Q3 2020 Earnings Call
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It is now my pleasure to introduce your host Adrian Griffin Vice President of Investor Relations. Thank you you may begin.
Thank you Christine good morning, everyone and welcome to C. S. W. Industrial fiscal third quarter 2020 earnings call.
Joining me today or just.
Chairman, Chief Executive Officer, and President C. S W Industrial and Gregg Branning, Executive Vice President and Chief Financial Officer.
If you have not restates the earnings release it is available on our website at Www Dot CFW industrial Dot com.
This call is being recorded.
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 the factors discussed in todays earnings release.
And the comments made during this call and then the risk factor section of our annual report on form 10-K, and other 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 not in college 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 more complete discussion of adjusted operating income net income and earnings per share see our earnings release.
We'll now turn the call over to Joe our.
Thank you Andrew good morning.
Thank you for joining our fiscal third quarter conference call.
As we prepare to discuss our strong quarter and year to date result, I was reminded that we're now in your five of our effort to build a diversified industrial growth company.
Approximately four to half years ago, we recognize the potential value that can be created by combining the companies that form CFW why at our initial efforts to consolidate these companies under a single operating structure to share resources and best practices and to optimize our manufacturing footprint have definitively.
Enhanced profitability.
The last year, we were actually completed this first phase of this transformation. We're now in a strong position as we look to the future.
As we continue along our path of maturation, we remain committed to investing in people processes and systems necessary to drive long term profitable growth guided by our compelling investment thesis.
Through ongoing product introductions deploying technology innovation and pursuing M&A, we're confident in our ability to provide growth in excess or in the end markets, we serve today and to deliver attractive risk adjusted returns to our shareholders.
Before I begin a discussion of our resulting in markets I would like to acknowledge perspective concerns in these early days of understanding the potential global impact of the Corona virus at this point, we do not expect any material impact on our financial position our results of operations.
We would like to express or concern for those who have fallen ill at our appreciation to those who are vigorously responding to the people impacted by this virus.
Like others with supply chain relationships that include companies located in China, We're closely monitoring the possible economic impacted this virus.
We sourced several products from Asia.
Specifically from areas of China outside of work on and at this stage, we have determined that our inventory position with these products. It sounds that's mitigating near term conceivable impacts.
We would remind everyone that our international sales are less than 20% worldwide and approximately 1% of that sold in China. So at the present time any impact related to sales into China would be and material.
Now I will provide a brief recap of our results for the quarter and year to date, followed by segment highlights and review of our end markets, then I'll hand, the call off to Greg for a closer look at the numbers.
I'm pleased to report our results for this quarter, but getting with consolidated revenue of $83.7 million, representing 8% total growth of which 3.4% was organic growth compared to the prior year period.
I'll remind our audience that fiscal third quarter of last year was exceptionally strong emphasizing this quarter's solid growth.
Comparing our organic growth rate to the recently reported 2.1% fourth quarter 2019, GDP growth rate further emphasizes our outperformance.
Consolidated quarterly operating income increased over 11% to $10.5 million.
There were no adjustments to operating income in the quarter in either year.
Given that we're nine months into the fiscal year I would also like to highlight that our team has delivered excellent performance of 11.1% of total revenue growth compiler compared to the prior year period with our two recent acquisitions contributing 4.5% or 450 basis points of this growth year to date so.
6.6% year to date organic revenue growth resulted from our team's focus on new product introductions that are driving market share gains customer specific programs targeting share of wallet growth and investments in our sales and marketing organization, including personnel product training number.
Formats based compensation.
We have robust growth in both our industrial products and specialty chemicals segments.
Each year to date have delivered healthy sales growth across the H.B.A.C.R. plumbing rail energy mining and architecturally specified building products in markets with flattish results in the general industrial end market.
We're particularly pleased with strong with such strong organic growth well above the end markets, we serve and nearly three times 2019, GDP further demonstrating our teams outstanding performance.
Third quarter adjusted earnings were 48 cents per diluted share compared to 46 cents in the prior year period.
