Greetings, and welcome to the CSW Industrials, Inc. First Quarter 2017 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom Cook with ICR. Thank you, Mr. Cook. You may begin.

Thank you, operator. Good morning, everyone, and welcome to CSW Industrials' Fiscal First Quarter Investor Call. Joining me today are Joseph Armes, Chief Executive Officer of CSW Industrials; Gregg Branning, Chief Financial Officer; and Christopher Mudd, Chief Operating 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. 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 and 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 include an analysis of adjusted operating income, adjusted net income and adjusted earnings per share, which are non-GAAP financial measures of performance. These non-GAAP measures should be used as a supplement to and not as a substitute for operating income, net income and earnings per share computed in accordance with GAAP. For a more complete discussion of adjusted financial measures, see our earnings release. I will now turn the call over to our Chairman and Chief Executive Officer, Joe Armes.

Thank you, Tom. Good morning, everyone. Thank you for joining us on the call today. We experienced a challenging first quarter of fiscal 2017. Volumes and energy-related end markets remained at trough levels and our exposure to rail end market came under significant pressure, which our customers have largely attributed to indirect exposure to weaker commodity markets. During their recent earnings calls, our customers have announced reduction in new rail car production of approximately 50%, which had a direct correlation on our sales decline and products sold into the rail manufacturing markets. There's also been a drop off of almost 12% in carload traffic, which has negatively impacted sales of rail lubricants. With that being said, when assessing our first quarter results beyond the headline numbers, there were many positive and encouraging developments to highlight. First, after taking into account public company costs, which were not in the prior year financials because we were not a public company at that time and onetime items during the period, we were able to hold margins relatively stable compared to the prior year. This stemmed from the collective work of our management teams across our operating segments to reduce costs, combined with the strong performance in our non-energy-related end markets, namely in our Industrial Products segment. Second, we made progress toward diversifying our end market exposures in our coatings segment and we expect new customers to contribute revenue of about $6 million annually on a run rate basis as we ship products to these new customers throughout fiscal 2017. While this volume did not benefit the current quarter, we were very pleased to see this level of quoting and order activity and new applications for our products. Third, we are proud to announce that Strathmore was recently named the Coatings Supplier of the…

Thanks, Joe, and good morning, everyone. Before digging into the numbers, I would like to provide an update on our financial initiatives to migrate from 6 individually managed private businesses to a single integrated operation with a centralized financial support system. These efforts are designed to streamline our reporting, provide real-time information, improve management tools to enhance analytics and enhance our reporting and transparency to the investors. Prior to my arrival last quarter, the team was in process of rolling out a new consolidation system, which enables centralized reporting on a shared system. I'm happy to report that as of the first quarter, we have completed Phase 1 of this integration and we were able to close the quarter on the new system. This is a significant first step as it included an integration effort at all of our operating locations. Phase 2, which is currently underway, includes the designing and implementation of a new set of analytical tools to improve our understanding and reaction time to market events and we expect to see the benefits of this with our second quarter close and further enhancements through the balance of the year. Since my arrival, I have completed site visits at nearly all of our operating locations and have collectively worked with financial leadership across the organization to identify relevant operating metrics, which we believe will prove valuable for internal and external analysis. In addition to the metrics, I'm working with our financial team and our external consultants to ensure we are Sarbanes-Oxley and COSA 2013 compliant by the end of the fiscal year. While we still have a lot of work ahead of us, we expect to provide progress updates throughout the year and roll out new analytical measures to help investors understand financial results at the completion of…

Thanks, Gregg. I'd like to begin today by providing an update on our corporate-wide integration initiatives, followed by some additional details of the restructuring plan we are initiating in our Coatings, Sealants & Adhesives segment. As we've communicated previously, since the commencement of the spin-off transaction, we've identified $7.5 million in annual savings, primarily through facility consolidations and our global procurement initiative. I'm pleased to report that we have made significant progress towards these programs. As of the end of the first quarter, we have ceased virtually all production in our Jet-Lube Houston facility and have completed the closure of Jet-Lube Canada. While it will take some time to fully realize the $5.5 million in savings under this initiative, we did realize some modest benefit in the first quarter, and will be in a position to realize the full run rate by April 1, 2017. Regarding our company-wide procurement program, we have put in place new purchasing agreements that will yield more than $2 million in annual savings we've previously communicated and we continue to identify additional opportunities beyond our original commitments. As a result of the additional opportunities, we now anticipate saving approximately $2.5 million in fiscal 2017. The benefits of this program resulted in savings of $600,000 in the first quarter. As you may recall, last quarter we detailed a path to improve profitability in our coatings business, and we have reached several milestones. First, of the $2 million in procurement savings company-wide, $1 million of that savings was expected in the Coatings, Sealants & Adhesives segment. I'm happy to report that as of quarter end, we've already achieved a run rate of around $750,000 annually. Second, we continue to make progress towards the exit from our expensive toll manufacturing arrangement in Houston and this should be complete…

Thank you, Chris. In closing, although we acknowledge a challenging quarter, we would also note that our broadly diversified portfolio of products and the diversity of our end market exposures provided stability under stressed market conditions. Our balance sheet remains strong and we're building a team able to execute on our long-term strategic priorities under any market conditions. We believe we are taking the steps necessary to manage through the current cycle and to position the company to deliver long-term, sustainable value for our shareholders. Let me take this opportunity to thank all of my colleagues at CSW Industrials as we continue to serve our customers and to steward well the capital entrusted to us by you, our shareholders. Thank you for your interest in CSW Industrials. And now operator, we're ready to take questions.

