CSW Industrials (CSW) Q2 2026 Earnings Transcript

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DATE

Thursday, October 30, 2025 at 10 a.m. ET

CALL PARTICIPANTS

Chairman, President, and Chief Executive Officer — Joseph B. Armes

Chief Financial Officer — James E. Perry

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RISKS

The Contractor Solutions segment reported a 7.7% decline in organic revenue in the fiscal second quarter (period ended Sept. 30, 2025), driven by reduced volume and weakness in the residential HVACR market.

Gross profit margin decreased by 260 basis points to 43% in the fiscal second quarter, as all three segments experienced margin contraction due to input cost increases and tariff impacts.

Book-to-bill ratio in Engineered Building Solutions dropped below 1.0, now at 0.92, as previously high activity, notably in Toronto, moderated, potentially affecting backlog conversion and near-term revenue.

Management is unable to provide an updated outlook on organic growth for the remainder of the fiscal year due to persistent end market uncertainty and distributor destocking.

TAKEAWAYS

Consolidated Revenue -- $277 million in revenue, up 22% for the fiscal second quarter, primarily due to acquisitions (Aspen Manufacturing, DSP Products, Waterworks), partially offset by a 5.6% reduction in organic revenue.

Adjusted EBITDA -- $73 million in adjusted EBITDA, a 20% increase to a quarterly record; Adjusted EBITDA margin contracted 40 basis points to 26.3% due to margin pressure from acquisition mix and tariffs.

Adjusted EPS -- $2.96 in adjusted EPS, up 15.2% for the fiscal first quarter, driven by revenue growth despite a higher share count from last year’s equity offering.

Acquisition Synergy -- Pending Mars Parts acquisition (expected close November 2025) for $650 million plus $20 million earnout; Mars delivers over $200 million revenue, targeting $10 million in cost synergies to move EBITDA margin to 30% run-rate within a year of close.

Contractor Solutions Segment -- Revenue was $208 million (74% of total), with $61.9 million from acquisitions offset by a $12.3 million organic revenue decline, mainly due to residential HVACR weakness and distributor destocking.

Specialized Reliability Solutions (SRS) Segment -- Revenue was $39 million, with EBITDA margin contracting 190 basis points to 16.5% due to material and freight cost increases connected to tariffs.

Engineered Building Solutions (EBS) Segment -- Revenue declined 2% to $31.9 million, segment EBITDA fell 20% to $5.2 million, and margin decreased to 16.4% from 20.1%, mainly due to materials cost pressure and competitive pricing actions.

Organic vs. Price/Volume Mix -- Contractor Solutions organic revenue fell 7.7%, with pricing providing a mid-single-digit positive tailwind but volumes down by low teens percentage points; Adjusting for acquired companies' pre-acquisition revenue, organic growth was a positive 2.8%.

Gross Profit -- $119 million, up 15%, but margin contracted to 43% from 45.6% due to higher input costs and margin compression across all segments.

Free Cash Flow -- $58.7 million in free cash flow, down from $61.9 million in the fiscal second quarter of the prior year due to prior year tax payment deferral; When adjusted for tax timing, free cash flow increased 30.2% year-over-year, driven by higher profit and lower capex.

Balance Sheet Position -- Net debt was reduced to $32 million, with a net debt-to-EBITDA ratio of 0.12x; $18 million of stock was repurchased, and $75 million of acquisition-related borrowing was repaid following the Aspen deal.

Tariff Exposure -- Cost of goods sold exposure to China in Contractor Solutions is projected at 10% as the company exits fiscal 2026, with remaining Asian exposure (primarily Vietnam) in the low 30% range; Tariff cost impacts were addressed with price increases implemented in June (Contractor Solutions) and late in the second fiscal quarter (SRS).

Future Leverage -- Following the Mars Parts acquisition, the net leverage ratio (as defined by the credit agreement) is expected to rise to approximately 2x, with liquidity from cash flow and a committed revolver to support further investment.

SUMMARY

The latest earnings call for CSW Industrials (NYSE:CSW) highlighted record results for consolidated revenue and profit (non-GAAP, fiscal second quarter, period ended Sept. 30, 2025), with growth almost entirely driven by recent acquisitions as organic performance declined. Management announced the imminent closing of the Mars Parts acquisition, expected to add significant EBITDA with identified cost synergies and margin expansion to a 30% run-rate within a year of closing, anticipated in November 2025. Segment discussions revealed broad margin compression and noted the impact of housing cycle weakness across legacy business lines, compounded by supply-chain driven distributor destocking and heightened cost environments from tariff exposure. Cash flow and balance sheet remain resilient, with rapid deleveraging post-acquisition and continued share repurchases reflecting confidence in capital deployment. Forward outlook is limited by management’s inability to forecast organic growth due to market uncertainty, but continued pricing actions, integration of new businesses, and a disciplined acquisition strategy were emphasized as principal drivers for ongoing value creation.

Chairman Armes stated, "I have communicated to our board my intentions to continue serving as the company's CEO for the next several years."

Perry confirmed, "we are not able to give an updated view of organic growth for the rest of this fiscal year." and invoked potential for improved visibility entering calendar 2026.

