CSW Industrials, Inc. (CSW) Q1 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the CSW Industrials, First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Christine. Good morning, everyone, and welcome to the CSW Industrials fiscal first quarter 2021 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. We issued our earnings release and presentation prior to the market opening today and both are available on the Investor portion of our website at www.cswindustrials.com. During this call, we will reference specific slides in the presentation. The call is being webcast and information on how to access the replay is included 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 today in our 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. I will now turn the call over to Joe Armes.

Thank you, Adrianne. Good morning, and thank you for joining our fiscal first quarter conference call. On today’s call, I will provide an update on the four guiding objectives that we presented last quarter; discuss our fiscal first quarter results and comment on our outlook for the remainder of fiscal 2021. I will then hand the call off to James for a closer look at the numbers. On our last call, we outlined four guiding objectives; treating our employees well, serving our customers well, and managing our supply chains effectively, thus positioning our company for sustainable long-term success. We recognize the challenges that the pandemic has posed to many of our stakeholders, including our employees, customers and suppliers and our focus has been on the safety, continuity of service and collaboration throughout a changing business environment. Our success in fiscal first quarter 2021 was directly attributable to the diligence in professionalism of each of our over 700 employees of CSWI. We have remained engaged, courageous and confident, while continuing our operations with minimal disruption. Our employee stock ownership plan, which is designed to ensure alignment incentivizes our team members to think like owners. We thank all CSWI team members for their effort to-date, as together, we work each day to ensure that CSWI emerges even stronger and better positioned for future growth. As we outlined on Slide 4, our diversified end-market strategy, history of robust profitability, strong cash generation and resilient balance sheet position us to capitalize on both organic and inorganic growth opportunities, while driving long-term shareholder value. We remain resolute in our commitment to be good stewards of your capital. On Slide 7, you will see our 2021 guiding objectives. Expanding on treating our employees well, we are providing continuing employment for full-time employees as we position our businesses for the ongoing recovery and demand that we began seeing some of our end-markets toward the end of the fiscal first quarter. We remain committed to the enhanced health and safety efforts we outlined on our last call, fostering these sound COVID-19 operational health and safety competencies and incorporating them into our standard work environment. We believe our recent actions have positioned to better mitigate the possible impacts of future unexpected events and to support our during risk – enterprise risk management strategy and processes. Like many companies that have continued to operate safely over the last several months, we have had a few employees test positive for COVID-19, but all proper precautions were taken to maintain the health of those team members around them. We estimate, $300,000 to $400,000 of costs were incurred in the fiscal first quarter related to the employment, health, and safety efforts, noted above. Turning now to second guiding objective, serving our customers well. In recent months, we increased our commitment to be a vendor of choice including emphasizing communication and customer service excellence. Our teams utilized the changing work environment to offer virtual product training, helping drive demand for our high-quality, high-value products, while concurrently offering customers the opportunity to earn continuing education credits, and to serve their customers more effectively. In addition, we have recently increased personnel in our shipping departments to capitalize on the recovery of demand in some of our end-markets predominatly HVAC/R and plumbing. We remained disciplined in managing our supply chain effectively and throughout the quarter, we utilized the strength of our balance sheet, selectively building inventory to ensure our ability to meet our customers’ needs and to take advantage of discounted market pricing on some key raw materials. In our architecturally specified building products end-market, these supply chain measures helped us to win projects from competitors thereby gaining market share and bolstering brand reputation. We anticipate additional prospective opportunities to deploy capital that support our organic growth objectives, thus driving long-term growth in excess of the end-markets we serve. We remained diligent in our efforts to improve the quality and reliability of our supply chain, thereby ensuring business continuity and reducing sourcing risk. Turning to how we position for sustainable long-term success. Since inception, our management team has committed to building and maintaining a conservative financial position including a strong and resilient balance sheet, ongoing access to capital and ample liquidity. As shown on Slide 8, we continue to demonstrate balance sheet strength with nearly $20 million of cash balances as of June 30, 2020, which is an increase from last quarter. During this quarter, cash flow from operations grew 45.4% over the prior year period to $14.1 million, representing a 15.5% cash flow yield on revenues in the quarter. We also repurchased 7.3 million of shares and paid our $2 million quarterly dividend for a total quarterly return of cash to shareholders of $9.3 million. As of June 30, 2020, we maintained a full $250 million available on our revolving credit facility supplementing the strength of our liquidity position and our ability to execute on growth opportunities. Our capital allocation strategy continues to guide our investing decisions with a priority to direct capital to the highest risk-adjusted return opportunities as we invest to our future, particularly in the end-markets we serve today. We are very active in pursuit of external growth as we