CSW Industrials, Inc. (CSW) Earnings Call Transcript & Summary

Greetings and welcome to CSW Industrials Fiscal Fourth Quarter 2024 and Full Year Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Alexa Huerta. Thank you. You may begin.

Thank you, Rob. Good morning everyone, and welcome to the CSW Industrials Fiscal 2024 Fourth Quarter and Full Year Earnings Call. Joining me today is Joseph Armes, Chairman, Chief Executive Officer and President of CSW Industrials; and James Perry, Executive Vice President and Chief Financial Officer. We issued our earnings release, updated investor relations presentation and Form 10-K 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. 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-K and other filings with the SEC. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Joe.

Thank you, Alexa. Good morning, everyone. Once again, it's my pleasure to report to you that our team has executed and outperformed the markets we serve. We achieved record results in both the fourth quarter and the full fiscal year, surpassing the healthy performance of the prior year. Earlier this morning, we reported record fourth quarter revenue, EBITDA and earnings per diluted share. We also delivered meaningful EBITDA margin expansion in the fiscal fourth quarter. CSWI has now delivered 4 consecutive quarters of record results, and therefore, also generated record full year results in revenue of $793 million, or 4.6% growth, and adjusted earnings per diluted share of $7.01, or 12.9% growth and an adjusted EBITDA of $200 million, representing a robust 14.9% growth. For the full year, our adjusted EBITDA margin expanded by 220 basis points. We continued to deliver strong cash flow from the operations despite being in a quarter where we typically are building inventory for the start of the summer season, with a fiscal fourth quarter cash flow from operations of more than $22 million. Our gross profit margin has expanded this year primarily due to increased volumes, pricing initiatives and reduced ocean and domestic freight in the first few quarters of the year. CSWI has achieved meaningful operating leverage and further expanded our best-in-class margins. We have invested in future growth that will outpace the markets we serve. In line with our capital allocation strategy of prioritizing capital investments based on their expected risk adjusted returns this year, the company invested in capital expenditures, acquisitions and returned cash to shareholders through dividends and share repurchases. We continue to seek both organic and inorganic investments and opportunities for growth with attractive returns that support our healthy margins. To fund our capital allocation strategy, we relied on our record cash flow from operations of $164 million, or 35% growth during the full fiscal year of 2024. Our impressive cash flow allowed the company to again increase its most recent quarterly cash dividend that was paid on May 10 by 10.5%, making the 21st consecutive regular quarterly cash dividend. During the full fiscal year, the outstanding debt on our revolving credit facility decreased by $87 million as we paid down debt with our excess cash flow. Having balance sheet strength and robust cash flow gives us confidence to pursue businesses -- to pursue business opportunities of any size. I am proud of the execution by each of our 3 business segments during the last quarter of the fiscal year. I will let James provide additional details around the performance of each segment during the quarter. But before I turn the call over to James, I would like to take a moment to thank our team for delivering top line growth in every segment for the full fiscal year of 2024. Last year at this time on our Q4 and year-end earnings call for fiscal 2023, we said we expected top line growth in each business and our teams have executed and delivered exactly that through volume and pricing during a year when some of our end markets were simply not growing. The resilience of our teams, the end markets we serve and the enduring value of our products allow CSWI to continue to grow through the cycles in the overall market. Our model to deliver low cost and high value products to our customers continues to attract new customers for the company and allows us to report record financial results like we have today. At this time, I'll turn the call over to James for a closer look at our results, and then I will conclude our prepared remarks.

