Good day, and welcome to the CSW Industrials Second Quarter 2024 Earnings Conference Call. Please note today's event is being recorded. I would now like to turn the conference over to Alexa Huerta, Vice President, Investor Relations. Please go ahead, ma'am.

Thank you, Rocco. Good morning, everyone, and welcome to the CSW Industrials Fiscal 2024 Second 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, updated Investor Relations presentation and Form 10-Q prior to the market's opening today, all of which are available on the Investors portion of our website at www.cswindustrials.com. This call is being webcast and information on accessing the replay is included in the earnings release. During this call, we will make forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results could materially differ because of factors discussed today in our earnings release, in the comments made during this call, as well as the risk factors identified in our annual report on Form 10-K and other filings with the SEC. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Joe.

Thank you, Alexa. Good morning, everyone. Our team continues to outperform the markets we serve and deliver impressive results against strong prior year period results. Our second quarter results demonstrate our ability to leverage our robust distributor relationships, drive operational execution, and prudently manage expenses. This morning, we announced record second quarter revenue of $204 million, record second quarter earnings per diluted share of $1.93 and record second quarter EBITDA of $53 million. We also continued to deliver outstanding operating leverage as EBITDA grew 21% on 7% growth in revenue with equally impressive EBITDA margin expansion of 300 basis points to 26%. We also announced record first half results and revenue of $407 million and earnings per diluted share of $3.90 and an EBITDA of $107 million. For the second quarter in a row, we delivered outstanding cash flow from operations with a record fiscal second quarter total of $45 million. This led to a paydown of $37 million of borrowings under our revolving credit facility in the second quarter and an $80 million paydown for the first half of this fiscal year, reducing our interest expense and providing us significant flexibility to pursue future opportunities as they arise. As we mentioned on our recent earnings calls, the cost of ocean freight has returned to more normal levels in the last few quarters. Since the beginning of fiscal 2024, we have also reduced our domestic freight expense and driven additional operational efficiencies versus the prior year. As we continue to staff for growth and retain our exceptional employees, we are experiencing increased compensation expenses. The amortization of intangible assets has also increased as a result of recent acquisitions. By successfully implementing a solid pricing strategy across all three segments and with our gross margin savings from freight expenses, we have been able to achieve operating leverage and further expand our margins. We continue to prioritize capital allocation decisions on a risk-adjusted returns basis with the ultimate goal of enhancing long-term shareholder value. We are often asked about our approach to M&A and our strategy has not shifted. We will continue to pursue both internal and external opportunities for growth that support our healthy margins and we will continue to maintain a pipeline of acquisition opportunities. I want to touch briefly on our segments, and then James will provide the additional details on our performance. Overall, I'm pleased with the execution of all three business segments. We are now approaching the slower season for our Contractor Solutions segment, but our team is highly focused on delivering another year of market outperformance despite the HVAC/R industry currently experiencing a decline in residential volumes. The strength of this segment centers around leveraging our robust distributor relationships, optimizing acquisition integration and delivering high value products to our customers. We are able to quickly acquire or master distribute products resulting in sales at a faster and more cost-effective rate due to our strong relationships with our suppliers, our network of sales representatives, logistics leverage and back office support. This allows us to do what we have always done with excellence, which is to focus on serving our customers well and being a great partner as we add new products to our portfolio. Our Specialized Reliability Solutions segment revenue was relatively flat in the quarter. The capacity utilization in our primary facility continued to improve over the prior year and our team there remains focused on top and bottom line growth. The SRS team has made notable improvements in operational efficiencies and quality, which give us confidence in our ability to reach our EBITDA margin goals for the full fiscal year. Industrial end markets are relatively stable, but we have seen some softening in energy, mining and rail. As an update on the Shell joint venture, we have elected to defer a portion of the planned capital expenditures as we assess the timing of production needs. We continue to work with Shell on forecasting their production requirements. Our Engineered Building Solutions segment was up with an increase in revenue of 13% in the quarter due to timing of project completions benefiting from our record backlog as well as positive pricing initiatives. For the seventh consecutive quarter, this segment's backlog reached an all-time high with Greco, our aluminum railings business, continuing to drive most of the growth. We continue to especially see strength in our Canadian market. Project mix and our record backlog skews more toward larger jobs, which can take more than two years to turn into revenue. But the vast majority of the backlog has, at a minimum, broken ground. We are still highly focused on pursuing institutional and multifamily projects undertaken by the highest quality developers with the highest likelihood of completion. Our EBS team continues to perform well. Before I turn the call over to James, I would like to remind everyone of the demonstrated resiliency of our business model. Strengths of our business model include diversification of our product portfolio and of the end markets we serve, as well as the consumable nature of many of our products that are used either in maintenance, repair and replacement applications or to extend the reliability, performance and lifespan of mission-critical assets. Specific to our largest end markets, HVAC/R and plumbing, the products we sell and the value they provide are often nondiscretionary fundamental necessities for both homeowners and businesses. We continue to outperform in the categories we compete in. We maintain a strong balance sheet that allows us to withstand market headwinds with ample liquidity that affords us the ability to pursue growth opportunities that arise across our entire portfolio of businesses. At this time, I'll turn the call over to James for a closer look at our results, and then I will conclude our prepared remarks.

