Carlisle Companies Inc (CSL) 2012 Q2 法說會逐字稿

(Operator Instructions).

Welcome to the Carlisle Companies, Inc., second quarter earnings conference call.

After remarks there will be a question and answer session.

(Operator Instructions).

At this time, I would like to turn today's call over to David Roberts, Chairman, President, and CEO of Carlisle Companies.

Sir, you may begin

Thank you, good morning and welcome to Carlisle's second quarter 2012 conference call.

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

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

Those slides detail our performance in the second quarter.

Before we start reviewing the slides, let me say we had a very good second quarter here at Carlisle.

Our sales were up 13% and we generated 14.2% EBIT margins.

Putting us on track to achieve our strategic goal of 15% margins by the end of 2014, assuming a growing economy.

These are the highest margins we've generated strictly from operations in our recent history.

Let's now turn to the Presentation.

As we do, please review slide two titled Forward-looking Statements, which details the risks involved in making an investment in Carlisle.

I encourage everyone to read this statement and to refer to our SEC filings before making any investment decision.

Please turn to slide three.

Slide three is a summary of the total Company's performance in the second quarter.

Sales were $985 million, up 13% over 2011, a Company record.

Approximately 8% of our growth was organic, while 6%, or $53 million came from the acquisitions of PDT, Tri-Star and Hertalan, that were made in late 2011 and early 2012.

FX had a small negative impact on sales in the quarter.

22% of our quarterly sales came from outside the U.S., putting us another step closer to our strategic goal of 30% of our sales coming from global markets.

We gained tremendous leverage on our sales growth with EBIT margins up 64% to $140 million in the quarter.

Our EBIT margins were up 440 basis points to 14.2%.

And Construction Materials margins were up 500 basis points and Transportation Products, margins were up 640 basis points.

Our second quarter earnings per share was up 60% to $1.39 per share.

In the quarter, we generated $67 million in cash flow, which was $70 million higher than the second quarter of 2011.

As I mentioned earlier, the 14.2% EBIT margins generated in the second quarter, were the highest operational second quarter margins in our recent history.

Turn to slide 4 and you'll see our sales bridge for the second quarter.

As you can see, price contributed 4.8%, volume contributed 2.8% and acquisitions contributed 6% to our growth.

FX had a small negative impact of approximately 50 basis points.

Slide 5 details our margin bridge for the quarter, with 280 basis points coming from price, net overall materials, 80 basis points from COS, the Carlisle Operating System, 30 basis points from volume, and 50 basis points from acquisitions and other items.

This adds up to a 440 basis points improvement over the second quarter of 2012, or 2011.

On slide 6, we begin to review our individual business segments, starting with our largest segment, Construction Materials.

Sales growth was 14% with the acquisitions of PDT and Hertalan, adding about half of the growth.

Price added 6% and volume added another 1%.

The volume increase came from our polyiso installation product line, while volume in our roofing membrane products was down in the quarter.

EBIT was up 58%, with the business earning $86 million, compared to $54 million last year.

Selling price exceeded our raw material cost impact in the quarter, allowing us to gain back some of the negative price to raw material variance we had in 2011.

As you may recall, in the second quarter of 2011, raw material costs were increasing more rapidly than we could implement price increases.

EBIT margins rose 500 basis points above our 2011 EBIT margins, mix and cost improvements also positively impacted EBIT margins.

Construction materials sales started very strong in the quarter but slowed as we neared the end of the quarter.

This will be a common theme in each of our Businesses, with the exception of Interconnect Technologies.

Slide 7 gives you a look at the progress we made in improving our Transportation Product Segment.

Our sales grew 4% in the quarter, with 5% of that growth coming from price.

We saw our Outdoor Power Equipment customers volumes decline, as our sales were negatively impacted by the hot weather and the drought that has encompassed nearly the entire U.S. Simply put, if the grass isn't growing, lawn mowers aren't selling.

The hot weather also impacted our AG sales, as farmers have slowed their spending for new equipment as crop yields are forecasted to be down in 2012.

Consequently, Outdoor Power Equipment and the Power Transmission sales were down 9% and 5% respectively.

High speed trailer in Power Sports continues to grow up 26% and 17%, respectively.

