all about the installed base.

Speaker 3

So the more units that are going into new homes, more replacement units that go into existing homes, people moving, putting

Speaker 2

in new units, the installed base

Speaker 3

is what's most important to us because we touch a new unit, we touch a replacement unit, we touch repair, we touch maintenance. The other thing I'll mention is their year over year numbers are coming off some pretty soft comps. They had this time last year, they were talking about things being down high single to low teens from a volume perspective. We've never said that. So we've held up pretty well throughout this because of our mix across the gamut.

Speaker 3

It's not just about new OEM installations. So our comps are a little bit tougher. So while we continue to see unit volume growth from market share gains, certainly there's a tailwind from OEM seeing more demand.

Speaker 4

Great. One more for me before I jump back in queue. Can you provide us an update with the input cost expectations going forward, especially when you look at overseas freight, which has risen significantly and your ability to maintain margin or margin dollars via pricing?

Speaker 3

Yes. Great question, Charlie. I'm glad you brought that up. So we've clearly seen ocean freight accelerate throughout the year. Not much impact in Q1, as we've talked about before and you know, but for the benefit of the others on the phone, that takes 3, 4, 5 months to get through the system.

Speaker 3

So Q1, you were really seeing containers that were priced back in kind of November, December, January, February timeframe. Now you're seeing those prices have accelerated a lot over the last few months. So Q2 is going to start seeing some of that impact, which is a headwind to margins. Q3 and Q4 certainly will. Rates have gone up about every week for the last few months.

Speaker 3

The last 2 weeks, we've seen rates come down, the last couple of weeks about 10%. So hard to say 2 weeks is a trend, but that's certainly encouraging that maybe you've seen a peak and now it's coming down. But nonetheless, the freight rates we're seeing the last couple of months are what's going to inform us on Q2, Q3 and now even into Q4. So is a bit of a margin headwind without a doubt. We've not taken pricing action to counteract that beyond our normal pricing we put through back in February March, We're certainly watching input cost closely.

Speaker 3

And if we continue to see elevated cost, then it's something that we always consider taking a look at as we go through the year.

Speaker 4

Great. Thank you.

Speaker 3

Thank you, Charlie.

Operator

Thank you. Our next question comes from the line of Julio Romero with Sidoti and Company. Please proceed with your question.

Speaker 5

Thanks. Hey, good morning, Joe, James, Alexa. I appreciate it. Maybe just start on Contractor Solutions. You called out very nice volumes in this quarter.

Speaker 5

Can you maybe quantify the sales contribution from that one customer that needed to load in? And then you mentioned a second customer that also placed a large order. How much will that benefit the Q2?

Speaker 3

Yes. Coolio, this is James. Good morning. Thanks for being on as always and for your It's not material enough that it's something we call out in the 10 Q or anything like that, but it's a few percent of revenue. I mean, it was that customer would have ordered some in Q1, so it's hard to know exactly how much was pulled forward that they simply ordered and we're able to deliver.

Speaker 3

So the couple of customers, it was a few percent of revenue, nothing material that we needed to get real specific about. But enough to be sure we mentioned it because when you do see some revenues like that shift from what could have probably been Q2 into Q1, we want to be sure to inform people of that so they understood the expectations are a little different as we look forward to Q2.

Speaker 5

Okay. That's helpful there. And then turning to the Engineered Building Solutions segment, this was your 2nd straight quarter of 20% plus EBITDA margins, very nice performance there and I know that was a target for a long time. Is this just a function of the higher margin mix you've talked about for a while finally flowing through? And then secondly, what inning are we in, in regards to that higher margin mix flowing through?

Speaker 5

Do we have more runway there for that to continue?

Speaker 3

Yes, Julio, thanks. James again. Really proud of the work that EBS did this quarter. We said 20% is kind of our long term margin goal and hitting that this quarter was really impressive. So really proud of that team and congratulations to them.

Speaker 3

Yes, it was a result of some higher margin products coming through the backlog and converting to revenue. That's obviously important. We have good visibility going out another quarter or so of that. The backlog remains solid. Backlog was generally flat.

Speaker 3

You see that if you do the math on the book to bill the last couple of quarters. So we've been able to maintain the backlog despite some weakness in the commercial construction markets, certainly in the multifamily market. The other thing I would point out besides some better mix is the team has really done a good job and had a concerted effort the last year and I think we saw the fruits of that this quarter of finding ways to take out costs from the supply chain. They've really tried to reengineer some products, find some new sources for the inputs for their products as they assemble the different products. So that's come through and that's led to some nice margin points.

Speaker 3

The margin is going to bounce around. So I don't think we're saying that we're at 20% permanently yet. We've kind of said that's a little bit of a longer term goal, so it's going to bounce around. As we look at the backlog the next couple of quarters, we're going to continue to have solid revenues. Margin is going to bounce around.

Speaker 3

What inning, Joe and I often say, we'll kind of see it coming. Given the backlog is there, we feel good about it. We would say things are maybe a little softer at the back part of the year right now, we're working to fill that in. Some of these projects, if we just put something in the backlog last week, it may be a year or 2 out. So we see maybe a little softness in the back part of the year.

