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.

Thank you. At this time, we'll be conducting a question and answer session. If you'd 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'd like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. My first question comes from John Tanwana with CJS Securities. Your line is now live.

Hi, good morning. Thank you for taking my questions, and congratulations on a strong quarter. My first one is, could you talk about inflation in COGS specifically where you're seeing the most pressure, number one. And then number two, talk about the pricing strategy to offset that and the timing around it. And if you expect to offset them at a dollar level or a margin percentage level over what timeframe, that would be helpful. Thanks.

Yeah, John and James, thanks for being on as always. Appreciate your support. We clearly continue to see some inflation at the COGS line, you know, primarily originally from tariffs. And obviously, we're looking back to the March quarters. We talk about things today. You know, tariffs and indirect impact from tariffs continue to cause some inflationary pressure. We had our, you know, normal price increase in contractor solutions at the beginning of the year. We've taken multiple price increases within SRS throughout the year. And we mentioned already three times this quarter we've done that, the first of each month, April, May, and June. to offset some of that. I'll come back to that in a minute. Within EBS, as you know, that's done as we bid projects as we go along, those that are longer-term focused. So we continue to see that inflationary pressure. I'd like to think that it's slowed down, but, you know, recent geopolitical impacts in the Middle East have increased the cost of, you know, ocean freight. Shipping, of course, has gone up quite a bit since quarter end. You've certainly seen an input cost on base oils directly within SRS. The supply chain for oil-based products like plastics that infects even contractor solutions has been impactful in Asia. You're not going to see that piece in contractor solutions flow through COGS. As you know, there's a lag of several months before it works its way through. But given that started a couple months ago, you'll start to see some of that in the coming months. We've not taken specific pricing action and contractor solutions yet. Some folks have done that. We're kind of watching to see what we see in the market as well as when we need to do things, as I mentioned, because of that lag effect in COGS. We have done it in SRS because that's more real-time focused. That product turns rather quickly when those input costs come in. Those pricing increases have come through from the suppliers pretty quickly. And I mentioned on the call, the last thing I'll mention there before I get to the last part of your question is You know, the recent 232 impact that affected inputs from Mexico and Canada didn't really impact us much. We had minimal input cost out of Mexico. Some of our recent acquisitions brought just a little bit there. No manufacturing footprint. So that didn't affect us like it affected a lot of the industry that is in Mexico. So we didn't have the impact there. And that doesn't mean that, you know, you don't have the indirect impact, of course. But that direct tariff impact should not impact us. In terms of protecting margin, obviously the long-term goal is to protect margin. We've always said within contractor solutions that our goal is to protect the margin dollars, so we really just pass on what we need to. I think our customers appreciate that. We've been pretty forthright about that in the market. Obviously, over time, your goal is to find ways to reduce costs to get that margin percentage back. You know, something like ocean freight going up the last few months is impacting us. We have found some savings, in fact, in domestic. Our internal group has done a really good job with logistics. But the savings they picked up has kind of been offset by diesel costs going up. So we've been working hard to find ways to cut costs to achieve those margin dollars and get back to the margin percentage, but there's been a bit of a headwind. But certainly the goal would be to get back there. Within SRS, we've, I think, done a more direct job on protecting the margins. You see that we were above 20% and have a long-term goal and plan to be above 20% with the acquisitions. and restructuring we've done. And the team has done a great job protecting margins with pricing there.

Got it. Thank you. I was also wondering if you could go a little bit more into detail on the rationalization of products within Mars, number one, and the wind down of the Greco business. Just what impact will both of those items have on the revenue going forward?

