CSW Industrials, Inc.

Greetings and welcome to the CSW Industrials, Inc. Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during a 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, Doug. Good morning, everyone, and welcome to CSW Industrials' fiscal fourth quarter 2020 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. 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 and in the comments made during this call, as well as the risk factors section of our annual report on Form 10-K and other filings with the FCC. 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 will now turn the call over to Joe Armes.

Thank you, Adrienne. Good morning, and thank you for joining our fiscal fourth quarter conference call. Before we discuss our results and outlook, we'd like to extend our sincere wishes for full recovery to everyone who's been affected by COVID-19. and also express our gratitude to the many frontline responders diligently working to ensure the safety of our communities. I would like to also welcome James Perry to our team as our Executive Vice President and Chief Financial Officer. As you read in our April press release, James has been serving in a consulting capacity for the last few weeks, ensuring a seamless transition. We are extremely pleased to have James as a part of our executive leadership team. He brings a wealth of experience, and a demonstrated track record of success that I expect will continue here at CSWI. Given the current environment, I will expand on our response to the current pandemic, make a few comments on our fourth fiscal quarter and fiscal full year 2020 results in financial performance, and discuss our outlook for fiscal 2021. I will then hand the call off to James for a closer look at the numbers. Preparing our remarks for this quarter, we were reminded of our earnings call in February where we proactively addressed the then current state of the virus, which has led to the pandemic-induced economic environment we navigate today. In the short three months since our last call, our team has responded with unwavering professionalism to the rapidly evolving business environment. In difficult times, we affirm our core values and our capital allocation strategy. Our commitment to be good stewards of your capital is resolute. To accomplish this goal, we are focused on four objectives, treating our employees well, serving our customers well, effectively managing our supply chains, and positioning the company for sustainable long-term success. I'm very proud of our team's demonstrated commitment to our core values of teamwork, citizenship, and respect as we rally to support the health, well-being, and safety of our colleagues and communities while maintaining business continuity and supporting our customers through a relentless focus on accountability, excellence and integrity. All of this positions CSWI for long-term success and is consistent with our core value of stewardship. Our employees deserve our utmost respect and sincere gratitude as they have shown tremendous resiliency and courage throughout this period. And together we will address the challenges of today and work toward a stronger tomorrow. Expanding on how we treat our employees, We remain steadfastly committed to our employee-centric culture, where the safety and well-being of our 700 employees are top priorities, and we have redoubled our efforts in this regard as the pandemic unfolded. A few examples of our enhanced actions include procuring and requiring the use of additional personal protective equipment, ensuring incremental cleaning and sanitizing of our work sites, modifying work schedules and processes, initiating employee health screenings, Encouraging working from home where possible, restricting business travel, and making paid emergency sick leave available. We have a highly experienced management team and board of directors comprised of accomplished leaders adept in managing through economic cycles. Since inception, our management team has demonstrated a commitment to building and maintaining conservative financial position, including a strong, resilient balance sheet, ongoing access to capital, and ample liquidity. We continue to demonstrate this through our $18 million of cash on hand as of March 31, 2020 and full $250 million availability on our revolving credit facility. Our entire team is focused on the factors we can control and we remain well positioned to capitalize on both organic and external growth opportunities as they emerge. Turning to how we serve our customers. We provide high quality products and services to professional tradesmen that are used to repair, protect and maintain homes and commercial buildings and materials critical to the continuity of essential businesses and critical infrastructure. Our operations have been deemed essential across the U.S. and other global locations. Providing our customers with high quality, high value products and services is the foundation of our success. Our customers have learned that they can rely on us during good times and bad. and as a result, we have earned their loyalty. With respect to how we manage our supply chains, in order to be good partners with our customers, we must also have reliable suppliers with minimal sourcing risk. Over the last several years, we have worked diligently to continuously improve the quality and reliability within our supply chain. While we have not experienced issues to date, we are evaluating opportunities to further diversify the locations where our products are made which will help ensure consistent supply chains going forward. Turning to how we position our businesses for sustainable long-term success. Our sustainable business model drove strong results throughout fiscal 2020 with outstanding top and bottom line growth resulting from increased volumes across both segments and contributions from our recent acquisitions. The growth in cash flow generated by continuing operations enabled us to return $34.6 million to shareholders through share repurchases and dividends during the year, to reduce our debt during the year, and to end the year with cash on the balance sheet and the full revolver capacity available. In addition, we paid our regular quarterly dividend earlier this month and we expect our strong financial position to support dividend continuity. 