CSW Industrials, Inc. (CSW) Q1 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the CSW Industrials Fiscal First Quarter 2022 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adrianne Griffin, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Carl. Good morning, everyone, and welcome to the CSW Industrials fiscal first quarter 2022 earnings call. Joining me today are Joseph Armes, Chairman, Chief Executive Officer and President of CSW Industrials; and James Perry, Executive Vice President and Chief Financial Officer. We issued our earnings release, presentation and Form 10-Q prior to the market's opening today, as well as a supplemental Form 8-K regarding our resegmentation, and all are available on the Investor portion of our website at www.cswindustrials.com. In conjunction with our resegmentation announcement, we've relaunched our website. The newly designed site includes descriptions of our new reportable segments, expanded information regarding our operations and products, corporate responsibility and investor materials. This call is being webcast and information on how to access 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 Armes.

Thank you, Adrianne. Good morning, and thank you for joining our conference call. We are extraordinarily pleased to share our fiscal first quarter 2022 consolidated results, reporting nearly 80% growth in both revenue and adjusted earnings per share as compared to the fiscal first quarter of last year. Our team delivered $70.3 million or 77.3% in total revenue growth, of which $36.8 million or 40.5% was organic growth and $33.5 million or 36.8% was inorganic growth from our TRUaire acquisition. This tremendous outcome was driven by our team's intense focus on understanding our customers' needs, active management of our supply chains, investment in inventory, bringing the best products to market and increasing our wallet share and share of market. I would also like to highlight that we returned to organic growth in every end market that we serve, specifically outperforming the growth of the HVAC industry by a significant margin. To underscore the magnitude and the significance of our top line growth, we can compare this quarter's results to our fiscal first quarter 2 years ago, our fiscal 2020. For that period, we reported $102.3 million in revenue. Accordingly, fiscal first quarter 2022 represents total growth of $59 million or 57.6%, including organic growth of $25.5 million or 24.9% over fiscal 2020. Our adjusted EBITDA this quarter was $40.5 million, representing growth of nearly 108% compared to last year and 67% growth as compared to 2 years ago. Our profitability remained strong with an adjusted EBITDA margin of 25.1%, 21.4% and 23.7% in the first quarter of each of the last 3 fiscal years. We are also reporting quarterly adjusted earnings per share attributable to CSWI of $1.46, which is 80% growth over the $0.81 per share in the prior year period and 44.6% growth over the $1.01 we reported in fiscal first quarter of 2020. While we're very pleased with our strong quarterly consolidated results, we are not satisfied. Our diligent pursuit of operational excellence, our expectation of outperforming the end markets we serve and our commitment to robust profitability and establish the manner in which we assess performance across all areas of our organization, and we will continue to swiftly respond to address and resolve any underperformance. Since we have now owned TRUaire for over 2 full quarters, we wanted to provide financial and operational updates. The demand for our TRUaire products is strong, and the results are exceeding the expectations we had when we made the decision to acquire that business. Commercial integration occurred promptly after closing, and we are actively executing the next phases of our integration plan. The region in Vietnam, where our TRUaire manufacturing operation is located was recently placed under enhanced COVID-19 restrictions. We have taken appropriate actions to ensure that we can continue operations while protecting the health, safety and welfare of our employees. Production levels at this facility are currently reduced to help satisfy COVID protocols, and our manufacturing is focused on products with the highest demand. For context, in the recent weeks prior to the reduced production levels, we shipped an average of 36 containers a week from Vietnam to the United States. Last week, we shipped 14 containers. We are continuing with our current operational plan. However, we are monitoring the situation closely and are prepared to respond to any further disruption. We anticipate that our focused production plan through this restriction period in conjunction with inventory on hand in our U.S. distribution centers will be sufficient to meet customer demand for the foreseeable future. Our fiscal first quarter results reflect the sound measures established by our leadership team in the early months of last fiscal year, which were executed in an ongoing manner by CSWI team members around the globe. We remain steadfast in our commitment to the guiding objectives we previously articulated, and our outcomes have demonstrated that we are focused on the right solutions to the benefit of our team members, our customers, communities and our shareholders, addressing many aspects of our corporate sustainability efforts. Over the past several quarters, we have shared specific metrics that provide insight into our guiding objective to treat our employees well. In our recently filed proxy statement, we shared an important metric that communicates the effectiveness of our focus on safety, Total Recordable Incident Rate, or TRIR. At the end of calendar 2020, our TRIR was 3.2, which was improved over calendar 2019. And through the first 6 months of calendar 2021, our TRIR was 1.5, demonstrated continued meaningful improvements year-over-year. Additionally, we recently announced the 2021 CSWI scholarship recipients who were awarded a total of $50,000 in assistance to further their education. This scholarship fund was established 4 years ago and has awarded a total of $200,000 to 26 students. Recipients of these scholarships must be dependents of our CSWI team members and attend a technical college or 2 or 4-year university. Of the 26 recipients to date, 61% are their family's first generation to pursue a post-secondary education. We're very proud of those students and of our company's investment in their future. Returning to our recent results. Our capacity to serve our customers well, which is another guiding objective, was demonstrated through our outstanding revenue growth. Demand for our products correlates with strong sell-through, channel inventory restocking and general improvement in the health of the global economy. To address the ongoing inflation in materials, freight and commodities during the first fiscal quarter across all segments and end markets served, we took price actions to protect profitability. These price actions were implemented at various points in the quarter, and therefore, this quarter's results do not reflect the full benefit of those price actions, resulting in some margin compression in certain end markets served. Additional pricing actions have taken place since the end of the fiscal first quarter, and we continue closely monitoring the cumulative impact of realized pricing actions and ongoing cost inflation to determine if further action is needed to protect profitability. While we are managing the same supply chain constraints that others are discussing, we have qualitative data that indicates we are performing significantly better than competitors on lead time and product availability across the end markets that we serve, reflective of our guiding objective to manage our supply chains effectively. We believe that we provide a premium product concurrent with best-in-class availability and customer service and will continue to appropriately address price inflation. At this time, I'll turn the call over to James for a closer look at our segment results. James?