For Contractor Solutions, Perry detailed price/volume drivers for the fiscal second quarter: "the pricing positive tailwind on that was mid-single digits, and the volume was down low double digits, kind of low teens, to break that out a little bit."

The Mars Parts transaction is structured at $650 million plus a $20 million earnout, with Perry projecting, "The synergies alone that we highlighted of $10 million, most of which will be front-end loaded in the first couple quarters, will get us right on top of that 30% number." The $10 million in synergies and 30% margin reference are based on a run rate expected to be achieved approximately one year after closing, not on a trailing twelve-month basis.

Book-to-bill ratio deterioration in EBS was attributed chiefly to the winding down of Toronto market projects; Perry noted, "We are filling up the backlog more with our smoke guard and balco businesses, which are higher margin, higher quality backlog for us."

Aspen Manufacturing's rapid growth is projected to "normalize," according to James Perry, as refrigerant transition demand abates, with its organic designation and reporting status clarified for fiscal 2026.

INDUSTRY GLOSSARY

Book-to-Bill Ratio: Order intake as a fraction of revenue billed in a period, used to assess growth trajectory and backlog health in project-based businesses.

GRD: Grilles, Registers, and Diffusers; HVAC products closely linked to new construction market cycles.

EBITDA Margin: Adjusted EBITDA divided by revenue, used to assess operational profitability before interest, taxes, depreciation, and amortization.

Full Conference Call Transcript

Joseph Armes: Thank you, Alexa. And good morning, everyone. It is my pleasure to report that once again, our team has delivered record quarterly results for revenue, adjusted EBITDA, adjusted net income, and adjusted earnings per diluted share. Before I turn the call over to James to provide further details on our results and performance of each of our business segments, I'd like to brag on and thank the entire CSW team for working so well together to build what has become a truly great company. Diligence and perseverance have defined our ten years as an independent public company, and the financial results we have delivered and the value we have created during that time have been impressive.

Our success is directly attributable to our disciplined deployment of capital into innovative business and product lines that, when combined with operational excellence under our ownership, grow faster than the overall end market. Despite headwinds and broad economic uncertainty during the quarter, especially in the residential HVACR end market, the CSW team delivered strong financial results. Our resilient balance sheet, access to capital, and disciplined approach to allocating capital have continued to fuel growth opportunities, most recently evidenced by our definitive agreement to acquire Mars Parts as previously announced. Despite short-term demand fluctuations and market volatility, we have been willing and able to execute on two highly accretive synergistic acquisitions in the last twelve months.

We expect to close on Mars Parts, our largest acquisition to date, very soon. As we continue to maintain a long-term perspective, investing in growth opportunities for the future. In light of the compelling growth and value creation opportunity ahead of us in our second decade, I have communicated to our board my intentions to continue serving as the company's CEO for the next several years. I remain passionate about the business itself and about the opportunity that we can provide for all of our team members to participate in the success that they helped create. I firmly believe that we have a partnership between capital and labor that meaningfully enhances the likelihood of sustainable long-term success.

And I'm honored to continue serving our company in this role. I eagerly look forward to the success that we can achieve together in the decade ahead. At this time, I'll turn the call over to James for a closer look at our results.

James Perry: Thank you, Joe. Good morning, everyone. As Joe mentioned, during the 2026, we delivered record revenue of $277 million, representing growth of 22% and in line with street expectations. The revenue growth was primarily inorganic, resulting from the acquisitions of Aspen Manufacturing, DSP Products, and Waterworks, all of which we completed since August 2024. This acquisition growth was offset by a 5.6% reduction in consolidated organic revenue. The organic decline was concentrated in our 20% growth in adjusted consolidated EBITDA with a slight contraction in EBITDA margin. Adjusted EPS in the fiscal first quarter of $2.96 was ahead of Street expectations and was 15.2% higher than the same quarter a year ago.

This 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 offer, as well as some compression in the margin. The second quarter adjustment to EPS included acquisition transaction expenses of $1.8 million or 8¢ per share, as well as the amortization of assets from acquisitions. The new adjusted EBIT EPS methodology we introduced last quarter. Our consolidated revenue during the fiscal second quarter of 2026 increased by a net of $49 million or 22% when compared to the prior year period. Our revenue growth totaling $62 million was primarily attributed to the aforementioned acquisition.

This inorganic growth was somewhat offset by a reduction in organic volumes in contractor solutions, which was impacted by the broader market disruptions seen across the US residential HVACR market this summer. Consolidated gross profit in the fiscal second quarter was $119 million, representing 15% growth over the prior year period. Our gross profit margin experienced a 260 basis point reduction to 43% compared to 45.6% in the prior year period as all three segments had margin contraction. Our consolidated adjusted EBITDA during the fiscal second quarter increased by $12 million to a quarterly record of $73 million or 20% growth when compared to the prior year period and ahead of Street expectations.

Our adjusted EBITDA margin declined by 40 basis points to 26.3% compared to 26.7% in the prior year quarter. The slight decrease was a result of the integration of the Aspen Manufacturing acquisition into our results for the full quarter, as well as input cost increases arising from the direct and indirect impact of tariffs.