Thank you, Joe, and good morning, everyone. As Joe mentioned, during the full fiscal 2024 year we delivered record revenue of $793 million, representing growth of 4.6%. $24 million of the growth was organic through increased volumes and pricing initiatives. The remaining $11 million of growth for the full year came from the acquisitions of Cover Guard, AC Guard, Falcon and Dust Free. Operating leverage on this revenue drove 15% growth in adjusted EBITDA along with 220 basis points of margin expansion and over 13% growth in adjusted earnings per diluted share. Our consolidated record revenue during the fiscal fourth quarter of 2024 was $211 million, an 8% increase when compared to the prior year period. This growth was half driven organically through increased unit volumes and pricing initiatives and half driven by inorganic growth from the newly acquired Dust Free business. Consolidated gross profit in the fiscal fourth quarter was $94 million, representing nearly 10% growth over the prior year period. The gross profit margin improved by 80 basis points to 44.4% compared to 43.6% in the prior year period. Our consolidated EBITDA for the fourth quarter increased by $6 million to $56 million, or 13% growth when compared to the prior year period. Our EBITDA margin improved by 130 basis points to 26.5% as compared to 25.2% in the prior year quarter, driven by gross margin expansion partially offset by incremental investments for future revenue growth. We will continue to strive for additional EBITDA leverage as we grow revenue managed expenses, but we are very proud of our current EBITDA margins and we maintain our focus on growing the EBITDA dollars as revenues grow. Net income attributable to CSWI in the fiscal fourth quarter was $32 million, or $2.04 per diluted share, compared to $27 million, or $1.74 per diluted share in the prior year period, representing growth of 17%. Our Contractor Solutions segment with $141 million in revenue accounted for 66% of our consolidated revenue, delivered $7.3 million, or 5.4% total growth as compared to the prior year quarter. Of the revenue growth in the quarter $3.8 million, or 2.8% was organic, while the remaining $3.5 million, or 2.6% came from the newly acquired Dust Free business. The fourth quarter acquisition of Dust Free brings an extensive line of patented products for residential and commercial indoor air quality and HVAC applications to the company. Growth for the quarter was reported in the HVAC/R architecturally specified building products, general industrial end markets and was a result of increased unit volumes. Segment EBITDA was $47.3 million, or 33% of revenue compared to $42.7 million, or 32% of revenue in the prior year period, as our impressive margin expansion continued. Our Specialized Reliability Solutions segment revenue increased 8% to 41.6% due to volume growth and pricing initiatives. Revenue growth in the quarter, it came from the general industrial, mining and energy end markets. Higher oil prices supporting energy demand and production during the quarter. The segment EBITDA and EBITDA margin, $8.2 million and 20% respectively in the fiscal fourth quarter, were generally in line with the prior year period results. We have mentioned before that the targeted EBITDA margin for this business is 20%. We are proud that our team delivered this in the quarter. Our Engineered Building Solutions segment revenue increased to $30.1 million, a 20% increase as compared to $25 million in the prior year period. Project mix in our backlog continued to skew towards larger jobs, which may take years to turn to revenue. Bidding and booking trends remain solid. At the end of the fiscal fourth quarter, our book-to-bill ratio for the trailing 8 quarters was approximately 1.1:1. Our sales team is focused on bidding on and booking institutional and multifamily projects with the highest quality developers. Segment EBITDA grew 98% to $6.2 million or 20% EBITDA margin compared to $3.1 million and a 12% margin the prior year period. Like the SRS segment, we target a sustainable 20% EBITDA margin in this segment as well and we're making progress on that goal. Transitioning to our strong balance sheet and cash flow. We ended our fiscal 2024 fourth quarter with $22 million of cash and reported fiscal fourth quarter cash flow from operations of $22 million compared to $37 million in the same quarter last year. For the current full fiscal year 2024, the company had a record cash flow from operations of $164 million, or 35% growth compared to $121 million in the prior fiscal year. Our free cash flow defined as cash flow from operations minus capital expenditures was $17.5 million in fiscal fourth quarter compared to $31.7 million in the same period 1 year ago. That results in a free cash flow per share of $1.12 in the fiscal fourth quarter as compared to $2.04 in the same period a year ago. A free cash flow for the full fiscal year was $147.8 million as compared to $107.5 million in the same period 1 year ago. That resulted in free cash flow per share of $9.48 for fiscal 2024 as compared to $6.91 in the prior fiscal year. This impressive level of free cash flow fuels our capital allocation, allowing us to invest in growth and enhance shareholder value. During the quarter, the outstanding debt on our revolving credit facility increased by $13 million due to the $27.9 million of cash consideration for the Dust Free acquisition offset by our cash flows. The addition of Dust Free to our portfolio allow CSWI the ability to offer industry leading technology that addresses indoor air quality. We ended the fiscal fourth quarter with $166 million outstanding on our $500 million revolver. Our bank covenants leverage ratio at quarter end was 0.73x, improvement from 1.3x at the end of fiscal 2023 due to our strong EBITDA growth and the $87 million pay down of our revolver during that period. As a reminder, the company has been the lowest tier of our revolver pricing grid since reporting our fiscal 2024 first quarter, reducing our interest rate spread and saving on interest expense. During the fiscal fourth quarter and the full fiscal 2024, interest rate hedge for the first $100 million of borrowing and the revolver saved us approximately $400,000 and $1.5 million respectively in interest expense. Our effective tax rate for the fiscal fourth quarter was 23.8% on a GAAP basis. As we look at the fiscal 2025, we anticipate delivering full year revenue growth as well as EBITDA and EPS growth with continued strong cash flow. With that, I'll now turn the call back to Joe for his closing remarks.