Thank you, Joe, and good morning, everyone. Earlier this morning, as disclosed in our Form 10-Q and our quarterly earnings release, we announced a strategic realignment of our reportable segments, and we also filed a Form 8-K providing supplemental historical segment information recast to reflect our new reportable segments. Following the acquisition of TRUaire and the formation of the Whitmore joint venture with Shell Lubricants, our leadership team in consultation with our Board of Directors determined it was appropriate to realign our reportable segments to more clearly reflect the manner in which our leadership team reviews business performance and allocates capital. We feel this resegmentation provides our investors with a clearer picture of the performance of our various businesses after the acquisition and the formation of the JV. CSWI is now organized into 3 segments. Our Contractor Solutions segment is comprised predominantly of our RectorSeal and TRUaire businesses, which are well-known for the value-adding products, mainly targeting residential and commercial HVAC/R and plumbing applications. Our Engineered Building Solutions segment is comprised primarily of our Balco, Greco and Smoke Guard businesses, which provide code-driven products, focused on life safety that are engineered to provide aesthetically pleasing solutions for the construction, refurbishment and modernization of commercial, institutional and multifamily residential buildings. Our third segment is Specialized Reliability Solutions, primarily comprised of our Whitmore business and the Whitmore Shell joint venture, which provide products that enhance the reliability, performance and lifespan of critical assets in the general industrial, energy, mining and rail end markets. Given the enhanced correlation between our reportable segments and the end markets served, we believe investors will have improved clarity to understand our performance. We will no longer provide quantitative updates on end market sales as these will be appropriately reflected directly within the segment results. Another item to note in our financials this quarter. This is the first fiscal quarter in which we are reporting the results of the Whitmore joint venture. The joint venture financial results are fully consolidated into CSWI, and we have reported select financial information on a basis that is attributable to CSWI. For clarity, these attributable results exclude the net income attributable to the noncontrolling interest. As Adrianne mentioned in the opening remarks, our new website is available and it, along with our quarterly investor presentation found on the website, reflects this new segment structure and incremental joint venture reporting. Our consolidated revenue during the fiscal first quarter of 2022 increased 77.3% to $161.3 million compared to $91 million in the prior year period. The higher revenue was driven by each segment with $60.4 million from Contractor Solutions, $3.5 million from Engineered Building Solutions and $6.4 million from Specialized Reliability Solutions. Contractor Solutions segment revenue was $110.2 million, a 121% increase from the prior year period due to increased organic sales into the HVAC/R, plumbing and architecturally specified building products end markets, plus the $33.5 million of worth inorganic growth from TRUaire and pricing initiatives that began in the fiscal fourth quarter 2021, and they continued and increased during the fiscal first quarter 2022. In fiscal first quarter 2022, this segment accounted for 68% of our consolidated revenue. Adjusted segment EBITDA was $39.4 million or 35.8% of revenue compared to $17.3 million or 34.7% of revenue in the prior year period. Engineered Building Solutions segment revenue was $25.7 million, a 15.8% increase from the prior year period of $22.2 million, principally due to enhanced marketing efforts to promote existing and newly developed products. Many of these projects have a shorter sales cycle, which contributed to our ability to drop growth despite a contracting nonresidential construction market. Segment EBITDA was $4.3 million or 16.6% of revenue compared to the prior year period of $4.2 million or 19.1% of revenue, with the margin decrease due to a shift in sales to lower-margin products. Pricing increases in this segment have been implemented in the second fiscal quarter. As of the end of the fiscal first quarter, our book-to-bill ratio for the trailing 8 quarters was just below 1. Specialized Reliability Solutions segment revenue was $25.4 million, a 33.9% increase from the prior year period of $19 million, mostly due to increased sales volumes into the general industrial and energy end markets. Segment EBITDA was $1.8 million or 7.3% of revenue, approximately flat to the prior year period as growth in material and freight expenses accelerated more quickly than the effectiveness of the implemented pricing initiatives. The JV contributed income this quarter and is expected to continue growing in future quarters as we ramp up production, which we are accelerating due to supply recently leading the market. While we are disappointed in the results from this segment, we remain confident in the expectation of improved profitability in the back half of the year due to improving end market conditions, accelerating growth of the JV and new segment leadership that arrived in June that has already instituted pricing increases. Consolidated gross profit in the fiscal first quarter was $68.6 million, representing 60.5% growth from $42.8 million in the prior year period, with the incremental profit resulting predominantly from the TRUaire acquisition and increased organic sales volumes. Adjusted to exclude the final $3.9 million purchase accounting effect from the TRUaire inventory value step up, gross profit was $72.5 million, resulting in an adjusted gross profit margin of 45% compared to 47% in the prior year period. As mentioned previously, the decline in gross profit margin was primarily due to incremental expenses related to inclusion of the TRUaire business as well as inflation in material and freight costs that outpaced instituted price increases in some end markets served. Adjusted consolidated operating income increased by 99.3% to $32.4 million, equating to a 20.1% margin and representing a 220 basis point increase over adjusted operating income margin in the prior year period. Adjusted consolidated EBITDA increased 107.9% to $40.5 million from $19.5 million in the prior year period. Adjusted consolidated EBITDA as a percent of revenue was 25.1% and 21.4% in the current and prior periods, respectively. Reported net income attributable to CSWI in the fiscal first quarter of 2022 was $20 million or $1.27 per diluted share compared to $12 million or $0.81 in the prior year period, which had no adjustments. Adjusted to exclude the final TRUaire purchase accounting effect, adjusted net income attributable to CSWI was $23 million or $1.46 per diluted share. Transitioning to the strength of our balance sheet. We ended the fiscal first quarter with $15.7 million of cash and increased our cash flow from operations to $18.9 million, a 33.8% increase over the prior year period. During the quarter, we reduced the outstanding amount under our $400 million revolving credit facility by $11 million, resulting in approximately $180 million of availability as of the end of the fiscal first quarter. As of quarter-end, our leverage ratio was less than 1.5x, well within our stated range of 1.0x to 3.0x. These metrics leave us well positioned for the continued allocation of capital as outlined in our capital allocation strategy. The company's effective tax rate for the fiscal first quarter was 23.9% on a GAAP basis, and the company continues to expect a 25% tax rate for the fiscal year 2022. With that, I'll now turn the call back to Joe.

