Carlisle Companies Inc (CSL) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Carlisle Companies Inc. first quarter conference call.

At this time, all participants are placed on the listen-only mode and (inaudible).

It is now my pleasure to turn the floor over to your host, President and C.E.O., Mr. Rick McKinnish.

Sir, you may begin.

Thank you.

Good morning, everybody.

Welcome to Carlisle's conference wall.

With me and Kirk F. Vincent, our CFO.

Our format will be the same.

Kirk will summarize the financials and turn it back to me.

I will have comments about the operating unit, provide some out look and then we will turn it back to the operator for questions.

So what, Kirk?

Thank you, Rick and good morning, everyone.

Last evening, Carlisle released it's first quarter 2003 results and announced earnings of 17.1 million for 56 cent per diluted share on record first quarter sales of $476 million.

This compared to first quarter 2002 earnings of $12.8 million or .42 cents per diluted share before the impact of adoption FAS 142 .

After recognizing the non-cash goodwill impairment resulting from the adoption of FAS-142 Carlisle had a net loss in the first quarter of 2002 of $31 million for $1.1 per diluted share.

In other words, without recognizing the effect of the goodwill impairment in 2000, our net earnings increased 33% your quarter over quarter on a 4.5% increase in revenue.

We saw significant revenue improvement in our industrial component segment, driven exclusively by organic growth that Carlisle Tire and Wheel.

We also saw revenue growth at our construction material segment driven by acquisitions completed last year and at our general industries segment, driven by Carlisle Life Sciences, Johnson Truck Bodies and Carlisle Food Service.

Our specialty products segment and transportation segment showed slightly increased revenue over last year in our automotive segment experienced declining revenue.

I want to point out our industrial component segment which is comprised of Carlisle Tire and Wheel and Transmission reported increased revenue even though we sold European power transmission business in the fourth quarter of last year.

In the first quarter of last year, the European power transmission business contributed about 8.5 million in revenue to this segment.

So, even having sold this business off, we still showed a $4.8 million organic growth in this segment's revenue.

Earnings before interest and taxes or EBIT , improvements were realized that our industrial components, -- especially products, transportation products and general industry segments, was significant year over year improvement occurring at Carlisle Tire and Wheel.

The truth of the matter is that we saw earnings improvement in almost all of our businesses in a year over year basis except Carlisle SynTec (ph) in our construction material segment which was basically flat with last year in spite of a difficult quarter from a weather standpoint, and Carlisle engineered products which saw a decline in demand at its big three customer base.

We also saw an earnings decline at our European joint venture, ICOPILE (ph).

ICOPILE is a European roofing business and it saw its losses increased by $1.4 million over last year's first quarter.

Europe, like most of the U.S., had a very hard winter that adversely affected ICOPILE.

ICOPILE was also adversely affected by rising raw material cost, sluggish economies in France and Germany.

However, if you know Carlisle, you know our roofing business is seasonal and we're extremely confident of a second-quarter improvement in the United States and in Europe.

On a consolidated basis, net sales increased 4.5%, EBIT improved 22.6% and interest expense declined about 10% on lower borrowings and greater utilization of our low cost (inaudible) program.

We also have lowered our effective tax rate from 34.5% to 33.5%.

All these improvements resulted in a 33.2% improvement net income before the cumulative effect of the FAS 142 change in accounting principle which was effective January 1, 2002.

From a cash flow standpoint, we increased working capital by $54.5 million in the first quarter as we build the inventory in anticipation of increased demand and our construction materials in Carlisle Tire and Wheel businesses.

We also had an increase in accounts receivable from the end of the year as quarterly sales increased sequentially.

So we used $18.7 million of our cash in operating activities, we spent $10.5 million net on cap ex and other investments and paid dividend of $6.6 million.

Our short-term borrowings increased almost $26 million in the quarter.

In comparison, last year our working capital also increased in the first quarter.

By the end of the second quarter last year it has more than reversed itself.

Frankly we anticipate the same thing will happen this year as our seasonal construction materials and Carlisle Tire and Wheel businesses increased demand in the second quarter this year.

