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Operator
Good morning and I would like to welcome everyone to the Carlisle Companies Incorporated third-quarter earnings conference call.
At this time, 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, Chairman, President and CEO of Carlisle Companies, you may begin your conference.
David Roberts - Chairman, President and CEO
Thank you, Bradley.
Good morning and welcome to Carlisle's third quarter 2012 conference call.
On the telephone with me is our CFO, Steven Ford; our Chief Accounting Officer, Kevin Zdimal; and Julia Chandler, our Treasurer.
On our website you will find slides for today's conference call.
Those slides detail our performance in the third quarter.
Before I go through a detailed review, I want to mention that we had a record-breaking quarter, both in sales and earnings.
Our overall sales growth was 5%.
We were able to generate 5% growth despite many of our braking customers adjusting their distribution channel inventory downward.
On 5% revenue growth, we generated record earnings with our earnings growing at 35%, producing third-quarter EBIT margins of 12.2%.
Included in our $111 million of EBIT, is a $7 million charge that we took as we begin to lean down our food service manufacturing and distribution center footprint.
Cash flow was also a highlight in the third quarter.
We generated $136 million in free cash flow, converting our earnings into cash at a rate of 195%, enabling us to reduce our debt by $125 million.
We're obviously very pleased with our performance in the third quarter and in the face of a few markets that were slowing, we thought it was a very good performance.
Let's now turn to the presentation, and as we do, please review slide 3 titled forward-looking statements.
This slide details the risk associated with making an investment in Carlisle.
I encourage everyone considering an investment to read the information contained on that slide and refer to our SEC filings before making any investment decisions.
Let's now turn to slide 3, where we find a summary of the Company's overall third-quarter performance.
Quarterly sales were $910 million, up 5% over 2011.
4%, or 34% (sic -- see Presentation Slides "$34 million") of our growth, came from acquisitions of PDT, Tri-Star and Hertalan.
Our PDT acquisition anniversaried in August.
Going forward, we will have a PDT apples-to-apples revenue and profit comparison on a year over year basis.
As a reminder, we will also anniversary the sales and profits of Tri-Star at the end of November.
Organic sales at CIT remain strong, growing at 21%.
Food service grew 3% organically, construction materials and transportation products grew 1% organically.
Brake and friction saw a negative growth as our customers leaned out there inventory and their distribution channels.
FX had a small negative impact of 60 basis points on our sales.
On those sales we generated tremendous leverage growth, with EBIT growing 35% to $111 million.
Our EBIT margins were up 280 basis points to 12.2% as a result of COS savings and price realization.
The $111 million in EBIT is inclusive of a $7 million restructuring charge we took to reduce the cost structure at food service.
As I mentioned earlier, quarterly cash flow was outstanding.
Cash flow was $136 million, up 50%, or $45 million over 2011.
Our year to date cash flow conversion rate is 103%.
Third-quarter EPS was up 27%.
EPS didn't grow at the same rate as EBIT due to an increase in our tax rate.
Slide 4 is a sales bridge for the quarter.
As you can see, acquisitions contributed 3.9% to our growth, price contributed 2.8%, while volume was negative 1.5%.
FX had a 60 basis point negative impact.
Looking at organic growth by segment, Interconnect Technologies was up 21% as aerospace markets continue to be strong.
Food service was up 3% as we implemented much needed price increases matching the price to cost curve.
While construction materials and transportation products were up 1%, as both businesses experienced lower growth as a result of the drought conditions many regions of the US encountered in the summer months.
The brake and friction business was down 10%.
As I said earlier, our customers worldwide are adjusting their inventory levels.
Turning to slide 5, which details our margin bridge for the quarter.
As shown on the slide, EBIT margins grew 430 basis points through net price of raw materials.
80 basis points from COS savings, while volume was negative 40 basis points.
The restructuring in food service plus the other costs negatively impacted profit margin by 190 basis points.
Summing these items, margins improved 200 basis points over the third quarter of 2011.
On slide 6, we begin reviewing the individual business segments, starting with construction materials, sales growth at CCM was 3%, with three months of Hertalan and one month of PDT contributing 2% of that growth.
Price added 4% and lower volume negatively impacted sales by 3%.
The volume was down in roofing membranes while our polyiso insulation was flat with 2011.
This business is still feeling the effects of the mild first quarter and the drought in the second and third quarters.
Despite slower sales growth, EBIT was up 32%.
We earned $80 million compared to $60 million last year.
EBIT margin increased 380 basis points to 17.4%.
In slide 7, you will see continued progress being made in the transportation product segment.
In aggregate, our sales grew 1% in the quarter.
We continue to see strength in our high speed trailer and power sports businesses, growing at 18% and 9% respectively.
Power transmission and AG and construction grew 3%, while outdoor power equipment continues to be impacted by the drought where sales were down 22%.
What is selling at a very good rate are our semi-pneumatic tires that are used on planters and seeders.
This is in the AG segment.
Despite the fact that crop yields are down in many regions of the country, grain prices are up.
Recent grain prices are offsetting yield declines, affording the opportunity for farmers to continue to invest in new equipment and that's what we're seeing with our tire sales.
EBIT in the quarter was up 164% from a $10 million loss in 2011, to a profit of $7 million this year.
Driving this increase are higher manufacturing efficiencies at Jackson and lower material costs.
As I look forward to the fourth quarter, we do expect a small charge of approximately $500,000 to flow through the transportation product income statement as we complete the shutdown of our Buji, China power transmission plant.
The products that are currently being manufactured in Buji will be transferred back to our Springfield, Missouri and our Fort Scott power transmission facilities.
Slide 8 details the results of our brake and friction business.
Sales were lower by 12%.
When FX is excluded, sales declined by 10%.
Of the 10% decline, 2 percentage points of the decline related to sales of non-profitable businesses that we exited last year.
In the construction equipment braking business, sales declined 20%.
Offsetting those declines was a 4% increase in mining, and a 10% increase in AG.
All regions of the world show signs of weakness.
EBIT was down 22%, but we still generated EBIT margins of 16.8%.
I do think braking margins will decline in the fourth quarter proportionally to volume declines.
Interconnect Technologies is detailed on slide 9. Sales grew 52%, with Tri-Star adding $23.2 million, or 31% to our growth.
Organic sales remain very strong, growing 21%.
The aerospace market continues to enjoy very good demand, growing at 25%.
We did see some slowing in military and test and measurement markets, down 2% at 15% respectively.
As you may recall, military sales were down 20% in the first quarter, 8% in the second quarter, and 2% now in the third quarter.
I think we are seeing a leveling off of military spending at this rate of decline, as it slowed over the last three quarters.
EBIT increased 72%, from $11 million to $19 million in the quarter.
The acquisition of Tri-Star contributed $4 million in EBIT earnings.
EBIT margins in this business were 16.4%, putting us well ahead of our 15% target.
Slide 10 provides color in the food service segment's performance in the third quarter.
Sales were up organically 2%.
And without the impact of FX, sales were up 3%.
Driving that growth was selling price increases of 6%.
Demand for the products were lower in the US and Europe in the quarter, forcing volume down 3%.
Our focus in food service over the next 12 months is on margin improvement.
While revenue generation remains extremely important, we are not looking to sales volume growth to drive margin improvement.
We plan to accomplish margins -- margin growth in the low to mid teens by streamlining the operations of food service.
Our food service restructuring got underway late in the third quarter, with a $7 million charge taken as we prepare to exit three facilities in a new product development project that we determine could not hit our profits targets once introduced into the marketplace.
We feel more comfortable, daily, that this business will reach double-digit EBIT margins over the next 12 months.
This concludes my review of business segments.
I will now turn the meeting over to Steve, who will review our balance sheet, cash flow statements and working capital slides.
Steve.
Steven Ford - CFO
Thanks, Dave.
Good morning.
Please turn to slide 11 of the presentation.
We currently have $430 million of availability under our credit facility, an increase of $125 million from our availability at the end of the second quarter, as we generated cash and reduced our borrowings in the quarter.
Our balance sheet remains strong with debt-to-capital ratio of 25% and a debt to EBITDA ratio of 1.1.
We remain well-positioned for future growth.
Turning to slide 12, our cash flow from operations for the quarter was $169 million, a $64 million improvement from the third quarter 2011.
As Dave noted, we generated $136 million of free cash flow in the quarter for a conversion rate of just under 200%.