Thank you, James. My colleagues hear me say this often: "At CSWI, how we succeed matters." And achieving these outstanding consolidated first quarter results represents an outcome of our commitment to be good stewards of your capital and to our goal of delivering long-term shareholder value. Our outstanding revenue growth during this first fiscal quarter was fueled by the TRUaire acquisition, organic volume growth and contributions from the price actions we've discussed today. Consolidated EBITDA margins were protected from inflation. As we look ahead to the remainder of this fiscal year, we continue to expect year-over-year quarterly growth and further expect that the rate of growth will necessarily decline from the 77% growth rate we realized this quarter as our strong performance in the last 9 months of fiscal year 2021 make future quarter-over-quarter comparisons more difficult. As we consider the drivers of expected revenue growth in the remainder of the fiscal year, we remind everyone that we acquired TRUaire on December 15, 2020. And accordingly, fiscal fourth quarter TRUaire contributions will be included in our organic growth, consistent with how we've treated all prior acquisitions. We expect that the fiscal third quarter will continue to be our lowest revenue quarter due primarily to the seasonally reduced spend in the HVAC/R industry. While we are proactively managing pricing to protect profitability, timing differences in the short-term headwinds in raw materials and freight could impact margins modestly. As I commented in my opening remarks, we are not satisfied with the performance of all of our segments, but we are optimistic about the long-term health of the end markets we serve and the strength of our leadership team today to return to consistently improving profitability across our organization. And before we open the line for questions, I'd like to take this moment to thank Bill Quinn, who has served on the Board of Directors of CSWI since our founding, nearly 6 years ago. As part of our strong commitment to the highest of governance standards, we have a mandatory retirement age for directors. And after our annual meeting of shareholders later this month, Bill's service on our Board will conclude. Bill has provided thoughtful, wise and decisive leadership to our organization. I would like to thank him for his indispensable contributions as Chair of our Audit Committee and as a member of our Board. On a personal note, Bill has been a mentor to me, and his influential presence will be sorely missed. We wish him the very best as he continues to serve on other boards and serve in his community. As always, I'd like to close by thanking all of my colleagues here at CSWI, who collectively own 6% of our company through our employee stock ownership plan and do such a great job, as well as all of our shareholders for their continued interest in and support of our company. With that, operator, we're now ready to take questions.

