Carlisle Companies Inc (CSL) 2014 Q1 法說會逐字稿

Welcome to the Carlisle Companies Inc.

first quarter earnings conference call.

(Operator Instructions)

It is now my pleasure to turn the call over to Mr David Roberts, Chairman, President and CEO of Carlisle Companies.

Please go ahead, sir.

Thank you, Maria.

Good morning.

Welcome to Carlisle's first quarter 2014 conference call.

On the phone with me is our CFO, Steven Ford; our Chief Accounting Officer, Kevin Zdimal; our Treasurer, Julie Chandler; our Group President of Construction Materials, John Altmeyer; our Group President of Interconnect Technologies, John Berlin; and our Group President of Diversified Products, which includes Brake & Friction and Food Service, Chris Koch.

Before I begin reviewing the first quarter's financial details, let me get you up-to-date on some key developments impacting the quarter.

We had a good quarter, especially considering the impact of weather in January and February.

Construction Materials had a very slow start to the year due to severe weather but recovered nicely in March.

Pricing was under pressure as available jobs were being priced very competitively, which had a negative impact on earnings.

Not helping earnings was the Polyiso capacity we added, which created an absorption issue in the first quarter as well.

That would have been concerning news to me had we not had a strong March.

March nearly saved the quarter, as sales and profits were both up double-digits.

We believe this is reflective of the strength of the market in reroofing and nonres construction.

We remain optimistic that 2014 can be a record year for Construction Materials if the sales trends continue as we see them today.

Interconnect Technologies had an excellent first quarter as we generated our highest level of earnings in the history of the segment.

We recorded EBIT margins of 20.3%, with earnings of nearly $31 million.

There were a couple of favorable income items that helped us achieve these margins, but these were minor compared to the operational earnings that we generated.

We are starting to see the light at the end of the tunnel for CBF, our incoming order rate has increased on a year-over-year basis for the seventh consecutive month.

We are starting to see this in our monthly revenue as sales grew approximately 1% in the first quarter.

We still have a long way to go, but the major declines we witnessed over the last 18 months have subsided.

Each of our customer categories have shown strength with the exception of Mining.

Food Service continues to make good progress improving profitability as EBIT margins were up 310 basis points to 11.9%.

We did see quarterly sales decline in Food Service products due to weather, but saw a strength in Healthcare as we completed the sale of retherm equipment to four VA hospitals.

Our Jan/San category also grew nicely for us in the quarter.

Sequentially, total Company working capital increased 100 basis points as we built inventory for our heavy selling seasons, which are the second and third quarters.

On a quarter-to-quarter comparison basis, working capital was reduced from 20.9% in 2013 to 19.7% this year.

Our capital spending projection remains at $119 million for the year with our two largest projects being the construction of CIT's Nogales plant and CCM's Carlisle TPO plant.

Construction at Nogales is expected to begin within a month as this facility must be producing product by early 2015.

Let's now turn to the slide presentation that's available on our website.

Before we begin to review our first quarter financial performance, please turn to Slide 2 and review our forward-looking statement and the use of non-GAAP financial measures.

I strongly urge you to read these statements and review the documents that we have filed with the SEC.

Both detail the risks associated with investing in Carlisle.

As we begin our detailed review, please be reminded that our 2013 results exclude the Transportation Products segment, which was sold on December 31.

Last year's results have been restated for comparison purposes.

Turning to Slide 3, you will find a financial summary of the Company's performance in the first quarter.

Sales increased 3.3% to $650.4 million as we enjoyed growth in every segment despite negative impact of sales due to weather in Construction Materials and Food Service.

This is the first quarter in seven quarters that we've experienced volume growth in each of our businesses.

EBIT increased approximately 14% as we earned $63 million, yielding an operating margin of 9.7%.

Margins were up on a year-over-year comparison basis by 90 basis points helped by a record result in CIT.

We did see pricing negatively impacting margin at CCM and CBF.

EPS from continuing operations was $0.56 per share compared to $0.68 per share in 2013.

As reminder, the first quarter of 2013 had a $13 million tax benefit which equated to $0.20 per share.

In the first quarter, we generated $27 million of free cash flow, up 143% from 2013.

We ended the quarter with $780 million of cash on hand.

Slide 4 is our sales bridge.

This slide details the positive and negative impacts on our revenue.

Organic sales growth was 3% with volume being up 4.5% and pricing down 1.5%.

The 1.5% of negative pricing was driven by pricing pressure at CCM and CBF.

FX had a very small 0.3% positive impact on sales in the quarter.

Organically CCM grew 2%; CIT grew 7%; CFS grew 3%; while CBF was up in volume but was virtually flat from a sales dollar perspective.

Slide 5 details our margin bridge.

Our quarterly operating earnings increased $7.6 million or 14%.

Price, net of raw material changes, negatively impacted profitability by 0.2%.

Volume positively impacted margin by 0.8%.

COS had a 1% positive impact.

Other, primarily mix and unabsorbed overhead, negatively impacted margin by 0.7%.

We finished the quarter with operating margins of 9.7%, up 90 basis points.

Slide 7 begins our review of the individual business segments starting with Construction Materials.

Sales for the quarter were $347 million compared to $340 million, an increase of 2%.

Pricing was lower by 2% as work was difficult to come by in January and February creating a very competitive environment.

Volume was up 4% led by TPO products.

European growth in the quarter was an outstanding 63% excluding FX.

Sales growth in Europe across -- was across all of the Northern European regions where EPDM is predominantly used.

EBIT for the quarter was down 11% to $32 million compared to $36 million in 2013.

Margin was lower by 130 basis points on lower selling prices driven by inclement weather.

Weather also had an impact on overhead absorption as the volume didn't materialize in the first quarter at our new Polyiso plants.

The good news is, we saw a recovery in March which helped salvage the quarter.

Sales in March were up 21% and earnings were up 19% as the weather broke and our customers were back on roofs.

There were some pricing challenges in March which could carry into April as these jobs were quoted during a very competitive time.

We also had $1.8 million of new client start up costs that hit the income statement during the quarter, marginally up over 2013.

The start up expenses were the cost of scrap and inefficiencies as our Greenville, Illinois PVC plant came online.

We expect to incur approximately $2.2 million of additional start up cost to be spread throughout the balance of the year as we bring the Greenville PVC plant up to its plant operating level and as we start the Carlisle TPO plant.

Slide 9 details CIT's performance in the fourth quarter.

Interconnect Technologies grew 6.9%, driven mainly by our Aerospace business.

$151 million in sales is a record for this segment.

Aerospace was up 12%, driven by a monthly build rate of 10 787s.

We also saw a heavy demand for in-flight entertainment and connectivity during the quarter.

We continue to see nice ramp-up of our Medical business.

Our Military, Industrial and Test & Measurement categories were all down this quarter.

Test & Measurement should be a third quarter growth business as our customers prepare to roll out new consumer products ahead of the Christmas season.

EBIT growth for the quarter was 67% as we earned $31 million compared to $18 million last year.

EBIT margin was up 730 basis points to 20.3%.

Both our EBIT dollars and our EBIT percent were quarterly records.

All signs point to record sales, record earnings and record working capital performance in 2014 at CIT.

Slide 11 details the performance of our Braking business.

We saw a small recovery in sales in the quarter as we grew to $92 million, up 1.5% driven primarily by FX.

Volume was up 2% offset by lower selling prices.

In the predominant sales category, Ag was up 17%, again driven by sales in Europe this quarter while Mining was down 20%.

This is this first quarter since the second quarter of 2012 that we have seen sales growth.

Obviously the comparisons are easier but we have now seen five months of improving backlogs.

EBIT was down 16% in the quarter as a result of lower selling prices.

EBIT margin for the quarter was 10% compared to 12.1% last year.

10% margins look like a predictable run rate for the year if the order rate continues at its continued level.

We incurred $200,000 in restructuring charges in the quarter as we continue to phase down the Akron plant.

Akron is forecasted to be closed by mid-summer and the total forecasted shutdown cost incurred this year will be $2 million of which $1.5 million will be -- will occur in the second quarter.

Slide 13 details the results of our Food Service business where the Management team continues to make strides in improving profitability.

Sales were up 3% driven by strong growth in Healthcare and Jan/San products.

Food Service products were off 8% as severe weather negatively impacted the business.

EBIT in the quarter was up 39% from $5 million in 2013 to $7 million in 2014.

EBIT margins improved 310 basis points reaching 11.9%.

The vast majority of this improvement came from operating efficiencies as our equipment downtime was reduced 40% and our scrap rate was reduced 30%.

This concludes my review of the business segments.

Steve will now review our balance sheet, cash flow and working capital slides.

Steve?

Thanks, Dave.

Good morning.

Please turn to Slide 14 of the presentation.

As Dave stated, we ended the quarter with $780 million of cash on hand which includes approximately $370 million of cash from our sale of our Transportation Products business on December 31.

We also have all $600 million of availability under our credit facility.

