Greetings, and welcome to the CSW Industrials, Inc. Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adrianne Griffin, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Doug. Good morning, everyone, and welcome to CSW Industrials fiscal fourth quarter 2020 earnings call. Joining me today are Joseph Armes, Chairman, Chief Executive Officer and President of CSW Industrials; and James Perry, Executive Vice President and Chief Financial Officer. If you have not received the earnings release, it is available on our Web site 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 in the comments made during this call as well as 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 will now turn the call over to Joe Armes.

Thank you, Adrianne. Good morning and thank you for joining our fiscal fourth quarter conference call. Before we discuss our results and outlook, we’d like to extend our sincere wishes for a full recovery to everyone who has been affected by COVID-19 and also express our gratitude to the many frontline responders diligently working to ensure the safety of our communities. I would like to also welcome James Perry to our team as our Executive Vice President and Chief Financial Officer. As you read in our April press release, James has been serving in a consulting capacity for the last few weeks, ensuring a seamless transition. We are extremely pleased to have James as a part of our executive leadership team. He brings a wealth of experience and a demonstrated track record of success that I expect will continue here at CSWI. Given the current environment, I will expand on our response to the current pandemic, make a few comments on our fourth fiscal quarter and fiscal full year 2020 results, and financial performance and discuss our outlook for fiscal 2021. I will then hand the call off to James for a closer look at the numbers. In preparing our remarks for this quarter, we were reminded of our earnings call in February where we proactively addressed the then current state of the virus which has led to the pandemic-induced economic environment we navigate today. In the short three months since our last call, our team has responded with unwavering professionalism to the rapidly evolving business environment. In difficult times, we affirm our core values and our capital allocation strategy. Our commitment to be good stewards of your capital is resolute. To accomplish this goal, we are focused on four objectives treating our employees well, serving our customers well, effectively…

Thank you, Joe, and good morning, everyone. I’m honored to be on the CSWI team now as the new CFO. In the weeks since I joined in a consulting role, I’ve appreciated the high quality of the people across the company, the commitment of everyone to our core values and the opportunities that our businesses have for long-term growth and value creation. I look forward to working with the investment community as we share our vision and plans. As Joe mentioned earlier, our consolidated revenue during the fiscal fourth quarter of 2020 was $98.5 million, a 7.7% increase over the prior year period. Higher revenue was driven by increased sales in both our Industrial Products and Specialty Chemicals segments due to 3.7% organic growth and acquisition-related revenue. By end market, increased organic sales were driven by the HVAC and general industrial end markets, partially offset by the energy, rail and architecturally specified building products end markets. Our Industrial Products segment posted revenue of $60.1 million which was up 11.9% over the prior year period. Organic revenue accounted for 5.3% of the increase and was driven by increased sales volumes in HVAC and plumbing end markets, partially offset by declines in the general industrial and architecturally specified building products end markets. Our GAAP segment operating income increased 7.7% to $13.6 million. There were no adjustments to GAAP results in the current or prior year periods within this segment. Our operating margin as a percent of revenue was 22.7% in the quarter, a 90-basis point decline over the prior year due to negative mix. As mentioned in the past few quarters, our trailing eight quarter book-to-bill ratio is greater than 1 and the architecturally specified building product backlog currently contains a portfolio of quality projects that match well with our strengths. Moving…

Thanks, James. As I stated in my opening remarks, CSWI has a strong and sustainable business model built upon operating businesses that have decades of history, skilled employees who provide a competitive advantage, an experienced leadership team, a strong balance sheet and a set of core values guiding our actions. We have deep longstanding relationships with our best-in-class distribution partners. We have a network of proven suppliers and a strong balance sheet with ample liquidity, low leverage and no near-term maturities. In difficult times, we return to our core values and we also confirm our capital allocation strategy. Our commitment to be good stewards of your capital is resolute. To accomplish this goal, we are focused on these four objectives; to treat our employees well, serve our customers well, to manage our supply chains effectively and to position our company for sustainable long-term growth and profitability. Let me take this opportunity to thank all my colleagues here at CSWI who collectively own approximately 5% of CSWI through our employee stock ownership plan and also thank all of our other shareholders for their continued interest in, and support of our company. And with that, operator, we’re now ready to take questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hi. Good morning, guys. Thank you for taking my questions.

