Earnings call transcript: CSW Industrials’ Q2 2025 revenue grows 22% amid market challenges

CSW Industrials Inc. reported a robust performance in its fiscal second quarter of 2025, with revenue surging 22% to reach $277 million, driven primarily by recent acquisitions. Adjusted earnings per share rose 15.2% year-over-year to $2.96. Despite these positive results, the company’s gross profit margin declined by 260 basis points to 43%, while cash flow from operations decreased by 8% to $61.8 million. The company maintained a strong balance sheet with a net debt to EBITDA ratio of 0.12x.

Key Takeaways

• CSW Industrials achieved record quarterly revenue, largely due to acquisitions.
• Organic revenue faced a decline, notably in the Contractor Solutions segment.
• The company is strategically moving manufacturing out of China to mitigate risks.
• The HVACR market experienced softness, impacting overall market conditions.
• Mars Parts acquisition is expected to bolster future growth and margins.

Company Performance

CSW Industrials demonstrated strong financial performance in Q2 2025, with significant revenue growth attributed to strategic acquisitions. However, organic revenue saw a 5.6% decline, particularly in the Contractor Solutions segment. The company continues to focus on essential product lines in the HVACR, plumbing, and electrical markets, maintaining its competitive position despite market challenges.

Financial Highlights

• Revenue: $277 million, up 22% year-over-year
• Adjusted EBITDA: $73 million, a 20% increase
• Adjusted EPS: $2.96, a 15.2% increase
• Gross profit margin: 43%, down 260 basis points
• Cash flow from operations: $61.8 million, down 8%

Outlook & Guidance

Looking ahead, CSW Industrials anticipates continued revenue and adjusted EBITDA growth in fiscal 2026. The acquisition of Mars Parts is expected to contribute significantly to this growth, with a target of achieving 30% EBITDA margins within a year. The company remains optimistic about EPS growth and stronger operating cash flow, despite current market challenges.

Executive Commentary

CEO Joe Armes highlighted the company’s resilience, stating, "We are not recession proof, but we have been recession resistant over time due to the essential nature of the products we sell." He emphasized the importance of strategic capital deployment, noting, "Our success is directly attributable to our disciplined deployment of capital into innovative businesses."

Risks and Challenges

• Market Softness: The residential HVACR market is experiencing a shift from system replacement to repair, impacting demand.
• Supply Chain Adjustments: The move to reduce manufacturing exposure in China could pose short-term operational challenges.
• Organic Revenue Decline: The decline in organic revenue, especially in Contractor Solutions, presents a growth challenge.
• Tariff Impacts: Ongoing pricing actions are necessary to offset tariff impacts, which could affect margins.

CSW Industrials remains committed to its M&A strategy and shareholder returns, positioning itself for future growth amid a challenging market environment.

Full transcript - CSW Industrials Inc (CSWI) Q2 2026:

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Hello and welcome to the CSW Industrials Fiscal 2026 Second Quarter Earnings Call. At this time, all participants are in 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 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alexa Huerta, Vice President of Investor Relations and Treasurer. Thank you, Alexa. You may begin.

Speaker 6: Thank you, Alexa. Good morning everyone and welcome to the CSW Industrials Fiscal 2026 Second Quarter Earnings Call. Joining me today on the call 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 quarterly report on 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.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Thank you, Alexa, and good morning, everyone. It is my pleasure to report that once again our team has delivered record quarterly results for revenue, adjusted EBITDA, adjusted net income, and adjusted earnings per diluted share.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Before I turn the call over to.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: James, to provide further details on our results and the performance of each of our business segments, I’d like to brag on and thank the entire CSW Industrials team for working so well together to build what has become a truly great company. Diligence and perseverance have defined our 10 years as an independent public company. The financial results we have delivered, the value we have created during that time, has been impressive. Our success is directly attributable to our disciplined deployment of capital into innovative businesses and product lines that, when combined with operational excellence under our ownership, grow faster than the overall end market. Despite headwinds and broad economic uncertainty during the quarter, especially in the residential HVACR end market, the CSW Industrials team delivered strong financial results.

Our resilient balance sheet, access to capital, and disciplined approach to allocating capital have continued to fuel growth opportunities, most recently evidenced by our definitive agreement to acquire Mars Parts as previously announced. Despite short-term demand fluctuations and market volatility, we have been willing and able to execute on two highly accretive synergistic acquisitions in the last 12 months. We expect to close on Mars Parts, our largest acquisition to date, very soon as we continue to maintain a long-term perspective, investing in growth opportunities for the future. In light of the compelling growth and value creation opportunity ahead of us in our second decade, I have communicated to our board my intentions to continue serving as the company’s CEO for the next several years.

I remain passionate about the business itself and about the opportunity that we can provide for all of our team members to participate in the success that they helped create. I firmly believe that we have a partnership between capital and labor that meaningfully enhances the likelihood of sustainable long-term success, and I’m honored to continue serving our company in this role. I eagerly look forward to the success that we can achieve together in the decade ahead. At this time, I’ll turn the call over to James for a closer look at our results, and after that I will return and conclude our prepared remarks.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Thank you, Joe. Good morning, everyone. As Joe mentioned, during the second fiscal.

