Greetings, and welcome to CSW Industrials Fourth Quarter and Full-Year Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I'd like to turn the conference over to your host, Alexa Huerta. Thank you. You may begin.

Thank you, Rob. Good morning, everyone, and welcome to the CSW Industrials fiscal 2023 fourth quarter earnings call. Joining me today is Joseph Armes, Chairman, Chief Executive Officer and President of CSW Industrials, and James Perry, Executive Vice President and Chief Financial Officer. We issued our earnings release, presentation and Form 10-K prior to the markets opening today, which are available on the Investor portion of our website at www.cswindustrials.com. This call is being webcast and information on accessing the replay is included in the earnings release. During this call, we will make forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results could materially differ because of factors discussed today in our earnings release and the comments made during this call as well as the risk factors identified in our annual report on Form 10-K and other filings with the SEC. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Joe.

Thank you, Alexa. Good morning. And thank you for joining our fiscal fourth quarter conference call. I'm pleased to report that, in fiscal 2023, we continued our successful track record of delivering exceptional performance. Our commitment to treat our employees well, to serve our customers well and to manage our supply chains effectively drove exactly the kind of growth in revenues and profitability that we had hoped for. Fiscal 2023 represented another record year of revenue, EBITDA and earnings per share. Today, we reported record revenue of $758 million, 21% growth over the prior year. Organic growth represented 15.3% of the total growth, with the balance coming from our recent acquisitions, all of which are reported on our Contractor Solutions segment. EBITDA reached a record $174 million or 31% growth over the prior fiscal year. Finally, our record EPS was $6.20, an increase of 41% compared to $4.39 as adjusted in the prior fiscal year. These record results are attributable to our diversified business model, disciplined capital allocation and commitment to operational excellence, which drove impressive operating leverage despite global and financial market uncertainties. As compared to the prior year, sales increased in all three segments, driven by positive pricing actions and growth from our acquisitions. Our Contractor Solutions segment achieved record sales of $514 million, including record HVAC/R end market sales of $418 million, an $83 million or 25% increase in our HVAC/R sales, including organic growth of $51 million despite a slight decline in unit volume. Our Contractor Solutions team deserves recognition for exceeding our expectations again this year, while successfully integrating multiple acquisitions and managing significant challenges presented by inflation and supply chain constraints. I want to congratulate and thank Don Sullivan and his team, including Jeff Underwood, the segment's Senior Vice President for Sales and Marketing, for their extraordinary performance in fiscal 2023. In recognition of this team's hard work, I'm pleased to share that we were recently named Supplier of the Year by Johnstone Supply, which is their only external vendor award that is given each year. Our Engineered Building Solutions segment grew by $7 million or 7%. Scott Stratton and his team effectively promoted existing and newly developed products and maintained market share gains due to competitive lead times, successfully overcoming the commercial construction end market decline during our fiscal 2021 and 2022. As a result of the EBS team's productive commercial efforts, this segment's backlog, as of the end of 2023, achieved an all-time high, and then reached another all-time high by the end of April, signaling a tailwind into fiscal 2024. Our Specialized Reliability Solutions segment achieved record revenue of $147 million, which represents $31 million of organic revenue growth or 27% as demand strengthened in all end markets served and commercial and operational execution improved significantly. In fact, segment revenue in the current fiscal year exceeded fiscal 2021 by an impressive 88% or $69 million. Since Mark Bass joined CSWI in June of 2021, he and his team have enhanced our competitive position within the marketplace, and have strategically addressed the demand for our market-leading, highly specialized products. On the heels of this solid execution in fiscal 2023, we remain confident in our ability to achieve further growth and strong margins in fiscal 2024. During the last fiscal year, we executed on all aspects of our capital allocation strategy, investing $58 million in acquisitions, including Falcon, Cover Guard and AC Guard, as well as $14 million in capital expenditures. We returned an aggregate of $46 million of cash to our shareholders through our share repurchase program and dividends. Subsequent to fiscal year-end, the board approved a 12% increase in our quarterly dividend to $0.19 per share, signaling our confidence in the business and in our ability to generate cash. On the M&A front, I'm pleased to report that all of our acquisitions during fiscal 2023 are progressing well. I'm impressed with the efficient integration of all of our acquisitions, and our ability to offer these new products to our broad base of distribution customers, adding vitality to our portfolio of products. Our M&A strategy remains active with many of the best ideas and opportunities generated organically from within our organization. Our capital allocation decisions remain focused on maximizing shareholder value on a risk-adjusted returns basis. This disciplined approach favors our current platforms, serving the same customers and end markets through our extensive distribution channels. Inorganic growth remains a key strategic initiative, and we continue to maintain an active pipeline of acquisition opportunities. The strength of our balance sheet and access to capital provides ample capacity to act decisively and quickly on acquisitions as opportunities arise. Each quarter, we provide an update on our commitment to treat our employees well. This quarter, I would like to focus on our pay-for-performance culture. For fiscal year 2023, our Board of Directors has once again approved annual performance bonus and profit sharing incentive payments. As we have reported previously, all domestic employees are eligible participants in our Employee Stock Ownership Plan, or ESOP, which results in direct alignment of interests with our shareholders. Our profit-sharing programs in fiscal 2023 included an 8% ESOP contribution, plus a 3% discretionary 401(k) contribution, which is in addition to our standard 401(k) participant match of 6%. Of note, our 401(k) plan also boasts a 96% participation rate, which is significantly higher than the recognized industry benchmark. Providing for a safe, secure and dignified retirement, along with aligning interests with our employees through our competitive profit-sharing programs, are some of the ways we strive to be an employer of choice, attracting and retaining quality talent. In fact, as a result of maintaining a consistent focus on our employee-centric culture, we continue to exceed industry standards in retention rates. Recently, approximately 79% of our employees participated in our fiscal 2023 engagement survey conducted through Great Place to Work, which showed that our engagement scores remained high, and we were pleased to announce, in January of this year, that we received the Great Place to Work certification. Our products remain in high demand. Our team is working diligently to treat our employees well, serve our customers well, and manage our supply chains effectively. I truly believe that our collective efforts have positioned the company for long-term sustainable growth and profitability. At this time, I'll turn the call over to James for a closer look at our results.