You bet. Good morning, Jon.

For the first one, I was just wondering, where are you guys seeing the most pressure or conversely maybe resilience or strength in any of your end markets heading into the first fiscal quarter?

Yes. It’s been down overall, Jon, so I don’t see any particular weakness. I will say that early on in the first six weeks of the quarter here, I think architecturally specified building products has shown resilience. There are projects already underway that folks are actually rushing to finish, and that’s been the area where we’ve had the best reports from the field. I would say our installation teams in Florida are working overtime right now. We kind of went into a bit of a plan where no overtime, no new hires, that type of thing when the pandemic hit, and I’ve had to approve overtime for those guys down there because we’ve got installation projects going on, and their business is really, really doing well right now. But overall, there’s weakness across the board. I wouldn’t say there’s any individual area that’s any weaker than any others.

Okay, got it. Do you have any exposure to hotels or restaurants or any large retail installation?

Yes, we’ve looked at that, and it’s very minimal. There are a couple of projects on the books for hotels, but no retail that we’re aware of and that has not been historically a big part of our business at all.

Got it, okay. And Joe, you mentioned broadly that first half for you would be the weakest. Any sense of whether that the first fiscal quarter or the second is going to be the trough for you guys as you see it right now?

I really don’t, Jon. We’ve been working hard on that trying to discern, but at this point we’re not in a position to make any estimates on that. So, we’re really looking at the year in two halves. The slope of the recovery in the second half is also kind of up for an estimate here, but at the same time I think we just need to think about it in two halves; first half down, second half beginning a recovery.

Jon, this is James. I want to highlight what Joe mentioned in his remarks. Our commitment to keeping our full-time employment where we have it right now and not making changes due to the pandemic allows us to take advantage of those rebounds whether they’re regional or in the end markets as you mentioned. So, we’re well positioned. If we wake up and the trough is behind us, then we’re ready to take those orders and produce, and a lot of our competitors have not been in a position due to balance sheet issues or otherwise to do that. So, we’re well positioned for the recovery that this economy reopens.

Got it, that’s helpful. I was going to ask, could you maybe give us a little bit more color on both the cost cutting attempts that you have done on the SG&A and the COGS side, what kind of quarterly savings are you expecting? And given the magnitude of, I guess, the volume decline that you’re seeing, do those efforts -- do they enable you to keep your incremental and decremental margins where they have been?

Yes. This is James. We’re not going to be able to provide specifics on that. It is meaningful, but the actions we took and they started the fiscal year with that in April. Some of those are the profit-sharing type things on the employee benefit side. So, while we’ve been able to maintain employment and benefits, some of those profit-sharing things that we offer the employees look like a good opportunity to maintain employment but curtailed those for now. Those are decisions that are temporary in nature that we could look at later in the year and obviously next fiscal year as we expect the economy has reopened. So, they are meaningful to the bottom line and that’s across the board for the company, not one in particular class or another. We’ve done a lot of things, as Joe mentioned, obviously things like travel. Some of that’s taking care of itself, but we’ve really been careful with discretionary expenses, consulting, those type things. That’s on the SG&A line. The other thing that Joe mentioned was a good portion of our workforce is on the temporary side, and while those are jobs as well, we always scale that up and down with seasonality. And so, those are people that aren’t on a benefit plan and those type of things, so we’re able to really maintain that full-time workforce and know that that temporary labor forces their force as things pick up, and then we can scale down as we normally do, so that’s kind of the flexibility that we’ve always had. Joe mentioned overtime that’s another place we’re being very careful. So, a lot of these things we are going to able to restore as things pick back up and as we think that makes sense, but for now we’ve pulled some of the levers. There’s more levers we can pull, but we’re watching very closely again as we see demand changing week to week and as we get into the months of the quarter and the quarters of the year that we’re able to scale up and down with demand.

Okay, got it. And James just to put you on the spot maybe a little bit, Joe can you talk about the timing of the CFO transition in the middle of a pretty dramatic situation, just talk about the reasoning and the planning that went into that?

Yes. These things don’t come about quickly oftentimes, and so this was a more thoughtful transition that began planning several months ago. And so yes, by the time you get – time to actually announcement of the transition, we’re in the middle of an interesting economic time. But I feel like it’s just a great opportunity for us to continue to evolve as a company. James brings a wealth of experience, nine years of public company CFO experience from a larger company, industrial company with multi-core business, a lot of complexity, and so very pleased to have him here. I think that he will be a fantastic thought partner for me and for the Board as we think about how we grow as a result of this economic downturn, how do we take advantage of our balance sheet, how do we deploy our capital to come out on the other side much better and stronger and grow through this. We’ve always said we don’t wish for recession. This is horrible. But given our situation, there will be opportunities for us. And so, we want to be able to take advantage of those opportunities, and I think James is the right guy to help us do that.

Got it. And just to follow on that last line of thought, are you willing to use your balance sheet at this moment to take advantage of situations and are those becoming more apparent or is it just more prudent to sit on that until maybe some of the uncertainty goes away?

Yes. I think we’re still in a little bit of wait and see mode. We’re in constant contact with acquisition targets. We’re in constant communication with the brokers and bankers and those types of folks. I would say today, the outlook is we don’t have enough visibility going forward on the broader economic kind of reopening, if you will, and what the rebound is going to look like in the second half to be able to comfortable committing large amounts of capital at this point. So I would say we’re still in a little bit of a wait and see mode. And I think sellers’ expectations will have to be adjusted and you’ll need to see a quarter or two of results to kind of understand what the demand degradation might be for some of these businesses. But I think we’re sitting in a great spot and I feel really good about the potential to take advantage of opportunities that will come out of this downturn.

Got it. Thanks, guys. I appreciate it.

You bet.

Thank you, Jon.

Our next question comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

Hi. Good morning, everyone.

Good morning, Joe.

So, Joe, can you just clarify, when you were talking in your prepared commentary regarding the outlook, you mentioned a 15% to 20% decline. Could you clarify what that’s referring to or if that’s just a general across the company or of a particular business?

That’s actually generally across the categories that we serve, the industry end markets that we’re picking up from other earnings reports and industry data, that type of thing. And so I’d say, broadly speaking, our customers are saying that they’re down 15% to 20%. And at this point in time six weeks into the quarter, we’re down more than that we think primarily due to destocking of – their shelves were full. They’re going to sell what’s on the selves first and not reorder until they really have to. And so we’re seeing that effect.

Okay. And could you help us maybe understand the trajectory of how the last two, two and a half months have gone? Essentially I’m just curious, are we sort of mainly in – on a directional basis mainly in a stabilization standpoint? And do you have any businesses that are still directionally actually getting worse on a week-to-week basis and vice versa any businesses that you’re sort of actually seeing a little more positive week-to-week – I know Jon asked this sort of as well and you answered building products. But are you seeing any sort of positive trends given with several states – many states actually opening up over the last few weeks?

Yes, I think we are. Again, back to the architecturally specified building products business, we did not see the immediate downturn that we saw in some of the other businesses. Again, projects were ongoing halfway through an installation of smoke curtains in a building. They’re going to – in places where it’s at all possible, there were finishing up those projects and pushing us to get those completed. And so that continued on let’s say in the month of April. The phones were not ringing very often in some of our other businesses. But yes, I do feel like there’s been stabilization since that time. Things have calmed down. Spirits are a little bit higher. And I would say, overall, we don’t see continued deceleration at this point. And so we’re taking that as positive. And again, as we talked to our customers, that seems to be the general theme that we’re hearing.

Joe, this is James. It really is, as we said a week-to-week thing, as temperatures are rising, that coincides with people – states reopening and people getting more comfortable with folks coming into their house for repairs and installations on the HVAC side especially. So as Joe mentioned, the destocking has been happening. Destocking turns into restocking. So as the phones start ringing as those inventories get low on the distributor side, we’ve made sure to keep our inventory levels as such we can meet that demand. So our people are producing the product. We’ve ensured our supply chains are there, as we mentioned, looking to diversify those. But we’ve made sure that we’ve got the inventory and are carrying what our customers need when they’re ready to restock as those installations pick up. And again, we’re seeing the green shoots here and there, but it’s anecdotal at this point.

