Greetings, and welcome to the CSW Industrials Inc. Second Quarter 2019 Earnings Conference 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. Please proceed.

Thank you, LaTonya. Good morning, everyone, and welcome to CSW Industrials' Fiscal Second Quarter 2019 Earnings Call. Joining me today are Joseph Armes, Chief Executive Officer of CSW Industrials; and Gregg Branning, 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 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 second quarter conference call. I would like to focus my opening remarks today on our formalized capital allocation policy disclosed earlier this morning. Thereafter, I will provide a brief recap of our results for the quarter before closing with an update by end market. Then I will hand the call off to Gregg to review our financials. Since the formation of CSW Industrials in 2015, we have been keenly focused on maximizing shareholder value through strategic investment within the company and by returning cash to shareholders. Through the years, we have stated that our goal was to drive attractive risk-adjusted returns and we have spoken at length about the pillars of our capital allocation strategy through our communication with the investment community. In connection with the strategic planning we have done with our Board of Directors this year, we have decided to formalize our capital allocation policy to increase accountability and transparency to our shareholders. Throughout this process, we have taken a hard look at the alternatives for capital allocation and have prioritized them in a way that we believe will deliver the greatest shareholder value through the ebb and flow of market conditions. To outline the core principles of our strategy, we are committed to maintaining a strong balance sheet with ample liquidity through both cash and available credit while maximizing potential growth opportunities. We will continue to pursue organic growth as well as growth through strategic complementary acquisitions to enhance our product platform. While investing in growth, we will target a sustained debt-to-EBITDA ratio under 3x. We state this recognizing that a leverage ratio is not a static number, and that it will necessarily fluctuate, sometimes meaningfully, and is needed - as is needed to support…

Thanks Joe, and good morning, everyone. Consolidated revenue during the second quarter fiscal 2019 increased 8.5% to $91.6 million, as Joe mentioned earlier. Higher revenue was driven by increased sales across our Industrial Products segment and our Specialty Chemicals segment. Looking at our segment-level revenue and operating income, Industrial Products segment revenue increased to $54.7 million, a 12.8% increase over the prior year. As Joe previously mentioned, higher revenue was driven by increased sales in HVAC and plumbing end markets. Specifically within HVAC, in the first quarter of 2019, we were negatively impacted by a cool wet spring. As weather patterns have normalized, we saw a catch-up in sales that eliminated any negative impact on a year-to-date basis for fiscal 2019. GAAP segment operating income increased to $14.2 million, a 15.4% increase over the prior year. And on an adjusted basis, segment operating income was $14.2 million compared to $12.5 million in the prior year. Turning to our Specialty Chemicals segment, revenue increased to $36.9 million, a 2.8% increase over the prior year, and the increased sales were driven by higher volumes in the HVAC and plumbing end markets. GAAP segment operating income increased to $6.2 million, a 17% increase over the prior year, demonstrating strong leverage on segment revenue growth. Turning back to our consolidated results. Gross profit increased to $42.2 million compared to $39.7 million in the prior year, and gross margin as a percentage of sales decreased to 46.1% compared to 47% in the prior year, driven by negative product mix and increased freight and manufacturing costs, more than offsetting sales leverage. Consolidated operating expenses were $25 million or 27.3% of sales compared to $25.1 million or 29.7% of sales in the prior year. The decrease as a percentage of sales was driven by leverage on the…

Thanks Gregg. In closing, the underlying trends in the end markets we serve remain largely positive. A normalization in weather led to a strong second quarter result, and we are right on plan with where we expected to be for the full year. Looking to the balance of the year, we expect to continue to benefit from a supportive backdrop in the end markets we serve and we expect to outperform those markets on a revenue basis. And we expect to grow operating income faster than revenues, in part due to normal operating leverage and in part due to the benefits of the efficiency programs we have implemented in our Specialty Chemicals segment. Now I want to take this opportunity to thank all my colleagues at CSW Industrials as we continue to serve our customers well and steward the capital entrusted to us by our shareholders. And I would note that through our ESOP plan, our employees now own approximately 6% of our company and we feel like the alignment of interest there between employees and the shareholders is a meaningful driver of our continued success. So with that, thank you for your interest in CSW Industrials. Operator, now we're ready to take questions.

[Operator Instructions] Our first question comes from Jon Tanwanteng with CJS Securities. Please proceed with your question.

