CSW Industrials Inc (CSW) 2026 Q1 法說會逐字稿

Ladies and gentlemen, greetings, and welcome to the CSW Industrials fiscal 2026 first quarter earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Alexa Huerta, Vice President of Investor Relations. Please go ahead.

Thank you, Ziko. Good morning, everyone, and welcome to the CSW Industrials fiscal 2026 first 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 in Form 10-Q prior to the markets 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 and the comments made during this call as well as the risk factors identified in our annual report on Form 10-K and other filings with the SEC. We do not undertake any duty to update any forward-looking statements.

I will now turn the call over to Joe.

Thank you, Alexa. Good morning, everyone. It is my pleasure to report that once again our team has delivered record results for revenue, for EBITDA, for net income and for adjusted earnings per diluted share for the first quarter of this fiscal year. This morning, we reported fiscal first quarter revenue of $264 million as well as fiscal first quarter EBITDA of $69 million, net income of $41 million and adjusted earnings per diluted share of $2.85. We are adjusting EPS beginning this quarter and going forward to exclude the amortization of acquisition-related assets.

Before I turn the call over to James to provide further details on our results and the performance in each of our business segments for the full -- for the first quarter of fiscal 2026, I would like to thank our team for its sharp focus on serving our customers well and on operational excellence. This continued focus delivered impressive results during a quarter marked by the integration of three recently acquired businesses and significant economic uncertainty and industry disruption, including the direct and indirect impacts of tariffs and trade policies, which have had near-term effects on global demand and consumer spending.

Our strong balance sheet, access to capital and disciplined capital allocation have continued to fuel growth opportunities, position us to navigate short-term demand fluctuations and market volatility and execute on growth initiatives. The theme of our recently released annual report to shareholders is a decade of demonstrated success. And while I am pleased with the results that we have delivered and the value that we have created for our shareholders over the past decade, I am equally optimistic as I look forward to what we can accomplish over the next 10 years.

Our commitment is to always do the right thing for the right reason, and both employee safety and environmental stewardship fully align with this focus. While we have been publishing safety metrics for some time, in recent weeks, we published for the first time a company-wide inventory of key environmental performance metrics, which can be found on our corporate sustainability web page. Over the last year, internal teams have worked diligently to commence reporting our energy and water usage as well as our greenhouse gas emissions, which will complement our robust social and employee safety disclosures.

At this time, I will turn the call over to James for a closer look at our results, and following his comments, I will return and conclude our prepared remarks.

Thank you, Joe. Good morning, everyone. As Joe mentioned, during the first quarter of fiscal 2026, we delivered record revenue of $264 million, representing growth of 17%. The revenue growth was primarily inorganic, resulting from the acquisitions of Aspen Manufacturing, PSP Products and PF Waterworks that we completed since August of 2024. This growth was slightly offset with a 2.8% reduction in organic revenue. The organic volume decline was concentrated in our Contractor Solutions segment, and I will discuss this in more detail later in my remarks.

We experienced 5% growth in EBITDA with 280 basis points contraction in EBITDA margin due to the expected and previously discussed margin compression resulting primarily from the Aspen acquisition as well as input cost increases arising from the direct and indirect impact of tariffs.

We are introducing a new performance metric this quarter, adjusted earnings per share, which excludes the amortization of certain assets that come from our acquisitions. Adjusted EPS in the fiscal first quarter was $2.85 or 2.5% 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 as discussed.

We have now crossed the $1 billion mark in terms of our cumulative investment in M&A since spinning off as a public company almost 10 years ago. Given the significant impact of the amortization of results, feedback from investors led us to start providing adjusted EPS each quarter adding this quarterly expense back to base EPS to provide a better measurement of our operating growth and profitability. The first quarter adjustment to EPS did not include any items other than the aforementioned amortization of assets from acquisitions.

Our consolidated revenue during the fiscal first quarter of 2026 was a record $264 million, a $37 million or 17% increase when compared to the prior year period. This revenue growth was primarily attributed to the aforementioned acquisitions totaling $44 million. This inorganic growth was somewhat offset by a reduction in organic volumes in Contractor Solutions, which was seen across the US residential HVAC end market. Consolidated gross profit in the fiscal first quarter was $115 million, representing 7% growth over the prior year period. Our gross profit margin experienced 370 basis points reduction to 43.8% compared to 47.5% in the prior year period as all three segments saw margin contraction.

Our consolidated EBITDA during the fiscal first quarter increased by $3 million to a fiscal first quarter record of $69 million or 5% growth when compared to the prior year period. Our EBITDA margin declined by 280 basis points to 26.1% compared to 28.9% in the prior year quarter. As we previously indicated on our fourth quarter earnings call, the recently acquired Aspen Manufacturing has lower margins than our legacy Contractor Solutions segment, and this impacts both our consolidated and Contractor Solutions segment margins. Additionally, the quarter experienced unfavorable sales mix and an escalation of input costs, including some resulting from trade policy.

