Q2 2020 Earnings Call
Reading.
Welcome to the CFW industrial, saying second quarter 2020 earnings conference call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
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No. This conference is being recorded.
Now I'll turn the conference over to your host Adriana Griffin you may begin.
Thank you Darryl good morning, everyone and welcome to C. S. W. Industrial fiscal second quarter 2020 earnings call.
Joining me today or just the Farr, Chairman and Chief Executive Officer C. S. W Industrial and Gregg Branning, Chief Financial Officer.
He has not received the earnings release it is available on our website at Www Dot CFW industrials Dot com.
This call is being recorded a.
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 won't 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 the factors discussed in todays earnings release and the comments made during this call and then the risk factor section.
Report on Form 10-K , another filings with the FCC.
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 measure 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 our chairman and Chief Executive Officer, Joe arm.
Thank you <unk>.
Good morning, Thank you for joining our fiscal second quarter conference call.
Let's start by welcoming Adrian torque team as she is our vice president of Investor Relations and Treasurer.
I'm pleased to have earned this newly created role which is part of our leadership team as a natural progression at our company's growth I.
I know she looks forward to meeting those of you listening to this call.
Well begin with a high level discussion of consolidated and segment level results followed by a review of our end markets.
Wrapping up with an outlook on the remainder of the fiscal year.
Then hand, the call after Greg for a closer look at the numbers.
Consolidated revenue for the second quarter of 2000, 2020 was 100 point $101.3 million, representing 10.6% total growth at 6.3% organic growth when compared to the prior year period.
Both our industrial products and specialty chemicals segment continued to see healthy sales growth across end markets with some pressure observed in the general industrial end market.
Second quarter adjusted earnings were 92 cents per diluted share, which marked an increase of 16.5% over the prior year period.
This continued growth and earnings per share, it's been driven by operating leverage from increased sales and ongoing benefits from prior years efficiency initiatives.
Our capital allocation strategy continues to guide our actions.
A priority is to direct capital to the highest risk adjusted return opportunities then the categories of organic growth strategic bolt on M&A and return of cash to shareholders through our share repurchase and dividend programs.
During the period, we continue to invest and new product introductions, which have been important and continuing to deliver growth in excess of the end markets we serve.
Demonstrated by our year to date organic growth rate of 8% over the prior year period.
Turning to M&A I am pleased to report that the integration of both Peterson and MSD remain on plan and the performance of these acquisitions has exceeded our internal forecasts.
Our team continues to pursue new M&A opportunities and while the pipeline is robust elevated valuations have removed many opportunities from consideration because they fail to meet our required return expectations.
We have continued to return cash to shareholders through our quarterly dividend program and we paid our second quarterly dividend in August .
In October we declared our third quarterly annual or quarterly dividend, which is payable on November 14 to shareholders of record on October 31st.
The quarterly rate indicates a 54 cents per share dividend on the stock for the full year, which is just shy of a 1% yield.
Turning to our share repurchase program, while we did not repurchase any shares and the fiscal second quarter. Our program remains active and we continue to opportunistic repurchase activity early in the fiscal third quarter.
Moving to our segment performance beginning with industrial products sales grew by 14.7% of which 7.5% was organic compared to the same prior year quarter.
Higher organic sales stemmed from volume growth in H.B., I see our plumbing and architecturally specified building products as we continue to outperform the markets we serve.
Our building products businesses are performing well evidenced by our bookings they continue to outpace revenue driving an increased backlog.
The industrial product segment reported robust operating performance during the period as we delivered segment level operating income of $16.4 million or 26.1% of sales compared to $14.2 million or 26% of sales in the prior year period.
The continuation of strong operating income margin performance reflects improving sales volume.
Turning to our specialty chemicals segment.
During fiscal second quarter sales were 38.6 million up 4.5% as compared to the prior year period, all of which was organic.
These increased sales were driven by ongoing volume growth into the energy and architecturally specified building products end markets, partially offset by softening in the general industrial end market.
Adjusted quarterly segment level operating income increased 6.4 million were 16.5% of sales as compared to 6.2 million were 16.7% of sales.
Adjustments in the period reflect removal of again on the sale of facility during the period of approximately $800000.
Due to the completion of our most significant integration efficiency projects. We're now delivering operating income margins in the mid teens range as planned.
Over the longer term, we see additional opportunity for incremental margin expansion as we generate higher throughput in our facilities and focus on operational efficiency.
Next I'd like to review the outlook on each of our major end markets. We've continued to see strong demand across the largest end markets we serve.
An H.B.A.C.R. and plumbing demand remains strong and the breadth of our expanding product offerings, coupled with new product introductions continue to drive growth rates well in excess of the end markets.
As broad market concerns that come into focus it's worth reiterating that our products are primarily used in repair and remodel activity, where the installed base continues to grow and is less dependent upon new construction.
Therefore, we are relatively insulated from broad market, we're helping cycles, particularly as repair activity and our categories is less discretionary than many other expenditures.
We have continued to gain momentum in the architecturally specified building products end market, particularly with the addition of Peterson into our product portfolio.
Our backlog strengthened in the second quarter, we continue to view our ability to grow primarily as a function of internal execution rather than market conditions.
We would remind everyone that there's always risk in these construction projects were delay that can be related to weather as we approach the winter months or labor shortages, we've seen from time to Todd and all these would that affect the timing of these projects revenues.
Moving to energy rig counts have decreased year over year, but are flattening, we've continued to see stable demand for our products.
We are monitoring this end market and currently expect volumes remain stable throughout fiscal 2020.
And our rail business sales, primarily consist of trackside applicators and lubricants generally follow rail traffic for full year period.
As we've noted previously quarterly rail volume can be volatile based on weather and inventory at distributors in the second quarter, we saw a modest uptick in sales as compared to the prior year, which has normalized after a very strong first quarter, resulting from seasonal change over of lubricants.
For full year fiscal 2020, 2020, we continue to expect GDP like growth and our rail business.
Finally general industrial was our only end market to post the decline in the quarter, which was in the mid single digits.
This alliance with widespread reports of weaker industrial demand that shrinking capex cycles, which are modestly affecting our business.
Most of our general industrial exposure is in our lubes in Greece is contained within our specialty chemicals segment.
We will continue to update investors on the status of the general industrial end market trends.
It's warranted.
We're pleased with our performance of the first half of fiscal 2020 demonstrated by double digit top line growth.
A very healthy sustained margin profile and the successful integration of to bolt on acquisitions.
We attribute the success to the strategic initiatives, we have implemented to drive volume and profit across our business.
We believe we're well positioned to realize continued improvement in free cash flow generation to fund our capital allocation strategy and maximize shareholder returns.
As we look to the second half of the fiscal year, we would remind the market protect participants that would not be appropriate to extrapolate. The first half total revenue growth rate to the second half.
We expect to deliver strong second half total revenue growth that approximates the 7% revenue growth we achieved in full year fiscal 2019.
Reflecting second half seasonality.
And a tough comparison to the prior years strong performance.
And similar to the first half of this fiscal year, we believe our expected second half revenue growth rate will be well in excess of the growth rate of the markets we serve.
With that I'll turn the call over to Greg for a closer look in the numbers.
Thank you Joe and good morning, everyone. Our consolidated revenue during the fiscal second quarter of 2020 was $101.3 million, a 10.6% increase over the prior year period.
Higher revenue was driven by increased sales in both our industrial products on specialty chemicals segments, primarily due to 6.3% organic growth and acquisition related revenue.
By end market increased organic sales were driven by H.B.C.R. plumbing architecturally specified building products and to a lesser extent energy.
Which was partially offset by the general industrial end market softness as Joe mentioned.
In looking at our quarterly segment revenue.
Operating income and growth drivers, our industrial product segment posted revenue of $62.8 million, which was up 14.7% over the prior year period.
Organic revenue accounted for 7.5% of the increase in was driven by increased sales volume in H.B.C.R. plumbing and architecturally specified building products. Our GAAP segment operating income increased to $16.4 million, a 15.5% increase over the prior year.
There were no adjustments to GAAP results in the current for prior year period within this segment.