Thank you, Joe. And good morning, everyone. Our consolidated revenue during fiscal fourth quarter 2023 was $196 million, a 13% increase compared to the prior-year period. Consolidated gross profit in the fiscal fourth quarter was $85 million, representing 18% growth, with the incremental profit resulting predominantly from pricing initiatives and the multiple acquisitions that we made during the year. Gross profit margin was 44% as compared to 42% in the prior year period. The gross profit margin increase resulted predominantly from positive pricing actions across our three segments. The operating expense margin, defined as operating expense as a percentage of revenue, was 23%, an improvement of 180 basis points compared to the prior year period. Fiscal fourth quarter EBITDA increased 33% to $49 million as compared to the prior year period. Our EBITDA margin was 25% as compared to 21% in the prior year fourth quarter, with the improvement due primarily to the higher gross profit margin and discipline around operating expenses. Reported net income attributable to CSWI in the fiscal 2023 fourth quarter increased $27 million or $1.74 per diluted share compared to $18 million or $1.17 in the prior year period. Now, I will transition to a discussion of our segments. Our Contractor Solutions segment, with $134 million of revenue, accounted for 68% of our consolidated total and delivered $14 million or 11% of growth as compared to the prior-year quarter, comprised of organic revenue growth of $9 million and inorganic growth of $4 million from our recent acquisitions. Quarterly segment EBITDA was $43 million, a 32% margin, compared to $35 million, a 29% margin, in the prior year period. This margin growth is a testament to the disciplined pricing actions and strong operating management in this segment. Our Engineered Building Solutions segment revenue grew to $25 million, a 5% increase compared to $24 million in the prior year period. EBITDA was $3.1 million, or 12% of fiscal 2023 fourth quarter revenue, a 43% increase from $2.2 million or 9% of fiscal 2022 fourth quarter revenue as a favorable project mix was further supported by a reduction in operating expenses. Bidding and booking trends continue to demonstrate strength as our year-to-date bookings and backlog increased by approximately 24% and 36%, respectively, as compared to the prior year period. As at the end of the fiscal 2023 fourth quarter, our book-to-bill ratio for the trailing four quarters in this segment improved to 1.2 to 1, leading to a record backlog. Our Specialized Reliability Solutions segment posted organic revenue growth of $8 million or 25% due to incremental sales volumes from both our legacy Whitmore business and the Shell-Whitmore joint venture along with pricing actions that continue to provide tailwinds. Segment EBITDA and EBITDA margin improved significantly to $8.2 million and 21% in the fiscal 2023 fourth quarter compared to $5.3 million and 17% in the prior year period. This represented impressive EBITDA growth of 55%. Turning now to our fiscal full year results. We achieved a record consolidated revenue of $758 million, representing 21% growth as compared to fiscal 2022, with all segments reporting organic growth. Consolidated gross profit in the current year was $318 million, representing 24% growth, with the incremental profit resulting predominantly from pricing initiatives and the multiple acquisitions that we made during the year. Gross profit margin of 42% was on par with the adjusted gross profit from the prior year. Despite the inflation in acquisitions, the operating expense margin of 24% showed an improvement of 170 basis points compared to the prior-year period, demonstrating the discipline and effectiveness in our management of operating expenses. In the current year, we reported a 31% increase in EBITDA to a record $174 million, equating to a margin of 23% as compared to an adjusted $133 million and 21% in the prior year. These results translated into record EPS of $6.20, an increase of 41% compared to an adjusted $4.39 in the prior year. Our Contractor Solutions segment, with $514 million of revenue, accounted for 68% of our consolidated total and delivered $97 million or 23% growth. This was comprised of organic growth of $61 million and inorganic growth of $36 million from our acquisitions. Segment EBITDA increased 24% to $153 million, a 30% margin, compared to $124 million and a margin of 30% in the prior year. Continuing to our Engineered Building Solutions segment, which accounted for approximately 14% of our consolidated total, with $104 million of revenue in the current fiscal year. This reflected a 7% increase over the prior year. Segment EBITDA was $14 million, a margin of 14%, an improvement from segment EBITDA of $13 million and a margin of 13% in the prior year period. Our Specialized Reliability Solutions segment posted impressive organic revenue growth of 27% or $31 million due to incremental sales volumes, driven by strengthening end market dynamics, price initiatives and increased volumes to the Shell-Whitmore joint venture. Segment EBITDA and EBITDA margin improved to $26 million and 18% compared to $15 million and 13% in the prior year. On our fiscal 2023 first quarter call, we affirmed our commitment to strong free cash flow generation, prudent working capital management, and maintaining sufficient liquidity to support our strategic objectives. We ended the fiscal 2023 year with $18 million of cash and reported cash flows from operations of $121 million, a 76% increase over the prior year. This was due to increased profit and improved management of working capital as compared to the prior year. For the year, our free cash flow, defined as cash flow from operations less capital expenditures, was $108 million or $6.91 per share as compared to $53 million and $3.38 per share in fiscal 2022. Our free cash flow conversion rate, defined as free cash flows as a percentage of net income, was 111% in fiscal 2023, an improvement from the conversion rate of 79% in the prior year. At fiscal year-end, we had $253 million of borrowings outstanding under our $500 million revolving credit facility, which resulted in a borrowing capacity of $247 million. This resulted in a leverage ratio in accordance with our credit facility of approximately 1.3 times debt to EBITDA, well within our stated range of 1 to 3 times. This provides us with ample liquidity and flexibility to execute on our organic and inorganic strategic initiatives. In early February of this calendar year, we entered into an interest rate swap, which fixes the SOFR portion of the first $100 million of our revolver borrowings at 3.85% through May of 2026. This compares favorably to the current comparable base rate of over 5.2% and settles monthly. This swap extends to the current expiration of our revolver in May of 2026. This fiscal year, we invested $58 million of acquisition capital. We returned $36 million to shareholders through the share repurchase, reducing our share count by approximately 336,000 shares. We did not repurchase any shares under our program during the fiscal fourth quarter. We have $100 million remaining on our current share repurchase program at the end of the year. As part of our broad capital allocation strategy, we remain committed to opportunistic market repurchases, guided by our intrinsic value-based model. We have 15.5 million shares outstanding, approximately the same total as when we went public over seven years ago. This is impressive, given that we have approximately tripled our EBITDA since that time, and have used our shares in acquisitions and in our equity compensation programs, but have repurchased a similar number of shares to what we have used. The company's effective tax rate for fiscal 2023 was 23.3% on a GAAP basis, which aligned with the company's previous expectation of 23% to 24% as discussed during our fiscal 2023 third quarter call. We currently expect a tax rate of approximately 25% for fiscal 2024. As we look to fiscal 2024, we expect to have revenue growth across all three segments and at the consolidated level, which, when coupled with meaningful operating leverage, will result in solid year-over-year EBITDA and EPS growth. As we look at our cadence of earnings over the four quarters, we expect our normal seasonality with the fiscal third quarter ending in December being the lowest level of earnings. With higher interest rates than last year, we expect our interest expense in the first two quarters will be higher than the prior year periods, and the year-over-year comparison for that line item for the back half of the fiscal year will depend on our outstanding level of debt. Our operating teams have done a great job maintaining the pricing that we achieved during the rapid inflation of the last several quarters. As we have seen reductions in the cost of certain inputs, including ocean freight, this leads to higher margin potential. We will continue to keep a close eye on our costs and are confident in our ability to achieve the profitability and margins that we and our shareholders have come to expect. As we look at our three operating segments, we expect revenue and profit growth in our Contractor Solutions segment to continue outpacing the categories we serve, driven by the pricing actions we have taken and maintaining, as well as adding new customers and selling more of our products to existing customers. While expectations, as reported by the public HVAC/R OEM companies, are for unit volumes to decline this year, our team is committed to deliver top and bottom line growth through strong commercial and operational execution. With the Engineered Building Solutions backlog at all-time highs, our team is focused on execution and expect to outperform the construction end market, while growing revenue and improving margins. Our Specialized Reliability Solutions segment expects to deliver another year of top line growth, although at a slower rate than the exceptional growth of the last two years, returning to our historical GDP-plus growth norms, while expanding the strong improved margins we achieved in fiscal 2023. Before I turn the call back to Joe, I'd like to offer an enthusiastic welcome to our new Vice President of Investor Relations and Treasurer, Alexa Huerta, who started with CSW just this week and opened our call today. Alexa brings a tremendous background of financial and investor relations experience to us. I look forward to introducing her to our investment community in the coming days, weeks and months as we meet with you. With that, I'll now turn the call back to Joe for closing remarks.

Thank you, James. As we conclude one fiscal year and begin another, I want to take a moment to mention a few metrics with a longer-term perspective. Our revenue compound annual growth rate for fiscal years 2018 through 2023 was 18%. Our adjusted EBITDA CAGR was 22%, with an adjusted EBITDA margin during this period of 22% and our adjusted EPS CAGR was 24%. The revenue growth, of course, has included acquisitions, and we would expect to continue to grow inorganically through acquisitions, thereby supplementing our organic growth. All of this has resulted in a total shareholder return of 377% since we went public in the fall of 2015, creating tremendous value for all of our shareholders. As we look ahead, we believe that our attractive and diverse end market exposure, strong customer relationships, enviable distribution channels, best-in-class products, with hard-earned reputation for quality and innovation, and a healthy balance sheet to execute on growth opportunities gives us every reason to be enthusiastic about fiscal 2024. And as always, I would like to close by thanking all my colleagues here at CSWI, who collectively owned 3.5% of CSWI through our Employee Stock Ownership Plan, as well as all of our shareholders for their continued interest in and support of our company. With that, operator, we're now ready to take questions.

Our first question comes from Jon Tanwanteng with CJS Securities.

Joe or James, just wanted to get a little bit of clarification. I think the press release said you expected margin growth in each of the three segments going forward. Is that kind of a directional guidance for fiscal 2024 and is that off of the 22% EBITDA margins you did for the year in 2023?

This is Joe. We have a long history of not providing guidance unless there's some correction that needs to be made or some misperception in the market. So this is very conceptual. Our commitment has always been to outpace the top line growth for the markets we serve, and then always grow profits faster than revenue. So that's all the guide we're willing to give at this point. James, you want to add anything?

We wanted to be clear that we do expect to grow revenue across the segments, as I mentioned in my remarks, and grow the margin. We've seen some nice momentum from a couple years ago. Jon, we've done a great job in our businesses keeping up with inflation through pricing, and we took a bit of a margin hit there for a year or so as we were catching up to that. But we've turned that corner now. We've started expanding margins again, and we expect that momentum to continue.

Can you just talk about the macro assumptions underlying your outlook as we go forward? I know several economists and other firms have called for a recession. There's always a risk of default coming. What are the thoughts on how broader demand could affect your business and are you planning for that at all?

Jon, we always keep an eye on that. The best thing is not necessarily television and newspapers, but talking to our customers and suppliers and understanding conditions on the ground, and our commercial and operating teams do a tremendous job of that across the segments. We continue to see nice demand. Orders have been good the last few months across the board. Looking at Contractor Solutions, the public OEMs in the HVAC space are looking for unit volume slowdown this year as you come off a couple of years of strong comps. They've generally talked about mid to high single-digit declines, and we expect to outperform that. We expect to grow revenue through the pricing we have and other methods and certainly grow profit at a higher rate. One thing you're seeing is existing home sales have slowed a bit because homeowners are reluctant to give up good mortgage rates. We've seen some good numbers in new housing starts. The good thing about our business is we're not as tied strictly to the OEM market. Our products go into repair and maintenance, replacement and new units, and we're continuing to penetrate with the acquisitions we've made, covering more of the water heater and HVAC system components. In Engineered Building Solutions, Scott and his commercial team have targeted areas with opportunity: institutional construction like hospitals, airports and education are less dependent on equity returns and less sensitive to interest rates. Multifamily, especially in Canada with our Greco business in Ontario, continues to be a strong area. We've grown backlog as a result and will continue to focus on those bright spots. In Specialized Reliability Solutions, Mark and his teams have leaned into energy markets. Our Shell-Whitmore joint venture continues to gain momentum in rail and mining in North America and the team has made international progress where they see opportunities. So while we always watch the macroeconomy, we're much more micro-focused. Our businesses have done a great job shifting commercial and production efforts to areas with the most opportunity.

Jon, the only thing I'd add is about the 'R' word, recession. We can't predict it, but we are absolutely prepared. We are diversified in end markets, across our product portfolio and businesses, we have a strong balance sheet and strong cash generation. Many of our products are consumable and non-discretionary, which makes us more resistant to cycles. Those attributes make us especially resilient and prepared regardless of economic cycles.

Do you have a snapshot of the pricing versus input spread that you have in the fiscal first quarter compared to where you were in Q4? And as a supplement, do you still have high-priced inventory coming through? Will that be a tailwind as you come off of that going forward?

If you look at the margins in each segment over the cadence of last year's earnings, you can see the margin improvement come into fruition. There is a lag on inventory, especially inventory that comes across the ocean, so it can be a couple of quarters. As you went through the calendar year last year and our fiscal year late in the year, some of that higher-cost inventory was still coming through, but most of that's worked through the system now. There's always some inventory exposure, but generally speaking we have a good level of inventory turns. Ocean freight has been down for a while, and that's working its way through the system. Our last significant price increases tied to inflation were last summer, so we started lapping that pricing a few months later. We also had our usual seasonal and annual price increases earlier this calendar year. In terms of high-cost inventory, there may be a little in the system, but most of it has been worked through, which supports our confidence in margin improvement as a tailwind.

Our next question is from Alex Hatman with Sidoti & Company.

This is Alex on for Julio Romero. Congrats on the results. My first of two questions is about operating leverage and the joint venture. Can you talk to the operating leverage that you've seen come to fruition so far and what your expectations are going forward?

As we've discussed, we continue to pick up volume through the Shell-Whitmore joint venture. It's been a nice partnership. It took a while to get the formulations and strategy together, and we're a couple of years into that. We're seeing nice momentum and profitability coming through over the last few quarters. That facility has room to grow; the Shell joint venture has helped with absorption and contributes to the joint venture's overall margins. At Whitmore, we can add equipment and volumes, which should continue to provide profitability opportunity through absorption of volume.

My second question is regarding the Contractor Solutions segment. Can you talk about how much of the driver was maintaining price versus benefiting from lower costs for this quarter and whether you can see that continuing?

It's hard to quantify exactly and break it into neat pieces, but maintaining price has been very important. We had our annual price increase during the fiscal quarter as normal in late winter and early spring. Our team has done a tremendous job maintaining pricing where it needs to be. We've talked about our position in the value chain and our ability to do that while maintaining and strengthening customer relationships. Regarding costs, we've seen some input costs come down—particularly container rates, which are back to levels from a couple of years ago—and we rely heavily on ocean freight for production. So it has been a combination of maintaining price and seeing costs decline that led to margin expansion. Each product category has its own dynamics, but overall the combination of pricing and lower costs delivered a stronger gross profit and, with operating expense leverage, an improved EBITDA margin.

My last question is on the financials. You touched on inventory, but would love to hear more about efforts to reduce working capital and how much more runway you think you have for improvement there.

I'm proud of the team. There's been a concerted effort across all three components of working capital. For accounts receivable, the team has focused on collections, ensuring invoices are issued timely and accurately, and working collaboratively with customers to ensure timely payment. We're seeing momentum and shaving days off receivables. For accounts payable, we treat vendors fairly and pay when appropriate, but where we see opportunity to extend terms, we've leveraged that. Inventory is the big piece. We continue to hold strategic inventory for certain products produced overseas, both our own and third-party production, because delays can happen. We won't revert to pre-acquisition inventory levels because since acquiring TRUaire we now have an internal operation overseas, notably in Vietnam, for Contractor Solutions production. So we'll hold more inventory than before but continue to look strategically at where to produce and procure products. While days continue to improve, there may be a bit more improvement left, but I'm pleased with how teams have managed working capital so we have cash available for attractive returns, both organically and inorganically, while ensuring we have product in stock to avoid missed sales.

Our next question is from Jon Tanwanteng with CJS Securities.

Just a question on the Whitmore facility and the joint venture with Shell. Where are you in filling that to capacity? And what is the margin limit for this segment if utilization continues to go up there?

We're in what we call phase three of the capital expenditures. You'll see that flow through the year over the next few quarters. We'll have the equipment fully ramped up and in production over the course of the fiscal year. We'll provide updates as we go along because this will increase our normal capital expenditures a bit. Shell pays half and we pay half, and we'll reflect that appropriately on the statement of cash flows. We're on that journey: the first couple of phases are through the CapEx, and we're increasing volumes month to month and quarter to quarter. Phase three will allow us over the next fiscal year and into fiscal 2025 to continue ramping to the levels we modeled when we started this project about 25 months ago. In terms of margin potential for the segment, inclusive of the joint venture, we've guided to reaching 20%. As you recall, we were down in the single digits in the depths of the pandemic, we got over 20% in the fiscal fourth quarter, and for the year we were in the high teens. We believe seeing that margin at or above 20% in the current fiscal year is achievable, though it may bounce around quarter to quarter, and the joint venture is an important part of that.

Could you talk a little bit more about the seasonal restocking at your HVAC and plumbing distributors? What are they buying this year compared to last year? If there's any difference in strength or weakness, whether it's mini splits or things from recent acquisitions. If possible, are you seeing more MRO or OEM products being pushed through, just to help us understand the size and shape of what you're seeing this year?

When you talk about inventory stocking, distributors have spoken about the levels they hold and generally they seem to have reached a nice equilibrium compared to a couple years ago. There may still be destocking of certain products, but order volume has been steady. Distributors manage their inventory carefully and don't want to miss sales. Jeff Underwood and his commercial team work closely with customers to ensure they have what they need. With seven distribution centers from RectorSeal and TRUaire combined, plus Shoemaker's facility in Washington, we can supply customers quickly and precisely. Regarding mini splits, last year there were OEM production delays that led to less mini split product demand. It appears OEMs have caught up, which increases opportunity for us. Mini splits are an area where we excel and they involve many installation components that aggregate good margins for us. I wouldn't overly distinguish between MRO, replacement or new; many of our products are fungible across those applications, and we don't always know exactly where a sale will go. Overall, we are seeing the demand we expect and that supports our confidence in revenue and margin growth in the segment.

I'd add that part of the question goes to mix. We're highly focused on selling more of our higher margin products. The last couple of years, keeping up with demand was job one, but in a slower growth environment it's important to focus on higher margin products. If we can grow those faster than overall growth, that contributes significantly. Mini splits are a great example—those products have been high-margin and have grown faster than the category, which has been a key to our success. We're broadening that approach company-wide and are focused on selling more higher margin products; that mix will show up in results over time.

Last one, update us on the relative attractiveness of places to deploy capital. Do you see any attractive M&A opportunities right now? Or does it make more sense to be doing other things with cash?

Our capital allocation philosophy hasn't changed: we operate on a risk-adjusted returns basis. We consider our cost of capital, which has risen with higher interest rates, so hurdle rates have gone up. That said, our ability to buy attractive, accretive businesses at reasonable valuations continues. We maintain an active pipeline and acquisition growth remains an important part of our strategy, particularly when opportunities leverage our distribution channels. Relative to the past, paying down debt is somewhat more attractive given higher rates, but we'll evaluate all options and continue to pursue acquisition opportunities that meet our hurdles.

Our next question is from Alex Hatman with Sidoti & Company.

I wanted to follow up on something you mentioned earlier. You spoke to the demand for residential HVAC. I wanted to hear a little bit more about what you're seeing around non-residential. Are you seeing any sort of trends today compared to three months ago? How do you see that playing out?

Alex, non-residential is a very small part of our business. The residential piece is by far the largest. A handful of products can be used in either residential or commercial, and only a very few products really address the commercial market. We haven't seen anything out of the ordinary for us. Our order pattern seems normal and consistent with expectations, so there's nothing in particular to note.

We have reached the end of the question-and-answer session. I would now like to turn the call back to management for closing comments.

Great. Thank you very much. We really appreciate everyone joining us for this conference call. We will continue to be good stewards of your capital and look forward to speaking to you at the end of our Q1.

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