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

Can you talk about the timing and the margin profile of the new businesses you're seeing in coatings? How do you expect that to ramp?

It's going to ramp -- this is Chris. It's going to ramp through the year. This is business that is additional incremental business in new markets. The question was more on the timing or the...

The timing and the margins as well.

Margins are going to be in line with typical coatings margins and the timing will be phased in over the course of the year. It's not always 100% in our control but we certainly expect to see this additional incremental sales revenue as we roll out through the rest of this fiscal year.

Okay, great. And just to clarify the $2.5 million to $3 million in run rate savings you're expecting, is that in addition to the previous synergies and savings you discussed of $7.5 million?

Yes, it is. This is in addition, and this is really in the Coatings, Sealants & Adhesives segment.

Okay, got it. So over the year or by the end of the fiscal year, about $10.5 million, is what you're talking about.

This is Gregg, Jon. Yes, it would be between $10 million and $10.5 million on a run rate basis as we exit this fiscal year.

Okay. And just a quick question on the corporate expenses, ex-items, you did $2.8 million in the quarter. Is that the run rate we should expect going forward, and should we continue to expect additional onetime expenses like the Sarbox consulting fees?

The Sarbox and consulting fees, primarily the Sarbox, I think we'll see some additional consulting as we continue to roll that out and become compliant this year. That the onetimes on that are probably more heavily weighted to the first quarter as we are in the process -- as we were in the process of designing the controls and putting systems in place, but we'll see a little bit more of it throughout the rest of the year. As to the run rate of the corporate expenses, I would say that those are higher than what we would expect, both with and without the onetimes, as we saw some timing of costs relative to some financial and professional fees relative to the audit taxes, things of that nature, that tend to be more heavily weighted in the first quarter.

Okay, great. That's helpful. And finally, can you just update us on the M&A environment, maybe what you're doing from a due diligence standpoint of what things like Strathmore, and how active are you in general?

Yes, this is Joe. We're very active in looking for acquisition opportunities. Similar to our statement on last quarter's call, the market continues to be a tough environment to find value. Valuations have been stretched and we're committed to a very disciplined approach. And so at this point, we have not identified -- we haven't closed any acquisitions because of valuations in large part but we're very actively looking. Primarily what we're looking for are strategic add-on acquisitions, acquisitions that allow us to leverage our distribution channels, acquisitions that would be oftentimes described as product line extensions. And so those are the type of acquisitions that we're looking for. And if we can find those at a reasonable value, then we would be very interested in that. However, at this point, valuations seem pretty high to us.

Our next question comes from the line of Liam Burke with Wunderlich.

Joe, on the fall-off in the rail business, obviously, the traffic volumes are what they are as well as the car load production. But is this just a volume decline, are you seeing any pricing pressure in either of those areas, either in the coatings or the friction management side?

Fortunately, we have not. We've really seen really decline in the orders from customers and their decline in their business. We have not seen price decline and we have not -- pricing pressure, and we have not lost share, to our knowledge. I mean, it appears to us that we are down in lockstep with the industry.

Great. And when I'm looking at the broader industrial markets, you highlighted weakness in your prepared comments. Are there any pockets of strength under that? It's pretty obviously broad category but do you see any strength in that industrial category that you laid out?

This is Chris, Liam. It's tough to say specifically. The industrial segment is a very broad brush that we use to describe everything that's not one of the other end use markets. So I can't really pinpoint one specific that would be an island of strength in the industrial end market.

In that area, do you see any continued momentum in new product introductions in that space?

Well, obviously, we highlighted in the Industrial Products area, in the Industrial Products segment, we talked about our new large screen curtains, which has been a nice success story and something that we just introduced, really, last fiscal year, and we're starting to see a nice uptick in that business. And so I guess, the other -- just to kind of touch upon themes we've hit in previous quarters, Liam, we continue to introduce some of our new products like the Deacon Sealants into a broad range of industrial end markets. And we're starting to see some uptick there through our distribution channels, so we're excited about that. And we believe that is going to be an area of strength going forward, is to be able to get those products into the hands of a broad range of industrial customers.

There are no further questions in the queue. I'd like to turn the call back over to management for closing comments.

Great. Thank you again for joining us. We appreciate your interest and look forward to speaking to you again next quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.