Sarah Bicknell - Investor Relations Joseph Armes - Chief Executive Officer Gregg Branning - Chief Financial Officer Christopher Mudd - Chief Operating Officer.

Jon Tanwanteng - CJS Liam Burke - Wunderlich.

Greetings and welcome to CSW Industrials’ Fourth Quarter 2017 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to Sarah Bicknell from ICR..

Thank you, operator. Good morning, everyone and welcome to CSW Industrials’ fiscal fourth quarter investor call. Joining me today are Joseph Armes, Chief Executive Officer of CSW Industrials; Gregg Branning, Chief Financial Officer; and Christopher Mudd, Chief Operating Officer.

If you had not received the earnings release, it is available on our website at www.cswindustrials.com. This call is being recorded. A replay of today’s call will be available. 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 of factors discussed in today’s earnings release and the comments made during this call and in 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. This call will also include an analysis of adjusted operating income, net income 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 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 Armes..

the first, rationalize and then refine our operations to deliver increased value for our customers and shareholders. As we turn to fiscal 2018, our most significant rationalization work is behind us. In our Industrial Products segment, we completed the acquisition of Greco Aluminum Railings in the fourth quarter.

Greco is a leading manufacturer of high-quality engineered railing and safety systems for multifamily and commercial structures and is based in Canada. And I am pleased to report that the business is performing ahead of our expectations in our first few months of ownership in all respects.

And we are continuing to see strong bookings for that business. This acquisition falls right in the middle of the fairway for our acquisition criteria as Greco nicely complements our architecturally specified building products business and further diversifies our offerings while enhancing cross-selling opportunities.

To that end and Chris will detail more in his remarks, we coordinated our sales efforts for our Smoke Guard and Greco products and combined our Balco and RectorSeal fire-stopping product sales efforts. This will allow us to capture share through cross-selling and balance our geographic penetration.

In our Coatings, Sealants and Adhesives segment, we are in the late stages of our integration efforts. We have exited the inefficient third-party manufacturing arrangement as of our fiscal 2017 year end and expect to have Strathmore facility consolidations completed by the end of this month.

We are continuing to diversify our customer base and find new opportunities for our products and have seen some incrementally positive signs from new customers in the fourth quarter in areas such as hopper and grain railcars in industrial coating.

Turning to our Specialty Chemicals segment, during 2017, we completed the footprint rationalization of our Jet-Lube operations. We are now producing all Jet-Lube volume out of our Rockwell, Texas production facility. In addition, the lease at Jet-Lube Houston rolled off in the fourth quarter.

So, we will begin to fully realize the lease and headcount reduction savings beginning in fiscal 2018.

While fiscal 2017 was very much focused on bringing all of this volume under one roof and rightsizing the business in response to market conditions, in fiscal 2018, we will endeavor to move up the learning curve and improve our operations to find efficiencies with the new volume at this facility.

Thus far, we have achieved the gross cost reductions we expected, but we are seeing some incremental cost, including increased freight, packaging and storage costs. As Chris will detail in a moment, we have identified opportunities to address these inefficiencies, reduce our working capital and we are well positioned to capture additional synergies.

Next, I would like to give an update on our end markets, beginning with commercial and residential construction. This continues to be our strongest performing end market as supported by a robust macro backdrop and our sales into this end market have been growing in excess of category rate, thanks to the market success for several of our products.

We continue to enjoy strong revenue growth in other key end markets, particularly in HVAC and plumbing. But given the extraordinary growth rates we have enjoyed recently, we would not be surprised to see some moderation in the growth rate in the year ahead.

In our energy related end markets, we have seen an increase off the bottom as rig counts have rebounded. And until the last week or so, we have been feeling encouraged by the price of oil and we are anticipating a nice uptick in our business during fiscal 2018 based on rig count, which is the primary leading indicator for that business.

More recently, volatility in oil markets have caused us to temper our expectations a bit. Turning to our rail end markets, demand for OEM railcars continues to be under significant pressure, so we are continuing to diversify our coatings products sales and find new markets to enter.

We have found some success in hopper grain and other railcars which we have not historically served. At our more traditional tank car market, sales continued to be weak, but our team is highly focused on finding new wins and being well positioned for when demand in this market recovers.

And finally in our mining end markets, similar to rail, we are still aggressively looking at new customers and applications to diversify into, but the market remains challenged. We have had some success in diversifying geographically in this end market. We will continue to focus on these efforts in fiscal 2018 to help offset weaker domestic volume.