We were able to offset most of these cost impacts with pricing actions, lower ocean freight expenses, and leveraging our operating adjusted net income attributable to CSW in the quarter was a quarterly record of $50 million, with $2.96 of adjusted earnings per diluted share compared to $41 million or $2.57, respectively, in the prior year period, representing 21.8% growth in adjusted net income and 15.2% growth in adjusted EPS. During the second quarter, our Contractor Solutions segment, with $208 million in revenue, accounted for 74% of our consolidated revenue and delivered $49.6 million or 31.2% growth when compared to the prior quarter.

Of the revenue growth in the quarter, $61.9 million or 39% came from our recent acquisition, which was offset by a decline of $12.3 million or 7.7% in organic revenue in the quarter from lower volume in the challenging market environment. The organic revenue decline in the second quarter was due in part to continued soft housing activity in the quarter and the shift to repair from replacement of HVAC units by many consumers, which is being primarily driven by the higher cost of new units with the new refrigerant standards, as well as the impact from tariffs.

We saw another quarter with lower GRD sales, specifically for the residential end market, as these products are more heavily tied to new residential construction than the rest of our product. Several of our customers reported destocking of their HVACR inventory in the second fiscal quarter. When that dynamic occurs, we see lower order volumes, which can lead to unfavorable comparisons to certain sales metrics in the industry. As they restock, our growth rate could be higher than our customers report due to timing differences. Growth through acquisitions comprises an increasingly meaningful part of our contractor solutions business. Aspen Manufacturing benefits from the trend of consumers shifting to the repair of HVAC units from replacement of their units to stock.

In part as a result of this, organic growth rate, including the pre-acquisition revenue effect from recent acquisitions, increased by 2.8% in the quarter, which is a strong accomplishment in the face of the aforementioned major residential HVACR market headwinds. The pending acquisition of Mars Parts will further enhance our product offering to satisfy HVACR repair demand. We remain focused on the pre-acquisition revenue effect because the Dassault's recent acquisitions were owned by CSW during the same period in the prior year and highlight the organic growth potential and performance of our acquisitions under our ownership.

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

Products we sell and uncertainty in the HVACR end market, we are not able to give an updated view of organic growth for the rest of this fiscal year. As we enter calendar 2026, we expect to have a better view of next year's growth potential and plan to provide our perspective on our next quarter's earnings call. Adjusted EBITDA for the Contractor Solutions segment was $68 million or 32.4% of revenue compared to $54 million or 33.8% of revenue in the prior year period.

The decline in EBITDA margin came from lower gross margins due to the expected previously reported dilutive impact from the Aspen acquisition, unfavorable volume leverage, and sales mix, partially offset by pricing actions and lower ocean freight costs. Our specialized probability solution segment revenue increased slightly to $39 million as compared to revenue reported in the prior period. Revenue increased in the general industrial and mining end markets and declined in the energy and rail transportation end. The segment EBITDA of $6.4 million in the second quarter represented a decline of 9.7% from $7.1 million in the prior year period.

The EBITDA margin contracted 190 basis points to 16.5% in the current period, driven by a decrease in gross margins due to an escalation in material costs to tariffs and higher freight costs to support international shipment growth. As we mentioned on our last earnings call, we announced a price increase in this segment during the second fiscal quarter. It went into effect late in the quarter to protect our margin dollars from recent cost increases in certain commodities. We remain committed to passing along cost increases as warranted. Our 2% to $31.9 million compared to $32.7 million in the prior year period.

Segment EBITDA was 20% lower than the prior year period at $5.2 million or a 16.4% EBITDA margin compared to $6.6 million and 20.1% in the prior year period.

James Perry: The contraction in EBITDA margin in the current period was primarily due to materials cost increases indirectly related to tariffs and strategic pricing to address competitive pressures. Our book-to-bill ratio for the trailing eight quarters dipped slightly below one to one and is now 0.92 to one. We were pleased with the trend and quality of the mix in EBS backlog, which has continued to add more business from our higher margin products within the segment, and we expect to recognize this benefit in future quarters. We've been increasing our pricing on products and projects to offset impacts from tariffs, as appropriate, and further price increases or transitioning to our cash flow.

We reported second quarter cash flow from operations of $61.8 million, down 8% compared to $67.4 million in the same quarter last year. However, the year-over-year variance was primarily attributable to a $16.8 million tax payment deferral in the prior year period under a temporary federal tax relief. Excluding the $16.8 million tax payment deferral, the second quarter adjusted cash flows from operations increased by $11.2 million or 22.2%. Our free cash flow, defined as cash flow from operations minus capital expenditures, was $58.7 million in the fiscal second quarter as compared to $61.9 million in the same period a year ago.

The free cash flow decrease from the prior year period was also by the $16.8 million tax payment deferral in 2025. Excluding this tax payment deferral, the second quarter free cash flow increased by $13.6 million or 30.2%, primarily driven by increased profitability and lower capital expenditures.

James Perry: Our free cash flow per share of $3.49 in the fiscal second quarter compared to $3.88 in the same period a year ago. Lower also due to the aforementioned tax payment deferral from the prior year period, as well as the higher share count in this year's quarter resulting from the follow-on equity offering last September. Excluding the tax payment deferral, our free cash flow per share in this year's second quarter increased by 66¢ or 23.2% from $2.83, primarily driven by increased profit and lower capital expenditures partially offset by the higher share count. Our effective tax rate for the fiscal second quarter was 26.4% on a GAAP basis, within our normal range.

As a reminder, the third quarter GAAP tax rate may be lower than average due to a potential $6.3 million release of uncertain tax position reserves upon statute expiration of several pre-acquisition tax returns for the acquisitions of TruAir Falcon several years ago. We spent Aspen Manufacturing's fiscal 2026 revenue to grow mid-teens of their trailing twelve-month revenue of $125 million through our fiscal 2025 fiscal year-end. This is a bit higher than our guidance on last quarter's call due to the strong performance since the acquisition, but we expect that the growth will begin to normalize in 2020 as the refrigerant transition comes to a close.

As a reminder, Aspen will only be included in our results for the eleven months during fiscal year 2026 due to the May 1 acquisition date. As a reminder, we funded the Aspen acquisition on May 1 by borrowing $135 million from our revolving 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 second quarter, we had already paid down $75 million of borrowings and ended the quarter with $60 million outstanding on our revolver.

Due to strong operating cash flows, combined with our cash on hand at quarter-end, our net debt for revolving credit agreement covenant purposes was just $32 million, resulting in a net debt to EBITDA leverage ratio of 0.12 times. We remain proud of our strong balance sheet with this low net debt to EBITDA ratio, providing us with ample liquidity to pursue growth initiatives, including the pending Mars Parts acquisition. During the quarter, we repurchased over $18 million of our stock in the open market, reflecting our belief in the long-term value creation that our growth initiatives will have. We will continue to consider share repurchases with our strong free cash flow and balance sheet.

As we've discussed, on October 1, we announced a definitive agreement to acquire Mars Parts for $650 million in cash at closing, with an additional $20 million of potential consideration based on revenue growth over the twelve-month period after closing. This acquisition, which we expect to close in November 2025, will expand our existing portfolio in the HVACR end market with the addition of motors, capacitors, other HVACR electrical components, equipment installation parts, and other components used by the ProTrade for repairs and replacements. We anticipate funding the transaction with a combination of a syndicated term loan and borrowings under our $700 million revolving credit facility.

We expect our net leverage ratio, as defined by our credit agreement, to be approximately two times at the time of closing. Following the closing of the acquisition, we will provide updated information pertaining to the final capital structure in this year's fiscal year's interest expense expectations. We currently forecast our fiscal year 2026 GAAP tax rate to be approximately 23% or 26% adjusted, which may vary from quarter to quarter due to specific items. We continue to closely monitor the tariff environment and impact on our specialized reliability solutions and engineered building solutions segments have minimal direct impact from tariffs but have been impacted indirectly as the follow-on economic impacts of aggressive tariff policy materialize.

Each has a small number of inputs that are sourced overseas, but even US-sourced materials have seen related cost increases. The SRS segment has minimal sales in the countries with high tariffs, so those sales, while immaterial, could be at risk. Within EBS, we consider the increased expenses as we are bidding on new projects. Within contractor solutions, and excluding the impact of the pending Mars acquisition,

James Perry: we continue to move third-party manufacturing out of China. We've been doing this for a number of years, and we now expect that as we exit fiscal 2026, our cost of goods sold exposure to China within Contractor Solutions will be around 10% of the total. As these moves take time, our exposure to Vietnam, which comes primarily through our own facility there, will be in the low thirties as a percentage of contractor solutions cost of goods sold. Other Asian exposure is about 15% within the segment, and the rest of our cost of goods sold is primarily in the United States.

The Mars Parts acquisition is not expected to materially change the geographic mix, especially once product harmonization between Mars Parts and our existing contractor solutions segment is complete.

James Perry: We undertook a number of pricing actions to offset the direct and indirect impact of tariffs. In contractor solutions, most of the pricing actions had an effective date in June 2025, which we believe covers most of the current tariff exposure. Adjusting for changes in manufacturing location and pricing support from contract manufacturers. In SRS, we communicated our pricing actions to customers in mid-August. It went into effect late in our second fiscal quarter. Within EBS, these pricing actions are taken on a project-by-project basis through bids and rebids. As we've said before, our goal is to protect margin dollars, and as a result, these tariffs will cause margin compression in the near term.

We will also assess the need to make further price adjustments as tariffs continue to remain somewhat fluid in certain countries. I will now turn the call back to Joe for his closing remarks.

Joseph Armes: Thank you, James. To summarize, during the 2026, we delivered record quarterly results for revenue, adjusted EBITDA, adjusted net income, and adjusted EPS. Our impressive 22% revenue growth was driven by our recent acquisitions, which have performed exceptionally well under our ownership, generating revenue growth well in excess of our acquisition model. Looking ahead to the fiscal full year of 2026, we will continue to focus on delivering sustainable growth that outpaces the end markets we serve, regardless of short-term market fluctuations. We expect to experience consolidated revenue and adjusted EBITDA growth this fiscal year, along with consolidated EPS growth and stronger operating cash flow, recognizing that timing and end market conditions can create quarterly fluctuations.

I would like to briefly comment on the Mars Parts acquisition that we expect to close next month. This synergistic acquisition will expand our existing HVAC product portfolio with highly complementary offerings and enhance our customer value proposition in the HVACR market. CSW is uniquely positioned to accelerate the growth of these products through our market knowledge, customer focus, and investment in people, systems, and processes. We believe this important acquisition fits perfectly within our strategy to drive above-market profitable growth and enhance long-term shareholder value. Importantly, we remain fully committed to maintaining a strong balance sheet.

Mars Parts is also expected to meaningfully grow CSW's already strong free cash flow, which will allow us to continue pursuing growth opportunities while paying down the debt incurred to consummate this transaction. With the significant investment in recent acquisitions, including the pending Mars Parts transaction, we continue to demonstrate our full confidence in the long-term positive fundamentals of the residential HVACR, plumbing, and electrical end markets. We have consistently and strategically positioned our balance sheet and our team to execute on all elements of our enduring capital allocation strategy through all market cycles, guided by our rigorous risk-adjusted returns analysis. I want to underscore this commitment as well as our long-term perspective on enhancing shareholder value.

On October 1, we celebrated our tenth anniversary as an independent public company. CSW Industrials, Inc. now boasts a decade-long track record of demonstrated success, rooted in the strength of our culture, sound principles of capital allocation, the resilience of our end markets, and the essential nature of our innovative products. While I am immensely proud of the results CSW has delivered and the value we have created for our shareholders over the last decade, I'm equally optimistic as I look forward to what we can accomplish in the years to come.

I consider it an honor and a privilege to continue in my role, providing continuity of leadership to our organization as we embark upon a new season of accelerated growth and capital stewardship. As always, I want to close my prepared remarks by thanking the CSW Industrials team, who collectively own 4% of our company through our employee stock ownership plan, as well as to all of our shareholders for your continued interest in and support of CSW Industrials, Inc. With that, Alicia, we are now ready to take questions.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed.

Jon Tanwanteng: Hi. Good morning. Thank you for taking my questions, and congrats on a nice quarter, especially on the integration front. Joe, I'm glad to hear you're gonna stay with us. Help us understand the trailing revenue trends at Mars. And if you saw similar impact, was it more in line with the organic performance you saw in the quarter? Is it more similar to Aspen? I think you called out in your comments that it was more of a repair business. Was wondering if you could help us understand how that business performed in the most recent data you have relative to the market trends we've been seeing?

James Perry: Sure, Jon. I appreciate it. This is James. Thanks for being on as always. Appreciate your support and good questions. Yeah. Mars has seen general trends. I'd say it's a little more like organic, but it's kinda between the two. They are a little more weighted towards repair. Aspen is primarily repair. Mars is weighted more towards repair, but it also goes into the replacement market. So it's kind of a blend. It'd really kinda be between our two numbers is what we've seen the last few months, I'd say, as cleanly as anything.

Jon Tanwanteng: Okay. Could you speak to the growth rate that they've seen over the last, let's say, twelve months?

Joseph Armes: I don't wanna get that specific quite yet. You know, I'll say until they get into our system and we kind of conform things in the same way to report, I couldn't say much. But you know, they have seen a bit of a tailwind from the repair business. We will say that year over year. But until we report things quite the same way, it'd be hard to get too specific. Yeah. Once we get the transaction closed, we'll be able to provide a little more information as we conform everything to our system.

Jon Tanwanteng: Okay. Fair enough. And then as we look forward, what are your expectations on the business from a growth and accretion perspective? Especially the energy synergies, what are you expecting from that front? I think you had a target of getting that business to above 30% EBITDA margins. Help us understand.

James Perry: Yeah. You're right. You know? And, yeah, you know, we've said that Mars is a little over $200 million of revenue. Its margins right now are in the mid-twenties. The synergies alone that we highlighted of $10 million, most of which will be front-end loaded in the first couple quarters, will get us right on top of that 30% number. So that'll get us up into the, you know, 60 plus million of EBITDA, that kind of ballpark. On a trailing 12 when we look back. And that 30%, keep in mind, is gonna kinda be a runway to run rate a year from now.

It's not necessarily gonna be a trailing number this time next year, but that'll be the run rate. And then we've got opportunity above and beyond that. The team is working hard on finding other cost opportunities, things like freight, those kind of things. Obviously, as we get it in our system, we fully expect to have some revenue upside as more and more of our customers. The feedback we've gotten has been very positive with our ownership of Mars Parts and their likelihood to move more business over to us. That's not factored into that $10 million of synergy.

So our first goal is to get to 30% run rate, you know, kinda this time next year, right after we, you know, the on the anniversary of closing. And then I think we have opportunity to get it even closer to our historical contract solutions margins as we bring it under our umbrella, Jon. And, Jon, this is Joe. Just to reiterate what James said, you know, in my script, I said, this acquisition fits nicely into our kind of strategy to grow faster than the market we serve. Mars will be consistent with that. There will be, you know, mid to high single-digit organic growth rates as we've said all along in our business.

Mars will fit into that once they're in our system. There is top-line growth opportunity there. And that top-line growth opportunity is not part of our $10 million in synergies.

