Carlisle Companies Inc (CSL) 2006 Q2 法說會逐字稿

Good day.

And welcome to today’s teleconference.

At this time, all participants are in a listen-only mode.

Later, there will be an opportunity to ask questions during our question and answer session.

I would now like to turn the program over to your moderator, Mr. Rick McKinnish.

You may begin, sir.

Good morning.

Welcome to Carlisle’s Second Quarter Earnings Call.

With me, as usual, is Carol Lowe, our Chief Financial Officer.

Now, in addition to the press release that went out this morning about earnings, we’d encourage everyone to go on the website, Carlisle.com, and if you’ll find the investor relations area, you’ll click on and see this presentation.

I think it would be very helpful, especially to new investors, because it lists the companies in each of our reporting segments we’re going to talk about.

We have a very short presentation because we want to get to the Q&A.

But I’ll turn it over to Carol to summarize the quarter.

Thank you, Rick.

And good morning everyone.

As you have seen from our second quarter release, Carlisle had a very solid quarter.

Our organic sales growth rate of 14.2%, the 30% increase in our income from continuing operations and EBIT margin of 12.2%, all evidence Carlisle’s strength in its own markets, as well as the strengths in many of the markets that we serve.

As we’ve noted in the release, the two braking acquisitions in the last half of 2005 accounted for 2.3% of the overall 17% sales growth and the currency rate fluctuations contributed less than 1% of this growth.

I would like to point out that our release includes a schedule of supplemental financial information.

The items that we’ve listed on this schedule represent gains and losses that management in its judgment considers non-operating.

We have also noted the EBIT dollars for each of these items in the applicable segment discussion.

The 4% for diluted share tax benefit we’ve highlighted represents the settlement of the 2004 and 2005 federal tax audit.

The second quarter effective tax rate of 30.7%, it includes this benefit as well as a reduction in the company’s estimated full year effective tax rate from 33% to 32.5%.

I also want to highlight strong operating performance within our segments before turning the call back over to Rick for comments on our full year guidance.

While at first glance it may appear that the construction materials segment realized a decrease in its EBIT margins, I encourage each of you to take into account the $2.6 million in non-operating gains that were recorded in the second quarter of 2005.

I think if you do the math, it will indicate to you that the growth in operating earnings was as strong as the 29% growth in net sales.

The capital that we’ve invested in our construction materials business for new insulation capacity and TPO membrane capacity on the west coast is already producing a return for our shareholders.

The growth for this segment is an indication of how the construction materials team is continuing to execute strategy for geographical diversification and total system sales.

We’ve highlighted for you that industrial component segment benefited from various gains in both the second quarter ’06, as well as ’05.

We have also noted that the segment incurred certain charges which partially offset these gains recorded in the second quarter of 2006.

These items are all attributable to the power transmission belt business.

Second quarter operating earnings for the segment improved on a year-over-year basis by more than 16% despite a very soft lawn and garden and agricultural market.

Wet weather on the east coast in the second quarter of ’06, as well as drought conditions throughout the Midwest, negatively impacted both the lawn and garden and the agricultural end markets.

Our tire and wheel business realized an increase of 100 basis points in their EBIT margins for the second quarter 2006, as compared with 2005.

As the business units grew its volume and its non-lawn and garden markets and it remained disciplined in passing along raw material cost increases.

Our diversified component segment realized significant growth in both net sales and operating income for the quarter.

Strong demand at Trail King, which is our specialty trailer business, and at Tensolite, our wire and cable business, contributed to an organic sales growth rate of approximately 11% for the segment.

The previously mentioned ’05 third quarter acquisitions for our braking business accounted for the 9% remaining sales growth rate.

As we described in the release, the diversified component segment was negatively impacted by arbitration proceedings related to the termination of a large European OEM supply agreement.

The reported EBIT increase of 41% and the related margin of 11.1% have been negatively impacted by the results of these proceedings.

In management speed, actual operating earnings for diversified components significantly exceed those reported.

I also want to note that in addition to the strong operating performance for the second quarter, Carlisle’s operating cash flow improved 181% on a year-over-year basis, with cash flow from operations of approximately $56 million.

Our tire and wheel business accounted for the largest portion of this increase, with operating cash flow of more than $40 million.

As we discussed on previous calls, and we note in our SEC filings, the seasonality of our industrial components business, drives cash in the second quarter, while our construction materials business provides positive cash generation in the last half of the year.

Operating cash flow was approximately $8 per diluted share for the last 12 month period.

The investment in our construction materials business represents more than half of the $51 million reported for year-to-date capital expenditures.

I also want to note that while Rick sets very high expectations for continued improvement and describes the quarter as meeting expectations, I hope that my comments this morning on the operating performance has conveyed to your our assessment of the strong operating performance, as well as enthusiasm for the results that we’ve realized for the quarter.

With that, I’ll turn the call back to Rick for his comments.

Thanks, Carol.

Let me start with just a quick couple of numbers about our overall growth.

I think we mentioned in the press release our growth was 17%.

Well, of that, 14.2% of our growth was organic, 2.2% of that was acquisition-driven, and 0.06 of 1% was currency, or exchange rate.

And those 3 elements, make up the 17% growth.

And I think Carol provides some information on each segment.

And I’m just going to really make a couple of comments about each segment and hopefully add a little something to the color.

First, let me go to construction materials.

There’s 4 basic drivers here.

We’ve been growing at above average rate for quite some time.

As Carol reported, the growth rate for construction materials in the quarter was 29%.

One factor -- These are in no particular order.

One key driver is obviously robust commercial construction demand.