Year to date, we have delivered $2.35 of adjusted earnings per diluted share an impressive 16.3% increase over the prior year period.
This continued growth in earnings per share is the result of leverage from increased sales ongoing benefits from commercial team initiatives and the outstanding performance of our recent acquisitions.
Our capital allocation strategy continues to guide our investing decisions with a priority to direct capital to the highest risk adjusted return opportunities within the categories of organic growth strategic bolt on M&A and return of cash to shareholders through our share repurchase and dividend programs.
We have remain true to this capital allocation strategy.
With our 6.6% fiscal year to date organic revenue growth.
An incremental 4.5% fiscal year to date revenue growth from recent acquisitions.
Additionally, through the repurchase up to 12000 shares of our stock in the quarter and the $6.1 million in dividend payments to shareholders. The first three quarters of the year. We've returned approximately 15% over operating cash to our shareholders year to date.
Looking forward, we remain very pleased with our robust M&A pipeline, which we developed through in house relationships market knowledge and foster through intermediaries.
Our M&A pipeline grew throughout calendar 2019, and today includes opportunities such as product line extensions and bolt on acquisitions that could expand our size and scale diversified product offerings or increase geographic footprint was at the end markets that we currently serve.
We remain committed to our disciplined acquisition process and while we are not an apart in a position to make an announcement, we persistent our focus on compelling value accretive opportunities.
As part of our commitment to return cash to shareholders in January we announced our fourth quarterly dividend that is payable on February 14th to shareholders of record on January 30, Onest at an annualized rate equaling 54 cents per share with the inaugural four quarters of our dividend program announced we believe the first quarter fiscal two.
2021 at the proper time to discuss with our board the appropriate size of any increase in our dividend as well as the trajectory of future dividend growth.
We expect to provide an update on this honor before our next earnings call.
Moving to our quarterly segment performance, beginning with industrial products sales grew by 11.5%, which is 3.3% was organic compared to the same prior year quarter.
Organic sales growth was predominantly associated with volume growth in the HDFC, our and plumbing end markets.
During the quarter, we saw softening in the organic growth of our architecturally specified building products end market due primarily to customer driven project delays in common with commercial construction projects compounded by the ongoing tightness in the labor markets.
We remain confident in the quality of our backlog and further our bookings continue to outpace revenue driving an increased backlog, which provides us with good visibility through the end of this fiscal year and into the next.
In order to augment our expertise in this end market during the quarter, we made a strategic higher for the leadership team within our industrial products segment I'm pleased to welcome Scott strategy, Vice President see Us W.
In general manager of building safety solutions, which is a newly created roll.
Scott joins us most recently from Theorising corrupt elevator and bring deep commercial and operational experience in the architecturally specified building products end market.
We look forward to seeing impact at this focus on driving continued organic growth and enhanced margins.
The industrial product segment delivered 7.2% increase in quarterly operating income to 8.6 million.
Compared to the prior year quarter, we realized a 70 basis point decline and segment operating income margin as we experienced negative mix and execution challenges architecturally specified building products business.
Coupled with lapping a strong comp.
The issues, we experienced in fiscal Q3 are likely to continue into Q into fiscal Q4, but we anticipate improved but as we exit this fiscal year.
During the fiscal third quarter, our specialty chemicals segment reported operating income of 5.4 million were 15.4% of sales.
This reflects a 3.6% increase in sales over the prior year period, all of which was organic as well as realizing a 190 basis point improvement in operating income margin due to sales leverage and positive sales mix.
Increased sales were primarily driven by the rail plumbing and mining end markets, partially offset by softening in the energy end market as rig count was 20% lower than the prior year period.
As we have entered our fourth fiscal quarter I'd like to provide a brief overview of the outlook in each of our major end markets.
We have continued to see strong demand across the largest end markets that we serve including Hvdc, our plumbing and architecturally specified building products, which collectively contribute approximately 70% of consolidated sales.
And rail energy mining and general industrial we continue to deliver long term end market outperformance.
