CSW Industrials Inc (CSW) 2026 Q3 法說會逐字稿

Greetings, and welcome to CSW Industrials fiscal third-quarter 2026 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alexa Huerta. Thank you. You may begin.

Thank you, Rob. Good morning, everyone, and welcome to the CSW Industrials fiscal 2026 third-quarter earnings call. Joining me today on the call is Joseph Arm, 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 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, and good morning, everyone. It is my pleasure to begin by reporting that our team delivered record fiscal third-quarter results in both revenue and adjusted EBITDA, despite market headwinds and economic uncertainty that has been present for most of this fiscal year and which has been most pronounced in the residential HVAC/R end market.

Before commencing our regular quarterly commentary, I want to provide additional context for our strategic initiatives and financial results in the quarter. CSW is a larger and more diversified company today than it was just three months ago when we last spoke to you. Capitalizing on our strong balance sheet and guided by our disciplined approach to capital allocation, we continued to invest in growth opportunities in a meaningful way.

In this most recent quarter, we completed three acquisitions, including the acquisition of MARS Parts within our Contractor Solutions segment, our largest acquisition to date at $650 million. We also acquired Hydrotex Holdings and ProAction Fluids within our Specialized Reliability Solutions segment, which amounted to $26.5 million in aggregate investment.

Considering the past 12 months to include the Aspen Manufacturing acquisition, we successfully executed four highly revenue, EBITDA, and cash flow-accretive synergistic transactions with a total investment of approximately $1 billion. In addition, we've invested $70 million in open market share repurchases during the quarter, emphasizing our dedication to maximizing shareholder returns. Our financial strategy (technical difficulty) is to maintain a long-term perspective and to invest opportunistically with great discipline, even amid short-term volatility.

Our capital structure now reflects these investments. In November, we strategically funded these acquisitions with cash on hand and low-cost debt capital, while always maintaining a net debt-to-EBITDA ratio well within our target range of 1 times to 3 times. This ensures that we maintain a resilient balance sheet with ample liquidity for future investment, as we have committed to do in writing to you, our shareholders.

These dynamics, along with the magnified seasonality effects from the addition of the Aspen Manufacturing and MARS Parts businesses make year-over-year comparisons of certain performance metrics less relevant. The interest expense generated by our new capital structure certainly impacts reported and adjusted EPS comparisons, particularly when comparing to prior year periods when we were in a net cash position.

Additionally, having deployed almost $1 billion in acquisition capital in the last year, our amortization of intangible assets will increase significantly, which also challenges comparisons. These items are excluded when providing EBITDA and adjusted EBITDA results, which is why we continue to point you toward these metrics as the best multi-period comparison.

Providing an update on the MARS Parts acquisition, we will remind you that at the time of acquisition, we reported that we expected to achieve $10 million of run rate synergies and to reach a 30% EBITDA margin for this business within 12 months. We have already actioned a majority of the identified synergies, and we now expect to exceed this initial objective.

I am pleased to share that the team has done an outstanding job in accelerating the integration of MARS Parts into our Contractor Solutions segment. The conversion of this business into the Contractor Solutions ERP system was completed earlier this month and other commercial integration initiatives, including product harmonization, are well underway. In short, we confidently maintain our expectations to achieve our operational and financial goals for this acquisition.

We have experienced encouraging order volume as we exited December and moved into January as compared to the overall fiscal third quarter. Based on very recent detailed customer discussions, we have positive feedback that our customers' inventory levels are getting more in balance as their destocking plans have been or are being completed.

Since going public in 2015, we have maintained that we generally expect mid- to high-single-digit organic growth through the cycle in our Contractor Solutions segment, though quarterly volatility is common. While not recession-proof, this segment has shown impressive resilience due to the essential nature of our innovative products.

While it is too early in the season to forecast what we expect in calendar 2026 and for our fiscal 2027, we are cautiously optimistic and encouraged by order patterns starting to emerge. We expect to have a better view of this outlook on our fiscal fourth-quarter earnings call in May.

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, this quarter had a lot of moving parts, and I will address many of them in my remarks today. During the third fiscal quarter of 2026, we delivered a record revenue of $233 million, up 20% as compared to the prior year, driven primarily by our acquisitions over the last year. This was partially offset by a 2.9% reduction in consolidated organic revenue concentrated in our Contractor Solutions segment. I will discuss the revenue trends by segment later in my remarks.

Adjusted consolidated EBITDA grew 7%. Adjusted EPS for the fiscal third quarter was $1.42, demonstrating resilience amid challenging market conditions. Recognizing that this reflects a 21% reduction compared to the same period last year, the reduction in adjusted EPS was primarily driven by $10 million of higher interest expense, as we moved from a net cash position last year to a net debt position this year after strategically funding acquisitions and share repurchases with cash on hand and low-cost debt capital.

