CSW Industrials, Inc.

and welcome to CSW Industrials Incorporated Fiscal Third Quarter 2023 Earnings Call. At this time, all participants are in the listed only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, James Perry, CSWI's Executive Vice President and Chief Financial Officer. Thank you, Mr. Perry. You may begin.

Thank you, Sherry. Good morning, everyone, and welcome to the CSW Industrials Fiscal 2023 Third Quarter Earnings Call. Joining me today is Joseph Arms, Chairman, Chief Executive Officer, and President of CSW Industrials. We issued our earnings release presentation and Form 10-Q 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, 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 Arms.

Thank you, James. Good morning, and thank you for joining our fiscal third quarter conference call. Once again, our team executed well in the face of economic headwinds. Our record third quarter results reflect the diligence and professionalism of our team members around the globe. Demand for our high value products remains strong. We are highly focused on managing our costs while pursuing market share growth. We have continued to deploy capital opportunistically while strengthening our balance sheet and liquidity. through reducing our leverage ratio and proactively increasing our revolver capacity, thereby maximizing our ability to pursue future opportunities as they arise. We delivered impressive operating leverage as EBITDA grew by 47 percent on 26 percent growth in revenue, while also generating $33 million in free cash flow, equal to 19 percent of revenue. In the current quarter, all three segments contributed to organic revenue growth of $23 million, driven primarily by the numerous price actions we have taken over the last two years. While we are still experiencing inflationary cost pressure, we have been able to partially offset these with productivity gains. We have seen reduction in the cost of shipping containers from Asia, as well as lower costs for certain raw materials. but still face higher costs for certain line items, such as domestic freight. We have successfully maintained our pricing, thereby expanding our margins. However, the net result of these variables is that we have not yet returned to our historical pre-pandemic margins, which remains a goal for all of us here at CSWI. During the fiscal third quarter, we consummated the previously announced acquisition of Falcon Stainless. This product line expands our offerings sold into our profitable HVACR and plumbing in markets. As a reminder, in our third fiscal quarter of last year, we closed the Shoemaker acquisition, which expanded our GRD offerings sold into the HVACR in markets. During the fiscal third quarter, the Shoemaker, CoverGuard, AC Guard, and Falcon acquisitions collectively contributed $12 million in revenue, all of which was reported in our contractor solution segment. These acquisitions reflect the accretive nature of our capital allocation strategy and our focus on complementary product categories and our existing end markets served. In the first nine months of fiscal year 2023, we deployed $105 million of capital via acquisitions, opportunistic share purchases, dividends, and capital expenditures. We continue to pursue both internal and external opportunities for growth, consistent with our discipline, risk-adjusted returns methodology, and to maintain a pipeline of acquisition opportunities. In prior quarters, we have discussed strategic investments we made in working capital in an effort to mitigate shipping delays and other uncertainties with the global supply chain. I am pleased to report that these delays have eased and our business leaders have shifted focus to reducing inventory and accounts receivable as prudent. This focus is intended to free up cash and reduce the accompanying interest expense and I am encouraged by the progress in recent months and optimistic about our ability to see continuous improvement in this area. I want to touch briefly on our segments, then James will provide the details on our performance. Overall, I remain pleased with the performance of all three segments, and in particular with the leadership team's response to changes in their markets. We are entering the busy season for our contractor solution segment, and our team is gearing up for another year of growth that exceeds the industry average. The strength of this segment lies in leveraging our distribution network, optimizing acquisition integration, and bringing high-value products to our customers. Our recent acquisitions have been well integrated, and the focus, as always, remains on serving our customers well as we add new products to our portfolio of offerings. Our specialized reliability solutions segment continues to exceed expectations. The capacity utilization in our main facility continues to increase, and our team there remains focused on top-line and bottom-line growth by driving operational efficiencies and offering the optimal mix of products. Energy markets remain strong, and industrial end markets are stable. Our distributors remain cautious about their inventory levels, so we stay in close communication with them relative to demand. Our joint venture with Shell continues to gain momentum, and we expect to complete the previously announced capacity expansion project of our existing facility later this calendar year, which will allow for increased revenue and profitability. Our engineered building solutions segment continued to grow with an increase of revenues of 7.6% year-to-date. And for a fourth consecutive quarter, this segment's backlog reached an all-time high. We are seeing a slowdown in biddings for new projects in line with recent AIA data, but are highly focused on pursuing those projects undertaken by the highest quality developers with the highest likelihood of completion. And our team is performing well in delivering on the current projects, albeit at a lower margin due to when those projects began. Before I turn the call over to James, I would like to remind everyone of the demonstrated resiliency of our business model. Despite the expectation of many in the financial community of a recession this year, we remain well positioned. Strengths of our business model include the diversification of our product portfolio and of the end markets we serve, as well as the consumable nature of many of our products that are used either in maintenance, repair, and replacement applications, or to extend the reliability, performance, and lifespan of mission-critical assets. Specific to our largest end markets, HVACR and plumbing, The products we sell and the value we provide are often non-discretionary, fundamental necessities for homeowners and businesses. We have maintained a strong balance sheet that allows us to withstand market headwinds with ample liquidity that affords us the ability to pursue growth opportunities across our portfolio of businesses. At this time, I'll turn the call over to James for a closer look at our results And then I will conclude the prepared remarks with our strategic outlook.

