CSW Industrials, Inc.

Greetings and welcome to CSW Industrial's fiscal fourth quarter and full year 2026 earnings conference call. At this time, all participants are on a listen-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. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Alexa Warta. Vice President of Investor Relations. Thank you. You may begin.

Thank you, Rob. Good morning, everyone, and welcome to the CSW Industrials Fiscal 2026 Fourth Quarter and Full Year Earnings Call. Joining me today on the call is 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, updated investor relations presentation, and annual report on Form 10-K prior to the market's opening today, all of which are available on the investors' portion of our website at www.ir.csw.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.

Thank you, Alexa, and good morning, everyone. To begin, I want to highlight what was a really strong quarter for CSW Industrials. Our team delivered record fiscal fourth quarter revenue, highlighted by both organic and inorganic growth, record adjusted EBITDA, and record adjusted earnings per diluted share. We crossed the $1 billion mark in annual revenue during fiscal 2026, achieving this milestone just 10 years after our spinoff as an independent public company, delivering 15% revenue compound annual growth rate over 10 years, while allocating over $1.7 billion to accretive acquisitions. Overall, these record results demonstrate the strength of our portfolio the excellence with which our teams are executing, and the strategies that serve as our guide. If you look at CSW today versus where we were when reporting our fiscal 2025 year-end results, we are meaningfully larger and more diversified, and that is intentional. Driven by our disciplined capital allocation philosophy and facilitated by our strong balance sheet, We leaned in during fiscal 2026 and invested in multiple high-quality growth opportunities. During the year, we completed five highly synergistic cash flow accretive acquisitions and made an incremental minority investment in an HVACR controls technology company. In our contractor solutions segment, we invested approximately $1 billion in acquisitions, including Mars Parts, our largest acquisition to date, for $650 million, Aspen Manufacturing for $313 million, and Duxtrip for $21 million. In our specialized reliability solutions segment, we acquired Hydrotex Holdings and ProAction Fluids for a combined $1. In addition, CSW returned an aggregate of $146 million in capital to our shareholders through $128 million of open market share repurchases and $18 million in dividends, demonstrating our commitment to long-term value creation and utilizing all capital allocation avenues available to us. We finance these investments with a mix of cash on hand and low-cost debt while maintaining our financial discipline. We ended the fiscal year at a net debt to EBITDA of 2.55 times, which is comfortably inside our target leverage range of one to three times. Our prudent approach has kept our balance sheet strong and resilient and continues to provide flexibility to support future growth opportunities. One note on comparability. With the size of the acquisitions made in fiscal 2026, especially Mars Parts and Aspen, some year-over-year comparisons can be challenging. As we have moved from a net cash position to a net debt position, interest expense is higher, and we also have more non-cash amortization of acquired intangibles. These factors impact both GAAP and adjusted EPS. As you think about performance across periods, we still believe that adjusted EBITDA and free cash flow are the most appropriate metrics by which to measure how the business is performing. From an in-market perspective, the positive momentum we saw in our contractor solutions and specialized reliability solutions segments as we exited December and moved into January continued through the fourth fiscal quarter. In contractor solutions, we also saw order trends pick up in March and April as our distribution partners started gearing up for the peak cooling season. We have maintained our momentum in May, though it is still early in the season. Over the last decade, we have consistently communicated that through the cycle, contractor solutions should be a mid- to high-single-digit organic growth business, while recognizing that short-term volatility is inherent in the business. The products we provide to our customers are essential, demonstrated by the strong resilience of the segment. Historically, we have been more indexed to the replacement of HVAC units in residences with some exposure to new housing. With the addition of Mars Parts and Aspen, we have increased our exposure to the HVAC repair cycle, providing a more balanced product offering that enables us to perform well as the repair versus replace mix changes from time to time during economic cycles. At this time, I will turn the call over to James for a detailed review of our financial performance, and then I will return with a few closing comments. Thank you, Joe, and good morning, everyone. This was another busy quarter, and we have seen conditions in the residential HVACR end market stabilize as we head into the summer season. I will walk through the fourth quarter's consolidated and segment results, cash flow, and the balance sheet, highlighting how we are positioning the business for growth. Starting with the headline numbers for the fourth quarter of fiscal 2026, revenue was a record $309 million, up 34% as compared to the prior year. Growth was primarily driven