Sure. Let me address Let me address the impact, and Joe may want to talk a little more big picture on Greco specifically, John. You know, the rationalization, when we bought Mars, there was clearly some overlap with legacy products that contractor solutions had. You know, as always with acquisitions, you do a, you know, who's got the better product, the better margins, the better relationships, those kind of things. You know, when we do it on the smaller acquisitions, it's not as impactful, and Aspen didn't have that. There was not overlap, of course. We were not in the oil and air handler business. But Mars, there were several product lines where we both carried that. We knew that going in. So as a result, you kind of pick the best product. And the legacy products, more often than not, were the product line that we kept, obviously, on things like motors, capacitors, those kind of things. Mars had the great industry leadership type product. So you lean towards that. But areas like surge protection, a couple other areas, the legacy products were there. So as a result, you'll see some of that revenue shift for Mars over to contractor solutions. Overall, it's a net positive at the margin line, so it's a good thing for us. But what we tried to preface a little bit in my remarks was you may see Mars will show some revenue deterioration, but the legacy business going forward, you'll have a little more organic growth on contractor solutions. Once we hit the November anniversary, all that's behind us and it's all organic, but we have a couple more quarters until we see that. So overall, it's nothing but a net positive. You'll see some revenue shift from Mars over to legacy. But again, the decision in every case is going to be where's the higher profitability opportunity to the better margins. In terms of Greco, strategic decision that we made to wind down the Canada business, given the market there, I'll let Joe address that. We do think there's a viable business that we can sell in the south, the business we have down in Florida. It's just not core to us. So you'll see revenues come down. I kind of gave you the new numbers, kind of what the fourth quarter looked like with and without. You can kind of run the math there and see what that is. But the net result is, you know, that was a business that simply didn't have the margins that our other businesses, SmokeGuard and Balco, do. And we've always talked about we need to have a 20% plus margin business. in that business, given our consolidated margins are in the mid-20s, of course, and contractor solution well above 30, and the hurdle just wasn't there. Probably makes sense for somebody else for that type of business, but what I gave you for the fourth quarter is a pretty good indicator. Jay, you want to talk about high level on Greco a little more? Yeah, John, the executive summary is that things have changed in Canada since we acquired the Canadian Greco business. Their economy is in a bit of a recession. Their Multi-family housing industry is in a depression. And so that was a big part of our business. About a third of that business, when we acquired it, was done south of the border in the upper Midwest of the United States. That's gotten tougher. Aluminum prices have obviously been a tough input cost. for a while. And so, as James said, rationalization of that business based on all those changes, we do not see that improving meaningfully north of the border for some time. And so, we have a long history of just saying, listen, you either meet our return parameters that we expect here, our expectations, or we That's not a business that's going to be a long-term hold for us. So the North business, the Greco-Canada business will go away. In the South, as James said, it's a good business. They will have attractive returns and attractive margins for a typical building products business. And in someone else's hands, that will be a perfectly fine business. The location in the Sunbelt in Florida, all those things work together to make that a viable business that we will sell and move away and really focus time, attention, and investment in the other two businesses, which, as you can see, have very attractive growth and margin metrics.

Understood. Thank you. If I could sneak in one more. Just with the interest guidance for the year, are you assuming any capital allocation in that, or is that just a run rate from what you did in Q4?

Yeah, John, it's pretty much going to be a run rate. When we look forward, do not forecast acquisitions and don't necessarily forecast outside share repurchases. We've certainly taken advantage of what we thought was a depressed stock price, and you heard what we did in Q4 for the full year. If the market were to have some dislocation, we're certainly not shy about share repurchases. We continue to look for acquisitions, certainly tuck-ins over the next couple of quarters, more importantly, and And we have a bit of a pipeline for those. We're always looking for that. But that generally assumes minimal capital allocations of those type things, John. So it's a bit of a run rate. The only hesitation I'll give is we do assume that if you don't have that capital allocation towards acquisitions and share repurchase, you're going to pay down debt. And right now, 5.5% interest rate or so is not a high interest rate in the grand scheme of things, but we will allocate cash flow towards paying down debt for lack of other capital allocation opportunities. So that kind of goes down each quarter as you go along.

Got it. Thank you very much, guys.

Our next question comes from Tomo Sano with JP Morgan. Your line is now live.

Hi, everyone, and congrats on the quarter, and congrats, Jeff, for the promotion.

Thank you, Tomo. Thanks, Tomo.

Thank you. So on CS business, you mentioned improvement in monthly demand from March to May. How have trends in order sales and shipments developed during this period and I'm also curious with the with the Mars and Aspen acquisitions increasing your mix of repair parts how is the current balance between repair and replacement demand evolving and when do you expect the shift back to our replacement? Thank you.