Thank you, Joe, and good morning, everyone. Our consolidated revenue during fiscal third quarter 2023 was $171 million, a 26% increase as compared to the prior year period, driven by pricing actions and contributions from acquisitions. Consolidated gross profit in the fiscal third quarter was $66 million, representing 28% growth. with the incremental profit resulting primarily from revenue growth. Gross profit margin improved slightly to 38.5%, compared to 37.7% in the prior year period, as strong revenue growth in the higher margin contractor solution segment, due in part to our recent acquisitions, outpaced revenue growth in our other segments. Consolidated EBITDA increased by $31 million, or 47%, as compared to the prior year period, Consolidated EBITDA margin improved to 18% as compared to 16% in the prior year quarter, driven by revenue growth, which outpaced incremental expenses. Reported net income attributable to CSWI in the fiscal third quarter was $16 million, or $1.01 per diluted share, compared to $9 million, or 59 cents, in the prior year period. The current quarter includes $1.5 million, or 10 cents per share of tax benefit related to the release of an uncertain tax position reserve upon the closure of certain Vietnam tax audits. Our contractor solution segment with $112 million of revenue accounted for 65% of our consolidated revenue and delivered 29 million or 36% total growth as compared to the prior year quarter. This was comprised of organic revenue growth of $17 million and inorganic growth of $12 million from the Shoemaker, CoverGuard, AC Guard, and Falcon acquisitions. Note that growth attributable to Shoemaker becomes organic growth starting with the current fiscal fourth quarter. Organic growth in the segment resulted from the cumulative benefit of pricing initiatives, partially offset by a slight decrease in unit volumes as compared to last year. The strong revenue growth as compared to the prior year period was driven by the HVACR in architecturally specified building products and markets. Segment EBITDA was $28 million, or 25% of revenue, compared to $17 million, or 21% of revenue, in the prior year period, as our margins continue to recover from the inflationary environment. We've started to recover margin point as we've been able to maintain our pricing as certain costs in this segment have declined. Of note, however, outside of the decline in ocean freight rates, many of our input costs remain high, so we are managing our overall cost structure carefully. Our specialized reliability solution segment achieved another impressive quarter of organic revenue growth of $5 million, or 16%, due to the continued benefits from pricing initiatives, strong in-market demand, including energy and general industrial, and improvements in our operations and executions. Segment EBITDA and EBITDA margin were $5 million and 14% respectively in the fiscal 2023 third quarter, compared to $5 million and 15% in the prior year period. Of note, we incurred a half a million dollar one-time charge in the quarter for the termination of a small Canadian pension plan in this segment. This is reflected in our EBITDA results. As Joe mentioned, with the ongoing addition of equipment in our Rockwall, Texas facility, to support growth of the Shell-Whitmore joint venture, we are in a position to post a compelling exit rate as we progress through the fourth quarter and into our next fiscal year. Our engineer building solution segment revenue grew to $25 million, a 3% increase compared to $24 million in the prior year period. Bidding and booking trends remain strong. In fact, our year-to-date bookings and backlog increased by approximately 38% and 47% respectively. as compared to the prior year period. As of the end of the fiscal third quarter, our book-to-bill ratio for the trailing eight quarters was almost 1.2 to 1. As Joe mentioned in his opening remarks, we ended December with the fourth consecutive quarter record backlog in this segment. Transitioning to the strength of our balance sheet and cash flow, we ended our fiscal 2023 third quarter with $15 million of cash and reported cash flow from operations of $84 million in the first three quarters of our fiscal year, compared to $69 million in the prior year-to-date period. Of the $84 million of operating cash flow in the current fiscal year to date, $37 million was generated in the fiscal third quarter as compared to an aggregate of $47 million in the fiscal first half. While our working capital levels will vary from quarter to quarter due to seasonality and other factors, We've made progress in reducing the levels of safety inventory that we have strategically held in recent quarters due to the uncertainties in the global supply chain. We have been and will continue to be committed to having the products our customers need. As supply chain constraints have eased, we have a laser-like focus on our working capital metrics at the business level and are committed to continuous improvement to free up balance sheet capacity and reduce our interest expense. As demonstrated by our cash flow this year, I am pleased with our progress and look forward to further refinements as we close out fiscal 2023 and enter fiscal 2024. Our free cash flow, defined as cash flow from operations minus capital expenditures, was $33 million in the fiscal third quarter, as compared to $23.3 million in the same period a year ago. That resulted in free cash flow per share of $2.13 in the fiscal third quarter, as compared to $1.47 in the same period a year ago. Through the first nine months of the fiscal year, our free cash flow was $75.8 million, or $4.87 per share, as compared to $61.1 million, or $3.86 per share in the same period a year ago. The impressive level of free cash flow drives our risk-adjusted returns capital allocation strategy, which, in turn, enhances shareholder value. An important component when assessing our generation of cash flow, as compared to a few years ago, is the non-cash amortization of intangible assets that arise from our multiple acquisitions in the last few years. That amortization figure alone was $16.4 million, or $1.06 per share, in the first nine months of this fiscal year, as compared to $5.4 million, or $0.36 per share, in the nine months immediately preceding the acquisition of TrueAir in December of 2020. During the fiscal third quarter, we were pleased to announce the expansion of our revolving credit facility capacity by $100 million through an exercise of the accordion feature. Of important note, this increase was affected with no change in terms or pricing, despite an increasingly challenging credit market that many companies face. This additional capacity gives us increased flexibility to pursue investment opportunities without having to access the capital markets in the current uncertain environment. We are appreciative of the strong support shown by our bank group, a testament to our recent success and future opportunities for profitable growth. We ended the fiscal third quarter with $267 million outstanding on the now $500 million revolver, a $7 million increase compared to the prior fiscal quarter end. As a reminder, during the fiscal third quarter, we invested $34.6 million of cash for the acquisition of Falcon. Our bank coverage leverage ratio as of the current quarter end was approximately 1.5 times, an improvement from 1.6 times as of the preceding quarter end due to our strong EBITDA growth. 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 year, we have repurchased 336,347 shares for an aggregate purchase price of $35.7 million under our prior $100 million share repurchase authorization. In December, we announced that our Board of Directors had approved a new $100 million authorization that is available through the end of calendar 2024. Our effective tax rate for the fiscal third quarter was 14.7% on a GAAP basis due to the previously mentioned 850 basis point benefit we received when the tax audits for several years were closed in Vietnam and we were able to release the reserve on our balance sheet. We expect a 23% to 24% tax rate for the full fiscal 2023 year. As we look to close out fiscal 2023, we anticipate strong revenue growth across all three segments and at the consolidated level for the full year, which, when coupled with meaningful operating leverage, will result in strong year-over-year EBITDA and EPS growth as well as cash flow generation. We expect to benefit from continued stability in our raw material and freight costs. With that, I'll now turn the call back to Joe for closing remarks. Thank you, James.

During the fiscal year-to-date period, we delivered record revenue of $562 million, representing growth of 24%. Operating leverage on this growth drove 30% growth in EBITDA and 39% growth in adjusted EPS. In light of the strength of our fiscal year-to-date results, we expect year-over-year revenue growth of approximately 20 percent with an EBITDA margin of over 22 percent for the full year. These full-year expectations imply fourth-quarter revenue growth of approximately 9 percent as compared to the same period last year with an EBITDA margin of approximately 23 percent in the fourth quarter. We are currently working through our budget process for our fiscal 2024, which begins on April 1. While there are headwinds in certain end markets, we expect to deliver consolidated revenue and earnings growth for CSWI. We are focused on efficiency gains and cost reductions, but we plan to accomplish these objectives without involuntary reductions in our level of employment. We are committed to providing our customers with the high-quality products and service that they expect from CSWI, and we will rely on the dedication of our team members to accomplish that goal. 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 is enabled by the strength of our balance sheet. We remain committed to enhancing sustainable growth in 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. I am pleased to share that for the third year in a row, Cigna has selected CSWI as a recipient of their Gold Level Healthy Workplace designation for demonstrating a strong commitment to improving the health and well-being of our employees through our workplace wellness program. This reinforces our distinctive employee-centric culture and affirms our intention to be an employer of choice. My colleagues here at CSWI hear me say this often. At CSWI, we must and we will succeed. There's no other option. But here at CSWI, how we succeed matters. Achieving these outstanding year-to-date results demonstrates our commitment to be good stewards of your capital and to our goal of driving long-term shareholder value. As always, I want to close by thanking all of my colleagues here at CSWI who collectively own approximately 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. With that operator, we're now ready to take questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from John Tanwantag with CJS Securities. Please proceed.

