Q2 2021 CSW Industrials Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the sea establish Industrial's second quarter Twentytwenty, One earnings conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
To join the question queue you May Press Star then one on your telephone keypad.
She didn't need assistance during the conference call you May see garden, operator by pressing star and seal.
I would now like to turn the conference over to Adrian Griffin, Vice President Investor Relations and Treasury. Please go ahead.
Thank you Claudia good morning, everyone and welcome to CFW Industrials' fiscal second quarter 2021 earnings call.
Joining me today are Joseph our Chairman, Chief Executive Officer, and President CFW, Industrial and James Perry Executive Vice President and Chief Financial Officer, We issued our earnings release and presentation. Prior to the market's opening today and both are available on the investor portion of our website at Www dot.
Yes, W. industrial Dot com.
During this call we will reference specific slides in the presentation. This 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 in today's earnings release and the comments made during this call as well as 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 I will now turn the call over to Joe arm.
Thank you operator, and good morning, and thank you for joining our fiscal second quarter conference call.
First I want to congratulate each of our over 750 CFW I team members for their ongoing efforts, they're working together so effectively during times of uncertainty positioning us for future growth and remaining dedicated to delivering results for our shareholders.
I'll begin with a high level discussion of consolidated results and key end markets conclude with commentary on the second half of our fiscal year.
Through the cycles, we didn't see us Wi measure our success in many ways focusing this fiscal year on our four guiding objectives that we outlined in may the details of which are included on page six of the October 2020 investor presentation.
[laughter], notably this quarter as compared to the prior year period, we realized 30% total growth in sales into the H.B.A.C.R. and plumbing end market driver.
Driving top and bottom line organic growth.
In addition to solid growth in revenue and operating income we reported increased profitability with record quarterly operating income margin of 21.1%.
Further enhanced our financial position with nearly $300 million of liquidity, including 47 million of cash on hand, and our full unfunded result revolving credit facility at quarter end.
On slide eight of the presentation, we outlined the results for the quarter, culminating an earnings per share from continuing operations of $1.10 per.
Per share, which is approximately 20% higher than the prior year period.
Our strong fiscal second quarter results contributed to a 19.4% increase in operating cash flow from continuing operations in the first fiscal half of 2021 over the prior year period.
Earnings per diluted share from continuing operations of $1.91, an increase over $1.89 in the prior year period.
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I would also like to share a few metrics illustrating the strength of our financial position in the last 12 months over $42 million of cash was returned to shareholders in quarterly dividends and share repurchases and our net cash provided by operating activities of $78.7 million during the same.
Period represents a nearly 21% cash flow yield.
Earlier this month, we celebrated the fifth anniversary of our existence as a standalone public company.
Our first five years, our total shareholder return was in an excess of 150% it.
Today, we remain unceasingly committed to being good stewards of your capital.
In recent months, our pursuit of value accretive growth opportunities has persisted as our companies and brands demonstrate attractive through the cycle durability.
We remain active evaluating organic and inorganic growth opportunities, yes, disappointing, especially regarding valuation perspective synergies cultural fit and ease of integration.
Our ample liquidity at quarter end enduring access to capital markets that are experienced leader team leadership team facilitate our pursuit of accretive bolt on acquisitions within our existing end markets to broaden our portfolio brands and products.
During the fiscal second quarter, our largest end markets outperformed.
Hours and the street's expectations.
We achieved 33% growth and record sales into the H.B.A.C., our end market driven by warmer than average temperatures and work from home trends.
A similar trajectory held in our plumbing and market as distributors restocked their inventory and sales increased nearly 20% over the prior year period.
Turning to slide nine in the presentation sales into the H.V.C.R. in plumbing in markets accounted for 42% at 11% of total quarterly revenue respectively.
Looking to the fiscal second half of the year, we anticipate ongoing strength in these markets with modest growth compared to the same prior year period.
We anticipate capitalizing on the strength the new single family housing construction as well as the ever increasing installed base, which is most important for our repair and replacement products.
Longer term, we remain bullish on these end markets as our products are utilized a new and replacement installation maintenance and repair.
Sales into the architecturally specified building products in market remained at 28% of total revenue in the fiscal second quarter exceeding sales in the fiscal first quarter and were nearly flat with the same prior year period.
Projects originally scheduled for the fiscal second half of the year were accelerated by our customers into the fiscal second quarter positively impacting results.