Our balance sheet remains extremely strong as we continue to have no debt following the CTP sale.

We are very well-positioned for future growth.

Turning to Slide 15, our free cash flow from operations for the quarter was $27.2 million as compared to $11.2 million for the first quarter 2013, a 143% increase.

The increase was primarily attributable to lower usage for working capital needs.

Turning to Slide 16, our average working capital as a percentage of sales for the first quarter 2014 was 19.7%, a 120 basis point improvement from the 20.9% reported for the first quarter 2013.

We improved inventory turns, 6.3 turns compared to 5.8 turns, and continue to make progress toward achieving our long-term goal of 15% of sales.

With those remarks, I will turn the call back over to Dave.

Thanks, Steve.

Maria, would you open the floor for questions please?

(Operator Instructions)

Ivan Marcuse, KeyBanc Capital Markets.

Great quarter.

Real quick, how big is -- I guess, the number in Europe jumped out at me.

How big is your European business now?

Was there a step change to get that 63% increase in sales?

Or was it more of a benefit of easy comps?

Yes.

Well, it was easy comp primarily because of the weather last year in Europe.

If you recall, we were actually down slightly last year.

But we had -- conversely to what we had in the US, we actually had a very mild first quarter.

So consequently, we grew at 63%.

Do you have the numbers, Steve, on what we're up?

Ivan, let us get that number.

Yes.

In Europe, we are up about some odd, 60%.

Europe represents a little over 10% of the segment's total revenues.

Okay, great.

But you talked about -- that roofing or the roofing that you're doing over there is gaining share.

Is that growing faster than you would have expected or is there something that's changing like the code?

I wouldn't draw any conclusions to the first quarter just because last year's first quarter was soft.

But yes, we're gaining momentum there.

It's still less than 5% of the total market.

Great.

Then if you look at the roofing business; TPO is up, while EPDM is down.

But the weather -- it impacted pretty much the entire US.

So what do you think is driving the TPO growth?

Is that just taking market share out of asphalt?

Or are you --?

Yes, it's actually taking it from both, Ivan.

TPO is taking share primarily from asphalt but a little bit from EPDM.

If you really look at the severe weather, the wet weather, it was in the Northwest and the Midwest, which is a predominantly, an EPDM market.

All right.

Has April trends continued with March?

We don't give guidance, but yes, they were okay.

Then, last question, I'll jump back in the queue.

How much -- are you still -- you talked about being pressured with benzene costs in your insulation last quarter?

Has that subsided a little bit?

Or is that something that will probably hit the second quarter?

Are you able to get price increases to pass that through?

We think that raw material costs at this point will be neutral.

We're still trying to catch up from the first quarter though.

Obviously, we didn't get any price in the first quarter primarily because there wasn't a lot of business being sold.

We had another price increase that went in April 1. We're anxious to see how successful we are in capturing that price increase.

So you're seeing materials goes up a little bit?

But you think you're going to be able to get price to neutralize that?

Yes.

Got it.

Thank you.

You're welcome.

Joel Tiss, BMO.

As long as we're doing CCM, can you just talk a little bit about the pricing trends in Europe?

What you're seeing there?

Yes.

Pricing in Europe is relatively stable.

There are no raw material cost increases that we're seeing flowing through.

It really wasn't driven by pricing.

It was all demand.

Okay.

Yes.

No, it just seemed like pricing was under pressure in North America from the extra capacity and maybe -- and mix and some other factors.

So, I just wanted to get the whole picture.

Joel, if you think about the European market -- again, it's an EPDM market.

Where we saw pricing pressure was primarily in our Polyiso markets and our TPO markets.

Okay.

Then, can we just dig a little bit into Ag?

When the brakes go on to the machines, is that stuff that was already ordered in late 2013 that's shipping now?

Yes.

Or is a closer to when the orders are?

Can you just help us understand what's flowing?

Yes.

It's generally, Joel, the lead times are six weeks to eight weeks on the Braking package on any piece of equipment.

So, yes, those orders were in last year that went on in the first quarter.

Is there any color you can give us for how that market looks for the rest of 2014?

Well, we don't think it's going to grow at 17%.

We think it will be up -- it will be up, but it's not going to be up 17%, I guess is the best way to say it.

We see strength in Europe -- part of that strength just comes from us gaining additional content and new customers.

It's not primarily driven by our only -- by the customers that we had, so we went out and captured some new business that allowed us to grow.

Whereas the US we find is relatively flat to up just slightly.

Okay.

Thank you very much.

You're welcome.

Kevin Hocevar, Northcoast Research.