And Hvdc are in plumbing outlook for demand remains strong.
We expect to continue to drive growth rates well in excess of these end markets anecdotally over the last over the year, our industrial products team invested approximately 1 million of capital on additional production capacity to support demand for our products in the ductless many split market.
Ductless, many split accessories have been a fast growing product category for us we're pleased with our teams innovation in this emerging sector of the Hvdc our market.
Building upon this momentum our team is continuing to innovate and develop additional products rates, we see our maintenance and repair adding to our suite of best of class products that approve and user productivity and help.
The tradesmen.
Grow their business.
We have achieved over 15% growth in the architecturally specified building products end market year to date, driven primarily by recent acquisition and organic sales growth of our fire and smoke related products.
We're confident that the combined strength of our growing backlog and additional leadership focus on the architecturally specified building products end market will result in a return to improve profitability and stronger organic growth.
In summary, our team has delivered double digit revenue and adjusted operating income growth year to date, driven by organic initiatives and successful acquisitions. We continue to have confidence in the 7% total revenue growth rate for the second half of the year that we mentioned in our last earnings call.
This continued growth profitability and strong cash flow generation or funding investments in our business and returning cash directly to shareholders with that I'll turn the call over to Greg for a closer look at the numbers.
Thank you Joe and good morning, everyone as Joe mentioned earlier, our consolidated revenue during the fiscal third quarter of 2020 was $83.7 million and 8% increase over the prior year period.
Higher revenue was driven by increased sales in both our industrial products and specialty chemicals segments, primarily due to the 3.4% organic growth and acquisition related revenue.
Increased organic sales were driven by the H.B.C.R.R. plumbing and general industrial end markets, partially offset by the architecturally specified building products and energy end markets in looking at our quarterly segment level revenue.
Operating income and growth drivers, our industrial product segment posted revenue of $48.7 million, which grew 11.5% over the prior year period.
Organic revenue accounted for 3.3% of the growth and was driven by increased sales volume in HB HCR and plumbing end markets, partially offset by declines in architecturally specified building products end market.
Our GAAP segment operating income increased 7.2% to $8.6 million and there were no adjustments to GAAP results in the current for prior year within this segment.
As we indicated our last earnings call operating income margins typically decrease in the third quarter as we experienced a 70 basis point decline over the same period last year due primarily to negative mix in our architecturally specified building products on market.
With respect to the negative margins as we've stated in prior quarters, we would expect our operating income fall through on incremental sales in industrial products to be in the 25% to 30%, 35% range assuming normal mix. So if you take that range of fall through and multiply it by our organic revenue growth you could approximate the.
Packed on the negative mix.
As we do not want to give a specific number on this due to competitive reasons.
As I mentioned last quarter, our trailing eight quarter book to Bill ratio is greater than one and the architectural architecturally specified building product backlog currently contains a portfolio of projects.
That are.
That are in our wheelhouse and we have seen a slight uptick and our book to bill ratio as we exited the quarter.
Given this backlog confidence we intentionally did not reduced labor as we made a longer term decision based on the projects in our backlog and the need for the skilled labor to meet future delivery requirements.
Moving to specialty chemicals, our segment revenue was $35 million, a 3.6% increase over the prior year period.
All of which was organic.
Sales growth was primarily driven by increased volumes in rail plumbing and mining end markets, partially offset by a decline in the energy end market sales leverage and positive mix has resulted in mid teens operating income margins a level. We continued to be pleased with and that matches expectations. We indicated a number of quarters ago.
Moving onto our consolidated results for the fiscal third quarter consolidated gross profit increased 10.1% to $37.7 million driven primarily by leverage from increased sales and recent acquisitions.
Our gross margin as a percentage of sales improved 80 basis points to 45% as compared to the prior year period, primarily as a result of the positive impact on recent acquisitions and leverage from increased sales, partially offset by negative mix and execution challenges in architecturally specified building products.
We expect the negative mix from architecturally specified building products to continue in the fourth quarter as Joe mentioned earlier in his comments.
