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Operator
Good morning.
My name is Ashley, and I will be your conference operator today.
At this time I would like to welcome everyone to the Carlisle's third quarter earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks there will be a question and answer session.
(Operator Instructions).
Thank you.
I would now like to turn the call over to our host, Mr.
David Roberts, Chairman, President and CEO of Carlisle Companies.
Please go ahead, sir.
David Roberts - Chairman, President, CEO
Thank you, Ashley.
Good morning, and welcome to Carlisle's third quarter 2011 earnings conference call.
On the phone with me are Steve Ford, our CFO; Kevin Zdimal, our Chief Accounting Officer; and Julia Chandler, our Treasurer.
We've provided a presentation that details our performance in the third quarter on our website under the Investor Relations tab titled Presentations.
The slides will provide you with the backup data being presented today.
We are prepared to get started, but let's look at slide two before we begin.
This is our forward-looking statement.
We encourage you to review this slide before making any investment decisions.
Now, on to slide three.
Our third quarter sales grew from $666 million in 2010 to $871 million, an increase of 31%.
15% of our growth was organic, 15% was confined with the results of the Hawk acquisition and the PDT acquisition, which we completed on August 1.
Slightly less than 1% of our growth can be attributed to FX.
We continue to see strength in the third quarter in our Construction Materials segment, which grew 25%; Interconnect Technologies, which grew 23%; and our Braking Business, which grew organically 36%.
Our Transportation Products segment grew 5% this quarter, but that growth was mainly driven by price.
Our FoodService segment, whose markets continue to be negatively impacted by the economic downturn, declined 4% in the quarter.
Company-wide EBIT grew to $82 million from $67 million, or a 23% growth in the quarter.
Our EBIT margin percent was down 60 basis points from last year despite strong earnings in Braking and Interconnect Technologies.
The decline in margin can be attributed to a $9 million loss we reported in our Transportation Products segment.
That loss was the result of severance costs and operating inefficiencies.
I will provide further color on those costs as we review the Transportation Products segment in detail.
Income net of taxes was $54 million, up from $47 million that we earn earned last year in the third quarter.
Earnings per share from continuing operations was $0.85.
Let's turn to slide four, and as you do you will find the sales bridge for the quarter, which details the 31% sales increase.
6% of our growth came from price, 9% from volume, 15% from acquisitions, and again, slightly less than 1% from FX.
If you turn to slide five we will take a look at our margin bridge for the quarter.
Margin was positively impacted 7.5% through price, volume, COS savings and acquisitions.
These positives were offset by 2.3% of operating losses and restructuring charges, primarily in Transportation Products, and 5.8% of negative raw material costs.
We have been able to offset approximately 80% of our raw material cost increases with price, and if this trend continues, we should be at price parity by the end of the year.
As a reminder, many of our raw materials we buy are oil-based, and while the intensity of raw material price increases subsided over the last two quarters, we have not seen any significant reductions in the cost of the materials that we use.
Please turn to slide six.
We will begin reviewing each business individually.
Starting with Construction Materials, sales grew 25% as reroofing demand remained strong in the quarter.
21% of the growth was organic, while PDT, the acquisition we made on August 1, contributed $13.4 million or 4% to our sales.
Also 5% or $18 million of our growth came through price.
EBIT for Construction Materials increased 11% from $54 million in the third quarter last year to $60 million this year.
The PDT acquisition contributed $2.2 million to EBIT, which was a 16% EBIT margin.
Raw materials were negative $27 million compared to 2010.
As you may recall, price of raw material were negative in the first quarter and second quarter as well, but we have been moving closer to price parity throughout the year.
The reported results for PDT during the third quarter excluded PDT's Profiles business, which has been classified held for sale and is reported in discontinued operations.
Slide seven details the transportation products segment performance in the quarter.
Our sales were up 5%, with selling price being up 12% and volume down 7%.
The price increases implemented throughout the year helped offset natural rubber increases of 47% and synthetic rubber increases of 66% over last year.
The third and fourth quarters are traditionally lower volume quarters in this segment, reflecting the seasonality of this business.
In the third quarter, Transportation Products lost $9 million due to restructuring charges, production inefficiencies and lower volumes.
Early in the quarter we reacted to the higher production costs by making managerial and organizational changes within the business.
Slide eight details the expenses we incurred, which include management change costs of $4 million, Jackson plant inefficiencies of $5.9 million, and plant restructuring costs of $1.3 million.
The management change and plant restructuring charges we took in the third quarter are one-time costs.
With these one-time costs behind us, and with the productivity gains we are seeing in the Jackson plant we remain confident in realizing the savings plan when we began to consolidate the three tire plants into Jackson.
We are not planning for any additional restructuring charges and expect to see continued improvement in the Jackson plant's operating efficiencies in the fourth quarter of this year.
As you can see on slide eight, improvements are being made in tire building efficiency and scrap rates.
Tire builder efficiency is improved 42% over the past quarter, and scrap rates are down 60% over the second quarter scrap rate of 6%.
We do expect the fourth quarter to continue to be challenging in this segment, as our lowest volume occurs due to the seasonality in the fourth quarter of the year.
But we will be operating more efficiently as we move into 2012.
Slide nine details the results of our integration of our Hawk acquisition to our Brake & Friction business.
The results just keep getting better.
In the third quarter our sales grew 334%.
When you exclude the acquisition, our sales grew organically 36%.
The demand for heavy duty off-road braking systems continues to be strong, and we do not see it weakening in the foreseeable future.
The real news is the EBIT margin improvement that we have seen in this segment.
In 2010, the EBIT margins in our old Brake & Friction business were 16.8%, and the preacquisition margins at Hawk were approximately 17%.
In the third quarter of this year, combined business margins were 19.1%, up sequentially 290 basis points from the second quarter.
The CBF management team has done a great job integrating this acquisition.
As a reminder we begin to anniversary of our Hawk acquisition sales and profit on December 1 of this year.
Turn to slide ten, where we review our Interconnect Technologies business.
Sales were up 23%, with aerospace growth from legacy aircraft up 38%.
Military sales declined 22% in the quarter.
Legacy aircraft owners continue to install new IFE systems, and we are starting to see an increase in shipsets for the 787.
Speaking of the 787, Boeing has informed its suppliers to ramp up for a build schedule of 60 airplanes in 2012 and 10 a month in 2013.
EBIT performance continues to improve in this segment.
EBIT margins for the quarter were 14.4%, up from 13.4% in 2010.
Volume increases in COS savings continue to be a positive impact on margin.
Over the next few quarters margins should continue to improve as volumes increase in our factories.
On slide 11 we see the results for FoodService.
Overall sales declined 4%.
The core FoodService business was up 3% despite the fact that restaurant traffic continues to lag pre-2008 levels.
But our healthcare FoodService business was down 22%, as the industry continues to be very cautious in their buying habits.
We are also starting to see additional competitive pressures in the healthcare market.
Raw material increases earlier in the year and a reduction of volume in our FoodService plants continues to have a negative impact on our EBIT margins.
In the third quarter, margins declined from 9.9% to 7.3%.
Lower volumes will weigh on our margins in the fourth quarter as well.
Effective price increase in FoodService during the quarter was 3.5%.
I'll now turn the meeting over to Steve Ford, who will take us through the balance sheet, cash flow statement, and working capital slides.
Steve?
Steve Ford - CFO, VP, General Counsel, Secretary
Thanks, Dave.
Good morning.
Please turn to slide 12 of the presentation.
Our balance sheet remains strong, with a debt to capital ratio of 26% and a debt to EBITDA ratio of 1.4.
Last week, we replaced our $500 million credit facility with a $600 million multi-currency facility.
We currently have $464 million of availability under our new revolver, as well as $80 million of cash on hand, leaving us well positioned to continue to focus on our growth objectives.
As Dave noted, during the quarter we closed on the PDT acquisition.
The purchase price was funded primarily by the cash flows generated by our businesses in the quarter.
Turning to slide 13.
You can see our strong performance, as we generated $90 million of free cash flow, resulting in a cash conversion rate of just under 170%.
We remain focused on free cash flow generation and currently expect to convert cash at 90% for the full year.
Turning to slide 14.
Our average working capital as a percentage of sales for the first nine months of 2011 was 21.5%.
This compares to 21.4% for the comparable period of the prior year.
And with those remarks I will turn the call back over to Dave.
David Roberts - Chairman, President, CEO
Thanks, Steve.
Ashley, we want to open it up for questions, please?
Operator
(Operator Instructions).
Your first question comes from the line of Peter Lisnic with Robert W.
Baird.
Peter Lisnic - Analyst
Good morning, everyone.
David Roberts - Chairman, President, CEO
Good morning, Pete.
Peter Lisnic - Analyst
Dave, I guess first question on the Transportation profitability.
Can you maybe give us a road map -- it looks like productivity and scraps improving -- give us a road map as to what profitability here might look like as we exit the first quarter into 2012?
Savings, restructuring, those sorts of details would be great.
David Roberts - Chairman, President, CEO
Sure.
I will give you general comments, and then let Steve take you through some of the numbers.
We think the fourth quarter will still be a challenge for us.
We have got still high priced raw material that will be coming out of inventory.
But we are very pleased by what we are seeing by the scrap rates and the productivity of the tire builders.
We are looking for anywhere from 4% to 7% margins next year in the business, and frankly, if we are lucky we should be on the higher end of that scale.
I think the new management team has made nice improvements there over the last month and a half.
Peter Lisnic - Analyst
Okay.
And then that would assume that there are no further inefficiency costs or restructuring costs, correct?
David Roberts - Chairman, President, CEO
Yes, I don't see any additional restructuring that will take place.
We have basically got the business back to the size that it needs to be.
And as we look at the tire builder productivity, we think that is going to be in the 75% to 80% range, where it is in most of our tire plants.
And, frankly, the scrap rate, we would like to see it come down a bit, but it is running much closer to what we do, again, in all of our tire plants.
So we are getting very close to where we need to be.
Peter Lisnic - Analyst
Okay, perfect.
And then on the Construction Materials business it looks like your net price cost headwind has kind of held at $9 million or $10 million, the last few quarters at least.
Sorry if I missed this, but at what point can you annualize the cost headwinds and get us back to neutral, do you think?
David Roberts - Chairman, President, CEO
We think fourth quarter we should be at price to cost parity.
We have implemented another price increase.
Actually, one that we followed one of our competitors with, which should help us.
We hope to be, again, at price parity by the end of the quarter.
The fourth quarter that is.
Peter Lisnic - Analyst
Okay.
Is that across the Company or just CM?
David Roberts - Chairman, President, CEO
No, Construction Materials.
I think that we are still going to have a bit of a headwind -- we had some headwind in Interconnect Technologies.
We've had some, certainly, headwind in the FoodService business.
It is really tough to get price there right now.
We have got a price increase that is going out the first of the year.
We think that will help us, really depending on what happens with raws.
Oil was up 5% yesterday.
I'm not sure what that is going to mean to us.
If that continues to climb again, we could have raw material pressures again.
Peter Lisnic - Analyst
Okay.
And then just two quick ones on Construction as well.
Just the magnitude of the price increase, and then were there any step-up charges for PDT in the quarter?
David Roberts - Chairman, President, CEO
Price increase was 4% to 5%.
Steve, step-up charges?
Steve Ford - CFO, VP, General Counsel, Secretary
In the quarter we had about $700,000 of cost associated with the acquisition.
And we are in the process now, Pete, of finalizing the purchase price accounting.
Substantially all of the purchase price will be allocated to goodwill and intangibles, but at this point we are still in the process of finalizing that allocation and coming up with useful lives and determining just exactly what the step-up charges are going to be.
Peter Lisnic - Analyst
Okay.
That is very helpful.
Thank you very much for your time.
David Roberts - Chairman, President, CEO
Okay, Pete, thanks.
Operator
Your next question comes from the line of Deane Dray with Citigroup.
Deane Dray - Analyst
Thank you.
Good morning, everyone.
David Roberts - Chairman, President, CEO
Good morning, Deane.
Deane Dray - Analyst
In Construction Materials, that 21% organic revenue growth jumps out.
Just kind of take us through how much of that is coming through on either competitive dynamics, and the idea what is -- or the visibility over the next couple of quarters?
I know it is usually pretty limited, but was there storm damage that you think is going to be a benefit over the next couple quarters?
David Roberts - Chairman, President, CEO
No, Deane, we don't see anything out there that the weather created.
Again, as you said, our visibility is very limited as you go forward in reroofing.
We think we probably picked up a small bit of share, but not significant.
So we think the market is probably growing at that rate.
Now keep in mind I think 5% of that was price as well.
So -- but still organic growth was very nice in the business during the quarter.
Deane Dray - Analyst
How about the outlook for new construction?
And it is not just that there is -- we can look at the Dodge Reports and starts, but is there further penetration of the synthetic roofing as an alternative?
David Roberts - Chairman, President, CEO
Well, we -- as we look at new construction, it was up about 5%.
But, again, that is on a very small base.
We think we will probably grow at very modest rates in new construction next year, and it will be probably at the benefit of TPO is where we will see that growth.
EPDM we think will grow much slower than what TPO does.
Deane Dray - Analyst
Got it.
And then over on PDT, the decision to move the Profiles business into discontinued ops, and just was this always going to be a noncore business?
I know it addresses different markets than what Carlisle is focused on.
But just kind of us take us through that whole thought process.
David Roberts - Chairman, President, CEO
Sure.
When we went through the acquisition process, our interest obviously was in the EPDM business.
We had limited interest at the time in the Profiles business.
We figured we would run it, since we couldn't separate them during the purchase.
We since have been approached by a company that would like to purchase the Profiles business.
We are very early in those stages.
We hope that we get that done.
But we felt that it was appropriate to move it into discontinued ops because of that.
Deane Dray - Analyst
That certainly makes sense.
Then how about the fact -- it was interesting that you gave us the EBIT margin of Hawk coming in.
You said that a 17% EBIT.
And we can do the math on this quarter.
It looks like that came in 600 basis points above that at 23% EBIT.
So is this all just on volume?
Have there been any other operating changes that you would have made that would have enhanced the profitability of Hawk?
David Roberts - Chairman, President, CEO
We -- certainly volume has helped us.
But we have made some changes to the operations.
We announced just here two weeks ago we are closing a small Canadian facility that we had, which will help the operating margins of the business.
That was part of the Hawk acquisition.
It is just a matter of implementing COS across the board in every one of the plants.
You walk in the factories today and, frankly, they are just more efficient than they were when we bought the business.
And nothing against the Hawk management group, because frankly, they did a nice job with the business.
It is just that we are slightly more efficient than they were.
Deane Dray - Analyst
Great.
And then how about for Steve, it looks like you going to come in below your free cash flow conversion target, coming in at 90%.
Just take us through the dynamics there.
Is it all working capital use?
Steve Ford - CFO, VP, General Counsel, Secretary
Yes, it is Deane.
Our sales -- our organic sales are quite strong.
And we are forecasting our receivables and our inventory to be up about 12% at the end of the year.
And that is what is driving a little bit of a decline in our conversion ratio.
For the most part we are sort of maintaining DSOs at or about 53 days, so we are not losing anything there.
And we are -- we have done a nice job of extending our DPOs, but the volume is what is pushing our working capital needs.
Deane Dray - Analyst
I got that.
Thank you.
David Roberts - Chairman, President, CEO
You're welcome.
Operator
The next question comes from the line of Ivan Marcuse from KeyBanc Capital.
Ivan Marcuse - Analyst
Hey, guys, thanks for taking my question.
David Roberts - Chairman, President, CEO
You're welcome.
Ivan Marcuse - Analyst
On the Transportation segment, you say it is going to continue to be challenged in the fourth quarter.
Does that mean you continue to lose money, or do you think you can get up to a break even?
David Roberts - Chairman, President, CEO
Ivan, frankly, we are planning for a small loss in the business in the quarter.
Obviously we are working hard not to have one, but it is our low volume quarter, and it really makes it difficult to break even in that environment.
The efficiencies continue to improve.
But I would bet on a small loss.
Ivan Marcuse - Analyst
Do you -- is the mixer up and going, or are you still shipping in material?
David Roberts - Chairman, President, CEO
No, we are still shipping in material from the other plants.
Ivan Marcuse - Analyst
When do you expect the mixer to be up?
David Roberts - Chairman, President, CEO
Well, there are two stages.
There is a master mixer, which we really never put into the operation, and then there is the other mixer that, frankly, will be -- is up and running today.
We have got some control issues with it, but it's running -- it runs better every day basically is the only way I can say it.
Ivan Marcuse - Analyst
And then on the Brake business, is there any seasonality into the fourth quarter, or do you expect volumes to sort of maintain where they are at the third quarter?
And would you expect profitability to, I guess with the closure of the Canadian plant, improve a little bit or say about the same?
David Roberts - Chairman, President, CEO
There will be a little bit of seasonality, but really isn't seasonality as well much as our customers shut down at the end of the year for the holidays.
So we lose some volume there, but it is pretty much relatively flat with what we would do this year, or for the remainder of the -- or earlier part of the year I guess.
There shouldn't be a dramatic seasonal impact in the business is what I'm trying to stay.
Ivan Marcuse - Analyst
Thanks.
Thanks for taking my questions.
David Roberts - Chairman, President, CEO
You're welcome.
Operator
The next question comes from the line of Wendy Caplan with SunTrust.
Wendy Caplan - Analyst
Good morning.
David Roberts - Chairman, President, CEO
Good morning.
Wendy Caplan - Analyst
First, can you remind us of the mix between aerospace and defense in CIT, and give us your outlook for the defense side going forward?
David Roberts - Chairman, President, CEO
Yes, it is 80% commercial, 20 -- not quite 20% military.
We have some test and measure in there.
But the vast majority of our business is commercial.
Military, frankly, we think is going to be challenging over the next year, but despite that with the 787 and the legacy aircraft that we are outfitting today and into next year, we should still have a pretty darn good year in Interconnect.
Wendy Caplan - Analyst
Okay.
And you mentioned Boeing's production plans for the 787.
When do you expect to see -- what is the timing of that in terms of when you should first see shipping product?
David Roberts - Chairman, President, CEO
Wendy, we should start to see -- I mean we are starting to build today.
We will start to see that volume pick up as we get into 2012.
I think it will have a limited impact on the fourth quarter, but we will see it in the -- certainly early next year is when the volumes really start to flow into their plants.
Wendy Caplan - Analyst
Okay.
And do you care to size that for us?
David Roberts - Chairman, President, CEO
Well, I mean they are talking 60 airplanes next year, and our content is, again, depending on configuration, $850,000 to $1 million per airplane.
It really -- if they build 60, it is just a huge opportunity for us.
Wendy Caplan - Analyst
Sure, sure.
And finally, I know you have had some management changes a couple of places, but just to focus on FoodService for a minute.
As you look at the strategy there, should we anticipate that all kind of three pieces of that -- hospital, restaurant, jan/san -- should all be part -- will all be part of this segment going forward, or are we looking at it strategically in terms of the mix?
David Roberts - Chairman, President, CEO
No, I think we are okay with the three segments.
The issue we have got is in healthcare.
For some reason they've backed off purchasing plans in that entire industry, and I'm not sure what they are waiting for.
On top of we have seen some -- a new competitor come into the market.
Now, we don't think we are losing share, but we think we are having some negative impact on price because of it.
I think long-term it is still going to be -- healthcare will still be a good business, and we are certainly comfortable with the core FoodService and jan/san, so I think the mix of that business that remain the same.
Wendy Caplan - Analyst
Okay.
Thanks very much.
Operator
(Operator Instructions).
Your next question comes from the line of Ajay Kejriwal with FBR.
Ajay Kejriwal - Analyst
Thank you, good morning.
David Roberts - Chairman, President, CEO
Good morning, Ajay.
Ajay Kejriwal - Analyst
So just maybe a follow-up on the efficiency question at Jackson.
So it looks like you've had good improvements in October.
And I know you said fourth quarter is a low volume quarter, but just thinking into next year, at these efficiency levels would you be making money, or is there more wood to chop here?
David Roberts - Chairman, President, CEO
Heck yes, we'll be making money.
We've -- I mean, we've -- at those efficiency levels, certainly, as I said earlier the margins should be 4% to 7%.
And I think we will just get better as the year goes on.
The issue with Jackson is frankly just taking us too long to get up and running.
What's disappointing is we make tires.
We make tires in other factories as efficiently as anybody does.
We just haven't been able to get the efficiency up in this plant.
And, yes, we will make money in the tire business next year.
Ajay Kejriwal - Analyst
Good to hear.
And then on the Hawk business, it continues to do very well.
Maybe just a read into your expectation for the ag, construction and mining markets going into fourth quarter, and any early thoughts on 2012?
David Roberts - Chairman, President, CEO
Yes, the market still looks strong.
In fact, I watched the Chair of Caterpillar yesterday on CNBC, and he remains very bullish.
They are our largest customer in that segment, and honestly everything we hear from them is that all markets look strong and will be strong in 2012.
Ajay Kejriwal - Analyst
Good.
And then maybe in Construction Materials, how do you feel about the pricing raw spread in the fourth quarter?
Looks like you had good pricing in the third quarter and raws have maybe come down a little bit.
So maybe comment on the spread?
David Roberts - Chairman, President, CEO
It really depends upon what happens with oil over the next couple of weeks.
It was up again yesterday.
I'm not sure what it is doing today.
But if we don't get any additional raw material price increases, we should be able to get to parity, by the end of the year.
And that has been our objective all along is that we continue to implement price and try to catch up to raw, and we should be very close to parity, as I said, by the end of December.
Ajay Kejriwal - Analyst
Thank you.
David Roberts - Chairman, President, CEO
You're welcome.
Operator
At this time there are no further questions.
I would now like to turn the call back over to Mr.
David Roberts.
David Roberts - Chairman, President, CEO
Thank you, Ashley.
Despite profit challenges of Transportation Products, soft volumes in FoodService; outstanding performance in Braking, Interconnect Business and strong demand in our Construction business leave us optimistic for the fourth quarter and 2012.
Our Hawk acquisition continues to perform at high levels, with double digit growth, and we also saw PDT grow at double digits, which validates our acquisition strategy.
Organically Construction Materials, Brake & Friction and Interconnect Technologies continue to show strength.
CIT had a great third quarter, and now the business will only strengthen with the ramp-up of the 787.
The Braking business is and will continue to enjoy strong demand for products, as our customers continue to book orders for mining, construction and ag equipment worldwide.
Construction Materials has demonstrated that they can grow -- and grow at robust rates -- in a weak nonresidential construction market.
While it is difficult to forecast how strong the business will be in 2012, we see no signs of it softening.
Despite the challenges facing us in Transportation Products in the fourth quarter, we are seeing daily improvements initiated by the new management team.
That gives us a higher level of confidence going into 2012 for that business.
With this in mind, I think 2011 will end on a strong note, and we should be well positioned for a strong 2012.
Again, thank you for attending our third quarter conference call.
Operator, you may now end the call.
Operator
This concludes today's conference call.
You may now disconnect.