For the nine months ended September 30, we have generated $230 million of free cash flow, for a conversion rate of 103%, a very strong performance in light of our seasonality.
We expect our strong cash generation to continue in the fourth quarter.
Turning to slide 13, our average working capital, as a percentage of sales for the quarter was 22.1%, as compared to 21.5% for the third quarter of 2011.
We remain committed to improving our management of working capital and achieving our long-term goal of 15% of sales, with a particular focus on inventory turns.
And with those remarks, I'll turn the call back over to Dave.
David Roberts - Chairman, President and CEO
Thanks, Steve.
Bradley, would you open the floor for questions now, please?
Operator
Yes, Sir.
(Operator Instructions)
Your first question comes from the line of Pete.
Pete Lisnic - Analyst
Good morning, gentlemen.
I assume it's me.
First question, as you look to the quarter and some of the slowing we have seen here in the third quarter, rolling into the fourth, can you give us a view on how this evolves into the fourth quarter?
You've given us some guidance in that last slide of the presentation, but as we roll into 2013, what is your view on how this plays out for each of the businesses?
David Roberts - Chairman, President and CEO
Yes, we just got a preliminary look at the plans for next year and every business is forecasting growth.
I think, what you will see is the braking business, I think will be off in the fourth quarter and probably the first quarter.
But I think they feel a little more optimistic once they get through the first-quarter that they'll start to grow again.
Honestly, the construction materials business, we are semi-guarded by the start in October but we had a pretty good start to the quarter in October.
So, I don't know if we have had a little bit of rain and we are starting to see roof leaks, people are getting ready for winter, but there appears to be some activity that we weren't seeing during the summer months in the construction materials business.
Transportation, I think AG will still drive growth there.
I think power sports will do very well.
I think the one down market that we have is in our outdoor power equipment.
My guess is that will continue to be soft.
We're through the season for basically riding lawn-mowers and I think what we will have to do is wait and see what happens next season now.
I think that all in all, all of the segments, with the exception of outdoor power equipment, looks okay.
Pete Lisnic - Analyst
Okay, that is very helpful.
More short-term, how do you feel about your own inventory levels in each of the businesses?
Are there significant production cuts that we should be thinking about here in the short term to match what you are seeing from some of your OEM customers, for example, in the brake and friction business?
David Roberts - Chairman, President and CEO
Yes, we have, over the last three months, we have taken about 600 employees out of the operation, primarily temps, to try to adjust our inventory levels.
We have had -- even during the third quarter, we had some what we call plant outages.
So we end up shutting down a plant for a week or take overtime out or whatever it might be to reduce the inventory.
We've been working the inventory down.
I don't see us having a dramatic shift in what we end up doing, perhaps other than the braking business, than what we did in the third quarter.
Braking business, I think, we'll still -- we'll probably end up taking a week out of November, and perhaps a week out of December around the holidays to try to reduce our inventory there.
I would expect that margins in the braking business will -- they are not going to be in the 16% range, but I think they will certainly be above 10% in the fourth quarter, unless volumes really fall off a cliff.
But we have not seen that at this point.
Pete Lisnic - Analyst
Okay.
And then last question on margins, again.
Construction material strong, and the third quarter is strong, and the second as well, can you maybe comment on sustainability of that margin as fourth quarter is seasonally slow, but as we look at 2013?
David Roberts - Chairman, President and CEO
The best thing that we have seen coming out of the construction materials business is that all of the competitors remain very disciplined.
We have had a little bit of margin degradation in the TPO area.
EPM seems to be holding up and installation seems to be holding up.
We are, again, cautiously optimistic about being able to maintain those margins going into next year.
Pete Lisnic - Analyst
Okay, perfect.
Thanks for your time and help.
I appreciate it.
David Roberts - Chairman, President and CEO
You're welcome.
Operator
Glenn Wortman.
Glenn Wortman - Analyst
Can you give us the latest breakdown in your construction materials business between new construction and replacement?
And how do you see the new construction piece of the business playing out over, say, the next 6 to 12 months?
David Roberts - Chairman, President and CEO
Glenn, it is about the same as it's been.
It is anywhere from 80% to 85% reroofing, but we have seen increased activity in new construction over the last quarter.
I think we are feeling a little more optimistic about new construction next year.
Now, I don't think it's going to get to a point where it's 50/50 but I think we will see growth in new construction and I would expect that once we get through this winter, depending on how wet the winter is, certainly the reroofing business will remain relatively strong.
Glenn Wortman - Analyst
Okay.
And then just on pricing, you talked about construction materials.
Can you talk about maybe the pricing environment for your other businesses?
David Roberts - Chairman, President and CEO
Yes.
We have had no issues with pricing in any of the businesses.
Like I said, we raised prices in food service.
I think we were behind the curve with our price increases there over the last couple of years.
We had a 6% price increase there.
I think effective price out of that is probably going to be, like every business, maybe half of it.
But, I think that all in all, the pricing environment still remains rational.
Glenn Wortman - Analyst
Okay.
And then last and I'm sorry if I missed it, but why the strong -- I understand the fourth quarter is seasonally weaker, but why the strong sequential margin degradation in brake efficiency?
You're talking about somewhere closer to 10% in the fourth quarter?
Can you just go over that?
David Roberts - Chairman, President and CEO
Yes.
I think it might be a little better than 10%.
Yes, 10% is probably a good number to use just for modeling.
I think there will be less volume in the fourth quarter.
Fourth quarter is, traditionally, we have one year with the Hawk acquisition, but it is traditionally a lower volume quarter for us primarily because as you get into, particularly the December holiday period, most of our customers will close down for a week for maintenance and other things that they perform.
So we generally have less volume that we ship.
I think this year they will probably do the same and it might occur in November and December.
I think it is just the volume that's flowing through that our customers are asking for.
Glenn Wortman - Analyst
Okay.
Thanks for taking my questions.
David Roberts - Chairman, President and CEO
You're welcome.
Operator
Ivan Marcuse.
Ivan Marcuse - Analyst
Hi guys, thanks for taking my questions.
David Roberts - Chairman, President and CEO
Good morning, Ivan.
Ivan Marcuse - Analyst
In the transportation business, is this -- are the operations and everything as good as it gets right now or is there still room for improvement, meaning there's less scrap and really what you need to see margins improve going forward from here is more volume?
Or do you think that continued operating improvements will continue to roll through and you should see, on an annual basis, at least some uptick?
David Roberts - Chairman, President and CEO
Yes.
I think that we are never done with improving operating margins in the business.
I think it can get better than what it is.
It will -- we've got some plans in place that will address some of the distribution issues that we have, some of the cost issues that we have.
I think margins will just improve as we go.
Now, with that said, I have said in the past, you're never going to see this business that it's going to be a mid-teens margin business, but certainly, during the season, it should be pushing up near 10% operating margins.
In fact, if you look at the second quarter, it's probably a good proxy for what the season should look like and I think we are 9.2% or 9.1% margin and we had a charge that flowed through, we would've been about 10% margins there.
I would think that on an ongoing basis, you would expect in the season this we'll be upwards of a 10% margin business and then in the off-season, probably half of that.
Ivan Marcuse - Analyst
Got you.
And then in construction materials, you mentioned that -- is there any cost associated with the iso plants that you are bringing on and the consolidation of the Georgia facility?
How much was that, if there was any?
David Roberts - Chairman, President and CEO
Yes.
There are no charges for the factories at this point.
They are just being built.
So there is no cost associated with that.
Let me ask Steve.
Steven Ford - CFO
In Georgia, $1 million, but not until the fourth quarter.
David Roberts - Chairman, President and CEO
Yes, the Georgia costs will occur in the fourth quarter and it is about $1 million.
Ivan Marcuse - Analyst
You mentioned in your release that there was some manufacturing absorption.
How much was that?
What business does that flow through?
Is that in the brake and friction?
Steven Ford - CFO
Yes, that was primarily in the brake and friction item, in light of the slowing there.
Ivan Marcuse - Analyst
Any idea of how much of that would be, a million or two?
Steven Ford - CFO
Yes, it probably contributed to about between 100 and 200 of the basis points decline.
Ivan Marcuse - Analyst
Got you.
Great, thank you for taking my questions.
David Roberts - Chairman, President and CEO
You're welcome.
Operator
(Operator Instructions) Matt McConnell.
Matt McConnell - Analyst
Hi, thanks for taking my question.
Could you quantify the price cost in construction materials?
How much did that contribute to the margin?
And then maybe give us a sense of whether that's anything recent on the price side or whether that is all from prior increases?
David Roberts - Chairman, President and CEO
Yes.
And I will let Steve talk to you about what the impact was.
But there have been no price increases that have flowed through over the last quarter.
So what we are seeing is really the effect of price increases that we implemented, actually in 2011, a little bit in early 2012, but prices have been relatively stable since that point.
Steven Ford - CFO
It was about a $25 million net benefit.
Matt McConnell - Analyst
Okay, great.
Thanks.
And with the droughts kind of pushing out the reroofing, I would imagine that doesn't eliminate the need to do reroofing.
So, is there any way you could talk about pent-up demand there?
Is that something that you expect to see really if we do get some weather?
David Roberts - Chairman, President and CEO
Yes.
And I don't think there's any question.
I don't know what the dollar volume is.
We were up 41% in the first quarter and 14% in the second, and I think that was set a really high expectation, both internally and externally.
I don't think we can grow at those rates consistently, but certainly as the weather becomes wet, it will drive roofing demand.
And we are planning on growth in the 5% to 7% range in that business over the next year or so.
Matt McConnell - Analyst
Okay, great.
That's helpful.
And then on brake and friction, you mentioned expectations for probably two tough quarters and then increases after the first quarter of 2013.
Is that based on order schedules from your customers, or what kind of visibility do you have there and what is the basis of that outlook?
David Roberts - Chairman, President and CEO
Yes.
It's primarily conversation with the customer.
What they're saying is that the inventory, or their channels got bloated with inventory as they were pumping inventory in the channel.
They thought that it would take anywhere from three months to six months to work that inventory off.
And then the order patterns was -- begin again.
This is not just with one of our customers, but with a number of our customers that have said the same.
That's why we are talking probably first quarter next year and then we will start to see some activity, or upward activity in the business.
Matt McConnell - Analyst
Okay.
Great.
Thanks very much.
Operator
Neil Frohnapple.
Neil Frohnapple - Analyst
Hi, good morning, guys.
Dave, you just mentioned 5% to 7% growth in construction materials next year.
Is this driven by increased quoting activity that you are currently seeing, maybe just some puts and takes there, a little bit more granularity?
David Roberts - Chairman, President and CEO
Yes, like I said, we're starting to see some new construction activity that is quoted.
Frankly, we think reroofing will come back.
And with reroofing back and a little bit of new construction, we should be pushing in that 5% to 7% range.
Neil Frohnapple - Analyst
Okay.
And I see one of your competitors announced a 5% increase for polyiso for January 1. Are you guys seeing raw material costs rise for your polyiso products and will you plan to try to get price early next year?
And also, can you give us a sense of any plans to get additional pricing for membranes in 2013?
David Roberts - Chairman, President and CEO
Yes, Steve just said, benzene continues to go up, which is one of the components of polyiso.
But, yes, as raw materials increase, we will have to increase the -- certainly the price to our customer.
And we will do that as raw materials flow through.
We do that consistently, anyway.
Neil Frohnapple - Analyst
And then, finally, pertaining to food service products, will you realize the full $5 million of annualized savings in 2013, or should we look for a smaller amount for the year and expect you to run rate the $5 million number as we exit 2013?
David Roberts - Chairman, President and CEO
I think that what you'll end up seeing is a -- those facilities will be closed by the end of the year.
I think all of the costs will be flowing through by then and we should start to realize the savings almost immediately, as we get into 2013.
Neil Frohnapple - Analyst
Great.
Thank you very much.
David Roberts - Chairman, President and CEO
You're welcome.
Operator
James Kawai.
James Kawai - Analyst
Good morning, thanks for taking my question.
Also as a follow-up on food services, 3% price, if we get half of that and then you throw in maybe a percentage point from restructuring, and it sounds like we may be getting to maybe 11%, 12% operating margins in 2013.
Is that kind of the ballpark?
And then what would be the next steps to hopefully get it up to that 15% that you guys have been targeting?
David Roberts - Chairman, President and CEO
Yes.
I think that your number is probably good for the early part of the year.