Yeah Tomo, James thanks for being on as always. Yeah it's a great question I think it's a little early to see are we seeing a shift from repair to replacement I think as existing home sales and new housing starts remain soft for now and interest rates remain where they are with no real expectation of rates going down. And as a follow-up to what John asked, too, we assume a flat interest rate curve for the rest of the calendar year, just kind of given what the dot plot and those things look like. I don't think you see necessarily strong replacement demand coming back. We haven't seen that necessarily yet, but it's May. As we said, we have had nice order volume in March and April as people stocked up. I think, as we said last quarter, I think it's come true that the destocking seems to be behind folks at the distributor level, and we were pleased with that. We saw normal stock up or turning to normal levels in March and April. As we said, the momentum has maintained in May, and we've seen stabilization. Last year was anything but stable. So the word I used, stabilization, was very direct in that respect. Nice order volumes. Team's done a great job getting things out the door. Really proud of that with the distribution system that we have. We talked about what we did at the Distribution Center for Mars in Missouri. Made a lot of changes there, and that team's done a good job. have a lot of boots on the ground helping them there. So I think we're pleased with that. So I'd say it's a little early to get too predictive on what the summer looks like, but so far we have nice momentum. Certainly things got hot rather early and then stabilized a bit. So you had nice demand early and Things are starting to get warm again, certainly down here they are in the sunbelt. In terms of replacement versus repair, the good thing is, to your point, with the acquisitions we made, we've got balance there. Last year we had just bought Aspen in May, didn't have Mars yet until November, so we didn't get to take advantage of that nearly as much. This year, whichever direction it goes, we've got really good momentum. and the ability to meet either demand. But I'd say it's early to tell. I think a lot of folks out there in their earnings calls for their first quarter, at least, talked about, you know, again, early to say whether it's replacement or repair. Again, we're in a good place. Repair seems to have a little more momentum, probably, just given the factors I mentioned at the early part of my answer. But that can only go on for so long. And so is that later this year? Is it next year? Is it a couple years out that replacement demand comes Screaming back, there's clearly a housing shortage. At some point, rates will come down, and we'll be prepared to pivot either direction.

Thank you. Just one more. You talk about the Mars and Aspen synergies are tracking about the initial 10 million target. Could you talk about, realize the synergies and potential upside and breakdown, the source of the synergies, cost versus cross-selling, please?

Yeah, sure. Yeah, so we've always advertised when we made the acquisition and reiterated it last quarter, $10 million of synergies and an inherent 30% run rate EBITDA margin by the time of the anniversary in November. We're ahead of that. We were willing today to talk about $12 million of synergies. We've always had higher internal targets. We've already actioned $10 million and We were ready to publicly talk about 12, and we'll update that again next quarter, but the team's really doing a good job. A lot of those synergies were day one, just overhead that was not brought over, those kind of things. Some of that was some pricing that was implemented since the time of the acquisition, but we're just now starting to really see that cross-selling. Jeff and his team is really doing a good job of earning new business. When you have a market that continues to show volume is down for the year from the peer folks that are out there, the comparators that are out there in the residential HVAC space, Tomo, we've got to do better than that. We've always been measurably above what the market says. And part of that is we're in faster growing markets like ductless and surge protection, those kind of things. But part of it is winning new business and cross-selling of things like Mars, winning new customers for Aspen this year. We bought them in the middle of the busy season last year, so that was hard to do. But that cross-selling impact is real. That was always part of what we talked about. But the biggest part of the synergies and the 30% was really just what we saw the week ago going into it that now we're executing very well. So we expect that business to continue to do really well. They've posted really good month after month. I'm proud of how those acquisitions are going. Getting them integrated in our ERP system in January was really important. We now have the front end of Aspen integrated as well. So from a customer-facing standpoint, that was done literally just a few weeks ago. And then the back end will be integrated later this year. So we've really got the momentum now for Jeff and his team to cross-sell and win over new business with customers that can order anything from Contractor Solutions very easily now.

Thank you. All the best.

Thanks, Tomo.

Our next question comes from Susan McClary with Goldman Sachs. Your line is now live.

Good morning, everyone. This is Charles Brown in for Susan. Thanks for taking my question. First, I'd like to touch on the outlook for contractor solutions. I understand you're not providing guidance per se, but, you know, how do you think about your organic growth rate outlook for 2027? What are some of the puts and takes you're monitoring that could lead your performance to diverge versus, you know, the historical mid to high single-digit cadence that you've provided in the past?

Yeah, Charles, thanks for the question. This is Joe. You know, we are not immune to the market, right? I mean, last year, the OEMs were down pretty dramatically on volume, and we outperformed them meaningfully. Our expectation is we will outperform the market meaningfully. We have an assumption of a market that is flattish, but... you know, we don't have a crystal ball for the market. Our commitment is that we will outperform the end markets we serve by meaningful basis. You saw that this past quarter that we're reporting on, and we would expect that going forward. Beyond that, you know, we're just unwilling to commit to, you know, a guidance range or anything like that. But, you know, We have a long track record of outperforming the markets we serve, and I would expect for you to see that again.