The market is strong.

It’s strong across the entire country.

And we forecast it to continue to be very robust.

The other factors were expanding our geographic presence.

And I’m going to give you a couple of numbers about that.

But we’ve been talking about that to the investment community for some time now.

The third is we focus in our solutions into roofing are single ply membrane driven.

This is the product we invented.

And these solutions continue to gain share across the entire market.

And one of the reasons, quite frankly, is that they require a lot less labor to install on the flat roof than other typical asphalt solutions.

And that -- As labor becomes shorter and shorter and more expensive, this labor gain or labor efficiency gain is very important.

The other one is new products.

We talked about that, especially new products for re-roofing.

So all 4 of these factors are continuing to contribute to this kind of growth rate.

And we believe the other 3 factors are more significant, quite frankly, in the long pull, than just the robust growth of the current demand.

Now, we’ve discussed for several quarters this new infrastructure that we’ve been building out west.

So I’d like to give you a number about the growth rate in the west.

This is for western Canada and all regions southwest and west.

This region grew at 43% year-to-date in units.

It grew at slightly higher than that in revenue.

But it grew 43% in units.

And that was with a higher growth rate in the second quarter.

Now that’s the year-to-date number.

I think Carol, as reported on, we analyzed in our opinion the pure operating results in construction materials.

The EBIT margins were up about 20 basis points.

That doesn’t sound like much.

But it more than offsets the increased raw materials and freight increases.

Our outlook going forward is for continued strong demand in commercial construction.

Industrial components was -- had a lot of one-time issues.

But our analysis shows, as Carol reported, that our earnings grew over 16% off-setting a soft lawn and garden market and continued increases in raw materials, especially natural rubber.

For those of you that follow the tire industry, natural rubber has been very volatile of late.

And I’m very pleased with the results in our tire and wheel business to be able to deal with that very quickly.

The last segment is diversified components.

And once again, as we analyzed the operating results, which we do, take out the one-time events.

The EBIT in this business was up over 50%.

The organic growth in this segment, because we had a couple of acquisitions.

We discount them.

The organic growth was 11.2%.

And we’re kind of pleased with that because there was an area of softness in this segment, which is casual dining, which his in our food service business.

The balance of it was acquisitions growth, bringing the total to 19 -- almost 20% total growth.

Looking forward to the market demand, looks very strong across this segment.

Our off-highway braking company focuses on mining and heavy construction.

The outlook is very strong there.

Trail King, we’ve talked about over the last several quarters.

It’s a specialty trailer company with a focus in construction markets.

The outlook is very strong going forward.

Tensolite, which is our specialty wire and cable business, we haven’t talked about in some time.

They’ve been a supplier to commercial aircraft for over 40 years.

They have significantly increased their content on the next generation planes and the outlook is very positive.

So there’s 2 trends going there for us in commercial aircraft.

The cycle is picking up.

It’s a late cycle market.

And our content on the latest generation of planes has gone up significantly.

So we’re excited about the opportunities for Tensolite.

I want to make one quick comment about the disposition activity in discontinued opps.

We talked about that in the press release.

The sale of the 2 businesses in discomps is on schedule for completion this year.

I would add if there is a gain on these sales, the gain is not in our guidance.

Now the key word is if.

I’m not making a statement whether there’s going to be a gain.

We’ve been clear in the past, we anticipate no negatives from the disposition.

But we’re adding that if there is a gain, this is not in the guidance.

Now, a couple of comments on our outlook and guidance.

First, I’d like to give you a couple of comments as we sit here mid-year.

We’ve experienced softness in 2 markets thus far.

Lawn and garden, which is well documented.

There’s been other major companies that are in the lawn and garden business that have talked about the weakness and have put quite a bit of information out there.

And the other one I mentioned earlier was casual dining.

These are 2 of our early cycle businesses.

They’re based on discretionary spending.

They’re very close to the consumer.

And there’s no question there’s been some pressure on our early cycle or discretionary spending markets.

We only have 2, lawn and garden and casual dining.

We’ve off-set this pressure with improvements across all of our companies.

And we’ve also made progress, which we’re very encouraged about, which is managing in this very volatile cost environment.

We’ve talked for years about how these kind of changes in raw material costs will not affect these businesses long term.

But there’s always been a lag and some tough comparisons as you get through the cycle.

Well, we as many industrial companies, we’ve improved our methods of dealing with this.

We’ve taken out long-term contracts.

We’ve indexed raw materials.

And so our exposure to this volatility of raw materials has been reduced quite a bit from several years ago.

And I think we’re well-positioned to deal with this volatility going forward.

We raised our guidance.

It’s in the press release.

The old guidance was $5 to $5.20 per share.

We’re raising it to $5.25 to $5.45.

I would say that we remain optimistic.

I would remind everyone that we’ve been optimistic for some time, at least we’ve tried to be optimistic.

I think Carol tells me that I’ve not been as optimistic as I should have.

So we’ll try to do better going forward.

One of the things that’s exciting here is we’ve gone through the restructuring, the shutting down all of the plants, and we’ve talked about a more focused Carlisle.

And as we take our senior management and spend more time on businesses that have leadership, our campaign leadership, we think that there’s a lot more good news to come.

We have exposure to some late cycle markets.

I mean, this is the flavor of the month out there in the investor community.

So, we have a lot of exposure to commercial construction.

That looks good going forward.

That’s the late cycle market if you’re interested.

Commercial aircraft, another late cycle.

And so we have a lot of very good outlook on those kinds of markets.

We’re confident, in summary, that our efforts to create competitive advantage, which is always our focus, in our key businesses, is improved with our reduced complexity and more narrow focus.

So we’re very optimistic going forward.

And we’d really like to -- that concludes our comments.

And we’ll turn it back to the operator and get some questions.

[OPERATOR INSTRUCTIONS]

We’ll take our first question from Deane Dray.

Thank you.

Good morning, Rick and Carol.

Morning, Deane.

Morning.

Hey, Rick, just to come back on your beginning comments when you broke out the sales growth and we went through this last quarter.

That 14.2% organic growth, how much of that is -- was contributed from the new insulation plants if we were going to look at Carlisle on the same stores basis?

Deane, I will tell you the insulation business is growing dramatically as you well know.

We’ve got the units and insulation grew over 50%.

But I really haven’t got that in dollars.

I don’t know.

I’m looking at Carol.

We have in terms of total dollars for construction materials, they account for $65 million of the increase of $101 million.

A large portion of that was for insulation.

But we also saw a lot of growth was in the TPO membrane as well.

Carol, out of that $65 million, how much of that came from stores that were not -- from plants that were not in operations this time last year?

I don’t have that right in front of me.

Can we circle back on that?

Yes.

I’ll look back at the numbers.

Okay.

I will tell you Deane, just to add, the growth that’s come is coming at all plants.

It’s not just the new stores.

But Carol can circle back on that.

Okay.

And then if I -- The question is on weather, Rick.

And this is very surprising and congratulations that you were able to off-set what was very wet in the northeast season.

So, talk us through the lawn and garden.

It looked like you were prepared for what you called a mediocre selling season.

But you certainly were prepared for that.

And as well as what was the weather impact on the roofing business for the quarter?

Well, Deane, I think you’re right on.

And I think it points up a couple things.

I think you noted early that there was some weather in the northeast that affected the number of roofing days.

And we did -- That was our worst comparison that region.

But, what you I guess are saying, we’re not communicating very well is we’re expanding across the country with new infrastructure, new capability.

And that just dwarfs any particular region.

I mean, our roofing model is so diversified now across all regions.

So quite frankly, where the weather in the northeast used to have an impact on us, you’re absolutely correct.

That was our softest region was the northeast.

And it was weather related.

But it just doesn’t show up.

We still grew 29%.

The other factor here is that we’ve grown the market available to SynTec.

In other words, we’re in the insulation business now.

It’s connected through a warranty to the membrane.

So now not only are we expanding geographically, but because we’re in the insulation business, the market available to SynTec is dramatically larger than it was 3 or 4 years ago.

And so all these factors I think -- I think if you go back and look, Deane, at the organic growth rate in our roofing business for the last 5, 6, 7 quarters, it was 29% this quarter.

But I mean this -- these are the numbers that they’re putting up.

And that’s some of the reasons.

So the weather in the northeast doesn’t have the impact on us that it used to have.

Deane, back to your question just so everyone will have the benefit of the answer.

The increase for insulation out of the total increase for construction materials, it was approximately 40% of the total increase.

For us, it’s not really relevant to say new store sales because as we’ve discussed previously, it’s not all incremental because we were doing some buy for resale previously.

So it’s just more informative to focus on the fact that total insulation sales for construction materials are up approximately 40% on a year-over-year basis for the second quarter.

Okay.

That’s helpful.

And then, Rick, if you address the weather impact on lawn and garden?

Well, there’s a couple of things in lawn and garden, Deane.

You’re absolutely right.

I mean, Carol talked about it.

Let’s face it.

Briggs & Stratton, a super company in lawn and garden with the engine business has come out with quite a few numbers about lawn and garden.

And we don’t disagree with any of their numbers.

We’ve seen softness in lawn and garden.

And there’s a couple of things going on here.

There’s 2 pieces in the lawn and garden business.

We have a consumer business that’s -- where you go to a mass merchant and buy a riding lawn tractor.

We’ve got a very high marketshare of that.

That’s the soft business.

Okay.

And that’s deteriorated.

The business that continues to grow that’s offsetting it is commercial lawn and garden.

And I think there’s a major trend here, Deane, where, quite frankly, I think it’s affluent America.

And people are just using lawn services as opposed to mowing their own lawn.

And we have a very high share of commercial lawn and garden.

And in the second quarter for the first time, our commercial lawn and garden dollars caught up with our consumer lawn and garden dollars.

So, I want to be clear.

The recession or softness has been in the consumer lawn and garden, the Sears, Wal-Mart, Kmart, riding lawn tractors.

The commercial lawn and garden business, the lawn service business, which is a heavier duty commercial monitor, that’s up.

But on total units, it is down.

I’ve seen numbers high single digits in units down.

But we were prepared for this.

And I’m very pleased with the results.

This business grew their earnings high teens in spite of the softness in lawn and garden and in spite of, quite frankly, some volatile raw materials.

Okay, Rick.

That’s very helpful.

Just last question.

Related to the softness on the consumer side of lawn and garden, I didn’t -- Do you have a sense of whether that was all weather related or is there a fall off in demand that’s more either consumer or housing related?

I sense there was some weather.

But, Deane, quite frankly, because we continue to see growth on the commercial side, we’re preparing quite frankly for -- the consumer lawn and garden business, we don’t see it going back to some of the numbers that we enjoyed earlier for the reason I’m talking about.

We see that there’s more commercial lawn and garden.

That’s very good for us, quite frankly.

We have a very strong share there.

Probably it’s a product mix improvement on a margin standpoint.

But, one commercial lawn tractor could replace -- I mean, you could do the math -- 50 or 100 fat guys mowing their grass in the backyard.

So, we’re putting -- We’re preparing for kind of a flat to slightly down consumer lawn and garden business going forward.

Deane, the other thing, as noted in our release, our ATV market, replacement market and our high speed trailer tire market, on a year-over-year for the second quarter, we grew revenues double digits for each of those markets.

And I think that helps off-set the softness in the consumer lawn and garden.

Deane, I think what you’re touching on here that’s kind of interesting.

One of our goals when we said we’re going to streamline our portfolio and focus in fewer places, was to take each one of these businesses and make them stronger and more diverse.

Construction materials used to -- would have been impacted by the weather in a particular region.

That’s no longer the case.

Our tire and wheel business would have -- used to have a disaster result if we have soft lawn and garden.

That’s not the case.

So what’s happening is we refocused into fewer businesses.

We’re going to make them more diverse and stronger through the cycle.

Great.

That’s very helpful.

Thank you.

Thank you.

We’ll take our next question from Pete Lisnic.

Good morning.

Great quarter guys.

Morning, Pete.

Rick McKinnish; Thanks, Pete.

Rick, if I could ask a quick question on the roofing business, I guess.

Can you maybe give us a sense as to what kind of materials cost pressure you’re facing in that business?

Well, yes.

I think just talking to John Altmier about this.

This is something -- I got to give him hats off.

They’re dealing with it, the raw material inflation there.

I could give you a wide range.

It’s been north of $50 million and probably we estimate could be as high as $100 million through this whole cycle.

So, they’re dealing with that on a timely basis.

They’ve been able to pass-through, really across our company, I think.

Carol was just reviewing it that we’ve really off-set raw materials I think across the entire company.

But this particular business, ’06 has been a real challenge on raw materials and continues to challenge -- the challenge continues.

And they’re dealing with it.

And is it safe to say in the second quarter that you were able to off-set the increased materials cost in roofing?

We -- Pete, on a consolidated basis, we’re whole.

But, actually, our roofing business, because there’s a delay --

Yes.

-- in the passing the raw material cost increases on to our customers because of the way contracts are bid, we were not whole for construction materials.

It was not as significant loss in terms of raw materials costs versus selling price.

But because we are on a lag and we’ll be pushing forward in the third quarter to recover those.

But, we’re slightly behind still within construction materials.

Rick McKinnish; Okay, Pete?

You were -- Carol, I’m sorry, you were saying that that’s not a material amount for the second quarter, right?

No.

It’s not material.

But we are still -- we’re slightly behind.

But we’re confident in the business.

And they’ll be able to realize price increases to cover the raw material cost increases.

But again, we’ve always got a slight lag.

Okay.

Fair enough.

And then, Rick, if I could ask another follow-up question and that’s on I guess the food service business and what appears to be some softness there.

And you’ve talked about that as being a potential growth platform for you.

Has that changed?

What are your thoughts about the business now seeing these kinds of results?

Pete, that’s interesting, first off.

I’m just sharing with you that the food service business continues to gain share and perform very well recognizing that they have strong position in casual dining.

And this is the middle market, Appleby’s, Chili’s.

And when the consumer is under stress, who knows what happens.

Would they go to fast food over casual dining, or whatever.

It’s one of the early indicators of pressure on the consumer.

And there’s no question we’ve seen softness.

I think it’s been in all the major papers on casual dining.

But that’s a cycle.

We’re gaining share growing -- We’re excited about the opportunities in food service.

Our food service business has been a domestic manufacturer, servicing the North American food service market.

We’re changing into a global manufacturer, servicing the North American food service market.

No.

No.

We plan to spend a long time talking and think it’s absolutely a growth platform.

Okay.

And is it safe to say that maybe with the downturn in the market that you might have some attractive opportunities coming your way to grow that platform?

Rick McKinnish; Absolutely.

Absolutely.

Yes.

Once again, where we’re at in the cycle doesn’t impact us at all.

It’s about creating advantage.

And that will dwarf these cycles over time.

But, no.

Don’t read in -- I’m just sharing with you some market conditions.

Two of our better businesses had some soft market conditions in the quarter and we got through it just fine.

Okay.

All right.

Fair enough.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

We’ll take our next question from Saul Ludwig.

Good morning.

Rick McKinnish; Morning, Saul.

I think for as long as I’ve been talking about eking out gains, we’re talking about beefing up the emphasis on acquisitions that started a while back.

And now you’re hired a person to be dedicated to that.

Could you bring us up to date on what the bulk of potential deals looks like and anything warm because you’re doing a great job of building up the cash.

The balance sheet is very, very strong.

And where do you see the company on the acquisition front?

Well, Saul, I mean I’m -- I guess I’m disappointed that I’ve got nothing really new to report to you there except that we’re determined.

We’re adding resources.

We view our performance as lacking in acquisitions.

Most of our peers are acquiring quite frankly at rates -- We’re continuing with our very disciplined approach.

But, the pipeline -- a lot of work.

But until you conclude a transaction, I can’t talk about anything, except to say that we’re adding more resources.

We’ve brought in some senior people.

In fact, we’ve got the group Presidents in today.

We’re talking about acquisitions.

So it’s very much on our radar.

I think we’re being clear with everybody that we’re disappointed in our own performance here.

But we see it as an opportunity.

We’re going to focus in these areas where we have leadership.

We’re going to pay appropriate multiples.

We’re going to be accretive.

I mean, we’re going to maintain the discipline.

I think we’ll be more productive because it’s a much higher priority today for us than it was a few years back when we were still working on restructuring our portfolio.

But I’ve got nothing new to report except that we’re committed to improving and making good acquisitions in the future.

Next question.

You kind of touched on it when you were talking about food service as it being transitioning from a North American business to a global business.

I think in the past, you’ve said that you’d like to find an Asian source to produce some of these products at a lower cost.

And I think a similar as regards to our radial trailer tires.

Have you been able to identify any possible facilities that would be available to you to achieve that goal?

Well, okay.

Have we identified some facilities to achieve the goal on the tire?

Yes, is the answer to that question.

We have identified Canada and are working on it.

Okay.

And how about -- talk about the food service transitioning to a more global business.

How do you see that unfolding?

Well, obviously food service for us, it’s -- a lot of good things have done there.

They’re very close to their customers, which are major food service distributors, Sysco, U.S.

Food Service, Edward Don.

And we’ve got east, west and central distribution, same day service that we really are best in class on customer service.

What we’ve been lacking here is the right price points on some of the more commodity like products.

And we embrace a global manufacturing strategy, there’s just tremendous opportunity.

So we have, Saul, to add to it, we’ve probably added -- I don’t know -- 4, 5, 6 professionals in Asia in the last 6, 8, 10 months that are working full time on business development and acquisitions.

We’ve doubled our staff in the Hong Kong area, Shanghai.

So, what we’re excited about here is our food service business has thought domestically -- I mean, they’re a global seller, but a U.S. manufacturer.

And there’s a lot of opportunities here.

It’s a very fragmented business.

A lot of small competitors.

So, we’re excited.

There’s a lot of can that’s in the pipeline there.

But I just don’t -- I have -- I can’t make any predictions about when and how much.

But a lot of opportunities in our food service business because they have the front half already into place with their new products, their distribution capability.

And what we need is really some lower manufacturer costs on some items.

Okay.

Good.

Sounds like you got that effort intensified.

And hopefully they’ll bear fruit.

Carol, just a few housekeeping items.

Interest expense jumped up sharply in the second quarter versus the first quarter, while your debt kind of actually went down a little bit.

Could you talk about that?

And then, also, what you see -- any update on Cap spending this year and a prelim of what it might be next year?

Saul, on the interest expense, while our overall borrowings at the end of the quarter, as you’ve noted have decreased, during the quarter, depending on the timing of cash receipts, the revolver is funding our working capital needs.

And probably for the year, on an actual basis, we’re about flat in terms of utilization of our facilities during the quarter.

But we’re at higher interest rates, obviously, as the fed has increased, it’s also increased.

We borrow at Libor plus a small spread.

So that’s what you’re seeing there sitting within the interest expense line.

As it relates to Cap Ex, right now as indicated in the earnings release, on a year-to-date basis, we’ve spent approximately $51 million.

Depending on what projects are presented for the balance of the year, Cap Ex will probably be somewhere between $75 and $100 million.

We’d like to have some good projects presented so we can spend $100 million on Cap Ex.

Right now, we’d probably be on target to spend about $75 million.

And for ’07, we’ve really not laid that out yet.

But, ideally again, we would like to be able to spend $100 million.

Now, from a maintenance standpoint, it’s -- we only need to spend about $30 - $35 million, from a pure maintenance Cap Ex.

Anything above that, is going to be for investment and return for the bottom line.

Do you see any -- this is for both of you -- opportunities where you’re going to need a major new plant?

I mean, you’ve got a lot of roofing plants coming on in the next year.

You’re going to benefit from that.

Any other place throughout the company where you see in your current portfolio, where you see a need for a major capital investment?

Well, I’ll just add to what Carol said, Saul.

Basically, our numbers are always different.

I see our business maintaining Cap Ex as very small.

I think it’s $20 million or less.

So our whole drive here is we think roofing has got room to run.

I think there’ll be additional projects as we -- I gave you the growth rate in the west trying to give you an example as we talk about this geographic expansion how the customers are reacting as we do this.

I think that the tire business -- I think all these businesses, quite frankly, there’ll be a lot of investments outside the U.S.

Low cost production is key to us.

So, I think if we don’t -- based on what’s on the drawing board now, our Cap Ex is going to start dropping, okay, with what’s on the drawing board right now.

But I’m very confident that we’re going to find -- continue to find ways to grow and improve the business.

And our goal is to keep the Cap Ex, as Carol said, up to this kind of area, because this is driving this organic growth rate.

And we think there’s room to run.

Great.

Thank you very much.

All right.

Thanks, Saul.

We’ll take our next question from Brenda Hartman.

Yes, thanks, operator.

It’s actually Brendan.

Good morning, Rick and Carol.

How are you guys doing?

Morning, Brendan.

Hey, Rick.

Don’t let Carol beat you up for being too conservative.

She’s pretty conservative herself.

Guys, a couple questions.

One, Rick, I was pleasantly surprised you were able to hold margins in the roofing business flat year-over-year if I adjust for all the puts and takes.

I would have thought they would have been down a bit given some of the new capacity coming on.

I got to imagine there’s a learning curve there and some start up costs.

Is that right?

And would you expect to see those margins kind of tick up as you go up the learning curve there?

Well, Brendan, I agree with everything you said.

But, we’re pleased.

I mean, freight rates have gone through the roof.

There’s a lot of freight in this business.

And they’ve not had their margins arose.

They’ve had some volatility in raw materials.

They’ve gotten through that.

We are bringing on new capacity, especially in insulation.

And we’re getting through that.

There’s been some issues.

I think you’re absolutely right.

There’s start up costs in Utah.

They’re unavoidable in these plant start ups.

So there’s probably some incremental improvements that we can make.

But I would say to you that our whole strategy, we’ve been clear from the beginning.

This business has a very high return on invested capital.

Our strategy here is to grow this business.

And we’ve been clear that this is not a margin increase strategy.

This is a growth strategy with very high margins and quite frankly even high return on invested capital.

So, you’re right.

Our goal quite frankly, Brendan, is to maintain margins and grow.

Okay.

Fair enough.

And in the new diversified industrial segment there, it’s kind of tough to model given all the changes and some of the acquisitions and divestitures in there.

Is there any seasonality to that business, Rick, now that you’ve got that different mix in there?

Not really.

That’s a good question, Brendan.

That portfolio there, quite frankly, has got the least seasonality to it.

There’s a little bit in some businesses.

But, quite frankly, the whole mix -- the seasonality for us is in the roofing business, as you know, with kind of a slow start to the year in the first quarter.

And then, of course, the industrial business with lawn and garden, as a lot of businesses are first half.

Yes.

So, no.

I think you’re right on it.

The diversified components business, on balance, is -- Now don’t look at it as a seasonal business.

So I would -- it’s reasonable to assume the second half doesn’t look that much different from the first half?

Yes.

Now, the only example is in July, as you know, that’s when these large OEs shut down.

Yes.

Vacations.

And so, I mean, I have to go back and look.

I mean, I think third quarter for most of our businesses because of July is down from the second quarter.

And that probably holds true for the diversified component segment too.

But I’m not calling that -- I mean that’s on almost every business in the country with OE business.

Okay.

And is Trail King benefiting from kind of the surge in heavy truck builds right now?

Or is that really totally different specialty end markets?

No.

It’s totally different.

I mean, this is really -- They’re very strong in construction, like CAT dealers, heavy duty equipment.

And they also are very strong in specialty trailers, like the new focus on wind energy.

And Trail King makes the trailers that transport these huge things for the wind industry.

So, it’s more a general construction and heavy construction play.

And it’s not really this trucking.

Okay.

Rick, final question, on the lawn and garden, the tire and wheel business.

I think you said that now the residential, the consumer piece is the same size in terms of revenues as the industrial piece, is that correct?

Yes.

In other words, I just -- I mean, this may have been a one quarter event.

But it was surprising to us.

The consumer lawn and garden business used to dwarf the commercial, which is what we’re calling the lawn service business.

And for whatever reason, because there’s softness in consumer lawn and garden, and strength in the commercial, these things are getting closer and closer.

So, yes.

I’m not predicting it as an annual event.

I just think it was a one quarter event.

But, the commercial lawn and garden business has been growing consistently through -- for some years now.

And the consumer lawn and garden business, the mass merchant big retail business has been soft.

And so we think there’s a trend here.

And we’re not that unhappy with it.

That makes a lot of sense.

And could you just quantify, Rick, how -- what are the total revenues in both those businesses versus your total lawn and garden business from tire and wheel?

Is it $3 or $400 million?

Well, out of --

Just on an annual basis.

It’s probably about $300 million.

Well, actually no because of the seasonality of it.

It’s probably about $250 million lawn and garden total in consumer plus commercial out of the total for industrial components.

So I could ballpark at $125 million each in revenues this year, assuming that kind of relationship holds up?

Actually what I’m giving you is for the tire and wheel business, the $250 million.

And then our power transmission business also has some exposure to lawn and garden, but it’s not as significant as it is for the tire and wheel business.

Okay.

Great.

But you want to put the two together, you can say it’s probably slightly under $300 million.

All right.

Great.

Thanks, guys.

And keep up the good work.

Thank you.

[OPERATOR INSTRUCTIONS]

We’ll take our next question from Robert Fetch.

Good morning.

Morning.

Good morning.

Just to reiterate your comments on lawn and garden, I have a close friend who is a power equipment dealer.

And he’s been noting that shift towards commercial away from retail for a good numbers of years actually already.

So it just sounds like more of the same.

Yes.

In regards to Tensolite, can you give us some sense as to your exposure and maybe how much content on some of the new planes is relative to content on some of the existing planes currently under production?

Well, I guess, Bob, the -- Right now if we look at the 787 versus the 737, for us, Tensolite’s content per plane is going to be ten times the content value that they have on the 737 for the 787.

Okay.

And is there any reason to expect profitability on those volumes would be anything other than the usual or normal?

No.

It’s all good solid business.

This trend, Tensolite, for years we were on the 737 and 757.

We got more business.

Our content went up on the 777.

And it’s really gone up, as Carol just disclosed, on the 787.

So a couple things going on with commercial aircraft.

The cycle is getting better.

And our content is going up dramatically.

But the margins are solid on the business.

And does the -- is content reflect share gains as well as just greater requirements for the aircraft itself?

Yes.

Well, let me say this on share gains.

The interesting thing there, we developed a product called Net Flight that focuses on in-flight entertainment systems.

We’ve been a leader in that sector.

And so as the larger planes are coming out, visualize the in-flight entertainment on these shift sets as compared to the 737 or 757.

So it’s really a move in the more recent generations to go to more in-flight entertainment.

And we have a very high share of the in-flight entertainment wire and cable business.

And that’s really a key driver there.

I know the sooner you see it, more broad based in all plane types the better.

Okay.

Great.

In regards to the power transmission, how significant is the Ag market that you referenced in the note?

Well, let’s see.

I mean, it’s a -- We’ve been trying to grow our exposure there.

And it does have an impact on it in terms of overall percentages.

Bob, I don’t know that I’ve got that right in front of me in terms of what the Ag market.

Well, is it large enough that any belt in the business was significant enough to single out?

Yeah.

Obviously, it is.

I mean, their business -- again, the power transmission belt business in total on an annual basis is approximately $150 million in revenue on a -- in a typical cycle.

And the Ag business, it’s spread kind of evenly across Ag, out where power equipment, appliance, belt and the recreational market.

Bob, I think what -- I think sometimes as things creep in our comments which significant to the business unit, but it’s not significant to Carlisle in total.

Right.

Rick McKinnish; That might be what you’re I think identifying.

Okay.

Clearly, you’re continuing to grow and probably gain share in the commercial construction roofing market.

In most recent period or periods, with the pick up in non-residential construction, are you seeing a somewhat higher mix of new versus replacement roofing?

Yes.

Yes.

That’s a good comment.

In other words, there’s no question that -- We’ve always been slightly stronger than our competitors in new construction.

And you’re right.

The cycle is very strong right now on new construction versus replacement.

Okay.

So to the degree that the non-residential markets, let’s say, hasn’t really -- hasn’t been all that long ago began to pick up and I guess the roof would go on at what point in the project would you say?

About half way through?

Yes.

Something like that.

I mean, I think there’s a lot of legs to run on commercial construction, dealing with the pent up demand from all the residential over the last number of years.

Okay.

In the food service area, you’re talking about opportunities, but you saw some softness in this period.

Can you talk about penetration in terms of new accounts or the number of accounts you’re adding or percentage of new accounts and/or an expanding product line into existing or new accounts?

Well, I think you’re once again identifying -- We’re comfortable or confident that we’re growing share.

I don’t want to get into specifics.

We’ve got a couple of key competitors there.

But, we’re definitely growing our share.

We’re picking up new accounts.

It’s a key focus for us.

And we like our position.

But, it’s early in the game yet.

We’ve not really done anything yet to change the competitive position in our food service business.

But we think that we’re going to be making some announcements and doing that in the near future.

We just like this space.

It’s a good piece of our portfolio.

Long term, it’s been a very, very good margin business.

It continues to be.

And there’s a lot of opportunities to grow it.

Yes, we’re growing share.

But I don’t want to get into details.

We’re in the Jan San business.

You can visualize who’s in that business.

And we’ve introduced a host of new products, specific to Jan San, waste disposal.

And they’ve been extremely well received.

So, we’re optimistic we’re going to continue to grow that business.

And your comments earlier about keeping up with raw material cost pressure as they apply to this business as well?

Yes.

I mean, I think, as Carol has said, I think across the board, it jumps around a little bit quarter to quarter.

But we’ve reduced our exposure with shorter term agreements.

We indexed the raw materials.

We’ve just gotten better, as I think most industrial companies have, at dealing with the volatility in raw materials.

Okay.

I know, I’ve been following the company for a long time.

This was a business that -- there was always a lot of hope and potential for.

But just in terms of order of magnitude, how much larger is it today versus say 10 years ago, if you had to guess?

Which business?

Food service.

Oh, it’s double.

I mean, we haven’t done anything.

We’re disappointed in our performance.

But, we’re optimistic for the future.

But it has probably doubled the size it was 5 years ago.

Okay.

So, and just the recent periods then, it -- well, it’s grown at a mid-double digit rate.

Yes.

That’s the case.

That’s good.

Can you update us on your initiatives in Asia/China?

Well, I tried to do that earlier.

I will just simply say that a key strategy we have, and we’ve been clear about this.

I guess it’s getting boring.

We’re transforming ourselves to a global manufacturer with a focus on the North American markets.

We’ve got the benefit of being a fairly small company.

And we’ve got a lot of room to grow that that strategy.

And we’ve done that in our belt business, our tire and wheel business.

And we’re going to take that to some of our other businesses.

The whole diversified components area that we’ve put together, a lot of opportunity from a global manufacturing situation.

So, we’ve doubled our staff, probably more than that in recent months.

We’re bringing in experienced professionals.

We’re making a lot of contacts.

We’re committed to investing heavily in Asia and transforming some of our smaller businesses into real players.

Okay.

And the fact that you said you’re going to be focusing on North America in terms of your sales, that kind of suggests that despite being able to source globally, the opportunities remain still so large here in North America that you don’t have to think about incremental sales or growth coming from non-North American geographies?

Yes.

I believe I mean -- you touched on a good point.

We’re growing our international business.

But when I talk about -- talking about creating competitive advantage, we look at the quickest way of doing that and the most powerful way and we think in your home market, your domestic market, it’s the art of war.

You win at home first.

And so when you’re trying to transform a $200 million revenue business or $150, the quickest way is to win at home in your home market with a global manufacturing strategy.

And then the international business will come after you have leadership and market share clout in your home market.

That’s the strategy.

Makes a lot of sense to me.

Thank you.

Thank you.

We’ll take our next question from Stephen McBoyle with Lord Abbett.

Yes.

Thank you.

A host of questions specific to roofing.

And unfortunately, I missed a good portion of the call here.

But, the sales growth of 29%, did you break that out volume versus price?

No.

A majority of it is based on volume, though.

There was a time when it used to be evenly split.

Is it 80/20, 90/10?

It’s predominantly volume.

Okay.

And on pricing, can you just give us an impression in terms of what your current strategy is there as you look out over the next 12 - 18 months?

Obviously, you’ve had a very favorable pricing environment.

Just wondering given the market dynamics that you’re serving today, whether you would consider to see a low mid-single digit type pricing opportunity going forward?

Stephen, are you talking about across the board or just roofing?

This is all roofing.

All roofing.

Well, I mean, we spent some time on this earlier in the call.

We’ve been able to deal with the volatile raw material situation to date in our roofing business.

I mean, there’s always some lags.

Will there be challenges?

Sure.

I don’t think raw material fluctuation is going to change the competitive balance here.

And so we think raw materials are a short-term issue.

There’s been additional price increases announced in the industry for the fall.

We don’t know yet whether those will stick.

But --

Order of magnitude?

Well, I mean, the order of magnitude, there’s a lot of 5% price increases out there in the industry.

But I will tell you, it’s early.

This is project-by-project.

And so we tend not to spend much time on that because we don’t know what’s going to happen.

But I think there’s a willingness or commitment in the industry to recover cost increases.

And I think our margins have held up through this period and I think that’s another data point you’ve got that these raw material issues tend to be handled over time.

And I know this is a ways off and a lot can change, but would you anticipate a positive pricing dynamic when you look to 2007?

I don’t -- I mean -- I don’t know.

One thing about the roofing business, it’s pretty fluid with a lot of projects.

And I just think raw materials, we can handle it going up.

And I think it’s going to -- I don’t think it’s going to be a dynamic going down either.

We’ll try to hang on to some of it.

But, quite frankly, we’re not planning on it.

Okay.

And to the extent that you made the comment on consumer and your assumptions there for the rest of the year being flat to down, what are you assuming specifically for construction materials for the back half?

Okay.

Now that comment was about the lawn and garden business.

Yes.

Okay.

Now, you’re asking what’s our assumption on roofing?

Exactly.

Well, I mean, we went through this.

Our assumptions on roofing are based on -- the demand is robust.

And you can get this confirmed everywhere you look.

Sure.

We are -- Our method is gaining share.

The single-ply membrane is gaining share of the overall commercial roofing business.

That’s clear.

We have new products and that’s growing.

And the geographic expansion, and I shared with the group the growth rate out west.

We spent a lot of time on that.

And those growth rates are obviously higher than the 29% than the averaging SynTec up.

Okay.

And just while you’re on the west, any recent discussion out of Firestone with regards to their potential PPO expansion?

Got no comments about -- You need to call Firestone about that.

Any meaningful new distributor in the quarter that had a meaningful impact?

Well, listen, I -- I mean, we’ve noted on earlier calls that we’re pleased with the reception we’re getting.

We think we’re trying to create the best experience for our customers in roofing.

And we’re able to periodically pick up new representatives, new distributors.

And we’re continuing to do that.

But I can’t -- I’m not -- really no comments about any specifics.

Okay.

And a typical insulation plant would do what to the end revenue?

I don’t --

Just being somewhat sensitive to insulation pricing, no pun intended, going through the roof, I’m curious what those assumptions may now be in your model?

We haven’t updated those recently.

I mean, the number has gone up, obviously, with the pricing.

I don’t know We’ve talked about $50, $60 million as a rough number.

But, I’m giving you just a very off the -- We don’t have a number in front of us.

Okay.

And --

Stephen, I will go back to your question about volume versus price.

I mean, again, predominantly, just to make it crystal clear, that the growth that construction materials has seen, hasn’t been largely on price.

For the second quarter, it’s approximately 90% was purely just volume.

So, they’re gaining market share.

The demand for their product is significant.

They’re not riding this increase just based purely on price.

Right.

They’re very disciplined and cost competitive for their customers.

Okay.

That’s helpful.

Now, the Utah TPO plant, is that operating at capacity today?

No, it’s not at capacity.

But it’s been ramping up nicely.

I don’t have -- believe it or not, I think SynTec’s overall utilization was about the same as the prior year.

Even though they’ve grown, they’ve added capacity --

Right.

-- as you well know.

But, no.

It’s not at capacity yet for the second quarter.

And we do anticipate that for the back half?

It’s not an insignificant size plant assuming maybe $100 million.

We’ve talked earlier about the growth rate out west.

We’ve been well received.

And obviously, we’re interested in ramping up and supplying our customers out west.

And so I can’t forecast exactly when we’ll be at capacity, but we think whether it’s this year or next year, we’ll be at capacity.

Any new plants being considered at this time?

We’re always considering new plants.

Great.

Congratulations on the results.

Thanks.

Thank you.

Thank you.

And we’ll take our final question from Pete Lisnic of Robert Baird.

Rick, if I could just ask a quick follow-up on Mr. McBoyle’s question.

Can you just kind of peeling back the growth rate that you saw in construction materials for the quarter, can you maybe talk to us about how Versico is helping drive that growth and relative to SynTec?

Well, obviously you’re right on top of it.

I mean, Versico is a brand.

It’s the brand we acquired from Goodyear some years ago.

I’m real excited about John Altmeyer and his management team and how they determined some time back that maybe we weren’t really working on the Versico brand like we should be.

So we’re using it coupled with the Hunter brand of insulation.

So visualize a Carlisle brand, which is our flagship.

And then we’ve got Versico with Hunter insulation.

And you’re right.

Versico with John’s team’s new effort, quite frankly is growing faster currently than the overall SynTec.

And so we don’t talk much about brand because he’s got another brand below Versico.

But let’s just say that that’s another new addition to the SynTec quiver is better use of channel strategy and brands.

And yes, Versico is growing.

We’re very pleased with it.

And it has the full force and support of Carlisle behind it.

Okay.

That’s what I was after.

Thank you, sir.

Thank you.

We have no further questions.

I’ll turn the program over to Mr. McKinnish for any closing comments.

Well, thanks to everybody for joining us on the call.

And we’ll talk to you again in about 3 months.

Have a good day.

That’s it.