Greetings and welcome to the CSW Industrials' First Quarter 2020 Earnings Call. As a reminder this conference is now being recorded. It is now my pleasure to introduce your host, Mr. Tom Cook. Mr. Cook, you may begin.

Thank you, Gerry. 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 Gregg Branning, Chief Financial Officer. If you've 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 of 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, 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 Armes. Joe?

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 Gregg 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 million of which was organic. We continue to see widespread growth across the end markets we serve and helped drive the results we experienced this quarter. Our first quarter adjusted earnings was $0.98 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 and 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 Petersen Metals to fold into our Industrial Products segment, which strengthened the breadth of our product offerings, increased our geographic coverage and exploited our market positioning in HVAC/R and building products end 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 $0.135 per share, which is payable on August 15 to shareholders of record on July 30. This quarterly rate indicates a $0.54 per share dividend on the stock for the full year, 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 Petersen, 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 Petersen's integration is progressing well. The commercial teams in our architecturally specified building products businesses have been trained with the Petersen 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 end 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 benefits of prior years' efficiency initiatives. On a go-forward basis, we believe mid-teen margin levels for the segment are sustainable and moreover, we still have the 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 HVAC/R 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 Petersen which is combined with Smoke Guard, Balco and Greco. We believe the increased diversity of our product offerings in 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 track side applicators and lubricants and generally follows rail traffic, we saw strong growth for the second consecutive quarter. Some of this growth was a 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 Gregg for a closer look at the numbers.

Thank you, Joe, and good morning everyone. Our consolidated revenue during the fiscal first quarter of 2020 increased 14.2% to $102.3 million compared to $89.6 million in the prior-year period and 9.6% of this growth was organic. The higher revenue was driven by increased sales in both the Industrial Products and Specialty Chemicals segments, mainly due to increased sales volumes into the HVAC/R end market as well as smaller increases in the architecturally specified building products, rail, energy and mining end markets, coupled with the inorganic revenue from our recent acquisitions. Looking at our segment level revenue and operating income, in our Industrial Products segment revenue was $63.4 million, which was up 17.6% over the prior year period. The higher revenue was mainly the result of increased sales volume in HVAC/R coupled with acquisition-related revenue. As we look at the balance of the year, these acquisitions are subject to the normal seasonality we see in this segment. So, we expect the contribution will moderate as we exit the peak of the season. Our GAAP segment operating income increased to $17 million, a 22.3% increase over the prior year. Segment adjusted operating income as a percentage of sales improved 160 basis points to 26.8%. We are pleased to see the incremental margin improvement on higher volume, which largely results from the 25% to 35% fall through from an incremental organic volume. I will note that we had no adjustments in the current year results, but we did have adjustments in the prior year as a result of some favorable one-time items primarily gains on sales of facilities, which we called out last year. The Specialty Chemicals segment revenue increased 9.2% to $39 million over the prior year period. Increased sales were driven by higher volumes in the rail, energy, architecturally specified building products and mining end markets. GAAP segment operating income was $6.6 million compared to the prior-year period of $6.5 million. Segment adjusted operating income as a percentage of sales improved 330 basis points to 17% compared to the prior-year period of 13.7%. This improvement in operating margin was related to the efficiency initiatives implemented last year, as well as the anticipated 25% to 30% fall through on incremental organic volume. Just as I mentioned with Industrial Product segment, I will note that we had no adjustments in our current year Specialty Chemicals segment results. But we did have adjustments in the prior year as a result of some net favorable one-time items primarily gains on sale of facilities, which we called out last year. As we move to our consolidated results in the first fiscal quarter, our consolidated gross profit increased to $47.2 million, up 12.1% over the prior year period. Our gross margin as a percentage of sales decreased 80 basis points to 46.2% compared to 47% in the prior year. This decrease in gross margin was primarily the impact of the net one-time adjustments in the prior year that did not recur, primarily the gain on facility sales. Consolidated operating expenses in the quarter were $26.9 million or 26.3% of sales compared to the prior year level of $24.3 million or 27.2% of sales. The 90 basis point decrease in operating expense as a percentage of sales was driven by sales leverage, partially offset by increased personnel-related costs and costs associated with acquisitions. Consolidated operating income for the first quarter was $20.3 million or 19.8% of sales compared to $17.7 million or 19.8% of sales from the prior year. When comparing current year operating income, which had no adjustments to the prior year adjusted operating income of $15.9 million, we saw an increase of $4.4 million or 27.7%. Fiscal first quarter consolidated operating margin was 19.8% of sales compared to the prior year adjusted operating margin of 17.7% of sales, a 210 basis point increase. The increase in operating margin was driven by leverage on sales and prior year efficiency initiatives. The effective tax rate on continuing operations for the quarter ended June 30, 2019 was 22.2% and we now expect our fiscal 2020 effective tax rate to be in the range of 23% to 26%. Reported net income from continuing operations increased to $15.3 million or $1 per diluted share compared to $14 million or $0.88 per diluted share in the prior year period. Adjusted to exclude one-time items in the prior year and applying a normalized tax rate in both years, adjusted net income from continuing operations in the fiscal first quarter increased 23.3% to $14.8 million or $0.98 per diluted share compared to $12 million or $0.76 per diluted share in the prior year period. Moving to our cash generation and balance sheet, our operating cash flow from continuing operations was $9.7 million in the first fiscal quarter 2020 compared to $11.8 million in the prior year period. The decrease was a result of increased working capital in fiscal Q1 to support our increased sales. Our net debt at quarter end was $11.6 million as we closed the quarter with $10.2 million of cash on our balance sheet. We had $239.5 million of borrowing capacity remaining on our revolving credit facility, which provides us ample flexibility to fund our growth and capital allocation strategy including acquisitions. With that I will turn the call back to Joe.

