Thanks and welcome to the CSW Industrials Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to Tom Cook. Thank you. Please go ahead.

Thank you, Brenda. Good morning everyone and welcome to CSW Industrials’ fiscal fourth 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 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 everyone and thank you for joining our fiscal fourth quarter conference call. I will begin with a high level discussion of our results for the quarter then I will provide some segment level remarks and review of our end markets. I will then hand the call up to Gregg for closer look at the numbers. We concluded our fiscal year with a strong finish that followed an excellent performance through the first nine months of the year. Our consolidated top line grew 9.6% year-over-year, 9% of which was organic related to the MSD acquisition we completed during the fourth quarter, 0.6% was inorganic related to the MSD acquisition we completed during the fourth quarter. For the full year, our consolidated revenue growth was 7.4% to $350.2 million of which 7.2% was organic. Our fourth quarter adjusted earnings per diluted share was $0.75 which marked an increase of 47.1% compared to the prior year. This growth and earnings was attributable to higher revenue combined with a 400 basis point improvement and adjusted operating margin. High profitability was mostly the result of the efficiency initiatives we completed in our Specialty Chemicals segment and a continuation of very strong margin levels and our industrial product segment. For the full year, our adjusted earnings per diluted share were $2.77, which was an increase of almost 30% year-over-year. Taking a look at our segment performance, sales in our industrial product segment were up almost 15% for the quarter and just over 10% for the year. Higher sales volume included widespread contributions from architecturally specified building products, HVAC, general industrial and plumbing products. While performance and volume were clearly strong in the second half as we look forward to 2020, we would remind investors that our industrial product business can’t be…

Thank you, Joe, and good morning everyone. Our consolidated revenue in the fourth quarter of 2019 increased 9.6% to $91.5 million, 9% of this growth was organic as we had a small contribution for the MSD acquisition in the quarter. Higher revenue was driven by increased sales in both the Industrial Products and Specialty Chemicals segment, mainly in our building products, general industrial, HVAC/R and mining end markets, partially offset by lower sales in the energy end market. Looking at our segment level revenue and operating income. In our Industrial Products segment, revenue was $53.7 million which was up 14.7% over the prior year period. The increased sales was the result of higher volume in architecturally specified building products, general industrial HVAC/R and plumbing end markets and was partially offset by lower sales in the rail end markets. GAAP segment operating income increased 16.5% to $12.7 million over the prior year period and segment operating income as a percentage of sales improved 30 basis points to 23.6%, primarily driven by the increase sales volume. In our Specialty Chemicals segment, revenue increased 3.3% to $37.8 million over the prior year period and the increase in sales was driven by rail, mining and building products end markets and that was partially offset by lower sales and the energy and plumbing end markets. GAAP segment operating income for the segment was $6.7 million compared to the prior year period of $3.2 million. Segment operating income as a percentage of sales improved 900 basis points to 17.8% compared to the prior year period of 8.8%. Moving now to our consolidated results for the fourth quarter, consolidated gross profit increased 18.2% to $42.8 million compared to the prior year period. Gross margin as a percentage of sales increased 340 basis points to 46.8% compared to…

Thanks, Gregg. As we began a new fiscal year, we're in a very strong position to build on the momentum of fiscal year 2019 and to continue to execute against our strategic plan. We're gratified to see these efforts translate to earnings and cash flow, and we remain committed to enhancing our business, providing our customers with best-in-class products and service to maximizing shareholder value. At this point, I want to take this opportunity to thank all my colleagues at CSW Industrials, who by the way own over 5% of our company through the employee stock ownership plan and congratulate them on our continued success as we continue to serve our customers and steward well the capital entrusted to us by our shareholders. Thank you for your interest in CSW Industrials. Operator, we're now ready to take questions.

[Operator Instructions] Our first question is from the line of Jon Tanwanteng with CJS.

