Carlisle Companies Inc (CSL) 2014 Q2 法說會逐字稿

Welcome to the Carlisle Companies second quarter earnings conference call.

(Operator Instructions)

I will now turn the conference over to Mr David Roberts, Chairman and CEO of the Carlisle Group.

Please, go ahead, sir.

Thank you, Crystal.

Good morning.

Welcome to Carlisle's second quarter 2014 conference call.

On the phone with me is our COO, Chris Koch; our CFO, Steven Ford; our Chief Accounting Officer, Kevin Zdimal; and our Treasurer, Julia Chandler.

Before I begin reviewing the second quarter's financial details, let me update you on some of the key achievements that we incurred in the quarter.

Our sales recovered nicely in the second quarter from the inclement weather-plagued first quarter.

We enjoyed solid revenue growth in all of our businesses.

Our sales were exceptionally strong in Construction Materials and Interconnect Technologies, our two largest businesses.

With an increase in volume came margins of 14.2% and a record $122.3 million of earnings in the quarter.

Sequentially, total Company working capital decreased by 170 basis points to a new record low.

On a quarter-to-quarter basis, working capital was reduced from 19.7% to 18%.

We continue to pursue acquisitions to put the $575 million of available cash to work for us.

We did not buy any shares this quarter, as we are in pursuit of a few select acquisitions.

Because we are pursuing defined acquisitions, we are not repurchasing shares.

We are hopeful of adding a business or two by the end of the year.

Our two largest 2014 capital projects are the construction of the CIT Nogales plant and the CCM Carlisle TPO plant, both of which are moving along nicely.

Both plants are on schedule and will be in production early in 2015.

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

Before you begin to review -- before we begin to review our second quarter financial performance, please turn to Slide 2 and review our forward-looking statements and the explanation of the use of non-GAAP financial measures.

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

Both detail the risk associated in investing in Carlisle.

As we begin our review of our performance in the second quarter, turn to Slide 3 where we'll find the financial summary of the Company's second quarter performance.

Sales increased 8.4%, with all of our businesses showing growth in the quarter.

This is the second consecutive quarter over the past eight quarters that we have experienced volume growth in each business.

The fastest-growing business was CIT, with organic growth of 11%.

Following very closely is our Construction Materials business, where sales grew 9%.

At Brake & Friction, sales were up 4%.

At FoodService, sales grew 2%.

EBIT increased approximately 12%, as we earned $122.3 million, yielding an operating margin of 14.2%.

Margins were up year-over-year 40 basis points, again, aided by a record results in CIT.

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

EPS from continuing operations was $1.15 per share, compared to $0.99 in 2013.

In the second quarter, cash flow was neutral but down compared to 2013.

Year-to-year cash flow isn't a direct apples-to-apples comparison, because in the second quarter of 2013 we still owned the Transportation Products business, which traditionally generated the vast majority of its cash in the first half of the year.

Our experience in the first half of 2014 should be a proxy for the future.

In the future, it's very likely we will use cash in the first half of the year and then generate very strong cash flow in the second half.

We ended the quarter with $757 million of cash on hand.

We expect to add approximately $250 million of cash by year end.

Slide 4 is a sales bridge, which details the positive and negative impacts on revenue.

Organic sales growth was 8%, driven by volume growth of 9.4%, which was offset by 1.4% of negative pricing at CCM and CBF.

FX had a small 0.4% positive impact on sales.

Organically, CCM grew 9%.

CIT grew 11%.

CBF grew 2%.

FoodService grew 2%.

Slide 5 details our EBIT margin bridge.

Our quarterly operating margins increased by 40 basis points on higher volume and COS cost savings, while being offset by higher costs for freight and plant start-up costs at CCM along with unfavorable pricing at CCM and CBF.

Our operating earnings grew 12% or $13 million.

Price, net of raw material changes, negatively impacted profitability by 0.3%.

Volume positively impacted margin by 0.9%.

COS had a 1.1% positive impact.

Other, primarily increased product costs at CCM, negatively impacted margin 1.3%.

