CSW Industrials, Inc.

Good morning and welcome to the CSW IndustrialSync fiscal second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, This event is being recorded. I would now like to turn the conference over to Adrienne Griffin. Please go ahead.

Thank you, Maura. Good morning, everyone, and welcome to the CSW Industrials Fiscal 2023 Second Quarter Earnings Call. Joining me today are Joseph Arms, 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 10Q prior to the market's opening today, which are available on the investor 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 and the comments made during this call, as well as the risk factors identified in our annual report on Form 10-K and other filings with the SEC. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Joe Arms.

Thank you, Adrienne. Good morning, and thank you for joining our fiscal second quarter conference call. Our record fiscal second quarter and record fiscal first half results demonstrate our successful efforts to drive top-line growth, expand margins, and increase earnings per share. Comparing our fiscal second quarter year-over-year performance, we reported 23% revenue growth, 29% EBITDA growth, and 37% growth in EPS. These metrics clearly demonstrate our ability to generate leverage on incremental sales as gross margin growth outpaced revenue growth, operating income growth outpaced gross margin growth, and this trend continued through the income statement to EPS. Against a backdrop of macroeconomic uncertainty, our team continues to perform exceptionally well, combining operational excellence disciplined capital allocation, and a keen focus on customer service. In the current quarter, all three segments contributed to organic revenue growth of $25 million, driven primarily by the numerous price actions in the current and prior fiscal year periods. Due to the high value nature of the products that we bring to market, we are able to realize positive pricing of our products. Our story this quarter is one of building on commercial momentum created in prior periods founded upon our highly differentiated products and leading positions in the end markets that we serve. During the fiscal second quarter, we closed the previously announced acquisitions of CoverGuard and ACGuard. And subsequent to quarter end, we completed the acquisition of Falcon Stainless. The acquired product lines expand our offerings sold into our profitable HVACR and plumbing in markets. Through these bolt-on acquisitions, we deployed $58.1 million of capital at a valuation of 6.6 times EBITDA, which was funded through cash on hand and borrowings under our existing credit facility. As a reminder, in December, we closed the Shoemaker acquisition which expanded our GRD offerings sold into our HVAC RN market. During the fiscal second quarter, the Shoemaker, CoverGuard, and AC Guard acquisitions collectively contributed $11 million in revenue, all of which was reported in our contractor solutions segment. The Falcon acquisition will be included in our results beginning with this quarter. These acquisitions reflect the highly accretive nature of our completed acquisitions and our focus on complementary product categories and our existing end markets. In reviewing the first two quarters of the fiscal year, material and freight costs and freight delays improved sequentially, providing early signs of supply chain recovery. While the persistence of this recovery is not yet known, Supplier on-time delivery has meaningfully improved, and we have proactively diversified sourcing for critical components. Our leadership team continuously evaluates inventory at the product and category levels to ensure that we can meet customer demand for our products while optimizing working capital investments. I'll transition now to a discussion of our segments. Our contractor solutions segment reported sales of $130 million, a 27 million or 26% increase, including organic growth of $16 million. The strength of this segment lies in leveraging our distribution network, optimizing acquisition integration, and selling high-value products. The acquired CoverGuard, AC Guard, and Falcon products were swiftly relocated to our existing distribution centers, and sales of these products have transitioned to our team. Our success in integrating acquisitions reflects a process that we've honed through multiple transactions that is predicated upon adding value to our customers consistent with our creative growth goals. We expect to continue to deliver growth that exceeds the end markets served supported by price actions and recent acquisitions. Our engineered building solutions segment continued to grow, reporting revenue of $26 million, an increase of 8% due to multi-year initiatives to professionalize our commercial team, focus on high-growth geographies, and introduce new products. For a third consecutive quarter, this segment's backlog reached an all-time high as we continued to be awarded high-quality jobs in multifamily residential, institutional, educational, and commercial categories. Several leading construction indicators continue to show signs of health. The latest FMI data demonstrates overall growth in the construction market with supportive outlooks for our primary subcategories. AIA billings have remained positive and above 50 for 20 months in a row. We are mindful of rising interest rates, flattening, and modest declines in some categories and geographies, but our team has defined actionable goals to maintain performance that exceeds the broad construction industry. Our specialized reliability solution segment continues to exceed expectations. delivering a second consecutive record quarter of $37 million in revenue. This was the fourth consecutive quarter for mid to high teen segment EBITDA margin. As capacity utilization increased, operational practices improved, and material cost inflation moderated. We expect continued strength in the segment, albeit at a moderating growth rate, as compared to these exceptional results. Before I turn the call over to James, I would like to acknowledge the resiliency of our business model. Important attributes include the diversification of our product portfolio and of the end markets we serve, and the consumable nature of our products that are used either in maintenance, repair, and replacement applications, or to extend the reliability, performance, and lifespan of critical assets. Specific to our largest end markets, HVAC, R, and plumbing, the products we sell and the value we provide are often non-discretionary, fundamental necessities for the homeowners and businesses. Over the past two years, our leadership team embraced the opportunity to successfully manage through uncertainty. We've strengthened our supply chain, remained focused on profitable growth, and confirmed our commitments to our customers and our employees. Now, at this time, I'd like to turn the call over to James for a closer look at our results, and then I'll conclude the prepared remarks with a strategic outlook.