The trailer tire business is growing due to the positive market acceptance of our new Trailer Tire and the Power Sports business is being driven by new side by side UTV products that have been introduced by our customers, Polaris and CanAm.

EBIT margins were up 640 basis points to 9.1%, as we earned $18.4 million compared to 5.3 million last year.

In the quarter, our selling prices increases exceeded our raw material cost increases.

We also continue to implement and see improvements in our operations.

In the quarter, we took a $1.5 million plant consolidation charge as we further align our manufacturing operations.

Slide 8 details the results of our Brake and Friction business.

Sales were up 4%.

6% with FX is excluded as our Mining, Construction and AG customers grew low single digits in the quarter.

2% of our growth came from selling price, while our Asian sales grew slower in the second quarter than they did over the past few quarters, growth was still a very respectable 13%.

An even brighter spot was our sales growth in Europe, where revenue was up 20% excluding currency impact.

EBIT was leveraged nicely in the quarter, growing 19% from $21 million in 2011, to $25 million this quarter.

Our EBIT margins were up 230 basis points to 19%.

As witnessed in Construction Materials and Transportation Products, we also saw a general slowing of this business as the quarter advanced.

Interconnect Technologies detailed on slide 9, you see sales grew 60% with Tri-Star acquisition adding $25 million or 35% to our growth.

Organic sales grew 25%.

The Aerospace market continues to enjoy very strong demand, growing at 33% and Test and Measurement was up 1% in the quarter.

This growth was slightly offset by Military sales declining at 8%.

You may recall Military sales were down 20% in the first quarter.

EBIT increased 49% from $12 million to $17 million in the quarter.

The acquisition of Tri-Star contributed $4 million to EBIT.

While we have good EBIT growth, we did see the impact of higher raw material costs in the quarter, and we also added sales people and increased our spending on new product development.

While both of these investments will have negative impact in the short term, we are convinced they will generate future growth for the business.

Unlike Construction Materials, Transportation Products and Brake and Friction, the Interconnect Technologies business continues to enjoy strong organic growth and we do not see this changing in the near term future.

Slide 10 provides color on our Food Service performance in the second quarter, where you'll see that sales were flat for the quarter.

By product categories, volumes in our traditional food service products was down 1%, Jan/San was down 7%, and both were somewhat offset by 3% growth in Healthcare products.

For the quarter, price was up 4%.

While food service was down, volume was down, EBIT dollars were up 8% to $6 million, and EBIT margins were up 60 basis points.

As I said in our first quarter conference call, this will be a year long journey, but we're feeling more confident that our margins could reach 10% by year end.

Before I leave Food Services, I want to mention the appointment of Trent Freiberg, as the President of our Business.

Trent has been with Carlisle for four years, all of which were spent in Asia, Trent, his wife and three small children have been living in Shanghai for more than six years.

Trent was originally hired as our Asian Brake and Friction Sales Director.

After success in that position, he was appointed General Manager of our Asian Braking Business, where he was deeply involved in the integration of the Hawk acquisition.

Upon successfully leaving that effort he was promoted to President of Asia, Carlisle Asia where he led our Company sales, purchasing and manufacturing efforts.

We're happy to have Trent back in the U.S. and he will lead our turnaround efforts in the Food Service Business.

This 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 Statement and Working Capital slide.

Steve?

Thanks, Dave.

Good morning.

Please turn to slide 11 of the Presentation.

We currently have about $305 million of availability under our credit facility, an increase of about $65 million from our availability at the end of Q1, as we generated cash and reduced our borrowings in the quarter.

Our Balance Sheet remains strong, with a debt to capital ratio of 30% and a debt to EBITDA ratio 1.5 times.

We are well positioned for future growth.

Turning to slide 12, our cash flow from operations for the quarter was $106 million, a $90 million improvement from Q2 2011.

And as Dave noted, our free cash flow improved by $70 million over the same period.

The significant improvement in cash flow resulted from higher earnings and improved working capital management.

Turning to slide 13, our average working capital as percentage of sales for the quarter was 21.8% compared to 21.7% for the second quarter 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.

Can we open the floor for questions now, please?

Operator?

(Operator Instructions).