Net income attributable to CSW in the quarter was a fiscal first quarter record of $41 million with $2.43 of unadjusted earnings per share compared to $39 million or $2.47, respectively, in the prior year period, representing 6% growth in net income and a 2% contraction in EPS. The contraction in EPS was due to the higher share count resulting from the successful follow-on equity offering last fall.

As we have mentioned on prior earnings calls, we believe that year-over-year and long-term comparison of CSW's performance are best reflected in our EBITDA and cash flow results and now our adjusted EPS metric, especially given the growing levels of amortization that come from our accretive acquisitions. I will provide more details on the components of EBITDA later in my remarks.

During the first quarter, our Contractor Solutions segment with $197 million in revenue accounted for 74% of our consolidated revenue and delivered $36.3 million or 22.6% growth when compared to the prior year quarter. Of the revenue growth in the quarter, $43.7 million or 27.2% came from our recent acquisitions, which was offset by a decline of $7.4 million or 4.6% in organic revenue in the quarter from lower volume in the challenging market environment.

The organic revenue decline in the first quarter is due in part to soft housing activity in the quarter, the nonrepeating stocking of a distribution center network for one of our larger customers in the prior year's first quarter, product volume being pulled into our fiscal fourth quarter as some of our customers made purchases in March to stock up for the season and the shift to repair from replacement of HVAC units by consumers, in part due to the higher cost of new units with the new refrigerant standards and some impact from tariffs.

During the quarter, our GRD sales, specifically for the residential end market, were down significantly due to being more heavily tied to new residential construction than the rest of our product offering. We generally expect mid- to high single-digit organic growth through the cycle, but we will see volatility in this figure from quarter-to-quarter. Our current view is that we will have mid-single-digit to high single-digit organic growth in each of the remaining three quarters of this fiscal year.

As a reminder, we consider growth to be organic after the one-year anniversary of an acquisition. However, with growth through acquisition comprising an increasingly meaningful part of our story, our policy to categorize our three recent acquisitions, Aspen, PSP Products and PF Waterworks, as inorganic revenue should not detract from their recent performance under our ownership. All three acquisitions had very impressive year-over-year revenue growth percentages, ranging from the high teens to the mid-30s.

Our organic growth rate on a pro forma basis to include all recent acquisitions was positive for the quarter. Looking forward, PSP Products will be considered organic beginning in August and PF Waterworks becomes organic in November. Aspen will be considered inorganic throughout this fiscal year. Our organic growth rate over the next few quarters is expected to reflect the strong growth trends of these businesses.

EBITDA for the Contractor Solutions segment was $65 million or 33% of revenue compared to $58 million or 36.3% of revenue in the prior year period. The decrease in EBITDA margin came from lower gross margins due to the expected dilutive impact from the Aspen acquisition, unfavorable volume leverage and sales mix, combined with an increase in operating expenses as a percent of revenue, primarily resulting from incremental amortization related to recent acquisitions.

Our Specialized Reliability Solutions segment revenue was $37 million, equivalent to revenue reported in the prior period. Revenue increased in the mining and energy end markets but declined in the general industrial and rail transportation end markets. The segment EBITDA of $6.5 million in the first quarter represented a decline of 23.6% from $8.5 million in the prior year period.

The EBITDA margin contracted 540 basis points to 17.7% in the current period, driven by a decrease in gross margins due to sales mix favoring lower-margin products and escalation in commodity pricing and onetime additional expenses with the consolidation of a sealants manufacturing facility into our primary facility in Texas. The decline in gross margins was partially offset by a slight decrease in operating expenses as a percentage of revenue.

Our Engineered Building Solutions segment revenue increased by 3% to $31.9 million compared to $30.9 million in the prior year period, driven by the timing of projects converting to revenue from a stronger backlog. Segment EBITDA was 29% lower than the prior year period at $4.4 million or a 13.9% EBITDA margin compared to $6.2 million and 20.1% in the prior year period, respectively. The contraction in EBITDA margin in the current period was primarily due to material cost increases indirectly related to tariffs, warranty claims and growth investments in the sales team and R&D to pursue new projects that will drive future revenue.

Our book-to-bill ratio for the trailing eight quarters remained at 1:1. The backlog quality continues to improve with projects that will deliver favorable margin mix in future quarters as they convert to revenue. We are pleased with the trend of the mix in EBS backlog, which has continued to add more business from our higher-margin products within the segment.

Transitioning to our cash flow, we reported strong first quarter cash flow from operations of $60.6 million, down $2 million compared to $62.7 million in the same quarter last year. The year-over-year variance was primarily attributable to routine fluctuations in working capital. Our free cash flow, defined as cash flow from operations minus capital expenditures, was $57.7 million in the fiscal first quarter compared to $59.6 million in the same period a year ago.