Moving to specialty chemicals segment revenue was $38.6 million afford a half percent increase over the prior year period, all of which was organic increase sales were primarily driven by increased volumes into the energy and ARX <unk> architecturally specified building products, partially offset by the general industrial.
End market.
Yep segment operating income was $7.1 million compared to the prior year period of $6.2 million adjusted to exclude nonrecurring items, including a gain on the sale of a facility in the current fiscal period segment operating income increased 3.4% to $6.4 million compared to $6.2 million in the.
Prior year period.
Moving to our consolidated results in the fiscal second quarter.
Consolidated gross profit increased 12.3% to $47.4 million compared to $42.2 million in the prior year period. The increase was primarily result of the impact of leverage from increased sales in a nonrecurring gain of approximately $800000 on the sale of a facility in the current year.
Period.
Gross margin as a percentage of sales improved 70 basis points to 46.8% compared to 46.1% in the prior year period.
Consolidated operating expenses in the current quarter were $27.3 million or 26.9% of sales and as a percentage of sales improved 40 basis points over the prior year level of 27.3% or $25 million.
This improvement was driven by sales leverage and was partially offset by increased personnel related expenses and costs associated with acquisitions.
Consolidated GAAP operating income for the second quarter was $20.1 million or 19.9% of sales compared to $17.2 million or 18.8% of sales from the prior year.
The increase in operating margin was driven by leverage on sales and benefits from prior years efficiency initiatives.
The effective tax rate on continuing operations for the second quarter ended September 31, 2019 was 29.2% in was higher than normal due to taxes on repatriation of some foreign cash we continue to expect our fiscal 2020 effective tax rate to be in the range of 23% 26%.
Reported net income from continuing operations decreased to $8.8 million or 58 cents per diluted share compared to $12.4 million or 79 cents per diluted share in the prior year period, primarily due to a onetime charge to terminate the companies use qualified pension plan of $7 million.
Rthirty five cents per diluted share after tax.
The $7 million pension plan charge virtually all of which was noncash with only half a million dollars being cash.
The termination of our US qualified pension plan was the natural next step as we froze the plan a couple of years ago and by terminating the plan, we've removed future expenses and risk associated with the plan based on market volatility along with along with interest rate volatility.
Adjusted to exclude onetime items and applying a normalized tax rate in both years adjusted net income from continuing operations in the fiscal second quarter of 2020 increased 12.9% to $14 million or 92 cents per diluted share compared to adjusted net income from continuing operations of 12.4 million.
Dollars or 79 cents per diluted share in the prior year period.
Moving to our cash generation and balance sheet, our operating cash flow from continuing operations increased 15.4% to $37.5 million in the second fiscal quarter of 2020 compared to 32 and a half million dollars in the prior year period, we ended the quarter in a net cash position of 12 and a half million dollars.
And we have the full $250 million of borrowing capacity remaining on our revolving credit facility, which provides us ample flexibility to fund our growth and capital allocation strategy, including acquisitions with that I will turn the call back over to Joe.
Thanks, Greg.
The solid foundation of our first half results position us well for the balance of fiscal 2020 and into 2020 watt.
We will continue to drive integration and efficiency initiatives to offer best in class products to serve our customers and help their business grow and to steward well the capital entrusted to us by our shareholders.
I want to take this opportunity. Thank all of my colleagues at CFW industrials for a great job this quarter and remind you that they collectively own over 5% of our company through our employee stock ownership plant.
We also want to thank all of our other shareholders for their continued interest in and support of our company.
With that operator, we're now ready to take questions.
Thank you at this time, we will be conducting a question and answer session. You would like to ask the question. Please press star one and your telephone keypad.
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Our first question comes from the line of John telling them and timing of CJS Securities. Please proceed with your question.
Good morning, gentlemen, a really nice quarter.
What are you.
Yep.
Can you remind me what percent of sales as a general industrial down and if you see that getting worse on a year over year decline basis in Q4.
Yes, let's start the big headline number is that industrial year to date is about 12% of revenues and so if you think about an order of magnitude HB AC plumbing and architecture, we spent specified building products together well over 70% of our revenue So theres limited exposure there.