[Operator Instructions]. The first question comes from Jon Tanwanteng from CJS Securities.

Really, really great. Congratulations on that. My first question is regarding TRUaire, that commentary out from Vietnam seems a little bit concerning. I was wondering how many days of inventory do you have for TRUaire at current demand and supply levels? And are you expecting to leave any revenue on the table for -- potentially for competitors to regain share or just not being able to meet in near-term quarters?

Yes, Jon, this is James. Thanks for the nice remarks. Very pleased with the quarter. The $1.46 of adjusted earnings is a record for us and very happy with that, and I appreciate the kind words. As far as Vietnam, yes, we wanted to be sure that you and our investors were aware of the situation over there. That's not necessarily in the news as much. The team over there, let me, first of all, say, is doing a tremendous job. Health and safety of our employees is priority one, and we've done a great job with that. What we've done with the reduced staff that we have, and we talked about the container loads we have coming over each week, the last couple of weeks, and you see the reduction there. I'll mention 2 things. We are highly focused on those products in the highest demand, as Joe mentioned. We know which products are the fastest moving products. As you recall, Jon, when we announced the acquisition and even in the last couple of quarters' earnings calls, we talked about TRUaire carrying a high level of inventory, so they can meet the customer demand very quickly. We don't see that being a problem anytime soon. We keep a high level of inventory. We talked, in fact, about that may be a strategic advantage for us being able to do that when we bought the company. And as a result, that required some investment. We've taken that same tack in some of the other parts of the company to hold a little extra inventory to be safe these days, and we've not had issues getting product to customers. At TRUaire specifically, again, we're focused on what's coming over from those containers is those highest moving products. But we did a pretty deep dive in the analysis in the TRUaire and RectorSeal team and Contractor Solutions did a really good job with this. We've got several, and by several, I mean more than a few months of inventory of those highest moving products already here in the states and more coming over in containers every week. So we feel very good about being able to meet customer demand for those products for the next several months. It's hard to look much further than that. Not many companies talk about several months of inventory. So having that little bit of extra already here, being able to continue to ship product over is an advantage to us, we think, in this market. If situations were to change in coming quarters, we'll talk about that. But to-date, we don't see revenue being left on the table anytime soon.

Got it. That's comforting to hear. Second, I was just wondering if you could comment on demand trends. And specifically, if you pulled forward anything from Q3. I know sometimes your distributors over order or restock or overstock sometimes. And I think in this environment, I think people would want more safety stock than normal, as you demonstrated. So I'm wondering, are you seeing continued demand strength? And if so, what are the components of that from a inventory versus true demand basis?