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 acquisitions, and the return of cash to shareholders through our share repurchase and dividend programs. Due to our strong financial position, we will continue to invest in financially and strategically attractive growth, including expanded product offerings, bolt-on acquisitions, and increased marketing, expanding sales footprint, all of which drive our strategy of targeting long-term profitable growth. I'm pleased to report our results for the fourth fiscal quarter, beginning with consolidated revenue of $98.5 million, representing 7.7% total growth compared to the prior year, of which 3.7% was organic growth. For the fiscal full year, our consolidated revenue was $385.9 million, were 10.2% total growth, of which 5.9% was organic. Organic revenue growth was driven by our team's focus on new product introductions and 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. During fiscal year 2020, we realized growth in both our industrial products and specialty chemicals segments and across all end markets we serve. We also completed the successful integration of our two most recent acquisitions. Fourth quarter adjusted earnings per diluted share were 83 cents, which is a 10.7% increase over the prior year period of 75 cents. For the fiscal full year, our adjusted earnings per diluted share were $3.20, which was an outstanding increase of 15.5% over the prior year of $2.77. This continued growth in earnings per share as a result of leverage from increased sales, ongoing benefits from commercial team initiatives, and the outstanding performance of our recent acquisitions. We have remained true to our capital allocation strategy with our recent acquisitions accounting for 430 basis points of incremental fiscal full-year revenue growth. Additionally, in the fiscal full year, We returned approximately 50% of net cash provided by operating activities to our shareholders. Taking a look at our quarterly segment performance, sales in our industrial product segment grew by 11.9% for the quarter and 14.1% for the fiscal full year, of which 5.3% and 6.7% were organic, respectively. Fiscal full-year organic sales growth was predominantly associated with volume growth in the HVAC and plumbing end markets, partially offset by modest declines in the general industrial and rail end markets. While performance and volume were strong in fiscal year 2020, we would remind investors that our industrial products business fluctuates from quarter to quarter with distributor order flow and weather and is highly correlated to the installation volume of new or replacement air conditioning units. The industrial product segment delivered 7.7% increase in quarterly reported operating income to $13.6 million, and there were no adjustments in either period. For the fiscal full year, the industrial product segment adjusted operating income increased 14.7% to $55.7 million and remained highly profitable with a 23.7% operating income margin, which was just about flat with 2019 fiscal year. There were no adjustments to segment operating income in fiscal year 2020. Turning now to our specialty chemicals segment, sales grew by 1.6% for the quarter and 4.7% for the fiscal full year, all of which was organic. Fiscal full year sales were driven by higher sales of consumable products into all end markets. While performance across all end markets continued to improve in fiscal year 2020, We saw a slight decline in the sales volume at the end of the fiscal fourth quarter due to pandemic disruptions and the volatility in the energy markets. Segment operating income was 5.5 million compared to 6.7 million in the prior year period. After adjusting for a $1 million trademark impairment, adjusted segment operating income was 6.5 million in the current fiscal quarter. There were no adjustments in the prior year period. For the fiscal full year, the specialty chemicals segment adjusted operating income increased 11.3% to $24.9 million and drove a 100 basis point improvement in operating income margin to 16.5% in fiscal year 2020. As we begin our fiscal year 2021, we expect most of the end markets we serve to experience temporary but significant demand degradation resulting from the pandemic disruptions. While we generally do not provide guidance or midterm expectations, in this environment we do want to provide additional clarity around our current expectations. We think about the year in two halves, and our current expectation is for revenue and earnings in the first half of our fiscal year to be meaningfully lower than the prior year period, with some recovery expected in the second half. I want to remind our investors that we are on a fiscal year that began April 1, so when we discussed halves of the year, we were referring to our fiscal year, which does not match the calendar year. During our fourth fiscal quarter, we observed distributors building their inventory levels, and as such, we expect some underperformance in the first quarter of fiscal 2021 as a natural result of distributor destocking driven by economic effects of the pandemic. Furthermore, we are not immune to macroeconomic changes, and thus we currently expect that our second fiscal