Our free cash flow per share of $3.44 in the fiscal first quarter compared to $3.82 in the same period a year ago, lower due to the slight decrease in our free cash flow as well as additional shares included in this year's quarter resulting from the follow-on equity offering.

Our effective tax rate for the fiscal first quarter was 24.3% on a GAAP basis. As we look to the balance of fiscal 2026, we continue to anticipate delivering full fiscal year growth in revenue and adjusted EBITDA for each segment as well as consolidated EPS growth and even stronger operating cash flow than in fiscal 2025. We expect Aspen's fiscal 2026 revenue to grow low double digits off their trailing 12-month revenue of $125 million through our fiscal 2025 year-end. This is a bit higher than our guidance on last quarter's call.

Note that Aspen's quarterly revenue sequencing is weighted more heavily to the first half of our fiscal year due to the nature of their products. As a result, we expect that Contractor Solutions go-forward quarterly revenue seasonality will be more pronounced than we've experienced in the past.

We still expect Aspen's EBITDA margin to be 24% for the full fiscal year 2026 despite headwinds from cost increases due to trade policy. The Aspen margin will vary from this full year level from quarter-to-quarter due to the seasonality of the business. As a reminder, Aspen will only be included in our results for 11 months during fiscal year 2026, including only two months in our fiscal first quarter due to the May 1 acquisition date.

As we mentioned on our last earnings call, the company funded the Aspen acquisition on May 1 by borrowing $135 million from our revolving line of credit and using the remainder of our cash on hand from last September's follow-on equity offering.

By the end of the first quarter, we had already paid down $40 million in borrowings and ended the quarter with $95 million outstanding on our revolver due to strong cash flows. Combined with our cash on hand at quarter end of $38 million, our net debt was just $57 million, resulting in a net debt-to-EBITDA leverage ratio of 0.2 times per our revolving credit agreement. We will continue to repay this debt during the fiscal year, absent other acquisitions, which we do continue to pursue.

With that context, we currently anticipate approximately $4.4 million in net interest expense for the full fiscal year, with the second fiscal quarter being the highest level. Our amortization of intangible assets will increase significantly over the prior year due to our acquisitions, most prominently from the Aspen acquisition. We've completed our first pass of our purchase price allocation accounting and now expect that the Aspen acquisition will add approximately $11.6 million of amortization expense in fiscal year 2026, which is a bit higher than we estimated last quarter.

Note that we will only own Aspen for 11 months in fiscal 2026. This addition of amortization leads to a consolidated fiscal year 2026 forecasted amortization figure of $39 million. Similarly, we now project Aspen to record $1.7 million of depreciation in fiscal 2026, and we expect total depreciation of $16.3 million for the company in fiscal 2026.

We currently forecast our fiscal 2026 GAAP tax rate to be 23% or 26% adjusted, which may vary from quarter-to-quarter due to specific items. Note that this forward-looking outlook was included in the quarterly Investor Presentation that we posted to our website this morning.

As I mentioned earlier, we expect to deliver impressive organic growth rates for Contractor Solutions in the remaining three quarters of fiscal 2026, with the segment adjusted EBITDA margin for the full year fiscal 2026 to be in the low 30s compared to the recent margins closer to the mid-30s as we layer in our acquisitions and the expected impact of tariffs. I will address tariffs in more detail at the end of my remarks. We remain highly focused on cost discipline and consistent execution across the company, especially in the current economic environment.

During fiscal year 2026, Specialized Reliability Solutions and Engineered Building Solutions are each expected to have higher full year revenue and EBITDA, with revenue growth and EBITDA growth in line with each other compared to the prior year. We expect to see EPS growth in fiscal 2026, although the company does not anticipate base EPS to grow as much as a percentage as revenue and EBITDA due to additional shares outstanding from the follow-on equity offering, increased interest expense and the increased depreciation and amortization from recent acquisitions.

Let me now spend some time on the current tariff environment, which we are watching very closely. This is obviously a very fluid situation. 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 tariffs policy materialize.

Each has a small number of inputs that are sourced overseas, but even US-sourced products have seen some unanticipated cost increases. The SRS segment has minimal sales in countries with high tariffs, so those sales, though immaterial, could be at risk. Within EBS, we take into account the increased expenses as we bid on new projects. In SRS, we are soon announcing a price increase to cover the higher input costs.

As we mentioned on the last earnings call, within Contractor Solutions, we continue to move third-party manufacturing out of China. We've been doing this for a number of years and now expect that in fiscal 2026, our cost of goods sold exposure to China within Contractor Solutions will be around 10%. Our exposure to Vietnam, which comes primarily through our owned facility there, will be in the low 30s as a percentage of Contractor Solutions cost of goods sold this fiscal year. Other Asian exposure is about 15% within the segment, and the rest of our cost of goods sold is primarily in the United States.