Joe or Gregg, were there any timing effects in the fourth quarter. I know in the past couple of years, you have some strange comps, weather impacts clients that were ordering ahead of seasonal norms. Just any color on that?

Yes. We actually had some odd ordering patterns last year, that caused us a little bit of concern for the quarter, but we were able to overcome that through the team's great execution and the demand in the marketplace was just there for our products. So I would say certainly nothing that enhanced the quarter.

Yes. Not this year.

Okay. Great. And then heading into the first quarter, are there any --is there anything unusual on your radar, has weather cooperated, do you see any other unusual trends that might be in the markets, that might impact you?

No, I mean we've had cooler than normal weather, which is typically negative, but we're also looking at it. We had terrible weather in the first quarter of this Q1 last year, so the comp is not that tough, so I would say net-net there's really not much to talk about there.

Yes. This is Greg, Jon. I would echo what Joe said I would -- clearly, we have an easier comp coming off of Q1 from a year ago. Yes, the winter was longer and colder this year, I mean, it snowed in Denver yesterday I saw, but when you look at -- much like we ended up having to do last year, I would look at really Q1 and Q2 for this year, given that last year's Q1 was an easy comp and last year's Q2 would have been a tougher comp that we'll work off of this year, but so far I think we feel good about it.

Okay. Great. And then you previously disclosed a capital spending increase, can you talk about some of the opportunities? Are you seeing that's triggering those investments, what kind of returns you might be seeing?

Yes. I don't think we'll be talking about returns on individual projects, but as we've said all along Jon, we evaluate these opportunities on a risk adjusted return basis. And so these will be new product, development opportunities, capital required to manufacture those products and go-to-market, and I would just say these are middle of fairway products for us that are in the high demand end markets. And just make all the sense in the world for us. And we feel really good about them. The discount rate we have to apply to this relates to new product. What it takes to get on the shelves and pull through by customers, it's not because we don't know the market it's not, because we don't have the distribution, it's not because it's new geography or anything like that.

Okay. Great. And then on the recent acquisitions you did. Can you give us a little more color on the financials and the run rates of these businesses, the valuations you paid, the synergies and accretion expecting, I know it's not expected to be total, that's significant, but any color on that would be appreciated?

Yes. Jon, this is Greg. We purposely didn't disclose anything because of the -- they're so small. We will as we did this quarter disclose what the inorganic revenue is as we go through the next 12 -- next four quarters, if you will. But I think the best thing that we can say at this point, because again, we don't want to get into the details of small acquisitions like this. We spent $20 million -- roughly $22 million on the two combined is that we do expect them to be accretive in the very first year.

The other thing I think that's important here Jon is, these were both directly negotiated with the seller, there was no banker or broker involved, and so, on small deals that makes a difference and that's a lot of what RectorSeal has done over a decade to define these product line, extension opportunities, privately negotiate with the seller. And it not only is accretive from net per share, but as we've said all along, it creates a flywheel of opportunity, a larger base on which to grow organically. And we think these are products that will grow organically in years two, three and following. And so that's why we're excited about.

And then, the last thing I would say, again this is Gregg is while we said what the organic and inorganic percents were just to make the math easy for you. It was roughly $0.5 million of inorganic volume in the quarter and that was all related to MSD, because that was the only deal we closed and we had owned them for two months.

Great. That's good color. And then finally just on -- that the pipeline for further M&A, what does that look like right now, do you obviously still have a lot of the firepower from the capital perspective? Just talk about the priorities for cash and where do you plan to invest in the future?