Hi, good morning. Thank you for taking my questions and congrats on the nice results. My first question is I was wondering if you could talk about how much change you've seen or you've discussed or experienced just in terms of your overall macro expectations and visibility over the last two or three months? It seems we got, you know, whipsawed a bit by pretty negative macro sentiments, you know, earlier in Q4 and things started to improve since then. Has that translated to any changes in your internal forecasts or discussions with customers as you go forward and heading into fiscal 24? Just help us think about your visibility, you know, in today's environment.

Yeah, John, as you note, visibility is tough these days. And so our goal is to be prepared for whatever eventuality. We think the strong balance sheet, the diversification of our business, the strength of our brands and the low cost, high value kind of products that we provide to our customers are going to be popular and profitable and great products to offer and a great business model, regardless of the economic backdrop. You know, March is a really important month for us, late February, March, for the pre-sale season in the HVAC business. And so we've got our eyes focused on that. But we'll know more then. At this point, you know, we don't have any indications of any – major changes in our expectations. But, you know, that's a very important timeframe for us when the pre-market, pre-summer sales to the distributors who are stocking up will give us our best indication. So, I would just say stay tuned.

Got it. And assuming from your point that you expect revenue and margin growth in the next fiscal year?

Yeah, this is James. John, good morning. Thanks for being on. Yeah, as Joe said, we do expect revenue and EBITDA growth next year. We're certainly working to continue to push margins. You know, as we mentioned in the call, you know, we focused a lot in the last couple of years on container rates. They've certainly come down, and for now they've stayed down. We know how quickly that can move. Some of the other costs are still high, obviously. You know, raw material costs, domestic freight, you know, shipping freight out between our facilities and the customers, those costs remain high. But we've done a good job with our pricing, been able to retain that. As we said, we're not back to our pre-pandemic margins. That's always a goal. That goal's tougher, because obviously when costs are higher and you have to move pricing higher, margins are more challenging. So we don't have a firm view yet on margin guidance yet, per se. But we certainly, Joe and I and our business leaders, have a goal to continue to push margin in the type of pace we've been able to recover so far.

Understood. Thank you. You mentioned a little bit of a slowdown in the bidding markets and in architectural. Can you just talk about where you've seen that number one and two expected to continue and kind of the impact, you know, when you might see that in the P&L?

Yeah, so good question. You know, as you know, that market, we've been through almost a couple of mini cycles in the last few years. You know, COVID hit and things really slowed down, so we were kind of taking some lower margin projects. Then we had a period where we, you know, things opened up again and things looked good, and Now we're producing some of the lower margin projects again, because with interest rates spiking and some economic uncertainty, some of the projects have been put on hold. Despite that, as we said, our backlog has grown. Biddings are very geographic, I'll say. We were talking to the leadership in that group just in the last couple of days, and the Sunbelt remains pretty solid, as you would imagine. Toronto, where we have a nice presence, has some good construction going on. The California market, especially Northern California, has been a little softer, and as you know, Our smoke guard product specifically, we have a good opportunity there because we're the distributor and the manufacturer. So we kind of have that double dip when we sell into that market, and that's been a little softer. So there's geographic pockets here and there. So we've seen bidding slow down just a little because I think funding for these projects has taken a little longer to firm up because of where interest rates are and equity expectations are. But our team is doing a really good job, as Joe mentioned in his comments, focused on those high-quality developers of projects. with a high likelihood that they're going to get done. We know that our backlog right now is solid. The projects in there are out of the ground. And as you know, our parts are at the back end. So what's in the backlog now that we've been taking orders for the last quarter to, you know, that's nine, 12, 18 months out. So I think as we get deeper into fiscal 24, the back half, and then even the fiscal 25, which, you know, it's hard to say out loud, but that's a little over a year away for us. We'll really start seeing these newer entries into the backlog come through the revenue. But in the meantime, the group's doing a good job, you know, keeping busy and keeping the projects going. The margins are just a little softer given the nature of those products.

Okay, great. And do you expect bidding to continue slowing from where you are today?

You know, John, again, I think that interest rates rising will slow parts of the market.

We have been focused on institutional investments We've been focused on high-quality projects that may have a little less entrepreneurial speculation in them. And so we're still a relatively small player. We think we can grow kind of in every market. But we do think that the interest rates remaining high will continue to have an impact on some of the more speculative projects. And so our focus on institutional, our focus on the healthier portions of that market, I think, is going to pay dividends for us.

Got it. Thank you. Jim, do you have any more color on just price versus volume trends? in the past quarter and kind of where we expect that mix to go as you continue growing into the future?

Yeah, John. You know, the growth this quarter was really based on the acquisitions that we talked about, the four acquisitions over the last 12 months, and then pricing. Volume overall on a consolidated basis was pretty flat. Contractor solutions down just a bit. Then we had a little offset with the other segments that helped, certainly in specialized reliability solutions. But pricing is really the driver here in the organic growth. Where that's going from here, as Joe said, you know, we're going to continue to have some year-over-year pricing pickup for the fourth quarter here and into the first fiscal quarter. The pricing kind of slowed down the increases the back half of last calendar year, so that'll start lapping, so to speak, so you won't have that pickup, so to speak, opportunity unless we see another step up in cost and we need to take action outside of just our normal annual price type increases, which we we implement this time of year. So pricing is going to continue to be a tailwind for us for a couple of quarters on the year over year. The volume, as Joe said, well, it's a little bit of a wait and see. The team's doing a great job talking to customers, understanding what their stocking levels are across segments. I think our distributors are being careful in overstocking. There's been a little bit of destocking, and I think that slowed down volume a little bit, and I think inventories continue to be right-sized. So as Joe said, the February and especially into March Ordering and buying season for contractor solutions will tell us a lot. And on the call we have in May with our fiscal year results, we'll have a much better sense of how that looks, of course.

Got it. Last one for me, just the working capital improvements as supply improves. How much excess are you carrying right now? What kind of cash can you throw off, assuming you get to your optimized levels?

Yeah, it's a great question, John. This is still James. You know, it's hard to put a specific number on it because it's going to vary week to week and month to month. Our teams do a really good job. You know, when you look back, you use things like days on hand and we know what those metrics look like and they bump around a little bit. Part of that, like I said, is seasonality and just stocking down and up for the seasons. But, you know, we really have a forward look and our businesses do a good job looking product by product, how much they think they need to hold, especially that product that comes from overseas. While shipping times have slowed down or have gotten shorter, I'm sorry, It still takes a while to get products, so you can't produce a lot of this overnight. So, you know, it's a few million dollars. How much that is, it's probably hard to identify and get real precise. We certainly have some goals and metrics. And as we get through our budget season, we're going to work hard on what those goals need to be given a little easing of the supply chain constraints that we have. So I wouldn't put a hard dollar number out there, but there's still a few million dollars out there that we think we can turn into cash. kind of in a quarter-over-quarter basis. Again, this quarter you start stocking back up, but when we think about days forward and days on hand, we have opportunity.

Got it. Thanks, guys. I'll let someone else ask questions.