Thanks, Gregg. The solid foundation of our strong results in fiscal Q1 positions us very well for the balance of fiscal 2020. We intend to continue our integration and efficiency initiatives and offer best-in-class products to serve our customers and help their businesses grow. Let me take this opportunity to thank all my colleagues at CSW Industrials who collectively own over 5% of our company through our employee stock ownership plan. And also thank all of our other shareholders for their continued interest in and support of our company. With that, operator, we're now ready to take questions.

Thank you. We'll now be conducting a question-and-answer session. First question is from Jon Tanwanteng, CJS Securities. Please go ahead, sir.

Good morning, gentlemen. Thank you for taking my questions and congrats on the strong results.

Thanks, Jon.

Thanks, Jon.

Joe, you said for maybe a year now that there is an extended HVAC maintenance and upgrade cycle. You mentioned that it's not tied to housing starts. Has that played out as you expected and does that trend have legs, and if it does, how long do you think that goes on for?

Yeah, Jon. Our primary thinking around that is it's really a business about the installed base. And as the installed base has grown, repair, replacement, maintenance, all those things are good for us. New installs are good as well. But we're really highly focused on the installed base and the growth opportunities there. In addition to what I talked about—our enhanced go-to-market initiatives and strategies—I think we've seen a professionalization of our sales efforts and marketing and some investment there. That's really paying off nicely. And so, notwithstanding the housing cycle and all of that, our business, we believe, is going to be resilient and continue to grow through the cycle.

Okay, great. And then from what you can see, whether any pull-ins or push-outs either from the architectural side or order timing maybe from the stocking side from your HVAC construction customers. I know sometimes you can get a little lumpy.

Yeah. We absolutely did see some projects move to the right in architecturally specified building products and that's been a theme that you've heard quite a bit. I think some of that is labor shortage, some of that is idiosyncratic to each individual project. I think weather can play a role in that, but there were some projects that got pushed to the right. On HVAC/R, I would say less of that. We would recommend that everybody look at the first half of the year versus the first half last year—between Q1 and Q2, you can have some lumpiness there, so the comp goes easier this quarter and may be tougher next quarter; if you really look at the first half of the year, that might be a better way to look at that.

Got it. Okay, thank you. And then Spec Chems, it looks great. You touched on this: your sales were better. The end markets, industrials obviously look like they're slowing down across the markets. What's driving your improvement ahead of the market, number one; and number two, you did 17% operating margins and you said mid-teens was the target—any reason why it's not mid-to-high teens?

Yeah, well, it probably will be mid-to-high teens now. But yeah, we feel like we have really innovative, strong products. I think again we are marketing those better; our go-to-market strategies have improved. We have moved into higher growth end markets and geographic markets for that, I think, in a very thoughtful way and we're winning in the marketplace. And so we would expect to continue to outgrow our end markets and while most of those end markets at least domestically are GDP growth, we expect there are markets outside the U.S. where the growth can be higher and we are exploring those opportunities as well. But, yeah, there's no question that increased volume drives our margins there and that will continue to be the story, and as we can continue to increase our volume and throughput through our facility, we'll see improvement in margins.

The other thing I would add, Jon, is I think the mid-to-high teens makes sense given where we finished the quarter. The one thing that I think the reason why we focused on mid-teens is, I'll just remind you and everyone else that we do have the seasonality in fiscal Q3 in both segments. Obviously, it's more pronounced in Industrial Products, but we do see it in Specialty Chemicals as well. And as you've seen over the last few years, volume makes a big difference in that business. And so as volume falls off some in Q3 due to that seasonality, it will pull that margin down.

