Carlisle Companies Inc (CSL) 2018 Q4 法說會逐字稿

Good afternoon.

My name is Cheryl, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Carlisle Companies Fourth Quarter 2018 Earnings Conference Call.

(Operator Instructions) Jim Giannakouros, Vice President of Investor Relations, you may begin your conference.

Thank you, Cheryl.

Good afternoon, everyone, and welcome to Carlisle's Fourth Quarter 2018 Earnings Conference Call.

We released our fourth quarter financial results after the market closed today, and you can find both our press release and earnings call slide presentation on our website at www.carlisle.com in the Investor Relations section.

Discussing the results and our updated outlook today are Chris Koch, President and CEO; and Bob Roche, our Chief Financial Officer.

Today's call will begin with Chris discussing our progress towards Vision 2025 and our plans for 2019.

Bob will discuss Carlisle's fourth quarter operating and financial performance.

Following our prepared remarks, we will open up for questions.

Now please refer to Slide 2 of our presentation, where we note that certain statements made during this call will be forward-looking, and actual results may differ materially from our expectations due to a number of risk factors.

A discussion of some of the risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Forms 10-K and 10-Q.

Those considering an investment in Carlisle should read these statements carefully, along with reviewing the reports we file with the SEC before making an investment decision.

With that, I turn the call over to Chris.

Thanks, Jim.

Good afternoon, everyone.

Please turn to Slide 3 of the presentation.

Carlisle had an excellent fourth quarter and strong finish to 2018.

We made solid progress towards our Vision 2025 goals of $8 billion in revenue, 20% operating income and 15% ROIC, which we anticipate will generate $15 in EPS, more than double the earnings achieved in 2018.

As we move into 2019, we will continue to build on the foundation we established in 2018.

And we remain focused on driving 5% organic growth with operational leverage, utilizing the Carlisle Operating System and its continuous improvement culture to drive efficiencies, building scale with synergistic acquisitions, continuing to invest in exceptional talent and deploying over $3 billion into capital expenditures, share repurchases and dividends.

In the fourth quarter, we again drove organic revenue growth in excess of our targeted goal of 5%.

We did this with sustained price leadership at CCM, capturing share in healthy aerospace markets at CIT, strengthening our market share and price position at CFT and through price recovery efforts and sustained positive momentum in the off-highway end markets at CBF.

In the fourth quarter, operating income rose 22.7%, almost 3x our revenue growth, a further indication that the restructuring efforts, pricing discipline and increased focus on productivity that we instituted over the last 2 years are paying off.

The Carlisle Operating System remains core to our culture and is an integral process for driving efficiencies throughout our businesses.

In 2018, we continue to build out our global COS team and increased our efforts to identify efficiency opportunities within our processes.

For the fourth quarter, we achieved cost savings of 1.3% of sales through COS and 1.5% for the full year, well within our goal of 1% to 2% savings annually.

With respect to building scale through synergistic acquisitions, we continue to work in active pipeline within our MedTech, aerospace, Fluid Technologies and building envelope platforms and recently closed on the acquisition of Petersen Aluminum Corporation, accelerating our expansion into the $4 billion-plus North American architectural metal roofing segment.

Metal roofing is a key component of a complete building envelope offering.

It expands Carlisle's presence with our customers, building owners and architects and enables revenue synergies and metal edging for single-ply roofing systems as well as underlayment and insulation synergies with Petersen products.

We are excited about adding Petersen's capabilities, reach and scale, and we are eager to build on Petersen's historical double-digit growth to create a market-leading platform for Carlisle.

We've identified over $5 million in synergies related to this acquisition, an increase over our previously communicated expectations of $4 million.

I'd like to take a moment to welcome the Petersen team to Carlisle and specifically acknowledge Mike Petersen and his industry knowledge and leadership, which will prove to be a tremendous asset for Carlisle as we further expand into the metal roofing markets.

Turning back to fourth quarter results.

Free cash flow in the fourth quarter exceeded $200 million, leaving us with an ending cash position of over $800 million for 2018.

We remained opportunistic and aggressive in the capital markets in the fourth quarter, repurchasing approximately $165 million of shares.

We also paid $24 million in dividends to shareholders in the fourth quarter.

For the full year, we repurchased 4.4 million shares for $460 million, a record amount for Carlisle.

We expect to exceed our Vision 2025 goal of $1 billion of share repurchases, and we continue to balance acquisitions with opportunistic share repurchases, this further reinforced by the board's repurchase authorization announced earlier this week.