Quarter of 2026 we delivered record revenue.

Of $277 million, representing growth of 22% and in line with street expectations. The revenue growth was primarily inorganic, resulting from the acquisitions of Aspen Manufacturing, PSP Products, and PF WaterWorks, all of which we completed since August of 2024. This acquisition growth was offset by a 5.6% reduction in consolidated organic revenue. The organic decline was concentrated in our Contractor Solutions segment. As I will discuss in more detail later in my remarks, we experienced 20% growth in adjusted consolidated EBITDA with a slight contraction in EBITDA margin. Adjusted EPS in the fiscal first quarter of $2.96 was ahead of street expectations and was 15.2% higher than the same quarter a year ago and was driven by revenue growth and came despite the current quarter having a higher average share count resulting from last fall’s follow-on equity offering as well as some compression in the margins.

The second quarter adjustment to EPS included acquisition transaction expenses of $1.8 million or $0.08 per share, as well as the amortization of assets from acquisitions. The new adjusted EPS methodology we introduced last quarter. Our consolidated revenue during the fiscal second quarter 2026 increased by a net of $49 million, or 22% when compared to the prior year period. Our revenue growth totaling $62 million was primarily attributed to the aforementioned acquisitions. This inorganic growth was somewhat offset by a reduction in organic volumes in Contractor Solutions, which was impacted by the broader market disruptions seen across the U.S. residential HVACR end market this summer. Consolidated gross profit in the fiscal second quarter was $119 million, representing 15% growth over the prior year period.

Our gross profit margin experienced a 260 basis point reduction to 43% compared to 45.6% in the prior year period as all three segments had margin contraction. Our consolidated adjusted EBITDA during the fiscal second quarter increased by $12 million to a quarterly record of $73 million or 20% growth when compared to the prior year period and ahead of street expectations. Our adjusted EBITDA margin declined by 40 basis points to 26.3% compared to 26.7% in the prior year quarter. The slight decrease was a result of the integration of the Aspen Manufacturing acquisition into our results for the full quarter as well as input cost increases arising from the direct and indirect impact of tariffs. We were able to offset most of these cost impacts with pricing actions, lower ocean freight expenses, and leveraging our operating expenses.

Adjusted net income attributable to CSW Industrials in the quarter was a quarterly record of $50 million with $2.96 of adjusted earnings per diluted share compared to $41 million or $2.57 respectively in the prior year period, representing 21.8% growth in adjusted net income and 15.2% growth in adjusted EPS during the second quarter. Our Contractor Solutions segment, with $208 million in revenue, accounted for 74% of our consolidated revenue and delivered $49.6 million, or 31.2% growth when compared to the prior quarter. Of the revenue growth in the quarter, $61.9 million, or 39%, came from our recent acquisitions, which was offset by a decline of $12.3 million, or 7.7% in organic revenue in the quarter from lower volume in the challenging market environment.

The organic revenue decline in the second quarter was due in part to continued soft housing activity in the quarter and the shift to repair from replacement of HVAC units by many consumers, which is being primarily driven by the higher cost of new units with the new refrigerant standards as well as the impact from tariffs. We saw another quarter with lower GRD sales specifically for the residential end market as these products are more heavily tied to new residential construction than the rest of our product offering. Several of our customers reported destocking of their HVACR inventory in the second fiscal quarter. When that dynamic occurs, we see lower order volumes, which can lead to unfavorable comparisons to certain sales metrics in the industry. As they restock, our growth rate could be higher than our customers report due to timing differences.

Growth through acquisitions comprises an increasingly meaningful part of our Contractor Solutions business. Aspen Manufacturing benefits from the trend of consumers shifting to the repair of HVAC units from replacement of their units this summer. In part as a result of this, organic growth rate including the pre-acquisition revenue effect from recent acquisitions increased by 2.8% in the quarter, which is a strong accomplishment in the face of the aforementioned major residential HVACR market headwinds. The pending acquisition of Mars Parts will further enhance our product offering to satisfy HVACR repair demand. We remain focused on the pre-acquisition revenue effect because it assumes recent acquisitions were owned by CSW Industrials during the same period in the prior year and highlights the organic growth potential and performance of our acquisitions under our ownership.

Our two most recent acquisitions, which make up most of the pre-acquisition revenue effect on organic revenue in the quarter, Aspen Manufacturing and PF WaterWorks, have delivered impressive performance under our ownership and had a weighted average growth rate of over 40% during the quarter. PF WaterWorks becomes organic in November and Aspen will not be organic until May of 2026. The PSP Products acquisition was considered as organic beginning in August of this year. We generally expect mid to high single-digit organic growth through the cycle in our Contractor Solutions segment, but we always say that we will see volatility in this figure from quarter to quarter. We are not recession proof, but we have been recession resistant over time due to the essential nature of the products we sell.