Okay, great. Thank you, and then just heading into Q2 on that business: do you see this momentum being sustained based on what you're seeing in July and August?

It's early on and we don't provide guidance at this level, but we're very pleased with the results so far in Q2. So we're not providing any cautionary information at this point because we don't see any need to.

Okay, great. And then finally just on the capital deployment: obviously you've done two acquisitions this year, you initiated the dividend. What's next in your plan? How does the pipeline look for M&A? Do valuations look a little bit better, do you see more opportunities? Just more color on the whole process.

Yeah, Jon, I wouldn't say that valuations have changed, but I do think we're seeing better opportunities. We're very pleased with the pipeline. I've had an opportunity to go through that very, very recently, and there is a lot of activity on that front. So I do think that's going to be a high priority for us on the capital allocation strategy. Otherwise, we're going to stay the course. We're going to allocate capital to the highest risk adjusted return opportunities in front of us and we were very pleased and very proud of the contribution that two seemingly small acquisitions made to our organic growth rate over and above organic. So 500 basis points of growth in the quarter from two really seemingly small acquisitions just proves that the acquisition strategy of singles and doubles, I think works really well over a long-term basis and you think about the compounding effect of that. So we're highly focused on the acquisition pipeline, highly focused on getting new products added to our distribution channels through acquisition, and I think we're going to continue to see success in that area.

I think the other thing is that from the standpoint of adding new products to our channel, that is a key focus for our businesses, even more so probably continuing on the Industrial Products side. They've been at it longer. And so with the leadership we have there, they're doing a really nice job of looking to consistently add new products, some of which are causing the higher capital that we talked about last quarter and again this quarter that we will see for the year. But a lot doesn't take capital. It's working with partners and being able to launch products that takes very little investment on our end, but will pay off in nice organic growth.

Not to put too fine a point on that, Jon, but there are some products that we distribute and it takes no capital whatsoever. And we can just put them through our distribution channels quickly. The margins are really attractive from that standpoint. There is no complexity to speak of. And so it's really nicely profitable business for us. So I think we are going to be, and have been and continue to be agnostic in some respects as to how we fill and exploit that distribution channel—whether it's new product development through our capital, whether it's product line extensions like MSD, whether it's distribution opportunities with other folks—innovative products that will flow through our distribution channels and we can leverage that. The answer is going to be all of the above, and that's going to drive that organic growth rate.

Okay, great, thanks a lot guys.

Thank you.

We have a question from Joe Mondillo, Sidoti & Company. Please go ahead, sir.

Hi guys, good morning.

Good morning, Joe.

I'm just wondering about the acquisition. Number one, was that a sort of a normal quarter sort of run rate in terms of revenue contribution and number two, how much did the acquisition contribute to either operating income or earnings?

Yes, Joe, from the standpoint of the revenue, obviously part of that revenue was in HVAC and so there is some lumpiness there. You'll see a slightly diminished revenue number in fiscal Q3. So I wouldn't take it and annualize it, but it's not going to be significantly off of the annualization number either for the combined business for the two acquisitions. And then from the standpoint of the profitability both of them were profitable and they contributed nicely, but not from a material standpoint given the fact that you've got purchase accounting and they are just starting out. But they exceeded our expectations both on the topline and the bottom line.

Okay. And the D&A that you realized for the quarter—just in terms of the acquisition—is that any sort of one-time type of stuff or is that D&A that you saw in the quarter sort of a good run rate going forward?

That's a good run rate going forward, I would say. The only thing, just like any type of D&A, particularly on the depreciation side, our CapEx was to no surprise lighter than our guidance of the higher capital expenditures. We only ended up at 2.2% of sales in CapEx in the quarter. So you will see a little bit uptick in D&A, but it's just not going to move the needle, simply because of how depreciation flows out.

Yeah, okay. Could you repeat the CapEx guidance again actually?

Yes. It's between 2.75% and 3.25% of sales and the increase is being driven by opportunities in new product development, primarily in our Industrial Products area. It's the projects have been developed. This is buying equipment to produce the products.

And what category would that be in? Is that HVAC or something else?

That's in HVAC.

Okay. So, I also wanted to ask about the architecturally specified building products and sort of the visibility that you have. How does that— I believe this is more of a backlog-driven business—how does that backlog been trending? And what does that look like going forward?