Thank you, John.

Our next question is from Julio Romero with Sidoti and Company. Please proceed.

Hey, thanks very much. Good morning. Maybe to start off, If you could just talk about on contractor solutions, just talk about what's working well in the segment. I know you mentioned strong pricing gains and the inorganic growth as well, but I was just hoping for a little more detail on the strong segment profit, especially given that this is usually your seasonally weakest quarter for that segment.

Yeah, Julio, thanks. We've got strength across the board.

I would say that... We're selling more of the ductless mini-split products than maybe we did a few months ago. There were some shortages by the OEM manufacturers that were slowing some of that down. That provides a good mix impact for us. And so straight across the board, really, I don't know that I'd note anything in particular. I would say that we continue to be able to grow wallet share with our customers. There are particular customers that are continuing to grow. We're growing our GRD business. As you recall, after we bought TrueAir, we had the kind of production slowdown in Vietnam because of the pandemic shutdown and all of that. We've had to rebuild inventory. And so some of the kind of wallet share gain that we had planned on for that acquisition were delayed a little bit. And now we're beginning to see some of that. And so there's positive things across the entire portfolio. The acquisitions, I think as much as anything, have really just performed well and the integration has gone well. And so we're very pleased with those new products that we can put through our distribution channels. Our customers like that, the The end users, the professional trade likes to have new different products to sell, and that's an important part of our kind of increase or our strong organic growth rate is to continue to bring new products into the market.

And I would add just briefly, Julio, Joe mentioned true or briefly, the Vietnam operations are performing at tremendous levels. The leadership team there that we brought in has done a great job. Our people have been able to get over there now. Shoemaker and TrueAir are working really well together, so really pleased with, yeah, from this commercial side to an operations side and everything in between.

Okay, that's very helpful. That's good color there. Maybe just staying on the segment, just talk about how you're balancing your inventory reduction initiatives with kind of being ready for the busy season within the contractor solution segment.

Yeah, absolutely.

Really, as James said, it was a focus. We've had a focus on product by product, looking at the weeks of inventory that we wanted to have on hand, not just historically, but looking forward, trying to forecast sales in each and every product type and trying to calibrate our inventory levels to make sense, really, for that March timeframe. And we talked about that, I think, at the last quarterly call, is that You know, you don't really want to measure that at the end of December because that's the seasonally slowest time. And some products, if you buy them, you know, if they're manufactured in China, you may be getting some of those shipments even in December, getting ready for the February-March timeframe. And so inventories can look a little odd at that period of time. But, boy, in the March high period, Season for us the the selling opportunity is there. We want to have product on the shelves We want to be the reliable vendor for our customers and we don't want to miss sales Especially early on in the season like that. So, you know, so we're we're making sure we have the the right products on the shelves the right amounts and just trying to properly calibrate that and At the same time, yeah, we've got a real focus on working capital reduction, but we're trying to do that in a very cautious, careful way so that we don't miss sales, we don't offend customers by not having a product on the shelves. and we don't take good care of our customers, which is our commitment to do. So it is a balancing act, no question about it. As interest rates rise, it becomes even more important, and so that's why we've been focused on that. But at the end of the day, we've got to take good care of our customers. Interest rates are not so high that we cannot afford to have the products on the shelves. And, again, it's another problem. benefit of a strong balance sheet. Our interest costs are not that high compared to the opportunity on the customer side.

Okay, that's helpful. Maybe one follow-up on John's previous question on the EBS segment. You mentioned some geographies, particularly Northern California, that's slowing, and you mentioned Sunbelt and Toronto still solid. I guess any other geographies or product lines that you can point to that are either slowing or still holding solid? Is there any additional granularity there?

Yeah, I would say, you know, Florida got hit by, you know, weather recently.

We felt that a little bit. And again, in Florida, like in Toronto, we not only fabricate, but we install product there. And so, some of the construction sites, you know, were shut down for a while. But, no, I think it really is kind of a Sunbelt story for the most part, and then plus Toronto. Southern California has been strong all the way across to Florida, and so those are not surprising, you know, the stronger growth areas for us. We're doing some nice work and picking up some business in New York, which has always kind of been a big target for us, but... But I would call it a Sunbelt plus Toronto kind of a story at this point.

How are bidding trends for the railings product line performing?

Yeah, you know, it's interesting. Very strong overall, but that's geographic as well. Toronto has been very, very strong. There are a ton of multifamily residential being built in the Toronto area. And we're getting our fair share of that plus some at this point. And so very, very pleased with that. Backlog's very strong there. And that bodes very well. Again, Florida's been a little more spotty with some of the weather issues and some other things. But yeah, the bookings and the backlog on Greco are up, I think, the most as a percentage, just because obviously it's off a smaller base. But their backlog's been very impressive.

Really helpful. I appreciate you guys taking the questions.

Thanks, William. And we do have a follow-up question from John with CJS Securities. Please proceed.

I'm just wondering what you think is the most effective place to be putting your cash to work, you know, just at the current moment?

The most, I'm sorry, attractive?

Yeah, you know, it's interesting, John. As I think about it, you know, repaying debt is kind of our risk-free rate, right? I mean... we can save 5%, 6% on an annual basis just by paying down debt. And so everything else is, as you know, calibrated off of that on a risk-adjusted return space. So all the return hurdles have gone up. And so it's become a little more challenging. So, you know, each opportunity has to be assigned a risk premium. And we think about everything from integration risk and all the other things that go into an acquisition. CapEx has got some execution risk but less. We've always said that organic investments are going to likely be higher risk-adjusted returns. We would always prefer those over inorganic. But as James noted, our high level of free cash flow generation says that we can do a lot of investing, and capital has not been a constraint for us. Opportunities have been a constraint.

Every once in a while, we're constrained by management bandwidth, but capital has not really been a constraint for us, and our cost of capital is low enough that when we find attractive returns, we're willing to pull the trigger.

Got it. Thank you for that. Just another follow-up. In the current guidance for Q4, I'm wondering what you're expecting to be the contribution from the acquisitions you've closed.

Yeah, so as a reminder, Shoemaker won't be acquisitions anymore. As we look year over year, that'll become organic now because that was bought on December 15th of 2021. So your acquisitions are the Falcon Cover Guard and AC Guard, and those are smaller acquisitions. So you have a little contribution from that. So the majority of the 9% kind of fourth quarter growth that we talked about in the release and in Joe's comments is going to be organic. And how much of that is price versus volume, you're still going to lean towards more being priced at this point the way we see things. But as Joe said, as we get to the back end of the quarter, we'll see what that brings us. But as we sit here on February 2nd, we see that 9% growth with the EBITDA of about 23% or so. Okay, great.

Thank you, guys. Thank you, John.

We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.