As we've discussed on prior calls pandemic driven demand softness resulted in lower bookings earlier this calendar year.
During the fiscal second quarter, we experienced a positive inflection point as bookings exceeded those in the fiscal first quarter by approximately 38%, indicating potential early improvement.
As of the end of the fiscal second quarter, our book to Bill ratio for the trailing eight quarters was just barely below one.
Given project pull forward into the fiscal second quarter and a reduction in first quarter bookings, we do expect fiscal second half revenue into this end market to be moderately lower than the prior year period.
But the positive impact of the recent increases in bookings anticipated to be realized in our fiscal 2022, which begins in April of next year.
In our general industrial rail and mining end markets sales declined in the short term due to pandemic weaken demand, but there are signals of early stage recovery for the types of maintenance and capital investing decisions that drive demand for our products.
Quarterly sales into our general industrial end market comprised approximately 10% of total sales and 11.6% increase over the fiscal first quarter, providing early signs of recovery.
Macro indicators for the energy rail and mining end markets, which collectively account for 9% of our sales have also begun to stabilize.
With this backdrop, we expect sales into these end markets in the fiscal third and fourth quarters to perform much like the fiscal second quarter with potential for modest increase.
Regarding the second half of the fiscal year, we expect consolidated revenues to be mid to high single digits lower than the prior year period.
During the fiscal third quarter expected performance in H.B.C.R. and plumbing are anticipated to be more than offset by a decline in our architecturally specified building products due to lower bookings in the fiscal first quarter.
And a slow recovery in the general industrial rail and mining end markets.
Fiscal third quarter earnings will be impacted more meaningfully than revenues due to decremental margins and normal seasonality as we expect to return to normalcy in the fiscal fourth quarter.
We remain diligent in our pursuit of operational excellence and a competitive cost structure, we're flexible to initiate swift reaction to the realities of the markets.
During the fiscal second quarter strength in our served markets and our served end markets delivered organic revenue growth increased profitability and enhanced liquidity, resulting in an increase in our net cash position.
Our attractive business model and diversified end markets continue to provide financial strength stability and resiliency, while our team provides thoughtful direction as we execute on our capital allocation policy, ensuring that investments are directed to the highest risk adjusted return opportunities.
That will continue to deliver long term shareholder value.
With that I'll turn the call over to James for a closer look at the numbers.
Thank you Joe and good morning, everyone.
Before I begin my remarks about our financial performance I would like to announce that our board of directors authorized a new upsized share repurchase program.
Previous 75 million dollar program was set to expire in November Eightth 2020.
The cumulative investment under this program was $46 million and approximately 740000 shares.
Our new $100 million authorization replaces the old program.
Takes effect immediately and expires on December 30, Onest 2022.
We welcome the opportunity to continue to support our share price and execute on our capital allocation policy as described on slide 20, which includes share repurchases.
Our consolidated revenue during the fiscal second quarter of 2021 increased 3.6% to $104.9 million compared to $101.3 million in the prior year period, 100% of this growth was organic.
The higher revenue was driven by $9.7 million of increased sales in the industrial products segment.
Partially offset by a $6.1 million decrease in the specialty chemicals segment.
Our property profitability metrics remains strong it's going.
So I'll do the gross profit margin of 46.4% 40 basis points higher than the same period last year after removing a prior year gain on sale that did not recur.
Consolidated operating income margin was 21.1% or 130 basis point increase from fiscal second quarter 2020, due to the stronger than expected growth in sales and some end markets served combined with cost reduction measures to offset some of the impacts from declining sales and the remaining in markets.
We expect margins in the second half of the year to be lower than the prior year period.
Net income from continuing operations in the fiscal second quarter was $16.4 million or $1.10 per diluted share compared to $8.8 million or 92 cents per diluted share in the prior year period.
After adjusting for the one time charge of 35 cents per diluted share after tax to terminate the company's U.S. qualified pension plan.
Turning to slide 10 the.
Industrial products segment deliver fiscal second quarter revenue of $72.5 million, 15.5% higher than the prior year period.
Segment operating income of $19.7 million and operating income margin of 27.2% exceeded the prior year period of $16.4 million and 26.1% respectively. These.
These strong results were driven by sales into the H.B.A. RC sorry, HVAC are in plumbing in markets that Joe described previously.
Continuing to slide 11, the specialty chemicals segment realized fiscal second quarter revenue of $32.4 million compared to $38.6 million in the prior year period sales.