Adjusted EPS was impacted to a lesser extent by increased operating expenses from the acquired businesses before realizing the full effect of planned and actioned synergies, as well as gross margin compression we have signaled all fiscal year, driven primarily by the margin dilution from the Aspen Manufacturing and MARS Parts acquisitions in Contractor Solutions.

More granularly on the EPS adjustments, our fiscal third quarter included $6.6 million or $0.40 per share in acquisition-related transaction and integration costs, net of tax, as well as $11.3 million or $0.68 per share of amortization of acquired intangible assets consistent with the updated adjusted EPS methodology we introduced in our fiscal first quarter.

Consolidated revenue for the fiscal third quarter of 2026 increased by $39 million or 20% when compared to the prior year period, driven mainly by the aforementioned acquisitions. Inorganic growth was partially offset by lower organic volumes in Contractor Solutions due to continued destocking by our customers in the residential HVAC/R market. Consolidated gross profit in the fiscal third quarter was $92 million, up 15% with a gross profit margin of 39.7%, down 170 basis points from 41.4% in the prior year period, with all segments experiencing some margin contraction.

Our consolidated adjusted EBITDA for the fiscal third quarter reached a record $45 million, representing a $3 million increase and 7% growth compared to the prior year period. Our adjusted EBITDA margin declined by 250 basis points to 19.2% from 21% in the prior year quarter. It was primarily driven by the margin dilution from acquired businesses prior to realizing anticipated synergies and higher input costs resulting from direct and indirect tariff impacts. We successfully mitigated a portion of these cost pressures through strategic pricing actions and reduced domestic freight expenses.

During the third quarter, Contractor Solutions generated $168 million in revenue, representing 71% of consolidated revenue and 27% growth over the prior year quarter. Growth in the quarter was driven by $42.7 million or 32.3% from acquisitions, partially offset by a $6.8 million or 5.1% organic decline due to lower volumes in a challenging market.

As a reminder, our fiscal third quarter has always been our weakest seasonally due to lower repair and replacement activity in the HVAC/R in the market. And that seasonality effect on revenues and the associated absorption has been magnified with the additions of Aspen Manufacturing and MARS Parts.

Third-quarter organic revenue decline reflects ongoing weakness in housing activity and the reduction of distributor inventory levels heading into calendar year-end. After a strong summer, MARS Parts experienced modest year-over-year revenue growth of approximately 1% during the quarter since the time of our acquisition, while Aspen experienced a reduction of 23.7% for the quarter.

Aspen's decline was expected, and driven by the prior year's unusually high third-quarter sales as distributors ramped up their inventories prior to the manufacturing deadline for products using the R410A refrigerant. Aspen's third-quarter sales this year were more in line with normal yearly seasonal patterns.

Since the May 1 acquisition date, Aspen's year-over-year growth has been 14%, demonstrating overall sales growing well above the market. As a result of the MARS, Aspen, and PF WaterWorks' fiscal third-quarter results, we had a total reduction of 7.3% in organic revenue, if we had owned these businesses last year, a metric we recently started reporting due to our large investments and acquisitions.

Adjusted EBITDA for the Contractor Solutions segment was $41 million or 24.4% of revenue compared to $37 million or 28.4% of revenue in the prior year period. EBITDA margin declined to lower gross margins from acquired business-related dilution prior to realizing anticipated synergies, partially offset by pricing actions and the lower domestic freight costs.

On November 4, we closed the MARS Parts acquisition in Contractor Solutions for $650 million in cash, utilizing a $600 million five-year term loan A and borrowings from our renewed and extended $700 million revolving line of credit. This acquisition, as previously mentioned, expands our existing portfolio in the HVAC/R into market with the addition of motors, capacitors, other HVAC/R electrical components, equipment installation parts, and other components used by the Pro trade for repairs and replacements. This acquisition also enhanced CSW's diversification into repair parts versus replacement parts.

Our Specialized Reliability Solutions segment revenue increased 10.8% to $38 million from $35 million in the prior period. Growth in the quarter included $2.3 million or 6.8% from recent acquisitions and $1.4 million or 4% from organic growth, driven by the general industrial and mining end markets, partially offset by declines in the energy and rail transportation end markets. Organic revenue includes the realization of the price increase in this segment announced during the second fiscal quarter, partially offset by unfavorable revenue mix.

The adjusted segment EBITDA of $6.5 million in the third quarter fell 1.6% from $6.6 million in the prior year period. The adjusted EBITDA margin contracted 210 basis points to 16.9% in the current period, driven by revenue mix.

