Q3 2021 CSW Industrials Inc Earnings Call
Greetings and welcome to the CSW Industrials, Inc. Fiscal third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation, if you'd like to ask a question. Please press star one.
On your telephone keypad.
If anyone connected via the phone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder of this conference is being recorded it is now my pleasure to introduce your host Ms. Adrianne Griffin, Vice President of Investor Relations and Treasurer. Thank you. Please go ahead.
Thank you Dana good morning, everyone and welcome to CSW Industrials fiscal third quarter 'twenty 'twenty one earnings call.
Joining me today are Joseph Armes, Chairman, Chief Executive Officer of President of CSW, Industrials, and James Perry, Our executive Vice President and Chief Financial Officer.
We issued our earnings release presentation and form 10-Q prior to the market's opening today and all are available on the investor portion of our CSW I website at CSW Industrials Dot com. During this call we will reference specific.
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, which 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 Adrian.
Good morning, and thank you for joining our fiscal third quarter conference call.
First I would like to express my gratitude to the entire CSW I, an organization, which has thrived in 2020 in spite of Mac macroeconomic uncertainty.
We embrace changes to enhance our safe working practices and we continue to deliver on our capital allocation strategy to drive long term shareholder value.
Beginning on slide four you will see the CSW has now invested $465 million through six acquisitions since our spin off in 2015.
Pro forma for the true Air acquisition, CSW always trailing 12 months revenue grows to approximately $490 million with over 45% of those sales into the H B, a C or end market.
Including our quarterly dividend payment. This month, we will have returned nearly $100 million to shareholders in the form of dividends and share repurchases.
Since October 2015 of our total shareholder return is approximately 300%.
So rest assured our commitment to being good stewards of your capital will continue unabated.
Slide five of the presentation exhibits the consistent strength in our consolidated results with.
With total quarterly revenue growth of seven 4% as compared to the prior year period of which 2.1% was organic with the remainder of contributed by the true Air acquisition, which closed on December 15 2020.
The team delivered leverage on the sales growth with a 15% increase in adjusted operating income.
Equating to an adjusted operating income margin.
Of 13, 4%.
As compared to 12, 5% in the prior year period.
On an adjusted basis earnings per share in the quarter were 59 cents.
Or 23% higher than the same prior year period.
In summary, our third fiscal quarter resulted in improved revenue and profitability over the prior year period.
The continued balance sheet strength.
The ample cash flow generation, while closing the acquisition and beginning the integration of true error.
I would like to provide an update on our fiscal 2021 guiding objectives included on slide on slide six.
The commentary on this slide reflect some of the proactive qualitative measures that have enabled and will continue to enable CSW eye to thrive through cycles.
CSW is now comprised of approximately 2300 employees around the globe.
Most of which are located in North America and Vietnam.
Our employee centric culture is reflected of the daily decisions of each of the business unit management team as well as the strategic decisions of the executive team and board of directors.
In addition to our historic focus on providing employees with a comprehensive suite of benefits, including our employee stock ownership plan.
We have thoroughly enhanced our approach to employee health and safety.
We conducted a corporate wide safety awareness month in January of this year.
Leaders from across our organization promoted disciplined adherence safe work practices supplementing the existing health and safety programs at each operating site.
And intending to reflect the importance of and our commitment to safety and our corporate culture.
Our second guiding objective is to serve our customers well, which we know drives long term relationships and organic growth.
This quarter, we highlighted the selection of initiatives across the organization.
Retro sale recently expanded its mobile responsive E commerce platform that allows manufacturers representatives distributors.
And users and retro <unk> sales staff access to the company's complete product portfolio of 24, 7%.
This expansion provides options to research specific products.
<unk> product training.
Order products and review invoices and it demonstrates the natural evolution of the tools and technology to support our objective of providing the best possible customer experience.
We expect to enhance true <unk> operations, with our tools and technology, including our common ERP and the E Commerce platform <unk>.
Representing future opportunity for working on it growth.
Each quarter, we affirm our commitment to our disciplined investment process.
Especially regarding returns.
Prospect of synergies.
True fit and ease of integration.
All of which are critical components driving long term shareholder value.
In November we announced the largest acquisition in CSW I's history as presented on slide seven true here in the organization focused on manufacturing and selling a broad suite of high quality grills registers, and diffusers and of the heating ventilation air conditioning, and refrigeration or HVA see our end market.
We welcome all of our new CSW My colleagues and we look forward to demonstrating to them, how we live out our company's mission culture and values.
Through this transaction, we acquired of wholly owned manufacturing facility in Vietnam in five U S distribution centers that expand our manufacturing and logistics footprint.
This acquisition was the result of two years of relationship building. We're in we discovered the true air and CSW I share a commitment to premier customer service.
Upon closing this acquisition in mid December our team is quickly transitioned to integration and customer service with an emphasis on expanding HVAC, our accessory market share and growing customer share of wallet.
We continue to anticipate that the true air acquisition will provide new supply chain strategic opportunities as well as short and long term accretion for shareholders.
Our team stays engaged in seeking accretive growth opportunities.
And just last month, we announced that our subsidiary of Whitmore had executed a definitive agreement to form a joint venture with shell lubricants.
On slide nine we outlined the potential for enhanced distribution of Whitmore products in the Americas.
And the maximization of our World class specialty chemical manufacturing operations.
This transaction was enabled by our 20 year private label relationship with shell.
It is expected to drive incremental sales growth.
Moreover, this transaction is consistent with our capital allocation strategy as capital required from CSW of II is expected to be minimal.
The joint venture is expected to be modestly accretive in the first year of operations.
Turning now to our end market performance in the fiscal third quarter and year to date periods demand and execution in the HVA C. R. In architecturally specified building products or ASB P end markets resulted.
The resulted in comparative period growth.
Year to date HVA see our end market sales grew 28% or $18 4 million of which $15, 7% or $14 million was organic with the remainder of contributed by true error as.
As the sustained number of people worked and we're educated from home single family home renovation strengthened in correlation with increasing home equity and.
In single family housing starts continued to outpace expectations.
Looking to the fiscal fourth quarter, we anticipate ongoing strength in this end market with.
With significant total growth as compared to the same prior year period.
As we expect the same macro trends to continue in the fourth quarter and generate modest organic growth and ongoing inorganic growth from true air's contributions.
And a S BP.
Year to date sales grew $2 $8 million or three 3% all of which was organic.
And the sales into this end market were approximately 30% of total CSW I revenue during this nine month period.
The strong performance was driven by continued acceleration of projects already underway as well as success in taking market share. Despite.
Despite the general reduction in activity across the construction industry.
During the first three quarters of fiscal 2021 pandemic driven demand softness resulted in a lower rate of bookings.
And when combined with project pull forward, our trailing eight quarter book to Bill ratio was just below one.
As of the end of the quarter.
Cumulative fiscal third quarter sales into the energy mining rail and general industrial end markets slightly exceeded each of the fiscal first and second quarters of 2021.
The marking a slow initial recovery from pandemic lows.
Sales into these end markets collectively accounted for 22% of year to date revenue.
Modest growth of the fiscal third quarter sales combined with improving macroeconomic indicators such as rig count.
Similar demand.
Railcar traffic and GDP growth.
Indicate the potential for a nascent recovery in.
Hence, we expect fiscal fourth quarter to perform much like fiscal third quarter.
In summary, we expect ongoing organic growth in the HVA see our end market.
Some weakness in the fiscal fourth quarter, ASP, VP and market that I discussed previously.
And stabilization across other end markets that we serve.
Our team is managing through certain headwinds, including global trends of market forces, such as price increases and specific raw materials and logistics expenses, especially related to the global container shortage.
Despite these factors organic growth strong execution and the contribution from true Air acquisition are expected to produce a solid finish to our fiscal year.
And with that I'll turn the call over to James from a closer look at the numbers.
Thank you Joe and good morning, everyone.
Our consolidated revenue during the fiscal third quarter of 2021 increased seven 4% to $89 $9 million compared with $83 $7 million in the prior year period.
Two 1% of this growth was organic.
And the remaining $4 $5 million of growth was due to the true where acquisition in December.
Our results reflect true <unk> contribution for the period of time since we closed the acquisition.
The higher revenue was driven by $10 $1 million of increased sales in the industrial products segment, partially offset by a $3 $9 million decrease in the specialty chemical segment.
Our profitability metrics remains strong with consolidated gross profit margin of 43, 7% compared to 45% in the prior year period.
The slight decline was primarily due to costs associated with the accelerated lower margin projects and the SPP end market.
Adjusted for the $8 million in transaction expenses consolidated operating income margin was 13, 4% of 90 basis point increase from fiscal third quarter 2020.
Due to the stronger than expected growth in sales and some end market served combined with cost reduction measures to offset some of the impacts from declining sales in the remaining end markets.
Net income in the fiscal third quarter was $2 3 million or 16 cents per diluted share compared to $7 3 million or <unk> 48 cents per diluted share in the prior year period.
Adjusted to exclude transaction expenses in the current period.
Adjusted net income was $8 8 million or <unk> 59 per diluted share, which compares very favorably to last year's fiscal third quarter.
Turning to slide 12, the industrial.
The product segment delivered fiscal third quarter revenue of $58 8 million, 28% higher than the prior year period of which 11, 6% was organic.
Adjusted for the true Air transaction expenses of $6 9 million segment operating income and operating income margin were $9 $9 million and 16, 9% respectively.
As compared to the prior year period of $8 6 million and 17, 8% respectively.
These results were driven by organic sales into the HB ACR and <unk> end markets as well as the inorganic revenue contribution from true here.
Continuing to slide 13.
The specialty chemical segment realized fiscal third quarter revenue of $31 1 million compared to $35 million in the prior year period.
Adjusted segment operating income and adjusted segment operating income margin were $5 $8 million and 18, 5% respectively.
As compared to the prior year period of $5 $4 million and 15, 4% respectively.
Transitioning to the strength of our balance sheet as of quarter end, our pro forma leverage net of cash was approximately 195 times, which reflects the funding of our largest to date acquisition.
We ended the quarter with $55 million of availability under our existing $300 million revolving credit facility.
$18 million of cash.
And maintained our durable cash flow from operations of approximately $54 million in the fiscal first nine months of 2021.
These figures all leaves us well positioned from the continued allocation of capital into strategic initiatives.
I'll now cover our fiscal first nine months consolidated financial results as outlined beginning on slide 16.
The strength of our second and third quarters, nearly offset the weakness of the first quarter with fiscal first nine month revenue of $285 8 million only of 0.5% decrease as compared to the same period last year.
Increased sales into the H V ACR and <unk> end markets were slightly offset by pandemic driven demand declines another end market served.
Gross profit margin was 45, 8% or 20 basis points lower than the same prior year period due to the modest year over year decline in sales.
Adjusted for transaction expenses operating income and operating income margin were $55 million and 17, 7% respectively.
As compared to $52 million and 17, 5% in the prior year period.
Adjusted for the transaction expenses in the current year.
Net income and earnings per share were $37 $2 million or $2.49 per diluted share.
Higher than the $35 $8 million or $2.35 per diluted share in the prior year period. After adjusting for the one time charge of 35 per diluted share after tax to terminate the company's U S qualified pension plan.
Turning to slide 17 the.
The industrial products segment delivered fiscal first nine months revenue of $192 $5 million 10, 1% of higher than the prior year period as excellent execution and product demand drove 15, 7% organic growth in the HV ACR in the market.
Ongoing project completion, plus the acceleration of projects in the ASB P backlog resulted in three 3% organic growth.
And the $4 $5 million of inorganic sales contributed about true here.
This growth was partially offset by other end markets served.
Adjusted segment operating income and adjusted operating income margin of $46 million and 23, 9%, respectively. After being adjusted for the $6 $9 million in true air transaction expenses.
This compared favorably to.
The $42 $1 million and 24, 1% in the prior year period.
Continuing to slide 18.
Our specialty chemicals segment realized revenue of $93 $3 million in the first nine months of the fiscal year compared.
Compared to $112 $6 million in the prior year period.
Adjusted segment operating income was $15 $5 million with adjustments related to the $1 $1 million of joint venture related transaction expenses, resulting in adjusted operating income margin of 16, 6%.
Compared to adjusted segment operating income of $18 $4 million and adjusted operating income margin of 16, 3% in the prior year period as year over year profitability was maintained despite the decline in sales due to managements effective cost reduction efforts.
The effective tax rate on continuing operations for the fiscal third quarter was 23, 2% on a GAAP basis, we continue to expect our full year tax rate within the range of 24% to 26% for fiscal 2021.
Moving to our cash generation and balance sheet as I mentioned earlier, our operating cash flow from continuing operations was $54 million in the first nine months of fiscal 2021 as compared to $64 million from the prior year period.
The decrease in operating cash flow was primarily attributable to transaction expenses in the current period.
With that I will now turn the call back to Joe.
Great. Thank you James during the fiscal third quarter, we delivered impressive revenue growth in our largest end markets.
We closed our largest acquisition to date, we announced an agreement to form of strategic joint venture and we delivered 23% growth in adjusted earnings per share all while maintaining our strong balance sheet and liquidity.
Outstanding customer service, along with the value added high quality products and services drive our reputation for excellence.
While we work to ensure the successful integration of our recent strategic transactions. Our team remains active in our pursuit of value accretive organic and inorganic growth opportunities.
As we know the business development lifecycle can take time.
As always I would like to close by thanking my colleagues here at CSW, I, who not only do a fantastic job each day, but also collectively own just over 4% of CSW I through our employee stock ownership plan.
And also thank all of our other shareholders for their continued interest in and support of our company.
With that Donna we're ready to take questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you would like to ask the question. Please press star one on your telephone keypad of confirmation tone will indicate your line is in the question queue.
The press Star two if he would like to remove your question from the queue. The participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys against that of Starwood to register of questions at this time.
Our first question is coming from John Ken Lin Tang of CJS Securities. Please go ahead.
Hey, good morning, gentlemen, thank you for taking my questions and very nice quarter.
My first one Joe could you provide just a high level overview of how things are trending from January both from the demand perspective, then the impact of new business and across maybe your business lines of supply chain.
Covid in January in any of the December.
Yeah. Thanks, John I appreciate the the <unk>.
Question, Yes January is.
Continued really the same trend that we've seen.
In the third quarter no no major changes there at all.
We're six weeks into the true air acquisition and integration and so that is going well, but.
Too early to really name of any trends there, but we're pleased with the way things are going I would say on the on the.
<unk>.
Purchasing and the strategic sourcing side. There are some cost pressures everybody has read about the container shortage steel prices other commodity price increases that our team is dealing with but we have a demonstrated track record of dealing.
With those those headwinds and buy.
Managing through that and protecting our profitability and so we would expect to do the same here.
Okay, specifically the true are there shipping from overseas, how much of the container shortage impacting them.
Compared to maybe what you thought they could do.
When you.
When you announced the agreement to acquire them.
Yeah again, John it's really early on I would say at this point there is no material disruption.
We're trying to look around the corner here and make sure. We don't we don't get any surprises, but it's at this point things are are relatively relatively stable expenses.
In some respects, but.
So far so good John this is James I would just add to that.
As you recall, when we announced the true of our acquisition, we talked about we maybe had some opportunity given the amount of inventory that they carry that's always been strategic for them to meet their customers' needs and times like this where we might anticipate a little bit of.
The disruption from container shortage again, nothing dramatic yet, but that inventory it turns into an asset for us and we're able to use that to meet customers' demands and pull from our distribution centers around the country to be sure of customers that they need.
Got it that's helpful helpful color. Thank you.
Just wanted to scale back of the broader HVAC business.
You mentioned home starts.
Just wanted to get a sense of do you know how much COVID-19 benefit you've gotten in that business, whether it's working from home ventilation.
The things that might go away as the year.
Progressive assuming that people get the estimated and the dynamics of side did you see any of that or is it more organic as you're looking at it now.
Well I mean, the honest answer is we don't know for sure I would say remember Jon that 80% of the HVAC market generally is going to be a repair and replacement, 20% is new residential construction and so the installed base really really matters here.
We do think that there has been.
The stay at home work from home go to school at home.
Has added additional demand on systems and people have invested in that and repaired and you're running your air conditioning in 24 hours a day as opposed to turn it off to go to work those types of things of that there's clearly some ex some.
Some additional demands put on your system, but we feel like the or the the.
The installed base is really the single largest important factor here and that that installed base continues to grow and we have both repair parts and products as well as parts of the products that go into the two of replacement or a new install and so.
That provides a balanced.
Got it Okay, and then just maybe a comment on the architectural product line.
You pulled in some projects one can you quantify how much came in the quarter compared to what you are expecting number one and number two when do you see the orders and demand recovering in that business I think you had said.
It would have been this quarter next quarter, maybe three months ago, what are you thinking now.
Yes, John this is James in all of the Joe.
Supplement what I might have to say.
We won't necessarily quantify that you can kind of see what the end market look like in our presentation quarter to quarter as you can get a little sense of that it held pretty steady in general.
We've talked for a couple of quarters now of that kind of an air pocket coming and the business has done a really nice job of filling that air pocket by some short term projects and the sum of gotten pulled forward and as a reminder, if all of US the pull those forward is the project manager of that says Hey, we're ready for your product a little earlier than we expected and so our team has done a great job adapting to that.
And so in some of those projects just from a mix basis were a little lower margin. So that was a bit of the headwind interestingly. So maybe helped the sales side to hit the margin a little bit more we would say from a bidding standpoint.
Things are a little softer, but we're still seeing activity from a booking standpoint, as we mentioned things are a little softer, but not dramatic necessarily so we continue to look out and kind of pushout that air pocket and so now we would say the fourth quarter. There is some softness we've talked about that and we kind of expected that.
As we've talked the last couple of quarters again, the team is looking to fill in the gaps with some smaller projects and some other things have gotten the pull forward, but it's hard to say really kind of when that really necessarily hits, but the bookings. We're taking now are more obviously into our next fiscal year now that we're a couple of months.
From the beginning of the next fiscal year. So management there is doing a good job strong effort on sales some of the areas, where we are stronger geographically have some headwinds right now just because they're a little more slow on the construction side. So there are some specific instances there, but overall the business has done a good job.
Great. Okay last one from me you continue to really impressed with the specialty chemicals margin is this the new floor, we should be thinking about in a seasonally.
The quarter that kind of high 18, 19 ish percentage or how should we think about that going forward.
Yes. This is James again, John Thanks, Good question.
It's hard to say a quarter two of the trend quite yet.
I think what we've seen happen through the year clearly you've continued to see the impact year over year of lower.
Caused by travel and entertainment that will return at some point, maybe not in the near term, but it's a global business. So you have some global travel you of a lot of domestic travel, but obviously is minimized right now that will come back at some point as it will for any company that has that type of model I will also say and I'm sure you recall of this very well we talked to.
When the pandemic first hit in our first earnings call back in May after the started that we had made a commitment not to make pandemic related reductions in our labor force.
I would say that's a business that because it got hit a little bit harder in terms of headwinds of the end markets. It serves the rail of the mining the energy industrial those type things that you had some.
The more labor than you probably needed and we've kind of let attrition take its course, so as people of have moved on for various reasons, we've maybe not backfill of as much as you might if things are really going strong we're able to ramp back up as we need to and we're starting to see some of the demand pick up but you've got some nice cost factors that are in the business right now that some of that is probably.
Not repeatable like the <unk> eventually that will fade away, but I think we of the business is all have found where the labor pool needs to be and really learned how to manage that even more effectively through the cycle.
Got it that's helpful. Thank you very much guys and again great quarter.
Thanks, John.
Once again, ladies and gentlemen that star one to register any questions. Our next question is coming from Chris Howe of Barrington Research. Please go ahead.
Good morning, everyone.
Thanks for taking my questions.
Good morning, you mentioned the contribution of true air in the quarter.
For overall perspective would you be able to provide.
True Ers revenue in the quarter.
And how that compared sequentially and on a year over year basis, and what your outlook in Q4.
Typically for <unk>.
Through are how that's looking.
Yes. This is james not not of lot of detail to provide yet I'll say a couple of things. One is you know we're as Joe said six seven weeks into the acquisitions, we're still getting the feel for the run rate, but things have been very smooth when we announce true error.
