CSW Industrials, Inc.

Greetings and welcome to CSW Industrials' fourth quarter 2019 earnings call. As this time all participants are in a listen-only mode, a question-and-answer session will follow the presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And as a reminder, this conference is being recorded. I would now like to turn the conference over to Tom Cook. Thank you. Please go ahead.

Thank you, Brenda. Good morning, everyone, and welcome to CSW Industrials' fiscal fourth quarter 2019 earnings call. Joining me today are Joseph Armes, Chief Executive Officer of CSW Industrials, and Greg Branning, Chief Financial Officer. If you have not received the earnings release, it is available on our website at www.cswindustrials.com. This call is being recorded. A replay of today's call will be available and details on how to access the replay are in the earnings release. During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. after results can materially differ because of factors discussed in today's earnings release and the comments made during this call and in the risk factor section of 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. This call will also include an analysis of adjusted operating income, net income, and earnings per share, which are non-GAAP financial measures of performance. These non-GAAP measures should be used as a supplement to and not a substitute for Operating income, net income, and earnings per share computed in accordance with GAAP. For a more complete discussion of adjusted operating income, net income, and earnings per share, see our earnings release. I would now like to turn the call over to our Chairman and Chief Executive Officer, Joe Arms.

Joe? Thank you, Tom. Good morning, everyone, and thank you for joining our fiscal fourth quarter conference call. I will begin with a high-level discussion of our results for the quarter. Then I will provide some segment-level remarks and a review of our end markets. I will then hand the call off to Greg for a closer look at the numbers. We concluded our fiscal year with a strong finish that followed an excellent performance through the first nine months of the year. Our consolidated top line grew 9.6% year over year, 9% of which was organic. Related to the MSD acquisition we completed during the fourth quarter, 0.6% was inorganic. For the full year, our consolidated revenue growth was 7.4% to $350.2 million, of which 7.2% was organic. Our fourth quarter adjusted earnings per diluted share was $0.75, which marked an increase of 47.1% compared to the prior year. This growth in earnings was attributable to higher revenue combined with a 400 basis point improvement in adjusted operating margins. Higher profitability was mostly the result of the efficiency initiatives we completed in our specialty chemical segment and a continuation of very strong margin levels in our industrial product segment. For the full year, our adjusted earnings per diluted share were $2.77, which was an increase of almost 30% year over year. Taking a look at our segment performance, sales in our industrial product segment were up almost 15% for the quarter, and just over 10% for the year. Higher sales volume included widespread contributions from architecturally specified building products, HVAC, general industrial and plumbing products. While performance and volume were clearly strong in the second half, as we look forward to 2020, we would remind investors that our industrial products business can be lumpy and based on distributor order flow and weather. Segment level adjusted operating income came in at $12.7 million or 23.6% of sales compared to $11 million or 23.5% of sales in the prior year. Margin performance in the quarter remained strong as a result of higher volume, cost controls, and proactive management of raw materials costs and tariff impacts. We are pleased with this margin level, and while we believe that further expansion will be modest, we do have the opportunity for incremental improvement as we seek to gain further leverage on higher sales. As we completed fiscal 2019 and entered fiscal 2020, we consummated two strategic acquisitions in our industrial product segment, MSD Research and Peterson Metals. Both of these are small in scale, but they underscore our opportunity to acquire high-quality businesses The MSD acquisition is a product line acquisition of AC condensate switches and line cleanouts. And through the first few weeks of ownership, the performance has been right in line with our expectations. Since our launch as a public company, we have been working diligently to develop stronger internal capabilities on integration, and I'm pleased to report that the integration of MSD has benefited from our previous learnings and experiences. The process to date has been seamless and our team has been quicker to integrate core functions like accounting, inventory management and logistics and has already identified opportunities for growth and innovation within the MSD suite of products. Moving to Peterson Metals. This acquisition nicely complements our Greco business. The business is based in Tampa, and as a manufacturer and installer of architecturally specified engineered metal products and railings. This acquisition serves to diversify our in-market exposure, enhance our cross-selling opportunities, broaden our product capabilities and extend our geographic reach. Similar to MSD, our integration team is executed quickly and core functions have already been fully integrated. We have also implemented best practices at the production facilities related to safety and environmental protection, and have begun to work to drive synergies with Greco. While terms of these acquisitions were not disclosed due to their small size, we do expect these acquisitions to be accretive immediately and we look