Now I would like to turn the call over to Rick McKinnish, Carlisle's President and Chief Executive Officer for some additional comments.

Thanks, Kirk.

I'm going to go through each segment and just provide a few comments to flush out each segment.

The first one is industrial components and this consists, as you know of our Tire and Wheel company and power transmission Bell Company.

Second group of only 4% but we invested 8.5 million of European belt business last year.

The Tire and Wheel business grew organically over 11%.

The growth occurred across most of their product lines.

Of particular interest, they drew their lawn and garden business, their all-terrain vehicle business and their trailer businesses quite a bit, double digits.

The trend of recreation closer to home is continuing, and we think it will continue for the foreseeable future.

In addition, to very health shares of OE (ph) business in all of these segments we have very high shares in the replacement channel, and this channel grew as well.

As many of you know, lawn and garden market is the single largest market segment served by our Tire and Wheel company.

We talk a lot about inventories in the channel.

Currently, today, inventories at our lawn and garden customers are light, and we anticipate continued solid demand in the second quarter in this very important lawn and garden business.

It's worth noting, I believe, that the EBIT margin in this segment is up 100 basis points.

There are two equal drivers in the quarter.

We exited the belt business in Europe and we had improvements in margin in our Tire and Wheel company in spite of a lot of volatility and raw materials.

The next segment is construction materials.

This is, as Kirk has mentioned, our commercial roofing company SynTec and a 25% interest in ICOPILE, a European commercial roofing company.

Europe had similar weather to North America.

It had a very harsh winter in the northern areas.

ICOPILE normally loses money in the first quarter, they lost money in the first quarter for 10 years and we plan on it but this year they had a $1.4 million worse quarter because of the weather.

On the other hand our U.S. roofing company SynTec orchestrated through their harsh winter much better.

They had flat earnings until last year in light of a substantially reduced number of roofing days-when there's snow and ice on a building, the roofer can't go up there.

The number of roofing days in the first quarter of '03 was dramatically below 2002 and we still had flat earnings.

Several of our key competitors that are public recently announced their results in the quarter and they had losses.

Very encouraging to us, when the weather broke in mid March, the activity levels changed dramatically up.

Quite frankly, all of our product lines at SynTec grew in march, even though we only had one half month of decent weather.

So the first quarter of roofing business is a very low quarter, we had a very poor result in January and February, when the weather broke in March, all product lines grew compared to the previous year.

We think that re-roofing activity in '03 is going to reflect a severe weather we have had.

There's a loft uncertainty in the construction industry currently.

But we don't have that uncertainty.

We have new products.

We have momentum.

We're gaining shares.

We're picking up new distribution all the time.

We anticipate improvement from the previous year in our construction materials segment, even though we're forecasting the overall market to be down.

And we did build some inventory to back up what we're talking about at SynTec and in anticipation of solid demand in the second quarter.

Next segment is automotive components.

Our current results there are consistent with our plan, consistent with our forecast and consistent with the guidance we have been given.

These comparisons, although negative, will continue the balance of the year.

We had some programs that we were on in the automotive business, the exterior trim parts that got phased out early because of refreshing certain models until these comparisons will continue until next year.

It's in our forecast.

The next two segments products and transportation products, had small improvements, in spite of soft market conditions.

The general industry segment, which consists of tensilite (ph), our high performance cable company servicing aircraft, aerospace and the high performance electronics business.

We have the Walter (ph) Company there which makes food and dairy storage, and specialty products for the pharmaceutical industry.

We have Carlisle process systems which makes cheese processing equipment and our food service business that we have talked about frequently over the last several calls.

The earnings improvement in this segment was across the board.

All four companies I just mentioned were improvement.

Of particular interest is two product lines at Walker.

Their pharmaceutical products, those (ph) business was up dramatically, they make barrier systems or containment systems for the farm pharmaceutical companies.

And the other business is refrigerated truck bodies or Johnson truck bodies.

They had an introduction of new products and both of these businesses grew over 30%in the quarter and had very strong similar earnings comparisons.

The growth at Walker, as you look at this segment, was partially offset by drop in revenue at our cheese equipment business of $5 million in revenue.

But the cheese business, I would add, improved their profits, even though they dropped $5 million in revenue.

I would like to provide some information which we have been doing the last several quarters that relate to our consolidated results.

We track price erosion.

Price erosion on the first quarter, across our entire company, was$1.4 million.

Eighty six per cent of that price erosion was in our automotive business.

Except for our automotive business, we're managing our pricing reasonably well in spite of these soft conditions.

Our factory utilization across the company in the first quarter was 74%.

That compares to last year's 70%.

Our unabsorbed overhead in the first quarter of this year was 18.9 million.

Last year, it was a negative 22.1 of unabsorbed overhead.

Slight improvements.

Our raw material costs were $1.6 million higher in the quarter compared to the previous quarter, previous year.

There's a lot of uncertainty out there in raw materials and we will probably get some questions.

We took raw material increases last year, weave managed those, we negotiated those, we passed along some price increases and quite frankly the bulk of this $1.6 million of negative raw material occurred late in the quarter, we had a spike (ph) late in the quarter.

Now, part of this spike has already backed down but we're forecasting, and it's in our guidance, raw materials being slightly more negative the balance of the year.

Your guess is as good as mine on what is going to happen.

A couple of comments about out look.

Our management team believes that we will continue to improve our businesses.

We're not waiting for these markets to improve.

We're taking action internally.

We don't care what happens in these markets.

The economic conditions that we've experienced in the first quarter have not improved.

But the current out look that we have in our businesses tells us that the guidance that we gave in February of 260-280 is still appropriate.

So we reconfirm our guidance that we gave in February of260-280 and with that I will turn it back to the operator and we would love to have some questions.

+++q-and-a.

Thank you, sir.

The floor is now open for questions.

If you do have a question, please press numbers 1 followed by 4 on your touch tone phone.

To remove yourself from cue, please dial the pound sign.

We do ask while you pose your question that you please pick up the handset to provide optimum sound quality.

Once again ladies and gentlemen that is one followed by four.

Please hold while we poll for questions.

Thank you and our first question is from Mike Harris of Robert W. Baird.

Good morning gentlemen

Good morning.

My first question relates to the margins in the specialty product segment as well as the general industry segment.

They were better than what we were expecting.

And just looking back over the past several quarters, the market trends in both of these segments have been jumping around a little bit.

Can you give us some indication if the Q1 quarter margins for both of these segments are sustainable in the near term?

Well, first, let me say, the margin in these segments are too low.

And I think I have talked about margins about a year ago.

We're unhappy on our margins.

These margins are way too low for specialty mixed business where we have leadership in many cases.

But the soft market conditions have slowed down our progress.

But to answer your question, we think continued improvement is available to us in these segments - what you're talking about.

Okay.

That is helpful, and then on the construction material segment, obviously ICOPILE had a negative impact on margins in the quarter.

You said ICOPILE historically loses money in Q-1.

Do you expect ICOPILE to return to profitability in Q-2?

Yes.

Is that be a significant turn around?

Well, I mean, it's been that way every year, they lose money in the first quarter and then are profitable the last three-quarters and we expect the same relationship.

Ok.

All right and in the automotive component segment, you talked about price deflation on a consolidated basis and you said a majority of that was in automotive.

Can you give us the price deflations for the quarter?

Well, I thought I did.

I said the price deflation for our company was $1.4 million and 86% of that was automotive.

That's the exact number.

And then organic sales growth quarter for the consolidated basis, I mean, you had a divestiture with acquisitions.

What was organic sales growth.

I, kind of estimate it to bed to be 3 to 4%.

Is that reasonable?.

Yes, it is and obviously we've had organic growth that at many of our companies a lot better than that.

I mentioned 11%, but we shrunk in the cheese equipment business and the automotive business.

Ok.

Which offset high single digit it organic growth over a lot of our companies.

Ok.

So the 3 to 4 is a reasonable estimate?

Yes.

Ok.

Just a couple more questions here.

