CSW Industrials, Inc. (CSW) Q2 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents mixed signals: positive cash flow adjustments and synergy expectations are offset by revenue declines and margin pressures. The Q&A reveals management's reluctance to provide specific growth guidance, raising uncertainties. Despite some optimism about synergies and strategic acquisitions, the lack of clear guidance and organic growth concerns balance the sentiment, resulting in a neutral outlook.

Key Financial Performance

Revenue Record revenue of $277 million, representing growth of 22% year-over-year. The growth was primarily inorganic, resulting from acquisitions of Aspen Manufacturing, PSP Products, and PF Waterworks, offset by a 5.6% reduction in consolidated organic revenue due to market disruptions in the U.S. residential HVAC/R end market.

Adjusted Consolidated EBITDA Increased by $12 million to $73 million, representing 20% growth year-over-year. The EBITDA margin slightly declined by 40 basis points to 26.3% due to integration of acquisitions, input cost increases from tariffs, and offset by pricing actions and lower ocean freight expenses.

Adjusted EPS $2.96, which is 15.2% higher than the same quarter a year ago. This was driven by revenue growth despite a higher average share count and some margin compression.

Gross Profit $119 million, representing 15% growth year-over-year. Gross profit margin reduced by 260 basis points to 43% compared to 45.6% in the prior year due to margin contraction across all segments.

Contractor Solutions Segment Revenue $208 million, accounting for 74% of consolidated revenue, with 31.2% growth year-over-year. Growth of $61.9 million from acquisitions was offset by a $12.3 million or 7.7% decline in organic revenue due to soft housing activity, shift to HVAC repair from replacement, and tariffs.

Specialized Reliability Solutions Segment Revenue Increased slightly to $39 million. Revenue growth in general industrial and mining end markets was offset by declines in energy and rail transportation end markets. EBITDA declined by 9.7% to $6.4 million, with a margin contraction of 190 basis points to 16.5% due to material cost increases and higher freight costs.

Engineered Building Solutions Segment Revenue Decreased by 2% to $31.9 million. Segment EBITDA declined by 20% to $5.2 million, with a margin contraction to 16.4% from 20.1% due to material cost increases and competitive pricing pressures.

Cash Flow from Operations $61.8 million, down 8% year-over-year due to a $16.8 million tax payment deferral in the prior year. Excluding the deferral, adjusted cash flow from operations increased by $11.2 million or 22.2%.

Free Cash Flow $58.7 million, down from $61.9 million year-over-year due to the tax payment deferral. Excluding the deferral, free cash flow increased by $13.6 million or 30.2%, driven by increased profitability and lower capital expenditures.

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Operating Highlights

Acquisition of Mars Parts: CSW Industrials announced a definitive agreement to acquire Mars Parts for $650 million in cash, with an additional $20 million contingent on revenue growth. This acquisition will expand the company's HVAC/R product portfolio with complementary offerings.

Performance of recent acquisitions: Recent acquisitions, including Aspen Manufacturing, PSP Products, and PF Waterworks, have performed exceptionally well, generating revenue growth exceeding acquisition models. Aspen Manufacturing, in particular, has benefited from the shift to HVAC unit repairs.

HVAC/R market positioning: CSW Industrials is strategically enhancing its position in the HVAC/R market through acquisitions and product portfolio expansion. The company is focusing on repair-oriented products to address market trends.

Revenue and profitability: Record revenue of $277 million in Q2 FY2026, a 22% increase driven by acquisitions. Adjusted EBITDA grew by 20% to $73 million, despite slight margin contraction.

Cost management and pricing actions: Implemented pricing actions to offset tariff-related cost increases and lower ocean freight expenses. Continued efforts to reduce manufacturing exposure to China.

Capital allocation strategy: CSW Industrials continues to focus on disciplined capital allocation, including acquisitions and share repurchases, while maintaining a strong balance sheet.

Long-term growth focus: The company is committed to sustainable growth, leveraging acquisitions and operational efficiencies to outpace end-market growth.

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Risk or Challenges

Residential HVAC/R Market Challenges: The company faced headwinds in the residential HVAC/R end market, including soft housing activity, a shift from replacement to repair of HVAC units due to higher costs of new units with updated refrigerant standards, and customer destocking of HVAC/R inventory.

Tariff Impacts: Tariffs have led to increased input costs, impacting gross margins across all segments. The company has taken pricing actions to offset these costs but still faces margin compression in the near term.

Organic Revenue Decline: The Contractor Solutions segment experienced a 7.7% decline in organic revenue due to lower volumes in a challenging market environment, particularly in the residential HVAC/R sector.

Integration and Margin Pressures from Acquisitions: The integration of recent acquisitions, such as Aspen Manufacturing, has led to margin contraction due to unfavorable volume leverage and sales mix.

Economic Uncertainty: Broad economic uncertainty and market volatility have created challenges in forecasting organic growth and end-market conditions for the rest of the fiscal year.

Specialized Reliability Solutions Segment Challenges: This segment faced declining EBITDA margins due to material cost increases from tariffs and higher freight costs, despite price increases to offset these impacts.