Our consolidated operating expenses in the current quarter of $27.2 million were consistent with the prior quarters run rate.
And as a percentage of sales operating expenses was 32.5% a 50 basis point increase over the prior year period, driven primarily by increased personnel related expenses and costs associated with acquisitions.
Our consolidated GAAP operating income for the fiscal third quarter was $10.5 billion and 11.3% increase over the prior year period.
There were no adjustments to operating income in the third quarter of 2020 or the prior year period.
The key for US is that is ongoing growth in topline sales, which will give us sales leverage to continue to drive improved margins.
The effective tax rate on continuing operations for the quarter ended December 31, 2019 was just over 22% year.
Year to date, our effective tax rate is approximately 25% and is inline with expectations for our fiscal 2020 effective tax rate three in the range of 24% to 26%.
GAAP net income from continuing operations increased to $7.3 million were 48 cents per diluted share compared to $6 million were 39 cents per diluted share in the prior year.
Adjusted to exclude onetime items and applying a normalized tax rate in both years adjusted net income from continuing operations in the fiscal third quarter of 2020 increased 5.2% to $7.4 million or 48 cents per diluted share compared to adjusted net income from continuing operations of $7 million.
Or 46 cents per diluted share in the prior year period.
For the first nine months of the fiscal year GAAP net income from continuing operations was $31.4 million or $2.07 per diluted share compared to $32.4 million or $2.07 per diluted share the prior year period.
After adjusting the current year period to date.
Excuse me after adjusting the current year to date period to normal it to a normalized tax rate into exclude onetime items. The most significant being the 35 cent per diluted share charge in the fiscal second quarter to terminate our US qualified pension plan adjusted net income from continuing operations improved to 35.
Point $8 million or $2.35 per diluted share in the prior year period, adjusted net income from continuing operations, which was adjusted to exclude onetime items and applying a normalized tax rate was $31.5 million or $2.02 per diluted share, resulting in an increase of 16.3% on adjusted earnings per share.
There.
Moving to our cash generation and balance sheet, our operating cash flow from continuing operations increased to $60.4 million year to date in fiscal 2020 compared to $58.3 million in the period prior year period, I'll remind everyone that in the prior year, our operating cash flow reflected a 10.4.
Million dollar deferred tax benefit related to the disposition of our coatings business that did not repeat this year.
Excluding that onetime benefit our operating cash flow was up 26% due to our continued strong operations performance.
We ended the quarter with cash on hand of approximately $40 million and had the full $250 million a borrowing capacity available on our revolving credit facility, which provides us ample flexibility to fund our growth and capital allocation strategy, including acquisitions and with that I will turn the call back to Joe.
Thanks, Greg.
Solid foundation of year to date results positions us well for the balance of fiscal 2020 and into 2021.
We will continue to drive integration and efficiency initiative and the offer best in class products to serve our customers and to help their businesses grow and also to steward well the capital and trust to us by our shareholders.
Let me take this opportunity. Thank all my colleagues at CFW, industrials, who collectively own over 5% of our company through our employee stock ownership plan.
And also thank all of our other shareholders for their continued interest in in support of our company.
With that operator, we're now ready to take questions.
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Yes.
Yes.
Thank you. Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Good morning. This is Brendan on for John So when the first go to the architectural and the mix issue that you called out.
You talked about the the delayed construction delays, especially with the labor shortages right. Now has an issue was that part of the mix issue as well and is this something that was known in the backlog was something external and then.
Looking out to Q4 and beyond.
How do a margins and scheduling look.
I'll start with that this is Joe now, let Greg follow up.
The issues of up kind of customer driven.
Delays was certainly a factor here as they have been over the past few quarters. We're just seeing a number of delays in projects moving to the right. Some of those are related to labor shortages and again customer driven completely out of our control.
Secondly, there had been.
Some execution issues, there with respect to some reworked needed to be re done on some.
On some up.
Materials that came out of the facility and cements installation issues.
That have impacted our profitability there and then thirdly would be I would say with respect to those it's important to note. There. They are limited in scope to really to primarily to one project and limited duration and so again, we suspect that those will continue throughout the.
The final fiscal quarter for our for our fiscal year, but not beyond that and so again limited in scope limited in duration and then thirdly because of the health of our backlog and.
Confidence in our backlog, we made a management decision during this quarter not to reduce.
Labour within our facilities.
And.
Notwithstanding the the slide to the write off of these projects and some of the delays and that is because we have a very strong backlog going into 2021, we need to be able to serve our customers. We don't want to lose any any customers are or damage our reputation for on time delivery and so we made a management decision.
There to kind of bite the bullet during this quarter and the next.
In the long term health of our business at really as an investment in our business going forward because of our our confidence.
In the backlog and our future prospects for that business.
Yes. This is this is Greg I'll I'll add to Joe's comment.
From the delays the delays were not due to us they were due to our customers and scheduling and our ability to get on site.
And the.
From from the decision to not reduce our labor that's skilled labor both inside the plant and with our installers.
And so when you look at our backlog as I mentioned in my prepared remarks, and Joe mentioned, a second ago. We we have our book to Bill ratio has actually gone up over the last eight quarters from what it was a quarter ago. So the quality of our backlog and the strength that's out there.
As vital for us to keep the skilled labor force in place.
So we wanted to make sure. We we helped everybody understand the impact of the slower sales in the quarter and the negative mix in the quarter and that that negative mix will also continue into.
Fiscal Q4, but as Joe mentioned, we do not expected to continue pass them.
Okay, great. Thanks for the clarity and then.
Moving onto the energy so he has called a rig counts 20% lower.
What are your thoughts on on the oil fields and energy for 2020, whether you're seeing where you think it can go.
Yes.
This is Joe I think that the weakness is likely to continue obviously oil prices have come down a little bit more.
[music].
We don't.
It's been a lot of time trying to predict commodity prices around here, we can just react to the market, but I would say that.
Energy's a small part of our business. These days the other thing I would say is that we do by base oils and so there is some natural hedge there I don't think it's anywhere close to one to one but there are some benefits to lower.
Commodity prices.
That we can take advantage of so again energy is a small part of our business and so we.
We keep in perspective, but we would not expect that immediate rebound in that business and this is Greg to emphasize of small part of our business. When you look at architecturally specified building products, our plumbing and our H.B.A.C.R. that makes up over 70% of our total revenue. So then when you when you're left with that other third.
80%, it's much smaller slices.
And so while rig count is important to us and we do pay attention to it. It just is not a huge driver to us.
Yes, Okay makes sense and then on the M&A front are you seeing.
More or less opportunities evaluations come into though still still tough to find good good deals out there.
We have not seen any material change in valuations, but we have seen an uptick in our pipeline and so we feel very very good about.
The robust pipeline that we see I think it's as strong as.
Ben here and so we're very pleased with the opportunities that we're seeing and.
Yeah again, some of those are intermediated, some or not and.
We're very pleased with what we're seeing and confident that we're we're doing everything we can too.
Bringing the opportunities to evaluate those according to our disciplined acquisition process, and we're ready willing and able to.
Transact when the right opportunities present themselves and I mean, the good news is that I mean small acquisitions can make a major difference as you see through the MSD acquisition and Peterson.
That is still considered acquisition or inorganic.
Revenue growth for us that is meaningful to us and I would just remind everyone and every one that we spent $20 million and capital and those two small acquisitions and they are meaningfully impacting our topline growth and our profitability. So.
It doesn't take a lot given the size of our enterprise and so.
We're very pleased with what we're seeing and we're optimistic that we're going to continue.
To augment our organic growth with these acquisition opportunities and this is Greg and I will also add as we've talked in many calls in prior quarters Cross selling is important the Peterson acquisition was a critical acquisition has an open geographic and other markets for us as well as we provide markets that it did.
The prior ownership Didnt have and so we are cross selling there.
As part of the reason that our backlog as has improved and why we've seen the up to Tikkun book to Bill.
And we'll see the benefits of that in future fiscal years.
Great that's good to hear and then.
Last thing.
Looking looking in 2020, I guess, what worries you the most or excites you. The most at this point has anything changed.
Since you last last time, you reported any opportunities or headwinds have come up.
Well I mean, obviously the macro I think is.
Theres a lot of uncertainty with respect to the macro and it's completely out of our control and so.
I think that's that's what keeps me up at night, the most I'm confident in our business and confident in our ability to navigate.
Navigate through whatever.
Comes our way, but we're not completely immune to it to the macro.
Uncertainty or any headwinds so I think thats the thing that bothers me the most and most excited about I'd go back I think our acquisition pipeline is is pretty compelling at this point and.
Very very pleased with that and optimistic that that we'll see some movement on that front.
Great. Thank you.
Our next question comes from the line of Joe Mondillo with Sidoti. Please proceed with your question.
Hey, Good morning, everybody is Brian on for Joe. Thanks for taking my questions just maybe.
Talk a little bit more about some of those execution issues could you just talk about.
How do you implemented any process is there anything like that kind of just make sure something like that doesn't happen again or is that something that maybe that new hire you guys address is going to be focusing on or just any more color on that would be helpful.
Yes, I mean, it's really both obviously you going you do a root cause analysis and figure out what's going on and make sure that those those things get fixed early on and we've done that Scott does bring a world of expertise and experience.
Through his background with rates increase and literally having.
Elevator mechanics out in the field that worked directly for him and so he's a hands on kind of manager and so the.
Hey, Dove into this very very quickly in addition to kind of reviewing the quality of the backlog to make sure that we can be confident in that so our confidence today is based in large part upon that review and so yes, I think we've got our arms around it. It's just a single project that will.
We got to get get the project finished.
But yes, we've addressed those issues feel like the business is fundamentally very very healthy backlog is strong.
No reason the world to think this is going to recur.
Great appreciate that and then maybe just on specialty can.
Pretty strong margin performance obviously.
Kind of where do you see that long term sustainable margin.
Tracking and then also it looks like you guys are coming up against a tough comp based on last year's fourth quarters, or how do you going to see that year.
Yes. This is Greg you know, we're obviously pleased with the strong margins, we posted in the quarter, but part of that was positive mix.
Those margins are in line with what we've stated our long term objectives are and will continue to be the case and so the key there as we've said in prior quarters.
Is that we would expect on a normal mix to see fall through between 20 and 30% on organic sales.
And clearly we had very strong fall through in the quarter.
Part of that that's strong fall through was driven by the fact that we.
We had.
In an inordinate amount of strength and consumables those consumables in the end markets that we spoke of.
Have much better margins and it's something that we always concentrating on we we it's it's what our core strategy is to provide more and more consumables be hit us because it extends the reliability in the life of the assets that our customers are using force so.
We will you're absolutely right, we're coming up on some tough comps just as we did here.
This year in this quarter and last quarter for that matter.
But we remain committed to our execution and performing in each of our businesses.
Okay, and then real quick you just mentioned that the 20% to 30% flow through so it's basically the 20 to 30 for specialty can and then I think earlier you mentioned 25 to 35 on industrial products is that we'll have that right just to collect that is correct and again, that's that's assuming normal mix. If you do them normally if you do the math you see that inspect.
In the quarter, we had 70% fall through so hence our comment about normal mix and then in industrial products. We have had just under 12%. So we had the negative mix. There. So all things being equal yes. Those are good good benchmarks to or rails to work off of.
Great. Thanks for taking my questions.
Thank you.
Thank you we have reached the end of the question and answer session I would now like to turn the floor back over to management for closing comments.
Great I just want to say, thank you to everyone for participating in the call today I'll look forward speaking to you again at the end of our fiscal year and.
Again, thank you for your interest in our company and your support of US as we as we continue and our journey. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines. This time. Thank you for your participation and have a wonderful day.