CSW Industrials, Inc.

Greetings, and welcome to the CSW Industrials' third quarter 2020 earnings conference call. At this time, all participants are in a 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, Adrienne Griffin, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Christine. Good morning, everyone, and welcome to CSW Industrials Fiscal Third Quarter 2020 Earnings Call. Joining me today are Joseph Armes, Chairman, Chief Executive Officer and President of CSW Industrials, and Greg Branning, Executive Vice President and 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. Thank you, Adrienne.

Good morning, and thank you for joining our fiscal third quarter conference call. As we prepared to discuss our strong quarter and year-to-date results, I was reminded that we are now in year five of our effort to build a diversified industrial growth company. Approximately four and a half years ago, we recognized the potential value that could be created by combining the companies that form CSWI and our initial efforts to consolidate these companies under a single operating structure to share resources and best practices and to optimize our manufacturing footprint have definitively enhanced profitability. In the last year, we largely completed this first phase of this transformation. We are now in a strong position as we look to the future. As we continue along our path of maturation, we remain committed to investing in people, processes, and systems necessary to drive long-term profitable growth. guided by our compelling investment thesis. Through ongoing product introductions, deploying technology and innovation, and pursuing M&A, we are confident in our ability to provide growth and access in the end markets we serve today and to deliver attractive risk-adjusted returns to our shareholders. Before I begin a discussion of our results in end markets, I would like to acknowledge prospective concerns in these early days of understanding the potential global impact of the coronavirus. At this point, we do not expect any material impact on our financial position or results of operations. We would like to express our concern for those who have fallen ill and our appreciation to those who are vigorously responding to the people impacted by this virus. Like others with supply chain relationships that include companies located in China, we are closely monitoring the possible economic impact of this virus. We sourced several products from Asia. and specifically from areas of China outside of Wuhan. And at this stage, we have determined that our inventory position with these products is sound, thus mitigating near-term conceivable impacts. We would remind everyone that our international sales are less than 20% worldwide and approximately 1% of that sold in China. So at the present time, any impact related to sales into China would be immaterial. Now I will provide a brief recap of our results for the quarter and year to date, followed by segment highlights and a review of our end markets. Then I'll hand the call off to Greg for a closer look at the numbers. I'm pleased to report our results for this quarter, beginning with consolidated revenue of $83.7 million, representing 8% total growth, of which 3.4% was organic growth, compared to the prior year period. I'll remind our audience that fiscal third quarter of last year was exceptionally strong, emphasizing this quarter's solid growth. Comparing our organic growth rate to the recently reported 2.1% fourth quarter 2019 GDP growth rate further emphasizes our outperformance. Consolidated quarterly operating income increased over 11% to $10.5 million, and there were no adjustments to operating income and the quarter in either year. Given that we are nine months into the fiscal year, I would also like to highlight that our team has delivered excellent performance of 11.1% of total revenue growth compared to the prior year period with our two recent acquisitions contributing 4.5% or 450 basis points of this growth year to date. The 6.6% year to date organic revenue growth resulted from our team's focus on new product introductions that are driving market share gains, customer-specific programs targeting share of wallet growth, and investments in our sales and marketing organization, including personnel, product training, and performance-based compensation. We have realized growth in both our industrial products and specialty chemicals segments, which year-to-date have delivered healthy sales growth across the HVACR, plumbing, rail, energy, We are particularly pleased with such strong organic growth well above the end markets we serve and nearly three times 2019 GDP, further demonstrating our team's outstanding performance. Third quarter adjusted earnings were $0.48 for diluted share compared to $0.46 in the prior year period. Here today, we have delivered $2.35 of adjusted earnings per diluted share, an impressive 16.3% increase over the prior year period. This continued growth in earnings per share is the result of leverage from increased sales, ongoing benefits from commercial team initiatives, and the outstanding performance of our recent acquisitions. Our capital allocation strategy continues to guide our investing decisions. with a priority to direct capital to the highest risk-adjusted return opportunities within the categories of organic growth, strategic bolt-on M&A, and return of cash to shareholders through our share purchase and dividend programs. We have remained true to this capital allocation strategy with our 6.6% fiscal year-to-date organic revenue growth and incremental 4.5% fiscal year-to-date revenue growth from recent acquisitions. Additionally, through the repurchase of 12,000 shares of our stock in the quarter and the $6.1 million in dividend payments to shareholders in the first three quarters of the year, we have returned approximately 15% of our operating