Turning to Slide 4. In the fourth quarter of 2018, Carlisle set a record for revenue of $1.1 billion, a 9% increase over 2017 and our 23rd consecutive quarter of year-over-year sales growth.

We experienced solid organic growth across all businesses, including strong pricing traction at CCM, CFT and CBF.

Of special note, CIT revenue grew over 10% organically in the quarter.

Our operating income in the fourth quarter grew 23% to $115 million, driving diluted EPS of $1.49, which includes $0.17 of restructuring, facility rationalization and acquisition-related costs.

We executed well on several funds -- fronts during the quarter.

We are especially pleased with the continued price discipline of our team at CCM.

In the quarter, we delivered $16 million of positive price, while maintaining our overall industry leading share.

In CIT, operating margins expanded close to 4 percentage points in the fourth quarter, reinforcing our progress towards our goals of 20% operating margins for this business.

CFT also continued to make substantial progress in 2018, driving operating income to nearly 15% in the fourth quarter, validating our conviction with respect to the substantial profitability potential for this Fluid Technologies segment.

Let's now turn to divisional highlights, starting with CCM.

CCM revenues grew 9% year-over-year, reflecting continued strong demand in the North American nonresidential construction markets.

With roofing labor markets remaining extremely tight and above-average rainfall having an impact on roofing days, we were pleased that we saw no overall drop in underlying demand.

We continue to view the demand backdrop at CCM as very attractive across nonresidential building applications, including our new markets of metal roofing and spray polyurethane foam.

CIT's fourth quarter revenue of 11% reflects our strong and growing presence in the aerospace and defense markets and continued progress in our MedTech platform.

Within the aerospace segment, build rates of Boeing and Airbus continue to be positive.

We have gained higher content per planes as exhibited on the newer platforms, including the 737 MAX and A320Neo.

Production in these new narrow-body models is expected to increase 10% annually over the next 5 years.

In addition, we also have higher content on Airbus' A350 and Boeing's 777X.

Rounding out our major aerospace platforms, Boeing has publically stated that they will be increasing production of the 787 in 2019.

CIT's global medical technology business continues to grow and remains a focus area for both organic and inorganic growth, given attractive industry dynamics, such as aging populations and trends towards minimally invasive procedures.

We are excited about our redgroup acquisition, which strengthens our engineering and new product development relationships with medical device manufacturers.

And finally, with the recently completed startup of our medical manufacturing facility in Dongguan, China, we have further enhanced our ability to deliver an expanded product range to medical OEs.

CIT also made solid progress on fourth quarter margin expansion, increasing 390 basis points, driven primarily higher volumes, savings and efficiencies gained from COS and lower restructuring costs.

We're excited about the momentum in CIT exiting 2018, and we will look to continue to build on these positive results as we enter 2019.

At CFT, we're pleased with the progress the team made in 2018.

While driving strong organic growth during the quarter, we also exited 2018 delivering close to 15% operating margins, which were driven by solid gains in pricing, discipline around cost controls and COS implementation.

With restructuring behind us, the margin profile is well on its way to reaching our Vision 2025 goals, and the new team is in place and performing, so now we will turn our focus in 2019 to enhancing our product breadth through new products and acquisitions and expanding our global reach.

CBF continues to benefit from stable off-highway equipment demand, particularly in construction and mining.

In the fourth quarter, we completed our Tulsa to Medina facility consolidation and fully expect to see the associated savings this year.

I'd like to acknowledge the tremendous work of all of our employees in Tulsa for their support of a year of double-digit sales growth for our CBF business, while doing the heavy lifting of transferring their operations to Medina.

Bob will now provide further detail about our fourth quarter operational and financial performance and review our balance sheet and cash flow.

Bob?

Thanks, Chris.

Please turn to the revenue bridge on Slide 5 of the presentation.

As Chris mentioned, we are pleased with our overall fourth quarter revenue performance.

Organic growth was 5.3% in the quarter, driven by steady demand at CCM and CBF and strong organic growth at CIT and CFT.

This is the last quarter we'll be calling out revenue recognition impacts as we anniversary the adoption of the new accounting rules.

But the fourth quarter did amount to a 40 basis point headwind year-on-year.

Acquisitions contributed 4.3% of sales growth for the quarter, and FX was a 40 basis point headwind.

Turning to our margin bridge on Slide 6. Q4 operating margin expanded 120 basis points year-over-year.

Positive pricing and volume leverage combined for 2.3 percentage points of the growth, and COS drove a positive 130 basis point margin improvement.

