CSW Industrials, Inc.

Greetings and welcome to the CSW Industrials First Quarter 2021 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 Vesta Relations. Thank you. You may begin.

Thank you, Christine. Good morning, everyone, and welcome to the CSW Industrials Fiscal First Quarter 2021 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. We issued our earnings release and presentation prior to the market's opening today and both are available on the investor portion of our website at www.cswindustrials.com. During this call, we will reference specific slides in the presentation. The call is being webcast and information on how to access the replay is included 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 today in our earnings release and in the comments made during this call, as well as 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. I will now turn the call over to Joe Armes.

Thank you, Adrienne. Good morning and thank you for joining our fiscal first quarter conference call. On today's call, I will provide an update on the four guiding objectives that we presented last quarter, discuss our fiscal first quarter results, and comment on our outlook for the remainder of fiscal 2021. I will then hand the call off to James for a closer look at the numbers. On our last call, we outlined four guiding objectives, treating our employees well, serving our customers well, And managing our supply chains effectively, thus positioning our company for sustainable long-term success. We recognize the challenges that the pandemic has posed to many of our stakeholders, including our employees, customers, and suppliers. And our focus has been on the safety, continuity of service, and collaboration throughout a changing business environment. Our success in fiscal first quarter of 2021 was directly attributable to the diligence and professionalism of each of our over 700 employees of CSWI. We have remained engaged, courageous, and confident while continuing our operations with minimal disruptions. Our employee stock ownership plan, which is designed to ensure alignment, incentivizes our team members to think like owners. We thank all CSWI team members for their effort to date as together we work each day to ensure that CSWI emerges even stronger and better positioned for future growth. As we outline on slide four, our diversified in-market strategy, history of robust profitability, strong cash generation, and resilient balance sheet position us to capitalize on both organic and inorganic growth opportunities while driving long-term shareholder value. We remain resolute in our commitment to be good stewards of your capital. On slide 7, you will see our 2021 guiding objectives. Expanding on treating our employees well, we are providing continuing employment for full-time employees as we position our businesses for the ongoing recovery in demand that we began seeing in some of our end markets toward the end of the fiscal first quarter. We remain committed to the enhanced health and safety efforts we outlined on our last call, fostering the sound COVID-19 operational health and safety competencies and incorporating them into our standard work environment. We believe our recent actions have positioned us to better mitigate the possible impacts of future unexpected events and to support our enduring risk enterprise risk management strategy and processes. Like many companies that have continued to operate safely over the last several months, we have had a few employees test positive for COVID-19, but all proper precautions were taken to maintain the health of those team members around them. We estimate $300,000 to $400,000 of costs were incurred in the fiscal first quarter related to the employment, health, and safety efforts noted above. Turning now to our second guiding objective, serving our customers well. In recent months, we increased our commitment to be a vendor of choice, including emphasizing communication and customer service excellence. Our teams utilized the changing work environment to offer virtual product training, helping drive demand for our high-quality, high-value products, while concurrently offering customers the opportunity to earn continuing education credits and to serve their customers more effectively. In addition, we have recently increased personnel in our shipping departments to capitalize on the recovery of demand in some of our end markets, predominantly HVACR and plumbing. We remained disciplined in managing our supply chain effectively, and throughout the quarter we utilized the strength of our balance sheet Selectively Building Inventory to ensure our ability to meet our customers' needs and to take advantage of discounted market pricing on some key raw materials. In our architecturally specified building products in-market, these supply chain measures have helped us to win projects from competitors, thereby gaining market share and bolstering brand reputation. We anticipate additional prospective opportunities to deploy capital that support our organic growth objectives, thus driving long-term growth in excess of the end markets we serve. We remain diligent in our efforts to improve the quality and reliability of our supply chains, thereby ensuring business continuity and reducing sourcing risk. Turning to how we position our business for sustainable long-term success. Since inception, our management team has committed to building and maintaining a conservative financial position, including a strong and resilient balance sheet, ongoing access to capital, and ample liquidity. As shown on slide 8, we continue to demonstrate balance sheet strength with nearly $20 million of cash balances as of June 30, 2020, which is an increase from last quarter. During this quarter, cash flow from operations grew 45.4% over the prior year period to $14.1 million, representing a 15.5% cash flow yield on revenues in the quarter. We also repurchased 7.3 million shares and paid our $2 million quarterly dividend for a total quarterly return of cash to shareholders of $9.3 million. As of June 30, 2020, we maintained the full $250 million available on our revolving credit facility, supplementing the strength of our liquidity position and our ability to execute on growth opportunities. Our capital allocation strategy continues to guide our investing decisions with a priority to direct capital to the highest risk adjusted return opportunities as we invest for our future, particularly in the end