Congrats on a nice quarter.

I wanted to ask on CIT, margins clearly were great at 20%.

Just wanted to get your thoughts on -- there's definitely a step up from what we've seen the last several years.

So, how sustainable are those margins where they're at today, around 20%?

Yes.

I think it will be a push at 20%.

We had a couple of things that helped us, obviously.

We had last year, the acquisition settlement.

We had a few other things that flowed through, but these are true margins.

They're probably going to be in the high teens, I would think would be a better way to model the business.

Keep in mind, we're still waiting for some conversation on pricing with one of our larger customers.

Okay.

Got you.

Then, back to Europe and the CCM, I guess I'm just curious, how are you able to handle a 63% or so increase?

If that was all volumes, could you -- did you have that amount of capacity available to manufacture?

If the market's that strong, would you look to build another plant there in the not-too-distant future?

Yes.

Kevin, keep in mind, the first quarter is always our lowest quarter.

So, we have, what the CCM guys call, sprint capacity.

So, when we get in the second and third quarters, which are the building season, we have capacity to handle that amount of volume that goes through.

So handling a 63% increase in the first quarter is not as difficult as it may seem.

We aren't in a position at this point that we're going to be building any additional plants.

We've turned the COS guys loose on Europe.

They've done a very nice job in improving our efficiencies there.

We don't see needing to add a factory in Europe, certainly, over the next couple of years anyway.

Okay.

Just final question on your backlogs in Brake & Friction.

It sounds like -- are the backlogs not only improving year-over-year but are they -- is that growth accelerating?

Should we expect the year-over-year sales growth as the year plays out to grow from the -- well, I guess it was flattish organic when you strip out FX, but should we expect that organic growth to accelerate as the year progresses?

Yes.

I think you'll see a small amount of growth.

There won't be a tremendous amount of growth there.

What we're seeing is an incoming order rate line that is trending upward, but it's certainly not a hockey stick.

It is trending -- would you would call it slowly?

I guess.

But it is trending upward.

Okay, great.

Thank you very much.

You're welcome.

Ajay Kejriwal, FBR Capital Markets.

Obviously a very impressive performance in CIT on the margin front, of course, top line as well.

Maybe drill into the margin performance a little bit.

I know you called out a couple of things, a favorable settlement, $0.9 million.

Was there anything else that helped?

I'm basically trying to get a sense of what the underlying margins were this quarter.

It is all operational improvements in the business, Ajay.

Volume picked up.

We've been saying for a couple of years that we really staffed and built the operation to run at the current level of the 787 build rate.

Finally, what we're doing is seeing that build rate.

It's helped us to absorb some of the overhead that we had.

Plus the fact -- as I said about the CCM plant, COS people have done an excellent job in improving the efficiencies in all of our factories.

So, it's really operational improvements.

Yes, there were a couple of minor adjustments, but it's primarily operational improvement.

That's terrific to hear.

Maybe update on the discussions you're having with your largest customer.

What's the timeline?

I know it's been going on for a while.

What are your expectations on timeline and eventual outcome?

Yes.

I can't answer that, honestly.

We're -- I just can't answer it.

We know that we're in continuing conversations with them.

I'm not quite sure where it's going to land.

I just really can't answer that question at this point.

I totally understand.

Maybe one last one for me and pass it on.

Thoughts on the M&A pipeline?

Obviously, balance sheet really, really strong.

Lots of cash, a good problem to have.

But what are you seeing in terms of deals?

Any thoughts on how we should be thinking about use of capital through the course of the year?

Yes.

I think that the pipeline has a couple of good opportunities in it that we're considering.

I don't think you'll see anything in the second quarter, but we're hopeful, in third quarter, perhaps something will materialize.

But there are a couple of good things out there that we're looking at today.

Any thoughts on size wise?

Any color you can provide?

No, at this point, I would rather not.

Okay, that is fine.

Good quarter.

Thank you.

Thanks.

Neil Frohnapple, Longbow.

Congrats on a nice quarter.

Dave, a very strong Brake & Friction performance in Q1 with 10% operating margins.

But in your prepared remarks, you mentioned that 10% is a predictable rate for the year.

I thought maybe the first quarter would be the floor.

Maybe there could be some upside now to your 10% target for the business?

Is there something we're missing?

Or are you guys just being conservative at this point just to see how the year plays out?

Or if you could provide more color?

Yes.

I think that we're probably conservative.

We're attempting to really determine what the order rate will look like as we get further in to the year.

We are not ready to predict that it's going to improve dramatically.

So, as long as we're at the current run rate, I think we should be right around 10%.