Thank you, James. To summarize, during the fourth fiscal quarter of 2024 and the full year, we posted record results across the board highlighted by organic and inorganic revenue growth, expanded margins and robust cash flow and consummated the acquisition of Dust Free. Since going public in 2015, CSWI has grown our market cap over 700% to around $3.8 billion while also delivering 720% total shareholder return. We're proud that we have the same number of shares outstanding today as when we went public. Fiscal 2024 was a record year for CSWI and our revenue CAGR over the past 5 years is 18%, including both organic growth and growth through acquisitions where we have invested over $600 million since fiscal 2016. As we begin fiscal 2025, we expect a year of revenue, EBITDA and EPS growth, as James mentioned earlier. We also expect to continue our history of executing on acquisitions to complement our organic growth. As I look at our expectations for fiscal year 2025, we should see similar top line growth as fiscal 2024 while maintaining our strong margin profile. Our goal is to make it as easy as possible to do business with CSWI and to be the partner of choice for our loyal customers. Earlier this month, our Contractor Solutions segment received the Vendor of the Year Award from Blue Hawk, and HVAC/R distributor cooperative with over 200 member owners. This award further demonstrates our commitment to our customers, and I'm extremely proud of the Contractor Solutions team for their continued achievements. Of note, this is the third major Vendor of the Year Award we have won over the last 18 months. At CSWI, we are committed to a culture of diversity, inclusion and respect, where we focus on recruiting and retaining great talent, offering rewarding careers, recognizing team members who excel while providing the opportunity for a safe, secure and dignified retirement. I could not be more proud to announce that CSWI has recently been certified as a great place to work for the second year in a row. This recognition is a testament to our team members embracing our focus on core values such as accountability, citizenship, teamwork, respect, integrity, stewardship and excellence. How we succeed matters and our success is shaped by the collaborative efforts of our team members. As always, I want to close by thanking all my colleagues here at CSWI, who have collectively -- who collectively own approximately 4% 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. With that operator, we're now ready to take questions.

[Operator Instructions] Our first question comes from Jon Tanwanteng with CJS Securities.

Really nice quarter there. My first question is just regarding the quarter, this Q4 looked a lot like your historical Q1 and Q2 performances just down from a revenue and margin perspective. I was wondering did you pull anything into the quarter or seeing anything that was more onetime in nature, maybe in the -- in a project based businesses or is this more of a base that you expect to build on going forward into your seasonally stronger summer quarters?

Yes, Jon, thanks. This is James. Appreciate your question and all the good work you do for the shareholder community. I've mentioned a couple of things, if you dive into the 10-K you'll see a couple of things as well. Our Engineered Building Solutions segment sold a prior facility, they relocated to a larger facility this quarter. So we had a kind of a onetime property gain that was $1.2 million, didn't hit revenue, but that would help our EBITDA a little bit. So that was a bit of a one-timer. You had some things going the other way in other segments. So that was relatively neutral. So we didn't call it out, and we don't do adjusted type things very often. You'll recall at the end of Q3, our Specialized Reliability segment, just getting some product out at the end of December, and we were able to make that up on the last call. You'll remember early February, we had already made that up. So they had a little better quarter than they might have as a result of that. That was more a catch-up than a full forward [ dose ]. So that was certainly not the case. And our Contractor Solutions segment just continued to perform well. I mean I think we see -- and the OEMs have said it as well that a lot of the destocking things to be behind us now. Our customers ordered from us. We have our usual price increase and promotional session as we go through our fiscal fourth quarter as everybody gets ready for the summer season. So their quarter, I think, was pretty normal. They did a really nice job getting things out the door by the end of the quarter. And I'd say overall, a pretty normal quarter, certainly on the top line. It's hard to ever know what you expect quarter-to-quarter. Some things come in. But there weren't any big project pull-forward [ trigger ] point. We didn't necessarily pull anything dramatic from Q1 to end of Q4. So I think as we said, we expect to have top line growth this next year, very healthy top line growth and our goal is to maintain these margins that our teams has been putting forward for the last several quarters.

Got it. That's very helpful. And I was just wondering about that top line growth guidance or I guess, the outlook is similar to 2020 -- excuse me, the fiscal '24. What are the components of that? Could you kind of rank what you expect to be growing the fastest and the slowest among the segments or end markets at the year-end?

