Thomas Cook - IR Joseph Armes - CEO Gregg Branning - CFO.

Joseph Mondillo - Sidoti & Company Jonathan Tanwanteng - CJS Securities, Inc. Liam Burke - B. Riley FBR.

Greetings, and welcome to the CSW Industrials' Third Quarter Fiscal 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Tom Cook, Investor Relations. Please go ahead sir..

Thank you, Kevin. Good morning everyone and welcome to CSW Industrials' fiscal third quarter investor call. Joining me today are Joseph Armes, Chief Executive Officer of CSW Industrials; and Gregg Branning, Chief Financial Officer. If you've not received the earnings release, it is available on our website at www.cswindustrials.com.

This call is being recorded and 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'll be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties.

Actual results can materially differ because of factors discussed in today's earnings release and the comments made during this call and the risk factor 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 more complete discussion of adjusted operating income, net income and earnings per share, see our earnings release. With that, I'll now like to turn the call over to our Chairman and Chief Executive Officer, Joe Armes..

Thank you, Tom. Good morning. Thank you for joining us for our fiscal third quarter conference call. Our third quarter includes an important transformational actions as we executed the restructuring of our business to better align with growth opportunities and we continue to drive sales and earnings growth from our continuing operations.

Before getting into the operating details and end market updates, I would like to spend a few moments discussing our restructuring. As we noted in our press release, we've decided to pursue a sale of our Coatings business, which was part of our Coatings, Sealants & Adhesives segment. We have moved the Coatings business to discontinue the operations.

This was not a decision that we took lightly, but as we addressed in previous calls, the state of the rail, OEM market, which is our primary Coatings end market remains under significant pressure after several years, and it's demonstrated minimal signs of meaningful recovery.

Through the lens of our strategic plan, we took a fresh look at our future opportunities with the Coatings business and concluded that it does not meet our profitability expectations. And we, therefore, be better served with another strategic owner that is more diversely exposed in especially Coatings end markets.

Along with this action, we took a one-time noncash charge, which was sizable enough, such that we do not expect any further write-downs of this business. We also consolidated our operations into two reporting segments from three previously.

As you may recall, essentially all of our Coatings business was in our Coatings, Sealants & Adhesives segment, frequently referred to as CS&A. With the exit of our Coatings business, we have moved Sealants & Adhesives, the remaining two-thirds of that segment, into Specialty Chemicals.

As part of this transition, Chris Mudd will be leaving the company to pursue other opportunities. Chris will remain in his current role until the end of February to ensure a smooth transition of duties. As a result of Chris' departure, we're also flattening our organizational structure and elevating our two segment leaders to report directly to me.

Don Sullivan, our SVP and General Manager of Industrial Products, will continue to lead our Industrial Products segment. And Craig Foster, our SVP and General Manager of Specialty Chemicals, will continue to lead our Specialty Chemicals segment, which now includes the Sealants & Adhesives product lines.

Both Gregg and Don are proven leaders and have a demonstrated track record of driving growth and efficiency in each of their respective segments. Financially, we expect these actions to have a materially positive impact on our consolidated operating results going forward.

This effect is most pronounced in our free cash flow from continuing operations as our free cash flow for the nine-month ended December 31, 2017, was $42.8 million, which is up significantly from $28.1 million for the nine months ended December 31, 2016.

In addition, our free cash flow should also benefit from the recent Tax Reform Bill, the lower U.S. corporate tax rates.

This enhanced free cash flow will provide us with alternative opportunities to deploy cash to strategic growth initiatives and M&A, while simultaneously allowing us to evaluate strategies to return additional cash to shareholders, both through our existing share repurchase program and potentially other avenues. Turning to our results.

Third quarter sales from continuing operations were $69 million, up 5.8% from $65.3 million in the prior year. Adjusted earnings from continuing operations were $5.1 million or $0.32 per diluted share compared to $4.9 million or $0.31 per diluted share in the comparable period.

Looking at the results by segment, beginning with Industrial Products, performance continues to be very strong. Segment level revenue increased 19.5% to $37.9 million in the quarter, which resulted from 5.8% in organic growth and a $4.4 million benefit from the recent acquisition of Greco.