forward to their contributions in fiscal 2020 and beyond. Turning to our specialty chemical segments, we posted top line growth in the fourth quarter of 3.3% to 37.8 million. adjusted operating margins of 17.8% were the highlight of segment level performance with an 850 basis point improvement against the prior year period. Higher segment profitability was mostly attributable to the efficiency initiatives we executed earlier in the year, supplemented by higher volume and discipline price increases we implemented throughout fiscal 2019. We were pleased to see the benefits of our efforts to optimize our production and distribution in the segment We believe that mid-teen margin levels are sustainable going forward as we seek to improve margins by leveraging our cost structure with increased sales. Importantly, with the segment now on a much stronger footing, we are well positioned to invest in growth and to expand. During the quarter, we also took meaningful action pursuant to our capital allocation policy that we articulated on our second quarter conference call. Since the end of fiscal 2018, we have deployed more than $65 million of capital through multiple methods to maximize value to shareholders. First, we allocated over $20 million to fund the two industrial products acquisitions that I mentioned earlier. Organically, we identified multiple new growth opportunities and are increasing our growth CapEx, which will increase our overall CapEx spending for fiscal 2020 to a range of 2.75 to 3.25% of sales. For competitive reasons, we have not disclosed the products or segments associated with these projects, but we do look forward to sharing progress on that as we go to market. Regarding the return of cash to shareholders, we recently announced a dividend program. The first regular quarterly dividend of 13.5 cents per share is payable on June 12 and indicates a 54 cents per share dividend on the stock for the full year. which at the time of adoption was right around 1% yield. Importantly, this action demonstrates the Board's confidence in our improved and consistent cash flow generation and our ability to execute our M&A and organic growth initiatives while simultaneously returning cash to shareholders. Lastly, during the quarter, we executed against our share repurchase plan and repurchased approximately 95,000 shares of our stock for a total of $4.9 million. and 861,000 shares for the full year for a total of 45.6 million. Now turning to our end markets. In general, we have observed robust demand across the end markets we serve. In HVACR and plumbing, we continue to see strong demand for our products and we expect that we will continue to outpace end market growth driven by new product introductions and the integration of acquisitions. In addition, while the outlook for new housing starts is less certain, our HVACR and plumbing exposure shows a tighter correlation to the repair and remodel market as the installed base represents a much greater proportion of the addressable market for us. In our architecturally specified building products, our bidding and backlog activity remains strong. Our products in this category are typically installed near the completion of a project So we have good visibility through fiscal 2020 in this category. We are still a small player in this category and have diversified our breadth of products, customers, and geographic reach through the acquisition of Peterson, which combined with SmokeGuard, Balco, and Greco. Importantly, the Peterson acquisition serves to further increase our sales in categories such as institutional, healthcare, and educational facilities, as well as to diversify our geographic exposure. As a result, we believe our ability to execute is the more impactful factor relative to the effects of any macro trends in this end market. Turning to energy, commodity prices during the quarter did edge up, but rig count remains the primary driver for us, which was down compared to the prior year and was exaggerated by market volatility in Canada. Overall, our energy volume was down compared to the prior year. and was our only end market that did not post organic growth during the period. Our rail business, which primarily consists of trackside applicators and lubricants and generally follows rail traffic volumes, was up double digits during the fourth quarter, which was above overall track volume growth as customers are increasing their spend on preventative maintenance. As we have noticed in the past, this is a GDP growth type business Although it is subject to volatility as we saw in the fourth quarter and based on macro forecasts, we would anticipate modest growth throughout calendar 2019. Finally, in our general industrial end market, demand was strong in the fourth quarter and our business continues to grow in excess of GDP. To conclude, we ended the year on a strong note. We delivered excellent full year results and we are positioned to build on this momentum in the year ahead. If we look back at our evolution as a company, out of the gate we invested substantial resources to build a corporate infrastructure, optimize our footprint, and improve efficiency. This included a series of restructuring activities, the divestiture of underperforming non-core assets, the recruitment of talented leadership, and changes to our organizational structure. As we conclude our third full year as a public company, this phase of our evolution is largely complete. We now have a robust platform poised for strong organic and inorganic growth with an improved free cash profile. We began to see the power of this in the back half of last year, and through a disciplined approach to evaluating organic growth and M&A opportunities, we expect to build on this success in coming years. Now I'll turn the call over to Greg for a closer look at the numbers.