We finished the quarter with operating margins at 14.2% as I said earlier.

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

Sales for the quarter were robust at $536 million, compared to $491 million in 2013, a 9% increase.

Pricing was lower by 2% as the market had resolved and was not accepting of price increases.

Volume was up 11%, led by TPO up 15%, polyiso up 13% and EPDM up 7%, where much of this product is going into reroofing applications, which speaks very highly of the strength in the reroofing market.

European growth in the quarter was up 7%, excluding FX.

EBIT for the quarter was up 4% to $81 million, compared to $78 million in 2013.

Margins were lower 80 basis points due to lower selling prices and higher product costs, including freight.

With the addition of the Seattle plant and the second polyiso line in Montgomery, New York, we now have capacity to handle future demand of the insulation market, but it may take 18 to 24 months to consume the capacity that we've added.

Margin was also impacted by $1.8 million in start-up costs at the Greenville plant, which began producing PVC membrane in the second quarter.

We expect to incur approximately $2.5 million of additional start-up costs to be spread throughout the balance of the year as we bring the Greenville PVC plant up to its planned operating levels and as we start-up the Carlisle TPO plant.

Higher freight cost is expected to be a headwind for the remainder of the year as well.

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

Interconnect Technologies grew 11%, driven by a very healthy growth in aerospace, test & measurement and a welcome increase in military.

Industrial continued its negative trend, down 4%.

The second quarter was a record sales quarter for CIT as we generated $162 million in sales.

Aerospace was up 13%, driven by a monthly build rate of 10 787s.

As in the first quarter, we saw heavy demand for in-flight entertainment in the second quarter.

Test & measurement was also strong, growing 31% as a major telecommunications customer ramped up production of a new product.

EBIT growth for the quarter was 53% as we earned $34 million, compared to $22 million last year.

EBIT margin was up 570 basis points to 21%, as we enjoyed exceptional leverage on our revenue growth.

This is the second quarter in a row that we've set sales dollars, EBIT dollars and EBIT percentage quarterly records.

We are on record pace for the year.

Slide 11 details the performance of our Braking business.

Sales grew 4% in the quarter aided by FX that was a direct offset to lower selling prices.

Volume was up 4%.

In the product categories, construction was up 11%, ag was up 2%, while mining was down 2%.

We started to see a slowdown in ag across the globe.

We anticipate the ag market will be flat for the remainder of the year.

This past quarter was the second quarter in a row over the past eight quarters that we've seen sales growth.

June was our 10th consecutive month of improving backlogs.

EBIT was down 13% in the quarter due to lower selling prices.

EBIT margin for the quarter was 11.1%, compared to 13.2% last year.

We earned $11 million in EBIT this year, compared to $12 million in 2013.

We continue to expect to generate margins in the 10% range for the remainder of the year.

The one thing that could impact the outlook is a dramatic shift in our sales run rate, either up or down.

Either would have impact on margin.

We incurred $400,000 in restructuring charges in the quarter, as we continue to phase down the Akron plant.

The estimated closing date for Akron is now December rather than late summer.

Our cost to relocate the plant will not escalate, but our estimated savings attributed to the closure of Akron will be delayed until next year.

We will spend approximately $1.4 million to complete the closure of Akron in the second half of this year.

Slide 13 details the results of our FoodService business.

Profitability improved 15% on a 2% increase in sales.

Some of that improvement came from the gain on the sale of our distribution center in Europe that was shuttered last year.

Sales were again driven by strong 13% growth in healthcare, a modest growth of 3% in jan/san and FoodService was off 3% due to soft international demand.

EBIT in the quarter was up 15% from $7 million in 2013 to $8 million this year.

EBIT margins improved 150 basis points, reaching 13.1%.

Margin improvement came from operating efficiencies, scrap rate reductions and the sale of our European facility that I just mentioned.

This concludes my business segment review.

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.

We ended the quarter with $757 million of cash on hand, which includes approximately $380 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 net debt following the CTP sale.

We are very well-positioned for future growth and as Dave noted, continue to pursue a few select acquisitions.

Turning to Slide 15, our free cash flow from operations for the six-months ended June 30 was $6.5 million, as receivables increased reflecting the strong organic growth sales at CCM and CIT.

Last year, our free cash flow for the first six months was $70 million.

As Dave noted, the year-over-year decline was primarily attributable to the sale of CTP, where cash generation was concentrated in the first half of the year due to the seasonal nature of the business as well as higher CapEx this year.

For the full year, we continue to expect to convert our free cash flow at close to 100%.

Turning to Slide 16, our average working capital as a percentage of sales for the second quarter 2014 was a record low 18%, a 150 basis point improvement from the 19.5% reported for the second quarter 2013.

We further improved inventory turns.

Currently, we're at 7 turns compared to 6.4 last year 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.

Crystal, you can open the floor to questions please.

(Operator Instructions)

Ivan Marcuse, KeyBanc Capital.

Real quick on the construction business -- roofing business, your pricing was down, but your volumes have been pretty strong.

Would you expect -- you've had some price increases announced.

So do you expect pricing to start reversing going to second half?

Or how do you sort of see that dynamic playing out?

What product is the pricing most pressured?

Yes.

It's in them polyiso insulation is where we're seeing most of the pressure.

We have seen some strengthening as we ended the second quarter.

We think we might see some resiliency, I guess, in the price increase in the third quarter.

So we would expect to see some improvement in that situation as we go forward.

Will it continue to be sort of pressured with the amount of capacity that you're bringing on?

That it's going to take 18 months to 24 months to fill up?

Yes.

I don't think it's going to take us that long.

I think that there was capacity added not only by us but by one of our competitors.

I think, if you look at that volume being up 13%, I think that capacity will very quickly get consumed.

I think there'll be more pricing discipline as we go forward.

Got you.

Then on -- again in the roofing business, I know in the past you've been able to sort of breakout sort of the new construction versus the replacement on product level.

How much was new construction up?

Have you continued to see sort of momentum build in that product line?

Yes.

New construction was up 15%.

We just enjoyed a very strong re-roofing market.

Most of that EPDM is going into re-roofing.

It -- frankly, it's just a very strong market out there in both.

Great.

Then my last question is, in your Interconnect Technologies, I know there's been some supply -- some negotiating with suppliers.

Is that over with?

Is that included in the numbers?

Or has that not happened yet?

Yes, it is still ongoing.

Got it.

Okay.

Great.

Thanks.

You're welcome.

Tim Wojs, R&W Baird.

I guess just in CCM again, looking at the margins, I think year-to-date margins have been down in CCM.

I'm just curious if volume alone could drive CCM margins to be up in the second half of the year?

Tim, I mean, it could.

I think that what you'll see is volume -- third quarter is always a big quarter for us.

So I think we'll see the typical seasonality that we see in the business in the third quarter.

I think you'll get a bit of margin improvement.

It's not just pricing.

We had start-up costs associated with the PVC plant that also impacted margins.

So we would expect those costs to continue to decline as we become more experienced at running PVC.

I also expect some price -- as I said earlier, resiliency I guess in the marketplace in the third quarter.

So I think we could see some margin improvement in the third quarter because of both.

Okay.

That helpful.

Thanks.

Then is it possible to talk about maybe volumes by month?

How did you guys -- I know April weather was a little -- still impactful in some areas of the country.

I guess, is it possible just to look at April, May and June in terms of either volumes or revenue growth in CCM?

It is.

I don't know if it's meaningful at all.

You're getting into the full roofing season as you get into the June timeframe, because you've got schools re-roofing and a lot of other things that are very seasonal.

I don't know if you can tell much by that.

But we had a steady ramp-up in volume as we normally do through April, May and June.

Okay.

No, that's helpful.

Then I guess just on the higher shipping costs that you guys called out, is that due to just some expedited demand?

Or is it just really tight capacity in trucking?

Yes.

It's really tight capacity in trucking.

What we ship, first of all, a lot of flats.

So they are in high demand and there's fewer of them.

Plus the fact that, some of the materials we ship are adhesive and so on and are considered hazardous material.

So it takes a different level of trucker to do that as well.

So it's just a situation where I think the type of trucks that we're looking for, we're seeing a shortage in availability.

In the rest of our businesses, we aren't seeing it.

So we're shipping primarily vans there, a different type of product.

We don't see it as much as we do in Construction Materials.

Okay.

Great.

Thanks a lot.

Kevin Hocevar, Northcoast Research.

This is Pat Kelly filling in for Kevin.

I had a question on CIT.

Just curious what your outlook was for the balance of the year for sales?

It seems like growth accelerated nicely during the quarter.

So is double-digit sales growth realistic for the back half?

I think it's going to be somewhere in the area of 9% to 11% or so.

Keep in mind that we started the ramp at the end of last year.

We're running -- the big aircraft for us obviously is the 787.

They've ramped up to the 10 a month now.

There's no projected increase in that until next year, so we'll be running at 10 a month in the 787's.

It's just strong demand across all aerospace.

I think Test & Measurement will be, again, a small component, but will be up probably in the third quarter.

It will start to tail in the fourth quarter, as this customer of ours ramps up and introduces new products.

I would think 9% to 11% would be probable.

Okay.

Great.

I have one more question pertaining to CBF.

In the press release, you mentioned an expectation for year-over-year sales growth in CBF for the balance of the year, mainly based on your growing backlog.

So just wondering what the magnitude was there?

Could it possibly be double-digit growth?

Then as a follow-up, what type of incremental margins are appropriate for that business?

Yes.

I think incrementals are probably in the 35% range.

It won't be double-digit growth.

We are starting to see a slowing in AG, which has been very strong for us all along.

I would expect growth to be very similar to what we saw this quarter, maybe up slightly from that, but nothing near double-digit.

Great.

Thanks for taking my questions.

You're welcome.

Ajay Kejriwal, FBR Capital.

Is it possible to quantify the impact from freight in the quarter?

Then it sounds like you expect freight to be a headwind in the second half.

I know things move around there, but what's kind of your expectation on freight in the second half?

Ajay, in the second quarter, freight was somewhere between $1.5 million and $2 million additional that we paid.

I would expect it to be similar in the second half of the year.

We don't see anybody having the -- having success, I guess, in adding drivers and adding equipment to their fleet.

So I think it'll still be tight as we go, certainly, in the third quarter.

It'll start to tail off in the fourth quarter again as volume drops.

Got it.

Then the Akron plant -- you mentioned savings into 2015, could you please remind us what the savings you're looking for?

Yes.

It was only about $600,000.

It wasn't a dramatic savings, from the closure of Akron.

Okay.

Then color on the pipeline, on acquisitions in terms of the types of deal you're looking at?

Or maybe the size of what's in the funnel?

Do you want me to just give you the names?

Or --

Exactly.

(laughter) Yes.

That would be all.

No.

We're continuing to pursue -- our main focus is in John Berlin's business, in the Wire & Cable business.

We'd like to make an acquisition or two there this year.

Then we continue to look for something that would be a replacement for the Tire & Wheel business.

In other words, another leg, but again as we've said all along, it would be something that we're very familiar with before we'd make an acquisition like that.

Got it.

Maybe on that topic, just remind us kind of the key criteria in terms of returns and accretion?

That would be helpful.

Thank you.

Yes.

Well, I think that we've said all along, we want an acquisition to be accretive in the first year.

I think size-wise, you could see something from -- I don't know -- $100 million to maybe $300 million in revenue.

Then it would be a margin profile of a business that we're trying to move Carlisle to.

So we want something with a higher margin that would have -- again, we'd like to have something with an aftermarket tail to it.

So that's what we're looking for.

Got it.

Thank you.

Glenn Wortman, Sidoti.

Another impressive margin performance for CIT.

Any change there on your margin expectations going forward?

Do you think the above 20% margin is now sustainable?

Or do you think that's going to come in a little --

I think the only -- yes, Glenn, the only thing that could happen is -- keep in mind, we're still in price negotiations with one of our customers.

Once that gets resolved, I would expect that there would be a slight reduction in margin.

I don't think you'll see us run at 21% for the year.

I think we could be maybe on the other side of 20%.

But not a dramatic change.

Okay.

Then on FoodService products, if you pull out the asset sale of -- I think your margin was 11.4%.

Is that pretty much -- a good approximation to use?

Yes.

I think so.

I think anything from 11% to 13%.

We just need some volume there.

They've done a nice job in taking cost out.

It's just at this point, volume would help us improve margin as well.

Okay.

Then lastly on CBF, I'll just ask the question a little bit differently.

So it sounds like, you think your sales might be down a little bit sequentially in the third quarter just given the slowdown in AG?

Yes.

A little bit.

Okay.

All right.

Thanks for taking my questions.

Okay, Glenn.

Neil Frohnapple, Longbow Research.

Dave, just a follow-up to Construction Materials.

Last quarter, you mentioned that there could be a little bit of negative pricing through the second quarter from jobs that were priced in the first quarter.

So just wondering if that contributed to a portion of the 2% price decline?

If that's largely behind us now?

Yes.

It did contribute.

Like I said earlier, I think there's more resiliency to a price increase at this point.

I would hope to see, at least, not negative price going forward.

I guess it's probably the best way to put it.

Got it.

That's helpful.

Then pertaining to Brake & Friction, just wondering if the price concessions are largely behind with orders improving?

Or how should we be modeling that dynamic for the remainder of the year?

Yes.

They should be behind us.

Okay, great.

Then just a final one on CIT.

Was there any one-time benefits that boosted profitability like last quarter?

Or was there anything else from a mix or raw materials standpoint that helped profitability in the quarter?

No, just good old-fashioned volume.

All right.

Great.

Thanks guys.

All right.

(Operator Instructions)

Matt McConnell, Citigroup.

It certainly sounds like there might be more activity in the M&A pipeline.

So I wonder if I could just get a sense of whether you have cash on hand, maybe to handle any deals that you're looking at?

Or whether you would add debt to fund these deals?

It's highly doubtful we'd have to add debt.

Okay.

Thank you.

Then on Brake & Friction, the 10% margin target that you talked about sounds a bit conservative.

You exceeded that this quarter with some restructuring and with 10 months or so of order growth.

Is there anything else coming in the back half that would pressure that margin?

Or is that just --

Yes.

There's another -- I think it's $1.4 million that we have to spend on the restructuring.

So that would have a negative impact on it.

That would come third -- most of it third, a little bit in the fourth quarter.

Maybe there's some upside there, but not a lot.

Okay.

So there's still a little more restructuring.

That's helpful.

Right.

Okay.

I think that's it for me.

Thank you.

Okay, Matt.

At this time, there are no further questions in queue.

Okay.

Why don't we go ahead and close the meeting?

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

We expect another record year in sales and earnings.

Our two largest businesses, CCM and CIT, should continue to see high single or low double-digit growth for the remainder of the year.

We also are projecting that CBF and CFS will grow low single-digits for the remainder of the year as well.

For modeling purposes, we expect corporate expense to be approximately $52 million, which is a change from the first quarter, as it now reflects the relocation of Chris Koch's expense following his promotion to Chief Operating Officer.

D&A expense will remain at approximately $107 million.

Capital expenditures will be around $117 million, which is down $2 million from our projection in the first quarter.

Interest expense to be approximately $33 million.

Our internal forecast has been built using a tax rate of 33%.

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

As I mentioned earlier in the call, we expect to put cash -- the cash sitting on the balance sheet, plus the cash we generate this year, to work making acquisitions.

The pipeline has a few attractive opportunities.

We're hopeful that one or two of those will materialize by year end.

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

As a reminder, the Board has authorized us to repurchase up to 3 million shares.

So with that, I'd like to thank you for attending our second quarter conference call.

I look forward to reviewing third quarter results with you in September.

Crystal, you may now end the call.

This concludes today's conference call.

You may now disconnect.