Yeah, Joe. As you know, we track that backlog really closely because, and we look at it on a quarterly basis as well as the book-to-build. It's important that you just don't look at it at one point in time because like a balance sheet, it can fool you. But the good news is the backlog is up. If you back out the backlog primarily from the Petersen Metals acquisition—because it's architecturally specified building products whereas MSD is not—even if you back out the acquired backlog, we are still up over prior year and were up over the last four to five quarters. So we're positioned well and expect to continue to see nice strength there. But as Joe mentioned earlier, we will continually caution people that when it comes to projects, particularly in architecturally specified, it can be lumpy due to labor shortages from our customers in the marketplace and due to weather. But we're still very bullish and expect to see continued nice growth.

On a directional basis, just given what we've seen with the slowing of the economy and you've even seen in the non-residential construction spending numbers as well as the Architectural Billings Index, have you recognized any sort of slowing in there or is it still very strong? How would you characterize that?

I'd say it's still very strong and frankly the building and commercial building indexes have been negative for some time now and our backlog is built and so at this point we're not feeling it. And again we think execution—providing really high quality products and delivering those on time and to our customers, given our size, is a much larger driver than the macro trends at this point for us. And so we're very pleased with the backlog, very pleased with the growth in those businesses. And at this point are not experiencing for ourselves in our business any of that softness.

I would echo Joe's comment. Execution is really critical and so we think even in a soft to down market, we can still grow because of execution. The other thing I would say—as we've said in prior calls over the last year—when you look at the majority of our products that go into architecturally specified building and the customers, the buildings that they go into tend to go late in the building cycle. And so that should give us some advance notice. So let's use railings and smoke curtains for a minute: the building has to be substantially built before those railings go in. Once the building is under contract, they're going to finish that building and so our sales will continue. That's why we track backlog and bookings to make sure that we're well prepped. All of that to make sure that we're well prepared and despite the slowdown we continue to see strong bookings, which is the more important thing to look at because it says we are executing.

Yeah, definitely. Thanks. Also the strength that you're seeing in HVAC: can you talk about volume versus price and then not sure if you have the visibility, but do you have any sense of what is channel stocking versus actual end user consumption?

Sometimes you don't know that until after the fact, Joe. But we don't believe there is channel stocking going on there. It's a short cycle—summer is three to four months long—and so that begins to work its way out pretty quickly through the system. So we don't really have any concerns about channel stuffing or being concerned about destocking later. Regarding growth being volume or price, we have taken some price increases, but we also see volume moving up dramatically. So it's really a nice combination of both. I think our go-to-market strategy has really been enhanced over the last couple of years and I think we're seeing the fruits of that now. We're selling premium products at premium prices and executing really well. So it's a nice combination of both price and volume.

I'll reiterate what we've said in the past: price has largely been used to address tariffs and so you've seen our margin increase. We have not been diluted due to the tariffs; we pass those prices along and they've been accepted in the market because of the premium products that we have. So we haven't seen volume dilution—volume is by far the biggest driver for us. And just to head off a question that might be out there with the most recent tariff announcements, we don't believe those announcements are going to affect us. Our products that were impacted by tariffs have already seen the impact. So absent any increases in tariff percentages, we think we're in good shape there.

At the Spec Chem business, we don't talk a whole lot about input prices or materials. What would your biggest input materials be—I would maybe guess that they are petroleum based—and then could you talk about price cost at that segment?

Yes, it is base oil and petroleum-based oils, but it's not a huge component. We don't have any primary commodity exposure that we really have to worry about driving the cost structure for our business there. By the same token as on the Industrial Products side, we've had a nice increase in volume and some price action that we think is indicative of our quality products. And so again, we're very pleased with the way that we are going to market and those price increases and the value that we provide for the price that we charge for our products have been well received. You see that in the volume increase.

All right, great. And then last question from me: the cash flow in the quarter seemed a little weaker than a year ago and it looks like it's working capital based. Could you address that?

Yes, it was down versus the prior year primarily due to working capital. Working capital was used as a result of our increased volume—our sales were up significantly and so our receivables were up. We were also positioning inventory to make sure for the fiscal second quarter, where we still have strong growth, that we're in good shape. We did see an increase of cash use on the liability side—payables and accruals—that runs hand-in-hand with the normal aspect of paying off some year-end items, compensation type items that will turn around and rebuild. So we should still have nice cash growth in fiscal 2020 over 2019—just a little bit of a blip in the first quarter.

Okay, perfect. Thanks a lot guys.

Sure.

There are no further questions at this time. I'd like to turn the floor back over to Joe Armes for closing comments. Please go ahead, sir.

Great, thank you very much. Once again, we had a great quarter. We're very pleased with the prospects for the remainder of the year. Thank you for joining us for this call. We look forward to doing this again next quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a good day.