Jon Tanwanteng: Got it. Thank you. And then last one for me. Could you just speak to the organic growth expectation for the rest of the year in each of your segments? Are you seeing continuation of what you saw in Contractor Solutions as we head into the third quarter here? And then just on the other two businesses, I think you mentioned your EBS bookings were below one to one on a book-to-bill. Just any thoughts on the other three businesses' organic growth?

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

You know, SRS, you know, it's got some energy exposure. So when that's been a little bit softer, then that's kinda kept our revenues flat. And that's also hurt the margin a little bit because that's a higher margin industry for us. So from a mix standpoint, that's hurt. But, you know, nothing dramatically we would think would be different in SRS. Within EBS, you know, we did talk about that the book-to-bill came down a little bit. And a lot of that's concentrated around that Toronto market that was so strong for us for a while. We talked over the last couple years. That's kinda wound down. And there's not a lot going on there now.

We are filling up the backlog more with our smoke guard and balco businesses, which are higher margin, higher quality backlog for us. You know, as you know, that takes a few quarters to turn, so we're probably looking at that impact more into kinda next spring and summer. But, yeah, we're just not able to give organic outlook for the rest of the fiscal year right now given the uncertainty in the market, and I think we've seen other industry participants say the same thing. You know, we clearly thought we would see organic growth in the middle of the summer, and we and others have said that we missed that.

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

Jon Tanwanteng: Okay. Great. Thank you very much.

James Perry: Thanks, Jon.

Operator: Thank you. Our next question comes from the line of Sam Reed with Wells Fargo. Please proceed.

Sam Reed: Thanks, everyone. Just wanted to quickly quantify the destocking impact that you saw in Contractor Solutions. Realized there can be some variability there between subcategories. And then the add-on question to that would be, can you just talk through where inventory levels in the channel sit today? Think we've heard from some of the carriers that they're pretty frothy, but I'd just love to hear kind of the perspective on where your product sits from a channel inventory standpoint?

James Perry: Sure, Sam. It's James. Thanks for being on today. You know, it's hard to break out the different things, but at the end of the day, destocking is really what it is. The demand was not there for the back part of the summer given the housing activity, given some of the cost headwinds we have on replacement of systems. You know? As we mentioned, Aspen and Waterworks had weighted average growth of 40% in the quarter, so we had positive growth if everything had been organic, and that's really what we focus on. The acquisitions being more and more important to us.

But the legacy business, it's a little more focused on replacement of systems, and then the GRD business, which is one of our larger product categories, of course, is even more focused on new housing starts. With that softness, you just didn't see the restock. You know, you had decent sales back in our fiscal fourth quarter, had good 8-8% or so organic growth as they were stocking up. We just didn't see the restock. And I think as you pointed out, they've talked about destocking. And as I mentioned in my comments, we're not gonna get orders. And so order volume was down. We were still well ahead of the end market.

You know, we still held up pretty well. For the most part. All things considered with that positive, you know, 2.8% growth including our acquisitions. So we were generally pleased with that performance vis-a-vis the market. But, you know, most of it is they're not destocking. You know, when contractors are not installing units, they don't need to backfill with inventory. As far as inventory itself, I think we would say that our inventory out in distributors is probably in pretty good shape. You know, those are channel checks we've had. We know we haven't or from what we've heard, haven't lost market share or anything like that. They just didn't order as much.

We've heard from some of the OEMs and distributors, specifically, out there, you know, with their public comments the last few days as I alluded to. Is that several of them feel that the destocking will kind of run its course through the end of this calendar year and as we enter next spring. Things should theoretically be normal, I think, but everybody's got a little bit of hedge on that until we really get a sense of that over the next couple months. All helpful contact.

Sam Reed: Great. And then like, switching gears to Mars. So first of all, congratulations on that. But then also would love to just get a sense for some of the ticket dynamics and I'm specifically thinking about per unit ticket, and just across some of the key subcategories, you know, capacitors, motors, you know, just the products that Mars sells. And then maybe give me a sense to sort of what those price gaps look like to some of Mars' competitors? You know, are you the premium? We just love to get a sense for that price gap dynamic too. Thanks.

Joseph Armes: Yeah. Yeah. Sam, it's gonna be roughly in line with what we have now. We have such a spread now. You know, Aspen obviously took the overall weighted average price of the product up quite a bit. Historically, our products have, you know, been in the sub-$100 range, and most of our products are in that same ballpark. They've got some products that are higher, of course, but it's not gonna change our overall weighted price dynamic a heck of a lot. In terms of their pricing via the competitors, again, nothing dramatic there.

You know, we think Mars has the best products in the business as we think that our contractor solutions segment has the best products in the business. Otherwise, we wouldn't have been interested. You know, we're always looking at premium products at a bit of a premium price, so there may be a little bit of pricing ahead of the competition. But they've done a good job with their market share. Given where their margins are, where we think we can take it in line with our contractor solutions, that tells you that there's price opportunity there. And we think that their products are priced appropriately.

But as they're under our umbrella, we can't really do much of that until we make the acquisition, of course. But as they get under our umbrella, we'll take a look at the broad product portfolio and how everything is priced in general as part of our contractor solutions family of products.

Sam Reed: Always helpful. Thanks so much. I'll pass it on.