I'll remind you that all of recently acquired Aspen's production is done in the Houston, Texas area with minimal foreign sourcing. Given that it takes a number of months for the impact of tariffs to roll through the cost of goods sold, we were thoughtful in rolling out pricing actions related to trade policy. We undertook a number of pricing actions with most having effective dates over the course of June that we believe cover the current tariff exposure, adjusting for changes in manufacturing location and pricing support from contract manufacturers.

As we have 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 are finalized.

With that, I'll now turn the call back to Joe for his closing remarks.

Thank you, James. To summarize, during the fiscal first quarter of 2026, we posted record quarterly results for revenue, for EBITDA, for net income and for adjusted EPS. Our impressive 17% revenue growth included both inorganic growth from our recent acquisitions and organic growth volume in our Engineered Building Solutions segment. Looking ahead to the fiscal full year of 2026, we will continue to focus on delivering sustainable growth that exceeds the markets we serve. We will continue to identify and pursue accretive acquisitions of innovative companies and products that are synergistic to our existing portfolio.

I would like to reiterate that we continue to anticipate delivering full year organic growth in revenue and adjusted EBITDA for each segment, along with consolidated EPS growth and stronger operating cash flow. However, timing can create quarterly fluctuations.

On our last earnings call, we discussed the successful acquisition of Aspen Manufacturing, a leading supplier of aftermarket HVAC evaporator coils and air handlers. We have been pleased with the performance of this business since the consummation of that acquisition on May 1. The acquisition closed at the beginning of Aspen's busy season, so the integration into CSW will begin to accelerate later this year. Our integration focus thus far has been on enhancing the safety of our new team members.

On June 9, we commenced trading on the New York Stock Exchange and celebrated with the Board of Directors and the executive management team by ringing the closing bell at the NYSE. This completes our strategic transfer to the world's largest stock exchange, and we believe this move will benefit all shareholders over the long term, including the dedicated team members here at CSW Industrials who collectively own approximately 4% of the company through our employee stock ownership plan.

On October 1, we will celebrate our 10th anniversary as an independent public company. We have a decade of demonstrated success and capital stewardship to be proud of. I'm gratified by the results the team at CSW has delivered and the value we have created for our shareholders over the last decade, but I'm equally optimistic as I look forward to what CSW Industrials can accomplish over the next 10 years.

So as always, to close my prepared remarks, I want to thank the CSW Industrials team as well as all of our shareholders for your continued interest in and support of CSW Industrials.

Ziko, we are now ready for questions.

(Operator Instructions) Jon Tanwanteng, CJS Securities.

I was wondering if you could talk a little bit more about the organic growth decline in Contractor Solutions. Maybe talk about true end demand versus distributor demand and the uncertainty with tariffs that are going on, if that contributed at all, number one? And how much maybe do you think was just low organic demand, whether it was due to weather or pricing that may have gone higher? Any clarity there or a breakdown of what you think contributed to that would be helpful.

Yeah, Jon. It's James. Thanks for being on as always, and we appreciate being at your conference a few weeks ago. Yes, I think you've hit on a lot of the points. I think we saw as we looked across other public company comps in the HVAC space, and obviously, we do a lot of channel checks, Jeff and his team, with the distributors out there. It was a slow sell-through in the fiscal first quarter. You had some stock up in March. That was pre-liberation day, so folks didn't know what to expect there, so we won't necessarily point there, but there was some stock up in March, and you didn't really need the restocking because demand was a bit soft.

As you pointed out, there were some slow starts to the summer in a lot of parts of the country. The cooling degree days data wasn't too far off, but it was really slower. We certainly saw things relatively slow in April, got a little better in May, got a little better in June. So things tended to pick up as we went through the quarter. But overall, I think demand was soft.

We don't normally talk about our dependence on new housing starts or existing home sales that much, especially new housing starts, but the GRD market is more dependent on that. When people build a new home, they put in 30, 40, 50 GRDs as opposed to a renovation project, it may be a few. And given GRDs is one of our absolute top product lines, we saw declines there. We've seen that pick up a bit again in July. We've seen some restocking in July of the GRDs. So that was something that we called out specifically.

We also have seen, and others have mentioned this as well, a shift towards repair from replacement. And as you know, Jon, we have a little better -- a little lower ticket in repair jobs than we do replacements or new units. Now, the Aspen Manufacturing acquisition helps us there. That's a repair product. So that helps us, but we only had Aspen for two months in the quarter. And as things started to pick up, their business picked up. And you may have noticed that we moved my guidance from high single to low double digits to clearly low double digits because we've seen really nice order pickup there as the repair volume has picked up.

