Carlisle Companies Inc (CSL) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Carlisle Companies fourth quarter 2002 conference call.

During the presentation all participants will be in a listen only mode.

After which we will conduct a questions and answers.

At the time if you have a question please press the one followed by the four on your telephone.

As a reminder this conference is being recorded Thursday, February 6, 2003.

I would now like to turn the conference over to Mr. Rick McKinnish, President and Chief Executive Officer.

Please go ahead, sir.

Thank you, welcome to Carlisle's 2002 year end conference call.

With me as usual is Kirk Vincent, our Chief Financial Officer.

Our format today is going to be the same as it's been.

Kirk will summarize the financials.

He'll turn it back to me for some operating comments.

I will make a few comments about our outlook and we will open it up for some questions.

So with that I will turn it back to Kirk.

Thank you, Rick, and good morning, everyone.

Last evening Carlisle released its fourth quarter and full year 2002 results and I would like to review the financial results with you now.

Beginning with the quarter, Carlisle announced that it almost doubled earnings from the prior year' fourth quarter on a 7% increase in sales.

In fact, but for a $500,000 loss on the sale of our European power transmission belt business, which occurred on December 30, 2002, we would have achieved a double.

Net earnings went from $7.6m, or $.25 per share in the fourth quarter, 2001, to $14.9m, or $.48 per share in the fourth quarter, 2002.

The loss on the sale of our European power transmission belt business cost us $.02 per share.

The largest fourth quarter earnings improvement came from Carlisle Food Service which is part of our general industries segment.

Carlisle Food Service suffered last year from a significant drop in casual dining and travel following 9/11.

Carlisle SynTec in our Construction Materials segment and Carlisle Tire and Wheel in our Industrial Components segment also showed an impressive year over year quarterly earnings improvement.

In fact, Carlisle Tire and Wheel did achieve a double.

It doubled its EBIT, or earnings before interest and taxes, in the fourth quarter of 2002 for the prior year' fourth quarter on record fourth quarter sales.

From a sales standpoint fourth quarter net revenues for Carlisle increased about $30m or 7% over the prior year's fourth quarter revenue.

Our Construction Materials segment showed the largest increase, partially as a result of the acquisition of MiraDri(ph) in October, 2002.

And as I said earlier, Carlisle Tire and Wheel achieved record fourth quarter sales.

We also saw in the fourth quarter increase in revenues at our food service, Johnson Truck Bodies and Carlisle Life Sciences businesses.

Now, moving on to the full year, Carlisle recorded net earnings of $72.4m, or $2.37 per share before $43.8m, or $1.43 per share charge for goodwill impairment under FAS 142.

This non-cash FAS 142 charge was reported as a change in accounting principles effective January 1, 2002.

And it affected our transportation and general industry segments.

Net earnings last year were $24.8m, or $.82 per share, but included a $21.5m or $.70 per share restructuring charge.

So without the effect of the FAS 142 goodwill impairment and with a 2001 restructuring charge and adding back goodwill, amortization that occurred last year but not this year, net income for Carlisle went from $54.7m, or $1.80 per share in 2001, to $72.4m, or $2.37 per share in 2002.

In other words, trying to get the earnings on an apple to apple basis, 2002 net income was 32% above 2001 net income, or a 7% increase of sales.

Most of this earnings improvement came from Carlisle Tire and Wheel, which almost doubled its 2001 earnings in 2002.

Our food service division which more than double its 2001 EBIT, our transportation products segment and our Construction Materials segment also contributed to the year over year earnings improvement, along with, to a lesser extent Johnson Truck Bodies and Carlisle Life Sciences.

Also contributing to improved earnings was about a $12m reduction in interest expense in 2002 from 2001.

We did see earnings deterioration at our specialty products division which manufacturers off and on highway braking systems, at Tensolite(ph), our high speed wire cable business which is in the general industry segment and which closed a plant this year and incurred about a $4.5m cost in shut down and relocation fees.

We also saw lower earnings at Carlisle Process Systems, our cheese, milk and whey manufacturing systems business.

From a revenue standpoint 2002 net sales of $1.979b was a record for Carlisle and compared to prior year sales of $1.849b; about $114m of the $122m increase came from acquisitions.

However, Carlisle Tire and Wheel, our Construction Materials segment, Carlisle's Walker Group and food service division did show impressive organic growth year over year.

Unfortunately, the revenue growth was offset to a large extent by revenue declines at our specialty products segment, at our automotive segment and Tensolite and Carlisle Process Systems.

Let's talk a little bit about cash flow right now.

Cash flow from operations was $69m in the fourth quarter, compared to $85m in the fourth quarter last year.

For the full year 2002 cash flow from operations was $226m, or $1m more than cash flow operations last year.

Total capital expenditures were about $39m in 2002, versus $66m last year.

Carlisle generated $24m of free cash flow, and we used this free cash flow to pay down debt.

We improved our BS debt to total capitalization of 46% at the end of last year to 35% at the end of this year.

Now I'd like to turn the call over to Rick again, Carlisle's President and Chief Executive Officer, for additional comments

Thanks, Kirk.

I think Kirk summarized the year but I would like to add a couple of existing, new comments.

Basically to summarize in one sense, we are disappointed with the year but we are pleased with the progress we've made through market share and internal improvements.

We've got 11 business units that fall into the six reporting segments that you see in your press release.

The majority of these businesses had nice improvements with no help from their markets.

We had three businesses that significantly under-performed the prior year and Kirk has talked about them.

But each of these businesses when you study the detail had major restructuring which included shut down and start up of entire plants.

These plant closing were covered at prior calls.

I'm not going to get back into them at this time.

We did elect to make some changes in our Specialty Products segment late last year.

At you know, this consists of two braking companies, Motion Control, that makes heavy-duty friction primarily for class A trucks, and Industrial Brake and Friction that makes braking systems for all highway construction vehicles.

We elected to consolidate these two companies under one management team to capture synergies and additional efficiencies.

These changes were made in December and we look forward to better results in '03.

We think it's important, I will try to give you some numbers that Kirk did not provide.

We think it's very interesting to look at price erosion, especially when you are experiencing so many soft market conditions.

Our total price erosion in Carlisle in 2002 was $9.4m.

That's slightly less than one half of 1% of sales.

We think that speaks volumes about our position in many of the markets we serve.

We grew $122m in '02 but there was some very interesting swings in that number.

Four of our businesses grew $80m organically -- roofing, tire and wheel, food service and the Walker Company.

I'd like to mention the Walker Company, we haven't talked about them in the last several calls, they make specialty stainless products for several markets.

One of the most interesting are barrier or containment systems for the pharmaceutical industry.

This business is starting to grow and we are very excited about the opportunities for Walker in the pharmaceutical sector.

We had three businesses that offset this $80m of organic growth that shrank $70m.

It's a very unusual year, in my experience we've never had this kind of volatility in our markets.

But we had three businesses that shrunk $70m, the auto business, the commercial aircraft business, which is Tensolite, and the cheese equipment business.

I think it's very important to understand how the year unfolded as far as revenue.

At the end of the first quarter our internally growth in Carlisle was a negative $47m.

So in the last three quarters we were able to offset, more than offset a dismal start to the year and we built momentum throughout the year in almost all of our markets.

We've been providing factory utilization numbers the last several quarters.

Our fourth quarter utilization in our factories was 65%.

This resulted in a negative overhead vance(ph) of $20.7m.

As you all know this varies with product mix.

This negative overhead vance goes away in Carlisle when our factory utilization is in the mid 80s, depending on product mix, somewhere between 83% and 87%.

The unabsorbed overhead for the year was $82m.

And our factory utilization for the year was 68%.

To give you some idea, we had record factory utilization in 1999 and the difference in unabsorbed overhead is $50m pretax, or $1.00 of earnings per share.

I'd like to conclude with a few comments about outlook.

As you know, Carlisle operates in some seasonal businesses.

We historically do not provide guidance this early in the year.

Last year's guidance came out in the second quarter.

But we are comfortable now providing guidance for the year.

The guidance in the press release is $2.60 to $2.80 per share.

This represents a 10% to 18% growth in earnings.

The sales growth that we anticipate or forecast at this time has been impacted by the divestiture of the power transmission business in Europe which was $35m in revenue.

We still are forecasting at this time mid-single digit growth of between 4% and 7%.

That's with no additional acquisitions.

To anticipate some questions about some of our major markets I thought I'd make a couple of comments about commercial construction, a very important market to Carlisle.

Now I am talking about the commercial construction market, not our business, this is how we see it in '03.

New construction, commercial construction we have down 3%.

Now that's on top of double-digit decreases in '02.

But re-roofing, we currently forecast up 2% to 3% aided by the real winter that we are having in many parts of the country.

The net effect of that is a flat commercial construction market in '03, and that's what's in our model.

We are in 30 markets as we've mentioned many times, most of these markets have stabilized, and we are forecasting flat to very little growth in '03 from a market perspective.

With that I would like to turn it back to the operator and we'd like to get some questions.

Thank you.

Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has answered and you would like to withdraw your registration, please press the one followed by the three.

If you are using a speaker phone please lift up the handset before entering your request.

One moment please for your first question.

The first question comes from Deane Dray with Goldman Sachs & Company.

Please go ahead.

Good morning, Rick and Kirk.

First question goes to your last comments on guidance, Rick.

It was interesting for you to say typically Carlisle doesn't provide guidance at this stage in the year.

I would imagine that the level of uncertainty geopolitically, et cetera, is probably at its peak right now but still you are going ahead and giving some guidance.

So just give us some color on what sort of confidence level do you have in making these kind of projections for the year.

Well, Deane, I mean, you're right, we are in a seasonal business and we really don't get into the season until March, April, May.

But we've been spending a lot of time talking to our customers, understanding inventories in the system, we've got our backlog analyzed better than we did a year or two ago.

We just think our information system and our ability to forecast is much improved from where it was several years ago.

And we are comfortable, quite frankly.

I don't know of any other way to say it.

I'm giving you some overall market guidance where we think our markets have stabilized, our backlog is up slightly.

We feel pretty good about our current position.

And the inventories in the channel in most of our markets are in very good shape.

So that's giving us the confidence to provide guidance.

Now, my guidance, the key phrase is that we are not anticipating major events or catastrophic events.

We are forecasting flat to modest improvements in the market that we serve.

And that's how we see the picture at this time.

So that's really all I can tell you about it.

We are just comfortable today providing guidance today.

Then just to drill down a couple of the inputs, first of all, the level of detail that you provide on factory utilization is extremely helpful and so we really appreciate it.

It helps us size where you stand and where the leverage is.

The point about price erosion being less than a half a percent, what are you assuming for '03 in terms of pricing and then, in the same breath, what about your raw material costs?

Takes us through expectations, carbon black, steel, et cetera.

Okay.

Well, we have another ½% of 1% pricing erosion in our '03 model and we have a negative swing of raw materials in '03 between $10m to $15m.

Can you break that out by raw material?

Well, let me just summarize.

Almost all of the $10m to $15m of the negative swing in raw material is in our rubber products area, which is a significant area.

As you know our belt business, our tire business and our roofing business are rubber related.

So the swings for us in raw material are primarily in that sector, Deane.

Okay.

Any impact from FX?

No.

Then lastly before I get back in line, one particular business, give us an update on SynTec.

Clearly better than expected on the revenue line and earnings.

What's the mix between Icopal, MiraDri?

You would have thought the weather would have been more of an impact this quarter, so just give us a quick update this, please.

Kirk, do you have the numbers on Icopal?

Sure.

Icopal was better than last year, Dean, I think, but not dramatically, by less than $1m, MiraDri did contribute at the EBIT level.

We didn't have it at all last year and that could be another $1m.

So if you look at their EBIT margins, instead of maybe 14%, if you take out the effect of Icopal and MiraDri, maybe you are down to 13%.

Deane, I want to add some color to what Kirk just said because I think you are touching on something.

I mean, think I said on previous calls, our SynTec company, our commercial construction company has executed extremely well in '02.

And when you sort through the numbers and take out the Icopal, you take out the MiraDri acquisition, you are going to see a slight margin improvement.

They've improved 50, 75 basis points in gross margin in a disastrous year which everybody would agree with commercial construction in '02.

So here's a business with new products that's clearly distinguishing themselves, building margin in a bad year.

So we are very pleased with our position in this very important business for Carlisle.

Yeah, I tell you, it's clear John Altmeyer(ph) is doing a great job there.

Did weather hurt or help this quarter?

It hurt somewhat and, Deane, I will just touch on '03.

A real winter works like this.

The roofers cannot go on the roof in the first quarter.

You can't get on the roof in the Northeast with snow and ice up there.

But it helps the roofing demand, the re-roofing demand the rest of the year.

So a real winter or severe winter hurts our business in the first quarter but helps it in the next three.

That's how we see it.

Great.

Thank you very much.

The next question will come from the line of Mark Keeler from CL King and Associates.

Please go ahead.

Good morning, Rick, good morning, Kirk.

If I could just pursue the commercial roofing business a little more.

I think in '02, the market, not Carlisle but the market, was down low to mid-teens but TPO was actually up and Carlisle benefited by capturing a large percentage of market share there.

And my question is, what do you expect for the TPO market in '03 as far as top line growth?

I mean, have any of the market dynamics changed there had in any way that would mean less market growth or less market share to Carlisle?

No, nothing has changed, Mark.

That's why I gave you, I knew there would be interest.

I singled out and gave you our market for new construction and re-roofing for the year.

I gave you those numbers earlier.

The TPO business, or the plastic membrane business, we believe will continue to take share of other roofing solutions.

But as it grows the rate of increase is probably going to slow down.

But we believe that we are positioned to capture the majority of the growth in the TPO membrane business.

We accomplished it in '02 and we think we'll continue to do that.

Sure.

And then with respect to capacity utilization for TPO, is there anything you have to do there if you do continue to capture increased market share in that market?

Yeah, a good question.

I mean, the current rate of growth, we are anticipating additional capacity demands in '04.

So, I mean, we might, depending on what we decide to do there, we are anticipating additional capacity requirements in 2004.

Okay.

And then let's just switch to the Industrial Components segment.

You know, the volume, of course, was down sequentially and the margins were down with the volume.

But was that the only thing going on there or are we still being impacted by continuing start up costs that the China plant?

Kirk, I need some help with the, were the margins down?

The EBIT margins were down sequentially from 7% in the third quarter to about 5½% in the fourth quarter.

And the volume was down from $147m to $133m in sales.

I think there may have been some costs in the China market due to the expansion of that facility to make power transmission belts.

But most of the decrease in margins was the result of lower volume.

Okay.

So then as we go throughout the year in '03, should we see increased margins as a result of the China operation coming up to speed?

Yes.

Mark, first let me say that I'm in a different location in Kirk and that's the reason why we have having a hand in it back and forth a little bit, I'm in a different city.

But one of the reasons that the industrial component margins has changed has been a full year in '02 of our belt business in Europe that we just sold.

See, when we sold $35m worth of belts in Europe in '02, it didn't make any profit.

Right.

So we divested that business the last day of '02 and it will shrink our '03 sales by $35m but will not change our earnings, okay?

So I think one of the reasons that we can do some more work on it but that you are seeing a declining margin in Industrial Components has been that full year of sales in a non-profitable European belt business.

We got rid of it last year.

Sure.

Then just one final question on the backlog, in the press release it said the backlog increase was due to systems in Carlisle Tire and Wheel.

If you can give us, I know you commented on tire and wheel but could you just give us a little more color on the pattern of the backlog build at tire and wheel?

Was it appreciably stronger than the previous year and what have you seen at tire and wheel in the first month of the first quarter?

Well, the tire and wheel business is on schedule.

January was as we forecast.

Really what's unfolding here, number one, inventories.

As we talk to our major customers in lawn and garden, which is the single-most important business to our tire and wheel company, as we talk to those customers there's a certain optimism.

Things have stabilized and we are talking about very modest but improvements in '03.

Now, weather can impact that the balance of the year but right now based on inventories we are forecasting a modest improvement in volume in lawn and garden in the first quarter.

Okay.

That does it for me.

Thank you very much.

If there are any additional questions please press the one followed by the four at this time.

The next question will come from the line of Deane Dray with Goldman Sachs and Company.

Please go ahead.

Just a couple of follow-ups.

What's the CAPEX outlook for the year and where does that stand in terms of, do you feel like you are at or below maintenance CAPEX levels?

Kirk, you have our CAPEX number for '03?

We are going to be, the plan shows $45m to $50m, Deane.

As you know we came in under $40m this year.

And I think $50m may be sort of maintenance, what we have to spend each year.

Although, as Rick said, we have plenty of capacity out there.

We've been spending above that $50m level prior to '02 and our plants are in good shape.

So I feel we are not harvesting these factories in any way, shape or form.

Kirk, is in anything in particular where that $50m is going, any IT spending, any kind of major projects that you can isolate?

I think the biggest project is the implementation of JD Edwards at Carlisle Tire and Wheel, and you absolutely right, that's an IT project.

What's the amount, approximate?

Less than $10m.

Deane, the other element of that is there's a sizeable amount of new product development capital that relates to tooling for new products.

And Carlisle Food Service, Carlisle Tire and Wheel, we hope to grow those businesses and anticipate quite at bit of capital spending in those areas for new product development.

Good.

And then, help me understand what happened with the sale of the European power belt business where you are saying that that had a $.02 loss on the sale.

Was that a transaction loss or were there any concessions?

What creates the loss?

What do you mean concessions?

It was a loss on the, it was an asset transaction, the price came in less than the adjusted book value.

Okay.

That's the, what gives rise to the $.02 loss?

Right.

Okay.

Good.

So that makes sense.

Then how about free cash flow?