Engineered Building Solutions Segment Challenges: This segment experienced a 2% revenue decline and a 20% drop in EBITDA margin due to material cost increases indirectly related to tariffs and competitive pressures.

Debt from Mars Parts Acquisition: The pending $650 million Mars Parts acquisition will increase the company's leverage ratio to approximately 2x, creating potential financial risk despite expected synergies and growth.

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Guidance & Outlook

Revenue and EBITDA Growth: The company expects consolidated revenue and adjusted EBITDA growth for the fiscal year 2026, despite short-term market fluctuations.

Mars Parts Acquisition: The acquisition of Mars Parts, expected to close in November 2025, will expand the HVAC/R product portfolio and is anticipated to enhance customer value, drive above-market profitable growth, and significantly grow free cash flow.

HVAC/R Market Outlook: The company remains confident in the long-term positive fundamentals of the residential HVAC/R, plumbing, and electrical end markets, despite current volatility and uncertainty.

Organic Growth in Contractor Solutions: Mid- to high single-digit organic growth is expected through the cycle in the Contractor Solutions segment, though current volatility in the HVAC/R market prevents updated guidance for the rest of the fiscal year.

Aspen Manufacturing Revenue: Aspen Manufacturing's fiscal 2026 revenue is expected to grow mid-teens of their trailing 12-month revenue of $125 million, with growth normalizing in the second half of 2026.

Pricing Actions: Pricing adjustments are being implemented across segments to offset tariff impacts and protect margin dollars, with further adjustments planned as needed.

Capital Allocation and Debt Management: The company plans to maintain a strong balance sheet, pursue growth opportunities, and pay down debt incurred from the Mars Parts acquisition, with a forecasted net leverage ratio of approximately 2x at the time of closing.

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Shareholder Return Plan

Share Repurchase: 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.

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Key Q&A

Q:Can you explain the trailing revenue trends at Mars and how they compare to Aspen and organic performance?

A:Mars has seen general trends that are somewhat between the organic performance and Aspen. Mars is weighted more towards repair but also includes replacement market, making it a blend. Recent data shows it aligns between the two numbers.

Q:What is the growth rate for Mars over the trailing 12 months?

A:Management avoided providing specific growth rates, stating that until Mars is integrated into their system, they cannot report specifics. They did note a tailwind from the repair business year-over-year.

Q:What are the expectations for Mars' growth and accretion, and how will synergies impact EBITDA margins?

A:Mars has over $200 million in revenue with mid-20s margins. Synergies of $10 million, mostly front-loaded, are expected to bring margins to 30% within a year. This would result in $60+ million of EBITDA on a trailing 12-month basis. Additional cost opportunities and revenue upside are anticipated.

Q:What are the organic growth expectations for the rest of the year across segments?

A:Management stated they cannot provide organic growth expectations due to the slower season and market uncertainty. They noted flat revenues in Contractor Solutions and SRS, with some softness in EBS bookings. They expect better visibility in the next fiscal year.

Q:Can you quantify the destocking impact in Contractor Solutions and discuss channel inventory levels?

A:Destocking impacted order volumes due to lower housing activity and cost headwinds. Inventory levels in the channel are considered stable, with no significant market share loss. Destocking is expected to run its course by the end of the calendar year.

Q:What are the ticket dynamics and price gaps for Mars products compared to competitors?

A:Mars products are priced similarly to the company's existing products, mostly in the sub-$100 range. They are considered premium products with a slight price premium over competitors, reflecting their quality and market share.

Q:How will margins be maintained in Contractor Solutions and other segments given organic growth challenges?

A:Margins in Contractor Solutions are expected to remain in the low 30s for the full year, despite organic growth challenges. SRS and EBS aim for 20% margins, though current margins are slightly below this target due to mix and market conditions.

Q:What is the approach to pricing and cost management across segments?

A:Contractor Solutions plans an annual price increase to cover inflation and costs. SRS implemented a 7% price increase, and EBS adjusts pricing project-by-project. Management is focused on maintaining dollar coverage for tariffs and input costs.

Q:What is the capital allocation strategy, and how does it balance acquisitions and shareholder returns?

A:The company plans to focus on smaller bolt-on acquisitions while integrating recent large deals (Aspen and Mars). Share buybacks will continue based on return analysis, alongside debt repayment and other capital allocation priorities.

Q:What is the order cadence in Contractor Solutions, and are there any notable trends?

A:Order patterns are stable but softer than expected due to destocking and market conditions. October orders have been managed well, with no extraordinary trends noted.

Q:Are there any early results from new sales channels or customer diversification in SRS?

A:Progress has been made in new product development and market expansion, with more updates expected in the future.

Q:What is the breakdown of organic growth in terms of volume versus pricing?

A:For the quarter, pricing contributed mid-single-digit growth, while volume declined in the low teens. Including acquisitions, volume was down slightly, and pricing remained a positive factor.

Q:Review of Unclear Management Responses

A:Management avoided providing specific growth rates for Mars, citing the need for system integration before reporting. They also did not provide organic growth expectations for the rest of the year due to market uncertainty and the slower season.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

CSW Transcript

CSW Industrials, Inc. (CSW) Q2 2026 Earnings Call Transcript

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