Yes, I don't think anything terribly unusual there. It's a little early in the year to know where the end markets are going. The residential HVAC space has been a bit of a headwind, and it's starting to turn a little bit. We've clearly outperformed that from the residential OEM HVAC perspective. So our team continues to do a really nice job there. It hasn't gotten real hot yet, but folks, of course, are gearing up for that. It will. From a Specialized Reliability Solutions standpoint, the joint venture continues to ramp up and our business is prepared for that. So we've got a little bit of an optimistic tailwind there. In Engineered Building Solutions, they built a really healthy backlog. That book-to-bill continue to stay in a really good place. There are some headwinds there in certain markets as we all would expect, some of the construction markets. But overall, again, last year, we had nearly 5% revenue growth. And we said roughly in line from an organic standpoint, I think we would expect that. And then we only had a couple of months of the Dust Free acquisition. We pointed out, that was about $3.5 million, and that was just a couple of months. So you'll have a full year of that now. So that run rate would get you kind of a little bit higher from an inorganic perspective growth rate given that Dust Free has been a really nice addition to the portfolio already.

Fair enough. And then last one, I'll jump back in queue. But just any thoughts to the margins going forward? You're expecting revenue growth, but maybe not so much margin expansion. And then to your credit, you've done a great job on margins on a trailing basis. So I'm wondering is there less upside to the margin as you see it today? And kind of what might be holding you back if that's the case?

Yes, Jon, I'll take that. I think we set our goal is to sustain the margins we have. These are best-in-class margins in all of our segments. That SRS segment has gotten to the 20% goal. Of course, we're going to continue just to push and see where we can find some more margin points. EBS's goal is to get to 20%. They were there this quarter, aided a little bit by the gain I talked about. But nonetheless, even without that it's still kind of a mid-to-high teen's business. And the goal there from the team is to hit 20% as well in the not-too-distant future. And then Contractor Solutions with these kind of low to mid-30s margins, 33% margin, we have in the rear view mirror now just tremendous margins. The one thing we point out when we say the goal is to sustain that, hey, we're very proud of the margins. And as we grow the top line, the bottom line is going to grow, of course, from a dollar perspective, and that's the ultimate goal is to have dollars to reallocate, have strong cash flows and invest in our growth. But we had some tailwinds on the pricing the last couple of years that we're able to increase. And some of the costs came down, we held on to that pricing. So we were able to kind of improve our margins and get back to some of the pre-COVID-type margins, especially in Contractor Solutions, we're back there. Even though cost of goods sold continue to be elevated in some of the places, while we've had some of that come back and we held on to the pricing that's given us this bump. But this year was kind of a year of normal pricing increases and normal inflation so far, it looks like. So to hang on to these type of margins and of course the goal is to maximize margins where we can as we hold on to cost. But we would expect to sustain these margins. And as we can eke out some basis points here and there, we're going to work hard to deliver that.

Jon, this is Joe. As you recall, because you've been with us for a long time, when we went public, we had best-in-class margins, and we stated our goal was to grow meaningfully and maintain our margins. And we said, if we did that, our shareholders will be rewarded. And we feel like that's played out exactly the way we planned. The ups and downs on how we got there have been very, very different. I could have never predicted that. But I think that continues to be the strategy. I mean it is a strong filter on acquisitions and other investments that we make, that we have these kind of margins and I think that adds to our disciplined approach on M&A. And I think that it's served us really, really well to have that kind of strategy, and I think we'll just continue doing the same.

You've done a great job. I'll wait for the next opportunity.

Our next question is from Julio Romero with Sidoti & Company.

Maybe to start on the Contractor Solutions segment. A very nice quarter here. Your prepared commentary, it sounds like you feel pretty good you're through customer destocking. Some of the HVAC OEMs have noted positive commentary surrounding residential HVAC demand. I think one major one called out with low single-digit volume growth for the remainder of calendar '24. Is that kind of in line with what you folks are seeing at the moment?

Well, we've seen mixed projections. The industry-wide estimates going forward are much lower than that. But I do believe that in real time, the OEM community seems to be a little more positive. So I would say mixed kind of backdrop for us. But against that, our commitment is always to outgrow the market, and we think that will result in positive organic growth for us, and it will be similar to last year.

Understood. And I guess, as we think about Contractor Solutions positive organic growth, I guess there would be a mix of price and volume for fiscal '25?