If the run rate starts to pick up, then we should have margin improvement.

Great.

Then just a follow-up within Brake & Friction, a solid 15% sequential sales increase.

I was wondering if mining sales also grew sequentially despite the year-over-year decline?

Just any signs of life within mining that you can point to that gives you confidence the worst is behind in this business?

Now, sequentially it has not grown.

We were down, I'm trying to remember what the number was, I think, 18% last quarter, down 20%.

It's really, relatively flat.

There's nothing going on in mining.

Mining basically is replacement today.

Everything is -- there's nobody building new trucks basically.

Got it.

All right, thanks.

I'll hop back in queue.

Okay.

Glenn Wortman, Sidoti & Company.

March sales in Construction Materials, you said, were up 21%.

Do you think that's indicative of the underlying strength in the market?

Or do you think there was maybe a little bit of catch up from the weather issues in the --?

Yes.

There was -- I'm sure John is cringing thinking that we're going to predict 21% growth every month going forward.

No.

There was some pent-up demand from January and February in that, Glenn.

It will probably grow at high single-digits.

Maybe when we get into the construction season, we might touch 10%.

But I don't think it's going to grow much more than that.

But we've been saying all along, we'll be up mid single -- high single-digits.

I think that's still the number that we're going to be looking at for the year.

Okay.

Then just on pricing.

Work that is being bid today, has pricing started to improve relative to where you were earlier in the year?

Yes.

I just can't say that.

We don't know yet.

It's still April, the price increases went into effect in April.

Keep in mind, we have some hangover from jobs that we priced based on first quarter pricing that are going in now.

I think there will be a little bit of a hangover, negative pricing through the second quarter.

Then we'll start to see some positive pricing in the third quarter.

Okay.

All right.

Thanks for taking my questions.

You're welcome.

Matt McConnell, Citi.

Were there any buybacks in the quarter?

Do you still feel like you could maybe do -- I think, last quarter you said $100 million to $150 million.

But that was when there was not much in the pipeline.

Given that there is now a little bit of an M&A pipeline, would you still expect to do some buybacks this year?

Matt, it really depends upon what happens with these acquisitions that we're looking at.

We really have placed ourselves in a blackout period based on what we know is in the pipeline.

We have not made any share repurchases.

If these don't materialize, we will go into our systematic share repurchase program.

But we're -- I think we're in a period where we need to basically not buy any shares.

Okay, got it.

Thank you.

On the CIT margin, does that benefit in any way from a mix shift with Aero being a lot stronger than the other categories?

Or is there any material margin --?

Not really.

IFCE -- IFEC certainly has a little bit better margins on it.

There's really nothing in there that would suggest that there was a mix change that causes the margins to be up dramatically.

It's really volume.

Okay.

Then related to some of the pricing discussions you have in that business, have you had any opportunities to pursue additional content?

I know that was kind of a big [chit] that large customer was putting out.

No.

We've just not had those conversations yet.

Okay.

So, no, not at this point.

Okay.

Great.

Thanks very much.

You're welcome.

(Operator Instructions)

Gregory Travers, Kalmar Investments.

Ivan Marcuse, KeyBanc Capital.

Thanks my question was answered.

Appreciate it.

Okay, Ivan.

(Operator Instructions)

I'm showing no further questions at this time.

Okay.

Great.

As our conference call draws to a close, let's turn to Slide 18.

If the momentum we are seeing in each of our business continues, we will likely have another record year in sales and earnings in 2014.

We expect our sales for 2014 to grow high -- single-digits and anticipating leverage with the revenue growth in both EBIT dollars and EBIT margins.

For modeling purposes, we expect: corporate expenses to be approximately $49 million; D&A to be about $106 million; capital expenditures to be around $119 million; interest expense to be approximately $33 million; and our internal forecast has been built using a tax rate of 33%.

Our free cash conversion rate is expected to be approximately 100% for the full-year.

We expect to put the $780 million of cash currently sitting on our balance sheet, plus the cash we generate this year, to work in making acquisitions.

The pipeline has a few attractive opportunities, as I mentioned earlier.

We are hopeful that one or two of these will materialize over the next two quarters.

If they do not, we expect to begin our planned systematic repurchase of our stock.

As reminder, the Board has approved a purchase of up to 3 million shares.

Let me now thank you all for attending our first quarter conference call.

I look forward to reviewing our second quarter results with you in July.

Maria, you may now end the call.

Thank you.

This concludes today's first quarter 2014 earnings conference call.

You may now disconnect.

Have a wonderful day.