Thank you, Joe, and good morning, everyone. During the fiscal year-to-date period, we delivered a record first half revenue of $407 million, representing growth of 4.1%. Operating leverage on this growth drove 14.9% growth in EBITDA and 12.9% growth in earnings per diluted share. Our consolidated revenue during the fiscal second quarter of 2024 was $204 million, a 6.5% increase as compared to the prior year period. This growth was driven by pricing actions, a slight increase in unit volumes due to the late summer heat wave in certain markets across the U.S., and inorganic revenue contribution from the Falcon acquisition last year. Consolidated gross profit in the fiscal second quarter was $91 million, representing 12.8% growth with the incremental profit resulting from revenue growth from pricing actions and lower inbound and outbound freight costs. Gross profit margin improved to 44.7% compared to 42.2% in the prior year period from revenue growth in the higher margin Contractor Solutions segment due to pricing initiatives combined with lower freight costs as compared to a year ago. Consolidated EBITDA increased by $9 million to $53 million or 21% growth when compared to the prior year period. Our EBITDA margin improved to 26% as compared to 23% in the prior year quarter, driven by revenue growth and gross margin expansion, partially offset by incremental employee expenses. This margin growth demonstrates the operating leverage we strive for as we focus on managing expenses while we grow revenue. Net income attributable to CSWI in the fiscal second quarter was $30 million or $1.93 per diluted share compared to $24 million or $1.57 per diluted share in the prior period, representing growth of 23%. The current quarter included increased amortization expense from intangible assets as a result of last fiscal year's acquisitions and Contractor Solutions. Our Contractor Solutions segment with $140 million of revenue accounted for 69% of our consolidated revenue and delivered $9.6 million or 7% total growth as compared to the prior year quarter. The $7.2 million or 6% of organic revenue growth was driven by the Plumbing and HVAC/R end markets and a result of pricing actions, with a slight increase in unit volume after the late summer heat wave experienced in certain portions of the U.S. Inorganic growth was $2.4 million in the quarter from the Falcon acquisition last fall. Segment EBITDA was $47 million or 33% of revenue compared to $39 million or 30% of revenue in the prior period as our margins continue to expand. The increasing margins result from the company's ability to maintain pricing and achieve operating efficiency opportunities, even as some, but not all, costs in the segment have come down over the prior year. Our Specialized Reliability Solutions segment revenue of $37 million was flat in the quarter due to the continued benefits from pricing initiatives, offset by softer energy, mining and rail markets. Segment EBITDA and EBITDA margin were $6.3 million and 17%, respectively, in the fiscal 2024 second quarter compared to $6.1 million and 16% in the prior year period. As Joe mentioned, our team in this segment remains focused on top and bottom line growth while driving operational efficiencies and offering the right mix of products to our expanding customer base around the world. Our Engineered Building Solutions segment revenue increased to $29 million, a 13% increase as compared to $26 million in the prior year period. Bidding and booking trends remain solid. In fact, we ended September with our seventh consecutive quarter of record backlog in this segment. At the end of the fiscal second quarter, our book-to-bill ratio for the trailing eight quarters was over 1.1 to 1. Our focus on profitability in this segment is visible as we delivered a record EBITDA of $5.7 million with a healthy 19.5% EBITDA margin in the second quarter. Transitioning to the strength of our balance sheet and cash flow, we ended our fiscal 2024 second quarter with $14 million of cash and reported record cash flow from operations of $45 million compared to $30 million in the same quarter last year. For the first half of fiscal 2024, we had a record cash flow from operations of $95 million compared to $47 million in the first half of last year. Our free cash flow, defined as cash flow from operations minus capital expenditures, was $41.9 million in the fiscal second quarter as compared to $28 million in the same period a year ago. That resulted in free cash flow per share of $2.69 in the fiscal second quarter as compared to $1.81 in the same period a year ago. This impressive level of free cash flow fuels our risk-adjusted returns, capital allocation strategy, which, in turn, enhances shareholder value. As Joe mentioned, as part of our broad capital allocation strategy, during the quarter, we paid down $37 million of our outstanding debt. We ended the fiscal second quarter with $173 million outstanding on our $500 million revolver. Our bank covenant leverage ratio at quarter end was 0.85x, an improvement from 1.3x at the end of fiscal 2023 due to our strong EBITDA growth and the $80 million of paydown of our revolver. As a reminder, at the end of the fiscal first quarter of 2024, our bank coverage leverage ratio was 1.1x, which moved the company into the lowest tier of our revolver pricing grid, reducing our interest rate spread and creating interest expense savings. As a further reminder, in February of 2023, we entered into an interest rate hedge for the first $100 million of borrowings under our revolver. During the fiscal second quarter and the first half of the year, the interest rate hedge saved us approximately $400,000 and $700,000, respectively, in interest expense. Our effective tax rate for the fiscal second quarter was 25.7% on a GAAP basis. We still expect our adjusted effective tax rate to be between 25% and 26% for fiscal 2024 with the third quarter tax rate elevated due to normal Q3 tax activities. The tax rate in the third fiscal quarter will be adjusted for the $8.6 million noncash other expense partially offset by the related $1.1 million income tax benefit that will result from the tax indemnification assets related to the TRUaire and Falcon acquisitions that will expire as detailed in our 10-Q. We expect to report adjusted earnings in our fiscal third quarter due to these large nonrecurring items. The EPS adjustment in the fiscal third quarter for these items is expected to be approximately $0.48 at this time. As we look out to the rest of fiscal 2024, we anticipate revenue growth for the second half of the year, which, when coupled with meaningful operating leverage, we expect will result in strong year-over-year EBITDA and EPS growth as well as strong cash flow. With that, I'll now turn the call back to Joe for closing remarks.