by the acquisitions completed over the last year, along with consolidated organic revenue growth of 2.8%, which was concentrated in contractor solutions and specialized reliability solutions. Adjusted consolidated EBITDA grew by 39%, reflecting both acquisition leverage and the resilience of our platform. Adjusted EPS for the fiscal fourth quarter was $3.14, up 21% from the same period last year. EPS growth did not fully keep pace with the strong revenue and EBITDA growth which was expected, primarily due to the higher net interest expense of $13.4 million and as we moved from a net cash position last year to a net debt position following the significant acquisition activity and share repurchases in the back half of our fiscal year. Also, as expected, we saw some margin dilution from recent acquisitions ahead of full synergy realization. Turning to items excluded from adjusted EPS and consistent with our updated methodology, the fiscal fourth quarter included net of tax, $13.6 million, or 83 cents per share, of expense related to impairment of goodwill, intangible assets, and other long-lived assets, and expenses related to restructuring and the write-down of additional assets of $1.6 million net of tax, or 10 cents per share. These items are connected with a planned strategic exit and disposition of the GRECO business line within Engineer Building Solutions which I will discuss again later in my remarks. We also had net of tax $3 million, or 18 cents per share, of acquisition-related transaction and integration costs, $900,000, or 5 cents per share, of a non-recurring inventory write-down, $400,000, or 2 cents per share, of other restructuring costs, and $12.1 million, or 73 cents per share, of amortization of acquired intangible assets. Looking at our revenue and gross profit in more detail, consolidated revenue for the fourth quarter of fiscal 2026 increased $78 million, or 34%, as compared to the prior year quarter, driven mainly by the acquisitions. We are pleased to post consolidated organic revenue growth of 2.8%, coming from the contractor solutions and specialized reliability solution segments. Adjusted consolidated gross profit in the fiscal fourth quarter was $135 million at 32%. Adjusted gross margin was 43.5%, down 70 basis points from 44.2% in the prior year period, primarily due to the acquisition-related dilution we have discussed, as well as inflation in some material costs and the impact of tariffs. The team has been able to offset some of the inflation and tariff-related margin dilution with pricing actions and freight savings. Consolidated adjusted EBITDA for the fiscal fourth quarter was a record $83 million, up $23 million, or 39 percent, as compared to the prior year period. Adjusted EBITDA margin increased 90 basis points to 26.8 percent from 25.9 percent, driven by the addition of recent acquisitions strategic pricing actions, and lower freight costs. Our already realized synergies in the operating expenses line contributed to the consolidated EBITDA margin accretion as compared to dilution at the gross margin line. In contractor solutions, fiscal fourth quarter revenue was $237 million, which was 76% of consolidated revenue, and the result was an increase of 43% over the prior year. Of that growth, $67 million, or 40.3%, was driven by acquisitions, and $4.3 million, or 2.6%, came from organic growth. We are particularly pleased to return to organic growth, especially against a strong comparable quarter last year. Pricing actions more than offset a slight unit volume decline in organic revenue. During the fourth quarter, Aspen delivered 10.4 revenue growth, Aspen has grown 13.5% since the time of acquisition, May 1st of last year, significantly outperforming the market. Mars parts revenue declined about 10.4% in the quarter, driven by a mix of short and long-term items. In the short term, the primary Mars distribution center was integrated onto the CSW ERP system in January, as well as upgraded to allow for greater storage and shipment capacity to realize future operational efficiencies. These upgrades delayed some order fulfillment early in the fourth quarter, though fulfillment rates at the end of the quarter were in line with expectations. For MARS parts in the longer term, we have completed the product SKU rationalization and portfolio review. This exercise resulted in exiting some nominal product categories where MARS did not have a differentiated product offering and or where the legacy contractor solutions products have a better and more profitable offering. Because of this, over the next 12 months, the top-line growth of Mars parts will not necessarily be indicative of underlying demand, as there has been and will be some shift of that demand to legacy contractor solutions products, including the Mars and Aspen fiscal fourth quarter results, total organic revenue for contractor solutions, would have increased 5.5% if we had owned these businesses in the prior year, or perform a metric we have been reporting following our $1 billion of capital deployed toward these acquisitions. A reminder that we will begin including Aspen in our organic growth reporting metric as of May 1st of this year, the one-year anniversary of that acquisition, per our historical methodology. Adjusted EBITDA for the contractor solutions segment was $75 million, or 31.7% of revenue, compared to $56 million, or 33.7% of revenue in the prior year period. The year-over-year margin compression primarily reflects acquisition-related dilution ahead of the full realization of expected synergies, partially