Yes. Again, we're going to be driven by expected returns and M&A is a really important piece of this, as for the reasons we stated earlier, I think that not only can it turbo-charge for the business that you buy, but then you have a larger base on which to grow organically. And so we're highly focused on acquisitions. I would say that the pipeline is good. We continue to see some good opportunities, some are intermediated some are not. And we have a buy-side firm working on our behalf, making calls to specified owners of businesses and markets. And folks that make certain products that are attractive to us, to add to our portfolio, so we have a multifaceted approach and initiative. And I would say the pipeline is good at this point. And every time we close an acquisition and we integrate it effectively, we get better and the team worked really well together on these last two, they're both in Industrial Products. And I would say that team is very, very capable of closing an integrating acquisition. We're looking on the spec chem side as well as I mentioned in my remarks, we feel like we really have a healthy platform there now. You can see from nice growth, attractive margins, the efficiency, initiatives that were undertaken were successful, and we feel like that's just a real nice healthy platform now from which to grow. And so that will get a little more focus in the future. There was a time when they were not ready, they were not prepared, they were not capable of closing and denigrating an acquisition. That's not the case now they are. And so we're operating on all cylinders.

Our next question comes from the line of Joe Mondillo with Sidoti.

Wanted to ask you first on the Industrial Products side of the business and specifically looking at your build to order revenue, looks like looking at the K, this morning that revenue was -- it looks like was up 20% in the fourth quarter. It was up almost close to 20% in the back half for the year, but then it was sort of negative in the first half of fiscal '19. So obviously this is related to your architectural building's business, which is lumpy and sort of backlog driven. So I'm wondering what sort of the backlog looks like, if there's anything that you can tell us about sort of the cadence and how fiscal '20 should sort of play out on a quarter-to-quarter basis, any sort of read through or color that you can provide there would be great?

Yes, Joe. This is Greg. When you -- you're absolutely right, when it comes to building products on a backlog, it is extremely lumpy given the fact that you take some of the projects that we do, I'll use the one that we've talked about the most over the last couple of years at the Greco with the Eau du Soleil project in Canada. When that job got booked it was over $5 million that was going to ship over multiple quarters. And so upon the booking you get this huge lump that comes in, and then other ones come in afterwards and then you ship against it. That being said, our backlog is up nicely from a year -- at this time, a year ago. And it is something we look at every quarter and we pay attention to and it's consistently been up as we look at it on a quarterly basis in a backwards looking. This particular disclosure that you see in the financials and Footnote 18 is a new revenue recognition disclosure, where we have to desegregate the pieces. And so that -- those numbers are always going to be pretty lumpy from time-to-time and so. Again from our perspective, we look at just -- what is our backlog year-over-year, period-over-period, and as long as it's growing we feel good and so. We feel really good as Joe mentioned in his prepared remarks for fiscal 2020 for our architecturally specified buildings products.

You wouldn't want to quantify that percentage growth rate for us would you?

No because it's a piece inside of our Industrial Products and that would cause us to ultimately head down the path of potentially having to create another segment.

Looking at the growth rates that you saw on the back half of the year, are those sustainable in the near term, looking out what the backlog is?

I think the best way to look at it is instead of trying to piece -- pull the pieces apart like you're trying to do is, go back to the discussion that Joe had -- Joe mentioned a quarter ago, when we look at our long term sustainable growth rate for our overall business, we see that in the mid-single digit rate. We're going to over perform the markets, particularly in HVAC/R, building products, and our HVAC/R plumbing and architecturally specified building products. And so those should continue to provide us nice organic growth. Obviously the Petersen and MSD acquisitions will give us a small amount of inorganic growth as well.

Yes, Joe. If you look over the four quarters for the full fiscal year that, that takes into account the seasonality because you've got all four quarters and that's right in the range of what we have indicated in the past would be the type of mid-single digit, high single-digit organic growth rate.

For the Company as a consolidated…

Yes, exactly, or through the seasonality issue.

Right.