cash to our shareholders year to date. Looking forward, we remain very pleased with our robust M&A pipeline, which we developed through in-house relationships, market knowledge, and fostered through intermediaries. Our M&A pipeline grew throughout calendar 2019 and today includes opportunities such as product line extensions and bolt-on acquisitions that could expand our size and scale, diversify product offerings, or increase geographic footprint within the end markets that we currently serve. We remain committed to our disciplined acquisition process, and while we are not in a position to make an announcement, we persist in our focus on compelling, value-accretive opportunities. As part of our commitment to return cash to shareholders in January, we announced our fourth quarterly dividend that is payable on February 14th to shareholders of record on January 31st at an annualized rate equaling 54 cents per share. With the inaugural four quarters of our dividend program announced, we believe the first quarter of fiscal 2021 is the proper time to discuss with our board the appropriate size of any increase in our dividend as well as the trajectory of future dividend growth. We expect to provide an update on this on or before our next earnings call. Moving to our quarterly segment performance, beginning with industrial products, sales grew by 11.5% of which 3.3% was organic compared to the same prior year quarter. Organic sales growth was predominantly associated with volume growth in the HVACR and plumbing in markets. During the quarter, we saw softening in the organic growth of our architecturally specified building products in market due primarily to customer-driven project delays common with commercial construction projects, compounded by the ongoing tightness in the labor markets. We remain confident in the quality of our backlog, and further, our bookings continue to outpace revenue, driving an increased backlog, which provides us with good visibility through the end of this fiscal year and into the next. In order to augment our expertise in this end market, during the quarter we made a strategic hire for the leadership team within our industrial products segment. I'm pleased to welcome Scott Stratton, Vice President, CSWI, and General Manager of Building Safety Solutions, which is a newly created role. Scott joins us most recently from Thuris and Krupp Elevator and brings deep commercial and operational experience in the architecturally specified building products end market. We look forward to seeing the impact of this focus on driving continued organic growth and enhanced margins. The industrial product segment delivered 7.2% increase in quarterly operating income to $8.6 million. Compared to the prior year quarter, we realized a 70 basis point decline in segment operating income margin as we experienced negative mix and execution challenges in our architecturally specified building products business. coupled with lapping a strong comp. The issues we experienced in fiscal Q3 are likely to continue into fiscal Q4, but we anticipate improvement as we exit this fiscal year. During the fiscal third quarter, our specialty chemical segment reported operating income of $5.4 million, or 15.4% of sales. This reflects a 3.6% increase in sales over the prior year period, all of which was organic. as well as realizing a 190 basis point improvement in operating income margin due to sales leverage and positive sales mix. The increased sales were primarily driven by the rail, plumbing, and mining end markets, partially offset by softening in the energy end market as rig count was 20% lower than the prior year period. As we have entered our fourth fiscal quarter, I would like to provide a brief overview of the outlook in each of our major end markets. We have continued to see strong demand across the largest end markets that we serve, including HVAC-R, plumbing, and architecturally specified building products, which collectively contribute approximately 70% of consolidated sales. In rail, energy, mining, and general industrial, we continue to deliver long-term in-market outperformance. In HVAC-R and plumbing, outlook for demand remains strong. and we expect to continue to drive growth rates well in excess of these end markets. Anecdotally, over the year, our industrial products team invested approximately $1 million of capital on additional production capacity to support demand for our products in the ductless mini-split market. Ductless mini-split accessories have been a fast-growing product category for us. We are pleased with our team's innovation in this emerging sector of the HVACR market. Building upon this momentum, our team is continuing to innovate and develop additional products for HVAC-R maintenance and repair, adding to our suite of best-of-class products that improve end-user productivity and help the tradesmen grow their business. We have achieved over 15 percent growth in the architecturally specified building products and market year-to-date, driven primarily by our recent acquisition and organic sales growth of our fire and smoke related products. We are confident that the combined strength of our growing backlog and additional leadership focus on the architecturally specified building products and market will result in a return to improved profitability and stronger organic growth. In summary, our team has delivered double digit revenue and adjusted operating income growth year to date, driven by organic initiatives and successful acquisitions. We continue to have confidence in the 7% total revenue growth rate for the second half of the year that we mentioned in our last earnings call. This continued growth, profitability, and strong cash flow generation are funding investments in our business and returning cash directly to shareholders. With that, I'll turn the call over to Greg for a closer look at the numbers.