offset by pricing actions and improved domestic freight efficiency. We can now update our expectation for Mars parts run rate synergies to be in excess of $12 million, as well as attaining greater than a 30% run rate EBITDA margin by the first anniversary of our ownership in November. Our confidence is based on already actioning in excess of $10 million in synergy so far, in addition to the skew rationalization process I mentioned earlier. As Joe mentioned, in the fiscal fourth quarter, the contractor solution segment completed a $21 million acquisition of DuckStrips, a differentiated electrical cable for HVAC mini-split systems that combines all required conductors into a single cable and helps the pro trade install more quickly and efficiently. Based on the announced seven times trailing 12-month EBITDA multiple paid and the approximately $3 million of trailing EBITDA assumed in our purchase price, we expect incremental EBITDA to CSO view to be about $2 million as CSW already participated in a portion of the business prior to the acquisition as a master distributor. We also made a $4.8 million incremental investment in FLIR, which has developed an innovative suite of HVACR control products, including smart grills, registers, and diffusers, as well as ductless thermostat controls, enabling room-level temperature control with meaningful energy savings. Specialized reliability solutions revenue increased 22.4% to $46 million, up from the $38 million in the prior period. The increase included $5.2 million, or 13.7%, from recent acquisitions, and $3.3 million, or 8.8%, from organic growth, partially offset by continued softness in the general industrial end markets. Adjusted segment EBITDA in the fourth quarter was $10.1 million, up 73.7% from $5.8 million a year ago. An adjusted EBITDA margin expanded 640 basis points to 21.8%. Margin expansion was driven by the inclusion of the higher margin acquisitions, pricing actions, and a favorable product mix. The integration of the two businesses acquired in the third fiscal quarter continues to progress very successfully. In response to margin performance and in-market challenges, the Specialized Reliability Solutions segment initiated targeted restructuring actions during the fiscal fourth quarter, as we noted on our January earnings call. These actions are intended to strengthen the integration of our recent acquisitions and support progress toward our sustained 20 percent EBITDA margin target for the segment. The financial benefits from the restructuring fully took effect on April 1st, and the pre-tax one-time charges associated with these restructuring activities in the fiscal fourth quarter were half a million dollars. We expect to fully realize the synergies from the acquisitions during the back half of the fiscal year. In response to the recent rising costs for certain input materials in the Specialized Reliability Solutions segment, We have implemented three separate price increases during the fiscal first quarter to offset the impact. We are monitoring the situation very closely and will continue to take appropriate action as needed. With respect to demand in the segment, we have seen solid momentum and resiliency to date in our fiscal first quarter, and the team has done a great job in meeting that demand. Engineer building solutions segment revenue decreased 4% to $27.6 million from $28.7 million in the prior year period. Segment EBITDA increased 17% to $4.9 million, representing a 17.6% margin, compared to $4.2 million and 14.5%, respectively, last year. The EBITDA margin expansion was driven by a favorable project mix that more than offset higher material costs indirectly linked to tariffs. The trailing eight-quarter book-to-bill ratio remains steady at 0.9 to 1. We are encouraged by the improved mix in the EBS backlog, as our SmokeGuard and Balco business lines grew backlog by 13 percent, including a greater proportion of higher margin products. Pricing actions to offset increased costs are ongoing, with additional increases planned on a project-by-project basis. During the fiscal fourth quarter of 2026, CSW finalized a plan to sell the Greco-US business and to strategically exit the Greco-Canada business, as both are increasingly non-core to CSW. These businesses are part of our EBS segment. The Greco-US business was classified as held for sale as of March 31, 2026. Greco-Canada recognized $2.1 million of expenses related to the planned exit. In addition, we recorded a $15.6 million impairment expense in connection with our decisions. We expect to incur $1 to $2 million of additional costs related to the GRECO Canada exit, primarily for severance and termination expenses as the process concludes. We will update our progress on these transactions on future earnings calls as warranted. Excluding the GRECO businesses, EBS segment revenue was $21.7 million, a 10.5% increase compared to $19.7 million in the prior year period. In the fiscal fourth quarter, segment adjusted EBITDA and adjusted EBITDA margin, excluding GRECO, were $5.6 million and 25.8% respectively, compared to $4.2 million and 21.2% in the prior year. The year-over-year improvement reflects stronger underlying performance of the remaining business lines. The trailing eight-quarter book-to-bill ratio, excluding the Greco businesses, was a healthy 1.05 to 1. Our remaining businesses within EBS are growing the backlog faster than revenue, generating a strong future revenue stream. We wanted to share these results in this manner to better reflect the EBS segment model going forward. which