Carlisle Companies Inc (CSL) 2011 Q4 法說會逐字稿

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  • Operator

  • Good morning.

  • My name is Dawn, and I will be your conference operator today.

  • At this time I would like to welcome everyone to the Carlisle's fourth quarter earnings conference call.

  • (Operator Instructions).

  • Thank you.

  • Mr.

  • Dave Roberts, you may begin your conference, sir.

  • David Roberts - Chairman, President, CEO

  • Thank you.

  • Good morning, and welcome to Carlisle's 2011 fourth quarter and year-end conference call.

  • On the call with me is our CFO, Steven Ford; our Chief Accounting Officer, Kevin Zdimal; and our Treasurer, Julie Chandler.

  • On the website you'll find a slide deck that details our performance in the fourth quarter and for the full year.

  • During this call I will provide you additional color on the slides.

  • But before I start reviewing the slides, let me just say that we consider 2011 as a very good year, both operationally and strategically.

  • In 2011 our sales were a record $3.225 billion.

  • 2011 was also a record earnings year.

  • When the gain from the [2000] sale of [Icopel] is excluded from our 2007 earnings, 2011 earnings from continuing operations were also an all time high at $182 million.

  • Our sales and earnings performance came in a year where daily news reports concerning the economy brought uncertainty in all of our markets, where raw material inflation was out of control during the first three quarters of the year, where new nonresidential construction continued to suffer its worst economic downturn since the great depression, and where restaurants for the third year in a row saw store traffic lower than it was in 2007.

  • Top that with the startup issues we had in our new tire factory in Jackson, Tennessee, and I think most of you will agree our overall performance was very good in 2011.

  • And 2011 performance is just setting the stage for a very good 2012.

  • Let's turn to the slides that will provide you with the background data for today's conference call.

  • As we get prepared to get started, please review slide two, titled Forward Looking Statements, to help you understand the risks of investing in our Company.

  • After reviewing that, let's turn to slide three.

  • The fourth quarter review begins on slide three, and our fourth quarter sales were up 26% to $790 million.

  • 13% of our growth was organic, driven by strong demand for our Braking, Construction Materials, and Interconnect Technologies products.

  • 13% or $81 million of our growth came from the combined sales of the Hawk acquisition that was completed in December of 2010, the PDT acquisition completed in August of 2011, and the Tri-Star acquisition, which we completed in December of last year.

  • EBIT dollars were $53 million, compared to $27 million in 2010, an increase of 97%.

  • EBIT margin in the fourth quarter was 6.7%, positively impacted by selling price and raw material parity within Construction Materials, and higher margin performance in CBS and CIT.

  • Our gains in margin were offset by $4.2 million of one time acquisition costs and lower volume in the FoodService business.

  • Slide four details the components of our revenue growth.

  • Our growth by segment is detailed in the center of the graph.

  • As can be seen, Interconnect Technologies enjoyed 20% growth, Construction Materials was up 18%, Brake & Friction 15%, and Transportation Products was up 5%.

  • Sales growth at FoodService continues to be a challenge, as its sales declined 5% in the quarter.

  • We have not seen any economic recovery in the food service marketplace in 2011, but the most recent NRA index has been above 100 for the past five months, and that should bode well for 2012.

  • As we turn to slide five you will see our margin dollars growing 97%, from $27 million to $53 million.

  • Detailed in the bridge for the fourth quarter, you will see that net charges, which are the difference between the acquisition cost to purchase Hawk in 2010 and the cost to purchase PDT and Tri-Star in 2011, was a 1.3% gain to margin.

  • EBIT generation from these acquisition added 1.2%, volume represented 0.6%, and COS savings another 0.4%.

  • Pricing net raw materials was negative 1.2%, and the vast majority of that raw material variance came in Transportation Products, with smaller amounts in CIT and FoodService.

  • Please turn to slide six, where we will begin reviewing each of the businesses individually.

  • The first segment slide provides color on the performance of Construction Materials.

  • The fourth quarter was a superb quarter in this segment.

  • We reached price parity with raw material in the fourth quarter, allowing us to leverage our sales for the first time in 2011.

  • With sales growing 23%, our EBIT grew 32%.

  • Our leverage would have been even greater had it not been for the $2.1 million in step-up charge for the inventory from the purchase of PDT earlier in the year.

  • Warm weather across the country in the fourth quarter extended the roofing season, which was reflected in our sales.

  • The vast majority of our sales growth was organic, with PDT contributing 5% overall in the growth -- of the growth in the quarter.

  • Another bright spot in construction materials was that PDT has grown 24% since we acquired the company in August.

  • The EPDM market is growing in Northern Europe despite the soft economic conditions on the continent.

  • Turn to slide seven, and we will take a look at Transportation Products, which grew 5%, but that growth was all price.

  • Volume was actually down in the quarter, as sales in outdoor power equipment and drive belts was lower than they had been during the fourth quarter of 2010.

  • Outdoor power equipment continues to suffer from an anemic residential housing market.

  • Fourth quarter EBIT was a loss of $4 million, as we sold inventory containing higher priced natural and synthetic rubber, which was purchased earlier in the year.

  • Plus lower volumes in our factories as the outdoor power equipment struggled to grow.

  • The good news coming out of Transportation Products is related to our Jackson, Tennessee, plant, where productivity continues to climb and our scrap rates are dropping like a rock.

  • Our fourth-quarter scrap rates were less than 2%, and our January 2012 scrap rate was 0.7%, all while our operating efficiency reached 74% in the fourth quarter.

  • For comparison purposes, in the second quarter of 2011 our scrap rate was in excess of 6% and operator efficiency approximately 50%.

  • Our current levels of productivity are now on par with the outputs in our other tire manufacturing facilities.

  • These improvements will pay dividends in way of higher earnings in 2012.

  • Turn to slide eight, and we'll review Brake & Friction.

  • Brake & Friction continued to operate at a high level in the fourth quarter.

  • The information contained on this slide reflects the value we got from Hawk during 2011.

  • As a reminder, December 1 was the anniversary date of the Hawk acquisition.

  • Fourth quarter sales increased 126% to $116.2 million from $51.4 million in 2010.

  • Organic sales grew -- growth was 15%, reflecting continued global demand for construction and mining equipment.

  • EBIT for Brake & Friction was $15.4 million, compared to a loss of $10.7 million during the prior year.

  • The loss last year was driven by the acquisition cost incurred while purchasing Hawk.

  • Hawk contributed $11.44 million of the EBIT in the fourth quarter.

  • EBIT at CBF in the fourth quarter was also positively impacted by higher organic sales volume and partially offset by $1.7 million in charges for additional warranty expense and other related integration expenses, mainly severance costs.

  • Turn to slide nine, and we will take a look at Interconnect Technologies, which was another shining star in the fourth quarter.

  • Sales were up 32%, with organic growth being 20% and the acquisition of Tri-Star contributing the other 12% of growth.

  • As a reminder, we purchased Tri-Star on December 2, so we had less than one month of the results in the fourth quarter of last year.

  • The aerospace retrofit business continues to be a strong driver of growth, along with the ramp-up of the 787 production.

  • EBIT increased 17% in the quarter to $10.4 million.

  • Keeping EBIT from growing at a higher rate were the integration costs of $2.1 million, which are one time costs related to the acquisition of Tri-Star.

  • The integration of Tri-Star will follow the same process that we used while integrating Hawk.

  • We began the COS blitz shortly after completing the Hawk deal, and we are following that same process with the Tri-Star US plants, followed a month later with a similar blitz in the Tri-Star Swiss plant.

  • We hope to gain the same efficiency at Tri-Start that we achieved at Hawk the 12 months following the acquisition.

  • Tri-Star should generate margins in the high teens, and their sales should be in excess of $100 million in 2012.

  • Please turn to slide ten, and we will review our FoodService business.

  • FoodService sales continue to lag the economic recovery we have seen in the other -- in three of our other five businesses.

  • The restaurant industry continues to suffer from slow store traffic and a [drought] of new restaurants being built.

  • Consequently our sales were down 5% in the fourth quarter.

  • This decline included a 2% realization of selling price.

  • Demand is down in both food service and health care.

  • Our EBIT perform was a loss of $2.1 million, with the vast majority of that loss coming from severance charges as we made changes to the FoodService management team and business structure.

  • In the quarter we changed many of the -- in the top management group at FoodService, hoping to bring new ideas to the business.

  • We also closed our Oklahoma City distribution center to lean out our operations and eventually reduce inventory required to support the business without impacting customer deliveries.

  • Let's turn to 2011, and we'll basically summarize the year of 2011.

  • Our net sales grew 28%, driven by strong demand in Construction Materials, Brake & Friction and Interconnect Technologies.

  • Organic growth of 14% was superb in a year in which the media questioned the health of the economy most of the year.

  • The acquisitions of Hawk, PDT and Tri-Star added $340 million or 13% to our annual sales.

  • EBIT margin of 8.5% is 70 basis points higher than 2010, despite having an underperforming Transportation Products and FoodService business.

  • I think this performance shows that the strategic steps we have taken over the past three years to grow our high margin businesses are starting to pay dividends.

  • As we improve both FoodService and Transportation Products, our margin improvement will be pushing closer to our long-term goal of 15%.

  • Our effective tax rate for the full year was 28.4%, down from 30.5% in 2010, and EPS was up 37% to $2.88 a share.

  • Slides 12 and 13 provide you with sales and margin bridge for the year, and I think they're self-explanatory.

  • If you have any questions on the data contained on these slides, we will gladly answer those for you in the question-and-answer period that immediately follows our remarks.

  • I will now turn the meeting over to Steve, who will take us through our 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 14 of the presentation.

  • As Dave noted, during the fourth quarter we closed on the Tri-Star acquisition.

  • The purchase price was funded by borrowing under our new credit facility.

  • We currently have about $265 million of remaining availability under that facility.

  • Our balance sheet following the acquisition remains strong, with a debt to capital ratio of 34% and debt to EBITDA ratio of 2.

  • Turning to slide 15, our cash flow from operations for the year was $191.2 million, compared to $107.4 million last year, a 78% increase.

  • Our free cash flow increased from $42.8 million last year to $111.6 million for 2011, a 161% improvement.

  • Turning to slide 16.

  • Our average working capital as a percentage of sales for 2011 was 21.9%, compared to 22% for 2010.

  • We remain committed to improving our management of working capital and achieving our long-term goal of 15% of sales.

  • And with those remarks I will turn the call back over to Dave.

  • David Roberts - Chairman, President, CEO

  • Thanks, Steve.

  • Before we open the phone lines for questions concerning 2011, let's turn to slide 18.

  • It will give us some idea of what we are planning for for 2012.

  • I'm sure you are going to have questions on 2012 during the question-and-answer period.

  • I think many of these will be answered by this slide.

  • Our performance in 2011 combined with the start we have seen in January, we are very optimistic about 2012.

  • While one month doesn't make a year, we are off to one of the strongest starts in Company history, and if raw material prices don't begin to escalate like they did in 2011, if nonresidential construction activity continues to improve as we have seen over the last few months, if the aerospace industry delivers the number of aircrafts forecast for 2012, and if construction and mining equipment customers have the year they are forecasting, and if Transportation Products continues to improve their operations, and we make the necessary improvements to FoodService, 2012 will be another record year for sales and earnings.

  • We think sales will be up approximately 10% in the year, and with the improvements we have made at Transportation Products and the changes we will be making early in FoodService and the volume increases that we will see in Construction Materials, Brake & Friction and Interconnect Technologies, we should see a corresponding increase in our EBIT margins.

  • We will increase our capital spending in 2012 to support the organic growth of Construction Materials, Brake & Friction and Interconnect Technologies.

  • We are expanding our brake plant in Italy.

  • We are completing the expansion of our St.

  • Augustine Interconnect Technologies plant to support the ramp-up of the 787.

  • We will be building two new polyiso plants this year.

  • One new plant will be located in the Seattle area, and the second plant will be a replacement facility for our Kingston, New York, factory.

  • And we will be also building a new brake plant in India to service our customers in Asia.

  • Growth in each of these businesses is dictating the need for new manufacturing space.

  • The remainder of slide 18 gives you an indication of our budget in the following categories.

  • Corporate expenses should be $44 million, depreciation and amortization will be $107 million, interest expense should be $24 million, our tax rate is planned at 33%, and our cash conversion rate will be 75% due to the higher capital spending that will occur in 2012.

  • With that summary let's go ahead and open the phone lines for questions.

  • Dawn, if you could do that, 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

  • Morning, Pete.

  • Peter Lisnic - Analyst

  • I guess first question, Dave, if I could, the outlook for mid single digit growth for 2012.

  • Can you maybe give us how the moving parts work there by segment?

  • I'm guessing stronger growth in Interconnect and maybe Brake & Friction, and then lower growth at Food.

  • David Roberts - Chairman, President, CEO

  • Yes.

  • Exactly.

  • If you look at certainly the Brake & Friction business we think we will be very high single digits, maybe low double digits.

  • Interconnect I think will be double digits.

  • Probably mid-teens growth with the ramp-up of the 787.

  • And now this is organic growth.

  • Obviously, you throw in the acquisition of Tri-Star, it could be up 45% or 50% with that addition.

  • And we think Construction Materials -- we can never predict what's going to happen there, so we're budgeting a high single digit growth in the business.

  • We're really starting to see a very active new construction quoting market, and it looks as though nonresidential is starting to turn a bit.

  • If that starts to turn, Pete, we could actually be up higher than the single digit that we have forecast.

  • Peter Lisnic - Analyst

  • Okay.

  • All right.

  • David Roberts - Chairman, President, CEO

  • And FoodService is going to -- I think we will continue to be in the zero growth or flat growth in that area, and I think transportation will be in the 3% to 4% to 5% growth range.

  • Peter Lisnic - Analyst

  • Okay.

  • Great.

  • That is perfect.

  • And then if I just look at the Interconnect business, can you maybe give us a sense as to what the military headwind is that you're facing there?

  • I think it was down [30 in the fourth quarter] --

  • David Roberts - Chairman, President, CEO

  • Yes.

  • Actually we were down about 15% this year in military.

  • Now, it's a small component of our total sales.

  • Our people really think it's going to be flat next year.

  • What they're looking at is maybe the projects that we're on or the equipment that we're on we think will continue at a lower rate, at that 15% decline that we have seen, but we think it will be flat next year.

  • Peter Lisnic - Analyst

  • Okay.

  • And then the fourth quarter for Brake & Friction, if I just look at the op margin sequentially, revenue down 10 and your EBIT number was down about the same.

  • Just wondering if there's some adverse mix in fourth quarter versus third to kind of push that margin down to where it was?

  • David Roberts - Chairman, President, CEO

  • Yes.

  • What happened, the -- well, the margin was extremely high in the third quarter, first of all, but if you look at the fourth quarter, I think there's a little more seasonality to this business than perhaps we had anticipated.

  • The -- most of the customers -- our customers close for the holiday period, just before Christmas through New Years, and -- so consequently they're not taking as much in volume.

  • We had some costs that flowed through the margin line related to a Canadian operation that we closed that was part of the Hawk acquisition.

  • We had some people that we asked to stay with us for a year, and they got severance charges -- or severance payment at the end of the year.

  • They are now gone.

  • I think all of the charges that we have related to Hawk are now behind us, and I think going forward that margin -- the margin should jump right back up to where it was.

  • Peter Lisnic - Analyst

  • Okay, perfect.

  • I will jump back in queue.

  • Thank you.

  • David Roberts - Chairman, President, CEO

  • Okay.

  • Operator

  • Your next question comes from the line of Deane Dray with Citi Investments.

  • Deane Dray - Analyst

  • Thank you.

  • Good morning, everyone.

  • David Roberts - Chairman, President, CEO

  • Hey.

  • Morning, Deane.

  • Deane Dray - Analyst

  • Before -- I definitely want to cover the outlook for 2012, but before we close the books on 2011 I just want to step through a couple of the charges.

  • And just to make sure I'm clear, you're including all of these charges in your operating results, right?

  • David Roberts - Chairman, President, CEO

  • Yes, we are, Deane.

  • Deane Dray - Analyst

  • Okay.

  • So that's -- it's interesting, because you see some companies will just very quickly exclude inventory step-ups and some of these acquisition charges, so kudos to you to include all these.

  • The one I would like a little more explanation on is on the brake side, the additional warranty expense.

  • Is this a legacy issue, something you inherited, or is this something more recent?

  • David Roberts - Chairman, President, CEO

  • Yes, it's probably a combination of all of that.

  • We had -- the operation that we have in Pontypool, Wales, they're effectively manufacturing brake boosters and master cylinders, and we had a vendor that supplied us with some master cylinders that had porosity in the castings.

  • Some of those got out into the marketplace.

  • We're replacing those, and to ensure that we were adequately covered we went ahead and took a charge for that problem we had with the castings primarily.

  • It's a -- Deane, it's one of those one time -- seriously is one of those one time charges that frankly we don't see reoccurring.

  • Deane Dray - Analyst

  • Good.

  • And that was above a customary reserve you would have had for warranty, is that right?

  • David Roberts - Chairman, President, CEO

  • Yes.

  • That's correct.

  • Deane Dray - Analyst

  • Okay.

  • And then I know it's a nit, but, Steve, could you take us through -- what was the -- the tax came in lower versus expectations in the fourth quarter.

  • There's some -- you called out some foreign tax credit.

  • What were the dynamics that brought you in at a lower tax rate?

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • Well, Deane, it really related primarily to our restructuring that we commenced in the third quarter of our European operations.

  • It was a fairly complicated transaction, but that restructuring resulted in a dividend that freed up some excess foreign tax credits that were previously generated by the Hawk business that were sort of an unutilized asset in Hawk's hands.

  • But we were able to free those assets up, and they benefited us here in the fourth quarter.

  • Deane Dray - Analyst

  • Okay.

  • That's a real good explanation.

  • And then over on the roofing business -- I mean, organic revenue growth was at 18%.

  • Just kind of take us through the business mix for the quarter.

  • It came in nice.

  • It looks like you've got the raw material issue, you got pricing, but just take us through what was remarkable in the mix that drove the upside.

  • David Roberts - Chairman, President, CEO

  • I think it was not so much the mix, Deane, but just the fact that we had such a warm winter -- or fourth quarter that the roofers were still on roofs and doing a lot of reroofing.

  • It's probably -- and I haven't really looked back at it -- if it's not our strongest fourth quarter, it's probably one of the strongest fourth quarters that we have had in Construction Materials.

  • And that trend continues as the weather continues to be warm.

  • Deane Dray - Analyst

  • Yes, well, I remember a year ago, we also had a pretty mild December too, so maybe that's the new trend.

  • But either way, just the fourth quarter operationally was a lot stronger, because you did include all these charges, and we're just noting that.

  • And then back of the envelope, Dave, on your organic revenue growth at mid single digits at the outset seems -- the math doesn't work for us, because --

  • David Roberts - Chairman, President, CEO

  • But, Deane, we're trying to be somewhat, I guess you would say, cautiously optimistic.

  • I think the year could be better than that.

  • It really depends upon I think Construction Materials and what happens there.

  • If I had better visibility in Construction Materials, I think we would be slightly more optimistic.

  • It's just that you never know what's going to happen with the reroofing market.

  • It continues to be strong.

  • It's just a question of what really happens to it over the entire year.

  • But from what we see today, we could certainly be higher than that.

  • Deane Dray - Analyst

  • Yes.

  • We can see that, and look, our math can get you into -- back into low double digits on a core revenue growth if we see some of these trendlines continue.

  • And particularly in Brake.

  • So I mean this one you do have a little bit more visibility in terms of what the OEs are telling you in terms of production.

  • So based upon that, do you think you can do something a bit higher than -- you thought high single digit, low double digit.

  • You have been closer -- I mean, above 20% in some -- in multiple quarters, so.

  • David Roberts - Chairman, President, CEO

  • Yes, but I think the -- that ramp-up that was occurring, I think that will slow a bit.

  • If I look at Caterpillar, their forecasts are very optimistic for the year.

  • If those forecasts materialize, then I think it could be higher than what it is.

  • Again, we frankly budget conservatively, so we don't allow expenses to get out of control, but we're certainly well equipped to handle any increase above what we're planning.

  • Deane Dray - Analyst

  • Great.

  • That's real helpful.

  • Thank you.

  • David Roberts - Chairman, President, CEO

  • Okay.

  • Operator

  • Your next question comes from the line of Saul Ludwig with Northcoast Research.

  • Saul Ludwig - Analyst

  • Hey.

  • Good morning, everybody.

  • David Roberts - Chairman, President, CEO

  • Morning, Saul.

  • Saul Ludwig - Analyst

  • In the Construction Materials, what was the split between volume and price as part of your revenue growth?

  • David Roberts - Chairman, President, CEO

  • Do you have that with you?

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • Yes, it was about half and half, Saul.

  • Saul Ludwig - Analyst

  • Could you review for us the last price increase that went into effect?

  • When did that take place, and the magnitude of it, and what is on the docket for this year?

  • David Roberts - Chairman, President, CEO

  • Well, the best way I can tell you is we had seven price increases in 2011.

  • The last one occurring -- I think it was November.

  • It was just a constant ramp-up of price trying to keep up with raw material.

  • We finally got to parity.

  • We are seeing carbon black continue to escalate in price.

  • That's one of the key components that we put in our material obviously.

  • And we're planning a price increase probably in the early second quarter, Saul, is what we probably end up seeing.

  • Saul Ludwig - Analyst

  • What was the order of magnitude of the November hike?

  • David Roberts - Chairman, President, CEO

  • Saul, I don't have it in front of me.

  • I'm guessing 5%.

  • Saul Ludwig - Analyst

  • Okay.

  • And given the great weather, do you think that is going to impact you negatively in the second quarter, where reroofing jobs that may have been put off normally in the first quarter that are getting done in the first quarter?

  • David Roberts - Chairman, President, CEO

  • You know, like I said, I have no visibility into reroofing.

  • My biggest concern is that we get everything early in the year, and then if the weather -- you know -- while we don't wish any ill will on anyone, cold weather and freezing and thawing helps the roofing business.

  • And we haven't seen that yet.

  • So it's too early to predict, but -- I can't answer that, honestly, but it could have a long-term effect.

  • Saul Ludwig - Analyst

  • Bad weather is your friend, and we haven't had that.

  • David Roberts - Chairman, President, CEO

  • Exactly right.

  • Saul Ludwig - Analyst

  • Okay.

  • And so as part of your -- when you think about Construction Materials, you said be up maybe 8%.

  • It looks like there's a lot of price in there and maybe not a lot of volume.

  • Is that the way to think about that?

  • David Roberts - Chairman, President, CEO

  • Yes, only because, Saul, I think what we're anticipating is just what you're saying, is that because the weather has been so mild that will the business grow at an 18% rate or whatever organically in 2012 that it did in 2011.

  • So I think that, again, we're being cautious not knowing what the warm weather will do to us at the latter part of the year.

  • Saul Ludwig - Analyst

  • Okay.

  • Where in the Company did you have negative price raws and what magnitude?

  • David Roberts - Chairman, President, CEO

  • Well, we had that -- in our Transportation Products group we had negative raws.

  • We had some in FoodService.

  • And a slight amount in CIT.

  • Saul Ludwig - Analyst

  • How much -- you said you sold off some high cost inventories, and being you're on FIFO, the stuff that you would have sold in the fourth quarter was costs that you incurred when prices were high in the third quarter.

  • How much do you think blowing out the high cost inventory cost you, and are you now in a position where you're not going to have the price raws negative, at least as it appears now going forward?

  • David Roberts - Chairman, President, CEO

  • Yes, Saul, I think you're right.

  • I think that the high price material should be gone, or a slight amount of it perhaps in January.

  • As far as the total amount -- do you have a feel for that, Steve?

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • Yes, Saul, it was about $10 million negative to Transportation Products, just for the reason you described, selling inventory that we manufactured in the third quarter at higher costs here in the fourth quarter.

  • And a similar amount will negatively impact the first quarter, but we do think we have got price to offset that.

  • Saul Ludwig - Analyst

  • Let me make sure I understand it.

  • In the fourth quarter in Transportation Products, you had a $10 million negative hit on the product that you blew out from inventory, with not any pricing recovery.

  • And so we could look at that $10 million as sort of a one time-ish.

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • Well, there was a little bit of pricing recovery, but we had about $10 million of negative capital variances that we -- that were flowing through the P&L in the fourth quarter.

  • It was only partially offset by the price.

  • Saul Ludwig - Analyst

  • And then -- so let's say that could have been $8 million net negative?

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • Yes, okay.

  • $7 million or $8 million, yes.

  • Saul Ludwig - Analyst

  • Okay.

  • And what do you see that happening in the first quarter?

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • I see in the first quarter substantially all of it being offset by price.

  • Saul Ludwig - Analyst

  • So the first quarter we should have none of that $10 million -- that $10 million -- see, a lot of us put models together.

  • You came in real short on the operating income.

  • It was offset by the lower tax.

  • And this $10 million or $8 million, that's a big number.

  • You didn't call that out in your text plus all the other $1 million and $2 million items.

  • It seems like --

  • David Roberts - Chairman, President, CEO

  • Well, Saul, we don't see that as one time.

  • That was a cost of doing business is the reason we didn't sort it out.

  • We knew we had high priced material, and I think we talked about it in the third quarter going into fourth.

  • But we don't see that as one time.

  • That was, to us, that was operating expenses.

  • Saul Ludwig - Analyst

  • Yes, it's the cost of doing business.

  • I understand that.

  • David Roberts - Chairman, President, CEO

  • Exactly.

  • Saul Ludwig - Analyst

  • But Steve is saying it's not going to be repeated in the first quarter.

  • David Roberts - Chairman, President, CEO

  • Right.

  • Saul Ludwig - Analyst

  • So that's a positive delta in earnings, right?

  • And then you had all these other $1 million and $2 million items for severance costs, integration costs.

  • It seems like you could have had maybe $15 million to $18 million of expenses in the fourth quarter that should not repeat going forward.

  • Is that correct?

  • David Roberts - Chairman, President, CEO

  • If you're including that raw materials, yes.

  • Saul Ludwig - Analyst

  • Well, you called that out as an item, so that's why I wanted to clarify that.

  • David Roberts - Chairman, President, CEO

  • No question.

  • That's why we're optimistic about 2012.

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • So we provided it in response to your question.

  • The items that we called out that we think are more one time in nature were the acquisition related costs and some of the severance items.

  • But we also -- obviously we were talking about the cap variance and the negative raw material impact in response to your question.

  • Saul Ludwig - Analyst

  • Okay.

  • And then finally, your goal of 100% cash conversion has been an elusive target.

  • You clearly come out and say you're not going to get there in 2012.

  • When do you see that happening, or are we just not going to see that for several years because you will probably make more acquisitions and -- how should we think about that?

  • David Roberts - Chairman, President, CEO

  • I think that -- certainly not this year, with the capital we are investing back in the business.

  • We continue to pursue acquisitions.

  • As the business -- the other thing is as the business grows at double digits, we consume a lot of cash in receivables, inventory and so on.

  • So I think if the business slowed to a single digit growth, if the capital investment was what it has been traditionally at maybe $70 million, then I think we would see it.

  • Saul Ludwig - Analyst

  • Then finally, ex any more acquisitions, these inventory step-ups are done, the severance costs are done.

  • Do you see any need for any special type items that you've included in your budget for 2012 that we should at least be cognizant of?

  • David Roberts - Chairman, President, CEO

  • Yes, the only thing we will have, Saul, keep in mind we bought Tri-Star in early December.

  • There will be some costs that will flow through in this year as a result of Tri-Star.

  • Step-up, other material -- or other acquisition costs that we'll end up taking.

  • But barring any other acquisitions that would be it.

  • Saul Ludwig - Analyst

  • And that might be $2 million, $3 million, $4 million.

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • Closer to $2 million.

  • There's about $2 million more of inventory that's being stepped up and amortized that will run through the P&L in the first quarter.

  • Saul Ludwig - Analyst

  • And then finally what was the COS savings?

  • David Roberts - Chairman, President, CEO

  • For the year?

  • Saul Ludwig - Analyst

  • Yes.

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • About $20 million.

  • $20.5 million.

  • David Roberts - Chairman, President, CEO

  • Yes.

  • Saul Ludwig - Analyst

  • And what do you expect for this year?

  • David Roberts - Chairman, President, CEO

  • We usually budget around $20 million.

  • Saul Ludwig - Analyst

  • Okay.

  • Great.

  • Thanks a lot, guys.

  • David Roberts - Chairman, President, CEO

  • Okay.

  • Thanks, Saul.

  • Operator

  • Your next question comes from the line of Ivan Marcuse with KeyBanc Capital Markets.

  • Ivan Marcuse - Analyst

  • Hey, guys.

  • Thanks for taking my questions.

  • David Roberts - Chairman, President, CEO

  • Hey, you're welcome, Ivan.

  • Ivan Marcuse - Analyst

  • I just have a couple quick ones.

  • In the FoodService business, that was probably a little bit worse than anyone was looking for.

  • So do you expect with the transition that you are doing now with the closure of the distribution center should this business turn profitable in the first quarter or first half of the year, or do you expect the --

  • David Roberts - Chairman, President, CEO

  • No, Ivan, we'll make money in FoodService.

  • The volume is up a little bit in January already.

  • We'll have some additional costs that will probably be incurred in the first quarter.

  • I don't think -- I would be very surprised if the business was not profitable in the first quarter.

  • I would expect it to be in a mid to high single digit margin for the year.

  • Ivan Marcuse - Analyst

  • Okay.

  • And then in -- you also called out in your slide deck you had higher customer rebates.

  • Was that in the $1 million, $2 million range?

  • And what was that related to, or is that just part of the [closure]?

  • David Roberts - Chairman, President, CEO

  • What it was is there were some customers that were close to their rebate levels, and they bought in product in the fourth quarter to drive that rebate, and then obviously there were some that weren't.

  • So we actually had higher rebates than we anticipated.

  • Primarily we didn't expect these customers to buy to that level in 2011.

  • Ivan Marcuse - Analyst

  • Okay.

  • Great.

  • And then for Transportation, now with the plant up to where you want it to be, what kind of margins are you targeting for next year?

  • Are you thinking mid single digits is a possibility?

  • David Roberts - Chairman, President, CEO

  • Yes, I think that's very possible.

  • The volume in January was actually slightly above what we had budgeted for.

  • We think February will be a good quarter for us.

  • This is a business you have to make it in the first half the year.

  • I think we'll be in the mid single digits in margin in the business.

  • Ivan Marcuse - Analyst

  • Okay.

  • So with the combination of all these -- the rebates and all these one time charges that were just discussed, and then going to mid single, you should see some significant EPS earnings growth next year.

  • David Roberts - Chairman, President, CEO

  • Yes, sir.

  • Ivan Marcuse - Analyst

  • Got you.

  • And then last question, just a quick one.

  • I know it's small, but EDPM growth in Europe.

  • I know that's mostly an asphalt market.

  • What's driving that?

  • Is that the new construction, or is it more --

  • David Roberts - Chairman, President, CEO

  • Yes, it's reroofing.

  • There's obviously a little bit of new construction, not a lot, but most of it is reroofing applications and people moving to EPDM.

  • So that's been a pleasant -- we anticipated it, but it's been a pleasant surprise for us since we bought it.

  • Ivan Marcuse - Analyst

  • Is the EPDM considered, at least in Europe, more environmentally friendly, or does it go better with the building codes than asphalt, and that's what's driving it?

  • Or is it just more (multiple speakers) [cost for]?

  • David Roberts - Chairman, President, CEO

  • It is a considered a more environmentally friendly product.

  • If you think about asphalt and the way it has to be applied.

  • And then some in PVC.

  • There's been some discussion about PVC roofing over the last few years in Europe as far as not being environmentally friendly.

  • That really is what's driving it.

  • And it's very -- a very small slice of the market today.

  • It's less than 5% of the market.

  • We view Europe in the EPDM market, now that we have an EU and more consistent building codes across the continent itself, is really in the stages where EPDM was in the US back in the early 70s, when we introduced the product.

  • So that is why we're making investments there.

  • Ivan Marcuse - Analyst

  • Got you.

  • Thank you very much.

  • David Roberts - Chairman, President, CEO

  • Okay.

  • Operator

  • Your next question comes from the lines of Ajay Kejriwal with FBR Capital.

  • Ajay Kejriwal - Analyst

  • Good morning.

  • David Roberts - Chairman, President, CEO

  • Good morning.

  • Ajay Kejriwal - Analyst

  • Just so I understand on the inventory issue, so were you carrying inventory at a cost that was higher than the market price?

  • I mean, what was the issue?

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • No, it's just it's based on the inventory turn.

  • So the inventory that we built in the third quarter was sold in the fourth quarter.

  • And the inventory tended to be a little bit more -- the price of the raw materials tended to be a little about the higher in the fourth quarter, and that was kind of rolling through the P&L as part of that sale.

  • Ajay Kejriwal - Analyst

  • Okay.

  • So for a $10 million impact on the EBIT, that's nearly 600 basis points.

  • Is it -- sounds like it was a substantial amount in the dollar -- in dollar terms, and in January it looks like continuing.

  • But are you -- will you be done post-January in terms of the liquidation?

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • Yes, based on our turns, if raw material stays at these current levels, at the end of the first quarter -- really at the end of February, all of the higher priced inventory will be off our balance sheet.

  • David Roberts - Chairman, President, CEO

  • Right.

  • Ajay, what we're doing there is we turn inventory about five times a year in Transportation.

  • So after you get through 2.5 months, effectively the high priced material is gone.

  • Ajay Kejriwal - Analyst

  • Got it.

  • Okay.

  • And then on Hawk, it looks like there's a nearly 40% sequential decline in the EBIT dollars, and I know you said it's seasonality.

  • Any color on what you are seeing with -- in the ag market?

  • We heard earlier this week from CNH on some pricing issues.

  • Are you seeing any of that at all?

  • David Roberts - Chairman, President, CEO

  • We have not yet at this point.

  • Now, ag is not a big component of what we do in the Hawk business.

  • Ours is primarily mining and construction equipment, but we do have a small component of ag.

  • But we have not seen a dramatic impact on pricing.

  • Ajay Kejriwal - Analyst

  • So that decline is purely seasonal?

  • David Roberts - Chairman, President, CEO

  • Yes.

  • There's nothing there that should alarm anybody.

  • Ajay Kejriwal - Analyst

  • Got it.

  • And then on the leverage ratios, maybe could you talk about where you are versus your targets, and then appetite for any further deals?

  • David Roberts - Chairman, President, CEO

  • Well, I mean, I will let Steve talk ratios, but yes, we're -- what I would love to do is to continue to expand the Construction Materials business in Europe.

  • So we would look to Europe.

  • And if we found certainly a -- we have said this all along -- if we found something in Braking or Interconnect, we would certainly have an appetite to go after those.

  • Frankly, there's nothing on our plate that is near term at this point.

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • Yes, Ajay, we're certainly comfortable with a 34% debt to capital ratio and a debt to EBITDA of 2.

  • We think we're going to have strong cash flow performance here in 2012, and we would certainly, in the absence of acquisitions, see those numbers improving.

  • So we're comfortable where we are, and for the right transactions we would be willing to go a little bit higher.

  • David Roberts - Chairman, President, CEO

  • Yes, and, Ajay.

  • When I said there's nothing on the plate near term, that was in the Braking business and also the Interconnect business.

  • We're pursuing some things on the Construction side.

  • If anything came in the short-term, it would be Construction as compared to the other two.

  • Ajay Kejriwal - Analyst

  • Excellent.

  • Thank you very much.

  • David Roberts - Chairman, President, CEO

  • You're welcome.

  • Operator

  • (Operator Instructions).

  • Your next question is a follow-up question from the line of Peter Lisnic with Robert W.

  • Baird.

  • Peter Lisnic - Analyst

  • Hey, guys.

  • I just wanted to run through the CapEx forecast again, $120 million to $150 million.

  • Can you run through just the couple new plants you're putting up for polyiso in West Coast and East Coast?

  • We thought you were maybe fully capacitized at this point, but what's the --

  • David Roberts - Chairman, President, CEO

  • No, actually, polyiso has done very well for us this year and last.

  • What we have been able to do is to serve the market in the Northwest out of our Tooele, Utah, plant.

  • It's getting to a point where it's very difficult -- just because of the price of transportation, it's difficult to do that.

  • So what we're doing is going to put a plant in the Seattle area to not only cover the Northwest in the US, but also the southern part of Western Canada out of that facility.

  • The plant going in Kingston, New York, or near Kingston, New York, we currently have a facility there today that's leased, and we're out of capacity.

  • It's one of -- in fact, it is the first polyiso plant that we had, and it's just outlived its usefulness, and we just need to move into a new facility to further expand that business.

  • But polyiso has been doing very well for us over the last couple of years.

  • Peter Lisnic - Analyst

  • Okay.

  • So it sounds like it's just running at full capacity basically and you need more?

  • David Roberts - Chairman, President, CEO

  • Exactly.

  • Steve Ford - CFO, VP, General Counsel, Secretary

  • And, Pete, this business has a particularly strong track record with respect to organic growth.

  • I mean, almost all of the growth that we have had over the last ten years has been organic.

  • They've built a number of factories, they've put product through existing distribution, and leveraged their brand, and at the end of the day they're generate returns on invested capital north of 30%.

  • So this is -- this has been a very successful model for us.

  • Peter Lisnic - Analyst

  • Okay.

  • All right.

  • That is very helpful.

  • And then I just wanted to get a little bit of insight on the new construction comment on CM that you made a little bit earlier, seeing what I'd call, I guess, better quoting activity.

  • I'm just wondering if you could give us feel for how that quoting is converting into actual orders.

  • David Roberts - Chairman, President, CEO

  • It's still a bit too early, but what we saw in the fourth quarter was architects starting to -- and contractors starting to quote new projects that are on the books.

  • I don't think we'll see a lot of it certainly early in the year.

  • I think if it develops it would come mid to the latter part of the year.

  • But we are seeing more activity than we have seen in the last three years.

  • Peter Lisnic - Analyst

  • Okay.

  • And then is it safe to say that as you look at 2012, the mix between reroof and new is still 80%-plus reroof, 20ish or maybe even less than that on the new construction side?

  • David Roberts - Chairman, President, CEO

  • No, I think that's probably a good number.

  • It would be good news if it was actually 70%/30%, because I think we will hold on to the reroofing.

  • We would just get more new.

  • Peter Lisnic - Analyst

  • Okay, but without any sort of margin plus or minus, correct?

  • David Roberts - Chairman, President, CEO

  • Absolutely.

  • Peter Lisnic - Analyst

  • All right.

  • Thanks again for your time.

  • I appreciate it.

  • David Roberts - Chairman, President, CEO

  • You're welcome.

  • Operator

  • And there are no further questions at this time.

  • I would now like to turn the call back over to Mr.

  • David Roberts for any closing remarks.

  • David Roberts - Chairman, President, CEO

  • Thanks, Dawn.

  • 2011 was a very good year for us.

  • Not only did our sales and earnings grow to record levels, we completed a number of strategic acquisitions, led by the purchase of PTD and Tri-Star.

  • We successfully integrated Hawk, achieving higher sales and higher margins than we originally forecast in our acquisition model.

  • When we bought that business, we were paying about 8.5 times EBITDA.

  • At the end of the year that price looked like it was a little less than 5 times EBITDA, so that was a very successful acquisition and actually helped 2011 for us.

  • We've made great progress in Transportation Products.

  • The new management team has made significant strides in Jackson, our productivity levels are up to where our other tire manufacturing facilities are.

  • And frankly, we're at this point starting to plan to bring work back from China and put it in our -- both of our Tennessee plants, both Clinton and Jackson.

  • We have found that we can actually manufacture as cheaply or cheaper here in the US than we can in China in our tire facilities.

  • While FoodService was a drag on our earnings in the fourth quarter, I think we quickly recognized the issues and we made a number of management changes very early on.

  • And the new management team has identified a number of cost savings that they will be implementing in the first quarter.

  • There will be some charges in the first quarter.

  • We don't how big, but we will have some charges.

  • But I still think the business will be a single digit -- mid single digit EBITDA -- or EBIT contributor in 2012.

  • One final comment on 2012.

  • Frankly, it's stacking up to be a very good year.

  • Again, one month in the books, but we're very optimistic at this point about 2012.

  • With that, I will now end our year-end conference call.

  • I want to thank everybody for attending.

  • We look forward to reviewing our results for the first quarter early in the second quarter of this year.

  • Dawn, you can now end the call.

  • Operator

  • This concludes today's Carlisle's fourth quarter earnings conference call.

  • You may now disconnect.