quarter will decline sharply from last year. And then we expect our results will rebound beginning in the fiscal third quarter. As a reminder, our fiscal third quarter has typically been our lowest level of profitability of the year due to seasonality. The negative impact on our full year profitability through potential margin erosion is expected to exceed the decline in revenue. While we have implemented several temporary cost reduction measures across the company, we have made a conscious decision to continue to invest our employees, and we have not reduced our full-time employee workforce due to the pandemic. This commitment to our full-time workforce provides us with the best opportunity to meet our customers' needs as the economy reopens and demand increases. Anecdotally, large distributors in certain end markets that we serve have publicly discussed declines of 15% to 20% and our decline has exceeded those levels in the first six weeks of our first fiscal quarter due primarily to the destocking effect that I mentioned previously. As our products are more geared toward residential applications, our rebound in areas such as HVAC and plumbing could be helped by the large number of individuals working from home entering the annual peak sales season and normalization of distributor inventory levels. As always, we are monitoring demand through both macroeconomic data and, more importantly, direct conversations with our customers, and we will remind investors that circumstances are very fluid. While no one can accurately predict how any company's results will be impacted by the evolving market dynamics, this constant contact with our customers provides us with improving visibility on the range of expected performance in each of the end markets that we serve. Our products are utilized in HVAC repair and the installation of new and replacement units, and as such, we expect near-term sales into this end market to decline, partially offset by the potential to increase sales of our environmentally friendly decontamination products, such as coil cleaners, along with new product introductions and the integration of acquisitions. Similar to our HVAC market outlook, near-term sales into the plumbing end market are expected to decline with long-term demand for our products, driving in-market growth as the installed base continues to grow with general construction. Within our architecturally specified building product end markets, we continue to see bidding activity and backlog stability, but the rate of bids turning into orders has slowed down in the last few weeks. We will regularly review the projects within the backlog and assess risk of project timing appropriately. By targeting growth in education, healthcare, and commercial office construction and pursuing cross-selling opportunities and new product introductions, we continue to believe in the long-term outlook for this portion of our business. We acknowledge the potential for project delays as certain jurisdictions have constraints and delays, but one bright spot for us in this end market is that we are seeing some competitors who are unable to deliver product or install that product So we have won several orders due to our consistent ability to manufacture and deliver products during the past two months. In the rail, energy, mining, and general industrial end market, we continue to expect long-term end market outperformance while acknowledging near-term headwinds as industrial companies reduce planned capital expenditures, global rig count softens, and rail car traffic has declined in some areas. Specific potential opportunities to offset near-term softness include expansion of sales into international energy markets, transit rail that continues its regular routes, moving essential workers to and from their jobs each day, and improving consumer demand for finished goods, which will necessitate industrial demand for our consumable products. Regarding our cost control measures, we continue to focus on pursuing operational excellence, which includes making our cost structure more flexible and competitive. We reduce certain profit-sharing incentives and benefits, as well as discretionary expenses, such as consulting, travel, and entertainment. Additionally, we have a flexible labor structure at certain facilities that utilizes temporary labor to manage stronger demand periods. We have been able to adjust this labor as demand improves or declines. We do not expect these cost reductions to fully offset the impact from the expected revenue decline in the near term, but there are additional cost measures available to us if the decline in revenue has a longer duration than currently anticipated. We are focused on long-term, sustainable value creation. We've made financial and strategic decisions in the years leading up to this event that allow us to continue investing in our business for growth and to gain market share. To accomplish our long-term objectives, we are willing to temporarily accept slightly lower profits in the near term, so long as, by doing so, we are able to generate greater profits in the intermediate and long term. In summary, throughout fiscal year 2020, our team delivered strong, top-line revenue and adjusted operating income growth year over year, driven by organic initiatives and successful acquisitions. During the year, we demonstrated our ongoing commitment to disciplined capital allocation with $34.6 million returned to shareholders via dividends and share repurchases. Combined with our strong, resilient balance sheet, liquidity position, and cash generation, We continue to be positioned for long-term growth and profitability that endures through economic cycles. And with that, I'll turn the call over to James for a closer look at the numbers.