As Joe mentioned, in the third fiscal quarter, CSW acquired Hydrotex and ProAction Fluids for approximately $26.5 million in aggregate, diversifying our Specialized Reliability Solutions segment's products and end markets. The Hydrotex acquisition expands our specialty oils and lubricants portfolio, and ProAction Fluids as products for horizontal directional drilling that support infrastructure build-out.

In conjunction with these acquisitions and in response to the challenges in the SRS segment's end markets and our recent margin performance, we have undertaken certain restructuring actions earlier this month. Some of these were related to winding down the headquarters facility for one of the acquisitions, and the remainder of the acquisitions where at our main legacy facility as proactive initiatives to streamline the combined operations.

We do not take these actions lightly, but we expect them to enhance our margins going forward as we strive for a sustained 20% EBITDA margin in this segment. The benefits from these changes will take effect April 1 and we will report further on the one-time charges associated with these restructuring activities with our fourth-quarter results in May.

Our Engineered Building Solutions segment revenue decreased 1% to $28.5 million from $28.8 million in the prior year period. Segment EBITDA decreased 5% to $3.9 million, representing a 13.7% EBITDA margin compared to $4.1 million and 14.2% in the prior year period, respectively. The slight contraction in EBITDA margin primarily reflects higher material costs linked indirectly to tariffs.

The backlog remained flat during the quarter with a trailing eight-quarter book-to-bill ratio remaining steady at 0.9:1. We're encouraged by the improved mix in the EBS backlog, which includes more higher-margin products, and we expect this to benefit future results. Pricing actions to offset increased costs are ongoing with additional increases planned on a project-by-project basis.

Transitioning to our cash flow. We reported third-quarter cash flow from operations of $28.9 million, growing 165% compared to $10.9 million in the same quarter last year. The year-over-year growth was primarily attributable to a $16.8 million tax payment made in the prior year fiscal third quarter, which was deferred from the first two quarters of the prior year due to a temporary federal tax relief.

Our free cash flow, defined as cash flow from operations minus capital expenditures, was $22.7 million in the fiscal third quarter compared to $7.8 million in the same period a year ago. The third-quarter free cash flow increase of $15 million or 193.1% was primarily driven by the aforementioned tax payment deferral, partially offset by higher capital expenditures in the current quarter and was otherwise relatively flat year-over-year.

Our free cash flow per share was $1.37 in the fiscal third quarter compared to $0.46 in the same period a year ago. Excluding the tax payment deferral, our free cash flow per share in this year's third quarter decreased by $0.09 or 6.2% from $1.46.

Our effective tax rate for the fiscal third quarter was a negative 34.2% on a GAAP basis due to a benefit from the $6.4 million release of uncertain tax position reserves upon statue exploration from the acquisitions of TRUaire and Falcon several years ago. Our adjusted tax rate was 28.3%, slightly higher than our normal range due to several items that vary quarter-to-quarter and due to the lower seasonal profitability in this quarter.

We currently forecast our fiscal year 2026 GAAP tax rate to be approximately 23% or 26% adjusted, which varies quarter-to-quarter due to specific items. Year-to-date, these rates have been 21.4% and 25.8%, respectively.

As Joe mentioned, our amortization of intangible assets will increase significantly due to the recent acquisitions, particularly MARS Parts. Based on preliminary purchase price allocation accounting, we expect that annualized amortization of intangible assets will be approximately $63 million moving forward.

As I mentioned, we funded this year's acquisitions using cash on hand from the September 2024 follow-on equity offering, revolver borrowings, and our new term loan A. At quarter end, we had $200 million outstanding on our revolver borrowings and the $600 million term loan A.

As a result of this debt, our third-quarter fiscal 2026 had interest of $78 million as compared to interest income of $2 million in the same quarter last year. Including cash on hand, our net debt for covenant calculation purposes was $764 million, resulting in a net debt-to-EBITDA leverage ratio of 2.3 times. This results in an interest rate of SOFR plus 200 basis points. As a reminder, we executed an interest rate swap of SOFR at a rate of 3.416% for three years to hedge a portion of our term loan A debt.

We maintain a strong balance sheet with a net debt-to-EBITDA ratio well within our target range of 1 times to 3 times, ensuring ample liquidity to continue to support growth initiatives and all other elements of our capital allocation strategy. Underscoring this point and with the support of our robust free cash flow and healthy balance sheet, during the quarter, we opportunistically repurchased approximately $70 million of our stock in the open market, representing 283,000 shares at an average price of $246 per share, reiterating our confidence in our ability to create long-term shareholder value.

We continue to monitor tariff developments and their impact on our businesses. While our Specialized Reliability Solutions and Engineered Building Solutions segments face minimal direct exposure, both have experienced indirect effects from broader economic consequences of tariff policies. Each of these segments sources a limited number of inputs internationally, but even certain US-sourced materials have seen significant cost increases.