The other thing I would say John as well when we put out our investor deck here in the next day air So you'll obviously see the pie charts year over year the percent decreased from the prior year year to date or a 14% down to 12 part of that decrease was going to naturally be due to the expansion of the larger pie.
Well as the acquisitions, coupled with the fact that was down slightly.
Okay, Great and how do you see that trying to get that into the December quarter.
You know, we don't have any better data than what this quarter gave us so we wouldn't anticipate any immediate turnaround but.
I think.
But we also don't hear anything in the marketplace that gives us a dramatic cause for for a dramatic action.
Okay Fair enough and the same question for energy and then given you know to declining rig counts what gives you confidence that your volume so it will be stable.
Yes, I mean, it's obviously a volatile but Rick had been down year over year for two or three quarters now and they seem to rig count seems to have stabilized and so we had pretty good quarter for energy and so again, we're just kind of we're seeing a.
Kind of a moderation there not a dramatic decline.
Okay, Great and then did you break out how much backlog you have an architectural business at this point and kind of what was the increase sequentially or year over year.
John This is Greg we didnt break it out, but I will tell you that it has grown.
And our book to build over the last eight quarters continues to be positive.
And so it's up and it's continuing to trend in the right direction that being said I'll remind remind you of Joe's prepared comments.
Earlier, where delays can affect us coupled with as we head here into the winter months, we typically we'll see delays or kensie delays due to weather.
Obviously.
Labor shortages continues to be an issue. Despite the fact, we had a nice quarter.
Okay.
Are you seeing those labor issues now or is it just more of a risk than a something that's actually going on.
You know, we get scatter reports I mean, it delays are sometimes it's hard to get to the bottom of why a delay is occurring but that has been something that has been repeated throughout the last few quarters that we hear from.
But that's just one that.
Those.
Those tend to be lumpy and that that part of its outside our control and so we're always very concerned about that cautious.
Okay got it.
Joe just to clarify you mentioned the 7% growth rate was that for the second half for the full year that you're seeing are you expecting to see second half, okay, so 7% year over year to age.
Total growth yeah got it okay.
And then a great one for you just the impact of the pension termination what was there a ongoing PML cost or cash flow.
<unk>.
Yes, it was more a more PNM was just the expenses of having it and then the volatility of up the market. So while about a year ago. We had started to move out of equities into more of a fixed income and so that better positioned us, but you know.
As interest rates change in particularly given the fact that we have seen to ticks down with the fed.
Our timing at it being somewhat fortuitous because the cost goes goes up as interest rate decrease.
And so it's simply gets us out of the volatility.
In noise. It was an overfunded plan, which is why it only cost us half a million dollars for for cash.
To to terminate it and so.
The PNM will hit part of that was due to.
The asset that was on our balance sheet and other assets coupled with the unamortized cost that was sitting in other comprehensive income.
Okay got as they're going to be a an ongoing impact or benefit going forward from this.
No because we we did part of people took lump sums and then the other part went into a new employees with a.
Qualified insurance provider and so all of that risk has moved out I will say that we completed the right at the very end of the fiscal quarter and so there maybe a little bit of of things that that could sprinkled through as we get the final.
Pension plan information from.
From our actuarial provider, but we don't expect that to be anything meaningful by any means.
Okay, great and.
And then Joe just any update on the use of cash and specifically the M&A pipeline, what you're seeing out there at this point.
Yes, we're pleased with the with the pipeline, we're having good meetings I'm personally involved in a number of those so a very pleased with the with the pipeline valuations continue to be.
A challenge we're going to continue to be disciplined, but we're seeing lots of opportunities and so I'm very pleased with that and both on the.
The kind of product line extension and then some other acquisitions that would be a little more moderate in size and so.
Again, very pleased with the robust pipeline just the.
Looking for that right opportunity, where the valuation makes sense for us.
Okay, Great Joe you mentioned.
Earlier. This year, you took up your capital expenditures to lots of new products at this at the market yet.
You know.
The primary piece of that have not will really be.
In the build up for next summer.
That either in Q4 Q1 of next year, but that the specific project that that was intended to.
We invested in there that has not come to market yet okay. Great. Thanks, guys.