Because of the current volatility and uncertainty in the HVACR end market, we are not able to give an updated view of organic growth for the rest of this fiscal year. As we enter calendar 2026, we expect to have a better view of next year’s growth potential and plan to provide our perspective on our next quarter’s earnings call. Adjusted EBITDA for the Contractor Solutions segment was $68 million or 32.4% of revenue compared to $54 million or 33.8% of revenue in the prior year period. The decline in EBITDA margin came from lower gross margins due to the expected and previously reported dilutive impact from the Aspen Manufacturing acquisition, unfavorable volume leverage and sales mix, partially offset by pricing actions and lower ocean freight costs. Our Specialized Reliability Solutions segment revenue increased slightly to $39 million as compared to revenue reported in the prior period.

Revenue increased in the general industrial and mining end markets and declined in the energy and rail transportation end market. The segment EBITDA of $6.4 million in the second quarter represented a decline of 9.7% from $7.1 million in the prior year period. The EBITDA margin contracted 190 basis points to 16.5% in the current period, driven by a decrease in gross margins due to an escalation in material costs due to tariffs and higher freight costs to support international shipment growth. As we mentioned on our last earnings call, we announced a price increase in this segment during the second fiscal quarter. It went into effect late in the quarter to protect our margin dollars from recent cost increases in certain commodities. We remain committed to passing along cost increases as warranted.

Our Engineered Building Solutions segment decreased by 2% to $31.9 million compared to $32.7 million in the prior year period. Segment EBITDA was 20% lower than the prior year period at $5.2 million for a 16.4% EBITDA margin compared to $6.6 million and 20.1% in the prior year period, respectively. The contraction in EBITDA margin in the current period was primarily due to materials cost increases indirectly related to tariffs and strategic pricing to address competitive pressures. Our book to bill ratio for the trailing eight quarters dipped slightly below 1 to 1 and is now 0.9 to 1. We were pleased with the trend and quality of the mix and EBS backlog, which has continued to add more business from our higher margin products within the segment, and we expect to recognize this benefit in future quarters.

We have been increasing our pricing on products and projects to offset impacts from tariffs as appropriate, and further price increases are forthcoming. Transitioning to our cash flow, we reported second quarter cash flow from operations of $61.8 million, down 8% compared to $67.4 million in the same quarter last year. However, the year over year variance was primarily attributable to a $16.8 million tax payment deferral in the prior year period under a temporary federal tax relief. Excluding the $16.8 million tax payment deferral, the second quarter adjusted cash flows from operations increased by $11.2 million or 22.2%. Our free cash flow, defined as cash flow from operations minus capital expenditures, was $58.7 million in the fiscal second quarter as compared to $61.9 million in the.

Same period a year ago.

The free cash flow decrease from the prior year period was also impacted by the $16.8 million tax payment deferral in the second quarter of fiscal 2025. Excluding this tax payment deferral, the second quarter free cash flow increased by $13.6 million, or 30.2%, primarily driven by increased profitability and lower capital expenditures. Our free cash flow per share of $3.49 in the fiscal second quarter compared to $3.88 in the same period a year ago, lower also due to the aforementioned tax payment deferral from the prior year period as well as the higher share count in this year’s quarter resulting from the follow on equity offering last September. Excluding the tax payment deferral, our free cash flow per share in this year’s second quarter increased by $0.66, or 23.2%, from $2.83, primarily driven by increased profit and lower capital expenditures partially offset by the higher share count.

Our effective tax rate for the fiscal second quarter was 26.4% on a GAAP basis within our normal range. As a reminder, the third quarter GAAP tax rate may be lower than average due to a potential $6.3 million release of uncertain tax position reserves upon statute expiration of several pre-acquisition tax returns for the acquisitions of Truair and Falcon several years ago. We expect Aspen Manufacturing’s fiscal 2026 revenue to grow mid-teens off their trailing twelve month revenue of $125 million through our fiscal 2025 fiscal year end. This is a bit higher than our guidance on last quarter’s call due to the strong performance since the acquisition, but we expect that the growth will begin to normalize in the second half of 2026 as the refrigerant transition comes to a close.

As a reminder, Aspen will only be included in our results for the 11 months during fiscal year 2026 due to the May 1 acquisition date. As a reminder, we funded the Aspen acquisition on May 1 by borrowing $135 million from our revolving credit facility and using the remainder of our cash on hand from last September’s follow on equity offering. By the end of the second quarter, we had already paid down $75 million of borrowings and ended the quarter with $60 million outstanding on our revolver. Due to strong operating cash flows combined with our cash on hand at quarter end, our net debt for revolving credit agreement covenant purposes was just $32 million, resulting in a net debt to EBITDA leverage ratio of 0.12 times.

We remain proud of our strong balance sheet with this low net debt to EBITDA ratio, providing us with ample liquidity to pursue growth initiatives including the pending Mars Parts acquisition. During the quarter, we repurchased over $18 million of our stock in the open market, reflecting our belief in the long term value creation that our growth initiatives will have. We will continue to consider share repurchases with our strong free cash flow and balance sheet. As we’ve discussed, on October 1 we announced a definitive agreement to acquire Mars Parts for $650 million in cash at closing, with an additional $20 million of potential consideration based on revenue growth over the 12 month period after closing.

