CSW Industrials, Inc. 2027 Q2 Earnings Call

Thank you, Jasmina. Good morning, everyone, and thank you for joining CSW Industrials Fiscal 2027 second quarter earnings call. Joining me today on the call is Joseph Armes, our Chairman, Chief Executive Officer, and President of CSW Industrials, and James Perry, our Executive Vice President and Chief Financial Officer. Earlier today, we issued our earnings release, updated investor relations presentation, and quarterly report on Form 10-Q. Each is available on the investors section of our website at www.ir.csw.com. Today's call is also being webcast, and replay information is included in the earnings release. Before we begin, I would like to remind everyone that today's discussion will include forward-looking statements. These statements reflect our current expectations and assumptions and are subject to various risks and uncertainties that could cause actual results to differ materially.

Additional information about these risks is included in our earnings release, our comments on today's call, our annual report on Form 10-K, and our other filings with the SEC. Except as required by law, we do not undertake any obligation to update any forward-looking statements. I will now turn the call over to Joe.

Thank you, Alexa, and good morning, everyone. Today, we reported all-time record results in several metrics, including revenue, adjusted EBITDA, adjusted EPS, and cash flow for the first half of Fiscal 2027, underscoring the wisdom of our strategy, the excellence of our execution, and the resilience of our business. Recent acquisitions have strategically expanded our product portfolio and enhanced our growth trajectory. Consistent with our enduring capital allocation strategy, we prioritized debt reduction during the quarter, paying down $91 million in outstanding debt and further de-leveraging the company. CSW also returned a total of $10.7 million in cash to shareholders, including $5.8 million in open market share repurchases and $4.9 million in dividends. Our net debt to EBITDA ratio declined from 2.37 times at the end of Fiscal first quarter of 2027 to 2.1 at the end of the Fiscal second quarter, driven by lower net debt and EBITDA growth.

Our strong balance sheet and record cash flow continues to give us the flexibility to pursue investment opportunities as they arise. End market activity followed a more typical seasonal pattern during the quarter, despite continued macroeconomic uncertainty. All three of our business segments delivered impressive top-line results when excluding the Greco business from EBS, and we achieved consolidated EBITDA margin expansion. Our Contractor Solutions segment delivered strong organic revenue growth of 13%, accompanied by 31.5% adjusted EBITDA growth. The addition of MARS and Aspen has broadened our product portfolio, expanded the repair solutions we offer, and increased our scale. Together, these capabilities position us to continue to serve customers more effectively and capture additional share of wallet growth through cross-selling. We continue to expect this segment to outgrow its end markets served and deliver healthy mid- to high single-digit organic growth through the cycle.

Our Specialized Reliability Solutions segment delivered record results across the board, including EBITDA margin above our 20% target for this segment. The integration of the two recent acquisitions continue to drive accretion. Adjusted EBITDA margin expanded 490 basis points, and we expect margin performance to remain strong for the full fiscal year. Strong organic revenue growth of 12.7% was a result of pricing discipline, volume growth, and strategic product placement and availability. We continue to advance the planned exit of the Greco businesses within our Engineered Building Solutions segment. Excluding the Greco businesses, the segment delivered organic revenue growth, a solid EBITDA margin, and exited the quarter with a healthy order backlog and increasing book-to-bill ratio. We remain confident in this segment's outlook, differentiated product offering, and margin trajectory.

At this time, I will turn the call over to James for a detailed review of our financial performance, and following his update, I will return with some closing comments.

Thank you, Joe, and good morning, everyone. As Joe noted, CSW delivered another outstanding quarter, highlighted by record results and continued progress integrating our recent acquisitions. I will review our consolidated performance, segment results, cash flows, and balance sheet. For the second quarter of fiscal 2027, consolidated revenue increased to $84 million, or 31% year-over-year to a record $361 million. Growth was driven by strong organic performance and contribution from recent acquisitions. Consolidated organic revenue growth was 10.2%, reflecting impressive double-digit growth in the Contractor Solutions and Specialized Reliability Solutions segments, as well as growth in the Engineered Building Solutions businesses that we will retain following the planned exit of the Greco businesses. Adjusted gross margin was 42.1%, compared with 43% in the prior year period, a decline of 90 basis points, primarily attributable to increased ocean and domestic freight expense, as well as rising raw materials costs.

Although we were impacted by this inflation as well as ongoing tariffs, planned pricing actions across our businesses offset most of the dollar increases. Consolidated adjusted EBITDA for the fiscal second quarter rose to a record $97 million, an increase of $24 million or 33% from the prior year period, reflecting stronger market demand and the earnings power of our expanded product platform. Adjusted EBITDA margin expanded 50 basis points to 26.8%, supported by the contribution from recent acquisitions, strategic pricing actions, synergy and restructuring realization, and disciplined cost controls as we grow. These results highlight the scalability of our business model and the margin opportunity embedded in our product portfolio. Adjusted EPS for the fiscal second quarter was $3.66, an increase of 24% from the prior year period.

As previously communicated, EPS growth trailed EBITDA growth primarily due to net interest expense, which increased by $11.1 million, reflecting the higher debt balance associated with significant acquisition activity and share repurchases over the past year. Turning to items excluded from adjusted EPS, the fiscal second quarter included, on an after-tax basis, $11.5 million or $0.70 per share of acquired intangible amortization and $0.9 million or $0.05 per share of acquisition-related integration costs. Contractor Solutions' fiscal second quarter revenue was $286 million, accounting for 78% of our consolidated revenue and representing growth of more than 37% from the prior year quarter. Acquisitions contributed $51 million or 24% of growth, while our organic growth contributed $26.8 million or an impressive 13%. Contractor Solutions delivered its third consecutive quarter of organic growth, supported by both pricing and volume.

Of note, we now estimate that approximately 75% of this segment's revenues are tied to replacement and repair demand while revenues tied to new housing comprises only about 25%, positioning us very well in various economic cycles. Contractor Solutions generated adjusted EBITDA of $89 million, representing a margin of 31%, compared with $68 million and a margin of 32% in the prior year period. The year-over-year margin decline primarily reflected higher freight and raw materials cost, partially offset by pricing actions. Of note, looking ahead, we announced a mid-single-digit price increase in this segment just this week to offset the rising costs. It will go into effect later this calendar year. As costs have risen quickly in recent months, there's a bit of a timing mismatch before pricing takes effect to offset cost. I would like to provide one final update on the MARS synergies.

We are approaching a total of $15 million in synergies related to the acquired MARS business, surpassing our originally stated target of $10 million. All of the synergies have been actioned and most have been realized as our first year of ownership comes to a close. Specialized Reliability Solutions revenue increased 28% to $50 million. Acquisitions contributed $5.8 million or 15%, while organic growth contributed $4.9 million or 13%, driven by volume growth, pricing actions, and our continued focus on product availability and customer service. Adjusted segment EBITDA in the second quarter was $11 million, an increase of 66%, and adjusted EBITDA margin expanded 490 basis points to 21.5%. The improvement reflects restructuring savings from actions taken earlier this calendar year, multiple strategic pricing actions, favorable product mix, and contribution from the higher margin acquisitions.

Integration of the two businesses acquired in the fiscal third quarter of 2026 is now substantially complete. In response to rising costs for certain petroleum-based inputs in the Specialized Reliability Solutions segment, we have announced four separate price increases during fiscal 2027, including the most recent increase earlier this month. We continue to monitor input costs closely and will take additional pricing as appropriate. Demand has remained resilient to date in this segment, and in fact, we recorded our highest ever incoming order day in early October. Within Engineered Building Solutions, we previously announced our plan to sell the Greco U.S. business and strategically exit the Greco Canada business. The Greco U.S. business was classified as held for sale as of March 31, 2026. We will continue to update our progress on this as warranted on future earnings calls.

Excluding the Greco businesses, the Engineered Building Solution segment revenue was $22.7 million, an increase of 2.4% from the prior year period. Adjusted EBITDA was $4.4 million, with an adjusted EBITDA margin of 19%, compared with 22% in the prior year. The remaining EBS businesses continued to perform well, supported by a trailing four-quarter book-to-bill ratio of 1.05 to one, and a healthy backlog, despite a shorter historical book-to-bill cycle, reducing the amount of revenue captured in the reported backlog. We have raised our prices as materials and freight costs have risen, and expect to have another round of price increases in the near future across all of our product lines. Turning to consolidated cash flow. Operating cash inflow reached a record $95 million in the fiscal second quarter, compared with $62 million in the prior year quarter.