This strong performance came despite lower volumes in industrial and architecturally specified building products businesses as we lap a tough comparable in the architecturally specified building products market in the prior year. I would add that in our current quarter, weather did present an unfavorable headwind to our results.

Anecdotally, I attended this year's largest HVAC Trade Show in Chicago a couple of weeks ago, where we introduced several new products, which we have developed internally. Two of the products we introduced were the armor equipment pads and AC Leak Freeze PRO with nanotechnology. The armor equipment pads are new product introduction for our business.

These pads, on which a condenser unit sits, are used in both commercial and residential applications. This product has a large domestic market and something that we're very excited about. AC Leak Freeze PRO with nanotechnology is a product enhancement to our successful AC Leak Freeze product line.

The nanotechnology allows the product to plug smaller leaks and cracks in an evaporator coil. These, along with our other product introductions, demonstrate the strength of our internal research and development team where we're continuing to improve our processes and find ways to shorten product introduction timeline, thus enhancing returns.

Overall, our booth had significant foot traffic at that show, and we received very positive feedback from attendees, including many HVAC contractors. These new product introductions into our largest end market reflect our increased focus on internally generated organic growth initiatives as we discussed in previous quarterly calls.

Now turning to Greco. This remains a very highly successful acquisition and -- with sales from the nine months ended December 31, 2017 were $14.4 million, which already exceeds the $13.5 million of sales the business reported in the trailing 12-month period prior to our acquisition.

In our Specialty Chemicals segment, which now includes Sealants & Adhesives and the balance of our continuing operations, sales declined 7.1% to $31.2 million. This decline was expected and was driven by two reasons discussed on last quarter's call.

First, in the prior year period, we burned off $1.5 million of excess backlog associated with our Jet-Lube integration, which did not recur in the third quarter of 2018. Secondly, this business has benefited greatly by the growth in rig count, which has stabilized over the past nine months or so, and we did not see any incremental growth there.

Lastly, and unique to this quarter, we experienced some reduction in sales due to seasonality. Next, I would like to give an update on our end markets. Beginning with our construction-related end markets, we've enjoyed nice growth through the first nine months of fiscal 2018, which we expect to largely continue to the end of the year.

Our HVAC condensate cut-off switches have been strong throughout the year as we have seen robust residential home construction compared to the prior year. Greco continues to perform well and we have now begun shipping products to the previously discussed Eau du Soleil high-rise condominium project in Toronto.

Within plumbing, we're seeing robust sales growth for RectorSeal No. 5 thread sealants especially in commercial applications. And sales of SureSeal floor drain traps have also been doing very well. Turning to our energy-related end markets. Drilling activity appears to be stable as we predicted over the last few quarters.

Specific to our business, we are no longer lapping quarters with weak sales relating to lower rig counts, but we expect sales and margins to remain stable in this business.

Within mining, we're seeing some increases international -- internationally, for example, Africa and South America, but North America remains a challenge, particularly in the open-pit coal mining and phosphate mining. To reiterate, fiscal third quarter marks some important developments.

We've been proactive in pursuing our objectives of enhancing our returns and strengthening our company. Our continuing operations are performing well and our team is working tirelessly to maximize our competitive positioning, to provide best-in-class innovative products to our customers, and to drive total shareholder return.

We firmly believe this optimized operational structure gives us a compelling platform for long-term profitable growth. With that, I'll turn the call over to Gregg for a closer look into details..

Thank you, Joe and good morning everyone. As a reminder, the results I will be discussing are on a continuing operations basis. On our consolidated revenue during the fiscal third quarter of 2018, we saw an increase of 5.8% to $69 million compared to the prior year period of $65.3 million.

Turning to our segment level revenue and operating income, Industrial Products segment revenue was $37.9 million compared to the prior year of $31.7 million. Higher revenue was a result of acquisition-related revenue and strong sales into HVAC and plumbing, partially offset by lower sales in architecturally specified building products.

Operating income increased to $7.3 million compared to the prior year of $4 million. And segment adjusted operating income increased to $7.3 million or 19.3% of sales compared to $4.3 million or 13.5% in the prior year. Our Specialty Chemicals revenue decreased to $31.1 million compared to the prior year of $33.5 million.

Lower sales were driven by $1.5 million of sales that shifted out of the second quarter 2017 into the third quarter of 2017, creating a tough comparable, while rig count growth rates normalized on a year-over-year basis as well as lower sales in mining end markets.

Segment operating income was $4.0 million compared to the prior year period operating income of $3.1 million. Adjusted operating income decreased to $4 million or 13% of sales compared to $5.3 million or 15.8% of sales in the prior year. The lower profits were reduced -- were due to reduced volume along with negative product mix.

Moving back to our consolidated results. Our consolidated gross profit increased to $30.2 million compared to the prior year level of $27.4 million. Gross margin as a percentage of sales was 43.7% compared to 41.9% in the prior year period. Higher gross margin compared to the prior year primarily reflected the increased sales volume.

Our consolidated operating expenses decreased to $21.9 million or 31.8% of sales compared to the prior year level of $22.2 million or 34.1% of sales.

Lower operating expense as a percentage of sales was a result of savings realized from prior year restructuring and realignment activity that did not recur during the current year period, partially offset by acquisition-related operating expenses.

Operating income from continuing operations for the third quarter 2018 was $8.3 million or 12% of sales compared with $5.1 million or 7.9% of sales in the prior year. Adjusted operating income from continuing operations was $8.3 million or 12% of sales compared to the prior year period of $7.7 million or 11.8% of sales.

The effective tax rate on continuing operations for the quarter ended December 31st, 2017 was 66.1%. And this unusually high rate was primarily due to the one-time transition tax of $4.9 million for mandatory repatriation based on cash and net accumulated earnings and profits of our foreign subsidiaries.

Income from operate -- continuing operations was $2.6 million or $0.17 per diluted share compared to $1.9 million or $0.12 per diluted share in the prior year period.

Adjusted to exclude one-time expenses and applying a normalized tax rate, adjusted income from continuing operations in the third quarter of 2018 was $5.1 million or $0.32 per diluted share compared to $4.9 million or $0.31 per diluted share in the prior period. Our net debt at quarter end was $13.6 million.

We closed the quarter with $26.5 million of cash on our balance sheet and had $259.8 million of borrowing capacity on our revolving credit facility, as we only had $28 million outstanding against the maximum line of $300 million, which provides ample flexibility to fund our organic growth and acquisition strategy as well as other alternatives.

As a result of the tax reform bill, we'll be moving approximately $20 million of cash that has been previously unrepatriated and trapped in Europe and Canada back to the U.S. and will use those funds to further reduce the outstanding balance under revolver.

Our operating cash flow from continuing operations for the nine months ended was $47.1 million compared to the prior year period of $33.7 million.

We expect our operating cash flow from continuing operations to be further enhanced in the future, driven by continuing strong performance of our strategic businesses as well as the benefits of a lower domestic corporate tax rate passed in the recent Tax Reform Bill. Now, I'll hand the call back to Joe for closing remarks..

Thanks you, Gregg. In closing, we're optimistic as we move forward with a more efficient platform. We will continue to look for ways to improve our operations and drive shareholder value.

I want to take this opportunity to thank all my colleagues at CSW Industrials for their diligence and professionalism as we continue to serve our customers and to steward well the capital interest to us by you, our shareholders. Thank you for your interest in CSW Industrials. And operator, now, we're ready to take questions..

Thank you. We'll now be conducting question-and-answer session. [Operator Instructions] Our first question today is coming from Joseph Mondillo from Sidoti & Co. Your line is now live..

Hi guys. Good morning..

Good morning Joe..

Good morning Joe..

So, just regarding the decision to sell off the Coatings business. Just wondering this late in the downturn, just curious on what your feelings are in terms of being so late in the cycle and is it just a diversify way from such a cynical type of a business? And just give us a little more color on how you came to that decision.

And then also could you give us an idea what the profitability of this business has been over the last few quarters? Was this breakeven? Was it a loss? Any idea on that would be helpful as well..

Sure. To address the timing, yes, we're almost three years into owning this business, Joe, and really the downturn began immediately upon our acquisition. Our timing was terrible. And this has been a -- if you look at the rail car manufacturers, they are down over 50% revenue and we followed their decline as well over that period of time.

We recognized that we may be late in the cycle, although we do not expect a big bounce back, a V-shaped type of recovery. It's too late for that. And -- so we look at this just with a realistic view, our sales decline has been such that the scale of business just doesn't work as a business for us, and it does not meet our profitability standards.

You asked about profitability of the business, actually losing money. So, it will be accretive to our shareholders to sell this. And so that's another thing which is not acceptable to us. We're not going to maintain businesses that are losing money.

And so hard call, tough decision to make, but we think it's absolutely the right thing for the shareholders..

And Joe, this is Gregg. A couple of things. One, we are going to be issuing a Form 8-K in the next couple of days that will be recasting on a retrospective basis, quarters beginning with Q1 -- fiscal Q1 of 2017 through Q2 of fiscal 2018 since Q3 is in our 10-Q as well as our earnings release.

So, that will give you a better idea of the individual quarters for both our operating and our Strathmore business on a disc ops basis. Relative to Strathmore specifically, in the quarter, they lost roughly $6 million of operating income pretax this quarter and that compares to last year of losing roughly $1.8 million of operating income.

And then, over the nine months ended, they had -- we had lost roughly $11.7 million pretax for the nine months this year versus -- and that excludes the impairment charge that we took versus roughly $9 million last year, which excluded a $2.8 million impairment last year.

So, I think, as Joe mentioned, we simply looked at it and said, it's in the best interest of shareholders to prune unprofitable business lines that don't have a clear path for profitability. As Joe said, we just don't expect the market to return enough to get us where we would need to be and this is the right action for shareholders..

Okay, great. I appreciate that. In terms of your sort of overall reorganization plans that you've been going through.

I know dealing with the facilities and trying to reorganize the facilities and definitely focusing on inventory and working capital and such, how does this change that whole aspect of it? And looking at working capital and free cash flow, how does selling off this business change all that?.

Let me address the first one for you, Joe. The primary planned consolidation projects that we've had been really two. One has been the Jet-Lube, Whitmore consolidation, which is complete, and that is separate and discrete from the Strathmore business; and the Coatings business.

And so the Coatings business had its own set of facilities and we had gone through a rationalization there previously. And at this point, we would expect to kind of maintain the status quo pending a sale. And so really doesn't affect the consolidation and capacity utilization efficiency, projects that we've had ongoing.

As I said, the Jet-Lube, Whitmore facility consolidation is complete. And then from a working capital inventory standpoint, I'll let Gregg address that..

Yes, from working capital perspective and all respects of the individual components of working capital, this doesn't change that. It's still a priority for us to continue to drive improved working capital and increase turns in working capital, inventory, higher DPO, et cetera.

What it does from an operating cash flow perspective, as you can see in our numbers, our continuing operations, operating cash flow is much stronger as this company -- as Strathmore had both negative earnings and negative operating cash flow. So, this will only further strengthen our operating cash flow.

As I mentioned in the call, we had over $47 million of operating cash flow from continuing operations for the nine months ended. We have one quarter yet to go and then when you take into account the Tax Reform Act, lowering our effective tax to roughly 25% to 27% that will also further enhance our cash flows on a go-forward basis..

Okay. And then just lastly and I'll hop back in queue. Just wondering, now with the sort of combined Specialty Chemicals business, you have the existing business that was -- has been growing at extremely high growth rates over the last couple of quarters at least.

What kind of growth rates have Sealants & Adhesives been seeing? And just overall in terms of looking at the segment in general, now that we're sort of lapsing or anniversarying these easy comps within the oil and gas and other parts of Specialty Chem.

Could you give us an idea of what you sort of think of this -- sort of normalized, or at least, over the next maybe four quarters or so, what kind of revenue grow do you think the segment can generate?.

Yes, Joe, it's a great question.

As you know, we don't give a lot of -- we don't give guidance here, but the growth in kind of Specialty Chemicals is not going to be -- the macro market is not going to be that different from GDP growth, where we have to outperform is through innovation and through opening new markets and new applications for our products.

And I think that's one of the things we've done really well. And so we've said all along that we -- we're not a GDP-growth business. We're going to grow well in excess of GDP and, obviously, we've seen that in the past and we expect that in the future. Whether we can maintain double-digit organic growth rates, that's hard to do.