Operator: Thank you, Sam. Thank you. Our next question comes from the line of Jamie Cook with Touro Securities. Please proceed.

Jamie Cook: Hi. Good morning. I guess just a couple questions. You know, given the lack of visibility in CS in terms of organic growth or lack of organic growth, how are you thinking about the ability to hold margins in that business? Organic growth declines? I think last time you sort of talked about, you know, holding margins in the, you know, low thirties, but that was under an environment where you saw organic growth would bounce back. I guess the same question, any color you can give on margins like, SRS, you thought margins should improve sequentially. Just given the weaker market, how do we think about margins across segments? Thanks.

James Perry: Yeah. Jamie. This is James. Thank you. Yeah. I think we would tell you that we still feel good about kinda low thirties margins in the Contractor Solutions for the full year. And keep in mind, I know you know this with us now, but, you know, our winter months, the margins are gonna be a little bit lower. Obviously, volumes are down in the winter months. So our margins tend to be more like high twenties in the winter months. But we would still expect to see those margins in the low thirties as we go through a full fiscal year. And organic growth being up or down a little bit as it is shouldn't affect that too much.

You know, we put up, you know, with the legacy organic decline this quarter, we still put up really nice margins. You know, you're gonna have a little bit of a headwind from Aspen, and the tariff impact is there. But I think that's generally behind us. You know, we'll have a price increase in Contractor Solutions as we always do. As we enter the busy season, we're working through that. So that'll help continue to maintain that. So I think we feel good about nothing different in the margins.

As we talked about with Mars coming on, you know, next month in November, you're gonna see a little bit of margin headwind that will impact us because they're more like mid-twenties, so you'll have that impact again. But then we'll get them up to 30% in about a year from now. So not gonna have much there. But there's gonna be some noise, and we'll try to walk folks through each quarter of the impact there. But the legacy business, nothing fundamentally has changed. We still feel good about that. And organic growth being down a few points just doesn't affect that dramatically. The team's done a really good job on managing cost.

As far as SRS and EBS, you know, they bounce around. We've always said that we've got a goal of 20% margins there. A little bit of the indirect tariff impact, even though we've raised prices to cover that, has a bit of a headwind. And then the mix, as I mentioned, with our lower margin business and EBS carrying a little bit of the weight the last couple quarters, that brings margins down. And in SRS with energy being down a little bit, that brings margins down. But we still have, and those two leaders would tell you that they still maintain a goal of reaching 20% margin.

So, you know, we've been above 20% in both the business a couple quarters. Right now, we're a few points below that, but we feel still good about that in the longer term.

Jamie Cook: Thank you.

Operator: Thanks, Jamie. Thank you. Our next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed.

Susan Maklari: Thank you. Good morning, everyone. Morning. This question, good morning. My first question is, you know, I appreciate the commentary on the call around both the price that is going through the business or that's planned to come in and some of the moves that you're seeing in the input cost. But I guess, generally, when you think across the three different segments, how are you thinking about where you are in terms of price cost? And how that will move as we go through the winter, and then any thoughts on how you approach that as you think about pricing for next season?

James Perry: Sure. Great question. We're going through the process right now in our Contractor Solutions business as we did this time last year of looking at what that price increase needs to be. There's an annual price increase in the industry that's normal. You know, as tariffs feel like they've settled down a bit, maybe we got a little whisper of good news this morning, in fact, coming out of China. That helps a little even though it's only 10% of our cost of goods sold. Every little bit helps. So we're fine-tuning what that price increase needs to be going into the season here in the next couple of months within Contractor Solutions.

So we'll push that out with our customers before too long. But we think we're in a pretty good place. You know, we're always looking at that carefully, but I think generally speaking, we've maintained our dollar coverage on tariffs. What we've done. And assuming no other, you know, moves up, then we're gonna have a pretty normal pricing increase that we would in a given year just to cover your normal inflation, you know, wage cost, those types of things. So we feel good about that. Others in the industry have said roughly the same thing, even though we haven't seen any announcements quite yet. SRS just put forth their price increase that went into effect late September.

We announced that on our last earnings call that was a 7% price increase. We felt good about that covering the indirect impact of tariffs. But we watched that very carefully. You know, I think an unintended consequence of some of the tariffs is, as I mentioned, US-sourced commodities have gone up as well. Things like copper, things like aluminum, and those are input costs in our different businesses. And so as those come through, if we see further increases, we'll need to take pricing action. Again, others in the industry have done it. That SRS price increase, in fact, was, you know, as well received as you could expect and passed all the way through.

Others did the same thing. Some even higher. So there's opportunity there. Within the EBS, you know, that's a project-driven business for the most part. So project by project, you know, those projects that have more aluminum in them, for example, or other commodities that have been impacted, then we're bidding higher prices. And these projects that are coming in for rebid, projects that didn't quite get done the first time around, they're looking for refresh bids, we're able to update that pricing. And we've got kind of an expiration date on that. So as commodities move around, then that gets refreshed from time to time.

So, you know, we're always looking to cover our costs because, as we said, our shareholders shouldn't bear the brunt of that. It gets passed through the system. So I think we feel that our leaders have done a really good job of covering the dollar cost. But it's a daily, weekly, and monthly activity that we're watching very closely, all the different dynamics. And we're not gonna be shy about pushing through price to be sure we cover those costs.

