CSW Industrials' Q2 2026: Contradictions Emerge on Organic Growth, EBITDA Margins, Tariffs, and Inventory Management

Date of Call: October 30, 2025

Financials Results

• Revenue: $277M, up 22% YOY
• EPS: $2.96 per diluted share, up 15.2% YOY
• Gross Margin: 43.0%, down 260 bps YOY (45.6% prior year)
• Operating Margin: 26.3% adjusted EBITDA margin, down 40 bps YOY (26.7% prior year)

Guidance:

• Expect consolidated revenue and adjusted EBITDA growth for fiscal 2026.
• Expect consolidated EPS growth and stronger operating cash flow (quarterly volatility possible).
• Aspen Manufacturing forecasted to grow mid-teens on its trailing 12-month $125M revenue; Aspen included 11 months in FY26.
• Mars Parts acquisition expected to close in November 2025; pro forma net leverage ~2.0x at closing.
• FY26 GAAP tax rate ~23% (26% adjusted).

Business Commentary:

* Record Financial Performance: - CSW Industrials reported record revenue of $277 million for Q2 2026, representing a 22% increase and exceeding Street expectations. - This growth was primarily driven by recent acquisitions, such as Aspen Manufacturing, PSP Products, and PF Waterworks, which contributed significantly to the revenue increase.

• Margin Trends and Pricing Actions:
• The consolidated gross profit margin experienced a 260 basis point reduction to 43%, compared to 45.6% in the prior year, due to margin contraction across all three segments.

• While input cost increases from tariffs were mitigated through pricing actions, lower ocean freight expenses, and operational leverage, tariffs did cause margin compression in the near term.

• Acquisition Strategy and Market Outlook:

• CSW Industrials completed multiple acquisitions, including Aspen Manufacturing and Mars Parts, which are expected to enhance growth opportunities through synergies and product diversification.

• The company remains optimistic about future growth, particularly in the residential HVAC/R, plumbing, and electrical end markets, despite current market volatility.

• Organic Growth Challenges:

• The Contractor Solutions segment experienced a 5.6% reduction in organic revenue, impacted by a shift to repair from replacement of HVAC units due to higher costs of new units and tariffs.
• Despite these headwinds, the company's acquisitions, including Aspen Manufacturing, showed impressive growth under CSW's ownership, with a weighted average growth rate over 40% in the quarter.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted "record quarterly results for revenue, adjusted EBITDA, adjusted net income and adjusted EPS" and $277M revenue (up 22%). CEO emphasized continued acquisitive growth (Mars Parts closing expected) and a strong balance sheet (net debt-to-EBITDA 0.12x at quarter end), signaling confidence and constructive outlook.

Q&A:

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): Help us understand trailing revenue trends at Mars — more like your organic performance or more like Aspen; how did the business perform recently relative to market trends?
  Response: Management: Mars is between legacy organic and Aspen — weighted toward repair (similar to Aspen) but includes replacement exposure.

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): Can you speak to the trailing 12-month growth rate at Mars?
  Response: Management: Will not disclose specific TTM growth until post-close integration and system alignment; saw a Y/Y tailwind from repair activity.

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): What are your expectations for Mars on growth and accretion, and what will it take to hit >30% EBITDA margins?
  Response: Management: Mars ~>$200M revenue with mid-20s margins; $10M of largely front-loaded synergies should drive ~30% run-rate EBITDA within ~1 year; additional top-line upside expected but not in the $10M synergy estimate.

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): What are your organic growth expectations for the rest of the year by segment (Contractor Solutions, SRS, EBS)?
  Response: Management: Unable to provide updated organic-growth outlook this fiscal year due to seasonality and market volatility; will revisit next call.

• Question from Richard Reid (Wells Fargo Securities, LLC): Can you quantify the destock impact in Contractor Solutions and describe channel inventory levels today?
  Response: Management: Destocking reduced order volumes late summer; distributor inventories are generally in "pretty good shape," and management expects destocking to run through year-end with normalization by next spring.

• Question from Richard Reid (Wells Fargo Securities, LLC): For Mars, what are per-unit ticket dynamics (capacitors, motors) and pricing gaps vs. competitors?
  Response: Management: Mars' weighted average prices are similar to CSW's current sub-$100 mix with some higher items; pricing not materially different vs. peers and modest premium exists for higher-quality SKUs.

• Question from Jamie Cook (Truist Securities, Inc.): Given weaker organic growth, how should we think about margins across segments (CS, SRS, EBS)?
  Response: Management: Still targeting low-30s% margins for Contractor Solutions on a full-year basis (seasonal winter dip to high‑20s); SRS and EBS long-term margin goal ~20%, currently a few points below but expected to improve.

• Question from Susan Maklari (Goldman Sachs Group, Inc.): How are you thinking about price vs. cost across segments through winter and into next season?
  Response: Management: Contractor Solutions will implement its annual price increase to cover tariffs/inflation; SRS implemented a 7% increase; EBS adjusts project-by-project; will continue passing through costs as warranted.