The SRS segment has negligible sales in high tariff markets, though those could be at risk due to geopolitical volatility. Within EBS, we factor higher cost in the bids for new projects. Within Contractor Solutions, we're continuing to reduce third-party manufacturing in China, a strategy that's been underway for several years. By the end of fiscal 2026, we expect China to represent 10% of the segment's cost of goods sold.

Vietnam, primarily through our owned facility, will be in the low-30s as a percentage of Contractor Solutions cost of goods sold. Other Asian markets will contribute about 15% within the segment, while the remaining cost of goods sold is primarily in the United States. After product harmonization is complete, the MARS Parts acquisition is not expected to significantly alter this geographic mix.

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

Thank you, James. In the fiscal third quarter of 2026, we delivered record third-quarter revenue and adjusted EBITDA, propelled by 20% revenue growth from recent acquisitions that have significantly outperformed our acquisition models. We remain highly confident in our business and our ability to deliver above-market profitable growth, thereby enhancing long-term shareholder value.

We invested approximately $1 billion in acquisitions over the last year demonstrating our confidence in the long-term strength of the residential HVAC/R, plumbing, and electrical end markets. Our strong balance sheet will allow our outstanding team to continue to execute on all elements of our capital allocation strategy across market cycles, guided by our disciplined risk-adjusted returns analysis. We are proud of our demonstrated 10-year track record of creating sustainable shareholder value through prudent capital management and operational excellence.

One of our guiding principles is to treat our team members well, and we remain committed to prioritizing the safety and health of our employees. I'm very pleased to report that in calendar year 2025, we achieved a total reportable incident rate, or TRIR, of 1.1, an improvement from 1.2 in 2024, even as we acquired new businesses and integrated them into our environmental, health, and safety programs.

This accomplishment reflects our ongoing dedication to maintaining a consistently safe work environment in our legacy businesses and enhancing the work environment of the companies we acquire. And I want to thank all of the CSW team members for their role in achieving this important milestone.

We recently completed our bi-annual employee Form 3 engagement survey. This is a very broad-based survey that we believe provides instructive data, and we are pleased to report that we had an impressive participation rate of 90% compared to 85% two years ago.

We invest significant time analyzing these results and applying our learnings to enhance our employee value proposition. Having such a high level of employee participation is encouraging and it speaks to the strong employee-centric culture that we have at CSW.

As always, to close my prepared remarks, I want to thank the CSW Industrials team who collectively own approximately 4% of the company through our employee stock ownership plan as well as all of our shareholders for your continued interest in and support of CSW Industrials.

With that, Rob, we're ready to take questions.

(Operator Instructions) Jon Tanwanteng, CJS Securities.

My first one is, I think you mentioned you saw encouraging orders in January, especially relative to Q3. I was wondering if you could maybe quantify in terms of orders and organic growth so far? And I know it's early, not your biggest month, but maybe a little more color just on the improvement degree from the last quarter would be helpful?

Yeah, Jon, thanks for being on as always. It's James. Appreciate that. Yeah, we exited December with a good order rate. October and November stayed relatively soft as we expected and previewed as we saw destocking continue with our customers. We were encouraged by December, the exit rate was good.

Hard to quantify January yet, but Jeff certainly tells us that orders had been very good. We're pleased with that. We also referenced, Joe did in his prepared remarks, very detailed conversations with all of our top customers, very thorough report, real-time even this week on their destocking plans. We're encouraged by that.

And obviously, that shows up in orders. Some are still working through it this quarter. I think a couple of the OEMs that have already reported said that they see this quarter, people still working through it. So hard to quantify that from an organic growth rate. I don't think we'd get ahead of ourselves yet. But Jeff would certainly tell you that we're very encouraged by the order rates in January. We mentioned it very intentionally.

I'll say we saw the same in the Specialized Reliability Solutions segment. Mark has seen similar order pace as we enter the beginning of the calendar year. So we'll report fully on the quarter. Things will really get going in February and March, of course, but very pleased with what we're seeing so far and it gives us encouragement, and as Joe said, cautious optimism leading into the busy season.

Got it. That's helpful. And then if you could give us a little more color on your recent acquisitions and what their expected seasonality is? I think that would be helpful just because I think it's been a little bit increased just in terms of seasonality basis with all the new businesses you've put in there.

Maybe more specific, what are you expecting from the contribution in fiscal Q4 from acquisitions? You mentioned $47 million or $45 million in Q3. What does that turn into just based on historical parameters?

Yeah, Jon, great question. We've had MARS for just a couple of months now. So we're getting our arms around that fully. Aspen now, we'll have it since May 1, so we're -- this will be our first January, February, March quarter. We talked about Aspen was down a bit year-over-year just because last year was such a buildup like the OEM saw with the equipment change.