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

Joseph Armes: Yes. Great. Thanks, great question. Thank you, Susan. This is Joe. We absolutely continue to believe that all components of our capital allocation policy are available to us. We've shown that during the last quarter by buying back shares, announcing acquisitions, paying down debt, all of the above. Now we're doing this, you know, again, on a returns, you know, analysis basis. And so we're looking for what provides the highest risk-adjusted returns for us. From an acquisition standpoint, you should expect us to continue to be active over the next year.

I would say smaller bolt-on acquisitions that require less integration work would be more likely in the next six months or so while we digest the billion dollars in acquisitions that we've acquired over the last twelve months. But given our balance sheet, given our access to capital, and given our team bandwidth, we're able to continue to be acquisitive. And so no stop there. Maybe a bit of a digestion pause, but certainly no change in our long-term strategy. Buying back shares is again a function of return. When we calculate the returns on these acquisitions, we find them to be compellingly attractive, and that's to whomever's buying the stock, whether it's us or somebody else.

And so that's an attractive option for us, and you should continue to see that occur as we move forward.

Susan Maklari: Okay. Thank you both for the color, and good luck.

Joseph Armes: Thank you. Thanks, Susan.

Operator: Thank you. Our next question comes from the line of Natalia Bak with Citi. Please proceed.

Natalia Bak: Hi. Good morning.

Joseph Armes: Morning, Natalia.

Natalia Bak: Maybe I'll ask about the order cadence within Contractor Solutions. Just given the current environment, have you seen any sequential improvement or weakening in weekly order patterns exiting this quarter? Do you expect continued softness in the second half given that you have an easier organic comp next quarter?

James Perry: Yes. It's a great question, Natalia. It's James. Yeah. Our fiscal third quarter last year was a little softer. It's good to remember that. Given the dynamic with all the refrigerant change. So the comp is a little bit easier. As we said, it's hard to predict organic growth given where we are in the quarter. We're gonna get out of that business for a little while, I think. But in general, our order cadence has been fine. You know, things do start softening in October. Certainly, the Aspen business is coming out of their busy season in the repair market. You know, we'll have Mars coming on in November is the plan. And we'll watch that.

But absent that, nothing unusual in the order pattern. You know, things are clearly softer in general, you know, than we would expect. But our team's done a really nice job in October getting orders in where they can. You know, again, like we said, there's some destocking going on in the industry, but nothing extraordinary we would point out as positive or negative, with the order pattern here a few weeks into the quarter.

Natalia Bak: Got it. That's helpful color. Maybe just switching over to SRS. Just curious, are you seeing any early traction from your new sales channels or customer diversification initiatives? And when should we expect that to show up meaningfully in revenue?

Joseph Armes: Yeah. Natalia, we just went through midyear reviews around here with all three of our business segments, and we're very pleased with progress being made at SRS. Both in some new product development that is directly attributable to conversations with customers about how can we continue to be a valued supplier for them. And new markets. So stay tuned. Yeah. I think you're gonna hear more about that in the coming quarters.

Natalia Bak: Got it. Thanks. Helpful.

Natalia Bak: Okay. That's it on my end.

Joseph Armes: Thanks, Natalia. Thank you.

Operator: Thank you. Our next question comes from the line of Tom Hayes with JPMorgan. Please proceed.

Ethan: Good morning. This is Ethan on for Tom. Thank you for taking my question today. On organic growth for the quarter, can you give a little bit of color around how much of that was volumes versus pricing? And then on end market trends, are you seeing any other key end markets? What are you seeing in other key end markets? And are there any pockets of strength or new areas of weakness?

James Perry: Yeah. Ethan, this is James. Thanks. Great questions. Yeah. The volume price mix on that legacy business down about 7.7%, the pricing positive tailwind on that was mid-single digits. And the volume was down low double digits, kinda low teens, to break that out a little bit. Obviously, when you look at the positive organic growth, including the acquisitions, then that would suggest volume was down just a couple points and price was up that mid-single digit. So that kinda gives you that breakdown.

In terms of end markets, I think it's, you know, as we've said, anything that's been more repair-focused, obviously, the Aspen business with the coils and air handlers, some of our things that go into the repair business, that's where you've seen strength, obviously, with 40% weighted average growth. But in general, I think it's pretty broad-based. You know, as we said, when new systems aren't being installed in new homes and replacement systems aren't being done in existing homes, you know, with existing home sales down and people just in general opting for repair versus replacement, it's those types of products specifically, but nothing else we'd call out too granular.

Ethan: Thank you.

James Perry: Thanks, Ethan.

Operator: Thank you. There are no further questions at this time. I'd like to pass the floor back to management for any closing remarks.

Joseph Armes: Thank you, Alicia. Thank you, everyone, for joining us. We report on a quarterly basis, so we understand the questions on a kinda quarter-by-quarter basis. But just know that we are absolutely very bullish on the long-term health and opportunity ahead of us for meaningful growth and compelling value creation here, especially given the two new acquisitions. There are a lot of good things ahead of us here. And we look forward to reporting to you again next quarter. So thank you.

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

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