Got it. Just I wanted to sort of follow-up on the earlier question, related to sort of the fourth quarter buying patterns. Last year it seemed like there was sort of a pull forward, and this year you saw a really good growth even on that book to ship business in the industrial segment on top of that, is there a new -- can you talk about what you think is sort of going on there? Is there anything related to sort of lower than usual inventories in the channel or a new buying pattern? Is there any risk, there was sort of a pull forward in the fourth quarter here -- in the first quarter, I know there's a restocking time period, maybe in May or June -- any worry about May or June restocking that tends to usually happen, because of the strong demand that you saw in the fourth quarter. Anything else that you can sort of provide in terms of what's going on there, because I would certainly surprised given the strength that you saw a year ago to see such strong demand here this quarter.

Yes, Joe. I'll answer first, kind of qualitatively and I'll let Gregg use more data, but I think that, yes, the quarter -- we always worry about pull forward and we always worry about these quarters, because they're such important quarters both from a revenue growth and profitability standpoint that we're always trying to read exactly the TUVs that you're talking about as to kind of how is the seasonality going to fall, because so much of the demand comes in, in the last two weeks of March even and so it's just such a thin line there. But having said that I would say that we haven't seen anything that gives us cause for concern that there's a big pull forward, we do need to keep an eye on the weather during the rest of the summer for those, kind of reorder rates, how quickly does -- do our products go off -- move off the shelves and into the customers hands from the distribution points and when do they need to reorder and how the timing within the summer time matters. But at this point, the other thing, I was going to mention, there is price increases in this as well, which will drive a little bit of revenue growth. And so because in anticipation of tariffs, we got ahead of that, I think we're very proactive and our team did a great job, making sure that we protected our margins and so there is some price in this as well, so that would be the only funky thing I think that would be any -- would need any real explanation. Rest of it looks like we've really got strong demand for our products, I think our team is executing really, really well and I think that we're going to continue to see really strong growth in those areas.

The other color that I would add Joe, this is Greg, again, is that, while as Joe mentioned, you get to -- like the last two weeks of fiscal Q4 and that is the stocking time for HVAC/R and so that's really what Joe was referring to with respect to the last two weeks. When you look at industrial products as a whole, our revenue was up 14.7% year-over-year. HVAC obviously was a piece of that and you're absolutely right, a year ago, we had stronger than expected demand. I would say when you look at the -- when you take -- if you were to take the individual end markets that we sell into that effect Industrial Products. HVAC/R was up, but it wasn't up huge. It was up nicely. It's such a big piece that you get a couple percent up year-over-year and it's going to drive dollars. What I will say is that the things that really drove that percent up were more in the architecturally specified building products and general industrial. In architecturally specified building products, we saw some nice growth in that market, out of our Greco and Smoke Guard business and with railings and smoke curtains. And on the general industrial from a product line standpoint, we saw some nice growth in our reliability products, that service a general and industrial end market. And so as a percent those were both driving the percent up quite a bit.

Okay. Great. Appreciate that. And then I just wanted to move to spec chem. You obviously did a really nice job last year with the margin expansion. I know there is -- I know you don't have -- it seems like you don't have as much sort of projects at hand that are going to enable some margin -- the margin expansion that you saw last year and even I think, Joe mentioned that margin expansion will be much more modest, which makes sense. Just wondering, just sort of the product mix though, is there anything that we should be aware of sort of trends, in terms of product mix, because I do think there are some different margins within the products, within that segment. Anything that we should sort of be aware of, obviously the fourth quarter was good, I imagine it was energy being light, but anything going forward that you can sort of provide on the margin spectrum there?

Yes. I would say, this is Gregg again. I would say that from a mix, we purposely didn't call out any unusual mix. We've -- with the projects that we put in place, the efficiency projects we put in place that was specifically driven to affect some of those mix issues, primarily in energy. You recall, we've talked in prior quarters, about the small fill initiative. That small fill initiative was exactly targeted for energy. Now energy was down, but our profits on energy are much better now with small fill behind us. And so when we look at it from an end market if you will, the increased sales in the quarter were driven by rail, mining and building products with lower energy and plumbing markets and so nothing really special from a mix perspective when you look at it from that standpoint.