But we certainly see GDP picking up a little bit and we should be well in excess of GDP growth through, again, product innovation and through geographic expansion. As I mentioned, we had some international sales initiatives by adding new sales folks in new geographies and those are working out very well.

The domestic coal mining markets are contracting. And so we have to find new geographies and we've been doing that fairly successfully. That's a continuing area of focus and emphasis for us so that we can maintain a growth rate that is well in excess of GDP..

And I would also add, Joe. This is Gregg, again. When you look at our first 2 fiscal quarters for Specialty Chem, they were greatly benefited by the lower rig counts that we were lapping and distributor stacking more of our product.

Obviously, and then as well, as we mentioned, we had $1.5 million impact of backlog that shifted out of Q2 last year into Q3 of last year, which artificially benefited our fiscal Q2 of this year and hurt our fiscal Q3 of this year. And so that cost us to be flattish in the quarter and then mining was down slightly.

And then to your last question, that you posed on the Sealants & Adhesives, I completely agree with Joe and his comments about that that is basically a GDP environment and we have grown slightly better than GDP there..

Okay, perfect. Thanks a lot. Appreciate that..

Thank you, Joe..

Thank you, Joe..

Thank you. Our next question today is coming from Jon Tanwanteng from CJS Securities. Please proceed with your question..

Good morning, Joe and Gregg and thank you for taking my questions. The first one is--.

Hey Jon..

How are you doing. The Coatings business. How much revenue did you generate in the quarter? If you gave the--.

Yes. In the quarter, revenue was $4.6 million and year-to-date, it was $19.3 million. And for everybody's benefit, obviously, everything has been released this morning. So, I understand people haven't been able to see all the pieces. There is a footnote in our 10-Q note three that gives a lot of this information for any more details that people want..

Okay, great. And then just given the op income number you talked about before, I think it has consolidated. Your earnings for the quarter would have been much lower than what they were right now, I assume that's--.

Correct..

That is correct..

That's correct..

Okay. You announced a plan to sell the business. What kind of price can you get for Coatings business, which I think, get high multiples, but you don't have any profits. So, I'm just wondering what your expectations are..

Yes, it's a great question, Jon. And we made a handful of phone calls out to some kind of usual suspect strategics prior to the end of the year. Most people were not in a position to respond appropriately or aggressively given the holidays. But recently, in consultation with the Board, we've decided to hire a banker and run a process.

And so, as you know, I mean, this is a little bit of a puzzle to figure out the valuation and so we think the best way to make sure that we maximize the value here for all of us is to run a process and to make sure that we have as many potential bidders as possible. So, answer is we don't know. But two things I would say.

Number one is we're going run a full process and make sure that we get the proper kind of price discovery there and ensure ourselves that we have maximized value. And number two is that we have taken a write-off this quarter that we believe is fully sufficient that we will not have to take another write-off.

So, there should not be another shoe to drop..

And then I would also add, as Joe said, we're hiring a banker. We selected one, we're just in the process of waiting for the engagement letter to come back to be executed. So, we can't say who they are yet, but it is a national banker that has a broad reach..

Got it.

And given that you have taken a write-off, what is the book value that you are carrying at it right now?.

We prefer not to say that because we don't want to put a ceiling on what we can sell it for, knowing that this is a public discussion. But it was a substantial impairment. We wrote down $46 million. Last year, you'll remember we wrote down $2.8 million as well.

So, we have taken -- as Joe said, we have taken a charge such that we do not expect to take further charges. On a go-forward basis, it's really going to come down to the operational results of the business while we still own it..

Got it. Thank you. And then just on the projected improvements in taxes that you are anticipating.

What is the improvement in cash flow that you're expecting, either compared to what the tax rate was before or maybe against the prior year?.

Yes, I think the best way to look at that is -- the prior year had some -- still had some really strange effective tax rates from a GAAP perspective. And so you'll recall that we have typically used an expected effective tax rate of around 35%, and we were roughly there for the last couple of quarters.

Our effective tax rate this quarter, like most companies, was significantly impacted by the Tax Reform Bill, which caused us to be high.