We've said generally that our legacy Contractor Solutions business is a 50% to 55% stronger two fiscal quarters, 45%, 50% in the others. Aspen and MARS are probably more like 60-40. Breaking down quarter-by-quarter is still a little early for us to get to and especially going through the first year with them, going through the disruption we've had in the market the last few quarters, of course, with the destocking. So I think as we get through this quarter, we'll have a better sense.

But they do exaggerate the seasonality, magnify that a little bit more because they're more repair focused. And obviously, folks are not turning their air conditioners on, certainly not with the cold snap we've had lately. But folks aren't turning their air conditioners on in December, January, February in most places. So you don't know that you have a repair.

If someone buys a new house, they may go ahead and replace the system. So that's why that business tends to hold up a little better through the seasonality. But they're going to exaggerate things somewhat. But I would ask that you give us this quarter to get a better sense of what that looks like under our ownership. And as we go along throughout the fiscal year, we'll get a better and better look each quarter and how each of those perform.

Susan Maklari, Goldman Sachs.

This is Charles Grom for Susan. Can you guys hear me? Wonderful. Sorry for the technical difficulties but good morning. I guess, first, I would love to ask about understanding your optimism for more normalized order rates coming through in HVAC?

Can you maybe help us understand what the organic growth for this business could look like in calendar '26 over the next few quarters? If the housing market remains weak, what is the confidence in your ability to return to your targeted mid- to high-single-digit growth over time?

Yeah, Charles, this is James. I wish we had a real precise answer. As we said, it's a little early. I'll say a couple of things. We've historically had a mid- to high-single-digit organic growth rate within Contractor Solutions and that's through the cycles. Obviously, this last year, we did not have that. We certainly had years when that exceeds 10%, and you get back to that average.

So I think as we go through the next couple of years, we expect that type of average to return. What quarter we start seeing that? We're not sure yet. We're certainly, as we said, encouraged by the order volume we've seen in December and January. We're most encouraged by the anecdotal evidence we have in talking directly to our customers and where their inventory levels are in terms of parts and accessories, which could be different from OEM inventory.

So we're encouraged by that. I would also say, as we go through the year, we're going to have easier comps. Last year's fiscal fourth quarter was up about 8%. And you had a makeup over the fiscal third quarter. So the quarter we just started January, February, March was pretty good last year because people waited to stock up because they were buying the OEM equipment in the November, December months and then they stocked up on parts and accessories down in March last year.

So this quarter's comps are a little harder. But as we go through the year, obviously, the comps get a little bit easier. So I think when we talk to you in May, we'll have a much better sense than with a couple of months behind us of order volume. You'll obviously hear a lot more from our customers, those public and the ones that we talk to that we're happy to talk about in terms of what their inventory levels look like.

So when we return to that, we'll see. But we've got a long history in this end market and in this business that tells us that a mid- to high-single-digit organic growth rate is what we expect in the long term.

Okay. That's very helpful color. Second, I'd just like to touch on pricing. Can you provide the latest on what you're seeing on the Contractor Solutions side? And considering the moving pieces in terms of tariffs and other input costs, how do you approach the decision to maybe get more pricing over time in this business this year?

We've been reactionary in terms of tariffs, obviously. The last couple of years, we've taken our annual price increase in January, and that's worked its way through the system and been well received. I think as we always say, that gets passed all the way through the system. Where we are in the value chain is very important. People pass that through as well.

As you know, we took a bit of a midyear price increase to cover our tariffs, and that's really starting to get fully impacted now, the quarter we just started. It takes a little while to get through the system. So as long as tariffs remain steady for the most part, we think we've covered that now. You've seen some -- obviously, some price increases on the metals side. Some of that starts to impact this.

Aluminum affects us in EBS, even something like silver can have a bit of an impact for us. We're watching that closely. It's not a big impact yet, but we're watching things like that as commodity prices continue to go up. But we think what we've done in terms of pricing is what we need, but we have never been shy about taking price increases and pushing those through if we see the costs moving up.

And we're very transparent with that with our customers, that gets passed through the system, like I said. We don't do that early or until we need to. Last year, as you recall, tariffs spiked, came back down, we waited, and I think our patience was rewarded with customer response on how we handle that in terms of the industry. And so we will not be hesitant to take pricing as we need to.

Last fall, we took price increases within Specialized Reliability Solutions and pass that through the system. Within EBS, that's a project-by-project basis. So we're not going to let the shareholders bear the brunt of cost increases. We will continue to pass that through as warranted.

No, that makes sense. Thank you for that. And if I can squeeze one last question in, maybe for James. Can you provide an update on your capital allocation priorities from here? Obviously, you're sitting near the midpoint of your targeted leverage range. And are you willing to do more acquisition in the near term? And what is the pipeline for M&A that you're seeing today?