Foreign currency, there wasn't really any meaningful impact from foreign currency in the quarter, was there?

No.

And then, Kirk, the tax rate of 33.5%, is that what we should be using going forward?

Yes.

Ok, and just a one final question, you know, there was a sequential increase in receivables, which. actually it was a 27% sequential increase by my calculations yet sales increased only 3% sequentially.

So that seems a bit high.

Is there anything unusual going on there?

I think it's just the market place and people dress up their balance sheets at quarter end and drag some payments but I'm comfortable where we are in the receivables.

Okay, great.

Thanks for the help.

Thank you.

Our next question is coming from Godfrey Brickhead (ph) from S.B.K.Brooks.(ph)

Okay, can you eliminate the other income and expense that went from 1.6 million to 3.1 million?

What's that about?

That was the increase in the loss that ICOPILE, Godfrey.

About$1.4 million.

We had other joint ventures in there, too, but that was the most of it.

Okay, thank you.

Thank you.

Our next question is from Sal Ludwig (ph) of McDonald Investments.

Good morning, guys.

Nice of you to squeeze out a decent quarter there.

Congratulations.

Thank you.

On the tax rate, when you had the loss at ICOPILE, that would seem to -- it would accentuate -- cause you to have a higher rate because ICOPILE is a net income number, is it not?

Right.

So you're sort of the -- you sort of back their loss out of the -- they lost -- the increment was $1.4 million.

What was their total loss?

2.7, Sal.

So if you were to sort of add that $2.7 million to your pre-tax, it would look as though you had a much lower tax rate.

What is driving your tax rate down?

And then in subsequent quarters, when ICOPILE makes money, that would have the impression of lowering your tax rate?

That's right.

ICOPILE is only one cog in the machine and there are a lot of moving parts, as you well know.

The tax rate decrease is a number of factors primarily driven by increased businesses at our offshore locations in mainland China and Trinidad.

But even without -- with ICOPILE the black or in the red, I still think, if you're looking for guidance, 33.5% is a good number to use for the rest of the years.

It sounds like 33.5 is a number where you have calculated where you think it will be for the year and you're going to apply that on a quarterly basis as opposed to it being influenced by ICOPILE making or losing money in a quarter?

That's right.

If something happens in the quarter that puts the 33.5% at a risk we will obviously change it but I think that is a fair number (inaudible)

Did you sell receivables in the first quarter?

No.

We're maxed out under that program at $100 million.

And we're at the max.

So why were your receivables down so much?

That is versus a year ago you did but not compared to the end of the year?

Right.

Sales of P.D.Europe (ph) was part of the reason for the year-to-year comparison.

Yes

Pardon me.

Yes, ok

And also in the first quarter last year we were not using the A.R.

Securitization program to the full extent.

We didn't have enough provisions in them to utilize the full 100 million the.

So 50 million.

More utilization this year than last year under the program and under the sale of P.D. Europe.

If you look, Rick, what you were talking about in the construction materials, looks like you're teed up for a dynamite second quarter, same thing in the industrial component.

Could those businesses be up 15, 20% in profits year over year in the second quarter based on what you've seen so far?

Well, Saul, I mean, I-- there's a lot of uncertainty right now.

It's pretty much all in my guidance for the year.

And I have talked about improvements each quarter, but I can't really forecast right now specific percentages for each quarter.

But you have got my number for the year.

And we're very comfortable with that.

Okay and where you talk about market shares, is there any particular segment where you could site examples of where you have gained market share?.

Well, I mean, we have talked about -- you really - let me talk about industrial, because the time will company grew 11% organically and we're estimating a point or two of market share in a lot of those segments, they have a lot of new products. they're a low cost producer.

We're excited about their opportunities going forward and the reviewing business -- there's no question we gained share last year, there's no question the first quarter was really half a quarter, when you look at the weather, but a lot of signs from the industry, we're just very bullish about our opportunities in roofing.

So our two big companies that, when you do the math, look at two-thirds of our EBIT are positioned very strongly quite frankly, going forward.