But I think the best way to think of it from a cash and earnings perspective is if you just look to our future earnings of our business and take an effective rate going from roughly 35% down to between the 25% and 27%, so somewhere between eight and 10 points, that should be the benefit both for cash and for earnings..

Okay, great. Thank you. Just any update to the M&A pipeline. If opportunities and valuations have strengthened or weakened in the last 90 days, obviously, you'll generate some cash from selling the Coatings business and you're getting a stronger tax -- cash flow from taxes.

Is the money burning a hole in your pocket at this point? Or how do you kind of process at this point?.

Yes, John. No, we remain exactly at the same place we were before. Money is not burning a hole in our pocket. We're going to maintain discipline. Valuations have not changed, so we just have to dig deeper for those opportunities. That's one of the reasons I was at the trade show in Chicago, the HVAC Trade Show.

We did visit with some prospects there, but I would say this pipeline is really unchanged. I mean, we continue to look at a lot of businesses and we're trying to be very, very disciplined and selective in that and valuations are high. But you make a good point with the repatriation saying, our revolver down, higher free cash flow.

As a result of the operating results and the lower tax rate, we are going to have an opportunity just to begin to build capital and that will provide us with some really nice options..

Got it. Last one for me. Just -- you mentioned you expect the drilling markets to be relatively stable from here. We've seen a couple of larger announcements from majors like Exxon, saying they're going to increase production in the Permian.

Have you factored that into your long-range planning and how that impacts your Specialty Chemicals business?.

We haven't. I mean, again, I'm not going to predict the energy markets or the commodity price, that's for sure. But we've seen the prices of the commodity kind of stabilize here in a kind of $50 to $60 range, which is a reasonable price where operators are profitable in the Permian.

But you're right, I think there's a lot of real positive signs and opportunities there. We're not predicting that. We're not counting on that, but I think we are well positioned to take advantage of it when it does come..

Thank you very much..

Thanks Jon..

Thanks Jon..

Thank you. Our next question today is coming from Liam Burke from B. Riley. Your line is now live..

Yes, thank you. Good morning Joe, good morning Gregg..

Good morning Liam..

Good morning Liam..

Joe, I know architectural products can bump around on a quarter-to-quarter basis. They are project-based in nature. You had tough comps from a year ago.

But in any kind of sense, could you give us a sense of how the business is going on a longer term basis, either how your backlog looks or any kind of sense as to when you get back to growth?.

Yes, it's a great question, Liam, you're right. The lumpiness of the large scale projects kind of insert some volatility into the results and so we're all mindful of that. I think that as we look at third-party, we look at third-party data, there's no question but the commercial construction cycle has been a little spotty in the last year.

Multifamily, in particular, was down double-digits. And so those are factors that we have to fight through. And I would say that Smoke Guard, in particular, architecturally specified building products side has had a little bit of softness. And -- but it's interesting.

Greco, which is primarily related to the multifamily residential, again the third-party data says that's down by 12% for calendar year 2017 and Greco was up dramatically. We had great results there. So, these are niche little products that a couple of projects that we win or lose can make a difference here.

And so I think that we have seen a little bit of softness in the kind of general architecturally specified building products segment or end markets, Liam. And we are monitoring that very closely. We don't think at this point that it's terribly concerning, but we're monitoring it.

And I think that we're redoubling our -- I know we're redoubling our efforts with respect to sales and sales leadership there to make sure that we're maintaining our presence and driving that business forward..

Okay, great. And on the Specialty Chemicals front, I know there are some puts and takes. I mean, the margins were down year-over-year. You've incorporated some of the old Coatings business in there.

But Gregg, can I get a little bit more detail as to what was the product mix in there or what moved the margin?.

Yes, the biggest issue, Liam, was the negative product mix. You'll recall we've been talking about that for the first couple of quarters, in the first couple of quarters, where we saw a very strong organic growth because of the catch-up on rig count and stocking of distributors, et cetera. That helped our topline.

It also helped our bottom-line, but we did see negative mix throughout the first two quarters, given that the revenue was actually down in the third quarter. That negative mix did continue and was compounded by the lower revenue on top of it..

Okay. Thank you Gregg..

Welcome..

Thank you. Our next question is a follow-up from Joe Mondillo from Sidoti. Your line is now live..