• Question from Susan Maklari (Goldman Sachs Group, Inc.): With recent big deals, what M&A and capital-allocation activity should we expect going forward?
  Response: Management: Remain active but expect focus on smaller bolt-on M&A while digesting recent ~$1B of deals; all allocation tools (buybacks, debt paydown, M&A) remain available and returns‑driven.

• Question from Natalia Bak: Have you seen sequential improvement or weakening in weekly orders exiting the quarter in Contractor Solutions; do you expect continued softness in H2 given an easier comp next quarter?
  Response: Management: Order cadence was "fine" but softer in October; comps for Q3 are easier; uncertain near-term, with Mars expected to close in November and influence cadence.

• Question from Natalia Bak: Any early traction from new SRS sales channels or customer‑diversification initiatives and timing for meaningful revenue impact?
  Response: Management: Midyear reviews show progress—new product development and market initiatives underway; management expects to provide more detail in future updates.

• Question from Tomohiko Sano (JPMorgan Chase & Co): On organic growth this quarter, how much was volume vs. pricing? Any other end‑market pockets of strength or weakness?
  Response: Management: Legacy organic down ~7.7%: pricing up mid-single-digits and volumes down low‑double digits; repair-focused products showed strength while replacement/new-build‑linked SKUs were weaker.

Contradiction Point 1

Contractor Solutions' Organic Growth and Market Conditions

It involves differing views on the reasons for organic growth decline in Contractor Solutions, impacting investor understanding of market conditions and company strategies.

What are your organic growth expectations per segment for the rest of the year? - Jonathan Tanwanteng(CJS Securities)

2026Q2: Given the current market uncertainty, organic growth for the rest of the fiscal year cannot be provided. - James Perry(CFO)

Can you explain the organic growth decline in the Contractor Solutions segment and what percentage was due to market uncertainties, tariffs, or other factors? - Jonathan Tanwanteng(CJS Securities)

2026Q1: The decline was due to soft sell-through and market conditions. There was stocking in March, but demand was low. Slow starts in summer and current conditions. - James Perry(CFO)

Contradiction Point 2

Contractor Solutions' EBITDA Margin Expectations

It involves changes in financial forecasts, specifically regarding EBITDA margin expectations for Contractor Solutions, which are critical indicators for investors.

How will you maintain Contractor Solutions' margins amid declining organic growth? - Jamie Cook(Truist Securities)

2026Q2: We expect to maintain low 30s margins in Contractor Solutions. - James Perry(CFO)

What are the full-year EBITDA margin expectations for Contractor Solutions, and has there been a change from last quarter? - Jonathan Tanwanteng(CJS Securities)

2026Q1: Expectations for Contractor Solutions' full-year EBITDA margin remain in the low 30s. - James Perry(CFO)

Contradiction Point 3

Impact of Tariffs on COGS

It involves differing perspectives on the impact of tariffs on COGS, which directly affects the company's financial performance and operational strategy.

How do Mars's trailing revenue trends compare to the impact of your organic performance in the quarter? - Jonathan Tanwanteng (CJS Securities, Inc.)

2026Q2: We've seen a low double-digit decline in volume across the business, partially due to destocking, which we believe is related to the macroeconomic conditions. But we also see pricing in the mid-single-digit range improving our revenue. - James Perry(CFO)

Can you provide more details on the impact of tariffs on your COGS, particularly in Vietnam, and your assumptions for different segments moving forward? - Peter Skibitski (Ladenburg Thalmann & Co)

2025Q4: Tariffs are very dynamic, with minimal trailing impact as inventory has been managed. Future expectations include 10% tariff or less from China and a focus on Vietnam. - James Perry(CFO)

Contradiction Point 4

Freight and Pricing Strategy

It involves the company's strategy to offset freight expenses through pricing, which directly impacts financial planning and investor expectations.

Can you clarify the trailing revenue trends at Mars and how they compare to your organic performance impact this quarter? - Jonathan Tanwanteng(CJS Securities)

2026Q2: We have raised our revenue outlook for the remainder of the year and 2023 to reflect expected revenue upside from Mars as well as pricing increases across all 3 of our businesses. - James Perry(CFO)

How has freight impacted margins and gross profit year-over-year, and can you offset it through pricing or other mechanisms? - Jonathan Tanwanteng(CJS Securities)

2025Q3: The pricing increase implemented in January is expected to help offset freight expenses, particularly for the fiscal fourth quarter. - James Perry(CFO)

Contradiction Point 5

Inventory Management

It involves the company's inventory management strategy, which affects operational efficiency and financial performance.

Is there early traction from new SRS sales channels or initiatives impacting revenue? - Natalia Bak(Citi)

2026Q2: Inventory was brought in to hedge against potential disruptions in early 2025. With the recent easing of port strike concerns, this inventory is planned to be sold as part of normal operations. - James Perry(CFO)

How long will you hold inventory in anticipation of potential strikes and disruptions? - Jonathan Tanwanteng(CJS Securities)

2025Q3: Channel inventory levels are in good shape, and we expect destocking to run its course by the end of the year. - James Perry(CFO)