Yeah. I'll pass some of this over to Joe, Charles, if you don't mind, but we will certainly work to pay down our debt, but we're sitting at a 2.3 times on the covenant. We've been there before after the TRUaire acquisition. We were right on that same number, in fact, and work that down over time.

We've got strong cash flow. As we get into the next couple of quarters, these acquisitions, the power is really going to show the cash flow that they generate similar to our legacy business. So we're going to have the opportunity to do that.

That leverage ratio obviously moved up from the acquisitions, but we also repurchased $70 million of stock in the quarter. We've got certain levels at which we do that, and that got triggered, and we did that. And we think having an average share price of $246 in that repurchase program last quarter is going to look very attractive long term and create a lot of value for the shareholders.

So we made a very intentional decision to take on a little more leverage to do that. But we're very comfortable at 2.3 times. We see that coming down over time from the results of our cash flow.

And I'll let Joe talk about our thoughts on M&A right now.

Yeah. Thank you, James. I think as James said, I mean, our free cash flow and our cash flow is going to be very impressive as we move through the year with these acquisitions. We do have a period of digestion here. I've been asked about future acquisitions and how long will it take to be able to be in a position to do another acquisition. And I've said that will be quarters, not years.

The integration is going exceedingly well. We are very, very pleased with the team's performance on that. And therefore, we're hitting all of our targets or exceeding. And so we're very pleased with that. And so again, that would be quarters of digestion, not years.

And -- but that also gives us quarters to pay down debt. And we will do that with our capital in the meantime. And we are disciplined. We are very rigorous in our analysis and our thinking about returns on those investments.

And so -- but we're in a bit of an execution mode right this moment. But again, that will last quarters, not years. And I think all levers are available to us, and we're just going to be very mindful of how we move forward. and continue our track record of carefully allocating capital to the highest risk-adjusted return opportunity, and that's paid off for us so far.

Natalia Bak, Citi.

I lost connection for a bit, so I'm not sure if this was asked, but I'll just ask it anyway. Just curious that given the colder weather and snow we've recently seen, have you observed any like near-term pickup in replacement activity or pull forward within the Contractor Solutions segment in this quarter?

Yeah, I don't think we see much impact there necessarily. We've got less exposure on the heating side, so to speak. Obviously, there's some there, but it's more on the air conditioning side. You tend to have something like this every year or two, so it's not terribly unusual in terms of changing patterns.

I think Natalia, all I would say so far, obviously, a look back will be valuable, a few weeks or a couple of months from now. But we talked about the order volume has been at a very encouraging pace as we exited December and January seeing very nice orders in the Contractor Solutions business as well.

The only direct impact we've seen so far is we lost a couple of shipping days at some of our facilities. We'll make that up in the quarter. So we're not concerned about that. So we don't see any negative impact.

In terms of tailwind, I think time will tell. But we see more of that in the summer when it gets exceptionally hot on the air conditioning side than in the winter when you get it exceptionally cold.

Got it. That's helpful color. And then just on the acquisition front. I think earlier, you mentioned that you expect to exceed the initial cost synergies that you outlined. So I'm just curious like what inning are you in or the margin maturity curve today versus when you initially close on acquisitions? And how much additional cost synergies do you expect to now realize from them?

Yeah. This is James, Natalia. Thanks for that. Yeah, Joe did mention that, and we're really pleased that we see in excess of $10 million. Just a couple of months in, I don't think we're ready to quantify that quite yet. We've got some internal goals. We always had internal goals that exceeded $10 million, but now we feel comfortable saying that we're going to exceed them.

In terms of innings, I'd say on the margin side, you're in the first couple of innings. We said that's a 12-month target, we're 2.5 months into the acquisitions and they'd be in the second or third inning, and it's a seasonally low quarter. So you can only do so much from a margin perspective. But we remain on track and are very comfortable with continuing to talk about a 30% margin.

I'll say this, margin's been fully integrated. So being able to directly pick out a margin is going to get difficult for us, but we're tracking it awfully well. In terms of the synergies, I'd say we're more in the middle innings because we've actioned these synergies.

A lot of it was folks that didn't come with the acquisition day one, We've wound down a facility. We have another -- the rent coming off of that facility as we go along. So we have actioned the vast majority of the $10 million and now even beyond $10 million of synergies but it takes the 12 months to really see that roll through.

Obviously, that's an annualized type number. So I think we're in the middle innings in terms of actioning, but you're still similarly in the first couple of innings in terms of pro rata and what we're seeing so far given that's a 12-month goal.