Then finally, I appreciate the numbers on the unobserved overhead where you went from roughly 22 to19 million so you picked up $3 million while your operating rate moved up 4 percentage points, so would it be sort of fair to say , (inaudible) for each percentage point, improvement in the operating rate, you picked up three-quarters a million dollars or unreserved overhead.

That would be fair and obviously, Sal, as you will know those numbers will change with product mix. but that's not a bad number today.

Okay.

Great.

Keep up the good news.

Thank you.

Once again, to ask a question you may dial the numbers 1 followed by 4 on your touch tone phone at this time.

Our next question is coming from Dean Andre of Goldman Sachs and Company.

Hey, Rick and Kirk, good morning.

First question, if we can go back to SynTec for a second, you had said the number of roofing days year over year in the first quarter was substantially less.

Can you put any numbers on that?.

I mean, we really haven't -- right now, Dean, we're obviously focused and we built inventory focused - the season is now here and we're focused on the second quarter, but there is no question.

We have got very strong shares in the upper Midwest and the Northeast.

And there were very few roofing days frankly in January and February.

I think at the end of February we looked at it and it was like one half.

But March got better mid month.

That's I want to provide some color on what happened to us in March when the weather broke.

I don't have an exact number, but it was pretty-dramatic to me the number of roofing days were down substantially.

Ok.

And then just to follow up on Saul's question, how do you gauge what sort of incremental re-roofing business is going to materialize?

Kind of thinking, you know can you think of think us through - is there a quote activity?

Are there a number of inspections that you're beginning to see?

And how does that compare over a normal second quarter?

There's no question that the quote activity demonstrates -well, first of all we have been in this business for thirty years and historically have been through mild winters and severe winters, so we've got thirty years of , you know, and knowing what happens.

But there's not question that we saw it in March when the weather broke and roofers could get up on the roof.

All the activity, I think I would used the word, increased dramatically.

So, yes, the quote activity, it's a lot of activity.

Severe winters ,that expansion and contraction creates lot of leaks in roofs.

So (inaudible) we have built inventory anticipating very strong demands in the middle of the year in re-roofing and have new products with pre-applied tape specifically designed for the re-roofing market.

So we're well positioned to get a greater share re-roofing than SynTec has ever been positioned.

Ok, Rick, so if we look at SynTec's margin this quarter and it looks like that's the lowest operating margin, and we go back a year, so how much of that decremental margin is weather and how much of that is pricing, raw materials?

Well, I gave you an overall raw material number.

I don't know unless Kirk has it unless it's in one of these pieces of paper.

There's no question but there were raw material increases at SynTec but the weather factor, Dean, was substantially greater.

Okay, and then just switching gears to the cash flow numbers, the increase in working capital related to the inventory bill, I think you said it was $54.5 million.

What, if you had to think about splitting that between Tire and Wheel and SynTec, what would that look like?

On inventory bill?

Yes.

Two-thirds, one-third.

I would say two-thirds CC and W. I mean, you've got some better numbers than that?

SynTec built their inventories a little over$14 million in the quarter.

And time wheel bit their quarter about 2.5 million.

So it's the other way.

Okay.

Good.

Rick, can you give us any update on the divestiture plans and, you know, on the other side of the coin, anything about potential acquisitions what the pipeline looks like and so forth?

Yes, I will say, Dean, obviously, we don't announce anything until we finalize the transaction.

But the acquisition and divestiture activity is -- there's more activity right now, there's more things happening.

And we think the environment for acquisitions is better today than it was a year ago,. so a year ago -- we're excited about that, and there's continued activity activity, as we have talked over and over again, we have continued on to focus on areas where we have leadership or can attain leadership.

So we hope to have some announcements this year on both sides of the ledger.

Okay.

Then last question relates to backlog.

How much of the increase in backlog are you expecting to be shipped, lets say next quarter?

Well, there's no question now -- a couple of things about backlog.

Remember, our roofing business, which is very important to us -- really it works without a backlog.

And that's a big part of our plans going forward.

But there's no question that we will ship -- you know, our backlog has an average time in it of about 60 days.

So you can do some math on that Dean.

Okay.