This acquisition, which we expect to close in November of 2025, will expand our existing portfolio in the HVACR end market with the addition of motors, capacitors, other HVACR electrical components, equipment installation parts, and other components used by the pro trade for repairs and replacements. We anticipate funding the transaction with a combination of a syndicated term loan and borrowings under our $700 million revolving credit facility. We expect our net leverage ratio as defined by our credit agreement to be approximately two times at the time of closing. Following the closing of the acquisition, we will provide updated information pertaining to the final capital structure and this fiscal year’s interest expense expectations. We currently forecast our fiscal year 2026 GAAP tax rate to be approximately 23% or 26% adjusted, which may vary from quarter to quarter due to specific items.

We continue to closely monitor the tariff environment and impact on our businesses. Our Specialized Reliability Solutions and Engineered Building Solutions segments have minimal direct impact from tariffs but have been impacted indirectly as the follow on economic impacts of aggressive tariff policy materialize. Each has a small number of inputs that are sourced overseas. Even U.S. sourced materials have seen related cost increases. The SRS segment has minimal sales in the countries with high tariffs, so those sales, while immaterial, could be at risk. Within EBS, we consider the increased expenses as we are bidding on new projects within Contractor Solutions and excluding the impact of the pending Mars Parts acquisition. We continue to move third party manufacturing out of China.

We’ve been doing this for a number of years and we now expect that as we exit fiscal 2026, our cost of goods sold exposure to China within Contractor Solutions will be around 10% as these moves take time. Our exposure to Vietnam, which comes primarily through our owned facility there, will be in the low 30s as a % of Contractor Solutions cost of goods sold. Other Asian exposure is about 15% within the segment, and the rest of our cost of goods sold is primarily in the U.S. The Mars Parts acquisition is not expected to materially change the geographic mix, especially once product harmonization between Mars Parts and our existing Contractor Solutions segment is complete. We undertook a number of pricing actions to offset the indirect impact of tariffs in Contractor Solutions.

Most of the pricing actions had an effective date in June 2025, which we believe covers most of the current tariff exposure, adjusting for changes in manufacturing location and pricing support from contract manufacturers. In SRS, we communicated pricing actions to customers in mid-August that went into effect late in our second fiscal quarter. Within EBS, these pricing actions are taken on a project-by-project basis through bids and rebids. As we’ve said before, our goal is to protect margin dollars, and as a result, these tariffs will cause margin compression in the near term. We will also assess the need to make further price adjustments as tariffs continue to remain somewhat fluid in certain countries. With that, I’ll now turn the call back to Joe for his closing remarks.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Thank you, James. To summarize, during the fiscal second quarter of 2026, we delivered record quarterly results for revenue, adjusted EBITDA, adjusted net income, and adjusted EPS. Our impressive 22% revenue growth was driven by our recent acquisitions, which have performed exceptionally well under our ownership, generating revenue growth well in excess of our acquisition models. Looking ahead to the fiscal full year of 2026, we will continue to focus on delivering sustainable growth that outpaces the end markets we serve, regardless of short-term market fluctuations. We expect to experience consolidated revenue and adjusted EBITDA growth this fiscal year, along with consolidated EPS growth and stronger operating cash flow. Recognizing the timing and end market conditions can create quarterly fluctuations, I would like to briefly comment on the Mars Parts acquisition that we expect to close next month.

This synergistic acquisition will expand our existing HVACR product portfolio with highly complementary offerings and enhance our customer value proposition. The HVACR end market, CSW Industrials is uniquely positioned to accelerate the growth of these products through our market knowledge, customer focus, and investment in people, systems, and processes. We believe that this important acquisition fits perfectly within our strategy to drive above-market profitable growth and enhance long-term shareholder value. Importantly, we remain fully committed to maintaining a strong balance sheet. Mars Parts is also expected to meaningfully grow CSW Industrials’ already strong free cash flow, which will allow us to continue to pursue growth opportunities while paying down the debt incurred to consummate this transaction.

With the significant investment in recent acquisitions, including the pending Mars Parts transaction, we continue to demonstrate our full confidence in the long-term positive fundamentals in the residential HVACR, our plumbing, and electrical end markets. We have consistently and strategically positioned our balance sheet and our team to execute on all elements of our enduring capital allocation strategy through all market cycles, guided by our rigorous risk-adjusted returns analysis. Our recent actions serve to underscore this commitment as well as our long-term perspective on enhancing shareholder value. On October 1, we celebrated our 10th anniversary as an independent public company. CSW Industrials now boasts a decade-long track record of demonstrated success rooted in the strength of our culture, sound principles of capital allocation, the resilience of our end markets, and the essential nature of our innovative products.

While I am immensely proud of the results CSW Industrials has delivered and the value we have created for our shareholders over the last decade, I’m equally optimistic as I look forward to what we can accomplish in the years to come. I consider it an honor and a privilege to continue in my role providing continuity of leadership to our organization as we embark upon a new season of accelerated growth and capital stewardship. As always, I want to close my prepared remarks by thanking the CSW Industrials team, who collectively own 4% of our company through our employee stock ownership plan.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: As.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Thank you to all of our shareholders for your continued interest in and support of CSW Industrials. With that, Alexa, we are now ready to take questions.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would 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. Thank you. Our first question comes from the line of Jon Tanwanteng with CGS Securities. Please proceed.