Partially offsetting these were a 50 basis point headwind from acquisitions; 170 basis point headwind from rising raw material, freight and labor costs; and a 20 basis point headwind from restructuring and rationalization cost.

Now please turn to Slide 7. There we have provided an EPS bridge.

As previously stated, we reported fourth quarter diluted EPS from continuing operations of $1.49, which compares to $1.73 last year.

Higher volumes contributed $0.10, positive price added $0.21, COS added another $0.14, and our share repurchase activity added $0.07 to the quarter's earnings.

Offsetting these positives were raw material, freight and labor cost increases, which amounted to a $0.25 headwind.

And the biggest impact came from an unfavorable year-over-year comparison on the tax line, $0.51 given last year's positive direct and indirect impacts due to the Tax Cuts and Jobs Act.

Now let's turn to Slide 8 to review the fourth quarter performance by segments in more detail.

At CCM, revenues increased 9.3% with acquisitions contributing 6.6% of the growth and organic growth of 2.8%.

Echoing Chris' earlier thoughts, CCM executed extremely well on accomplishing $16 million of price realization in the quarter.

This was the culmination of 2 years of exceptional price discipline by the CCM management team.

Beginning in '16, we reversed the negative price trend we had weathered since 2012.

Nearly $34 million of price gains were achieved for the full year 2018.

This price discipline more than offset the higher raw material- and freight-related inflation of $7 million in Q4 and $43 million for the full year.

The full year $9 million net price cost headwind is right in line with what we had predicted coming into the year.

Closing out our first year with Accella, we executed our targeted $10 million of year 1 synergies.

Operating margin at CCM was 14.4% in the quarter, a 20 basis point increase over last year.

Please turn to Slide 9 to review CIT's results.

CIT capped off a solid year by growing organically almost 13% in the fourth quarter, with a partial offset of 2 percentage points, given the change in revenue recognition standards.

CIT's operating margin grew 390 basis points year-over-year to 14.4%, given higher volumes, lower restructuring costs and COS savings.

Now turning to Slide 10.

CFT's organic revenue increased almost 6% year-over-year.

General industrial markets were up double digits, particularly strong in the Americas, and overall, pricing was up 1.5% year-over-year.

This, coupled with our 2017 and '18 facility rationalization efforts, vertical integration and savings associated from COS, expanded our fourth quarter margin almost 10 points -- 10 percentage points to 14.6%.

Turning to Slide 11.

CBF's organic revenue growth of 4.9% was in line with our expectations, given support of off-highway vehicle markets, successful price implementation and share gains during the quarter.

Given our planned increases and restructuring costs related to the closure of our Tulsa, Oklahoma facility, operating income declined $5.9 million from last year's fourth quarter.

On Slide 12, we show select balance sheet metrics.

Our balance sheet remained strong as we ended the year with $804 million of cash on hand and $1 billion of availability under our revolver.

During the quarter, we opportunistically repurchased approximately $165 million of shares, bringing our total share repurchase activity for the year to $460 million.

Further, our board authorized an additional 5 million shares for repurchase earlier this week.

Turning now to Slide 13.

Our free cash flow for the quarter was $212 million compared to $105 million last year.

The increase was due to timing of customer payments and lower capital expenditures in the current-year quarter.

And with that, I will turn the call back over to Chris.

Thanks, Bob.

Please turn to Slide 14 as we discuss our 2019 outlook.

For Carlisle as a whole, we expect year-over-year growth to be in the high single-digit range.

By segment, at CCM, driven by what we view as continued strength in the North American nonresidential construction market, a solid backlog of worker contractors, tight labor markets and the addition of the Petersen acquisition, we expect revenues to grow high-single digits to low double digits in 2019.

CCM will continue to maintain price discipline, and indications that we will benefit from a more positive raw material dynamic are in place.

In CIT, after a strong 2018, we expect revenue growth in the mid-single-digit range, demonstrating continued strength in our core CIT markets of aerospace and medical.

CIT will benefit from pricing actions taken late in 2018 to offset inflation and other cost increases.

Our strong continued core growth will be somewhat muted by isolated customer dynamics in the SatCom segment, where the model of IFC service providers offering subsidies was found to be financially unsustainable for them.

This very public transition to a new model began in mid-2018, and we anticipate it lasting through 2019.

We also expect roughly $15 million in restructuring charges to be taken at CIT this year related to the consolidation of North American facilities to drive operational improvements and efficiency gains in the business.