Thank you, James. To summarize, during the second fiscal quarter of 2024, we once again delivered record results, highlighted by both organic and inorganic revenue growth, expanded margins and robust cash flow. While there is uncertainty in certain key end markets, we still expect to outperform the markets we serve and to deliver consolidated revenue and earnings growth in the second half of fiscal 2024 against strong prior year period results. We remain focused on leveraging our strong distributor relationships, gaining efficiencies through operational excellence and prudently managing costs. We have and will continue to work to expand margins and to drive cash flow conversion. Consistent with our demonstrated track record, we will allocate capital according to our risk-adjusted returns discipline enabled by the strength of our balance sheet. This approach has led to consistent outstanding financial results and we do not intend to deviate from that strategy. Our stated goal is to be the partner of choice for our loyal customers, making it as easy as possible to do business with CSWI. In October, we were named HVAC Supplier of the Year by affiliated distributors, which is one of the largest customer organizations in our Contractor Solutions segment. This award is given to only one out of hundreds of suppliers based on direct feedback regarding availability of products, delivery times, ease of doing business, product innovation and other important metrics gathered from actual customers. This award is the latest in a series of such awards our team has received this year and demonstrates our commitment to serving our customers well. I'm extremely, extremely proud of the Contractor Solutions team for their continued success. As always, I want to close by thanking all my colleagues here at CSWI, who collectively own approximately 5% of CSWI through our employee stock ownership plan as well as all of our shareholders for your continued interest in and support of our company. With that, Rocco, we're ready to take questions.

Thank you. Today's first question comes from Jonathan Tanwanteng with CJS Securities. Please go ahead.

Hi. Good morning. It's Pete Lukas for Jon. Just wondering if you could talk a little bit about what you're seeing in terms of HVAC distributor destocking in the quarter — if you've seen any? And do you think that inventories in the channel are rightsized at this point? Or is your sell-through in line with end demand?

Good morning. It's James. I appreciate you being on the call. We obviously have a lot of customer conversations and contact. The destocking continues, probably some. The OEMs and the distributors have mentioned some of the same. I think it has certainly decelerated. We had our fiscal first quarter, the April, May, June quarter, with the slow start to the summer, they built up the inventory and worked through quite a bit of that with the really strong second quarter. And then obviously, as you end the second quarter, kind of the September month, people start working down the seasonality and then ramping back up. And you see it in our inventory. Our inventory came down quite a bit from March to September as we kind of went through the summer season. Now we'll start ramping back up, getting ready for the busy selling season in the spring. So overall destocking and our sell-through, we feel very good about. We get good feedback on our sell-through rates. The fact that our volumes had a slight increase in the quarter, while most folks said that residential HVAC was still down low to mid single digits, it is a very positive sign in that respect and as Joe said, we continue to outperform the market.

Very helpful. Thanks. And can you just discuss maybe some of the bigger moving parts you're seeing today in terms of input, segment, or end market and your ability to pass those through in terms of pricing?

Sure. I think a lot of the costs have started to stabilize. We talked a lot a year ago, two years ago about ocean freight. Obviously, we ship a lot of containers over here from our Vietnam facility and other third-party outsourced suppliers we have. And those rates have come back down to good historical levels and have been relatively stable. They still bounce around some. The ocean freight carriers look to raise rates, but the demand has been a little bit soft. So we've been able to stabilize that and are pleased with where that's been. Similarly, trucking rates bounce around quite a bit with the cost of diesel here domestically. We ship things to our customers and between our own distribution centers. So that bounces around. It stabilized and looks good for now. But with oil prices up, you watch that very carefully. Overall raw material costs have generally been pretty stable in the Contractor Solutions segment, I would say, things like steel, aluminum and resins. Within the Specialized Reliability Solutions segment, however, with oil prices up around $90 a barrel, obviously, base oil is a big component for a lot of the input costs there. So we have seen some increase in that space and, in fact, have raised prices recently to cover that and put through a price increase just in the last few weeks. Overall, though, our pricing has been stable. We've been able to hold on to our pricing. We will go through our normal annual look at pricing in the spring as we always do with our businesses, and that's expected, especially in the Contractor Solutions segment, but we have been able to maintain pricing. Overall, we've been able to see input costs stable. The one thing I'll mention, you heard us mention a couple of times, labor costs tend to be up a bit to attract and especially retain, as Joe said, our exceptional talent. There's a cost to that. As I'm sure you know, we've got pretty high compensation costs in terms of the benefits we provide with our ESOP plan. Every employee gets company stock each year that we pay for and a retirement plan. Every employee is on an incentive plan. So we treat our employees very well. That's one of our key tenets of our culture. And so we have seen a rise a bit in employee cost, but to keep the talent we have to be able to meet the demand — that's an investment in our workforce.

Perfect. Thank you. And then could you also just give us a little more color on the drivers of the higher sequential corporate expense?

I think just overall, I think compensation expense is part of this, as I mentioned. As the company grows, you've got to cover that growth to some degree, the acquisitions we've done, the organic growth we've done. Nothing unusual in the corporate line, I would say, just kind of general growth with the overall company growth.

Perfect. Thanks. And then just the last one for me. You talked about your M&A strategy being unchanged and still seeing a pipeline of opportunities, but looking to allocate on a risk-adjusted basis. Just wondering, are you seeing just more or less opportunities given the higher cost of capital and hurdle rate? Or just in general, what are you seeing out there?

Yes, Pete, this is Joe. I don't know that we are seeing a lot different level of activity. Certainly, our hurdle rates have risen as a result of the higher cost of capital. We've always had a really high hurdle rate to begin with from the standpoint of our margins. We really don't want to dilute our margins. We have really high-value products that we offer to customers. And so our opportunity set, I think, continues to be robust, and we're pleased with that. We tend to respond well in tougher markets because we've got a stronger balance sheet than others, which allows us to move with speed and certainty and provide that to sellers. As you may recall, our largest and most successful acquisition to date, TRUaire, was done in the middle of the pandemic. And we did that on our balance sheet because we had the liquidity and the available capital to do that. So we are optimistic.

Extremely helpful. Thanks for your time and I will jump back in the queue.

Thank you.

Thank you. And our next question today comes from Julio Romero with Sidoti & Company. Please go ahead.

Great. Thanks. Hey, good morning, Joe, James, Alexa. Thanks for taking the questions. Maybe to start on the Contractor Solutions segment. I was particularly impressed by the increase in the unit volumes there, and you called out that some of that might be attributable to a warm summer. What's your best guess as to what the impact of that late summer heat wave was on the volume in the quarter? Or, thinking about it another way, how are unit volumes trending in the periods not affected by that heat wave?