Speaker 3

In the next fiscal year, we see some of that picking up again. There are some projects that have sped up, in fact, up in the Toronto market as a very specific example. You've heard us talk about Toronto quite a bit. We've got some nice backlog up there. They're having a labor crunch because there are so many projects, and some of those have gotten sped up.

Speaker 3

So we've benefited from that. Other markets, things have slowed down because the demand has slowed down a little bit. So it bounces around, but a long way to say that really proud of the quarter, really proud of the way the rest of the year looks, but it's going to pop up and down a little bit.

Speaker 5

Got it. That's very helpful color there. And then that kind of dovetails into my last question here is just overall thinking about your margins. Obviously, you had very strong margin performance in the quarter. You guys reiterated that your focus is really on the EBITDA dollars and growing that portion.

Speaker 5

But if you could just talk to us about, aside from maybe the volume leverage, why some of this margin performance isn't sustainable? Or maybe asked in another way, anything from this quarter that may get us more constructive on margin expansion for the remaining 3 quarters of the year?

Speaker 3

Yes, it's a great question, Julio. Obviously, we're always aiming for margin expansion. The team did it in the Q1, really proud of the team's work there from top to bottom. We talked about last year's margins being market leading and very proud of that. Yes, mix matters and there were some products in the quarter that mix really was favorable to us and that can obviously move around.

Speaker 3

The team has picked up some share and given these couple of orders we talked about maybe a little bit of pull forward from Q2 to Q1 that's volume leverage. There were also nice mix of orders in that perspective. The team, I think, going into the year when we talked about protecting margins and maintaining where we are has really taken a hard look at cost and has held off on maybe some hiring and some cost from a G and A perspective. As we continue to see the volume pick up and as we continue to see success, there's some holes we need to fill in, I think. So you'll see some of those costs maybe come in, but Q1, they weren't there.

Speaker 3

But overall, we're optimistic, but we really just want to caution folks that the margin performance in Q1, which is always going to be seasonally a strong quarter, you know that as well as anybody on this call. And when you have a little bit of pull forward, things just fired on all cylinders. So we don't want to talk about margin too much. But I think looking at last year's margins and applying that and then accounting for the pull forward maybe a little bit from Q2 to Q1, as you asked earlier, a few percent of revenue, kind of gets you back to what's probably a little more normal expectations for Q2 and then going forward the rest of the year.

Speaker 2

And Julio, it's Joe. The other thing I would point you to is Q3 is always the seasonally lowest revenue for our Contractor Solutions, which has our highest margins. And so that margin is never the same as Q1. So just it's important to keep that in mind.

Speaker 5

No, absolutely. Great color guys. Nice job. Appreciate it.

Speaker 2

Thanks, Julio. Thanks, Julio.

Operator

Thank you. Our next question is a follow-up from Jon Tanwanteng with CJS Securities. Please proceed with your question.

Speaker 4

Hi. Just one more for you. Actually, 2 more. When you look at your strong cash flow, is M and A still kind of a high priority for you and are opportunities becoming more actionable there in the pipeline?

Speaker 2

Yes, Charlie, it is. We've always kind of laid out our capital allocation policy. Organic growth opportunities are almost always the most competitive from a return standpoint, but we don't have enough of those to spend $200,000,000 of cash flow in a year. So, M and A is going to be an important part of our story. It has been and will continue to be.

Speaker 2

We're pleased with the pipeline. We're very pleased with the opportunities that we're seeing. I would say a really good mix of small and large acquisition targets. And there's a little bit of price discovery still going on right now, trying to figure out exactly what the clearing price is on these targets. But it feels like we're closer today than we were 3 months ago, the last time we talked to you guys about these things on folks coming together on a meaningful kind of way on price.

Speaker 2

So yes, we're very pleased with the pipeline, very pleased with the calls we're getting, the opportunities we're seeing, and the pricing kind of valuation issues, I think, are going to shake out here.

Speaker 4

Great. And just lastly, just with the storms recently in Houston and the area there, any impact near term? And how should we think about weather kind of in general this year impacting or driving demand?

Speaker 2

Yes. We did have some minor damage in Houston to a roof, insured loss and actually, honestly, a roof we were getting ready to replace anyway. The 5 days kind of out of power here in Dallas, we were laughing earlier, you don't get a lot of TV coverage on a power outage. There's no good video for that. So but it affected their business.

Speaker 2

And so hopefully, those are behind us now. I think we've got a very resilient organization. Houston team certainly has been through this repeatedly, and we don't see that as a really high risk. But it's something that we keep in mind and are always prepared for. So at this point, there's nothing that we would point to, nothing that we would say would affect our financial results.

Speaker 4

Great. Appreciate the questions. Thank you.

Speaker 2

Thanks, Charles. Thanks, Charles. Thanks for being on.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over to Mr. Armes for any additional closing remarks.

Speaker 2

Yes. Thank you. We just appreciate everybody's interest and taking part in this call and look forward to our next conversation next quarter. So thank you very much.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation

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CSW Industrials Q1 2025
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