Thank you just out.
Our next question comes from the line of Brian Lau from Sidoti. Please proceed with your question.
Hey, good morning, everybody, Brian on for Joe Mondillo. This morning, congrats on a quarter.
Thanks, Brian .
Hey, just real quick forgive me if I missed this in the beginning in the prepared remarks, but just on the specialty chemicals segment.
Like X that facility sale the margin was down about 20 basis linking can you can just walk me through the reasoning behind that and how you kind of see that playing out.
The rest of the year.
Yes, Brian This is Greg. So there was primarily mix you're right. It was down 20 basis points when you pull it out.
But it just it was simply the mix of products work continued to be pleased with the mid teens that we had had indicated a number of quarters ago was was our expectation.
And so I think the only thing to be cautious of relative to just spec chem as well as industrial products that I'll remind you and ultimately Joe.
About is our back half of the year Q3 in particular tends to be our weakest quarter, and so margins come down due to the the seasonality there.
But the key key for US is growing top line sales as we move forward, which will give us leverage to drive those margins up even higher.
Okay, and then just is as far as the mix is that.
Product specific or is it can I think a market as a whole with the industrial being down and the energy kind of being a little stronger.
Is it kind of end market specific or how can I kind of thing about that mix.
Yeah. It was all over the board when you're dealing with 20 basis points, it's hard to.
Endpoint it exactly.
And say it was due to this end market or this given product if you will.
And then just on the industrial products it looks like organic growth might be slowing a little bit sequentially granted it's coming off a pretty strong quarter last quarter and how do you kind of look at that.
Going forward.
Yes, it affect your victim of drought success summit, our past growth rate make it just harder to two.
To not have that mathematically, but that business is very robust. We're very pleased with the prospects very pleased with our execution and don't don't have any concern at all that's how the business. Yes. The other thing I'll add on that Brian . This is great again is that if you go back and look a year ago, our fiscal Q1 comp left a year ago.
So was pretty low which resulted in a really nice us posting a really nice growth number in fiscal Q1 of this year and then fiscal Q2 last year in Q3 were high and that was because of an order issue that we had with with one of our major customers going back all the way to the two of fiscal year. So.
Eight eight digging.
And so it just kind of made our our first half in into Q3 somewhat choppy, creating weird comps for us year over year. So.
While while you naturally would see some some lower typically some lower growth in Q2 'cause sequentially Q1 is always our strong strongest quarter than Q2, then Q4 than Q3.
I know that's helpful. And then they send the sort of sense just need less last leaving you guys kind of touched on a little bit just maybe the pace of bookings.
In the architectural Lee specified building products I'm, just kind of going into this quarter I'm still still strong are.
A stronger yelling at all.
Yes, I know the pace of bookings is still really strong we are book to build in the quarter.
Continue to be positive for the last eight quarters in a row as I mentioned earlier, our book to build exceed exceeds 100%.
And so we're very pleased with.
That business and where it sits given its more of a backlog based business. So.
We think we're in good shape.
What's the general kind of timing looked like for that backlog.
So backlog there can last anywhere you get can be a short term project that you can.
You can book revenue on in three months, all the way up to an 18 to 24 months, depending on the timing of the project.
And is it leaning one way or another right now or its again 10, all over the place it fits all over it's pretty consistent with what we've seen which is good because.
It's it is consistent and as soon as backlog builds.
That that sets us up pretty well to finish this year and go into next year.
Again.
Reiterate our cautionary comments that Joe had and I had earlier.
The seasonality that we see with weather and manpower shortages. So it can be lumpy, but we're we're feeling very good about the that group of businesses and and the strength of the backlog those projects rarely get moved up they built bill slip in time, but they rarely ever get moved up so it's a that that's why we we caution on that.
Okay, No <unk> that does it for me appreciate it.
Thank you Brent Thanks, Brian .
We have reached the end of the question answer session I will now turn the call back over to CEO , Joe arms for any closing remarks.
Great. Thank you once again for participating at our quarterly conference call. We appreciate your interest in our company and look forward to speaking to you again next quarter. Thank you.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.
Yeah.