At CFT, we expect revenue growth to continue in the mid-single-digit range, driven by solid global GDP growth, new product introductions and geographic expansion.

At CBF, with predicted stability in global off-highway markets, we anticipate low single-digit growth for the year.

Corporate expense is expected to be approximately $75 million to $80 million.

Depreciation and Amortization expense is expected to be approximately $200 million.

For the full year, we expect capital expenditures of about $110 million to $125 million, and free cash flow conversion of 100%.

Net interest expense is currently expected to be about $55 million to $60 million for the year, and our tax rate is expected to be approximately 25%.

As we enter 2019 with solid momentum and a strong financial foundation, fully cognizant of the uncertainty surrounding Brexit, the unresolved U.S.-China trade negotiations and the global political environment, we feel that despite these uncertainties, we are confident in the team's ability to achieve our strategic and financial targets across the businesses in what remains a generally positive global economic environment.

As we enter year 2 of our Vision 2025 journey, we remain committed to meeting our goals of $8 billion in sales, 20% operating margin, 15% ROIC and driving to $15 of EPS.

In closing, I'd like to thank our over 14,000 global employees who, through their dedication to Carlisle and its customers, make our success possible.

This concludes our formal comments.

Cheryl, we're now ready for questions.

(Operator Instructions) The first question comes from the line of Tim Wojs of Baird.

Just maybe in -- starting off in construction.

As you kind of look at '19, obviously, raw materials are more favorable today than they were 3 to 6 months ago.

So as we kind of think of margins and kind of price/cost in '19, how should we think of that kind of trending through the year?

Yes.

Tim, what we're looking at right now is $40 million to $50 million tailwind coming into '19.

It's what we're expecting.

And that's net of any sort of price?

Or is that just raw material?

That's net.

That's net.

Okay.

Okay.

And would that start mostly kind of March-April time frame?

Or would that -- would you start seeing that in the first quarter?

That'll be a little after Q1, especially the price carryover.

Okay.

And then when we think about just Accella, in that what you're embedding in that for 2019.

I think I'm kind of getting like a 3% to 5% organic growth range for CCM.

What's the Accella growth assumption in '19?

Tim, we're thinking we're going to grow along with the market there, and we've had that market somewhere in the mid- to high-single-digits.

It's on a smaller base.

But we think that SPF market growth continues, and that's a big part of that.

Okay.

Okay.

And then just the last one.

So free cash flow, I think you said, in line with earnings kind of 100%.

But I think D&A is $200 million, and CapEx is may be $120 million at the midpoint.

So there's kind of an $80 million gap.

Is that all working capital?

Or what's the variance there?

I thought it'd be a little better.

Yes, I know.

We expect it to be a bit over, but we're looking at streamlining working capital and the things going on at CIT involves inventory and then what we're doing with Petersen.

So I would expect it to be a little bit than that, maybe a little conservative on our guide, but it will be at least 100%.

Your next question comes from the line of Neil Frohnapple of Buckingham.

Just first, could you guys provide some more color on how you're thinking about capital deployment this year?

I mean, you bought back larger than expected amount of stock in 2018.

The board just authorized, as you said, an additional 5 million shares for repurchase.

Do you plan to potentially buy back a similar amount in 2019 as you did versus '18?

And then just how you're thinking about M&A after the Petersen deal?

Chris, I know, you called out some different verticals.

But just curious if multiples have come down at all over the last few months?

We've -- yes, Neil, I think, you'll continue us -- to see us be opportunistic on the share repurchases.

We're going to balance it, obviously.

We've talked about -- Bob and I have talked about the balance between acquisitions and share repurchases.

I would imagine, obviously, with the authorization, we'll continue to buy shares back, provided the value is still there.

But the pipeline is pretty robust for acquisitions, but the valuations are still high.

So we'll continue to be disciplined in our approach.

We want to make sure again that we have acquisitions that have good organic growth that we can leverage that we can publish synergies on that and we can drive to the -- to exceed the hurdle rates we've set for ourselves.

Bob, do you want to add anything to that?

No.

Chris, I agree.

We're going to continue to be disciplined as we always are and balance between the -- when we have acquisitions, what we see coming and then the repurchases.

And we're not going to sit on a lot of cash.

We're going to deploy it appropriately as we see fit.

Okay.

And what was the full year restructuring number for 2018 relative to the $23 million to $27 million you expect for 2019?

'18, we ended up a little over $30 million.

Okay.

And I think you previously talked about $15 million of restructuring costs for '19.