see opportunities emerging in several of our end-markets. When outlining expectations for the fiscal first quarter on our last earnings call in mid-May, we discussed potential underperformance driven by natural distributor destocking as attributable to pandemic-driven demand degradation. We also reported then in the first six weeks of the fiscal first quarter, our revenue decline was in excess of 20% in some of our end-markets. With this backdrop, I am pleased to report that fiscal first quarter revenue was $91 million reflecting an 11% decrease compared to the same prior year period. These results exceeded our own as well as the consensus expectations for the quarter. The outperformance began in the second half of the first quarter as demand improved for products designed for residential applications in areas such as HVAC/R and plumbing, as well as in our architecturally specified building products. During the quarter, May results exceeded those in April, and June exceeded May providing us with strong momentum heading into our second quarter. In fact, in the month of June, sales into the HVAC/R and architecturally specified building products end-markets were actually higher as compared to the prior year period. As we discussed in May, we implemented a broad range of temporary cost reduction measures at the very early stage of the COVID-19 outbreak in the United States to preserve profitability. While the cost reduction measures did not fully offset the impact from the revenue decline, we reported a solid $16.3 million of operating income and 17.9% operating income margin, only a 200 basis points decline in margin from the prior year period. We’ll also highlight that we have continued to invest in our people, and we have not had any pandemic-related reductions to our full-time employment allowing us to serve our customers’ dynamic needs as they adjusted to varying demand for their products. As I mentioned earlier, these actions have resulted and are winning business in several of our end-markets, especially, architecturally specified building products. We believe these actions further demonstrates our stated commitment to a long-term perspective on driving shareholder value. Turning now to Slide 9, the resiliency and diversification in our end-markets is highlighted on this page. In addition to my previous comments on the strength we’ve seen in the HVAC/R and plumbing end-markets, there are several factors positively affecting demand for our products, including the large number of individuals continuing to work from home and the 12% increase in June cooling degree days, as compared to the same month last year. The architecturally specified building products end-markets was effectively flat year-over-year with strength in sales driven by our quality backlog to primarily the completion of projects that commenced prior to the pandemic. Our three largest end-markets, HVAC/R, and architecturally specified building products comprise nearly 77% of our revenue this quarter. While the pandemic has caused acute short-term uncertainty in our general industrial, rail and mining end-markets, we expect these businesses to return to growth as our customers return to normalized operations and resume the types of maintenance activity and capital investing decisions that drive demand for our products. We remain confident in the long-term secular fundamentals supporting these end-markets. For example, Class 1 rail is critical to transporting goods across the United States, while transit rail is a growing market worldwide and suitable for many of our niche products. Additionally, the general industrial, mining and energy end-markets provide geographic diversification with access to faster growing international markets. Now I would like to discuss our current thoughts in the remainder of this fiscal year and first remind our investors that our fiscal year began on April 1. Earlier in my prepared remarks, I noted the momentum in our largest end-markets that we have realized since the second half of the fiscal first quarter. Based upon the steadily improving demand, we now expect revenues and earnings in the first half of the fiscal year to be slightly lower than the prior year period. In the second half, which is typically negatively affected by seasonality, we expect some recovery in select end markets, resulting in moderately lower revenue and earnings than the same period last year. As the current situation remains fluid, the duration and trajectory of end-market recovery are hard to determine. We see ongoing strength in our HVAC/R and plumbing end-markets opportunities for incremental growth in the general industrial and heavy end-markets, with potential declines late in the fiscal year in our architecturally specified building products end-market. As discussed on our last call, our bidding activity has remained strong while there has been a decline in the rate of projects being added to the backlog as builders’ commitment to large projects has slowed. With the pace of bookings remains at current levels, a decline in architecturally specified building products revenue could materialize late in this fiscal year or early in the next. As of the end of the fiscal first quarter, our book-to-bill ratio for the trailing eight quarters remained above one and only one project was removed since our last call, indicating the quality of our backlog. We continue targeting education, healthcare and government projects as matter of bolstering our prospects and increasing the diversity of our portfolio, which is otherwise weighted toward multi-family tailwinds. As a result of expected year-over-year revenue declines in this fiscal year, we continue to be – we continue to expect slightly lower margins due primarily to our previously discussed efforts to retain employments for our team members. However, we remain diligent in our pursuit of operational excellence and a competitive cost structure and we will initiate additional cost mitigation efforts if the pace of demand recovery slows. In summary, our strong balance sheet continues to enable us to have the financial flexibility to succeed in the current economic environment by investing organically and inorganically in our business driving long-term growth and returning cash to our shareholders in line with our capital allocation strategy. And with that, I will turn the call over to James for a closer look at the numbers.