markets we serve today. We are very active in pursuit of external growth as we see opportunities emerging in several of our end markets. When outlining expectations for the fiscal first quarter on our last earnings call in mid-May, we discussed potential underperformance driven by natural distributor destocking as attributable to pandemic-driven demand degradation We also reported that in the first six weeks of the fiscal first quarter, our revenue decline was in excess of 20% in some of our end markets. With this backdrop, I am pleased to report that fiscal first quarter revenue was $91 million, reflecting an 11% decrease compared to the same prior year period. These results exceeded our own as well as the consensus expectations for the quarter. The outperformance began in the second half of the first quarter. as demand improved for products designed for residential applications in areas such as HVAC-R and plumbing, as well as in our architecturally specified building products. During the quarter, May results exceeded those in April and June exceeded May, providing us with strong momentum heading into our second quarter. In fact, in the month of June, sales into the HVAC-R and architecturally specified building products in markets were actually higher as compared to the prior year period. As we discussed in May, we implemented a broad range of temporary cost reduction measures at the very early stage of the COVID-19 outbreak in the United States to preserve profitability. While the cost reduction measures did not fully offset the impact from the revenue decline, We reported a solid $16.3 million of operating income and 17.9% operating income margin, only a 200 basis points decline in margin from the prior year period. I will also highlight that we have continued to invest in our people, and we have not had any pandemic-related reductions to our full-time employment, allowing us to serve our customers' dynamic needs as they adjusted to varying demand for their products. As I mentioned earlier, these actions have resulted in our winning new business in several of our end markets, especially architecturally specified building products. We believe these actions further demonstrate our stated commitment to a long-term perspective on driving shareholder value. Turning now to slide nine, the resiliency and diversification in our end markets is highlighted on this page. In addition to my previous comments on the strength we've seen in the HVAC-R and plumbing end markets, there are several factors positively affecting demand for our products, including the large number of individuals continuing to work from home and the 12% increase in June cooling degree days as compared to the same month last year. The architecturally specified building products end market was effectively flat year over year, with strength in sales driven by our quality backlog primarily the completion of projects that commenced prior to the pandemic. Our three largest end markets, HVACR, plumbing, and architecturally specified building products comprise nearly 77% of our revenue this quarter. While the pandemic has caused acute short-term uncertainty in our general industrial, rail, and mining end markets, we expect these businesses to return to growth as our customers return to normalized operations and resume the types of maintenance activity and capital investing decisions that drive demand for our products. We remain confident in the long-term secular fundamentals supporting these end markets. For example, Class I rail is critical to transporting goods across the United States while transit rail is a growing market worldwide and suitable for many of our niche products. Additionally, the general industrial, mining, and energy end markets provide geographic diversification with access to faster-growing international markets. Now I'd like to discuss our current thoughts on the remainder of this fiscal year. And first, remind our investors that our fiscal year began on April 1. Earlier in my prepared remarks, I noted the momentum in our largest end markets that we have realized since the second half of the fiscal first quarter. Based upon the steadily improving demand, we now expect revenues and earnings in the first half of the fiscal year to be slightly lower than the prior year period. In the second half, which is typically negatively affected by seasonality, we expect some recovery in select end markets resulting in moderately lower revenue and earnings than the same period last year. As the current situation remains fluid, The duration and trajectory of end market recovery are hard to determine. We see ongoing strength in our HVACR and plumbing end markets, opportunities for incremental growth in the general industrial and heavy end markets, with potential declines late in the fiscal year in our architecturally specified building products end market. As discussed on our last call, our bidding activity has remained strong while there has been a decline in the rate of projects being added to the backlog as builders' commitment to large projects has slowed. If the pace of bookings remains at current levels, a decline in our architecturally specified building products revenue could materialize late in this fiscal year or early in the next. As of the end of the fiscal first quarter, our book-to-bill ratio for the trailing eight quarters remained above one, and only one project was removed since our last call. indicating the quality of our backlog. We continue targeting education, healthcare, and government projects as a manner of bolstering our prospects and increasing the diversity of our portfolio, which is otherwise weighted toward multifamily housing. As a result of expected year-over-year revenue declines in this fiscal year, we continue to expect slightly lower margins do primarily to our previously discussed efforts to retain employment for our team members. However, we remain diligent in our pursuit of operational excellence and a competitive cost structure, and we will initiate additional cost mitigation efforts if the pace of demand recovery slows. In summary, our strong balance sheet continues to enable us to have the financial flexibility to succeed in the current economic environment by investing Organically and inorganically in our business, driving long-term growth and returning cash to our shareholders in line with our capital allocation strategy. And with that, I'll turn the call over to James for a closer look at the numbers.