I think you will see it grow as the year continues.
I think, overall you might see 12% to 13% margins for the full year with them starting in the 10% range, 9% to 10% range at the first of the year and growing to the mid-teens at the latter part of the year.
James Kawai - Analyst
Okay.
Great.
That's helpful.
And then on brake and friction, Caterpillar was out there saying they were going to take their inventories down by $3 billion throughout their supply chain.
And then that's up from $2 billion just a month ago.
That sounds like a very dynamic situation.
Can you maybe help us get some color around what areas they are cutting back on?
And any geographies or any further colors so we know what to look for to make sure that the channel is clearing?
David Roberts - Chairman, President and CEO
Sure.
What they have said is that -- well CAT and other manufacturers have said worldwide inventories were high and they are taking it out of their worldwide inventory.
I don't know how else to describe it.
We are seeing the effect now.
We saw it in the third quarter, we'll see it in the fourth and we'll probably see it in the first.
But, that's about all I can tell you relative to the inventory reduction.
James Kawai - Analyst
Great.
Thank you.
David Roberts - Chairman, President and CEO
You're welcome.
Operator
There are no further questions at this time.
David Roberts - Chairman, President and CEO
Okay.
Let me go ahead and close the call here.
As our third-quarter conference call draws to a close, let's turn to slide 15.
The information contained on this slide will provide everyone of you an idea of what we see -- how the fourth quarter is playing out.
We project low double-digit sales growth for the full year.
This is a slight change from our comments in the third quarter.
We were talking about mid double-digit growth at the end of the second quarter call.
We see braking business will continue to slow, as we mentioned on this call.
About half of our overall growth will be organic, the other half will come from acquisitions that we made over the past year.
We are also planning for year over year margin improvement in the fourth quarter, which I think will be comparable to the improvements that we had seen in the first three quarters.
Corporate expense will be approximately $49 million, D&A will be approximately $105 million, interest expense about $24 million and our tax planning rate for the year is 33.3%.
Cash conversion is expected to exceed 100%, even though we will continue to spend $135 million to $140 million of capital that we've talked about throughout the year.
The capital investments we discussed during previous conference calls, as I said, will continue.
The expansions at our CIT Saint Augustine aerospace wiring plant and our CBF Italian braking plant are basically complete.
Our polyiso plants in New York state and Washington state are well underway and should come online in mid 2013, as we originally planned.
Construction of our PVC plant in Greenville, Illinois continues to be targeted as a startup date for the first half of 2014.
So capital spending in 2013 will be higher than our normalized rate, as well, which is normally about $75 million.
We're planning at this point to spend approximately $90 million as we complete the projects we started, as we get into 2013.
Wrapping up the third quarter, our performance in the quarter puts us squarely within reach of two of our strategic financial goals, our 15% EBIT margin goal and our 15% return on invested capital.
We have got work in front of us to achieve our 15% of sales tied up in working capital, but we've got plans to move below the 22% level that we are running at today.
Strategic revenue goals are our biggest challenge as the economy softens, particularly in most of our markets globally.
While revenue growth is important, we feel we can create shareholder value through EBIT margin growth, improvement of ROIC, and reduction of working capital.
While we saw a softness in a few of our markets in the third quarter, I don't think this is a long-term issue.
I think once the election is behind us, we will start to see the economy grow again.
The softness we see in the assembly of construction equipment will take a bit longer to recover and that obviously has an impact on our brake and friction business.
As we continue to lower our operating costs at food service, I think we all feel more comfortable that low to mid teen EBIT margins are very attainable in this business.
And as we plan for 2013, we're planning for growth in all of our businesses.
As I said in the second quarter conference call, I expected 2013 to show single-digit revenue growth and allowing us to leverage that growth into strong earnings growth.
Frankly, my view has not changed on that.
We have taken a number of steps over the past three years to improve our profitability and that was evident in our 14.2% second quarter margins and our 12.2% third quarter margins.
I see this trend of double-digit margins continuing into 2013.
With that, I will now close the third-quarter conference call.
I want to thank everybody for attending.
I look forward to reviewing our fourth quarter and full year results in February of next year.
Bradley, you may now end the call.
Operator
This concludes the conference call.
You may now disconnect.