As you ramp up the use of capital in your new allocation plan, where do you see that all going in terms of breakdowns? Is it 1/3 to growth investments, 1/3 to repurchases and the rest to M&A? Or what is the actual priorities for allocation there?

Yes, again, we don't view it in that sense, Jon. Again, we prioritize, kind of force rank our opportunities by risk-adjusted returns. And so whatever opportunities in our opportunity set that present the highest risk-adjusted returns is where we're going to push the capital. And so while we'd like to have a balanced approach, we will, by policy and just by our DNA, we're going to allocate capital to the highest risk-adjusted returns opportunities in front of us.

The other thing I would add to that, Jon, this is Gregg, it is timing. Some things will present themselves at times whereas others will not.

And where do you see the most risk-adjusted returns today as you sit now?

Well, I don't think we're prepared to disclose what we're going to do in the future. But I think the - all of the above. I mean, I think organic growth is obviously prioritized first, and the opportunities that we have there, as we said, with respect to product development, with respect to sales expansion, new markets, new products, operational efficiencies, those types of opportunities are attractive, repurchase of shares is attractive. Acquisitions is something we're absolutely committed to. Valuations today are high, but those are all good alternatives for us. And we just need to continue in our disciplined approach to allocate capital to the highest risk return-rated projects and I think we'll be rewarded for that.

And then I noticed that strategic acquisitions, it may be something new that hasn't been or hasn't come up before. How do you, I guess, approach that, given the lessons learned with acquisitions such as Strathmore in the past?

Yes. Listen, again, we're going to prioritize accretive, bolt-on acquisitions that leverage our distribution channel and leverage our product platform. However, when you commit something to writing like this, you want to leave yourself some flexibility going forward. But make no mistake, our priority is to find the accretive bolt-on acquisitions that complement our product line and leverage our distribution channels.

I'm not sure if you addressed this before, but just in the HVAC and construction end markets, did you see any impact from hurricanes and cold weather and rains in September and October? And if so, what did you notice?

Jon, this is Gregg. I would say that clearly, we will see the normal seasonality in Q3. It has been a cooler fall, and so I think really probably what you're trying to get at is in prior quarters, we made the comment that we expected to make up the shortfall in Q1, in Q2 and Q3. We essentially made that up in Q2, but we expect to continue to outperform the markets for the balance of the year. And I think the best way to look at us from a growth perspective is look at the first half growth in general, as to what happened, given the soft Q1 and the strong Q2, and then use that for the back half, understanding that seasonality does come into play.

Just a comment on crude prices, the recent volatility there. How that impacts your oil field businesses and may be just the import prices for some of the other products?

Well, that's a good question. Prices have come down a little bit, we would expect the rig count to follow, but so far we haven't really felt much there. I would say what impacted us a little bit more up in Canada, related to your earlier question of weather is that the - there was some colder weather, wet weather in Canada earlier, I guess, this fall than expected. And up there, you need it to be really, really hot and dry or frozen, and so the in-between is not good. So we did see some impact there in energy-related products, but there's no question, our Jet-Lube products will follow rig count and the commodity price matters. But that is not a huge part of our business, and it's mitigated by the decrease in oil prices is good for other industries, and so we keep an eye on it, it can impact the Jet-Lube specific energy products and their demand, but at this point, we've - we're not terribly concern.

And this is Gregg again, Jon, to your other - second part of your question on input cost. There, we've seen - the biggest input costs that we've seen hitting us isn't so much in raw materials as the trend that's being seen by all companies across the U.S. and that's freight. Freight continues to go up with driver shortages, truck shortages, regulations that have been put in place on drivers as to how much they can drive and so that has continued to be a headwind, as we mentioned in our prepared remarks. And tariffs have had a very minor effect on us. As we did mention - as Joe mentioned in our prepared remarks, we did leverage our balance sheet and increased inventory to try and get ahead of the tariffs, and we're doing other things to try and offset them by applying to change some of our codes that we think were wrong, that will ultimately help us. But that obviously requires the government going through and seeing that. All that being said, the other things that we've done from a standpoint of input costs and tariffs and freight in particular, is we have pushed on price increases in our various businesses that will offset that and protect us. And then we will just continue to monitor it. And even if tariffs come through and stay in the present sense that they are and we get no relief on the codes, tariffs will likely be less than 1% of our costs.

At this time, I would like to turn the call back over to Mr. Joe Armes for closing comments.

Great. Once again, we appreciate your interest in CSWI and your joining us on today's call. And look forward to doing this again next quarter. So thank you very much.

Thank you, everyone. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.