Jon Tanwanteng, Analyst, CGS Securities: Hi, good morning. Thank you for taking my questions and congrats on a nice quarter, especially on the inorganic front. Joe graduated. He’s going to be staying with us for a couple more years. My first question, if you could, was just help us understand the trailing revenue trends at Mars and if you saw a similar impact, or was it more in line with the organic performance.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Saw in the quarter.

Jon Tanwanteng, Analyst, CGS Securities: Is this more similar to Aspen? I think you called out in your comments that it was more of a repair business. I was wondering if you could help us understand how that business performed in the most recent data you have relative to the market trends we’ve been seeing.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Sure, Jon, I appreciate it.

This is James. Thanks for being on. As always, appreciate your support and good questions.

Yeah, Mars has seen general trends. I’d say it’s a little more like organic, but it’s kind of between the two. They are a little more weighted towards repair. Aspen is primarily repair. Mars is weighted more towards repair, but it also goes into the replacement market. It’s kind of a blend. It really kind of be between our two numbers is what we’ve seen the last few months, I’d say as cleanly as anything.

Jon Tanwanteng, Analyst, CGS Securities: Okay, could you speak to the growth rate that they’ve seen over the last 12 months?

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: I don’t want to get that specific quite yet. I’ll say until they get into our system and we kind of conform things in the same way to report, I couldn’t say much, but they have seen a bit of a tailwind from the repair business. We will say that year over year, but until we report things quite the same way, it’d be hard to get too specific. Yet once we get the transaction closed, we’ll be able to provide a little more information as we conform everything to our system.

Jon Tanwanteng, Analyst, CGS Securities: Okay, fair enough. As we look forward, what are your expectations on the business from a growth and accretion perspective, especially as you add your synergies? What are you expecting from that front? I think you had a target of getting that business to above 30% EBITDA margins. Help us understand what it takes to get there.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Yeah, you’re right.

You know, we’ve said that Mars is a little over $200 million of revenue. Its margins right now are in the mid-20s. The synergies alone that we highlighted of $10 million, most of which will be front end loaded in the first couple quarters, will get us right on top of that 30% number. That’ll get us up into the $60 plus million of EBITDA, that kind of ballpark on a trailing 12 when we look back. That 30%, keep in mind, is going to kind of be a run rate a year from now. It’s not necessarily going to be a trailing number this time next year, but that’ll be the run rate.

We have got opportunity above.

Beyond that, the team is working hard on finding other cost opportunities, things like freight, those kind of things. Obviously, as we get it in our system, we fully expect to have some revenue upside as more and more of our customers. The feedback we’ve gotten has been very positive with our ownership of Mars Parts and their likelihood to move more business over to us. That’s not factored into that $10 million of synergy. Our first goal is to get to 30% run rate, kind of this time next year right after we, on the anniversary of closing. I think we have opportunity to get it even closer to our historical Contractor Solutions margins as we bring it under our umbrella.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: John and John, this is Joe. Just to reiterate what James said, in my script, I said this acquisition fits nicely into our kind of strategy to grow faster than the markets we serve. Mars will be consistent with that. There will be mid to high single digit organic growth rates, as we’ve said all along in our business. Mars will fit into that once they’re in our system. There is top line growth opportunity there, and that top line growth opportunity is not part of our $10 million in synergies.

Jon Tanwanteng, Analyst, CGS Securities: Got it, thank you. Last one for me, could you just speak to the organic growth expectation for the rest of the year in each of your segments? Are you seeing continuation of what you saw in Contractor Solutions as we head into the third quarter here? Just on the other two businesses, I think you mentioned your EBS bookings fell below 1 to 1 on a book to bill, any thoughts on the other three businesses, organic growth?

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Yeah, Jon, I mentioned in my script that we really can’t speak to organic growth right now. You know, this is the slower season in Contractor Solutions and certainly for Aspen especially, so it’s just hard to comment on that. On the next call, I think we’ll have a better look at what the next fiscal year looks like as we start getting some good channel checks and people start ordering for the busy season next spring. We’re not able to do that, you know, and it’s really hard in SRS to do that. Contractor Solutions doesn’t really carry a backlog, so it’s hard to do that. They’ve been relatively flat the last couple quarters. SRS, you know, it’s got some energy exposure.

When that’s been a little bit softer, then that’s kind of kept our revenues flat and that’s also hurt the margin a little bit because that’s a higher margin industry for us. From a mix standpoint that’s hurt. Nothing dramatically we would think would be different in SRS within EBS. We did talk about that. The book to bill came down a.

Little bit, and a lot of that’s.

Concentrated around that Toronto market that was so strong for us for a while. We talked about over the last couple years that’s kind of wound down and there’s not a lot going on there. Now we are filling up the backlog more with our Smoke Guard and BALCO businesses, which are higher margin, higher quality backlog for us. As you know, that takes a few quarters to turn. We’re probably looking at that impact more into kind of next spring and summer. We’re just not able to give organic outlook for the rest of the fiscal year right now given the uncertainty in the market. I think we’ve seen other industry participants say the same thing.