So I think as we looked across the market, we saw others report kind of high single to low double-digit organic volume declines. A lot of folks in the space had a bigger price impact because of the OEM side of things with the refrigeration cost leading to much higher tickets. So price kind of covered some of that up. Our pricing adjustment, which we just took in June, will now flow through the rest of the fiscal year. So we only had a few weeks of that. But that was just kind of to cover the tariff impact. We don't get that same pickup that fully covers the organic volume.

So we saw the 4.5% decline in organic revenue overall. We also had –- last thing I'll mention, you recall a stock up last year, one of our big customers was opening up and standing up some new distribution centers. That was kind of a onetime thing that helped last year, so the comp was a bit tough.

But to repeat something I said in my script, we do expect mid- to high single-digit organic growth in Contractor Solutions each of the next three quarters. So things will move around quarter-to-quarter. We saw that in the fiscal third and fourth quarter last year. It will bounce around. But that would lead to mid -- kind of mid-single-digit organic growth for the year, which is what we tend to expect through the cycle.

Got it. So just a normalization in the coming quarters, and you think that this is more of a one quarter blip just with all the moving bits and pieces that are going on?

It feels like it. I think demand is still soft. And when you look at something like new housing starts, existing home sales, we don't expect that to turn around in the fiscal second quarter. But some of the other things -- you don't have those onetime year-over-year tough comps like we did last year. It has gotten hot in most parts of the country. Here, in Dallas, we just had our first 100-degree day. So it did get hot slower here and later here, but some parts of the country have seen it. So we've certainly seen some things starting to pick up as we went through June and into July.

Okay. Great. And then just with the mid- to high single-digit organic growth for the remainder of the year, how much of that is from the pricing increases you're implementing to offset the tariffs?

Yeah, there's certainly a part of that. That price increase was kind of low to mid-single digits across the different product lines. We tried to be as specific as we could there. So you're certainly seeing some pickup, which is important. If you get volume back to relatively normal and have that price increase year-over-year, that's -- both of those come into play, yes.

Okay. And for the margin in Contractor Solutions, I think you mentioned low 30% for EBITDA margins for the full year. How much different is that from what you're expecting maybe last quarter?

Really no difference. We haven't seen a difference. Aspen is performing as we expected. Margins for Aspen are a little higher in the fiscal first and second quarter because of the seasonality. But through the full year, we said we expect a 24% margin. We're going to start working on that, and we expect that margin to be better next fiscal year. But for now, we really haven't changed our expectations of the low 30s on EBITDA. Now that's facing some headwinds. The tariff headwind is there. We think that the pricing increase will cover that. As we always talk about the dollars, you got a little pressure there.

We've seen some input costs come down a little bit, Jon. Ocean freight rates have come down some. But as a percent of COGS, that's a couple of percent, so it doesn't move the needle a lot, but it helps. So Jeff and the team are finding every way to cut cost and be as efficient as they possibly can and doing a good job of that. But the expectations haven't really changed from last quarter.

Okay. Great. And then just on the EBS segment, just given the long lead times of the projects there, the new steel and aluminum tariffs are the increased ones. How much do those affect you? I know you mentioned higher margins in the backlog, higher quality backlog, but I was wondering if projects that were priced a long time ago are going to face some impact from the higher prices either directly or indirectly.

We're seeing some impact, and you saw some of that coming through in the quarter, Jon, with the margins lower. We do think margins will improve as the year goes along. As we bid new projects, we have that opportunity. We talked last quarter a little bit, rebidding activity is the highest that Scott and his team have seen it in a long, long time. So we're kind of bidding a lot of projects now that we thought were up a couple of years ago, they didn't quite come to fruition in the backlog, now we're rebidding. So we're seeing a lot of activity right now.

So as you know, that takes a couple of quarters to run through the system. The team has done a really good job finding alternative sources for aluminum especially and those type of input costs that they have. But those are those indirect impact of tariffs that we're seeing. We may not have a direct impact in importing some of that. A lot of that sourced domestically. But we're bringing in aluminum where we can from different markets that have less tariff impact and less indirect impact so far. But again, as we bid each project new, we're making sure to account for that.

Got it. And then finally, just on capital allocation. What are your thoughts today, just M&A environment and the attractiveness of opportunities versus buybacks? Your stock price is indicating lower today. Or any other investments that you might have in the pipeline?

Yeah. No, this is Joe, Jon. It's a great question and certainly something that's top of mind for us. We have seen some of the M&A prospects that came -- what we thought were going to come early in the year. There's been a pause on some of those. There is a pipeline, and we are pleased with our ability to participate in that and to hear about those and to be really one of the top choices of a potential buyer. So we're hearing about all the opportunities, I believe. Our hurdle rate has gone up. Cost of capital and the risk premium associated has been a little higher in this environment. But we're still open for business and looking for the right opportunity to put capital to work.

I'll remind everybody we did the TRUaire acquisition, which was wildly successful for us, in the middle of the pandemic. And we've got to be very, very thoughtful about potential returns and the risk associated with that, but there are opportunities in times like this that we can take advantage of. Having the capital kind of base that we have and the strong balance sheet really gives us an advantage.

Susan Maklari, Goldman Sachs.

My first question is going back to the comment on -- or the shift in repair versus replace within Contractor Solutions. When you think about the macro and the housing backdrop and the state of the consumer, what do you think would need to happen in order to see that shift back? And how are you thinking about the mix going forward and what the implications of that specifically will be as we think about fiscal 2026?

Susan, I think one thing -- this is James. I think one thing as we see some easing in interest rates down the road, that will certainly unlock some of that. I think the -- we've certainly seen the consumer sentiment is just tough right now. People willing to make that $15,000, $17,000 investment in a replacement unit when they could do it through repair. So it's hard to know exactly what will unlock it. We certainly read a lot of your research about housing and see where that's heading.

As the new housing market picks up, then that helps new units, of course. Existing home sales will impact replacement units. I don't think the cost is necessarily coming down. I think more than anything, it's certainty in those type things. It getting hot later in the year this year doesn't give us quite as much data to work from. But as we've said, as things shift, at least for now from replacement to repair, Aspen gives us a great entree there. So we have a bit of a mitigating effect with Aspen. We'll have the full quarter of Aspen here in the second quarter and going forward.

And Susan, this is Joe. It may be obvious, but I mean, obviously, interest rates matter to new residential construction to home kind of sales, existing home sales as well, to home equity lines of credit for improvements. And so as your firm is predicting some interest rate relief later in the year, that would be helpful as well.

Yeah. Okay. That's helpful. And then maybe turning to the acquisitions. Can you talk a bit of how the integration of all three of the recent deals is progressing, the ability to realize some share gains as you're getting those fully into the channel? And then as well with share, can you talk about the ability to perhaps gain a bit as you think about the tariff situation and your domestic footprint?

Yeah, absolutely. The integrations have gone really, really well for Dust Free, for PSP, for PF Waterworks. Each deal is different. But with PF Waterworks and with PSP, not a huge amount of employee kind of add or facilities. I mean, those are relatively smaller operations. And really, it's getting them into our distribution channels and getting them into our sales channels. And so those have gone really, really well, and that's reflected in the results. I mean the growth rates have been phenomenal for those. So we're very, very pleased with that.

Yeah, Aspen has been a little bit different. It is a larger operation with a lot of employees and a larger facility. We have elected to not overburden that team right now with a lot of integration. We've been highly, highly focused on safety initiatives there in the early days. And once they get through their busy season -- we've talked about the -- James talked about the seasonality there. They have a real busy season and they have a slow season. And so a lot of our integration work to date has been either safety related that's been done directly or planning for when the slower season comes, and we can do other integration initiatives there.

So stay tuned on that one, but we're very pleased with the business results. And there has been lots of opportunity, as you mentioned, for share gain, working -- kind of like we show in our Investor Presentation, additional points of sale, additional distribution partners that we can bring those products to. We have this national footprint and size and scale in the distribution channels and have done a great job with our partners there. And so that opportunity to gain share of wallet with our customer and then market share as a result of that we think is very, very favorable. We're seeing that. Our team is executing well, and we think there's lots of upside.

I would note we were talking about earlier this week, we are still winning over distribution even with our TRUaire product that's been in place for five years now, we've owned for five years. There is still ongoing share of wallet gains with customers even now. So it's a ground game. It takes a lot of work. But our team does a great job at it, and we've proven -- we've got a proven track record on that to really be able to meaningfully grow these lines of business, these product offerings once they're under our ownership.

Stephen Farkouh, Truist Securities.

Here on for Jamie Cook. Just a few questions. It seems like in your release, mining, energy and markets were kind of turning a corner for you guys, but general industrial and rail are still seeing some softness. Were there any changes as we exited June and kind of into July in those end markets that can kind of give us confidence in the growth outlook?

Nothing dramatic. Stephen, this is James. Appreciate you being on. Nothing dramatic. And we kind of gave you the what was up, what was down. I'd say in all those cases, it was kind of a little bit on either side of positive or negative, obviously, given that the revenues were flat in SRS for the quarter. You had -- a couple of those were a little bit up, a couple were a little bit down, that kind of product categorization of which customers are buying the product. We wouldn't say that through the first few weeks of the quarter there was anything significant or any different type of momentum we saw. Those can flip each quarter. So nothing dramatic there.

I think the team is doing a good job going after the right sales, both domestically and internationally. Proud of the work that they're doing, introducing new products, in fact, and those kind of things to really give the customers what they need, but nothing dramatic in terms of momentum or acceleration of any of those categories.

Got it. And then kind of switching gears here. On the Big Beautiful Bill, can you guys quantify like any direct benefit to you from the tax provisions? And then is there any expected upside to demand from the bill?

Yeah, good question. I would say, first of all, on the rate, our first take is that we don't see much change to our tax rate going forward from the tax bill. We would say that we've got some cash tax pickup on bonus depreciation, especially. There's some international tax benefits that we see picking up that starts in 2027. So there's a little bit of pickup there. But where we see things is really on cash taxes. So it will help our operating cash flow and free cash flow, which is most important. As we often say, you can't reinvest tax rate, but you can reinvest tax dollars. And so we had a bit of a pickup there.

In terms of demand, I don't think we really see anything yet. It's so early. That got signed July 4. So there's a lot of interpretation still to be had, but we wouldn't point to anything yet from a demand perspective from the bill.

If we do have any, it would be likely seen in our EBS business and then some of the architecturally specified building products that show up both in EBS and in Contractor Solutions. I mean to the extent people are taking advantage of this bonus depreciation and building out capital expenditures, those would be the segments that you'd likely see.

Got it. And are you guys quantifying the cash flow benefit?

We're not. But one thing I'll remind you, our CapEx is pretty low. Our CapEx is usually a couple of percent of revenue. So the impact, without quantifying, it's a few million dollars, it's not tens of millions of dollars, Stephen, just to help you out. So we would expect to start seeing that in the coming quarters. But our CapEx dollars aren't that big, and some of our CapEx dollars are on ERP implementation, those kind of things. So we've got to really even within CapEx parse out which projects qualify for the bonus depreciation. So it's not something that we would highlight as material, but it's a benefit.

Tomo Sano, JPMorgan.

My first question is, I'd like to understand the -- what was the EBITDA margins in the first quarter compared to from your -- I mean, like initial internal like plan three months ago, especially on EBS and SRS? So despite the fact I see the sales flat or plus 3%, I see EBITDA margin is actually declining. And how do you see -- like any changes from the three months ago? And then how should we think about the next quarters for margin, please?

Yeah, Tomo, this is James. I'll remind everybody that we've put a 20% EBITDA margin target on both of those segments in kind of the intermediate to long term, and we think that both are going to get there. We would expect that margins would improve the rest of the year overall as a fiscal year versus where they were. There were some things in the quarter that we certainly saw coming. We knew that, for example, we were moving our sealants facility, shutting down the facility in Pennsylvania, consolidating that into our Texas facility, which will give us long-term benefits, but there were some expenses associated with that. That impacted margin a little bit. Those kind of things.

But you can't really predict product mix within SRS, and sometimes you just sell products that have a little more favorable margin than others. And so I would say that with flat revenues in SRS, the margin was a little softer than we anticipated, but we would expect that to recover in the coming quarters and get closer back to that 20% level that we've set as the target.

Within EBS, you certainly know which projects are in the backlog and coming. So I think we had expectations. Some of those had lower margin. You don't always know exactly which ones are going to close out in a quarter versus carryover. We would say that our backlog continues to improve. We're selling more product out of our two businesses, Smoke Guard and Balco specifically that are historically at higher margins. Those have really seen a pickup in backlog and a pickup in bidding and rebidding as we talked about. That's favorable for us going forward.

So that lends more confidence to getting closer to that 20% number as we look forward in the coming quarters and in the next couple of fiscal years. We had a couple of things within EBS. One thing I mentioned in my comments, there were some warranty claims. We would consider those pretty onetime. We literally kind of changed the input supplier on one product and it didn't work out real well. We had to take some warranty claims. We've moved back. So we don't intend for that to recur. So I would say both, we were a little surprised, but nothing dramatic.

And Tomo, this is Joe. I would point in each of those two segments. In SRS, closing down the facility in Pennsylvania and moving that into our Rockwell facility is intended to drive higher margins in the longer term. So we're taking a long-term view there. That's the right thing to do, and we'll all be rewarded for that. EBS, same thing on the investments in R&D and sales. Investment expenses, those are going to drive sales. And so those are investments. That doesn't cover all of the margin decline, but those particular instances are absolutely investments in our future and we're all going to be rewarded for that.

And just a follow-up on the supply chain management. Thanks, James, to update us with the recent commentary about the tariffs. But could you talk about -- a little bit about -- more color on the recent -- a lot of the complex situations versus your medium- and long-term supply chain management? And how you see decision make actually happened with some KPIs? And if you see -- if I could touch on like some kind of like a measurement that you did in the past like three months, that would be great.