And then the increase in the backlog, you said came from the life science business, those are the barrier systems, right?

That's correct.

Now, some of that, you're seeing some lower national health spending.

How sensitive -- you said it grew 30% this quarter.

Is that your expectation for further double digit on these new products or how are you thinking about that?

Well, this was an easier comparison.

But t this is a double-digit organic growth company.

We're signing up preferred supplier positions with a lot of the major pharmaceutical companies.

We have got a lot of opportunities here.

And so we anticipate, you know, mid teens kind of growth for the next three or four years.

Okay.

Thank you.

Thank you.

Our next question is coming from Stephen O'Brien of Wallington Management.

Stephen O'Brien With the very bad weather this year versus last year, does that -- for the construction materials, does that actually cause an increase of demand for the whole year or is it a jump that comes through fourth quarter kind of makeup of the first quarter?

Historically it plays out over the balance of the year.

Because the roofing companies can only get to this at a certain rate.

And so you get these jobs in the cue and so to answer your question, it plays out over the balance of the year.

Okay, so it's not like the harsh weather causes an incremental break down in roofing, then?.

No, the harsh weather deteriorates the roofs and increases what we call " re- roofing " or replacement of existing roofs.

So this increasing "re-roofing " activity will play out over the rest of the year.

It doesn't -- I thought your question was, would it play out in the second quarter?

Ok, no, I was thinking the second through fourth quarter.

I didn't know if it was just the second through fourth quarter or stronger because of the inability to install roofs in the first quarter or in fact it really causes more demand for the full year.

You're saying it causes more demand for the full year?

The roofing business is seasonal.

Forget the winner.

Historically the first quarter, the northern half of the country does very little roofing because of weather?

Right.

So that's a historical seasonal thing.

We're just simply saying that that historical seasonal thing is in effect this year as with us.

But also because of a severe winter.

We're coming off several years of mild winters.

Now we had a severe winter.

Now we're going to have increased re-roofing activity, the balance of the year, in addition to the historical seasonal effect.

Okay.

And the raw materials increase in costs were primarily or totally due -- in the construction materials group?

No, they were across -- we have about 75% of our businesses that relate to rubber or plastics, and so that's spread equally across all segments.

Okay.

And were you able to get any price increases when the raw materials went up, so you get a little extra incremental (inaudible) in as they come back down or did that happen too quickly and you just get back to normal margins.

No, you get back.

In soft market conditions, I mean, you're challenged to recover the raw material, because on capacity -- a lot of companies are operating at low capacity.

So you can tell from our margins, you know, that we -- we tend to be able to manage through these raw materials inflationary periods pretty well.

And, you know, I talked about how that will play out.

We see raw materials slightly more negative at the end of the year but we historically recover these raw material increases.

Okay, thank you very much.

Thank you.

Thank you.

Our final question is a follow up from Mike Harris from Robert W. Baird.

Thank you.

Rick, just a high-level question here.

When you gave your initial 2003 guidance in early February of 260-268, that was contingent on a modestly improving economy.

Clearly this has not been the case over the past two months yet the company has reiterated that guidance range of 260-280 and my question is, is this still contingent on an incrementally improving economy on this point forward?

Because based on your commentary during this call that doesn't appear to be the case?

Well, I mean it's based on -- yes, it's based on not getting worse.

I mean, there's no question that what1 happening is -- I mean, a lot of customers are so uncertain, that schedules are fluctuating weekly.

There's lot of uncertainty.

What I'm saying is based on the current environment we're in, which there is uncertainty, we don't see things getting worse. in our backlog, talking to our customers.

We don't see things deteriorating.

We don't see them very good like they were in 1999 or 2000 but they're not deteriorating.

So that's in our guidance.

So it's kind of a stay where it's at, very, very modest improvements, and that's in the guidance.

Mike Harris Okay.

That's helpful.

Thank you.

Gentlemen, do you have any closing comments?

No, we don't.

If that's all the questions, we thank you very much for participating in our conference call and that concludes our conference call.

Thank you.

That concludes today's teleconference.

You may disconnect your lines at this time and have a great day.