We clearly thought we would see organic growth in the middle of the summer and we and others have said that we missed that things did not pick up the back part of the summer. There’s been some destocking at the distributor level. Once we see them starting to restock, we’ll get a sense of what that looks like and what kind of tailwind we expect to have going into next year. I heard someone else say in our earnings call, we would say the same thing. We’re going to be very strong. We’re going to give the product offering and we’re going to have the product availability. We’re ready as this market bounces back, hopefully next busy season to meet that demand.

Jon Tanwanteng, Analyst, CGS Securities: Okay, great. Thank you very much.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Thanks, John.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Thank you. Our next question comes from the line of Sam Reed with Wells Fargo. Please proceed.

Thanks everyone. Just wanted to quickly quantify the destock impact that you saw in contractor solutions. Realize there can be some variability there between subcategories. The add on question to that would be can you just talk through where inventory levels in the channel sit today? I think we’ve heard from some of the carriers that they’re pretty frothy, but I’d just love to hear kind of the perspective on where your product sits from a channel inventory standpoint.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Sure.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Sam, it’s James.

Thanks for being on today. It’s hard to break out the different things, but at the end of the day, destocking is really what it is. The demand was not there for the back part of the summer, given the housing activity, given some of the cost headwinds we have on replacement of systems. As we mentioned, Aspen Manufacturing and PF WaterWorks had weighted average growth of 40% in the quarter. We had positive growth if everything had been organic. That’s really what we focus on, the acquisitions being more and more important to us. The legacy business, that’s a little more focused on replacement of systems, and then the GRD business, which is one of our larger product categories, of course, even more focused on new housing starts with that softness. You just didn’t see the restock.

You had decent sales back in our fiscal fourth quarter, had good 8% or so organic growth as they were stocking up. We just didn’t see the restock. I think, as you pointed out, as you listen to the OEMs and distributors calls over the last few days and couple of weeks, they’ve talked about destocking. As I mentioned in my comments, when they destocked, we’re not going to get orders, and so order volume was down. We were still well ahead of the end market. We still held up pretty well for the most part, all things considered with that positive 2.8% growth, including our acquisitions. We were generally pleased with that performance vis a vis the market. Most of it is they’re not destocking. When contractors are not installing units, they don’t need to backfill with inventory.

As far as inventory itself, I think we would say that our inventory out in distributors is probably in pretty good shape. Those are channel checks we’ve had. We know we haven’t, or from what we’ve heard, haven’t lost market share, anything like that.

They just didn’t order as much.

We’ve heard from some of the OEMs and distributors specifically out there, their public comments the last few days, as I alluded to, is that several of them feel that the destocking will kind of.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Run its course through the end of this calendar year.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: As we enter next spring, things.

Should theoretically be normal, I think. Everybody’s got a little bit of hedge on that until we really get.

A sense of that over the next couple of months.

That’s great. Switching gears to Mars. First of all, congratulations on that. I would love to just get a sense for some of the ticket dynamics. I’m specifically thinking about per unit ticket just across some of the key subcategories, you know, capacitors, motors, just the products that Mars sells. Maybe give me a sense as to what those price gaps look like to some of Mars’ competitors. Are these prices at a premium? I’d just love to get a sense for that price gap dynamic, too.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Yeah, yeah, Sam, it’s going to be.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Roughly in line with what we have now. We have such a spread now. You know, Aspen obviously took the overall weighted average price of a product up quite a bit. Historically, our products have been in the sub-$100 range, and most of Mars products are in that same ballpark. They’ve got some products that are higher, of course, but it’s not going to change our overall weighted price dynamic a heck of a lot in terms of their pricing vis-à-vis the competitive competitors. Again, nothing dramatic there. We think Mars has the best products in the business as we think that our Contractor Solutions segment has the best products in the business. Otherwise we wouldn’t have been interested. We’re always looking at premium products at a bit of a premium price.

There may be a little bit of pricing ahead of the competition, but they’ve done a good job with their market share. Given where their margins are, where we think we can take it in line with our Contractor Solutions, that tells you that there’s price opportunity there. We think that their products are priced appropriately, but as they’re under our umbrella, we can’t really do much of that until we make the acquisition, of course. As they get under our umbrella, we’ll take a look at the broad product portfolio and how everything is priced in general as part of our Contractor Solutions family of products.

Always helpful. Thanks so much.

I’ll pass it on.

Thank you, Sam.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Thank you. Our next question comes from the line of Jamie Cook with Tourist Securities. Please proceed. Hi.

Jamie Cook, Analyst, Tourist Securities: Good morning. I guess just a couple questions. Given the lack of visibility in CSW Industrials in terms of organic growth or lack of organic growth, how are you thinking about the ability to hold margins in that business as organic growth declines? I think last time you talked about holding margins in the low 30%, but that was under an environment where you thought organic growth would bounce back. I guess the same question, any color you can give on margins like SRS, you thought margin should improve sequentially. Just given the weaker market, how do we think about margins across segments?

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Thanks.