The Christmas we talked about it I know you initiated after that but as we know it's true error, we talked about there of calendar 2020 revenues were tracking at about $108 million.
And that as you add on if you look at it the last two weeks of the year. We said there were $4 $5 million. So the math literally tells you that the dead on that number we've talked about EBITDA of about $36 million again that was a backwards looking type thing as we were closing in on the end of the calendar year. So that type of run rate has translated so far we would expect that.
They would see the type of organic growth that we hope to see this year, but we're still diving into what that looks like putting together strategic plans for this year, we've done a great job of integrating the customer base, we had talked about 100% customer overlap and our sales team has integrated extremely well with theirs and spending a lot of time with those customers. So we've not really seen any headwinds.
And what we've had in fact, we've seen some tailwind. So I think there's good opportunity there, but not really comparative year over year specific to true error that we would detail at this time.
Okay. That's helpful. Nonetheless.
Part of the noise.
As we can.
Kind of things are going to normalize a little bit in the fourth quarter.
Even more so as we get into next calendar year.
What's your view as of now.
How incremental margins look coming out of this and as we nor.
Normalized and get to a better than normal, which I hope happens sooner rather than later versus how the business has done historically coming out of the recession.
Sure and obviously coming out of the pandemic may look differently coming out of a recession a.
A recession may kind of take all of the end markets down whereas in this case as we talked about a few minutes ago with John.
You did have some tailwind from from the the work from home and educate from home.
The new cycle that we've never seen something like that before so you had some tailwind with HVAC. We continue to see good tailwind from HVAC and continue to hear and see good things from others in the industry.
We're just starting the restocking and busy season for our for our in the market. There. So that's really kicking off right now so we'll get a good sense for that as we talk to you again in may as we've talked about the fourth quarter. So I think it's a low too early to talk about what normalized looks like we just talked a minute ago also about the specialty chemicals margins in those markets. So.
As we see things come back to what looks like normal whether that's a few weeks or a couple of quarters depends on the end market that they're all going to come back differently, but right. Now most end markets have a tailwind rig counts are up rail traffic is up low oil prices have moved up.
You've still got some restrictions being able to travel as I've said and get out of certain mines. For example, some of those things of demonstrate your products and went over some market share, but I think we have the opportunity certainly from a margin perspective to do very well.
We've continued to put up nice margin. These last couple of quarters in both segments and looking more directly in our end markets. We're pleased with the performance we've seen but we're really going to need to kind of get into the post pandemic world to get back to normal and then again integrate true error and it'll be a little bit of apples and oranges, but we'll do our best to try to give you apples to apples as we get through that.
Great and one last question the integration of true are going well six weeks into it but I assume that will continue to run relatively well.
As we consider this integration your leverage came in at 195 times a little bit ahead.
The low where you were expecting of two one times, which is good.
How should we think about inorganic activity.
I was here, perhaps for the next three to six months as we integrate who are or.
It continues to roll Nonetheless.
Yes, Chris This is Joe you know it's interesting.
We continue doing exactly the same things we were doing before as it relates to looking for acquisition opportunities as far as evaluating those types of things, having said that we did.
Make clear that we needed to digest this acquisition within this.
With this management team and so you see the shell JV announced that's a different management team and so you've got the.
An opportunity to generate some some.
The organic growth through that initiative, we believe with the different.
The spec Chem side of the business and so are our activities continue just as they were before.
I would say, especially as it relates to product line extension of smaller acquisitions I don't think we'd have any hesitation whatsoever in doing something like that do something else the size of true error in the HVAC space with the same management team.
There is a period of digestion the needs to take place here, but on the other hand, I will tell you I mean like true here, we pursued that for two years and so we can't stop we continue doing what we're going to do the cycle on those on the on the development of those opportunities takes months, if not years at times and.
So I think we'll be prepared when the next opportunity arises.
Just because of the the way the calendar works.
Great. Thanks for taking my questions.
You bet, Chris Thank you.
Ladies and gentlemen, this brings us to the end of our Q&A session of today's teleconference. We thank you for your interest in CSW Industrials, we wish everyone. A good weekend you may disconnect your lines and enjoy the rest of your day.
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