Great. Thank you, Sherry. And thanks, everyone, for joining us today. Very pleased with the results and pleased to have the opportunity to visit with you about this and look forward to talking again at the end of our fiscal year in May. So thank you very much.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation. Thank you. Thank you. © transcript Emily Beynon Hello. Bye. Thank you. Thank you. Thank you. you Greetings and welcome to CSW Industrials Incorporated Fiscal Third Quarter 2023 Earnings Call. At this time, all participants are in the listed only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, James Perry, CSWI's Executive Vice President and Chief Financial Officer. Thank you, Mr. Perry. You may begin.

Thank you, Sherry. Good morning, everyone, and welcome to the CSW Industrials Fiscal 2023 Third Quarter Earnings Call. Joining me today is Joseph Arms, Chairman, Chief Executive Officer, and President of CSW Industrials. We issued our earnings release presentation and Form 10-Q 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, 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 Arms.

Thank you, James. Good morning, and thank you for joining our fiscal third quarter conference call. Once again, our team executed well in the face of economic headwinds. Our record third quarter results reflect the diligence and professionalism of our team members around the globe. Demand for our high value products remains strong. We are highly focused on managing our costs while pursuing market share growth. We have continued to deploy capital opportunistically while strengthening our balance sheet and liquidity. through reducing our leverage ratio and proactively increasing our revolver capacity, thereby maximizing our ability to pursue future opportunities as they arise. We delivered impressive operating leverage as EBITDA grew by 47 percent on 26 percent growth in revenue, while also generating $33 million in free cash flow, equal to 19 percent of revenue. In the current quarter, all three segments contributed to organic revenue growth of $23 million, driven primarily by the numerous price actions we have taken over the last two years. While we are still experiencing inflationary cost pressure, we have been able to partially offset these with productivity gains. We have seen reduction in the cost of shipping containers from Asia, as well as lower costs for certain raw materials. but still face higher costs for certain line items such as domestic freight. We have successfully maintained our pricing, thereby expanding our margins. However, the net result of these variables is that we have not yet returned to our historical pre-pandemic margins, which remains a goal for all of us here at CSWI. During the fiscal third quarter, we consummated the previously announced acquisition of Falcon Stainless. This product line expands our offerings sold into our profitable HVACR and plumbing end markets. As a reminder, in our third fiscal quarter of last year, we closed the Shoemaker acquisition, which expanded our GRD offerings sold into the HVACR end market. During the fiscal third quarter, the Shoemaker, CoverGuard, AC Guard, and Falcon acquisitions collectively contributed $12 million in revenue, all of which was reported in our contractor solution segment. These acquisitions reflect the accretive nature of our capital allocation strategy and our focus on complementary product categories and our existing end markets served. In the first nine months of fiscal year 2023, we deployed $105 million of capital via acquisitions, opportunistic share purchases, dividends, and capital expenditures. We continue to pursue both internal and external opportunities for growth, consistent with our disciplined risk-adjusted returns methodology, and to maintain a pipeline of acquisition opportunities. In prior quarters, we have discussed strategic investments we made in working capital in an effort to mitigate shipping delays and other uncertainties with the global supply chain. I am pleased to report that these delays have eased and our business leaders have shifted focus to reducing inventory and accounts receivable as prudent. This focus is intended to free up cash and reduce the accompanying interest expense and I am encouraged by the progress in recent months and optimistic about our ability to see continuous improvement in this area. I want to touch briefly on our segments, then James will provide the details on our performance. Overall, I remain pleased with the performance of all three segments, and in particular with the leadership team's response to changes in their markets. We are entering the busy season for our contractor solution segment, and our team is gearing up for another year of growth that exceeds the industry average. The strength of this segment lies in leveraging our distribution network, optimizing acquisition integration, and bringing high-value products to our customers. Our recent acquisitions have been well integrated, and the focus, as always, remains on serving our customers well as we add new products to our portfolio of offerings. Our specialized reliability solutions segment continues to exceed expectations. The capacity utilization in our main facility continues to increase, and our team there remains focused on top-line and bottom-line growth by driving operational efficiencies and offering the optimal mix of products. Energy markets remain strong, and industrial end markets are stable. Our distributors remain cautious about their inventory levels, so we stay in close communication with them relative to demand. Our joint venture with Shell continues to gain momentum, and we expect to complete the previously announced capacity expansion project of our existing facility later this calendar year, which will allow for increased revenue and profitability. Our engineered building solutions segment continued to grow with an increase of revenues of 7.6% year-to-date. And for a fourth consecutive quarter, this segment's backlog reached an all-time high. We are seeing a slowdown in biddings for new projects in line with recent AIA data, but are highly focused on pursuing those projects undertaken by the highest quality developers with the highest likelihood of completion. And our team is performing well in delivering on the current projects, albeit at a lower margin due to when those projects began. Before I turn the call over to James, I would like to remind everyone of the demonstrated resiliency of our business model. Despite the expectation of many in the financial community of a recession this year, we remain well positioned. Strengths of our business model include the diversification of our product portfolio and of the end markets we serve, as well as the consumable nature of many of our products that are used either in maintenance, repair, and replacement applications, or to extend the reliability, performance, and lifespan of mission-critical assets. Specific to our largest end markets, HVACR and plumbing, The products we sell and the value we provide are often non-discretionary, fundamental necessities for homeowners and businesses. We have maintained a strong balance sheet that allows us to withstand market headwinds with ample liquidity that affords us the ability to pursue growth opportunities across our portfolio of businesses. At this time, I'll turn the call over to James for a closer look at our results And then I will conclude the prepared remarks with our strategic outlook.

