CSW Industrials, Inc.

Greetings and welcome to the CSW Industrials first quarter 2020 earnings call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tom Cook. Mr. Cook, you may begin.

Thank you, Jerry. Good morning, everyone, and welcome to CSW Industrials Fiscal First Quarter 2020 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. Actual results could materially differ because of factors discussed in today's earnings release, in the comments made during this call, and in the risk factors 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, Thank you, Tom. Good morning, and thank you for joining our fiscal Q1 conference call.

I will begin with a high level discussion of our results for the quarter followed by 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. Our fiscal year is off to a strong start as we saw our consolidated revenue increase 14.2% to 102.3 million year over year, 9.6 of which was organic. We continue to see widespread growth across the end markets we serve and help drive the results we experienced this quarter. Our first quarter adjusted earnings was 98 cents per diluted share, which marked an increase of 28.9% over the prior year. This growth was due to leverage on sales, margin expansion initiatives and the benefits from strategic actions we took last year. Especially notable this quarter was the continued strength in operating margin that our specialty chemicals business achieved which continues to reflect the benefits of leverage on sales and our efficiency initiatives. Next, I would like to focus on capital allocation. On organic investment, as we previously discussed, we have increased our capital spending in fiscal 2020 to a range of 2.75 to 3.25% of sales, which will help enhance and diversify our product portfolio through new product introductions. We are already seeing early success of this internal initiative which will further enhance our ability to leverage our distribution channels and add value for our customers through offering best-in-class products to serve their needs. Moving to M&A, in April we announced the acquisitions of MSD Research and Peterson Metals to fold into our industrial product segment which strengthened the breadth of our product offerings, increased our geographic coverage, and exploited our market positioning in HVACR and building products in markets. We are pleased with the initial results delivered by both of these businesses. This reflects the fact that we have spent significant time over the past two years upgrading our infrastructure and talent within both industrial products and specialty chemicals to support and integrate acquisitions. As a result, we believe that both segments of the company are now in a much stronger position to execute on potential opportunities that meet our internal hurdle rates for risk-adjusted returns. Moving to the return of cash to shareholders, in July we declared our second quarterly dividend of 13.5 cents per share, which is payable on August 15, to shareholders of record on July 30. This quarterly rate indicates a 54 cents per share dividend on the stock for the full year, which is just shy of a 1% yield. Overall, we will continue to direct capital to the highest risk-adjusted returns available. Our strengthened cash flow profile allows us to execute on a variety of capital allocation strategies and is due in part to the strategic actions we have taken over the past few years. Furthermore, our cash position, revolver capacity, and minimal debt give us ample flexibility to allocate capital across the range of investment options available to us. Moving to our segment performance, sales in our industrial products business were up almost 18% for the quarter. Higher revenue mainly resulted from increased sales volume in HVAC-R and acquisition-related revenue of $4.1 million. While we are essentially only one quarter into our ownership of MSD Research and Peterson, we are very pleased with the performance of both businesses thus far, which is ahead of our original expectations. We've completed the integration of MSD, and Peterson's integration is progressing well. The commercial teams in our architecturally specified building products businesses have been trained with the Peterson commercial team to allow for cross-selling of products. We want to remind investors that our industrial products business can be lumpy based on distributor order flow, construction labor availability, and weather. As a result, while we experienced an easier comparable period in the first quarter, we expect to have a tougher comparable period in the second quarter of fiscal 2020. Segment level adjusted operating income came in at $17 million, or 26.8% of sales, compared to $13.6 million, or 25.2% of sales in the prior year. Margin performance remained strong in the quarter, and we believe that while further margin expansion will be modest, we do have the opportunity for incremental improvement through added leverage on sales. Turning to our specialty chemicals segment. We posted top line sales in the first quarter of $39 million, up 9.1% over the prior year. Growth was driven by increased sales volumes across rail, energy, architecturally specified building products, and mining in markets. Adjusted operating margins of 17% were the highlight of segment level performance and reflected a 330 basis point improvement against the prior year period, demonstrating the operating leverage on increased sales and the benefit of prior years efficiency initiatives. On a go-forward basis, we believe mid-teen margin levels for this segment are sustainable, and moreover, we still have room to further optimize the business incrementally and leverage our cost structure with increased sales. Now turning to our end markets. Overall, we still are observing solid demand across the end markets we serve. In HVACR and plumbing, we continue to see strength for our product offerings and still expect to see growth outpacing the end markets driven by new product introductions and enhanced go-to-market strategies. As a reminder, new housing starts are not as correlated to demand in this end market as repair and remodel activity on the installed base serves as a stronger barometer and represents a larger portion of the market opportunity. In architecturally specified building products, we continue to see strong bidding and additional cross-selling opportunities driven in part by the acquisition of Peterson, which is combined with SmokeGuard, Balco and Greco. We believe the increased diversity of our product offerings and categories that we serve help provide a level of insulation for us from macro exposure. Moving to energy, commodity prices during the quarter edged up given geopolitical uncertainties. Despite some weakness in Canada, our sales volumes were up in the quarter as rig count increased slightly. In our rail business, which primarily consists of trackside applicators and lubricants and generally follows rail traffic, we saw strong growth for the second consecutive quarter. Some of this growth was the result of seasonal changeover of lubricants and varies due to weather. But as mentioned last quarter, this business is more volatile quarter to quarter and is generally a GDP growth type business on an annualized basis. To that end, and based on macro forecast, we would anticipate modest growth throughout fiscal 2020. Finally, in our general industrial end markets, demand continued to be positive in the first quarter as it grew in excess of GDP. We continue to monitor the industrial end market for signs of an industrial slowdown, as reported by peers, but to date, we are pleased with our above market performance. To conclude, fiscal 2020 is off to a strong start, and we are well positioned to build on the momentum generated during the first quarter. We still see health across our end markets and opportunities for us to continue to win in the marketplace. Execution remains a priority and the primary driver of our market growth opportunities. We continually evaluate our operations to identify areas where we can further optimize our business and drive additional margin expansion opportunities. And we expect to make incremental improvements in both business segments on a continual basis. We believe all these efforts will further enhance the free cash flow generation of the business and Drive Long-Term Shareholder Value. Now with that, I'll turn the call over to Greg for a closer look at the numbers.