currently has an EBITDA margin well in excess of 20%, our long-staged goal for this segment. Our new strategy is expected to support improved margins over time. Turning to consolidated cash flow, we had an operating cash outflow of $1.7 million in the fiscal fourth quarter compared to an inflow of $27.3 million in the prior year quarter. The year-over-year change primarily reflects working capital deployed to support our record revenue along with acquisition-related integration costs and the higher level of interest expense. Free cash flow, defined as cash flow from operations less capital expenditures, was an outflow of $6.8 million in the fiscal fourth quarter, compared with an inflow of $22.8 million in the prior year period. The $29.6 million year-over-year decline was driven by the same factors just mentioned. Our effective tax rate for the fiscal fourth quarter was 27.1% on a GAAP basis. Our adjusted tax rate was 22%, modestly below our normal range due to discrete items that can vary quarter to quarter. For the full fiscal year, our tax rate was 22.5% on a GAAP basis and 24.7% on an adjusted basis. As we enter fiscal 2027, amortization of intangible assets will step up meaningfully as a result of the significant acquisitions completed in fiscal 2026, particularly Mars parts. On an annualized basis, we now expect amortization of intangible assets to be approximately $61 million for fiscal 2027. We funded this year's acquisitions with cash on hand from the September 2024 follow-on equity offering, revolver borrowings, in our new term loan A. At quarter end, we had $871.5 million outstanding across our revolver in the term loan A. Reflecting the shift to a net debt position, interest expense in the fourth quarter of fiscal 2026 was $11.8 million, compared with interest income of $1.6 million in the prior year quarter. We currently estimate fiscal 2027 interest expense of approximately $46 million. At quarter end, our net debt for covenant calculation purposes was $843 million, resulting in a net debt to EBITDA leverage ratio of 2.55 times. This corresponds to an interest rate of SOFR plus 200 basis points for the revolver and Term Loan A. As a reminder, in the third quarter of fiscal 2026, We executed an interest rate swap to fix SOFR at 3.42% for three years to hedge $300 million of our term loan A balance. This swapped interest rate remains well below the current SOFR rate. We continue to maintain a strong balance sheet with the net debt to EBITDA well within our target range of one to three times. This provides ample liquidity to support growth initiatives and the rest of our capital allocation priorities. Consistent with that position, during the quarter, we repurchased approximately $35 million of our stock in the open market, representing about 132,000 shares at an average price of $265 per share, reinforcing our confidence and our ability to create long-term shareholder value. For the full fiscal year, we repurchased $128 million of our stock at an average purchase price of $253 per share. Let me touch briefly now on tariffs and our expectations as we look ahead. We continue to monitor tariff developments and the potential impact across our businesses. Importantly, the recent 232 tariff interpretation is expected to be neutral for CSW industrials in terms of direct tariffs paid. Of note, we have minimal exposure to inputs from Mexico with no manufacturing footprint there. However, the recent changes could have indirect commodity price impacts. While our specialized reliability solutions and engineer building solution segments have minimal direct exposure to tariffs, both experienced indirect effects during fiscal 2026 from the broader economic consequences of tariff policies. Each of these segments sources a limited number of inputs internationally, and we have also seen meaningful cost increases even on U.S. source materials. As I mentioned, in SRS, we have mitigated the indirect impact of tariffs and rising commodity prices through pricing actions. In EBS, we continue to factor higher costs into bids on new projects. As we have filed our applications for tariff-free funds that we are due with limited receipts to date, we will update this process during our next quarterly earnings call. I'll remind everybody that our forward-looking outlook is included in the investor presentation posted on our website this morning. Overall, we expect all segments to show revenue growth versus the prior year. In the EBS segment, that growth excludes the impact of exiting the GRECO businesses. In contractor solutions, we expect solid growth in revenues and EBITDA, as well as strong synergy realization throughout the year from our recent acquisitions. we continue to make strategic changes to our global supply chain to reduce the impact of potential disruptions. We remain highly focused on cost discipline across the company, especially in the current economic environment. Turning to specialized reliability solutions, we expect a higher full-year EBITDA margin in fiscal 2027 as we realize synergies from the recent acquisitions and the restructuring actions we've executed. In engineering building solutions, expect a higher full-year EBITDA margin, excluding the GRECO businesses, supported by a growing backlog in our remaining business lines that includes a higher proportion of higher margin projects. At a consolidated level, we expect to see significant adjusted EPS growth in fiscal 2027. As a reminder, GAAP EPS will be impacted by the full-year impact from higher interest expense and the step-up in intangible