You made the point that the expected use of proceeds was to pay down debt.

Is that true for '03, or any acquisitions on the horizon, and how do you feel about divestitures these days?

Let me start first off, you've seen our BS, Deane, so we are ratcheting up our acquisition activity and we are doing it with a high level of focus in the areas that I keep talking about, Construction Materials, specialty tire and wheel, power transmission belts and food service.

We are committed to finding the right transactions that add value into these markets where we currently have leadership.

And so with that said, yeah, we think, our hope is that there will be a balance in '03 of further debt reduction and acquisitions.

And divestitures?

Well, I mean, I talked about that in the past and we continue to work on improving certain companies and don't really have anything that's imminent at the moment as far as divestitures are concerned.

Okay.

Last question on Tensolite, what's the current mix between aircraft-related wiring and everything else that would be just be considered general electronics?

Okay, well, the good news is we've grown other areas and the commercial aircraft business is now a minority of their business, it's in the low 40%s, I don't know, 40%, 45%, 46% of that business.

It used to be 75% of the business.

We've right-sized this company.

I mean, it's undergone two major shutdowns of plants in '01 and '02.

It was profitable the second half in a dismal marketplace.

So we are well-positioned and Tensolite will be improved in '03 versus '02; even though we are forecasting, quite frankly, a continuation of a very poor commercial aircraft business in '03 and '04.

Hey, Rick, how much of that, I should have asked this, within Tensolite that's somewhere in the mid-forties aircraft, you said it's commercial.

Isn't that there some military in that as well?

There is some military in that and it's just a small piece for us relative to the commercial business.

There is some upside there, yes.

And is it all Boeing, or has there been any Airbus penetration?

We continue to submit samples and work with Airbus and anticipate some good news in the future but don't have anything concrete as yet.

We are also, quite frankly, a lot -- in the other general electronics there's a military piece there, radar related, surveillance, missile guidance, so there's military pieces outside of just the aircraft side.

Good.

Thank you very much.

Thank you.

Next question will come from the line of Bob Edmundson with Adage(ph) Capital.

Please go ahead.

Good morning guys, how ya doing.

Bob, long time, haven't heard from you.

Yeah, we're back.

Real quick.

You were nice enough, I think, to give us a really good profile of the commercial construction market and how that might impact you.

You mentioned the tire and wheel segment, can you just sort of give us the same granularity on your expectation for tire and wheel for '03, sort of the market and then anything that's going on specifically to Carlisle that might help you or hurt you relative to what your market outlook is?

I will touch base, I think I touched base on it.

I am talking markets now.

It's nothing to do with our internal revenue projections.

But the markets I've mentioned already that we think, the lawn and garden business, early in the year is going to be up very modestly because of inventories.

The weather will tell the story the balance of the year.

But, quite frankly, we've had a draught in major areas of the country, that's the worse possible thing you can have in the lawn and garden business.

So I mean hopefully some day we won't have a draught and that's a lot of upside there.

So we've got a very modest improvement for lawn and garden.

Last year our trailer business grew 18%.

People are seeking recreation closer to home, they are not traveling as much.

We are well-positioned here.

We forecast growth in the trailer business and we are forecasting growth in new products in the ag. and construction sector.

So basically in markets that are going to be flat to up to low single digits we are forecasting better than that in our tire and wheel company.

Excellent.

Also, the MiraDri, it looks like it added about $6.5m to your fourth quarter.

How many months was included in that number?

October, November, December.

Okay.

So that's just, is there any seasonality to that business?

Should we think about that as an analyzable number as we try to think about what increment we should throw into '03?

There's some seasonality to the business, Bob.

So it's similar to some of our other construction material businesses which are heavy in the middle of the year, second and third quarter.

Got it.

Lastly, just on Specialty Products, there was a fair amount in that fourth quarter in terms of actions taken to sort of fix that business, if you will.

Can you give us just some sense as to your expectation for Specialty Products in '03?

Is that break even, better than break even, slight loss?

Just sort of order of magnitude.

Better than break even.

Okay.

Right.

Thank you.

Gentlemen, there's no additional questions.

Please continue the presentation or any closing remarks you may have.

Well, that concludes my portion.

Kirk, do you have anything to add?

I'm finished, also.

Okay.

Well, thank you very much.

And we appreciate everybody taking the time to listen to our conference call.

And hopefully there's more interest than there was shown from the questions.

We anticipated more questions.

But thank you and that concludes our conference call.

Ladies and gentlemen, that does conclude your conference.

Thank you for your participation and I ask that you please disconnect your line.