Yeah, Jamie, this is James.

Thank you.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Yeah, I think we would tell you.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: We still feel good about kind of low 30s margins in Contractor Solutions.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: For the full year.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Keep in mind, I know you know this with us now, our winter months, the margins are going to be a little bit lower. Obviously, volumes are down in the winter months, so our margins tend to be more like high 20% in the winter months. We would still expect to see those margins in the low 30% as we go through a full fiscal year. Organic growth being up or down a little bit as it is shouldn’t affect that too much. We put up with the legacy organic decline this quarter, we still put up really nice margins. You’re going to have a little bit of a headwind from Aspen Manufacturing and the tariff impact is there, but I think that’s generally behind us. We’ll have a price increase in contractor solutions, as we always do as we enter the busy season.

We’re working through that, so that’ll help continue to maintain that. I think we feel good about nothing different in the margins. As we talked about with Mars Parts coming on next month in November, you’re going to see a little bit of margin headwind that will impact us because they’re more like mid-20%, so you’ll have that impact again, but then we’ll get them up to 30% in about a year from now. You’re not going to have much there, but there’s going to be some noise and we’ll try to walk folks through each quarter, the impact there. The legacy business, nothing fundamentally has changed. We still feel good about that. Organic growth being down a few points just doesn’t affect that dramatically. The team’s done a really good job on managing cost. As far as SRS and EBS, they bounce around.

We’ve always said that we’ve got a goal of 20% margins there. A little bit of the indirect tariff impact, even though we’ve raised prices to cover, that has a bit of a headwind. The mix, as I mentioned, with our lower margin business in EBS carrying a little bit of the weight the last couple quarters, that brings margins down and in SRS with energy being down a little bit, that brings margins down.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: We still have those two.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Leaders would tell you that they still maintain a goal of reaching 20% margin. We’ve been above 20% in both businesses a couple quarters right now. We’re a few points below that, but we feel still good about that in the longer term.

Speaker 6: Thank you.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Thanks, Jamie.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Thank you. Our next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Thank you.

Susan Maklari, Analyst, Goldman Sachs: Good morning, everyone.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Morning.

Susan Maklari, Analyst, Goldman Sachs: Good morning. My first question is, appreciating the commentary on the call around both the pricing that is going through the business or that’s planned to come in, and some of the moves that you’re seeing around the input cost. I guess generally, when you think across the three different segments, how are you thinking about where you are in terms of price, cost, and how that will move as we go through the winter? Any thoughts on how you’ll approach that as you think about pricing for next season?

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Sure, great question. We’re going through the process right now in our Contractor Solutions business, as we did this time last year, of looking at what that price increase needs to be. There’s an annual price increase in the industry that’s normal. As tariffs feel like they’ve settled down a bit, maybe. We got a little whisper of good news this morning, in fact, coming out of China, that helps a little. Even though it’s only 10% of our cost of goods sold, every little bit helps. We’re fine tuning what that price increase needs to be going into the season here in the next couple of months within Contractor Solutions. We’ll push that out with our customers before too long. We think we’re in a pretty good place. We’re always looking at that carefully. I think generally speaking, we’ve maintained our dollar coverage on tariffs.

What we’ve done and assuming no other moves up, we’re going to have a pretty normal price increase that we would in a given year just to cover your normal inflation wage cost, those types of things. We feel good about that. Others in the industry have said roughly the same thing, even though we haven’t seen any announcements quite yet. SRS just put forth their price increase that went into effect late September.

We announced that on our last earnings.

That was a 7% price increase. We felt good about that coverage, the indirect impact of tariffs, but we watch that very carefully. I think an unintended consequence of some of the tariffs is, as I mentioned, U.S. sourced commodities have gone up as well. Things like copper, things like aluminum, and those are input costs in our different businesses. As those come through, if we see further increases, we’ll need to take pricing action again. Others in the industry have done it. That SRS price increase in fact was as well received as you could expect and passed all the way through. Others did the same thing, some even higher.

There’s opportunity there.

Within EBS, that’s a project-driven business for the most part. Project by project, those projects that have more aluminum in them, for example, or other commodities that have been impacted, we’re bidding higher prices. These projects that are coming in for rebid, projects that didn’t quite get done the first time around, they’re looking for refresh bids. We’re able to update that price, and we’ve got kind of an expiration date on that. As commodities move around, that gets refreshed from time to time. We’re always looking to cover our costs because, as we’ve said, our shareholders shouldn’t bear the brunt of that. It gets passed through the system. I think we feel that our leaders have done a really good job of that, of covering the dollar cost. It’s a daily, weekly, and monthly activity that we’re watching very closely, all the different dynamics.

We’re not going to be shy about pushing through price to be sure we cover those costs.

Susan Maklari, Analyst, Goldman Sachs: Yes. Okay, that’s helpful. Maybe turning to the balance sheet and capital allocation, you obviously have done two large deals in the last several months with Aspen Manufacturing and Mars Parts. As you think about the pipeline of M&A, can you talk about the kind of deals that you’ll consider from here, especially as you do integrate the two larger ones? It was nice to see you buying back some stock this quarter as well. Just any thoughts on how you’re thinking about shareholder returns in this kind of an environment?