amortization from our recent acquisitions. As such, we will continue to focus on adjusted EBITDA as the best comparable measure of our profitability growth over time. We expect strong free cash flow generation in fiscal 2027 with significant growth from the fiscal 2026 level due to our expectations for earnings growth and prudent management of working capital. Finally, we currently forecast our fiscal year 2027 gap tax rate to be approximately 23% and the adjusted tax rate to be approximately 26 percent. Their rates will vary quarter-to-quarter based on specific items. With that, I'll now turn the call back to Joe for his closing remarks. Thank you, James. To summarize, our fiscal fourth quarter of 2026 provided a strong finish to the year. We delivered record quarterly revenue and adjusted EBITDA with revenue up 34 percent year-over-year. This outperformance was driven by acquisitions that are outperforming our acquisition models and are also helping to support organic growth. As previously discussed, we are proactively managing our portfolio of businesses consistent with our long-term objectives. As a result, we feel very good about the strength and positioning of the portfolio and our ability to continue delivering sustainable, above-market, profitable growth over time that creates long-term shareholder value. For the full year, we deployed approximately $1 billion of capital into acquisitions, which underscores our conviction in the long-term fundamentals of residential HVAC, our plumbing and electrical end markets. With a strong balance sheet and disciplined capital allocation philosophy, we have invested opportunistically through market cycles. And importantly, We are doing so with a clear focus on prudent capital management, operational excellence, and the good work of our fantastic team of people across CSW who deliver impressive results day in and day out. Turning to fiscal year 2027, while the environment remains dynamic, our priorities are unchanged. To deliver sustainable growth that exceeds the markets we serve, expand profitability, and to allocate capital in a disciplined manner while maintaining our strong balance sheet. We expect to deliver full-year growth in revenue, in adjusted EBITDA, in adjusted EPS, and in free cash flow. We will continue to identify and pursue accretive acquisitions of innovative businesses and products that are synergistic with our portfolio while maintaining our balance sheet strength and our discipline with respect to our capital allocation. As always, our expectations reflect our current view of the market conditions and are subject to the forward-looking risk and assumptions discussed in our materials. Our most recent acquisition, Duck Strip, is a strong strategic fit within contractor solutions. It adds a differentiated, high-value product that aligns with our focus on innovation. Along with our minority investment and flair, this final acquisition of fiscal 2026 reflects our continued confidence in allocating capital to the attractive HVAC R space, including faster-growing areas like ductless, where we can leverage our distribution scale and execution capabilities. Moving on to our people, you may have seen in a separate news release on May 12th that we announced the promotion of Jeff Underwood to Executive Vice President of CSW in recognition of his outstanding leadership and his commitment to excellence while executing on our long-term growth strategy. Jeff has been an instrumental leader at CSW and the primary driver of growth within contractor solutions. His relationships in the market, his commitment to an employee-centric culture, and his ability to successfully lead in the consummation and integration of acquisitions have meaningfully improved the size and scale of CSW. Please join me in congratulating Jeff on this well-deserved promotion. CSW strives to be the partner of choice for our loyal customers with the goal of making it as easy as possible to do business with us. During the fiscal fourth quarter, our contractor solutions segment was recognized as vendor of the year by both Gensco and Standard Supply, further validating the service levels and the operational excellence our teams deliver. I want to publicly recognize the Contractor Solutions Organization for these achievements. Finally, our employee-centric culture continues to be a competitive advantage. I could not be more proud to announce that CSW Industrials has recently been certified as a great place to work for the fourth year in a row. This recognition is a testament to our focus on core values such as accountability, citizenship, teamwork, respect, integrity, stewardship, and excellence. At CSW, how we succeed matters, and our success is shaped by the collaborative efforts of our team members. We remain focused on attracting and retaining great talent, offering rewarding careers, and offering our team members the opportunity to earn a safe, secure, and dignified retirement. In that spirit, our Board of Directors approved a profit-sharing employee stock ownership plan contribution for fiscal 2026 equal to 6 percent of each U.S. employee's salary, as well as an additional profit-sharing 401 contribution of 3% for fiscal 2026, on top of our existing 6% match. In closing, I want to thank all of our CSW Industrials team who collectively own approximately 3% of the company, which includes our ESOP, for their continued performance. And I also want to thank our shareholders for your continued interest in and support of CSW Industrials. With that, Rob, we're ready now to take questions.