Okay. What about oil and gas? You stated in prior answers to one of the questions that you haven’t seen one of – any of the industries sort of weaker than the others. I would have thought actually that you would actually have seen oil and gas be weaker than others. Is that not the case?

Well, I would say two things. One, it’s relatively small for us overall. So I wouldn’t – so it’s not top of mind necessarily. But I would say, domestically it’s been very, very weak but we’ve seen strength in our overseas market. We felt that out of the UK, into the North Sea and the Middle East and those – our kind of weekly sales reports there have been very positive. So it’s a mixed bag even there. But yes, sales of copper coating in West Texas are down pretty dramatically, no question, with the rig count.

Okay. And at the HVAC segment, prior to the downturn, did you have a sense of where industry inventories were when you characterized them as sort of normal or higher than normal, any sense of where those inventories were out of this downturn?

I don’t think I – I would just remind everybody that this hit at the peak stock season. We had had a lot of stocking orders for the new summer season. And so as we all recall, March is a huge month for us. And so our March kind of continued on as normal, ordinary course. But that is the season when all of our distributors, our customers are going to be stocked to the gills for the upcoming summer season. So I can’t tell you that they were more stocked or less stocked than we would have expected for this year with the growth we were expecting from last year and all of that, but I would just tell you seasonally that is a time of high inventory levels every year.

And in terms of work across the country over the last couple of months, I’m in New York and of course a lot of people are completely shutting off their houses, but I know elsewhere in the country it’s a little different. Did you get the sense that maintenance – because everyone’s staying at home, everyone’s thinking – because of that people I think are probably most likely thinking about retrofitting certain things around their house and whatnot. So I would think coming out of this, you’d see some pretty good demand. Do you agree with that? Number one. And has there been areas that really haven’t completely shut down and there has been inventory destocking through this period as work’s been done and as people have been staying home and thinking about retrofitting their houses?

Yes. Listen, we’re very bullish on the long-term health of that end market. It’s really our favorite end market. If we were going to invest capital in any end market today, that would be the end market that would be highest on our priority list. Having said that, there were – again kind of anecdotally but reports of AC contractors that didn’t want to go into people’s houses or people didn’t want those folks in their houses. So I think that could offset some of that effect that you’re talking about over the past month or two, Joe. But we do feel like going forward, more folks at home in the summer months coming up here, more folks needing their air conditioning to kind of operate at peak with everybody in cramped corners I think that could be very good for our business. So yes, we feel like – and again, our products are used both in repair and replacement and we are geared more toward residential than commercial, so I think all of those are good factors.

Okay. And in terms of the building products business, could you provide us your thoughts, what you’re seeing, what you’re hearing in terms of maybe your order rates, projects that are being out there? I know you said the business right now is doing okay, but that’s probably because of existing projects. The Architecture Billings Index just came out of the month of April and it was below 30. What are your thoughts on sort of longer-term project pipeline for the non-res cycle?

Yes, we are watching it very closely as well. And as you said, we’ve had relative strength there. I would say that our bidding has been active and we’ve been pleased with that. Our backlog that we’ve gone through and assessed very, very soberly to determine what we think about our backlog and that seems to be holding up well. And so really – it’s the bidding that turns into bookings where we’ve seen the softness most recently, Joe. And so we have seen folks that are just not willing to commit to beginning a new project over the last few weeks. And so we are seeing that. How long that will last and what the reopening will do for that, we’re not in a position to predict. But there’s no question we have seen some softness of bids turning into bookings.

Okay, great. And last question, just the discontinued ops income, what business is that related to? Did you sell off a business within the quarter or --?

I think that would have been the old Strathmore business. It may have been the sale of the final piece of real estate from Strathmore that we sold in this period and the coatings business.

Okay. All right, great. Thanks.

Thanks, Joe.

Thanks, Joe.

There are no more questions in the queue. I would like to hand the call back to management for closing remarks.

Great. Thank you very much, everyone. Really appreciate the time and look forward to speaking to you again soon. Thank you for your interest in CSWI. And just know that we take the stewardship of your capital very seriously. So thank you.

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