Thank you, Joe, and good morning, everyone. Our consolidated revenue during fiscal third quarter 2023 was $171 million, a 26% increase as compared to the prior year period, driven by pricing actions and contributions from acquisitions. Consolidated gross profit in the fiscal third quarter was $66 million, representing 28% growth. with the incremental profit resulting primarily from revenue growth. Gross profit margin improved slightly to 38.5%, compared to 37.7% in the prior year period, as strong revenue growth in the higher margin contractor solution segment, due in part to our recent acquisitions, outpaced revenue growth in our other segments. Consolidated EBITDA increased by $31 million, or 47%, as compared to the prior year period, Consolidated EBITDA margin improved to 18% as compared to 16% in the prior year quarter, driven by revenue growth, which outpaced incremental expenses. Reported net income attributable to CSWI in the fiscal third quarter was $16 million, or $1.01 per diluted share, compared to $9 million, or 59 cents, in the prior year period. The current quarter includes $1.5 million, or 10 cents per share of tax benefit related to the release of an uncertain tax position reserve upon the closure of certain Vietnam tax audits. Our contractor solution segment with $112 million of revenue accounted for 65% of our consolidated revenue and delivered 29 million or 36% total growth as compared to the prior year quarter. This was comprised of organic revenue growth of $17 million and inorganic growth of $12 million from the Shoemaker, CoverGuard, AC Guard, and Falcon acquisitions. Note that growth attributable to Shoemaker becomes organic growth starting with the current fiscal fourth quarter. Organic growth in the segment resulted from the cumulative benefit of pricing initiatives, partially offset by a slight decrease in unit volumes as compared to last year. The strong revenue growth as compared to the prior year period was driven by the HVACR in architecturally specified building products and markets. Segment EBITDA was $28 million, or 25% of revenue, compared to $17 million, or 21% of revenue, in the prior year period, as our margins continue to recover from the inflationary environment. We've started to recover margin point as we've been able to maintain our pricing as certain costs in this segment have declined. Of note, however, outside of the decline in ocean freight rates, many of our input costs remain high, so we are managing our overall cost structure carefully. Our specialized reliability solution segment achieved another impressive quarter of organic revenue growth of $5 million, or 16%, due to the continued benefits from pricing initiatives, strong in-market demand, including energy and general industrial, and improvements in our operations and executions. Segment EBITDA and EBITDA margin were $5 million and 14% respectively in the fiscal 2023 third quarter compared to $5 million and 15% in the prior year period. Of note, we incurred a half a million dollar one-time charge in the quarter for the termination of a small Canadian pension plan in this segment. This is reflected in our EBITDA results. As Joe mentioned, with the ongoing addition of equipment in our Rockwall, Texas facility, to support growth of the Shell-Whitmore joint venture, we are in a position to post a compelling exit rate as we progress through the fourth quarter and into our next fiscal year. Our engineer building solution segment revenue grew to $25 million, a 3% increase compared to $24 million in the prior year period. Bidding and booking trends remain strong. In fact, our year-to-date bookings and backlog increased by approximately 38% and 47% respectively. as compared to the prior year period. As of the end of the fiscal third quarter, our book-to-bill ratio for the trailing eight quarters was almost 1.2 to 1. As Joe mentioned in his opening remarks, we ended December with the fourth consecutive quarter record backlog in this segment. Transitioning to the strength of our balance sheet and cash flow, we ended our fiscal 2023 third quarter with $15 million of cash and reported cash flow from operations of $84 million in the first three quarters of our fiscal year, compared to $69 million in the prior year-to-date period. Of the $84 million of operating cash flow in the current fiscal year to date, $37 million was generated in the fiscal third quarter as compared to an aggregate of $47 million in the fiscal first half. While our working capital levels will vary from quarter to quarter due to seasonality and other factors, We've made progress in reducing the levels of safety inventory that we have strategically held in recent quarters due to the uncertainties in the global supply chain. We have been and will continue to be committed to having the products our customers need. As supply chain constraints have eased, we have a laser-like focus on our working capital metrics at the business level and are committed to continuous improvement to free up balance sheet capacity and reduce our interest expense. As demonstrated by our cash flow this year, I am pleased with our progress and look forward to further refinements as we close out fiscal 2023 and enter fiscal 2024. Our free cash flow, defined as cash flow from operations minus capital expenditures, was $33 million in the fiscal third quarter, as compared to $23.3 million in the same period a year ago. That resulted in free cash flow per share of $2.13 in the fiscal third quarter, as compared to $1.47 in the same period a year ago. Through the first nine months of the fiscal year, our free cash flow was $75.8 million, or $4.87 per share, as compared to $61.1 million, or $3.86 per share in the same period a year ago. The impressive level of free cash flow drives our risk-adjusted returns capital allocation strategy, which, in turn, enhances shareholder value. An important component when assessing our generation of cash flow, as compared to a few years ago, is the non-cash amortization of intangible assets that arise from our multiple acquisitions in the last few years. That amortization figure alone was $16.4 million, or $1.06 per share, in the first nine months of this fiscal year, as compared to $5.4 million, or $0.36 per share, in the nine months immediately preceding the acquisition of TrueAir in December of 2020. During the fiscal third quarter, we were pleased to announce the expansion of our revolving credit facility capacity by $100 million through an exercise of the accordion feature. Of important note, this increase was affected with no change in terms or pricing, despite an increasingly challenging credit market that many companies face. This additional capacity gives us increased flexibility to pursue investment opportunities without having to access the capital markets in the current uncertain environment. We are appreciative of the strong support shown by our bank group, a testament to our recent success and future opportunities for profitable growth. We ended the fiscal third quarter with $267 million outstanding on the now $500 million revolver, a $7 million increase compared to the prior fiscal quarter end. As a reminder, during the fiscal third quarter, we invested $34.6 million of cash for the acquisition of Falcon. Our bank coverage leverage ratio as of the current quarter end was approximately 1.5 times, an improvement from 1.6 times as of the preceding quarter end due to our strong EBITDA growth. 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 year, we have repurchased 336,347 shares for an aggregate purchase price of $35.7 million under our prior $100 million share repurchase authorization. In December, we announced that our Board of Directors had approved a new $100 million authorization that is available through the end of calendar 2024. Our effective tax rate for the fiscal third quarter was 14.7% on a GAAP basis due to the previously mentioned 850 basis point benefit we received when the tax audits for several years were closed in Vietnam and we were able to release the reserve on our balance sheet. We expect a 23% to 24% tax rate for the full fiscal 2023 year. As we look to close out fiscal 2023, we anticipate strong revenue growth across all three segments and at the consolidated level for the full year, which, when coupled with meaningful operating leverage, will result in strong year-over-year EBITDA and EPS growth as well as cash flow generation. We expect to benefit from continued stability in our raw material and freight costs. With that, I'll now turn the call back to Joe for closing remarks. Thank you, James.

During the fiscal year-to-date period, we delivered record revenue of $562 million, representing growth of 24%. Operating leverage on this growth drove 30% growth in EBITDA and 39% growth in adjusted EPS. In light of the strength of our fiscal year-to-date results, we expect year-over-year revenue growth of approximately 20% with an EBITDA margin of over 22% for the full year. These full year expectations imply fourth quarter revenue growth of approximately 9% as compared to the same period last year with an EBITDA margin of approximately 23% in the fourth quarter. We are currently working through our budget process for our fiscal 2024, which begins on April 1. While there are headwinds in certain end markets, we expect to deliver consolidated revenue and earnings growth for CSWI. We are focused on efficiency gains and cost reductions, but we plan to accomplish these objectives without involuntary reductions in our level of employment. We are committed to providing our customers with the high-quality products and service that they expect from CSWI, and we will rely on the dedication of our team members to accomplish that goal. 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 is enabled by the strength of our balance sheet. We remain committed to enhancing sustainable growth in 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. I am pleased to share that for the third year in a row, Cigna has selected CSWI as a recipient of their Gold Level Healthy Workplace designation for demonstrating a strong commitment to improving the health and well-being of our employees through our workplace wellness program. This reinforces our distinctive employee-centric culture and affirms our intention to be an employer of choice. My colleagues here at CSWI hear me say this often. At CSWI, we must and we will succeed. There's no other option. But here at CSWI, how we succeed matters. Achieving these outstanding year-to-date results demonstrates our commitment to be good stewards of your capital and to our goal of driving long-term shareholder value. As always, I want to close by thanking all of my colleagues here at CSWI who collectively own approximately 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. With that operator, we're now ready to take questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from John Tanwantag with CJS Securities. Please proceed.

Hi, good morning. Thank you for taking my questions and congrats on the nice results. My first question is I was wondering if you could talk about how much change you've seen or you've discussed or experienced just in terms of your overall macro expectations and visibility over the last two or three months? It seems we got, you know, whipsawed a bit by pretty negative macro sentiments, you know, earlier in Q4 and things started to improve since then. Has that translated to any changes in your internal forecasts or discussions with customers as you go forward and heading into fiscal 24? Just help us think about your visibility, you know, in today's environment.

Yeah, John, as you know, visibility is tough these days. And so our goal is to be prepared for whatever eventuality. We think the strong balance sheet, the diversification of our business, the strength of our brands, and the low-cost, high-value kind of products that we provide to our customers are going to be popular and profitable and great products to offer and a great business model, regardless of the economic backdrop. You know, March is a really important month for us, late February, March, for the pre-sale season in the HVAC business. And so we've got our eyes focused on that. But we'll know more then. At this point, you know, we don't have any indications of any – major changes in our expectations. But, you know, that's a very important timeframe for us when the pre-market, pre-summer sales to the distributors who are stocking up will give us our best indication. So, I would just say stay tuned.

Got it. And assuming from your point, do you expect revenue and margin growth in the next fiscal year?

Yeah, this is James. John, good morning. Thanks for being on. Yeah, as Joe said, we do expect revenue and EBITDA growth next year. We're certainly working to continue to push margins. You know, as we mentioned in the call, you know, we focused a lot in the last couple of years on container rates. They've certainly come down, and for now they've stayed down. We know how quickly that can move. Some of the other costs are still high, obviously. You know, raw material costs, domestic freight, you know, shipping freight out between our facilities and the customers, those costs remain high. But we've done a good job with our pricing, been able to retain that. As we said, we're not back to our pre-pandemic margins. That's always a goal. That goal's tougher, because obviously when costs are higher and you have to move pricing higher, margins are more challenging. So we don't have a firm view yet on margin guidance yet, per se. But we certainly, Joe and I and our business leaders, have a goal to continue to push margin in the type of pace we've been able to recover so far.

Understood. Thank you. You mentioned a little bit of a slowdown in the bidding markets and in architectural. Can you just talk about where you've seen that number one and two if you expect it to continue and kind of the impact, you know, when you might see that in the P&L?

Yeah, so good question. You know, as you know, that market, we've been through almost a couple of mini cycles in the last few years. You know, COVID hit and things really slowed down, so we were kind of taking some lower margin projects. Then we had a period where we, you know, things opened up again and things looked good, and Now we're producing some of the lower margin projects again, because with interest rates spiking and some economic uncertainty, some of the projects have been put on hold. Despite that, as we said, our backlog has grown. Biddings are very geographic, I'll say. We were talking to the leadership in that group just in the last couple of days, and the Sunbelt remains pretty solid, as you would imagine. Toronto, where we have a nice presence, has some good construction going on. The California market, especially Northern California, has been a little softer, and as you know, Our smoke guard product specifically, we have a good opportunity there because we're the distributor and the manufacturer. So we kind of have that double dip when we sell into that market, and that's been a little softer. So there's geographic pockets here and there. So we've seen bidding slow down just a little because I think funding for these projects has taken a little longer to firm up because of where interest rates are and equity expectations are. But our team is doing a really good job, as Joe mentioned in his comments, focused on those high-quality developers of projects. with a high likelihood that they're going to get done. We know that our backlog right now is solid. The projects in there are out of the ground. And as you know, our parts are at the back end. So what's in the backlog now that we've been taking orders for the last quarter to, you know, that's nine, 12, 18 months out. So I think as we get deeper into fiscal 24, the back half, and then even the fiscal 25, which, you know, it's hard to say out loud, but that's a little over a year away for us. We'll really start seeing these newer, entries into the backlog come through the revenue. But in the meantime, the group's doing a good job, you know, keeping busy and keeping the projects going. The margins are just a little softer given the nature of those products.

Okay, great. And do you expect bidding to continue slowing from where you are today?

You know, John, again, I think that interest rates rising will slow parts of the market.

We have been focused on institutional investments We've been focused on high-quality projects that may have a little less entrepreneurial speculation in them. And so we're still a relatively small player. We think we can grow kind of in every market. But we do think that the interest rates remaining high will continue to have an impact on some of the more speculative projects. And so our focus on institutional, our focus on the healthier portions of that market, I think, is going to pay dividends for us.

Got it. Thank you. Jim, do you have any more color on just price versus volume trends? in the past quarter and kind of what we expect that mix to go as you continue growing into the future?

Yeah, John, you know, the growth this quarter was really based on the acquisitions that we talked about, the four acquisitions over the last 12 months, and then pricing. Volume overall on a consolidated basis was pretty flat. Contractor solutions down just a bit, and we had a little offset with the other segments that helped, certainly in specialized reliability solutions. But pricing is really the driver here in the organic growth. Where that's going from here, as Joe said, we're going to continue to have some year-over-year pricing pick up for the fourth quarter here and into the first fiscal quarter. The pricing kind of slowed down the increases the back half of last calendar year, so that'll start lapping, so to speak, so you won't have that pick up, so to speak, opportunity unless we see another step up in cost and we need to take action outside of just our normal annual price type increases, which we we implement this time of year. So pricing is going to continue to be a tailwind for us for a couple of quarters on the year over year. The volume, as Joe said, well, it's a little bit of a wait and see. The team's doing a great job talking to customers, understanding what their stocking levels are. And across segments, I think our distributors are being careful in overstocking. There's been a little bit of destocking, and I think that slowed down volume a little bit, and I think inventories continue to be right-sized. So as Joe said, the February and especially into March Ordering and buying season for contractor solutions will tell us a lot. And on the call we have in May with our fiscal year results, we'll have a much better sense of how that looks, of course.

Got it. Last one for me, just the working capital improvements as supply improves. How much excess are you carrying right now? What kind of cash can you throw off, assuming you get to your optimized levels?

Yeah, it's a great question, John. This is still James. You know, it's hard to put a specific number on it because it's going to vary week to week and month to month. Our teams do a really good job. You know, when you look back, you use things like days on hand. And we know what those metrics look like. And they bump around a little bit. Part of that, like I said, is seasonality and just stocking down and up for the seasons. But, you know, we really have a forward look. And our businesses do a good job looking product by product, how much they think they need to hold, especially that product that comes from overseas. While shipping times have slowed down or have gotten shorter, I'm sorry. It still takes a while to get products, so you can't produce a lot of this overnight. So, you know, it's a few million dollars. How much that is, it's probably hard to identify and get real precise. We certainly have some goals and metrics. And as we get through our budget season, we're going to work hard on what those goals need to be given a little easing of the supply chain constraints that we have. So I wouldn't put a hard dollar number out there, but there's still a few million dollars out there that we think we can turn into cash. kind of in a quarter-over-quarter basis. Again, this quarter you start stocking back up, but when we think about days forward and days on hand, we have opportunity.

Got it. Thanks, guys. I'll let someone else ask a question.

Thank you, John.

Our next question is from Julio Romero with Sidoti and Company. Please proceed.

Hey, thanks very much. Good morning. Maybe to start off, If you could just talk about on contractor solutions, just talk about what's working well in the segment. I know you mentioned strong pricing gains and the inorganic growth as well, but I was just hoping for a little more detail on the strong segment profit, especially given that this is usually your seasonally weakest quarter for that segment.

Yeah, Julio, thanks.

We've got strength across the board. I would say that... We're selling more of the ductless mini-split products than maybe we did a few months ago. There were some shortages by the OEM manufacturers that were slowing some of that down. That provides a good mix impact for us. And so strength across the board, really. I don't know that I'd note anything in particular. I would say that we continue to be able to grow wallet share with our customers. There are particular customers that are continuing to grow. We're growing our GRD business. As you recall, after we bought TrueAir, we had the kind of production slowdown in Vietnam because of the pandemic shutdown and all of that. We've had to rebuild inventory. And so some of the kind of... wallet share gain that we had planned on for that acquisition were delayed a little bit. And now we're beginning to see some of that. And so there's positive things across the entire portfolio. The acquisitions, I think as much as anything, have really just performed well and the integration has gone well. And so we're very pleased with those new products that we can put through our distribution channels. Our customers like that, the The end users, the professional trade likes to have new different products to sell, and that's an important part of our kind of increase or our strong organic growth rate is to continue to bring new products into the market.

And I would add just briefly, Julio, Joe mentioned true or briefly, the Vietnam operations are performing at tremendous levels. The leadership team there that we brought in has done a great job. Our people have been able to get over there now. Shoemaker and TruAir are working really well together, so really pleased with, yeah, from this commercial side to an operations side and everything in between.

Okay, that's very helpful. That's good color there. Maybe just staying on the segment, just talk about how you're balancing your inventory reduction initiatives with kind of being ready for the busy season within the contractor solution segment.

Yeah, absolutely.

Really, as James said, we've had a focus on product by product, looking at the weeks of inventory that we wanted to have on hand, not just historically, but looking forward, trying to forecast sales in each and every product type and trying to calibrate our inventory levels to make sense, really, for that March timeframe. We talked about that, I think, at the last quarterly call, is that know you don't really want to measure that at the end of December because that's a seasonally slowest time and some products if you buy them you know if they're manufactured in China you may be getting some of those shipments even in December getting ready for the February March timeframe and so inventories can can look a little odd at that period of time but boy in the March high Season for us the the selling opportunity is there. We want to have product on the shelves We want to be the reliable vendor for our customers and we don't want to miss sales Especially early on in the season like that. So, you know, so we're we're making sure we have the the right products on the shelves the right amounts and just trying to Properly calibrate that At the same time, yeah, we've got a real focus on working capital reduction, but we're trying to do that in a very cautious, careful way so that we don't miss sales, we don't offend customers by not having a product on the shelves, and we don't take good care of our customers, which is our commitment to do. So it is a balancing act, no question about it. As interest rates rise, it becomes even more important. And so that's why we've been focused on that. But at the end of the day, we've got to take good care of our customers. Interest rates are not so high that we cannot afford to have the products on the shelves. And again, it's another benefit of a strong balance sheet. Our interest costs are not that high compared to the opportunity on the customer side.

Okay. That's helpful. Maybe one follow-up on John's previous question on the EBS segment. You mentioned some geographies, particularly Northern California, that's slowing. And you mentioned Sunbelt and Toronto still solid. I guess any other geographies or product lines that you can point to that are either slowing or still holding solid? Is there any additional granularity there?

Yeah, I would say, you know, Florida got hit by, you know, weather recently. We felt that a little bit. And again, in Florida, like in Toronto, we not only fabricate, but we install a product there. And so some of the construction sites, you know, were shut down for a while. But no, I think it really is kind of a Sunbelt story for the most part. And then plus Toronto. Southern California has been strong all the way across Canada. to Florida. And so those are not surprising, you know, the stronger growth areas for us. We're doing some work, some nice work and picking up some business in New York, which is always kind of been a big target for us. But I would call it a Sunbelt plus Toronto kind of a story at this point.

How are bidding trends for the railings product line performing?

Yeah, you know, it's interesting. Very strong overall, but that's geographic as well. Toronto has been very, very strong. There are a ton of multifamily residential being built in the Toronto area, and we're getting our fair share of that plus some at this point. And so very, very pleased with that. Backlog's very strong there, and that bodes very well. Again, Florida's been a little more spotty with some of the weather issues and some other things, but... Yeah, the bookings and the backlog on Greco are up, I think, the most as a percentage, just because, obviously, it's off a smaller base. But their backlog's been very impressive.

Really helpful. I appreciate you guys taking the questions.

Thanks, Julia. And we do have a follow-up question from John with CJS Securities. Please proceed.

I'm just wondering what you think is the most attractive place to be putting your cash to work, you know, just at the current moment.

The most, I'm sorry, attractive?

Yeah, you know, it's interesting, John. As I think about it, you know, repaying debt is kind of our risk-free rate, right? I mean, we can save 5%, 6% on an annual basis just by paying down debt. And so everything else is, as you know, calibrated off of that on a risk-adjusted return space. So all the return hurdles have gone up. And so it's become a little more challenging. So, you know, each opportunity has to be assigned a risk premium. And we think about everything from integration risk and all the other things that go into an acquisition. CapEx has got some execution risk but less. And so we've always said that organic investments are going to likely be higher risk-adjusted returns. So we would always prefer those over inorganic. But as James noted, our high level of free cash flow generation says that we can do a lot of investing, and capital has not been a constraint for us. Opportunities have been a constraint. Every once in a while we're constrained by management bandwidth,

But capital has not really been a constraint for us, and our cost of capital is low enough that when we find attractive returns, you know, we're willing to pull the trigger.

Got it. Thank you for that. Just another follow-up. In the current guidance for Q4, I'm wondering what you're expecting to be the contribution from the acquisitions you've closed.

Yeah, so as a reminder, Shoemaker won't be acquisitions anymore. As we look year over year, that will become organic now because that was bought on December 15th of 2021. So your acquisitions are the Falcon cover guard and AC guard, and those are smaller, so you have a little contribution from that. So the majority of the 9% kind of fourth quarter growth that we talked about in the release and in Joe's comments is going to be organic. And, you know, how much of that is price versus volume, you're still going to lean towards more being priced at this point the way we see things. But as Joe said, as we get to the back end of the quarter, we'll see what that brings us. But as we sit here on, you know, February 2nd, we see that 9% growth with the EBITDA of about, you know, 23% or so.

Okay, great.

Thank you, guys. Thank you, John.

We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.

Great. Thank you, Sherry. And thanks, everyone, for joining us today. Very pleased with the results and pleased to have the opportunity to visit with you about this and look forward to talking again at the end of our fiscal year in May. So thank you very much.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.