And with that, I would now like to turn the call over to Gregg to do the financials during the quarter..

Thanks, Joe and good morning, everyone. Consolidated revenue during the fourth quarter of 2017 increased 14.5% to $87.3 million compared to the prior year period of $76.3 million. Organic growth was 12.9% and acquisitions contributed 1.6% to total growth.

The increase in revenue was primarily attributable to increases in architecturally specified building products and HVAC end markets, partially offset by decreases in rail. Looking at our segment level revenue and operating income, Industrial Products segment revenue was $41.6 million, up 22.7% compared to the prior year of $33.9 million.

Higher revenue was driven by strong sales into architecturally specified products and HVAC end markets. Operating income increased to $8.4 million compared to the prior year of $6.3 million. Adjusted segment operating income increased 52.2% to $9.6 million compared to the prior year period of $6.3 million.

Segment adjusted operating income as a percentage of sales improved to 23% compared to the prior year period of 18.5%. Coating Sealants & Adhesives segment revenue increased 5.3% to $26.7 million compared to the prior year of $25.3 million.

Higher sales were attributable to new business associated with the company’s sales diversification efforts, partially offset by lower OEM rail volume and existing – with existing customers. Segment level operating loss was $59,000 compared to the prior year loss of $63,000.

Adjusted to exclude nonrecurring costs primarily related to realignment and restructuring, segment operating income was $1.9 million compared to the prior year period of $424,000. Segment adjusted operating income as a percentage of sales improved to 7.3% compared to the prior year period of 1.7%.

Now moving on to Specialty Chemicals, segment revenue was $19.1 million compared to the prior year of $16.9 million. Higher sales were primarily driven by improved Jet-Lube volume due to the increased rig count that Joe mentioned plus industrial lubes business in cement and power generation.

Our reported segment operating loss was $817,000 compared to prior year period operating income of $3.1 million. Adjusted to exclude non-recurring costs, segment operating income decreased $2.4 million compared to $3.1 million in the prior year.

Segment adjusted operating income as a percentage of sales was 12.6% compared to the prior year period of 18.1%.

The lower profitability was due to the resolution of a customer issue in the fourth quarter and writing off some inventory, neither of which was related to the realignment and restructuring actions taken for this segment and therefore are not reflected in our adjusted results.

Turning back to our consolidated results, consolidated gross profit in the fiscal fourth quarter of 2017 was $31.1 million, a 9.7% decrease compared to the prior year level of $34.4 million. Gross margin as a percentage of sales was 35.6% compared to 45.1% in the prior year period.

Lower gross margin compared to the prior year reflected increased costs related to realignment and restructuring as the company improves its operational footprint. In total, we incurred $5.3 million in realignment and restructuring costs during the period.

Consolidated operating expenses decreased 4.6% to $26.4 million or 30.2% of sales compared to the prior year level of $26.7 million or 36.2% of sales. Lower operating costs compared to the prior year were primarily attributable to reduced salaries and benefits in the quarter.

Consolidated operating income for the fourth quarter was $4.7 million or 5.4% of sales compared to $6.8 million or 8.9% of sales in the prior year. Adjusted operating income was $11.1 million, a 39.8% increase compared to the prior year period of $8 million.

Consolidated net income was $2.7 million or $0.17 per diluted share compared to $1.9 million or $0.12 per diluted share in fiscal 2016.

Adjusting to exclude one-time expenses and applying a normalized tax rate, adjusted net income in the fourth quarter of fiscal 2017 was up 23.5% to $6.9 million or $0.43 per diluted share compared to $5.6 million or $0.35 per diluted share in the prior period.

Our net debt at quarter end was $48.3 million and we closed the quarter with $24.9 million of cash on our balance sheet and had $239 million of borrowing capacity on our revolving credit facility, which provides ample flexibility to fund our growth and acquisition strategy. Now I will turn the call over to Chris..

Thanks Gregg. I would like to begin today by touching on some of our operational achievements in fiscal 2017 and their implications to fiscal 2018. Beginning with Industrial Products, this segment had exceptionally strong year as HVAC and architecturally specified building products contributed double digit sales growth during the year.

We are pleased with the Greco acquisition and it is performing ahead of our expectations. Our pipeline in this business also looks favorable as this market offers good visibility based on the long lead times from project award to build dates, similar to our other architecturally specified product offering.

As part of the integration of Greco, we conducted a two day commercial meeting with our sales and marketing leaders and implemented a significant improvement in our sales efforts.