Yes. If you look at the last several quarters — Julio, this is James. And again, appreciate you being on with us — in the last several quarters, we've talked about volumes being slightly down. We've never called out large decreases. The comps have been hard after a couple of really strong years; 2021 and even 2022 were pretty strong and this fiscal year we are up against some tough comps. The comps have maybe gotten a little bit better. But overall, our team is doing a great job by picking up new customers, by picking up market share and wallet share. And again, when the OEMs and distributors talked about, they're still seeing residential down low single digits, and that's better than low mid teens or mid teens to high single digits. Overall, though, we feel good about that. We were already a month into it and July was looking hot, August stayed hot, September stayed hot. So we certainly picked that up. As part of that, obviously, the heat wave and we called that out specifically because it was a late start to the summer, and when people are on their air conditioner 24 hours a day instead of 10 or 12 hours a day, that certainly creates more maintenance work, more repair work and even replacement, which is a positive tailwind for us. So we are pleased to have turned that from a slight negative to a slight positive. But I think as much as anything, it's our team out there selling more to new customers, a little bit of benefit from the acquisition, as we talked about. Falcon is the only one that's considered inorganic and that will turn organic again after this next quarter here in Q3. That will be organic. But overall, really pleased, and I want to highlight, too, the margin growth — to see the inflation we've had the last few years, to see even just slight unit volume growth, which we are very proud and pleased with that team, to see margin growth like we've had of a few hundred basis points year-over-year is really impressive.

Okay. That's good color there. I appreciate that. And maybe talk to the timing of this HVAC residential volume normalization. How would you have us think about how that cadence plays out over the next few quarters?

Well, yes, we are entering, obviously, the slower quarter. As you all know, our fiscal third quarter here through December is the slower selling season because air conditioners aren't being run as much, obviously in most of the country, and then we'll start stocking up. And our fourth quarter is when we see things ramp back up. No one can fully predict what next year looks like economically. The interest rate environment has clearly put some pressure on some of that. But as we talked about earlier, from the question that Pete asked and as you've seen out in the market, everyone seems to think that destocking has decelerated and the destocking is generally kind of done by the end of this calendar year. And like I said, we are working the stock back up. We were just with our Contractor Solutions team — Joe, Alexa and I were in the last couple of weeks looking at their inventory and what we need to stock up to be sure we are ready for the busy selling season that really gets going in February, March again. So we are optimistic about next year. And we talked about second half growth overall for the company, and obviously, Contractor Solutions is a big engine to that. We are not forecasting anything for fiscal '25 yet, but I would certainly say that we are optimistic on our ability to continue to introduce innovative products, continue to win more market share, continue to penetrate and win more customers with more of our products. And then as Joe mentioned, also find acquisitions that can continue to fuel growth.

Got it. Really good color there. Maybe just turning to the Specialized Reliability Solutions segment. Maybe if you could talk about the end markets that you called out that are seeing some softening — maybe give us a flavor of the magnitude of the softening. And do you see demand for those markets continuing to trend that way or maybe stabilizing anytime soon?

Thanks, Julio. I think it's at the margin. We don't see large changes. Interestingly, the rig count domestically is down, while production rates are not down that much. The rig count is down. But international rig count is up, Canadian rig count is up. So mixed signals there. Mining and rail has been a little bit slower, and we are seeing some of that through the JV. So it's — none of it's alarming. It's just at the margin, and we would expect normal variations throughout the year. There's a little bit of seasonality in some of those end markets, but nothing that's alarming at all.

What would you maybe attribute some of that softening to? Is it just the general economic uncertainty, higher interest rates or anything of that nature?

Yes, I think so. I mean a lot of uncertainty. People are not committing a lot of capital right now to larger projects due to higher interest rates and uncertainty of what the future holds. So I think that's a little bit of slowdown to be expected.

Got it. And then maybe just last one for me on that segment. With the deferral of some of the CapEx you're doing, does that change the timing of when Phase 3 comes online?

Well, it could. I think that our commitment to our shareholders all along has been to invest on a risk-adjusted returns basis. And so that presupposes that we are going to have demand for that capital investment. As we have said a couple of quarters now, the ramp up has been a little slower than anticipated, and so the capital is going to be a little slower than anticipated. We need to fully utilize the existing capacity before we add more. And we just think that's the prudent thing to do and good stewardship of our investors' capital.

Very good. Thanks a lot guys. I appreciate it.

Thanks, Julio.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to the management team for closing remarks.

Great. Thank you, Rocco. We sure appreciate everyone joining us today and look forward to our next conversation next quarter. Thank you.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.