Just a couple of follow-up questions if you don't mind. You mentioned, I think, in your prepared remarks that weather was -- and did adversely affect your Industrial segment. Could you clarify that? And if so, I assume the growth rate should be a little higher then, however, that affected the segment..

Yes, the weather, how it affected it in the fiscal third quarter. The cold snap that the country saw, the heavy snow has certainly affected the HVAC and really when you think of us, it's more on the AC market.

And as we've spoken before, where we get our biggest strength is in the ductless mini-split, which have had significant growth and still does well and we did well in the quarter. But we did see a slowdown from what we would have expected in the third quarter because of that cold snap..

Okay. And then, I believe it's the Greco business that has that Toronto project.

How significant is that further go-forward quarters? Is there any way you can help us think about how big that project will be?.

The project is the largest they've ever had. It's a multimillion dollar project for Greco over the next three to four quarters. As to how much it is per quarter; that will be largely dependent upon weather in Toronto.

And while they have started, certainly the weather up there has slowed that project, and so we didn't see much in the way of revenue in fiscal Q3.

Depending on what the weather holds for this quarter will have a factor in our fiscal Q4, but certainly once the weather turns and gets nice, they will be building -- construction will be looking to move as quickly as they can, which will in turn help us.

And I think the best way to think of Greco is you look at what they -- what we've done there and the strength, $14.4 million year-to-date versus $13.5 trailing 12-month, our growth is up very nicely and we expect that growth to -- for the areas that we serve to continue to be strong for that part of our architecturally specified building products..

And Joe, not to put too fine a point on it, but that has -- that growth has occurred. We really haven't seen much out of Eau de Soleil project yet. That is just beginning to deliver, and those results -- those shipments will be seen in the results over the next two or three quarters..

And their backlog -- our backlog for that business has grown nicely because of that project..

Okay.

And the backlog, at the rest of the architectural building business, has that -- can you -- how far ahead can you see in terms of backlog? And has that started to improve? Or do you see any signs of getting any better sort of -- just sort of stable at this point?.

I think we look at backlog kind of 12 months out and I would say that the backlog is even too down a little bit over this time last year. And again, number of different factors could be affecting that. One thing that you -- we do hear about in the marketplace and hear about broadly is labor shortages in construction.

And so construction projects are having a hard time making progress forward and we're feeling some of that..

Okay. And then just lastly, I just -- I'm sure you mentioned this but I missed it.

In terms of the new tax rate, what are you expecting going forward? And then the corporate cost run rate looked a little high this quarter compared to -- I mean, maybe by a few hundred thousand dollars, but just wondering that $3.1 million that we saw in this quarter, is that good run rate that we should expect? Or should that come down at all? Or what are we expecting for that?.

Yes, Joe, this is Greg, again. And the effective tax rate, we've traditionally set our effective tax rate in 35%, 35.5% range.

With the new Tax Reform Act, we would expect our effective rate to drop to the 25% to 27% range, certainly not all the way down to down to the 21% for domestic and that's primarily due to a couple of aspects in the reform package. One is the continuing repatriation tax on foreign earnings that will -- that the law put into effect.

Two is you have a lower shield, Federal shield and state taxes. And while on the corporate -- while on personal rates, that shield went away. The corporate rates are still there, but it's no longer 35%, it's 21%. So, that would drive the effective tax rate up some.

And then the other one is the impact of Section 162(m) for corporate officers and how the changes there impacted it. So, again, look at a rate decrease of between 8% to 10% on the corporate cost. Our Q3 is typically the highest of the year. There is some seasonality there due to year-end audit work and things of that nature.

So, I think that the number that you see in our third quarter is ticked up from fiscal Q2, but that is the higher rate. Fiscal Q1 and Q2 are the lowest of the year and fiscal Q3 is the highest and then fiscal Q4 slightly in between..

Okay. Thanks a lot. I really appreciate it..

You're welcome..

Thank you. We've reached end of our question-and-answer session. I'd like to turn the floor back over to Joe for any further or closing comments..

Again, just want to say thank you, everyone, for your interest and your time this morning. And we look forward to speaking to you again at the end of our fiscal year. Thank you..

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today..