Thank you, Joe, and good morning, everyone. Our consolidated revenue during our fiscal second quarter 2023 was $191 million, a 23% increase as compared to the prior year period. driven by price and contributions from acquisitions. Consolidated gross profit in the second fiscal quarter was $81 million, representing 28% growth, with the incremental profit resulting primarily from sales growth. Gross profit margin improved to 42% compared to 41% in the prior year period due to the cumulative benefit of price actions and TrueAir Vietnam COVID expenses of $1.2 million incurred in the prior year period that did not recur. I'll note that we did not call out any adjustments to our reported earnings in the current fiscal quarter. Consolidated EBITDA increased 29% to $44 million as compared to the prior year period. Consolidated EBITDA margin improved to 23% as compared to 22% in the prior year quarter. driven by sales growth, which outpaced incremental expenses. Reported net income attributable to CSWI in the fiscal second quarter was $24 million, or $1.57 per diluted share, compared to $18 million, or $1.15 in the prior year period. Our contractor solution segment, with $130 million of revenue, accounted for 68% of our consolidated revenue. and delivered $27 million or 26% total growth as compared to the prior year quarter, comprised of organic revenue growth of $16 million and inorganic growth of $11 million from the shoemaker, cover guard, and AC guard acquisitions. Organic growth resulted from the cumulative benefit of implemented pricing initiatives, partially offset by a slight decrease in unit volumes as compared to last year. Strong net revenue growth as compared to the prior year period was driven by the HVAC-R architecturally specified building products and plumbing end markets. Segment EBITDA was $39 million, or 30% of revenue, compared to $32 million, or 31% of revenue, in the prior year period, as our margins continued to recover from the inflationary environment. Due to the growth of this segment, both organically and through acquisitions, we have recently added people and process infrastructure needed to support continued growth, which created a bit of margin pressure in the second quarter. In the fiscal second half of the year, unit volumes could be impacted by distributors' desired inventory levels and declining residential construction trends. Despite these potential headwinds, we foresee that our prior pricing actions in improving cost dynamics will support strong fiscal full-year margins. Our Engineer Building Solutions segment EBITDA improved to $4 million, a 15% margin, compared to $3 million, a 13% margin in the prior year period. Bidding and booking trends remain strong. In fact, our fiscal first half bookings and backlog increased by approximately 54% and 29% respectively as compared to last year's fiscal first half. As of the end of the fiscal second quarter, our book-to-bill ratio for the trailing eight quarters was 1.14 to 1. As Joe mentioned in his opening remarks, we ended September with a third consecutive quarter of record backlog in this segment. In the back half of this fiscal year, we expect slightly slower revenue growth over the prior year period and moderate segment EBITDA margin pressure as the remaining legacy lower margin backlog projects are completed. In early fiscal year 2024, we expect the quality of our current backlog to result in improved segment profitability. Our specialized reliability solution segment achieved another very impressive quarter of organic revenue growth of $8 million, or 30%, due to continued benefits from pricing initiatives, strong end market demand, especially in the energy market, and improvements in our operations and execution. Segment EBITDA and EBITDA margin were $6 million and 16% respectively in the fiscal 2023 second quarter, compared to $3 million and 10% in the prior year period. For the remainder of this fiscal year, and as compared to the prior year period, we expect continued strong revenue growth, albeit at a lower pace and modestly lower margins due to the timing impacts of material and freight cost increases, previously implemented pricing initiatives, and the shift in mix toward the Shell-Whitmore joint venture as volumes ramp up. With the ongoing addition of equipment in our Rockwall, Texas facility to support the growth of the Shell-Whitmore joint venture, we are in a position to post a compelling exit rate as we complete this fiscal year. Transitioning to the strength of our balance sheet and cash flows, we ended our fiscal 2023 second quarter with $14 million of cash and reported cash flow from operations of $47 million in the first half of our fiscal year, compared to $43 million in the prior year period. Of the $47 million of operating cash flow in the current fiscal first half, $30 million was generated in the fiscal second quarter, as compared to $17 million in the fiscal first quarter. On our fiscal 2023 first quarter call, we affirmed our commitment to strong free cash flow generation prudent working capital management, and sufficient liquidity to support our strategic objectives. By the end of this fiscal year, we expect to deliver cash flow conversion metrics that reflect meaningful progress toward historic norms. As Joe mentioned in his opening remarks, our leadership team continues to evaluate appropriate inventory levels, and by the end of this fiscal year, we expect inventory investment to decline to the use of working capital, corresponding with the improvement in our supply chain. We ended the fiscal second quarter with $260 million outstanding on our $400 million revolver, a $4 million decrease compared to the prior fiscal quarter end. As a reminder, during the fiscal second quarter, we acquired CoverGuard and ACGuard, and with the intra-quarter operating cash flow generation, we were able to reduce the borrowed amount. Our leverage ratio as of the current quarter was approximately 1.6 times in improvement from 1.7 times as of the preceding quarter end due to the increased EBITDA and decreased borrowing amount. For a former for the Falcon acquisition, which was closed in the fiscal third quarter, our leverage ratio was below 1.8 times, well within our stated range of one to three times. Our strong balance sheet continues to provide flexibility for capital allocation that enhances shareholder value. As part of our broad capital allocation strategy, we remain committed to opportunistic share repurchases guided by our intrinsic value model. During the fiscal 2023 first half, we were purchased over 335,000 shares for an aggregate purchase price of $35.6 million under our current $100 million share repurchase authorization. Our effective tax rate for the fiscal second quarter was 24.6% on a GAAP basis. we continue to expect a 25% tax rate for the full fiscal 23 year. As we look to the remainder of fiscal 2023, we continue to expect to have strong revenue growth across all three segments and at the consolidated level, which, when coupled with meaningful operating leverage, will result in strong year-over-year EBITDA and EPS growth. We expect to benefit from continued stability in our raw material and freight costs. As we look at our cadence of earnings across the remaining quarters of this fiscal year, we expect the third quarter to remain our seasonally lowest quarter, though we do not expect as much variability between quarters as we have historically produced due to the acquired GRD businesses demonstrating less seasonality. With that, I'll now turn the call back to Joe for closing remarks.

Thank you, James. In the first half of fiscal 2023, we delivered record revenue of $391 million, representing growth of 23%. Operating leverage on this growth drove 25% growth in EBITDA and 31% growth in EPS. In light of the strength of our fiscal first half and including our recent acquisitions, we now expect a year-over-year revenue growth rate of approximately 20% with an EBITDA margin of approximately 22% for the full year. We remain committed to operating discipline that will maintain our profitability, and we will assess opportunities for potential cost reductions as well as further pricing options. This quarter, I began reviewing all new and replacement hires to ensure that the position is warranted in the current environment and we are maintaining our disciplined approach to monitoring our costs across the company. We are expanding margins and driving cash flow conversion. We are confident in our near-term and long-term opportunities for disciplined capital allocation, which are enabled by the strength of our balance sheet. We remain committed to enhancing sustainable growth and shareholder value, even in the face of economic uncertainty. By doing this, in the past, we have consistently delivered outstanding financial results, and we will utilize that same approach for the remainder of 2023 and beyond. With respect to our acquisition pipeline and plans, as we sit here today, we are focused on integrating the four acquisitions that we have completed in the last 12 months on working capital efficiency and operational excellence. We do not currently expect to close any acquisitions in the next few months, and thus we expect to de-lever through the repayment of debt by growing our EBITDA. Earlier this month, we welcomed Danielle Gard, who joined our executive leadership team in a newly created chief people officer role. Danielle brings extensive experience building teams and a demonstrated track record for organizational development. The creation of this role recognizes the global growth that we have realized and will continue to pursue. Danielle is personally dedicated to CSWI's distinctive employee-centric culture, and she affirms our intention to be an employer of choice. My colleagues hear me say this often. At CSWI, we must and we will succeed. There's no other option. But at CSWI, how we succeed matters. Achieving these outstanding year-to-date results demonstrates our commitment to being good stewards of your capital and our goal of delivering long-term shareholder value. As always, I'd like to close by thanking all of my colleagues here at CSWI who collectively own approximately 4% of our company through our employee stock ownership plan as well as all of our shareholders for your continued interest in and support of our company. With that, operator, we're now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.

At this time, we will pause momentarily to assemble our roster. The first question is from John from CJS Securities.

Please go ahead.

Hi, good morning, everyone. Thank you for taking my question. My first one is, could you talk a little bit more about demand in each of your end markets and where you're continuing to see areas of strength and maybe where you're starting to see areas of weakness? You mentioned inventory reductions. in your contractor solution business, you know, maybe is that based on sell-through or is it purely inventory management? Just a little more color there would be helpful.

Yeah, John, good morning. Thanks. This is James, and I'll let Joe chime in as well, but I'll start the question. You know, looking across our segments, you look at contractor solutions, we continue to see good demand. Obviously, we're entering kind of the seasonality where things are a little bit lighter. So, you know, the next couple of months, it's normal that that we would see that. We're seeing a little bit of destocking out there. I think everybody's feeling more confident about the supply chain. So we see and hear distributors talk about a little bit of destocking. We're in the same mode. Obviously, with more confidence in the supply chain, things are getting here a little more quickly. We feel better about that. We see a little bit of destocking ourselves. You know, as Joe mentioned, we always have prudent working capital management. But with higher interest rates, there's a higher carrying cost as well. So we've got an intent focus on that. You know, higher cost of carrying goods is important to us and meaningful. So we're watching that carefully. So we do anticipate in the coming months seeing inventory come down a bit in terms of kind of days on hand, what we call weeks in stock. Now, obviously, as you get into the busy season, you know, kind of that March timeframe, you're going to need to stock back up. So we have to really plan carefully. Some of what we're going to be selling in March is already on the water. It takes a few months for things to get from our facilities in the Far East over to where they need to be to sell. So it's a moving target, but we've spent a lot of time with our teams. In fact, just yesterday, we were talking about inventory with the contractor solutions team. They're doing a good job managing inventory. And it's a product by product analysis. It's easy just to look at one big number and say, let's bring it down or we need to take it up. But That team is doing a good job, as all of our business are, of going product by product, understanding the demand dynamics, what customers are telling them, where that product comes from, what might be backordered. We had some backorders, for example, in one product that they got a big shipment of a few days ago and got it right out the door almost immediately. So that can happen when you're waiting on products. So we're managing that carefully. As we've always said, with the margins that we have, especially in that segment, we don't want to miss a sale. So you carry a little extra inventory, but we have more confidence that we don't need to carry as much. In terms of demand, we continue to see good demand. As we mentioned, obviously, you know, residential new construction is coming down a little bit. So you watch that. That has an indirect impact on us. You know, we're not selling the units, but obviously we sell more when it goes into a new installation than we do in repair and maintenance. Kind of looking across the other segments briefly, the other segments I want to point out are doing a good job with inventory and working capital management as well. And, you know, Joe and I and the business leaders have all kind of told each other we're going to continue to work down inventory where we can, but most of the other segments' inventory comes from domestic sourcing, so you have a little better sense of that. You're not as reliant on that overseas shipping and the time that takes. In terms of the specialized reliability solutions, we continue to see strong demand there, John. The energy sector continues to do very well. The industrial rail across the board, we continue to see really good demand in those segments, so our Our team is reacting very well in terms of meeting demand, in terms of pricing and those kind of things, working hard on focusing on the right customers and the right products. And under Mark's leadership, they've continued to do a good job. Engineer building solutions, commercial construction has slowed down some, but the interest rates, where they are, you would imagine some projects are put on hold. So while biddings and bookings have continued to be strong, you're starting to see a little bit of pocket of weakness in some areas. You know, I'll say that it's very geographic. The Sunbelt continues to be very strong. You'll have other pockets that aren't quite as strong. We will say this, however, and I'll let Joe chime in if I haven't said everything because I've talked for a while, but our backlog, as we mentioned, is at record levels, and Joe and I specifically asked the question, are those projects out of the ground? And the answer is yes. So the projects that are in our backlog, we don't see a lot of risk there in terms of those getting done. Timing can shift around a little bit, but it's very important that Those are good, high-quality projects that, you know, take a while to come through. It's a few quarters before things we just booked come through. But those are projects out of the ground, and as you know, John, we're at the back end of projects. That revenue flows through in a little while. Joe, what could I possibly have missed?

The only thing I would say is, you know, James did a good job describing the backlog on EBS, but we have backlog in all three of our segments. SRS has maintained a very healthy, very consistent backlog in their business for the last, six or eight months, and that remains at a similar level, so no change there. And Contractor Solutions has had a backlog now, which is larger than normal, and they've been able to work that down some, but we still have shortages in some products, maybe a little bit more inventory than we want in other products, but our focus is on really March timeframe, when the season begins again, the high season for HVAC restocking, if we've got the right levels of inventory in March, that's key to customer satisfaction, key to making sure that we don't miss a sale. We'll be working very diligently, highly focused on right-sizing the inventory both on an addition and a subtraction basis to get the right inventory by March because, as James said, we're going into a little bit of a slower season for us, and it's the right time to get those inventory levels right-sized.

Great. Thank you so much for that very detailed answer, guys. I appreciate it. That kind of dovetails into my next question a little bit. Joe, you mentioned 20% growth, 22% EBITDA margins. How confident are you in those expectations or how much cushion is there maybe just given that you're seeing some slowing in some areas, maybe more uncertainty in others, especially since a lot of that is going to be noted in the end of the March quarter when you see the restocking season?

Yeah, you know, traditionally we always are concerned about March. That's a big month for us, and it's important to get the orders in and execute against those orders. But we feel good about that, John. That's an increase from where we started the year. It's an increase from where we were last quarter. And so, you know, we're pretty sober about those things. And so we feel good about those numbers. We feel like... We've got good visibility for the next six months. We spend a lot of time. We do mid-year reviews. We just completed those with all three business segments, and I think we've got a real – our teams have a really good handle on their businesses for the next six months. And so we feel good about those expectations.

Okay, great. And then just one housekeeping question. The interest expense in the quarter was a little bit higher. Was that completely – you know, the underlying base rate increasing, or was there a bigger intra-quarter drawdown, number one? And number two, were there any M&A expenses that maybe you didn't call out or add back? Just because you . Yeah, John, great question.

Yeah, please. This is James. Great questions. I'm glad you pointed that out. Yeah, interest expense, obviously rising rates, you know, and you had another jump yesterday of 75 basis points. You'll see that again. So, you know, I want to be sure we continue to factor in those rates are up because we're on a variable rate with our revolver. We were down a little in the quarter, quarter over quarter, but the acquisition we made of AC Guard and Cover Guard was early in the quarter. So the debt that we took down for that, we paid for that all quarter at that higher interest rate. So that's what it is. And I think the run rate that you saw this last quarter, you need to consider rates going up a little bit more. And we borrowed for the Falcon acquisition right after quarter end. So So you're going to see as we gave you a leverage number up a little bit, so a little higher debt, a little higher interest rate. However, you know, we have the opportunity to offset that. Timing will dictate when we can do it, as we said in Joe's remarks. Right now, we foresee delevering a little bit. Now, some of that's EBITDA growth. That didn't affect interest expense. Some of that is we intend to pay down some debt in the coming months, but when that happens, not sure. So I think interest rates going up and our interest expense going up is a reasonable expectation. In terms of acquisition costs, yeah, we didn't call that out. You know, it wasn't big enough to adjust earnings like we did when we did Truett. We really try not to do adjustments if we don't need to. It was about three cents, John, in the quarter, about $600,000, which is about three cents on the M&A expenses we had for the cover guard, AC cover guard, and the work we had done to date on Falcon during the quarter. So hopefully that helps your model a little bit.

It does. Thank you very much. And I'll jump back in here.

Thank you, John.

Thanks, John.

The next question is from Julio Romero from Sedoti.

Please go ahead.

Hi, this is Stefan Guillaume on for Julio Romero.

How are you?

Good. Hey, Stefan. Good morning.

Good. On the SRI segment, how are the different end markets trending?

Yeah, I think we're seeing positive end market demand across the board. The energy market remains very strong. That's very important to us, you know, with the rig counts where they are, with the oil prices where they are, and that's a very important market for us. I think as we look at, you know, the industrial markets and markets continue to do well, rail shipments continue to be good, and that's an important market for us. You know, I think you look across the board, Joe, we're seeing good demand. As Joe mentioned, we had mid-year reviews with that group and had their executive team all in a room with us for a few hours last week, and we really saw a lot of optimism. That team, in fact, is overseas at a big conference this year, or this week, and that's going really well, too. So we're seeing global demand, but domestically, you know, that energy market is a big driver for us and very important.

Thank you. And on the CS segment, can you guys talk about the volume trends that you guys are seeing?

I'm sorry, ask again, Stephan?

Can you talk about the volume trends on CS segment?

In terms of volume trends, you know, this quarter, like we said last quarter, we're down just a hair quarter over quarter. You know, that would indicate a bit of a slowdown potentially, but last year you just had a really strong demand. It was a pretty hot summer. You were still working through COVID. There were still a lot of folks at home. You have less of that this year. So volume's or down ever so slightly again this quarter, you know, low single-digit percentages. So we still feel good about that. So the growth that we had year over year was the acquisitions, which obviously helps volume in general, and pricing initiatives. You know, we've had several pricing initiatives, the last one being, you know, at the beginning of this last quarter, so you had the tailwind of pricing there. But volumes have hung in there well. Again, you're working against some pretty tough comps from last year on a same-store sale basis, so to speak, so down ever so slightly.

Thank you. Now, on your recent acquisitions within the CS segment, can you guys talk about what attracted you to CoverGuard, AC Guard, and Falcon, and the strategic rationale behind them?

Well, let me say broadly, Stephan, that we have said that contractor solutions, HVAC, and plumbing in markets has been our highest priority for M&A. And so, consistent with those themes, these acquisition opportunities arose and we've been pursuing the the Falcon acquisition for literally a decade institutionally James and I and others weren't here but others started those conversations really it's about value to the customer which should be connoted in gross margins and and growth opportunity for us. And so like a lot of the products that we are able to acquire and put through our distribution, we can provide broader distribution. And so the accretive opportunity for us is pretty significant. And so high quality products that bring significant value to our customers that would benefit from broader distribution is a great recipe for us. And then the last thing I'll say is very attractive valuations, as you saw. You know, acquisition multiples oftentimes don't move in dramatic fashion, but these were very attractive valuations for us, and we're very pleased to get these deals consummated.

Thank you. So could you please give us, like, historical organic revenue trends for those three businesses? Sure.

Not on the acquisitions. You know, they've had nice growth. But what's really important, as Joe talked about, is being able to put their products through our distribution channel. We think accelerating the growth they've had in the past is a good opportunity for us because they had some regional distribution, a little bit nationwide, but very regional given what they were able to do. And we've got the opportunity here to really see some nice organic growth from those acquisitions.

Thank you. Thank you, Stefan.

The next question is a follow-up from John Tan Wanting from CJS Securities. Please go ahead.

All right, thanks for the follow-up. I just wanted to drill down a bit on the energy business, pun intended there. Where is that as a percentage of revenue within SRS today, and how does it compare to prior peak or trough levels? First of all, and then second, I guess, what is the expectation there going forward, assuming that OPEC is cutting production You can't keep releasing from the SPR forever. Just help us think of what that business looks like going forward.