Okay. That's helpful. And then just one last quick question. Just switching over to SRS. Adjusted EBITDA margin contracted in SRS. And I believe last quarter, you mentioned that you implemented a price increase. So how much of the margin pressure is due to the timing lag in pricing versus structurally higher material costs? And when do you expect pricing to fully offset the material inflation in the segment?

Yeah. I think that we've seen the price increase come through now, Natalia. So that offset the tariffs, I think, were there. That was done prior to last quarter end, so I feel comfortable with that part. The biggest change this quarter was mix.

When the energy markets are some of our more attractive products, and they were down, you obviously see less drilling activity and some of those things. So as the energy markets are softer and our product mix shifts away from that, you're going to see potentially lower margins.

I'll reiterate, though, that we mentioned in my remarks that the acquisitions are going to be favorable to us, as we get through a year of having those. We've got synergy and margin goals with the acquisitions. While small, they're going to be important to us. They also to continue to diversify our end markets, more in the food and beverage market, for example, which is attractive; more in the horizontal drilling market, infrastructure continues to be attractive, so we feel good about their contributions.

And then we mentioned we took the opportunity, and we really give Mark a lot of credit for the proactivity here. We took some restructuring activity earlier this month, both with shutting down the headquarters facility (technical difficulty) the acquisitions, which was part of the plan. But we also saw some administrative and other roles that we could reduce and combine and give others more responsibility at our legacy facility here just outside of Dallas.

We'll have some charges here in the fourth quarter that we'll quantify on the earnings call. Those will all then be a tailwind for us as we enter the new fiscal year, April 1. So when we look at a margin in the mid-teens the last couple of quarters with the goal of 20% sustainable, Mark, in working with the team, looked at that and said, we've got to get to the 20%, and taking these acquisitions into effect with these restructuring activities gives us better sight to that goal.

Tomo Sano, JPMorgan.

Congrats on TRIR by the way. And my first question is regarding margins. How persistent do you expect the one-off costs such as integration, inventory write-downs recognized in this quarter to be going forward? Like when do you anticipate margin recovery once these costs subside, please?

Yeah, Tomo, this is James. Thanks. I really appreciate you mentioned the TRIR. We know how important it is to you, and it's the highest important to us. So seeing that come down this year was really an exciting achievement to be able to report.

In terms of margins on Contractor Solutions, we'll continue to have some integration expenses. Transaction expenses will be behind us. Those were, because of the acquisitions of MARS, Hydrotex, and ProAction during the quarter. So those were specific expenses related to that.

Not only the acquisition expenses themselves, the pro formas that we put out a couple of weeks ago were at the corporate level. So we have those costs. I think those are for the most part behind us. We'll continue to have some integration expenses.

The ERP integration just went live 2.5 weeks ago at MARS. So we'll still have some integration expenses. We will quantify and adjust that out. But I think as we get through this quarter, most of that should be behind us.

We still have to do the ERP implementation for Aspen. However, that will be coming as we go throughout the year. So we'll have some integration expenses, but we'll be sure to identify that for you, so that's why we continue to point to an adjusted EBITDA margin as being the best comparative tool, and we feel good about using that.

Was there another part to the question? Sorry if I missed that. The other thing you mentioned, I apologize, the inventory write-off that we had, that was one-time in nature. That was related to a specific distribution relationship that terminated.

We've since replaced that product in our product line. The customers have received that very well in the last few weeks since we were able to start marketing that. But that specific call out was one-time in nature.

Thanks, James. And my follow-up is EBS business. We didn't touch that much in the Q&A session. So could you update the color of the market outlook as well as your growth strategies, margin improvement initiatives for EBS business, please? Because you got the $1 billion M&A on basically CS business, SRS business, but not for EBS business. So could you talk about organic and inorganic strategies and margins for this business, please?

Sure, Tomo. This is Joe. I would say EBS has always been our most cyclical business and the commercial construction market continues to be really pretty tough out there. We've been very pleased with the performance of our team in bucking that trend and showing some growth various quarters and continuing to serve our customers really, really well.

I would say that the opportunity for organic growth is still out there. One of the great things about this business is it's small, and you win a project or two, and it really makes a difference. And we are very pleased with the reception in the marketplace of some of our new product development work, especially in EBS, where we have brought some new products to market that are being spec-ed into projects, and we would say that that is a really good opportunity for us to see organic growth.

But the market is tough. We continue to point to the Toronto market that really blew up over the last couple of years, added significant chunk to our backlog; that is now being revenued. It's not being replaced in the backlog. The new starts for high-rise residential in Canada has changed dramatically.

But we're not seeing cancellations out of the backlog. We're not losing any business there. And so those projects are revenuing, and so we're benefiting from that as well. So new product developments probably our best opportunity for organic growth in this tough market.

But I think one of the things that we see with EBS is we are really well positioned for when the market does come back. We are serving multiple property types. We have focused highly on institutional, hospitals, things like that, that are high end and set the standard for other types of construction within that market. And so we think there is organic growth opportunity there for us. If the market would come back, I think you'd really see a nice uptick there.

Jon Tanwanteng, CJS Securities.

I was wondering if you could just give your high-level thoughts on what you think housing demand and home improvement demand looks like heading into calendar '26? And beyond that, if there's any specific puts and takes that we should be applying on top of that like lapping the refrigerant change or others like that?

Yeah, Jon, it's James. We're all hopeful, of course, that housing activity picks up. New housing activity continues to stay pretty soft, it looks like. If you look at permit numbers, it stayed soft. Existing home sales, we've seen some green shoots there, it looks like. Mortgage rates have dipped now and then and you've seen the pickup on that.

And as we talked about on the last quarterly call, a good number of existing home sales come with replacement of units, so that would be a good thing. I think we'll see in the first couple of months here, if mortgage rates start to move, what consumer confidence does in terms of mortgage rates, and there's a lot of pent-up inventory it sure seems, so people willing to give up the lower mortgage rates to move has been challenging. We would say that, obviously, the order rates we've seen this quarter so far could give us a little bit of positive signs there. It's probably a little bit early.

Another thing I would mention is someone else mentioned on the call earlier this week in the industry that there's been a lot of repair business last year, and we think that continues this year. We're not sure when that shifts back obviously. And obviously, now with the diversification of MARS and Aspen, we've got good exposure, a much better balance between our repair and replace, but eventually those repair jobs turn into a replacement.

They may have buy you a couple of years or a few years, but eventually, those units do need to be replaced. But there's no doubt that housing activity is key and I think you've hit right on it. And when Charles asked earlier about organic growth rates, if you can tell us what housing is going to do, we'll have a much better sense of that.

And as our teams right now are going through the budget process. Our fiscal year being April 1. We're going through the intense budget process right now. obviously, housing activities to be key to that.

So we're watching the same (inaudible) that you are. We watch the weekly permits. We watch the weekly inventory numbers, the weekly mortgage rates, and that informs us on what we think we could expect and we hope to see some continued optimism in the next couple of months.

Got it. And then two quick timing questions. You mentioned higher margin backlog flowing through in EBS. When do you expect that to hit, number one?

And then number two, you mentioned trying to achieve the 20% margin consistently in SRS. What's the timeline or your expected schedule to arrive there?

Yeah. On EBS, the better backlog is coming over the last couple of quarters, and those usually have anywhere from 16 to 18 months turn around. So I think we'll start seeing that. We still have some of the lower margin projects in the backlog. So that offsets that.

So Jon, I think we'd like to tell you that as we exit the fiscal year next year, you're really getting a lot closer to that goal that we've put out there. But again, we're going through the budget as we speak, so if you can let me put a pin in that till May, we'll give you a little better sense of expectations as we go through the budgeting process I just mentioned.

In terms of SRS, I give you the same answer. But they're in that 16%, 17% range a little more consistently recently. And with the acquisitions coming in and with the restructuring that we've taken once we adjust that out during the fourth quarter, I think you're closer to seeing that 20% sustainably in the next few quarters.

Great. And then final one for me. Just a little more detail on the two smaller tuck-ins you did. Any mention on revenue and what the margin was there as well as the growth potential?

Yeah, Jon, I would say both should be accretive to the margin profile of that segment. It's one of the reasons we did it. It gave us the benefit of both diversifying end markets and being accretive to our margin profile. So that's good.

Growth, we expect to be able, again, to take their momentum and also add our sales force to that, our distribution channels. They've opened up a couple of new end markets for us, namely would be food, beverage where we've seen really nice growth already. And then also agriculture, which is something we have not done any of.

And so we've got high hopes for that. That's a GDP-plus business. And so growth of mid-single digits organically would be a good rate for that business. And we think we can do that and more with these acquisitions, providing some tailwind. But the margin accretion is also really important to us on that to show over the next few quarters.

And Jon, in terms of revenue pacing, we said we had $2.3 million of contribution in the quarter from those. That was just a couple of months' worth. It's also for something like horizontal drilling, especially a bit of the slow season. So I think that run rate, $1 million a month-or-so is what you were seeing, that's a little on the lowering because of seasonality.

So I think you could see 15%-ish revenue opportunity accretion from that. But we'll give you a little more detail as we get to a full quarter of owning these businesses and what that looks like. But the team is really excited and Mark's already reported some good opportunities in those businesses now that we own them in terms of sales.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Joe Armes for closing comments.

Thank you, Rob, and thank you, everyone, for joining us for this quarterly report. And we appreciate your support and interest, and we look forward to talking to you again in May. Thank you.

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