Greetings, and welcome to the CSW Industrials Fiscal Third Quarter 2016 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Cook, with ICR. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to CSW Industrials fiscal third quarter investor call. Joining me today are Joseph Armes, Chief Executive Officer of CSW Industrials; Kelly Tacke, Chief Financial Officer; and Christopher Mudd, Chief Operating Officer. If you have not received the earnings release, it's available on our website at www.cswindustrials.com. This call is being recorded. A replay of today's call will be available. 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 can 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 information statement filed as an exhibit through our Form 10 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 and adjusted net earnings, which are non-GAAP financial measures of performance. These non-GAAP measures should be used as a supplement to and not a substitute for net income computed in accordance with GAAP. For a more complete discussion of adjusted operating income and adjusted net earnings, see our earnings release. I would now like to turn the call over to our Chairman and Chief Executive Officer, Joe Armes.

Thank you, Tom. Good morning, everyone, and thank you for joining us on the call today. First, let me remind everyone that we are on a fiscal year ending March 31. So the results released today are for the third fiscal quarter of the year that will end March 31, 2016. We also acknowledge that our results are complicated due to the inclusion of several one-time items incurred in connection with our recent spinoff transaction and 2 acquisitions consummated during this quarter. Finally, please note that we are comparing our results for this quarter against the prior year quarter in which CSWI did not exist. Having said that, our third quarter fiscal year 2016 results were broadly in line with our expectation, in light of the effect of regular seasonality on demand in our HVAC end market and despite the deepening depression in the energy end market. Third quarter 2016 sales were $70.9 million compared to third quarter 2015 sales of $60.9 million. Year-over-year, the 16.5% increase was attributable to acquisitions completed in the past 12 months, partially offset by weakness in certain end markets, most markedly within the energy industry. To provide some additional insight into our organic growth trend, it is important to note that on a consolidated level, pro forma, to include Strathmore, our organic sales were down 3% for the fiscal year-to-date. This consolidated result reflects 2 very distinct trends in our business. Beginning with energy, which represented approximately 15% of our revenue mix in fiscal 2015, primarily in our Specialty Chemicals and Coatings businesses, organic sales declined approximately 51% year-to-date versus the prior year. In contrast, the remainder of our end market, which include industrial, HVAC, rail, plumbing, architecturally specified products and mining, organic sales were up 4.7% year-to-date. In particular, strong commercial construction cycle…

Thank you, Joe. Third quarter 2016 revenue of $70.9 million increased 16.5% as compared to the third quarter last year, mainly as a result of recent acquisitions and a higher year-over-year volume in HVAC, plumbing and architecturally specified products, partially offset by declining sales in the energy and mining end market. Consolidated gross profit increased to $32.1 million, or 45.3% of sales in the third quarter, an increase of 12% as compared to $28.7 million or 47.1% of sales in the third quarter last year. Higher overall gross profit resulted mainly from acquisitions completed during the past 12 months but pressured our consolidated margin profile as a result of an unfavorable margin mix, particularly from the inclusion of Strathmore. Operating expenses for the third quarter increased to $26.5 million compared to $19 million in the prior year. This increase is due to additional costs related to the integration of our recent acquisitions and the inclusion of standalone public company cost of $1.5 million in the quarter. On an adjusted basis, operating expenses were $25.6 million or 31% -- 36.1% of sales compared to $19 million or 32 -- 31.2% of sales in the prior year. Consolidated operating income was $5.6 million or 7.9% of revenue, which included acquisition costs related to Deacon and AC Leak Freeze, start-up costs following the spinoff from Capital Southwest and the Strathmore earn-out reversal. Excluding these items, operating income was $6.5 million or 9.2% of sales, which was down from $9.7 million or 16% of sales in the prior year. Our effective tax rate for the third quarter was 58.6% due to start-up and organization costs incurred in connection with the spinoff, which are not deductible for tax purposes. Net income for the third quarter was $2 million or $0.13 per diluted share. Excluding one-time…

Thanks, Kelly. As Joe noted earlier, we have been active in our integration efforts since becoming a standalone company and are continuing to make excellent progress. We are finding opportunities to optimize our footprint and reduce operating cost. Notably, the ongoing consolidation of Jet-Lube's Houston production into our state-of-the-art Whitmore facility in Rockwell, Texas continues to remain on track and on budget. We plan to discontinue all Jet-Lube production in our Houston facility by October 1 of this year. By March of next year, we will be seeing the full operational benefits. In addition, I'm pleased to report that we -- as we progressed deeper into this process, our team was able to identify an additional $1 million in anticipated annual synergy savings, and we now expect this integration to deliver more than $5 million in annual synergy savings by March of 2017. Currently, we have transferred 80% of Jet-Lube operations to Whitmore. The remaining 20% of production represent lower volume and specialty niche production, some of which will be moved to Rockwell, some will be outsourced to third-party manufacturing in Houston, and some may be discontinued. To complete this integration, we remain on track for CapEx spend of $7 million during this fiscal year and approximately $3 million in the next. Turning to Strathmore. Our integration plans are progressing on track and on budget. However, as Joe mentioned, end market pressure is impacting volume, particularly in Coatings that serve the energy markets, which account for 15% to 20% of their total revenue. As a result, we are taking this as an opportunity to accelerate several of our long-term integration plans for Strathmore, which includes 4 discrete items. First, we took a close look at sourcing at Strathmore and have found that, as a result of CSWI's scale of purchasing,…

Thank you, Chris. In closing, we continue to believe that our broadly diversified product portfolio and end markets provide stability for our business. We have a very strong balance sheet and we are growing free cash flow. The recent management changes will result in a renewed focus on operational excellence in each of our business segments. And we believe that, together, we can create sustainable value for you, our shareholders. Finally, let me take this opportunity to thank all of my colleagues here at CSW Industrials as we continue to serve our customers and to steward well the capital entrusted to us by our shareholders. Thank you for your interest in CSW Industrials. Operator, we are now ready to take questions.

[Operator Instructions] Our first question comes from the line Jon Tanwanteng with CJS Securities.

Can you provide an update on these systems that you're putting into place to get more real-time data from the businesses? And have you gotten a good sense of what things look like heading into January and February?

Yes. We are in the middle innings of the implementation of a one-stream product, which is a consolidation and planning and reporting tool that we think is going to fit very, very well for our business. We expect that to be fully implemented in May and that should begin to bear dividends shortly thereafter. We are going to load our 2000 -- fiscal year 2017 budget into one stream as we complete that here in the next couple of months, and that will be a significant benefit to all of us in managing our business and providing us with more real-time data.

And just on January and February and the trends heading in?

Yes. Absolutely, Jon. The 3 kind of drivers for this quarter, I think, were obviously the energy downturn, which continues. And we don't see any change there over the next couple of months or over the next couple of quarters even. Number two is seasonality, and I'm not sure that our no-guidance policy did us any favors this time. But seasonality in Q3 was completely consistent with the seasonality that we have seen in the past with this quarter, both in volume and in margins. So the seasonality does affect our -- it's primarily our HVAC end market. It is -- affects our largest -- that's our largest end market and our largest and most profitable business segment. However, that seasonality hits its low watermark in this third quarter, and we have not seen anything this year that is inconsistent with prior year's seasonality. So there is no concern there whatsoever. Thirdly is Strathmore. And without question, Strathmore has disappointed. That is, in part, energy exposure; part of it is some weakness in rail, which may be indirectly affected by energy; but it's also some management disruption and distraction and slower-than-hoped-for integration. And so that has our full attention. Chris and his team are working on that very, very diligently. We have new leadership there, and I think the trend from here is favorable and much better. And so as we look out for the next -- for this next quarter -- again, we don't give guidance, but I will say that it will be much closer to Q1 than it was Q3.

Great. Chris, you provided a pretty good breakdown on what's going on under the hood at Strathmore. Are there any other specific operating adjustments you're making in the rest of the businesses as a result of macro headwinds you're seeing?

Well, that's good -- thanks for asking, Jon. I think, our recent organizational announcement that was made in December was kind of the start of being able to look at how best to manage our 3 business segments. And so one of the things that I've tasked each of our newly-named general managers is to look for exactly that. So within the Coatings segment, obviously, we've got a lot of activities that are ongoing within Strathmore. At -- in the Specialty Chemicals segment, we've got the Jet-Lube, Whitmore integration project, which is nearing -- more than 80% complete, and that one is on track. But within all 3 segments, we think that there are more opportunities for cross-selling, for sharing of technology and innovation, for optimizing our manufacturing footprint. There are just a lot of additional things that these managers are looking at right now, and we certainly hope that there will be additional synergies that we're able to find going forward.

Okay. Great. And how much of the $7 million in synergies that you've identified has already been realized in the current quarter?

Very little. The $7 million really is -- I think, we indicated we would be fully realized March of 2017. Of course, $5 million of that is related to the integration of our lubricant and grease manufacturing into Rockwell, and so we really don't see the savings on that until towards the end of this fiscal year, early [ph] next fiscal year. The procurement will start to roll out over time. The $2 million of procurement savings is something that we are actively working. And I think, over time, as we go forward through this fiscal year, we will start to see more and more of that, and by the time we get into the beginning of next fiscal year, we should be fully realized on that as well.

Okay. Joe, I assume the market and energy turmoil has helped M&A valuations out there. Can you tell us what the pipeline looks like, and if there's anything that's changed in the last couple of months on that front?

Sure. And Jon, I misspoke earlier. What I meant to say is that Q4 will be closer Q2, not Q1, sorry. Q1 is the high watermark from a seasonality standpoint. Q2 is more of a steady-state quarter. So Q4 is more likely to look like Q2 than it is Q3. That's what I [indiscernible]. Yes, acquisition pipeline. We're actively looking. We are pleased with the activity. One of the results of the organizational changes is David Smith, who has run RectorSeal for the last 25 years and has done such a fantastic job of these product line extensions, these add-on acquisitions; he's done 26 in 25 years or so. David is working with me directly on acquisition and helping us to kind of implement and affect our acquisition strategy. And David and I stay close. He is out speaking to business owners and folks that he's begun relationships with years ago and continuing those conversations and beginning new conversations. And so we have a real focus on that. I would say that the product line extension, smaller, bolt-on acquisitions are really bread and butter for us. And so we continue to pursue those aggressively. They have little integration risk or -- integration is much easier than a larger acquisition, and so we feel like that's a repeatable business process and something that we're spending a lot of time on. So we feel good about that. Deacon and AC Leak Freeze are fantastic examples of the types of acquisitions that we'd like to do on a very, very regular basis.

Great. That actually leads in my next question. Can you tell us how accretive you think Deacon and AC Leak Freeze might be in this year or next?

Well, I think, what we have -- I think we have announced their earnings -- or their LTM EBITDA in each of those, and combined, it's about $4 million of EBITDA. And then, with respect to those businesses, we expect those businesses to grow top line at double-digit growth.

[Operator Instructions] Our next question comes from the line of Peter -- I'm sorry, it seems that we have no further questions at this time. I'd like to turn the floor back to Mr. Armes for any final concluding remarks.

Yes. Again, we thank you for your time and interest today. We do believe that, despite this quarter's headwinds, that this is not an indication of any trend or any indication of the health of the business. We do recognize and acknowledge we have a lot of work to do. And we, as your management team, are committed to growing profits, creating value for you, our shareholders. And we take very, very seriously the responsibility that we have to you, our shareholders. And so thank you, and we appreciate your support.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.