Gotcha. Okay, now that's helpful, Culler. And just talking about price in general, how do you approach your decision to get price in contracted solutions? I understand that you – I don't think you've announced anything, as you mentioned in your prepared remarks – But, you know, are you seeing any trade down in certain category? And how do you make sure you remain competitive as well against your competitors in those markets?

Yeah, Charles, this is James. We certainly watch the market, of course. We act independently. And our decision to raise pricing mid-year is based on input costs. And if we see cost of sales going up, and that's where it is, of course, with input costs going up, I mentioned some, you know, petroleum-related products in that business that are plastic-focused. You certainly have indirect impact of tariffs here and there. So as we see our costs go up, and obviously diesel costs going up in over-the-road trucking for domestic shipments, and the ocean freight's been up 25%, 30% in the last few months since the conflict started in the Middle East, we will push pricing if we need to. As I mentioned earlier, we have a several-month lag. You know, by the time something gets on a boat overseas and gets over here and works its way through revenue, that's a few months. So... While we certainly see that coming in certain areas, you don't have to react the next day and knee-jerk. We haven't found ourselves needing to do that, and customers appreciate the thoughtful approach. So, literally, if we need to push pricing, we will. We've seen some folks do that. As I mentioned, the 232 tariff impact that came out a few weeks ago, some of the folks in the industry have gone ahead and pushed price because they had significant Mexico input costs. We do not have that, so we did not need to react to that. But we watch the market. We watch competitively. I don't think we've seen a trade down in products. We always say that we've got the best in class products. We're the highest quality product out there, and as a result, you pay a premium for that, and our customers will do it because the contractors know our brand names and know our products, and we believe strongly in that. So we will very carefully and thoughtfully push pricing as we need to, but no, we've not announced anything to date.

Gotcha. Okay, that makes sense. And maybe lastly, can you talk about what you're seeing in terms of M&A pipeline given the macro volatility you're seeing today? And also more broadly, how do you think about using excess capital in terms of capital allocation and share repurchases?

Sure. This is Joe. saw a very active year last year in M&A, not only for us, but also in the industry. As we have talked about in some depth, there were seven or eight potential transactions last year that we saw coming to market, and we were very active. I would say we continue to be committed to digesting these large acquisitions that we have done and getting them fully integrated, fully executing on all the requirements the synergies that we've committed to, getting to the margin rates that we've committed to, and making sure that our customers are well taken care of. So that's priority number one. That's the most creative thing we can do right now. Secondly, I would say we continue to be active. We closed on an acquisition called Duck Strip this last quarter, and we continue to invest. We continue to invest in our share repurchases. So capital allocation is a top priority here. We continue to be active on all fronts. I would say that the industry has not had a major M&A going on yet this year. There's been an IPO. There's been some other talk of other capital markets transactions, but no big changes. transactions that we have passed on or anything like that. So we're ready, willing, and able to continue, especially, as James mentioned, on the smaller add-on bolt-on acquisitions. Those are very accretive and easy to integrate. And so those are a top priority. But investment of the of our excess cash will be, you know, all the levers are available to us. There'll be debt pay down. There will be share repurchases at appropriate levels. And you've seen that this quarter. And we continue to be open for business on the M&A front.

Got it. Thank you for the caller, guys, and good luck with next quarter.

Thank you.

Thanks, Charles.

Our next question comes from Tim Wojcic with Baird. Your line is now live.

Hey, everybody. Good morning. Nice job. Thanks. Maybe just the first question on kind of pricing in the contractor business. I think just kind of back to the envelope math, you're probably up mid-single digits, maybe a little bit better in the March quarter. Is that a reasonable kind of run rate that we should think about for fiscal 27, or do you actually see a little bit of a, I guess, step up as maybe, you know, kind of the quarterly run rate kind of annualizes, you know, into the June quarter.

Yeah, that's the neat thing else, Tim. You're in the ballpark. Yeah, it's obviously a little different product to product. And with the acquisitions we brought in, kind of how that lapsed. But yeah, mid-single digits is appropriate for that, you know, absent any future action later in the year.

Okay. Okay. And then I guess just bigger picture, if we kind of step back and we think about, you know, kind of the portfolio with Mars and the portfolio with Aspen now, is there any examples that you could give us just in terms of, you know, the cross-selling opportunity or just kind of what you're hearing from customers about buying more from CSW and RectorSeal? Has there been... any sort of kind of tangible improvement that you could talk about, you know, related to those conversations?

You know, I wouldn't give specific examples, but I would certainly tell you that as Jeff and his team presented their budget for the year a couple months ago, you know, we assume, as Joe talked about and we talked about, the market's relatively flat this year. You know, I think third-party folks and other folks in the industry, the bigger folks on the residential side especially, which we have to parse out, as you well know, as well as anybody. Expect the market to be flat at best, maybe. And as Joe said, we expect to do better than that. And that's not just magically done. That's done by leaning into higher growth markets like Douglas and new product lines like surge protection and indoor air quality. But it's also done with new business. And Jeff and his team have targets for new business. Some of that's the cross-selling of Aspen and Mars. Some of it is simply continuing to win over businesses. make it easier for our customers to do more and more with us. And they've had to deliver on that, and they already have. We've executed several, converted several customers here before the busy season this year that were on their list last year and some that were on their list this year, of course. You know, getting Mars converted over to the ERP system in January prior to the busy season, now getting Aspen converted over at the beginning of May is a big deal. Customers can now log on to the system and order any product in the portfolio, you know, You know, in terms of tangibles, again, I won't mention specific customers, but we continue to win business with folks more and more. Jeff's got great stories there all the time. He and his team are really, really knocking it out of the park in that respect. You know, we've got a customer, you know, that a few years ago we weren't even in their top 20, and right now we're number one. And that's a result of bringing in these acquisitions, making it easier to do business with, making it easier for them to to buy more product, implementing some AI tools so they can track their orders better, we can manage inventory better, we can collect receivables more efficiently, all these types of things that we've implemented without massive investments. We've stayed technologically ahead of everybody else. We've done a great job delivering what they need and continuing to give them more products they can put in their basket and get a pallet or a parcel truckload or a truckload instead of having to buy from three or four different vendors. Tim, I think that's a really important vein that we're mining pretty successfully here, which is converting our existing customers to these new product categories that we're acquiring. That's an organic growth opportunity that is very creative for us and works really well both for our customer and for us, and I think you're going to be hearing more about that.

Okay. Okay, great. And then just I'll take the last one. And just, I know there's a, you know, kind of year over year, you know, dilution from from the acquisitions, you know, the last couple quarters, as we anniversary Aspen, and then, you know, kind of later in the year anniversary Mars, you know, would we expect to see margins expand in the back half of the year in contractor as as that occurs?

You know, let me separate those. We've said all along that we've got a little bit of improvement we can do in Aspen. Some of that's obviously in the last year taken effect. But Aspen's going to be lower than your contractor solutions margins. You know, that's a mid-20s business. You know, we bought it in the lower 20s. Getting it to the mid-20s, you know, kind of the goal, maybe we continue over time. working on that as we put more and more through that facility. The team's doing a great job with throughput and those type things. So I think you've got incremental opportunity with Aspen, but Aspen's going to be dilutive just kind of overall. Mars, you know, we talked about Mars being a mid-20s business when we bought it, getting up to 30% run rate on the anniversary. We're going to have months when it's well above that, as you can imagine, in the busy season, especially if the repair market stays really strong. You'll have months seasonally where it bumps around because it doesn't do as much in the winter months. So that's going to help. Now, Does Mars at 30% become accretive at some point to the historical kind of 32%, 33%? We'll see. We're going to continue to work on that. So we wouldn't promise that. You're clearly going to have accretion to the consolidated margin. But to your point, I think you have the opportunity for the contractor solutions margin to come up during the year as you see that. Not necessarily poke its head above where it was before. You've got so many other factors with tariffs and commodity prices and those kind of things. And you know, if we see, you know, petroleum prices ease, obviously there's an indirect impact there that can help us. But yeah, I think we should see contractor solutions margins have opportunity over time, but it's going to bounce around given the nature of these acquisitions.

Okay. Okay. Sounds good. Good luck on the, uh, thank you.

We have reached the end of the question and answer session. I'd now like to turn a call back over to Joe arms for closing comments.

Great, Rob. Thank you. We really appreciate everyone joining us for this call. Appreciate your support and look forward to reporting again relatively soon after Q1. So thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.