So the margin that you saw in the fourth quarter, what can we sort of make of that going forward. Is that anywhere as close to being sort of sustainable or should we sort of think modest improvement on the entire fiscal '19 year?

Yes. I would focus on the entire fiscal '19, because chemicals -- especially chemicals have in there. There's a seasonality within Industrial Products and Specialty Chemicals, because you've got all the chemicals in HVAC that are sitting in Specialty Chemical, as well as some of the chemicals used in building products. So I think, it's when you are looking at it from a full year perspective you're better off using the full year adjusted operating margin, which was roughly 15.5%. And they are really comes down to being dependent on incremental volume. If we look at the bulk of our spec chem business, which is the Rockwall business or the Rockwall facility I should say, there we've got a fair amount of capacity, and so as we drive, as we can get incremental sales you're going to get more of a fixed cost leverage off of that than what we would in the industrial products just because the industrial products rep margins are as a present is up as high as it is, we will still get some there, but it won't have nearly effect that you can get on spec chem.

Okay, I also wanted to follow up on a question related to sort of that capital investments that you're making. And it seems like Joe you were talking a lot related to sort of new products. So I'm just wondering if at all, we should be aware of maybe some R&D expenses being higher in fiscal '20 that will hit the P&L?

No. We don't anticipate, Greg can address that, but no that's really it's the capital at this point, R&D has been done. Its run through the income statement. And as I said these are kind of middle of the fairway products for us. They're not -- we're not Green fielding anything here really from an industry standpoint. And this is really the capital required to get the molds and get the equipment in place to actually manufacturers.

Yes. We're not -- as we've talked before, we're not a blue sky R&D company. And so as Joe mentioned, the work really is behind us. This is buying equipment and tooling, so that we can produce the products and launch them at which time we'll be able to further analysis what is going on, what these products are, obviously don't want to from a competitive standpoint. I think from a commercial aspect in our businesses, we're going to continue to upgrade and add to our commercial resources, and then I am using commercial on purpose that's all encompassing between engineers, selling and marketing. And so, as we grow as a company, we'll continue to add resources there, but nothing from an extraordinary standpoint.

No surprises on that.

Okay. And last two quick questions. Number one, the sort of ramp up of tariffs and heated trade war issues. Anything incremental or I guess that's going to affect the business going forward related to the last month or two that's going on? And then lastly, I was wondering what the D&A with these acquisitions and the capital investments, what your D&A that you're expecting for this year would be?

Sure. Let me hit the tariffs real quickly. We've really moved in anticipation of these tariffs. And I think our teams have been really proactive in that. And so we are positioned nicely for that. Obviously, if there are additional tariffs, additional products that are covered that, that could change things at this point. We think we're well positioned for our businesses with the tariffs that are currently in place or being implemented as we speak. So no real news there Joe, I think again, we got on the front end of that, I think our teams manage that very, very well. And so where we are today, we should be fine.

Yes. And on the D&A again, I'll start off by saying the terms were not disclosed because they are so small. We don't want to get into the habit of disclosing small deals. There will be some additional D&A, but it's not going to substantially drive our numbers at the end of the day. The safe bet would be, you look at we invested $22 million, a piece of that's going to be attached to more than the amortization for intangibles, then a step up of depreciation. Although, there will be some step up on depreciation, so you could take a percentage of the $22 million and divide it by 10 years and you'll get close to it. Doing the simple math, it's just not a big number.

Right. And you'll see disclosed eventually, I mean we didn't buy any real estate here, and so the real -- there's no real assets there will be a little bit of equipment in inventory in that type of thing.

Thank you. This concludes our question-and-answer session. I'd like to turn the call back to Joe Armes for closing comments.

Great. Thank you very much for your participation today. Look forward to talking to you next quarter. We appreciate our shareholders and those that follow our business and look forward to another successful call soon. So, thank you very much for your interest.

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