Thank you, Joe, and good morning, everyone. As Joe mentioned earlier, our consolidated revenue during the first quarter of 2021 was $91 million, and a 11% increase over the prior year period. Lower revenue was driven by decreased sales in both our Industrial Products and Specialty Chemicals segments and across all end-markets struggled. Despite a 11% decline in revenues, our profitability metrics remains strong with a gross profit margin of 47%, slightly above the prior year period and consolidated operating income margin of 17.9%, the 200 basis point decline from fiscal first quarter 2020 and flat to adjusted fiscal first quarter 2019. There were no adjustments in these recurrent or prior year period. The effective tax rate on continuing operations for the fiscal first quarter was 23.5%. We expect our full year tax rate to return to a normal range of 24% to 26% in fiscal 2021. Net income from continuing operations in the fiscal first quarter of 2020 was $12 million or $0.81 per diluted share, compared to $15.2 million or $1.01 per diluted share in the prior year period. Turning to Slide 10, the industrial products segment delivered fiscal first quarter revenue of $61.2 million, only 3.3% lower than the prior year period. Operating income of $16.3 million and operating income margin of 26.6% were in line with the prior year period of $17 million and 26.9% respectively. Continuing to Slide 11, the Specialty Chemicals segment delivered fiscal first quarter revenue of $29.7 million, compared to $39 million in the prior year period. Segment operating income was $3.9 million, a $2.7 million decrease, compared to the prior year period as cost reduction efforts offset a large portion of the decline in sales revenue. Operating income margin in the fiscal first quarter was 13.3%, a 370 basis point decline from fiscal first quarter 2020 and flat to adjusted fiscal first quarter 2019. The decline in operating income margin reflects the decremental margins resulting from lower volumes. As we’ve shared previously, this segment is highly correlated to volumes and hence as volumes recover with improved demand, operating margin would be expected to return to our long-term expectations of mid-teens. Balance sheet and cash management has increasingly been in focus for investors and as Joe mentioned in his remarks, our cash flow from operations increased 45.4% over the prior year period. Our cash balance as of June 30, 2020 was approximately $20 million, approximately $2 million higher than on March 31, 2020. This increase in cash balance occurred while returning $9.3 million to shareholders through our quarterly dividend and share repurchases. With our solid cash generation, and excellent liquidity position, including the full $250 million available on our revolving credit facility, we are well positioned to fund accretive growth. In my first few months at CSWI, I’ve had numerous opportunities to review our portfolio of growth opportunities and I am encouraged by the quality of the opportunity set and the employee growth available to us. I am also very confident in the team’s ability to support this growth, while focusing on the existing business, both of which are critical for success. The increase in inventory balances, as Joementioned in his prepared remarks, we utilize the strength of our balance sheet to position ourselves advantageously to gain market share as certain competitors were unable to meet their contractual obligations to provide goods and services. We also capitalized on discounted pricing for specific raw materials and high volume items, as we anticipate demand in our largest end-markets. In the short-term, we expect to maintain strategically elevated levels of inventory as we prudently manage our supply chains. In conclusion, CSWI remains very well positioned to not only perform well through the economic conditions, but to emerge as a stronger company poised for growth. Thanks for the dedicated efforts of our team members and support of our Board of Directors and investors. With that, I will now turn the call back to Joe.

Thank you, James. Our guiding objectives for fiscal year 2021 are consistent with and supportive of our core values. Our strong, sustainable business model is built on operating businesses with long track records of success, skilled employees that think like owners, experienced leadership teams and a resilient financial position, our commitment to be good stewards of your capital is resolute. Let me take this opportunity to thank all my colleagues at CSWI who collectively own approximately 5% of the company through our employee stock ownership plan and also thank all of our shareholders for the continued interest in and support of our company. And with that, operator, we are now ready to take questions.

[Operator Instructions] Our first question comes from the line of Joe Mondillo with Sidoti. Please proceed with your question.

Hi, good morning everyone.

Good morning, Joe.

So, first off at the Specialty segment, I was wondering if maybe you could help us understand what you saw through the April to July time period, sort of the things get significantly better like a lot of companies have talked about over that four month period? Any details there would be good.

Well, again, I think, if we think about it as end-markets, Joe, end-markets show significant kind of recovery, where HVAC/R and plumbing, architecturally specified building products is really steady throughout. The other end-markets were down in April, and have recovered some, certainly not falling any more. And so, I would say that, that means our Specialty Chemicals segment would be affected by the general industrial, heavy industrial, certainly the oil and gas, energy. But remember, there are some plumbing, chemicals, in particular that run through Specialty Chemicals that would help provide a balance there.

I see. But with some of those more cyclical general industrial energy-related end-markets, did you see a significant improvement from, say, the April month to June, July?

No, we really did – we saw a flattening. And so, again, those end-markets are no longer in decline, but no snap backs there again.

And Joe, this is James. This is an area where we built some inventory. That’s one of the couple areas through the quarter as we anticipate some of that demand coming back. And as Joe said, we didn’t see much come to the quarter revenue-wise, but a little bit of that inventory build within that Chemical space to be sure that we took advantage of raw material pricing and built the inventory. So when it does come back, we are ready with the employee base we have.

But we did think we see evidence of kind of the end or the tail of destocking that was going on there.

Okay. I guess, just lastly, just a follow-up on this topic. What do you sort of make out of that? Do you sense any changing of share at all? The reason I ask is, because it seems like most companies, even sort of the most cyclical industrial type companies have seen pretty good improvement from April, May to June, July. Do you sense any changing of share within the market or so? How do you look at your performance relative to the overall market?

Yes. I don’t see any change in share at this point, Joe. What we see is really a fair amount of that business goes through distribution. So you’ve got destocking at the distributor level. They are squeezing their inventory down. And like I said, we are beginning to see the effects of that now when folks are beginning to place orders, I believe the destocking has run its course and I think, things are going to get better from here. But – no, we don’t perceive that as being a share loss at this point.

Alright. And then, I wanted to also ask about the HVAC business more in the Industrial segment. How much was – I guess, HVAC down in the quarter? And the follow-up on that, it seems like it was better than I would have thought. Could you just talk about that business, because, I sort of – I suspected that especially in the early part of the quarter, people were not able to service, people maybe not able to enter homes. And then, in addition to that, which I thought maybe would have affected demand, distribution, destocking a little bit, relative to just the overall economic cycle. So, could you just help us understand how that business performed and I guess, maybe relative to your expectations?

Yes, Joe. This is James. I think you’ve hit a lot of the key points that are pretty well in summarizing it actually. So very specifically, the HVAC/R’s piece within Industrial Products was down about $1.3 million. That was offset by about the same increase on the architecturally specified. So with the other businesses being down just a little, that’s why you saw just a 3% decrease. As you recall, on the May 20th earnings call, we talked about us seeing distributors down 20% plus. And at that point, that’s about what we were seeing things a little bit worse than that. So the fact that that business was only down 3% for the whole segment and HVAC only down a little over $1 million. That tells we really saw a recovery late in Maya and then especially through June. We continue to see that in July. We’ve obviously now wrapped up July. We continue to see that momentum. And I think you hit on some of it. Clearly, as people got through the quarter, along that’s a residential business, number one, more people staying home, more people got confidence that we are going to be at home for a while and certainly as you said, government contract people coming into their homes for repairs, that certainly helps pickup business. We have seen a bit of destocking and we started to see restocking as the folks on the trucks needed to hit their distributors and that’s who we sell to. They had to be sure they have the products they needed. So we saw lot of orders for that restocking, which when we talked in May, we weren’t sure when that was coming. And then lastly, and Joe mentioned it briefly in his remarks, the cooling degree days were up quite a big year-over-year and even above normal. So, on top of people being at home or and it’s simply being hotter, not just in certain geographical areas that pretty much nationwide, that led to a very good end of May, very strong June and again in July.

Okay. Yes. I was going to follow-up actually there and just everything that we’ve heard is, whether it’s retrofit or construction and I know, like 80% of the business there is sort of retrofit. It seems like any company or any business associated with that is performing extremely well. So it sounds like, June, July have bounced back pretty strong sort of - to in line with other companies that are associated with housing retrofit.

Yes, I think – this is James. I think we are certainly seeing that and I’ll also tell you what a good job our teams out in the field were doing with the employee base that we kept on that really proved to be a strong strategy for us to be sure we can meet that demand when it came so quickly. We had the people in place. In fact, we’ve had to hire up a little bit on the shipping side in the HVAC business specifically at our facilities to be sure we could the products out the door that our distributors needed. So we didn’t lose those sales. So, I think we are currently seeing what you are seeing, as you pointed out ours isn’t as much directly to the OEMs which are lot of the comparators you see out there for that type of industry data. But we are absolutely seeing that strong pickup and again, our teams are doing a great job of meeting that demand to understand what customers need. And that again, we tried to foretell some of the inventory buildup that we might continue to do strategically to be sure the supply chains are strong as they are right now where we got the products we need. So we can continue to meet the demand.

Okay. And last question for me, I’ll let someone else have a chance. Is regarding costs and sort of cost management through this time period, specifically at the Specialty Chemicals segment, have you reduced any cost either permanently or temporarily? Or how are you managing your cost, especially at that Specialty Chemicals segment that we are seeing a pretty severe downturn and it seems like, it sounds like we haven’t seen any sort of rebound quite yet.

Sure, Joe. This is James again. As we said, it’s a volume-driven business. As I reminded you a minute ago, we did maintain the full-time employment in light of the pandemic, we’ve not had pandemic-related reductions. We have an attrition kind of take care of some employment numbers having a little bit of a over-employment potentially. So, as you just have normal people leave a company, performance issues, we haven’t necessarily backfilled some of those people. The Specialty Chemicals business is more of a full-time employment business. The Industrial Products has a little more of the temporary type labor. So that’s able to be a little more variable. So, you’ve had a little bit of headwind on that employment in Specialty Chemicals which drives that margin. We have however though across the company, but in Specialty Chemicals, certainly seen real strong cost management. Obviously, things like travel has come down, use of consultants have come down. Anything discretionary the teams across the company I think have done a really good job, continue to challenge themselves to find cost reduction. So, as Specialty Chemicals you’ve seen it, you obviously had some margin and profit degradation with a low volumes. As I mentioned, we did buildup some inventory. So we have the employment base and so we’ve built up the inventory that helps sure absorption to some degree. We slowed that down a bit in June. So we’ve built up the inventory, but the revenues didn’t quite follow and we look for them potentially in Q2 to really start reducing that inventory in July and into August and September. So, specifically, the answer to your question, I would say the team is doing a great job of finding ways to reduce cost. But again, it was a company-wide decision we made to maintain that employment base and serving our – treating our employees very well, we felt strongly about that. And it’s a bit of a headwind, but we are certainly seeing in a couple of the other spaces within the Industrial Products that’s turned out to be a very good decision that we were able to make company-wide.

Okay. Great. Well, thanks for taking my questions. Good luck.

Thanks, Joe.

[Operator Instructions] Thank you. Our next question is a follow-up from Joe Mondillo with Sidoti. Please proceed with your question.

Alright. Well, I have a couple other questions that I wanted to ask. So, thanks. As far as the architectural, specialty – specified buildings products business, could you help us understand what you saw – what you are seeing in terms of bookings? What the trends are? Are new bookings down year-over-year? How much? Just help us understand what you are seeing in that business.

Sure, Joe. It’s James. We talked about the back half of the year seeing some softness in our fiscal year. The team has done a really good job of being able to finish up projects that were already on the books in the backlog. And as we mentioned that speaks for the quality of the backlog, those projects got done. Some even moved up in the calendar as project managers and contractors wanted to be sure they got projects done before they potentially had any shutdowns. Construction has remained an essential business virtually everywhere. So they have been able to get those done. We continue to see a good number of bids for projects that are out there. Some have turned into bookings, a lot of those were even into next fiscal year, just given the time it takes the lead time for our products to go into a brand new project that’s not yet coming out of the ground. So, we are seeing some bookings, but not a lot of that creeps into this fiscal year yet. What the team has done a good job of is, finding the shorter term projects, some of those renovations, those workups. Obviously, you see some buildings that aren’t crowded right now, population was. And so, a lot of the buildings are coming into the space and doing some of those renovations right now. But just had to make those decisions quickly. So that helps us get through the pretty smoothly, but the bookings, I would say, are certainly down, a lot of bidding activity, a lot of dialogue, but bookings are down right now. So, what would fall into this fiscal year and that speaks to some of the back half especially in Q4, calendar first year softness.

And when you look over – I know, three, four months is not a – doesn’t paint a huge picture, but, how did – in terms of that booking flow, did anything – just any sort of pull off in April and just sort of flat line throughout the next handful of months? Or was there anything – any sort of trends in there that gives you a positive or a negative indication of how things are going to play out?

I wouldn’t say things changed a whole lot during the quarter. We talked in May that we’ve seen a lot of biddings and not much bookings we continue to say it. And again, that’s not to say, we haven’t picked up some bookings, some for short-term projects, some for projects that are out there our ways. We are very aware of a lot of projects that are underway that folks want to get nailed down, but with the uncertainty out there, I think – we have to carry a specifically, but just haven’t turned into that. So, I wouldn’t say the trend has changed so much. It’s not an overly pessimistic view. It just hasn’t turned into optimism quite yet.

And Joe, this is Joe. I would say that’s specifically is an area where we’ve been able to pick up market share where our competitors have stumbled. And so, again, our financial strength, our strong execution by our team has put us in a position to win business there literally from compare directly from competitors who are having problems completing projects, getting folks on the job, that type of thing. And so, we are seeing some uptick there, which makes us a little more optimistic about the future, as well. We do feel like we are gaining some share there being able to prove ourselves as a fantastic provider of these important products and services.

And also to follow-up there, I guess, a couple things. So, like you say, construction is a – has been ongoing throughout this downturn. So I think what’s a lot of people are a little concerned, then I am sure you are looking at it is that, backlogs are being grained down and as the bookings just aren’t replenishing that backlog. So, number one, I know you had a pretty good backlog heading into the calendar year, at least. So where are you with the backlog of the stronger that is, you can maybe weather some of the slowness in the bookings. And then, number two, could you help us understand the break out of kind of buildings that you are selling into? I think people are certainly concerned of retail, office, and hotels. So just give us an idea of sort of the break out of that general business?

Yes. This is James. We’ve got a lot of detail. It’s the standard type of things that we are looking at the more hospitals, universities, those type things. Not as focused on the office building type of things, we do some re-phasing of multi-family high rises. Those type things, as well. So, again we are seeing some of that renovation work in just that we are picking up some work from some of the competitors that aren’t able to maintain their labor force, aren’t able to have the financial wherewithal that we do, given the strong balance sheet. So, not much has really changed in that respect. In terms of the backlog, you kind of look at it, we kind of look at it trailing two year book-to-bill that still remains above one. But obviously, this last quarter, you saw some pull down of that backlog. It’s still healthy. It’s still out there. It’s still good. It’s still high quality. It still has good profitability in it, but we’ve not seen a lot of addition to that per se, that’s kept up with the backlog itself in that respect. So, but again, we kind of look at that trailing two year, because it’s – and to look at it quarter-to-quarter type backlog in that business for these big projects is difficult. We’ve continued to take some orders that just hadn’t quite kept on, but again, optimism is always out there. But we are being careful about the projects we bid on and really been aggressive on talking to folks and ways getting in the bid process.

Okay. And just – I would have though smoke guard, would have a decent amount of office exposure, but you are saying overall, not a whole lot of office just overall.

Well, Smoke Guard does, but you’ve got, Smoke Guard, Balco and Greco. So you think about Greco is being a lot of high rise residential and in this institutional business of hospitals, universities, that type of thing. Balco is going to be larger, more institutional airports, the warehouse that type of product type and then, Smoke Guard will have a combination of anything with an elevator which does include a fair amount of office. But again, it’s only a part of that business. And that’s why safety, there is a recurring revenue piece at Smoke Guard. That’s a little less a discretionary spending, if you will.

Okay. Last question for me. Just on M&A, what is the environment like for you? And did this downturn, especially at this point in time where at least the overall economy has maybe somewhat stabilized a little bit following a sharp pull off in April. What are you seeing in your thoughts on M&A in the next six to 12 months?

Yes. That was a great question. I think we are much more in a better position today than we were the last time we had a quarterly call like this to make decisions around that. We’ve got better visibility. We think we’ve got an idea of how our businesses are responding. And so, I think the M&A pipeline is strong. We have a strong desire to grow inorganically. We have not seen dramatic decreases in valuations. I just think that so deep and available that that has been less of an issue and we are not really looking for distressed company. We like to buy healthy companies at fair price. But we think the opportunities are there and we think the environment is better today than it was the last time we spoke in May because of a little better visibility and our willingness to commit capital is higher today than it was six or eight weeks ago. And so, we are optimistic on that front and feel like the opportunities in front of us are pretty attractive.

Okay. Well, great. Thanks for taking my follow-up questions and again, good luck with everything.

Thanks, Joe.

Our next question comes from the line of Jon Tanwanteng - CJS Securities. Please proceed with your question.

Hey. Good morning, guys. Great quarter and thanks for taking my questions.

Thanks, Jon.

Just wanted a little more color on some specific segments and then, of course the outlook going forward. First off, I think you mentioned that July was going strong for you, especially in the HVAC segment, not surprising given that there has been – across the country. People are staying more indoors, I would expect due to the pandemic, can you just talk about runrates in July on a year-over-year basis, number one? And number two, inventory distribution, we’ve seen reports as stock outs had a lot of air-conditioning service providers and I am wondering how that fits with what you are seeing at your distributors? And if there, it could be a restocking tale and long into of the future?

Yes. This is Joe. I’ll take the second part of the question and let James not address the first part. We’ve had some very small spotty outages, both from distributor side and with us. But demand is very, very strong and as we said, we had to add additional personnel in shipping in order to meet customer demand. And so, that is the great indication of the kind of strength that we are seeing in June and July in that business. And we are very, very pleased with that. And our teams are doing a great job in executing to making sure that our customers are – have what they need. I don’t think we are going to build to talk about year-over-year, but James, what kind of color do you want to give?

Yes, Jon. Good morning. This James. Yes, it’s hard to give a lot of color other than July was very good for us in the HVAC and plumbing spaces specifically. The other businesses continued to see roughly the same type of things we ended the quarter, but we’ve just started to see what July have looked like on a month end basis and we talked about, April was kind of our low point, our trough. And May got better, June got better and July continued to look like June in that space. So, we’ll provide that specific color here in the middle of the quarter. We’ll be able to kind of do a quarter look back at the end, but continuing to see very strong demand for those products. And again, I can’t emphasize on how strong the team has performed and given that the supply chain and the products in the door, getting that processed and really working to – as I mentioned, even increase our shipping employment base to be sure that we get it out the door to as you said, keep those distributors are stocked up as they want to be, but they continue to have demand. So that’s a very favorable selling for us as we head into August.

Got it. That’s helpful. And then, just from an overall consolidated perspective, Joe, you mentioned that you expect the first half to be down slightly versus last year. Given the strength that you are seeing in HVAC and maybe, call it, a steady runrate in the rest of the business, is it within your range of possible outcomes that the second quarter is up year-over-year just doing the math?

Yes. This James. Yes, I won’t correct or confirm you math from that standpoint. Well, we certainly push ourselves to the better each month than we did before and look at quarter-over-quarter. When we talk about the slightly below, I think, you are looking at it relatively correct, when we see how weak April and then the first half of May was, and so we saw it really pick up the back half of the quarter, really the last five or six weeks and we are continuing to see that. Again, we continue to highlight that HVAC and plumbing space where we are seeing the strength. We are still seeing things down a bit in some of this heavier industrial businesses as Joe talked about earlier and we mentioned in our remarks and in the 10-Q. So, again, we’ll confirm exactly what it looks like quarter-over-quarter, but that word slightly is very carefully used in terms of what we are seeing year-over-year at this point as we tried to get a forecast in such uncertain times.

And then, Jon, you know our business very well. But then I’ll remind you and everyone that Q3 – our fiscal Q3 is typically seasonally at the lowest. And so, that plays into our thinking of the back half of the year, as well, a lot of seasonality there.

Got it. Okay. Just wanted to get a little bit more color on the M&A front. You sounded pretty positive on the opportunities that are improving compared to the last time we reported you have a lot of slides in your presentation dedicated to M&A, which you didn’t go over. Maybe just two specific questions. Are you seeing more opportunities now in terms of number of available targets? And number two, is your ability to diligence them, improve versus two or three months ago, just in terms of travel and – either you traveling or targets traveling, it’s being able to see what’s under the hood. Just anymore color on those two specific topics.

Yes. No, it’s a great question, Jon. I think, the good news is that, we use the time during this pause that we had kind of in March, April, May, timeframe to continue our work and so continue to fill the pipeline, continue to communicate, very, very intentionally with potential targets. And also to continue our work in the diligence side of things. And so, things that take longer, because of lack of travel and other things where we were able to get a lot done during that period of time. So, we are adapting to new processes with respect to diligence and travel is certainly still very, very limited at this point for us. But, we are very pleased with the opportunity set in front of us. I would say, the opportunity set in front of us is as good or better than it’s been. But our willingness to transact our ability to get comfortable with looking out into the next few years and making the kind of projections and estimates that we need to make in order to convince ourselves that it’s appropriate to allocate capital. That’s really been a question of timing and valuation and it feels like those things are coming together nicely now. And so, we are positive about the opportunities in front of us.

Got it. Okay. And just switching over to architectural. I know, it did seem it imply that the book-to-bill was below one this quarter. I know that business is lumpy. Do you see any future quarter at this point in the game where either the order rates increase or maybe you have to restructure that business, as well for a lower expected runrate as people maybe get more get us transacting in real estate?

Yes. This is James. That’s a good question. I don’t think we look out it and see which quarter we are going to see order activity pick up. The good thing is, as I mentioned, we continue to have a lot of dialogue with those project managers and contractors. We know the projects are on paper and being talked about. We mentioned briefly in Joe’s remarks, we’ve done a lot of training in that business specifically with some of the contractors and experts out in the field. They need further continuing and it gives us an opportunity to educate them on our products. So there still a lot of people wanting to see what’s out there to do this innovation, the most reliable products. And so we are having a lot of contact with those folks. I don’t think to your point, we need to necessarily reach that expectations restructure the business. We’ve got great leadership in that business and they joined us several months ago just looking over the building safety systems businesses. And so, we are very pleased with the opportunities in front of us and the operations that we have. We just to go out and see these projects turn into orders and see that book-to-bill cross above one again. Again, one quarter doesn’t make a trend, but they are holding on and doing well. But it’s probably next fiscal year before we really see that pop. Joe talked about the back half being more seasonal for us, especially in the third quarter and we continue to remind you that when we talk about revenue and earnings being moderately lower in the back half. Some of that is looking out in the third and even fourth quarter in that business specifically and seeing some softness based on the current bookings.

Got it. Thanks for the color guys and again, very nice quarter.

Thanks, Jon.

We have reached the end of the question-and-answer session. Mr. Armes, I would now like to turn the floor back over to you for closing comments.

Great. I just want to say thank you very much. Really appreciate everyone’s interest and participation in the call today. And I look forward to talking to you again next quarter. So, thank you.

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