During these meetings, we identified similar sales processes for Balco and RectorSeal fire stopping products and also, Smoke Guard and Greco products based on placement in the engineering timeline with our customers.

As a result, we have now combined sales efforts for Balco and RectorSeal fire stopping products and we also coordinated the Smoke Guard and Greco sales teams. This reorganization occurred to drive improved cross-selling opportunities and we have already identified – we have already begun to see the positive impact of this in our business.

In addition, we identified several geographic differences and penetration rates between products and we expect these changes will help capture higher and more consistent share across regions.

Moving to the reorganization and footprint optimization efforts, the Whitmore and Jet-Lube consolidation has been completed on schedule and as a result, we expect to begin to realize the gross annual run rate savings that we had previously disclosed.

This includes an incremental benefit beginning in the first quarter as our lease on the Houston facility rolled off at the end of the last fiscal year. Bringing all volume under one roof and launching product manufacturing in the Rockwall facility was challenging and it consumed substantial resources during fiscal 2017.

As we turn to the new fiscal year, we are working to reduce the complexities associated with the Rockwall integration, with the by-product of this driving improved efficiencies as we streamline the process and reduce SKUs.

We expect it will take some time to fully optimize our operations and we – and then recognized the full net savings, which is our primary objective for fiscal 2018.

Turning to the Strathmore footprint consolidation, we exited the expensive coatings tolling arrangement in Houston as of the year end and we are in the process of completing the relocation of the volume from our Syracuse, New York facility to Longview, Texas and Acworth, Georgia. This is expected to be completed by the end of June 2017.

We decided to delay this closure by one quarter for two primary reasons; first, production setup and training times for certain products have taken a little longer than expected and second, we received some pre-buy activity ahead of these facility moves and as a result, we believe it was prudent to leave a little extra time to ensure a seamless transition for our customers.

With that, I will turn it back over to Joe for closing remarks..

Thank you, Chris. In closing, we are very pleased with how we finished this year and are highly focused on driving growth, profitability in all of our business segments. We had diversified our revenue base while rationalizing costs.

As we look to the year ahead, we are confident in our strategy and encouraged by the trends we have been observing in our end markets and believe we are taking the right steps to deliver long-term sustainable value for our shareholders.

I would like to take this opportunity to thank all of my colleagues here at CSW Industrials as we continue to serve our customers and steward well the capital entrusted to us by our shareholders. Thank you for your interest in CSW Industrials. Operator, we are now ready to take questions..

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Jon Tanwanteng with CJS. Please proceed with your question..

Good morning. Thank you for taking my questions.

Could you talk a little bit more about the Greco acquisition, can you quantify maybe what the opportunities look like from a revenue and cross-selling synergy standpoint and if there are any potential cost saving synergies?.

Yes. Let me start with that, Jon. Greco has a great line of products and fits really well within our product portfolio. However, there are not a lot of significant cost savings here. This is a cross-selling and product extension, product line extension acquisition, and so the integration process is simple in that regard.

We are not closing any facilities of integrating any production, and so the opportunity really is here on the top line. And as we said, we are really pleased with the way that they have folded into our sales organization.

Cross-selling has begun and Greco’s kind of existing legacy business, if you will, is performing very, very well in the early months here..

This is Chris. Greco has very strong relationships with architects and specifiers across Canada. And of course, our Smoke Guard business primarily is a U.S. based business. And so combining those cross-selling efforts is really going to help us to promote Smoke Guard products in Canada and to promote the Greco products into the U.S.

market, especially the West Coast. So that’s part of the cross-selling is to help geographically diversify both Smoke Guard and Greco’s sales..

As far as quantifying that, Jon, Greco’s had kind of a historical growth rate of 9% or so. And so that’s a really nice growth rate. However, we are hopeful that the cross-selling opportunities will allow us to drive that even higher..

Great, that’s very helpful.

And just a little more color on the rail markets, what are the chances of real recovery here in the next 12 months and maybe break that down between the coatings and the lubricants side?.

Sure. This is Chris. We are still not seeing much of an uptick on the railcar OEM side. And even on the refurbishment, things are still pretty slow. So for coatings, as Joe mentioned, we are still seeing a lack of recovery there. On the lubricants side, there might be some signs for optimism.

We had reported in the past about Class I railroads choosing to not lubricate the track just to save money. We are seeing a little bit of improvement there and a little bit more spend on applicator equipment. So maybe some signs of optimism on the lubricant and applicator side..

Although that’s primarily with a new customer where we picked up some share gain, so the existing customers have continued to remain flat..