Segment operating income was $5.8 million compared to adjusted segment operating income of $6.4 million in the prior year period.
As cost reduction efforts offset a large portion of the decline in sales revenue.
The prior year period was adjusted to exclude an $800000 gain on sale that did not recur this year.
Operating income margin in the fiscal second quarter was 17.9%.
Well 140 basis point improvement from fiscal second quarter 2020 also due to the cost reduction initiatives deployed to offset the decline in sales.
Transitioning to the strength of our balance sheet cash.
Cash balance as of September 32020 was approximately $47 million approximately $28 million higher than at June Thirtyth 2020.
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.
I'll now cover our fiscal first half consolidated financial results as outlined beginning on slide 13.
The strength of our second quarter, nearly offset the weakness of the first quarter with fiscal first half revenue of $195.9 million only a 3.8% decrease as compared to the same period last year.
Increased sales since the HV AC are and plumbing end markets were more than offset by pandemic driven demand declines in other end markets served.
Gross profit margin was 46.7% or 20 basis points higher than last year's first half of the fiscal year as the decline in sales was more than offset by cost reduction efforts.
Operating income was $38.4 million, a 5% decline over the prior year period as the decrease in lower sales volumes was partially offset by a reduction in expenses.
Reported net income from continuing operations was $28.3 million or $1.91 cents per diluted share compared to $28.8 million or $1.89 cents per diluted share in the prior year period. After adjusting for the one time charge of 35 cents per diluted share after tax to terminate the compass.
He's U.S. qualified pension plans.
Turning to slide 14, industrial products segment delivered fiscal first half revenue of $133.7 million, 6% higher than the prior year period.
As demand driven sales and the HV HCR in plumbing end markets, partially offset by other end markets served.
Segment operating income of $36 million and operating income margin of 26.9% exceeded the prior year period results of $33.5 million and 26.5% respectively.
Continuing to slide 15.
The specialty chemicals segment realized fiscal first half revenue of $62.2 million compared to $77.5 million in the prior year period.
Segment operating income was $9.8 million and operating income margin of 15.7% compared to adjusted segment operating income of $13 million and operating income margin of 16.8% in the prior year period as the decline in sales in all end markets served more than offset.
Cost reduction efforts.
The effective tax rate on continuing operations for the fiscal second quarter was 23.8%. We continue to expect our full year tax rate within a range of 24% to 26% for fiscal 2021.
Moving to our cash generation and balance sheet.
Our operating cash flow from continuing operations was $44.8 million in the first fiscal half of 2021.
A 19.4% increase over the $37.5 million in the prior year period, due primarily to working capital from increased sales.
During the fiscal first half of the year, we returned $13.3 million to shareholders through share repurchases and dividend payments with that ill now turn the call back to Jeff.
Thank you James.
We think about evaluating the sustainability of our company, we are seeking to generate strong business results. Despite the challenges our markets face today and.
And we also want to attract and retain outstanding diverse talent to propel us into the future.
Certainly this quarter, we've continued to demonstrate see us Wi sustainability, delivering top and bottom line growth above the end markets served.
And increasing profitability that results and growing S.
Ample liquidity and a strong balance sheet, while maintaining a commitment to our guiding objectives that are consistent with and supportive of our core values.
I'm very proud and honored to announce during the quarter see as Debbie I was awarded the Cigna outstanding culture of well being award for 2020, which is further evidence of our commitment to support the health and well being of our team members.
Our dedicated employees have enabled our operations to continue without disruption.
Our employees are essential to our success and we are committed to providing a safe workplace and an inclusive and diverse environment supporting professional development through employee education and advancement opportunities. In addition to a compensation strategy were each member of the CS Wi team participates financially and the success of our company.
As always do I want to close by thanking all my colleagues here at CES, Wi who collectively own approximately 5% of CS Wi through our employee stock ownership plan.
As well as all of our shareholders for their continued interest in and support of the company.
With that operator, we're now ready to take questions.
Thank you Sir our first question is from Jonathan One thing with CJS Securities. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions and congrats on the record quarter.
To start I was wondering if you had.
I was wondering if you had any view of the channel inventory in.
An edge back in plumbing and if your customers still need to restock after a very nice quarter.
Yes, John that has not been a major topic of conversation with our teams I mean, I think that we saw the the destocking earlier in the year and then the restocking and I think the sell through has been.