Sure, Jon. Yes, that's a great question and a key question for us. We watch closely what the distributors are doing, those that publicly report, what the OEMs are doing, although it's not a perfect comp. Obviously, you have a few OEM comps out there that you know very well. And we generally outperformed the market in the HVAC space, and very, very pleased with that, and that's really a testament to our commercial sales efforts, the availability of inventory, like I talked about, and the team to produce and get these products out the door. But in terms of the other side of things, we watch very closely the sell-through rates of the distributors. And those rates were very high this last quarter. There may be a little deceleration of that, and we're starting to see orders kind of, I think, get an equilibrium with that. As Joe talked about, the comps get harder year-over-year because our first quarter last year, we kind of had half of a tough quarter and the back half ended up good. Last year, our second and third quarter were very strong. We're starting out this quarter very well again. We feel good about demand is still there. It's always hard to know until you get on the other side, is there a pull forward demand. But again, the sell-through rates that we watch very closely at the couple of institutions that publish that, tell us that the distributors are selling what they're buying. So we feel right now that there's not much pull forward. Time will tell if there's a little bit, but the demand is still strong.

And Jon, this is Joe. One thing I would add to that is that we are building backlog of orders that we haven't had before in much larger quantities. And so businesses that have typically tried to ship out within 24, 48, 72 hours of an order coming in, we have significant backlogs there. So again, demand is not a problem at this point, and we feel really good about that.

Got it. That's helpful. And I really appreciate you breaking out the Architectural business into this new segment structure. I was wondering on a go-forward basis, are you expecting continued improvements for these levels? Or is there more of a trough ahead as non-construction continues to be a little bit weaker?

Yes. And thanks for recognizing the new segments. We're pleased to be able to present that. We think over time, it's going to make things easier for everybody, and you can see the historical performance of those segments in the 8-K we published. In terms of that segment specifically with Balco, Greco and Smoke Guard, it can be bit of a mix. We are seeing what looks in 2022, like a downturn in commercial construction. That leads to some of what these businesses sell, of course, having a little less demand. There is a backlog in these businesses. We are seeing, however, bidding activity up, order activity up, and we're starting to rebuild some backlogs in these. Some of those, though, are a few quarters out, as we always talk about. So without getting real specific business by business, right now, some of the products in these businesses are kind of moving into the air pocket we've talked about for a while and a little bit of -- a little bit of troughy following the commercial side of things. But some of the other businesses and products are still performing very well. Those are shorter term in nature. And that's what's really held this business up to have nice margins and nice revenue growth year-over-year. So we'll continue to update that. But the trends we're seeing, you're right, that there seems to be a downturn in commercial construction this year because, obviously, coming out of the pandemic, a lot of projects were put on hold. Some of those are getting ramped back up, and we're seeing that in orders for projects that will be completed later this year and into early next fiscal year.

But we are strongly optimistic about fiscal 2023 for that business, Jon. And so we can already begin to look through the back half of the year here and see we're setting up for a nice year in fiscal 2023 there.

Okay. Great. And then last one for me. Just are the pricing increases in the Reliability segment enough to increase the margins on a sequential basis?

Yes. I'll say a couple of things. That was the business that probably was the latest in the timing of the price increases. Part of that was due to kind of our change in leadership and really getting the feet on the ground and working through that. Some of it was you've got some contractual relationships, that business has some backlog and it has to work its way through. You had some higher price costs coming through pretty quickly, and it's taken us a little bit of time to get that pricing increase to really offset that from a margin perspective. So you had some degradation. We're going to see some of that this quarter as well before we really kind of get our sea legs there, and that really starts kicking in. The Contractor Solutions businesses -- and I'll come back to Reliability. For Contractor Solutions, was able to do that early and often during the quarter and continues to, and Engineered Building Solutions had success there as well. But the Specialized Reliability Solutions segment had a bit of a headwind there. I'd say a couple of things in terms of margins. Number one, as we go through -- now specifically in my remarks, mentioned the back half of the year. Looking a little through this current quarter that we're in the middle of now to the back half of the year, we see those pricing increases really having nice effect all the way through the back half of the year. I will also say, as demand and business is picking up in the end markets served in that space, the general industrial, the mining, the rail, the energy spaces, the demand is picking up. So volumes are picking up. You saw that year-over-year, obviously, in the numbers. And then lastly, the JV, the joint venture is ramping up very quickly, and we're even accelerating some of that because we mentioned some supply leaving the market, and we have an opportunity to fill that demand. That all leads to better absorption in the plant. You know very well, Jon, and most of our investors do that we have a very nice facility that have a lot of capacity. And one reason the JV was very elegant for us and worked very well was to fill that capacity. So between the organic demand and the JV demand, we think we have good opportunity back half of the year and fully expect to have back half of this year and certainly into next fiscal year, margin improvement that is going to be quite noticeable.