I don't think we have a KPI that we're sharing publicly, but Jeff and the team have really done a good job of continuing to move things out of China. Some of that's into our own Vietnam facility, some of it is -- companies that had operations in China that we contract with are standing up operations in Vietnam and other Asian countries. Obviously, this is very fluid given the tariff environment and where you prefer to be. And as that slows down, we'll continue to refine that. I'd say the team is ahead of schedule in that respect.

This is something, as we've mentioned a couple of times, Tomo, that we've been doing for years. We have seen just from geopolitical reasons the desire to move away from China into our own Vietnam facility and other parts of Asia and here domestically in the US where things are appropriate. And Aspen being fully US manufacturing helps that even more as a percent of cost of goods sold. So that helps minimize that impact to some degree.

So we certainly internally are tracking things very carefully on which products we're able to move out. As I said, we're ahead of schedule. Our contractor partners have helped with that. They're doing a good job. We've brought some extra product into our inventory. We're in the process of doing that right now for two reasons.

Number one, to get ahead of some of the tariffs that could go into a place as soon as tomorrow. And also, as these facilities are transitioning, let's be sure we have plenty of inventory for our customers so as that transition happens, we don't run out of anything. So you could see working capital pop a little bit on inventory this quarter, and then we'll work it down. Nothing terribly unusual, but you might see that.

So we're tracking those inventory levels carefully. We have something we call weeks in stock. We know how much inventory we need for the demand we expect, and our teams are doing a great job with that. And then again, Jeff and his supply management team are doing a really good job of tracking product by product, contractor by contractor, when things are supposed to move and where we are in terms of schedule. And so nothing numerically or a KPI to publicly release, but there's a lot of internal charts and graphs and tables and those kind of things that our team is working on 24/7.

Congrats on many milestones.

Natalia Bak, Citigroup.

Maybe just sticking to EBS first, but you called out prospective revenue opportunities supported by growth investments in R&D and sales force. Can you just elaborate on where you're seeing these prospective revenue opportunities? Is it data center related? And can you maybe also size that pipeline as well?

Yeah, there are a number of them, Natalia. I would say, for instance, just to back up one step, some of the R&D would be like in testing. A lot of the products that EBS produces are life safety products. They're subject to very significant scrutiny by UL or other testing agencies for kind of performance-related thresholds and standards. And so that testing is expensive and it's very rigorous, but it's also a really nice barrier to entry, right? Once you get certified, then that gives you a product that has that listing and others would have to invest to get that.

So we like those types of products. There are new product developments going on that relate to data centers. We don't talk about it a lot. It's relatively small today. But yes, that's one of the projects that we have spoken about with -- internally with our team recently and beginning to get some traction there that we're very pleased with, and that would be in the fire stopping type of or fire control materials and products that they produce at EBS.

Got it, helpful. And then switching over to SRS. This was asked earlier, but maybe asking it another way. Can you just elaborate on the magnitude of impact from like lower margin product mix versus commodity inflation versus consolidation costs? Like should we expect margins to rebound sequentially as these onetime consolidation costs subside? And also with the Texas facility consolidation now complete, do you expect any like volume or customer churn impacts in the near term?

Yeah, this is James, Natalia. In terms of the margin impact of the few hundred basis points, I'd say 1 points to 2 points of that, 100 basis points to 200 basis points of that was the move. It was a few hundred thousand dollars. So out of the $30 million plus of revenue, you had 1 point or 2 points of impact from the move, and that's onetime in nature. And as Joe said, that should flip the other direction because that's going to be efficient for us going forward. That helps us get closer and back to that 20% margin level.

The other piece is there were certainly some headwinds on the input cost. It's hard to parse all of it down. I'd say kind of across the board. The sales mix was probably the biggest factor of what's left in that margin percentage. That can move around quarter-to-quarter. And we've just got some really high-end margin products and some lower-margin products. And sales mix was probably the biggest thing that we would mention there in that respect.

In terms of the consolidation itself, we do think that we're going to see some impact from that. Part of it is certainly cost savings. But we would certainly tell you that having our team running that segment based here in Texas at that facility, our sales team, our operations team, supply management, all those type of folks, having oversight of those products -- and those are the high-margin products, by the way, among the highest margin products that we have in the business. Having oversight of that, being able to see what they're doing, R&D, those type of things, having that locally here, we would say that we do expect an uptick in sales opportunities there.

Is that near term? It's probably more intermediate term. That takes a little bit of time. They've just gotten moved down here in the last couple of months. But I appreciate you picking up on that. We see that as a benefit as well.

But we do not see any real sales churn. We've had no customer issues on the transition. We're shipping product now that's been produced in Rockwell, and we've seen no concerns there from a transition standpoint for our customers.

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Joseph Armes, CEO, for closing comments.

Thank you, Ziko. We really appreciate everyone joining us for the call today and look forward to speaking to you again next quarter. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.