Your first question comes from the line of Peter Lisnic with Robert W. Baird.

Good morning, gentlemen.

Hey, good morning, Pete

Dave, I guess the first question if we look at the slowing or maybe the lower organic growth outlook that you have going from plus 10 to comp plus nine, can you give us the puts and takes where you're seeing the slowing, obviously in Europe and Brake and Friction, can you give us the lay of the land and of what is exactly slowing and where

You're talking overall, Pete, or just Brake and Friction.

Overall.

Sorry.

Yeah Construction Materials, as I said, we came off a really great April.

May was not, we're good but wasn't as good as what April was and June slowed even more so.

So we're really watching that very closely.

We think there will be growth in construction materials, but certainly not at the rate that we had at the start of the year.

So I think Construction Materials will slow.

I think it will still grow, but it will slow.

The Brake and Friction business, I think we might be slightly lower in the third quarter than we were last year from our revenue side.

But the fourth quarter still looks pretty good.

We've got good orders in house, so we think that might be a short term correction of inventory at our customers' locations.

The Tire business, that's a tough one to call.

This is where we kick into the after market.

And after market demand late in June looked pretty good.

So while the OE's have slowed as they normally do during this period of time, I would think that we would probably see flat to slightly up growth in the Tire and Wheel Business, you know, this quarter, being the third quarter, compared to last year.

Food service, I think will be flat.

You know, we've said all along that business will be relatively flat.

That market never really recovered after the downturn in 2009, and we're just waiting for that to happen.

And I think that, you know, the Aerospace business will grow probably at the rate it has been organically.

And we still have the effect ofthe acquisition Tri-Star up until November of this year.

So I think the growth there will be very similar to what it was in the second quarter, and in the third quarter

Okay.

And then on the, just to circle back on the roofing side, can you give us a little color on the acquisitions in Europe and kind of what you're seeing from a volume perspective there, versus the volume trends that you're seeing in the U.S. or North America

Yes.

The volume was actually good in Europe.

It was up not as high as it was in the first quarter, but it was still up very high single digits in both of the acquisitions and, you know, we're pleased with what we're seeing there.

So that's not an issue for us.

It's just that it appears that we hit a wall here in the May and June time frame.

Where we normally get a lot of school work that comes out, you know, in other words, re-roofing of schools in the summer months, we saw less of that this year than we have in the past here in the U.S. But everything else looks okay

Okay.

Any chance that the very hot weather could have had an impact on that school piece or no?

I think hot weather, not so much hot weather but the drought definitely had an impact.

You know, if it's not raining, roofs aren't leaking and people just don't know that they need to replace them.

Okay.

Last question.

On roofing, I guess the bifurcation between growth and polyiso and membrane being down seems, may imply I guess maybe you're getting some share in polyiso, or can you give us some color as to why that happened.

It's just as you said.

We're getting a little bit of share.

That's a product we actually sell under the Hunter Brand and we sell it to some of our competitors.

And I think we just gained share from some of the other polyiso manufacturers.

Perfect.

I will jump back in queue.

Thanks for your help.

You're welcome.

Your next question comes from the line of Deane Dray with Citi Investment Research.

Good morning everyone.

Good morning, Deane.

In Construction, can you comment on the very healthy 6 percentage points in price, just comment on what price you had put through, whether the competition matched this and the sustainability of this price increase.

Yes.

Deane, I think the price quarter to quarter was relatively flat.

What we ended up doing is, we have price increases that flowed through in the first quarter.

We had a price that we were going to put through, or we did put through in April.

I think there was little enthusiasm for that price, because of raw materials declining.

So we got very little of price that went through in April.

We had one scheduled for July, frankly.

That just did not go through.

So I think that while we're on parity with raw materials, I think there will be very little interest in the marketplace for price increases.

Okay.

And then the comment on raws, just take us to the next layer of detail.

We saw rubber pricing has come down.

Energy has come down, but I'm not sure whether some of your forward purchasing was already at higher prices, but just comment specifically on construction and the raws

Deane, we have seen a leveling of prices.

Granted, natural rubber is down.

We use very little natural rubber in construction materials.

It's primarily a synthetic product.

You know, and we still have some of the raw materials that we use EPM polymers, so on and so forth, still add, in other words, they haven't declined.

They're still at the prices they were coming out of the first quarter.

Okay.

And then in Transportation, what was the plant consolidation charge, and is that related to Jackson and what's the status on the operating efficiencies there.

No it's consolidation charges we're putting together.

We're going to put a little work back from China into our Springfield and Fort Scott Business, so it's power transmission compared to the tire business

And that was included in these operating results, correct.

Yes.

And just last one for me on the Interconnect business, it's encouraging to see both core revenue growth outlook, you expect to stay strong.

Meanwhile, you're investing pretty significantly in this business.

So just frame for us what that growth path should be.

Obviously, it's not all the 787.

But how, comment how you're investing for growth, adding salespeople, investing more in R&D.

Yeah.

We're adding salespeople.

Obviously, we're just trying to cover the market better and some of those are in Europe to cover the Air Bus market.

We are looking at new product development.

Frankly, we've under invested in this business over the years in product development.

We've got some ideas primarily focused on Aerospace that we're working on.

Those, whatever that is, won't be for another year or two.

We still expect that this market's going to be relatively strong.

I would guess it to grow at the rate it has been growing at for the first half of the year and the second half of the year.

The 787 has ramped up.

I think it's at six planes a month now, which is the highest rate they've been at.

And it's just general Aerospace across the globe.

The what we call the life of business is still doing well and new aircraft build is doing well.

Okay.

Thank you.

Your next question comes from the line of Glenn Wortman, Sidoti & Company.

Good morning, everyone.

Good morning, Glenn.

Focusing on operating margin for Construction Materials, I think that was the highest quarterly result going back to at least 2005.

But the ability to hold those margins from Q2 to Q3, as I recall I think you were projecting on lower prices for some of your raw materials in Q2, that goes away in 3Q, so you might see higher price costs there, first if you could comment on, that please.

Sure.

Glenn, I think it really depends upon just what you're saying, what has happened happens with raw materials today.

We aren't seeing a tremendous amount of pressure with increasing raw material costs but who knows within the next month and a half to two months holds.

If we're able to hold on to price, where we are today, and if we're able to have raw materials be relatively stable, I think margins will be good in the third quarter, as well.

You know, generally, third quarter is equal to or slightly better than what our second quarter is.

So I think the third quarter should be good for this business.

Can you comment on the pricing environment just assuming maybe flat volumes as we move forward in the back half of the year, let's say raw materials kind of hold steady.

Do you think that price, pricing declines could --

You know, Glenn, I just don't have a good feel for that.

I mean it really depends upon what's going on in the market.

If volumes decline, I think you'll see pricing become a little more difficult.

If volumes remain at the level they are today, I think we'll probably be okay.

I think you'll see probably greater pressure in TPO than you will in EPDM, but that's purely speculation on my part.

You know, it's tough for me to give you an idea of what the pricing environment's going to look like.

I just don't have a good feel for it.

Okay.

And then just in some of your other businesses, the pricing has come down.

Are you starting to see any of your easing in input costs in any other segments

Well, we've seen a bit but keep this mind the price of a barrel of oil is not directly correlated to the price of our materials.

It's something we watch obviously, because gives us a bit of an indicator.

But it really goes with the level of demand for the type of chemical that we're buying or the products that we're buying, as I said earlier, EPM polymers have not come off prices.

Carbon blacks have been remaining high.

Just the variety of resins continue to be at the levels they were as we came into the year.

So we are seeing a tremendous amount of decline in raw material costs

Okay thanks for taking my questions.

You're welcome.

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

Good morning, guys.

Good morning, Saul.

On Roofing, the construction materials, what was the degree of volume decline in roofing membrane, versus the volume increase in insulation.

I don't have those numbers in front of me, Saul.

But if you think about the business, the membrane is probably half of what we sell.

Insulation is maybe 40% of the remainder.

You know, that includes polyiso and EPS insulation.

So I just don't have that information in front of me.

Sorry.

I can't give it to you.

Okay.

In terms ofthe outlook for new nonrez.

The way the business works, you get the request for quotes, you make proposals to contractors or for new buildings, and then some of those come to pass or they don't come to pass.

How would you characterize the outlook for new nonrez and it's impact on your construction material business because I'm sure it hasn't been much of a factor up to now.

You're right.

It hasn't been.

And that is exactly the activity.

There's a lot of quoting activity going, or that's underway today.

But we see very few people willing to pull a trigger on a new project.

Seemingly what we've heard in the marketplace, is they're waiting for the Election in November.

I don't know why.

But that's what we're hearing from the marketplace.

So people just aren't willing to go ahead and finally pull the trigger on new construction even though they're quoting a number of projects.

Okay.

What do you expect, if any, let's call it the start-up costs, integration costs, similar to the couple million dollars that you had this quarter.

I know you got some new ISO plants starting up.

And if there's anything further planned in transportation products.

What do you got teed up for, what should we be aware of for the second half special costs

Yes.

Saul, there shouldn't be a lot.

The ISO plants come on next year.

So what we're doing basically today is building the buildings so there will be no start-up costs until 2013.

In the Transportation business, you might see some minor adjustments like we had this quarter.

But nothing significant.

Okay.

Then the plan you alluded to higher raw material costs in the Information Technology sector.

What raw material costs were in the Interconnect Technology.

What raw material costs were going up?

Yeah.

They were basically sheathing for wires.

So if you think about Teflon coatings, anything that goes into a coating for a piece of wire.

So chemical based, resin based materials we saw go up.

Would you think that these type of products, these are largely, the wires made out of copper?

Yeah.

It was copper but the sheeting is also a cost associated with the product.

Copper, aluminum, a variety of different things.

All of those things are, the chemicals, we got oil prices down.

Would you expect raw material costs in this sector to sort of trend out a little bit?

If all of that holds true, yes.

Well, just based on what we've seen today.

Right.

Yes.

So that could be sort of a plus, if you will, on your margins because there you're selling on sort of fixed price.

They're not linked to do raw material costs.

You sort of win or lose depending on how they go.

Correct.

Okay.

Then finally, what's the magnitude of the additional fixed costs that you're adding.

You added some salespeople, I don't know, five or ten sales people or something like that.

Yeah.

What's actually, it's minor, Saul.

There's, in total, we will probably end up with ten people in total and it's the cost of ten people, sales and engineering people.

Okay.

So these, you allude to do that but that's not going to be really much of a factor.

No.

No.

Great.

Thanks a lot, guys.

You're welcome.

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

Hi, guys.

Thanks for taking my questions.

Most of them have been answered, but real quick on Interconnect Technologies, would you expect those margins to sort of continue back to the high teens going to the back half of the year?

Yeah.

I would think so.

Certainly, as the, you said high teens?

Right.

Oh,

I'm sorry.

Like the, you know, higher than they were this quarter.

Yeah.

I think they will be higher than they were this quarter.

I don't think they will be higher than they were this quarter.

I don't think they will be in the high teens.

I think they will be in the --

16, 17.

Yeah.

That's probably a good number.

Gotcha.

And then the organic growth rate, so you're looking, if you were 14% in the first half, sort of to get to the, I guess four to five type of range in the back half of the year.

Yeah that's what we're looking at.

We're looking at activity in the second quarter.

What we think the third quarter is going to look like, you know, we could, anything could happen.

But that's what we're forecasting today, yes.

Great.

And then my last question is on the acquisition front, is there, what's the back log looking like and is there, do you think there's any opportunities for any deals to be completed maybe in the back half of the year or over the next twelve months.

Certainly over the next twelve months I think that we would hope to do something.

There's nothing that, you're not going to wake up tomorrow and see an acquisition.

But you would hope by the fourth quarter and perhaps in the first quarter of next year, we would add something.

Gotcha.

And then is there any reason why the margins would be, you know, back to the question on the margins for roofing.

If, I mean there shouldn't be, the third quarter looks a lot like the second quarter usually.

So there shouldn't be a big difference in profitability, right?

Yeah.

What I was trying to say on the earlier question, it should be about the same as long as pricing holds.

Gotcha.

And where we stand today, pricing is, you're not getting any price increases but it's not declining.

Well, there's a bit of pressure on TPO.

EPM has been okay.

Gotcha.

Okay.

Thank you for taking my questions.

You're welcome.

(Operator Instructions).

Your next question comes from the line of Ajay Kerjriwal with FBR.

Hi.

Good morning.

Hi Ajay.

Just a couple from me.

On the growth in Europe and Brake Friction, that's frankly surprising given all the macros.

Is that more reflective of share gains for you, or is that customers exporting a lot of their product, any color there would be helpful.

Yeah.

Really, what it is are customers exporting outside of Europe.

They're going either into Russia or into South America.

And that demand appears to be holding up.

I agree with you.

I mean, you know, 20% growth there is pretty darned good growth in that business.

Got it.

And then in roofing, impressive price gains there, volume slowing down a little bit.

And I know you talked about expectations for the seconds half.

But maybe just, you know, what you see in your customers is that slow down more reflective of construction activity or is there an element of higher prices maybe hurting demand a little bit?

I don't think price has anything to do with demand.

I think really what's hurt the business certainly in the second quarter has been the drought.

We just haven't seen a lot of rain around.

And like I said earlier, if there's no rain, roofs don't leak and people don't replace them.

Makes sense.

All right.

Thank you.

You're welcome.

(Operator Instructions).

At this time, sir, there are no further questions.

Okay.

Thank you.

If everybody would turn to slide 15, it gives you an idea of what we're planning for the year.

As you look at this, we're planning for the yearly sales growth to be in the mid teens and for year over year margin improvement for the remainder of the year.

Corporate expense will be approximately $48 million.

D&A will be approximately $105 million, interest expense $25 million and planning tax rate is 33%.

Our cash conversion is up a bit from what we were forecasting last year.

We think that will be 80% to 90% which suggests that cash flow will be higher in the second half of the year.

Our capital expenditures should be around $140 million that we talked about in the first quarter.

In closing, many of you may have recalled that I said that our Brake and Friction business would be the first to see an economic slow down and that's exactly what we saw in the second quarter.

We anticipate the third quarter in Brake and Friction will be softer than the third quarter in 2011.

But the fourth quarter still shows signs of growth.

While high levels of orders are in house for the fourth quarter, we're being very cautious with our inventory build and any employee hiring, as we anticipate these orders may be reduced as we get deeper into the third quarter and our customers see inventory sitting in their lots and in their locations.

Despite a slowing of revenue in Brake and Friction, we will maintain a high level of profitability with margins in the high teens.

After construction materials started the second quarter with a very strong April, we saw volumes slip in May and June as I said earlier.

Talking to our customers, it seems that dry weather has negatively impacted roof replacements.

But more concerning is the seeming paralysis created by the upcoming presidential election.

Many of our customers we've spoken to say that they're waiting to see what happens with the November election before committing any funds to new building projects.

Frankly, I don't profess to understand the situation.

But that's the feedback we're getting from the market.

Despite slow growth, I think the year will still yield record results in earnings and sales for the construction materials business.

Revenues and Transportation Products and Food Service will continue to be flat in the second half.

Both businesses will continue to show improved profitability, however.

The cost improvements implemented in both businesses are really not dependent on volume there, so we should continue to get the cost improvements in each business.

Interconnect Technologies will continue to show strong organic growth.

Production level of the 787 has now reached seven units a month.

And then volume will continue to drive organic sales growth.

Earnings should grow inline with our sales growth in the Interconnect Technologies business.

The capital investments we laid out in the first quarter will continue as planned with the exception of our Indian Braking facility.

We will continue to monitor the strength of the Indian market before we decide to begin construction of that new facility.

On the other hand, our polyiso plants in New York and Washington state are well under way and should come on line mid 2013.

The expansion of our CIT plant in Florida and our Brake and Friction plant in Italy will be completed later this year and will provide us the capacity needed to handle the ramp up of 787 production and to meet the demands of our European braking customers.

We have taking a number of steps over the past three months to improve our profitability, and that was evident in our 14.2% second quarter margins.

We've got the business firing on all cylinders and if sales remain stable at the level we experienced in the second quarter, if pricing holds in the market, and if raw materials remain stable, we will have a very good 2012.

Thank you for attending our second quarter conference call.

I look forward to reviewing our third quarter performance with you in October.

Operator, you may now end the call.