The next question comes from Chris Howe from Barrington Research.

Jumping right in here and I apologize if this was asked earlier. Juggling multiple things this morning. But as we think about this pressured environment that may or may not pressure profit, can you talk about anything in the quarter that as far as the timing of orders or anything to point out there that might have -- might be pushing into the following quarter? And as far as the price increases, you mentioned it as to how it relates to the Reliability segment. So can you talk about just how this environment is playing out versus your expectation without kind of getting into a quantifiable number?

Chris, this is James. I'll start, and Joe will add a little bit to that. The first question you asked about timing of orders. I think what I would point to, nothing unusual other than what Joe mentioned a minute ago about backlog. We did have some backlog in some of our businesses because the demand has been so strong. And so in order that was placed, maybe in our fiscal first quarter, the revenue we may see here in the fiscal second quarter because of those backlogs. We have a couple of product lines where that builds, and we got some relief when we had good shipment of product come in and got that out the door. So other than that, nothing unusual in terms of timing of orders that I would talk about this quarter. In terms of the Reliability Solutions segment, as I mentioned earlier, opportunity for pricing increases there, opportunity to continue to focus on which products have the best margin opportunity where we need to focus our capacity, which geographies have the best margin opportunity and where we need to focus our sales efforts and our capacity. And I think we're heading in the right direction in that respect. Joe?

Yes. I think there's a laser focus on this within the management team. And while, as James said, the reliability business got a little bit of a late start. Everybody is highly focused on this, and we see no reason why we won't have the pricing power available to protect our profits. And that's absolutely our commitment.

And Chris, one thing I'll mention, we've mentioned it a couple of times, just to clarify, and I'll let you ask your next question, is what we're really focused on first is profit dollars. So as we increase our prices, our first goal is to be sure we're covering those cost increases, which span across raw materials, airborne freight -- or seaborne freight, excuse me, and labor. All of those have cost increases. Some of those likely won't go back down, something like freight likely will over time as we see some congestion relief, but some costs won't. But our pricing increases have been to at least cover those costs from a dollar perspective. As we were able to in the market, increase price beyond that, we can protect that margin percentage. So while margin percentage may see a little bit of headwind, as you mentioned, those dollars, we feel very good about, and thus the record year-over-year earnings.

That's great color. And it led me to another question I didn't have planned. As we think about these price increases, I mean, if we look at TRUaire, you have a good market position and the brand names that you carry in some of the other areas of the business. Is this an opportunity for the company to take price? In other words, not give some of it back as this inflationary environment or strained environment starts to loosen, given your market position?

Yes, Chris, I think you're right that there'll be some stickiness on some of this pricing. But we're going to take a long-term perspective with respect to our customers and treating our customers well, serving our customers well is one of our guiding principles. And so being overly optimistic in this environment is probably not the right approach either. So we're going to work through that, but take a long-term perspective. But there's no question that price increases have some stickiness to them. Some of these commodities, some of these freight costs, those types of things will come down. They're all cyclical, and we'll see how it plays out from there.

And one last question. It probably has been asked. But there aren't many companies around with your capital structure. You've got a leverage ratio of less than 1.5 turns. Surely, we have to make sure TRUaire is integrated fully. But as you kind of navigate this environment from a competitive perspective, I would assume your pipeline for inorganic growth is only growing, and it's just about being disciplined and making sure that it's the timing of the company.

Yes, Chris, I couldn't agree more. I mean I think we are setting up very, very nicely with a lot of free cash flow, really strong balance sheet, a lot of dry powder. And as you said, discipline is key. We have a demonstrated track record of being disciplined and waiting for the right opportunity as TRUaire was, but then being decisive, and taking advantage of the opportunity. So we're looking for another opportunity to do that. And with every passing day, we're getting closer to that because the integration of the JV and TRUaire are going well, and we're going to be in a great position to allocate capital to inorganic growth opportunities. But again, discipline is the word of the day. We're not going to overpay, and we're going to make sure it's the right acquisition at the right price so that it creates shareholder value.

All right. Great. Thank you to you and the team for a great quarter.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Joe Armes for any closing remarks.

Yes. I just want to say thank you very much for joining us today. I know it's a busy week. And appreciate your interest in CSWI and look forward to doing this again next quarter. So thank you. Take care.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.