Got it, okay. And just a quick update on the new CSA customers you have been adding.

Are you seeing opportunities to move the margin up with those either new products or how you sell into them?.

Not yet..

Not yet. And those are more industrial applications, Jon, and those are going to be a little more transactional, not as highly specified as our base business. And so that’s a business that’s nice to have, given the current kind of weakness in the other markets. But longer term, we want to be more heavily focused on the highly specified applications..

This is Gregg. And those highly specified applications, as I think we have said before, those are a longer sales cycle. We are getting products out in the field for testing to be qualified. The team’s working hard to drive those but they continue to take time..

Got it. Thanks.

And also just wondering, how do you expect corporate expenses to trend in ‘18 versus ‘17, given all the one-times and other things that have been going on?.

one, it will be driven by the fact that we had – this will be the third year of stock awards, and those vest over 3 years so you get a full year’s worth of cost with that third grant. So that’s a driver. Obviously, we have added two new Board members that drive some cost.

And there were some other savings that we saw in fiscal ‘17 that are not expected to repeat. Obviously, we will work hard to offset those costs within the business as wherever possible, but it will – the corporate costs will be going up..

Okay, got it.

And then finally, just how do you see the pipeline for further M&A valuations, the number of opportunities, all that good stuff, if you could?.

Yes. Jon, we are continuing to push hard for filling the funnel with opportunities. We are absolutely committed to growing through acquisitions but doing that in a disciplined way. And so Greco was a fantastic opportunity for us, a compelling opportunity, and so we were able to get that one closed.

We do have several acquisitions that we are looking at, at this time but valuation, as you said, is always a gating item here. And we have got to find the right opportunity and continue to be disciplined, so nothing to report though..

Okay, great. Thank you very much..

Thank you, Jon..

Our next question is from the line of Liam Burke with Wunderlich. Please go ahead with your question..

Yes, thank you. Good morning. On the Jet-Lube Whitmore consolidation, it looks like the plant – the operational piece has been consolidated. You can move along with fine-tuning or improving the operations.

In terms of the sales effort and combining or cross-selling Jet-Lube and Whitmore products, how is that progressing?.

Yes, I mean – Liam, this is Chris. That – we are continuing to make progress, and it’s really the Whitmore and Jet-Lube and Deacon products are all being promoted by the same sales team through distribution as well as, in some cases, direct. And we have really merged those sales groups together. They work as a team.

It allows us to have a broader product offering to distributors. It allows us to get into new regions where we have had some growth with lubricants and sealants in Asia and Latin America. So I think it’s coming along as expected.

And we have got one leader over that whole group and one sales team that’s driving all those different products in the market..

And just keeping on that note, you mentioned sort of fine-tuning the SKU count now that everything’s been combined.

How long do you think that process will take?.

This is Gregg. I think as we mentioned, both SKU count as well as some inefficiencies, we will continue to see some of those inefficiencies here in the first quarter. We would like to think that most of them will be behind us.

But clearly, as I think Joe and Chris both talked in our prepared remarks, we have seen the gross savings but we have seen inefficiencies, the deal with both the SKUs as well as packaging going Whitmore, as I think you remember on your trips, Whitmore packages very large quantities, Jet-Lube package is small.

And so that’s created some inefficiencies within the business all under one roof..

Sure.

And then Gregg, just a quick question on working capital, it might just be timing but the accounts receivable balance was higher however you want to mention it from a year ago while the inventory levels relatively flat?.

Right, right. So, on the accounts receivable, two things. One was timing due to the strong sales within the HVAC markets within our Industrial Products as those sales went up over 20% that drove higher receivables. And the other factor would be the Greco acquisition.

Obviously, they were not in – their receivables were not in our balances last year and they are this year. And then inventory, we have begun trying to work down inventory.

We have a supply chain leader at each of our sites, and we have supply chain leader for one of the overseas, our steering committee, and so that is something we have talked about this past year, and we are focused on and trying to work that. We will continue to try and drive those down.

The other thing that really didn’t come out in the call that factors into some of this or in our prepared remarks is that we did see the procurement savings that we have been talking about this past year. That did roll through our financials. We saw roughly $2 million of savings here in the back half of the year and that has made its way through.

And so that certainly has helped our inventory levels..

Great. Thank you very much..

[Operator Instructions] Gentlemen, there are no additional questions at this time..

Great. Well, we would just like to say thank you everyone for participating in our call today. We look forward to speaking to you again soon. Thank you for your support..

Thank you this concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation..