Carlisle Companies Inc (CSL) 2012 Q1 法說會逐字稿

Good morning, my name is Brandi, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Carlisle Company's first 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.

Mr.

David Roberts, you may begin your conference.

Thank you, Brandi.

Good morning, and welcome to Carlisle's first quarter 2012 conference call.

Attending the call with me is our CFO, Steve Ford; our CAO, Kevin Zdmal and our Treasurer, Julia Chandler.

On our website, you will find slides for today's conference call.

Those slides detail our first quarter performance.

As in the past, this call will provide additional color on our performance, but before we start the slide deck, let me say that our performance in the first quarter was nothing short of outstanding.

We made terrific progress in reaching our long-term financial goals plus made and other step in the globalization of our business as we purchased the Dutch EPDM roofing manufacturer, Hertalan.

As we turn to the presentation, please review slide 2 titled forward looking statements which details the risk involved in making investment in Carlyle.

I encourage everyone considering investment in our Company to read this statement and to refer to our SEC filings before making any investment decisions.

Now, let's turn to slide 3.

Slide 3 is a summary of the Company's overall performance in the first quarter.

Sales were $890,000, up 28% over the previous year, a first-quarter record.

22% of our growth was organic led by Construction Materials growing organically of 34%, Interconnect Technologies at 29%, Transportation and 15%, Brake and Friction at 12% and FoodService at 5%.

6% of our total growth, or $44 million, came from the acquisitions of PDT, TriStar and Hertalan.

As a reminder, PDT was purchased in August of 2011, TriStar was purchased in December of 2011 and Hertalan was purchased in March of this year.

We gained tremendous leverage on our sales growth with EBIT earnings being up 74% to $96 million in the quarter.

Our 28% sales growth in the $96 million we've earned, which included $4.6 million of related acquisition cost, was especially strong for a first quarter performance.

Our EBIT margin percentage was 10.8%.

Since 1994, we reported double-digit margins in the first quarter three other times, but the 10.8% this quarter was the highest margins we have generated in any first quarter in that 18 year period.

In addition, our EPS was up 77% to $0.94.

Slide 4 is a sales bridge for the first quarter.

Price contributed 6.6% to our growth, volume contributed 15.5%, and acquisitions contributed 6.3%.

FX had very little impact with a negative 20 basis points.

Slide 5 details our increase in margin from 8% in 2011 to 10.8% this quarter.

1.1% of our margin increase came from volume, 1.1% came from price, net of raw materials, 0.8% came from improvements through the Carlisle operating system, while other costs were negatively impacted our margin 0.2%.

Slide 6 begins our review of the individual business segments, starting with our largest segment, Construction Materials.

On March 9, we acquired Hertalan, which is headquartered in the Netherlands.

When Hertalan and PDT, which was acquired in 2011, are combined, we are now one of the largest manufacturers of EPDM roofing in Europe.

These acquisitions added 7% to our 41% sales growth in the quarter.

When analyzing our 34% organic growth, you will see that 10% came from price and the remaining 24% was volume.

Considering that volume was up 24%, you get a feel for the strength of our Construction Materials market.

EBIT was up 133%, with the business earning $42 million compared to $18 million last year.

Reaching price parity with raw material costs at the end of 2011 enabled us to increase our profitability compared to last year during the quarter.

Negatively impacting the $42 million of EBIT was $3.1 million of expenses associated with our acquisition of Hertalan.

Slide 7 gives you a snapshot of the progress we've made improving the profitability in our Transportation Product segment.

Our sales grew 15% in the quarter with 8% of that growth coming from price.

We are seeing strong volume coming from our ag markets.

Our largest customer in this segment continues to increase their forecasts which in turn drives higher demand for our products that we are supplying them.

We are also seeing strong growth in our high-speed trailer business, driven by the penetration of a large national tire retailer with our new Radial Trail RH trailer tire.

Our power sports customers are also enjoying strong sales of their ATV and UTV products, which drive the demand of our tires and wheels.

EBIT was up 46% from $13.5 million in 2011 to $19.7 million in 2012.

We receive pricing increases that offset our raw material increases, and our Jackson plant is running at forecasted levels of efficiency with scrap rates slightly below our original plan rates.

As a reminder, we had $2 million worth of plant restructuring costs in the first quarter of 2011 last year, which did not repeat.

Another positive note concerning Transportation Products is that cash flow is positive in the first quarter, which is typically a cash consuming quarter due to the seasonality of the tire business.

Our cash conversion rate was 93%.

We were cash positive in the quarter for the first time in six years.

Slide 8 is an explanation of our results in our Brake and Friction business.

Sales were up 12%, sales growth was driven by our ag business, which was up 34%, mining, which grew at 16% and construction which grew at 15% year.

Our growth in Europe was up 39%, driven primarily by the ag markets worldwide.

Borrowing a quote from Mark Twain, the rumor of the death of the European economy is greatly exaggerated.

We just aren't seeing it.

As a reminder, we grew organically more than 30% in 2011, so growing 12% in the first quarter is a testament to the strength of the heavy equipment markets.

EBIT was up 28% from $19.7 million in 2011 to $25.2 million this quarter.

Our EBIT margins were up 230 basis points to 18.8% with additional margin expansion to come later in the year.

This business continues to perform at a very high level.

Interconnect Technologies is detailed on slide 9, which shows sales growth of 68%.

39% of that growth comes from the acquisition of TriStar, which was completed in December of 2011.

The remaining 29% came organically.

Our aerospace market continues to enjoy very strong demand while our test and measurement markets are recovering from the economic downturn we suffered over the past three years.

Our growth in aerospace and test and measure were partially offset by an decline in our military sales, which were off 20%.

EBITDA was with nearly doubled in the quarter, growing 88% to $16.7 million.

Margin percent was up 160 basis point to 15%.

The acquisition of TriStar contributed $3.4 million of EBIT dollars despite including a $1.5 million charge for acquisition related costs.

Slide 10 provides color on our first quarter performance in FoodService.

Sales were up 5%, which was aided by a 2% price increases that we got on the quarter.

We saw volume growth in January and February, but the growth moderated in March.

This business is still impacted by slower traffic in restaurants, which some restaurant operators contribute to higher gasoline prices.

We also think restaurant traffic has found a lower cost meal alternative as sales to our quick serve customers has grown.

While we don't provide the QSRs with product -- while we do provide QSRs with products, the Carlisle FoodService dollar value per sale to the QSRs is considerably less than they would be to a typical casual dining restaurant.

EBIT performance in FoodService was flat with 2011 at $5.5 million of EBIT, and EBIT margins declining from 9.7% to 9.3%.

While margins have declined slightly in the quarter-to quarter comparison, the real indicator of improving performance is looking at the first quarter sequentially with the fourth quarter of 2011.

Margin dollars have improved from a $2.1 million loss in the fourth quarter of 2011 to a $5.5 million profit this quarter.

We still have work to do to get the business to where it consistently generates double-digit margins.

We have changed most of the management team and they are making strides in improving the profitability of this business, but it will be a year-long journey.

This business should operate with margins similar to the first quarter is for the remainder of the year.

That concludes my review of the business segments.

I'll now turn the meeting over to Steve Ford who will review our balance sheet, cash flow statements and working capital slides.

Steve?

Thanks, Dave.

Good morning.

Please turn to slide 11 of the presentation.

As Dave noted, during the first quarter, we closed on the Hertalan acquisition.

The purchase price was funded by utilizing about $28 million of overseas cash and borrowing the balance under our credit facility.

We currently have about $240 million of remaining availability under that facility.

Our balance sheet following the acquisition remains strong with a debt to capital ratio of 33% and a debt to EBITDA ratio of 1.8.

Turning to slide 12, our cash flow from operations for the quarter was $48.3 million, $48.6 million improvement from the first quarter of 2011.

Our free cash flow improved by $43.5 million over the same period.

The increase has resulted from the higher earnings as well as improved working capital management.

Turning to slide 13, our average working capital as a percentage of sales for the quarter was 22.3% compared to 23.4% for the first quarter of 2011.

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'll turn the call back over to Dave.

Thanks, Steve.

Before I open the call for questions, please turn your attention to slide 14.

We provided you with a number of planning assumptions for the remainder of the year.

If you have any questions related to this information, we'll be able to answer them for you during the question-and-answer period, which begins now.

Brandi, if you would open the floor for questions, we would appreciate it.

(Operator Instructions) Your first question comes from Deane Dray

Hi, good morning, this is James filling in for Dean.

Hey, James, how are you?

Very good, very good.

I was wondering if you could break down in Construction Materials the difference between the price increase that went into effect on April 1 and the pull forward in orders that you guys experienced?

Yes, James, there was a little pull forward we think.

We don't think it was dramatic, to be honest.

I can't really quantify it, but we know there was a little bit of pull forward.

Okay.

Are there any more price increase expected this year in that group?

Well, it depends on raw materials.

We do have a couple of raws that are increasing at a dramatic rate.

We will have to wait and see, but at this point, there are nothing planned.

Okay.

And also sticking with the reroofing, what was the magnitude, would you gauge, in terms of the impact of the warm weather and drier weather this past winter?

Yes, I think there was some impact, but I don't think it was dramatic.

I think that while the roofers were on the roofs certainly longer into the winter, but we don't really think that it was that dramatic.

There was a little bit because of warm weather, a little bit because of the price increase, but that would've occurred in -- mainly in March.

And frankly, January and February were good months as well.

Okay, terrific.

And then I'll do one last one and I'll let others jump in.

Brake and Friction were there -- were the planned cost synergies still from Hawk this year?

I believe this was a $13 million year and last year you guys were able to get about $7 million in cost synergies, am I still correct on those numbers?

I think last year -- James, this is Steve, we were very, very effective in accelerating a lot of those savings.

So, a lot of those savings that we talked about that we anticipated from the integration, we achieved substantially all of those savings last year.

Okay.

Okay.

So, no more for cost synergies from Hawk this year, then.

In terms of general efficiencies, but no more specific cost efficiencies that relate to the integration.

Right, okay, great.

Thank you.

I'll jump back in line, thank you.

Your next question comes from Josh Chan.

Hi, good morning, congrats on the quarter.

Thank you.

I guess first question is on selling price, matching or exceeding raw materials.

I'm sure it's a welcome relief.

Based on what you're seeing in incoming input costs, how comfortable are you that you can at least hold that relationship at parity going forward?

Yes, we think so.

It really depends upon what's going to happen with raws.

But what we're seeing today, as I said, there are a couple of categories that are ramping up, but we think that we can at least keep very close to parity with those with price increases.

Okay.

And then on construction materials, this is -- you're starting your third year of pretty significant volume growth, and the reroofing market has obviously been strong for you despite soft macro fundamentals.

Are you taking share in that business?

Or what is it that's driving the reroof strength for you?

Yes, we honestly just think that if you look at -- I think it we said it a number of times, the population or the number of roofs that are out there were on the second generation of replacement EPDM roofs and on the first generation of replacement for TPO roofs, and the population is just very large of roofs that will have to be replaced.

I think it's just a very favorable dynamic that's in the market, and I don't see it subsiding.

Certainly over the next couple of years, I think the reroofing market will continue to be very strong.

Okay.

And then the last question is on the Transportation business.

You outlined the 47% margin operating margin goal for the full year.

I know volume is typically lower in the second half, but does the first quarter margin performance, is that in line with your expectations, or does that put it a little bit above?

No, I think that we were 8%-plus points of margin the first quarter, we expect to be close to that in the second quarter, then it will decline in the third and fourth quarters.

I think we said on the call in February for our year-end call we expect the Transportation Products business to be somewhere in the mid- single-digit margin, and I think that's still a pretty good number.

Okay, great.

Thank you for your time.

You're welcome

Your next question comes from Saul Ludwig.

Good morning, nice to see you eke out a gain there.

Thanks, Saul.

Related to an earlier question with the price increase on the roofing, in the first couple weeks of April, did you see any noticeable slowing in the pulse of business because of the price increase?

Or is it volume growth that continues -- business continues to be potent?

Well, Saul, as you know, so we don't provide guidance, but just, April was -- the start of April was down slightly, but not significantly.

Okay.

Talk about the outlook for new construction.

You indicate that it is still weak.

What are you seeing there in order and quoting et cetera?

How do you see that shaping up?

Yes, our breakdown is still about 85% reroof, 15% new.

Quoting activity is up, but nothing has turned to orders yet, Saul.

Now, we would expect that that would occur later this year or very early next year, but nothing that indicates that new construction is coming back in, certainly in the next quarter or next two quarters will it have an impact on the revenue line.

Got you.

And then if you think about the -- in Europe, talk about the potential there for growth over the next couple of years and the way the market -- is there a shift in the market from other types of roofing materials EPDM?

I think -- I was under the impression EPDM was a pretty small player in Europe, and now you've got a base of business there.

But what is the competitive landscape like in EPDM and what is the prospects for a transformation to EPDM and your capacity to meet that demand should it occur?

Right, Saul, I think that we -- our view of Europe is very similar to our view of the US 30 years ago.

EPDM is still less than 5% of the market.

We recognize that it is now becoming more favorable to put a EPDM roof on, but it's going to take a number of years for it to become a major player in the roofing market.

What it would be replacing would be modified bitumen.

The first few months that we've owned PDT and Hertalan, they've both grown at double-digits, but they are off small bases.

We anticipate this as a long-term investment, and we envision that as you look down the road 10 to 15 to 20 years, we think this market will be the same size as what the US was and the growth prospects very similar to what the US was when we started back in the 70s with EPDM.

But it's replacing the asphaltic group for modified bitumen, which is the major player in the marketplace.

Yes.

And do you see this business -- how -- between the two businesses, what are your annualized sales there now?

And what is your capacity, and is this the place where some of your cap spending is going?

Yes, Saul, today we are about a $125 million to $135 million in sales.

We certainly have capacity.

We're running -- we've got 2 EPDM plants primarily.

We are actually -- one of those is being expanded.

When I say expanded, another line is going in, and we have plenty of capacity to fulfill the market over the next few years.

Great.

Okay, thank you.

You're welcome.

(Operator Instructions) Your next question comes from our Ivan Marcuse.

Thanks, guys, for taking my question.

You're welcome, Ivan.

The first question, on a per ton basis, how much were your raw materials up in construction materials?

On a per ton basis?

Or a unit, however you want to -- how much were the up in total, however you want to break it up?

In the quarter?

Well, in terms of dollars, Ivan, about $10 million.

We are looking at this year, Ivan, we are going to be $30 million to $40 million is the projection that raws will go up.

Okay.

And then you mentioned you're investing in your new businesses.

I know you are putting in iso plant -- a couple of different iso plants.

When we do expect these to come online?

How would you break out -- when would you expect these to come on line, and how much in sales would you expect the new plant -- the new plants to generate versus what you're generating now?

Yes, I don't think -- well, first of all, they'll come online, both of the, probably sometime early next year, so 2013.

I don't expect that you'll see a dramatic impact in revenue coming out of the Kingston, New York plant.

And basically, we're calling in an Orange County, New York at this point.

We're in Kingston today.

It is a situation where we are just moving into a more efficient facility.

What we expect to do is perhaps improve margin there more than anything.

The plant in the northwest will prove some incremental revenue, but that is not what it was being built for.

It was primarily allowing us to be more cost competitive in the northwest part of the US and the southwest part of Canada.

We are now shipping product out of Tooele, Utah.

When you ship insulation, you are shipping air, primarily.

And the freight costs basically eat into all the competitive pricing advantage that we have in that market.

It was more a competitive pricing play than anything, allowing us to be competitive in that market.

Now, I think we will pick up some share, but that is not the reason that we ended up building that facility.

Got you.

And then just real quick back to raw materials.

I think you mentioned that a couple are going up, and I know EPDM, the material that goes in that has been tight.

Does that continue to be tight, and is there any other materials that are escalating at a pace above others?

Well, EPDM is really the one area that we are talking about; the polymers have gone up.

Average cost has increased 40% to 50% of EPDM polymers, and we've done some hedging.

We've bought ahead, but that hedge runs out sometime midyear.

So, we will have raw material cost increases that flow through, probably as we get into early third quarter, late second quarter, we will start to see some raw materials flow through.

And Ivan, as you know, we sell a lot of insulation, and there one of the key inputs is benzene with some pressure on that commodity as well.

Great.

Okay.

And then moving over to the Brake and Friction.

One of the things I was sort of surprised at, and maybe this is just a shipping difference, is why was your aerospace down in Brakes and then its up and Interconnect Technologies?

Is there more replacement factor, or is it just shipments?

No, it is strictly, as you said, replacement.

The business that we have at Hawk, the aerospace business, is strictly old technology.

Braking systems that go on older generation 737s.

And as a new planes come out, they are equipped with a different style of brake.

And I'm not sure who's manufacturing that brake, but my guess is their sales are up.

And ours will continue to be relatively strong, but I think it will decline there quarter to quarter ever so slightly.

Got you, so your brakes aren't on the new 787 and the new Airbus?

No, that's a different type of braking system that aren't we playing in today.

Got you.

And then my -- the last question and I'll get back in the queue is, this time last year, Transportation also started out fairly strong and then the second quarter is, I guess the story is, derailed a little bit.

A lot.

Yes, a lot.

What is different this year versus last year?

And what do you expect at least -- because I know the first half is really -- makes or breaks the year for this business.

What is your expectation for the second quarter?

And what gives you confidence that you'll be able to accomplish it this quarter in the second quarter versus not accomplishing it last year?

I think there are a few things.

First of all, demand still looks very strong.

As we got into the second quarter last year, demand really started to dry up, driven primarily by our inefficiencies in ability to deliver product on time, and now was driven by the efficiencies coming out of our manufacturing plant in Jackson.

So, Jackson is running today equal to what our other manufacturing facilities are.

As I said, the efficiencies are equal to other plants, scrap rate is a little lower than we had planned on there.

So, they have done a very nice job in getting that facility up and running and running at a rate that we would've expected it to last year.

So, I think we are more comfortable with that.

What it allows us to do now, is last year, because we were inefficient, we were -- had a number of changeovers in the line which put us behind the eight ball in our after market.

And the after market is generally what we sell -- after market tires are generally what we sell as we get into the latter part of the second quarter and into the third and fourth quarter.

Well, the good thing is that we don't have those inefficiencies, we will be able to serve that after market this year which we weren't able to serve as well last year.

Got you, so volume is keeping almost the same, just being able to go to replacement, your volume should be up every quarter?

Well, volume, I think, will be relatively flat Q1 to Q2, but --

I meant on a year-over-year basis?

Year-over-year, there'll be some improvement year-over-year.

But Ivan, recall all of last's inefficiencies in the first quarter were effectively capitalized because our inventory returns hit the P&L in the second and the third quarters.

That's a big change year over year.

And that's not going to happen this year?

Right.

Got you.

Well, great quarter, thanks for taking my questions.

At this time, there are no other questions.

I'd like to turn the floor back over to David for any closing comments.

All right, thank you.

The optimism I expressed during our year end conference call in February has not subsided.

As indicated by our performance in the first quarter, 2012 should be a breakout year for us, barring any unexpected economic conditions that would negatively impact certainly any of our businesses or all of our businesses.

If our markets continue to support the momentum we saw in the first quarter, and we don't see any signs that it won't, the Company will continue on a double-digit sales growth and double-digit EBIT margins for the year.

Our Construction Materials, Interconnect Technologies and Brake and Friction businesses should continue to perform at a very high level.

I expect Construction Materials and Interconnect to deliver double-digit growth for the year and will leverage the sales growth in the two businesses of incremental margins of approximately 30%.

While I do not expect Brake and Friction to grow at double-digit for the remainder the year, I'm confident their growth rate will be in the high single digit range and they will continue to improve their margins throughout this year.

Transportation Products should generate second-quarter sales similar to first quarter and will have the normal sales slowing and earnings slowing in the third and fourth quarters of the year due to the seasonality of the business.

But I do not expect -- but I do expect year-over-year improvement in the second half of the year as we just were discussing with Ivan.

I anticipate that FoodService will continue to show improvement, generating mid- single-digit sales growth and should deliver mid to high single-digit margin performance for the remainder of the year.

This will be a significant improvement over last year.

With that, I'd like to draw the close -- the call to a close, and thank you all for attending.

Thank you, that completes today's conference call, you may now disconnect.