Pretty strong since then and so that's not a driving a driving factor at this point.
Okay got it and then just in terms of the spiking covered cases around the country. What are you doing to prepare for that.
With regard to your own operations and how it could impact your demand or supply chain. It have you integrated that into your and your outlook for the second half.
John This is James Yeah, certainly we've looked at that a little I wouldn't say, we've necessarily try to predict what the financial impact of that would be one thing I would say that we've done and it's kind of the corollary to what you asked a minute ago is we've certainly talk to our businesses a lot about adding a little bit of inventory internally. So you may see working capital move up a little bit this quarter because.
We do want to be sure weather's cobot related supply chain related which may which may be covered related as well.
Yeah, Weve seen little issues here and there and nothing substantial certainly not.
Internal code.
Disruptions, but we have told our folks and we support with the balance sheet, we have which is a great reason that we're proud of the strength we have in the balance sheet to invest that an inventory to be sure when our customers do need to stock when our customers do need the product we can get it to him in a timely manner and not lose that sale.
And I would say John that we continue to have anecdotes.
Where we've been able to pick up business from competitors because of shorter lead times and our ability to deliver during these uncertain times net that's gaining market share for us.
Got it. Thank you and then just on the chemical business. The margins there were much stronger than I expected. I think you you mentioned that there was due to cost cutting.
I know that should come down seasonally in the next quarter, but should we think of this quarter's performance as a new base. So was there a one off or do you think some of those cost reductions get rolled back as you as you normalize demand there.
Yes, John This is James you know again as you pointed out you have some some seasonality with certain businesses and as we mentioned there are certainly a little bit of unpredictability, but the team has done a nice job across the board you know it was certainly a highlight the specialty chemicals segment, but the same is true in industrial products.
The teams have done a good job reducing cost I think some of this cost stay out of the system. As we see you know things start to pick back up some of that May come back clearly have continued to reduce travel.
You know, it's a it's an expense that in.
In the near term release, that's going to stay low you could see some of that creep back, but I think we've learned to adjust it some sort levels at the administrative level potentially in some other type cost that maybe you thought were discretionary but now they are somewhat permanent in the system. So I wouldn't necessarily want to say that were at a new margin level or that's our new base. So to speak I think it'll take a couple of quarters for.
Thats a rollout I think the team has gotten very comfortable with this new level of expenses I'll remind you when we talked about this on the last couple of calls we've committed to maintaining employment as a result of Cove. It says we've had attrition than we've been able to right size operations, but we've not made cobot related employment decisions. So some of your personnel expenses were up or down here.
And never overall there are costs that are out of the system that I think we can maintain long term.
Got it that's very helpful. And then just I think you mentioned that architectural some of the business pulled in from the second half can you quantify that and how much it impacted your quarter, both on the top and bottom line.
Yeah. This is James <unk>, we wouldn't quantify that I know that would help some certainly that helped the second quarter and it helped us as we pointed out almost make up for the first quarter, which obviously the first half of the first quarter was tough. So we almost caught all the way back up on a consolidated level and did so on an earnings level. So we had some pull forward we started seeing that.
A little lift into the first quarter certainly saw it in our fiscal second quarter. So that leads to this weakness a bit of an air pocket in the third quarter potentially for us.
And that's why we really want to point out that third quarter is kind of where we see the weakness on top of just seasonality. So we wouldn't quantify that but it was certainly an impact on on.
Beating our expectations so to speak on that second quarter, along with the H. back performance that was very strong.
Okay fair enough and obviously congrats on landing more orders in that business can you describe the customers at that place, so sorters and kind of where that came from those.
It was something that was delayed and then finally were released or is it just more.
More organic demand and kind of what you're expecting in the next couple of quarters there.
Yes, John This is Joe I think it's a combination of all the above I would say.
Yeah, the business that we bought down in Florida, a couple of years ago has been really strong and institutional.
Occasional type of a kind of end market.
If you will or categories, which has been stronger than.
Some other areas. So our diversification into that is paid off really really nicely and that's worked well, but it's been it's been a mix of residential it's been office and again. This is more institutional educational piece all all of the above and it's been spread geographically and so I think it's it's.
A really nice.
You know result to see the strength across the board there and our bookings growing I've been very pleased with that John at our team's performing well.
Got it.
So again, thank you very much.
Thanks, John.
This concludes the question and answer session and today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.
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