Yeah, John, I'll defer to James, but I don't think we've been providing those kind of in-market data points like we used to. But I would say that, you know, certainly you've seen a meaningful increase here from the lows. I don't know. Certainly the rig count, which is a great proxy, is not anywhere close to where it was. a few years ago and may never get there. You know, there's fewer rigs being used for multiple wells now, and the whole math on that has changed. But I would say demand is really strong, both domestically and internationally, and we think that it could even get stronger. And so we're very positive on that business. It doesn't always move in sync with our other end markets. At this time, it is. moving in sync. And so all of our end markets are on the uptrend, as James said. Energy is a little bit of that swing end market that really makes the difference here for us. And that's an important part of the profitability. But the increased volumes overall and the increased volumes from the Shell JV are also contributing nicely for overhead absorption and as we talked about the you know that's a higher fixed cost business than our others and so volume really matters there and so as we continue to see strength in the energy market we expect to see continued outstanding results out of that business for all of those for all of those reasons

Got it. Thank you. Could you break out the expected contribution from the three acquisitions in the second half of this year on a revenue?

Yeah, we're not providing that now. As we go through each quarter, we'll give you the inorganic growth. I think we said in the second quarter it was $11 million of revenue. Shoemaker was obviously a part of that, which has been with us since last mid-December. And then CoverGuard and ACGuard came in early in the quarter, as I said, so they added a little bit. You know, these are on the smaller side, you know, in total, with 57 million of acquisitions, but you're going to see contribution. You're going to see immediate accretion, and you're going to see revenue contribution. Because we go through each quarter, we'll give you the inorganic growth, and you'll be able to look back and see what that is. As we enter the January, February, March quarter, Shoemaker won't be inorganic anymore, and we'll remind you of that. So you'll get a good sense of that as we go along, but we're not prepared to give a pro forma of that. But I will say, to Joe's comment and, you know, the kind of raise in guidance, so to speak, of 20% revenue growth for the year and 22% EBITDA margin for the year. The strength of the first half and the acquisitions contribute to that. So that tells you that these acquisitions are accretive, obviously contribute to growth, and are very positive for us in full fiscal year context.

Got it. Thank you. And just a question on supply chain and inflation and shipments, just One, did you miss any shipments in the quarter and are expecting to close that gap going forward? And number two, just with supply improving, are you seeing that cost coming down as well, whether it's freight or components or other inputs that you're seeing?

Yeah, good question, John. I'd say the raw materials and those things have come down a little, not dramatically. As I mentioned earlier, the time on the water especially, and that's what's most important to us, with that question has come down. You know, you were 12 weeks before. Now you're anywhere from 6 to 10, depending on which ports you're going to. The West Coast is obviously getting things a little more quickly, but as we shift things to Houston or the East Coast, it's a little longer, and that's always going to be the case. I'm sure you've seen freight rates decline dramatically. You know, we saw freight rates in the 20,000 plus a container for a while. Now you're seeing things in the low thousands to the West Coast. You know, what you see published is kind of that Shanghai to Long Beach rate, And we're coming from China and Vietnam into Long Beach and then other parts. And obviously, as you get further around the states, as I mentioned earlier, Houston or the other ports, you're in kind of the mid to a little bit higher single digits. So a blended rate is not that published rate you see. What's important, though, and I know we've talked about this before, John, but your question tees up a great reminder to you and our investment community, is when you see that rate, if we put something on a boat at a few thousand dollars, it's not going to flow through the cost for several months, say three or four months, because the time on the water, then the time in our warehouse to the time we turn it into revenue, it's a three, four, maybe even five-month lag depending on the product. So those rates coming down dramatically in the last couple of months, you're now going to start seeing that tailwind here kind of into this quarter and into our fiscal fourth quarter, which again, to Joe's point, gave us confidence in that 22% EBITDA margin because we see costs coming down but it takes a while to flow through from when you see that CNBC headline about freight rates coming down this week.

Great. Thanks so much again. Thank you, John. Appreciate it.

That was the last question.

I would like to turn the conference back over to CSW Industrials for any closing remarks.

Great. Thank you, Mara. Thank you, everyone, for joining us for our conference call today. We look forward to talking to you again soon.

Take care.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.