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Yes, great question. Thank you. Susan, this is Joe. We absolutely continue to believe that all components of our capital allocation policy are available to us. We’ve shown that during the last quarter by buying back shares, announcing acquisitions, paying down debt, all of the above. Now we’re doing this again on a returns analysis basis. We’re looking for what provides the highest risk-adjusted returns for us from the acquisition standpoint. You should expect us to continue to be active over the next year. I would say smaller bolt-on acquisitions that require less integration work would be more likely in the next six months or so while we digest the $1 billion in acquisitions that we’ve acquired over the last 12 months.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Given our balance sheet, given our.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Access to capital and given our team bandwidth, we’re able to continue to be acquisitive. Maybe a bit of a digestion pause, but certainly no change in our long term strategy. Buying back shares is again a function of return. When we calculate the returns on these acquisitions, we find them to be compellingly attractive. That’s to whomever’s buying the stock, whether it’s us or somebody else. That’s an attractive option for us and you should continue to see that occur as we move forward.

Susan Maklari, Analyst, Goldman Sachs: Okay, thank you both for the color and good luck.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Thank you. Thanks, Susan.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Thank you. Our next question comes from the line of Natalia Bak with Citi. Please proceed. Good morning.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Morning, Natalia.

Jamie Cook, Analyst, Tourist Securities: Maybe I’ll ask about the order.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Cadence within Contractor Solutions, just given the current environment. Have you seen any sequential improvement or weakening in weekly order patterns exiting this quarter? Do you expect continued softness in the second half just given that you have an easier organic comp next quarter?

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Yeah, it’s a great question. Natalia, it’s James. Our fiscal third quarter last year was a little softer. It’s good to remember that given the dynamic with all the refrigerant change. The comp is a little bit easier. As we said, it’s hard to predict organic growth given where we are in the quarter. We’re going to get out of that business for a little while, I think. In general, our order cadence has been fine. Things do start softening in October. Certainly the Aspen business is coming out of their busy season in the repair market. We’ll have Mars coming on in November is the plan, and we’ll watch that. Absent that, nothing unusual about the order pattern, things are clearly softer in general than we would expect.

But.

Our team’s done a really nice job in October getting orders in where they can. Again, like we said, there’s some destocking going on in the industry, but nothing extraordinary we would point out positive or negative with the order pattern here a few weeks into the quarter.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Got it.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: That’s helpful.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Color, maybe just switching over to SRS. Just curious if you’re seeing any early.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Traction from your new sales channels or customer diversification initiatives.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: When should we expect that to?

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Show up meaningfully in revenue?

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Yeah, Natalia, we just went through midyear reviews around here with all three of our business segments, and we’re very pleased with the progress being made at SRS, both in some new product development that is directly attributable to conversations with customers about how can we continue to be a valued supplier for them and new markets. Stay tuned. Yeah, I think you’re going to hear more.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Thanks.

Jamie Cook, Analyst, Tourist Securities: Helpful.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: That’s on my end.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Thanks, Natalia.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Thank you.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Thank you. Our next question comes on line of Tomo Fano with JP Morgan. Please proceed.

James Perry, Executive Vice President and Chief Financial Officer, CSW Industrials: Good morning, this is Ethan on for Tomo. Thank you for taking my question today on organic growth for the quarter. Can you give a little bit of color around how much of that was volumes versus pricing? On end market trends, are you seeing any other key end markets? What are you seeing in other key end markets and are there any pockets of strength or new areas of weakness? Yeah, Ethan, it’s James. Thanks. Great question.

The volume price mix on that legacy business down about 7.7%. The pricing positive tailwind on that was mid single digits, and the volume was down low double digits, kind of low teens to break that out a little bit. Obviously, when you look at the positive organic growth, including the acquisitions, that would suggest volume was down just a couple points and price was up that mid single digit. That kind of gives you that breakdown in terms of end markets. I think it’s, you know, as we.

Said anything that’s been more repair focused.

Obviously the Aspen business with the coils and air handlers, some of our things that go into the repair business, that’s where you’ve seen strength, obviously with Ford, 40% weighted average growth. In general, I think it’s pretty broad based. You know, as we said, when new systems aren’t being installed in new homes and replacement systems aren’t being done in existing homes, with existing home sales down and people just in general opting for repair versus replacement, it’s those types of products specifically. Nothing else we’d call out to Grand North.

Thank you.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Thanks, Ethan.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Thank you. There are no further questions at this time. I’d like to pass the floor back to management for any closing remarks.

Joe Armes, Chairman, Chief Executive Officer and President, CSW Industrials: Thank you, Alexa. Thank you everyone for joining us. We report on a quarterly basis, so we understand the questions on a kind of quarter by quarter basis. Just know that we are absolutely very bullish on the long term. Long term health and opportunity ahead of us for meaningful growth, for compelling value creation here, especially given the two new acquisitions. There is a lot of good things ahead of us here and we look forward to reporting to you again next quarter. Thank you.

Alexa Huerta, Vice President of Investor Relations and Treasurer, CSW Industrials: Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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