I think that $30 million might have been below what you were previously looking for.

So curious, where the incremental spend is for '19?

Or have just some of the costs got pushed out for this year?

No.

We expect it around $15 million to $20 million.

We're going to end up, I'm going to say, in the middle of our range is $25 million.

Some of that's Petersen, because obviously, when we were talking about '19 a quarter ago, we didn't know we're going to have the Petersen step-up.

So some of that's the Petersen's step-up, and then you have a little bit of other things around.

But largely, the $15 million plus Petersen gets you to over $20 million.

Okay.

And then just one final one on restructuring.

So within Brake & Friction, there's a large implied step-down in restructuring costs in 2019.

Can you provide the year-over-year tailwind to operating income from both the lower restructuring costs and the savings, excluding any sort of positive impact from changes in volume this year, just so we can get a sense of the starting point for 2019, given the big restructuring that is basically behind us now?

Yes.

I mean, we had almost $20 million of restructuring in 2018.

And that's going to $2 million restructuring.

So the tailwind just from restructuring is $18 million.

And then we'll have -- we're expecting $12 million of savings in '19 related to the restructuring we had last year.

Your next question comes from the line of Charley Brady of SunTrust Robinson Humphrey.

This is actually Patrick Wu standing in for Charley.

And just looking into 2019 for your metal roofing business that you guys have now, what -- I guess, what is your expectations for growth there for 2019 in metal roofing?

And how does the metal roofing margin look like relative to the legacy CCM margin, I guess, pre-Accella?

First of all, on the growth, we would like to see Petersen continue their recent double-digit growth.

I think that's definitely higher than the metal roofing average, but Petersen has done an excellent job with new products and also geographic expansion and share gains.

So we'd like to see that continue.

With respect to the pre-Accella margins at CCM, metal roofing -- the Petersen metal roofing acquisition would be below that, but we're anticipating, with our actions around COS, with the synergies that we have and with the combination of the other metal acquisitions that we've built around volume and purchasing and that we would be aspirational to give back to the traditional CCM averages.

Okay.

I guess, just switching with the CCM margins, and we already touched upon Accella, can you just provide an update on how the Accella margin looked like in the quarter?

And sort of how you expect that to progress in 2019?

Yes.

I mean overall, we're fully combining Accella in the CCM.

So as that combines in the factories, purchasing gets mixed together.

We're -- we don't have a great view.

We are tracking the synergies, we're keeping an eye on it and making sure we're doing what we said we'd do.

And nothing's changed from the last outlook we gave where we believe we'd end up in ending next year at high-single digits.

Your next question comes from the line of Garik Shmois of Longbow Research.

Just first question is just on CCM.

So legacy volumes, if you back out the pricing comments that you made, looks like demand may be flat to slightly up in the quarter.

So just wondering if my math is correct.

And if true, what drove the deceleration?

2Q was a bit higher than that, 3Q I think was up low-single digits.

Was it all weather?

Or is there something else going on or were you trading volume for just getting price increases through?

So I guess that's my first question.

Yes.

Garik, as you mentioned it, you're correct on your assumptions with volume there.

And we -- I think, we've been pretty clear for many quarters about how we were going to say with our price discipline, and there were certain areas where our pricing discipline caused to walk away from some jobs that would would've added volume but wouldn't have done anything for profitability.

Secondly, I think you're right about the weather days, as we mentioned it in my comments that we still suffer from some very wet weather.

And that was days on the roof, and as we pushed to the end of the year, losing any of those days, you obviously can't make them up in the quarter.

So I think a combination of that, and when we look at -- for a comparison, when we look at our industry data, we were right in line with where the industry was.

So no loss in market share.

Okay.

And then just...

Only price gains.

Okay.

And I think just looking at your outlook for 2019, in CCM, just what are you seeing in the market that's giving you confidence that it comes back up to mid-single digits?

Yes, it's really, again, our gains versus the competition, we think, in certain areas, specifically, in PVC.

EPDM, we still see some outlook there that's positive.

We still think the market has some room to grow.

We've got new products coming out, I think, Bob mentioned that, that we have new products.

So we're fairly optimistic with the underlying demand and then with our own actions where we can gain share.

Okay.

And just my last question is just on the improvement in the CIT margins in the fourth quarter.

If you could provide a little bit more color on what drove that?

And if you think you can get up to mid- to high teen margins in CIT, just given some of the tailwinds into 2019?

Yes.

I mean, I don't think we'll get the high teens.

I've been talking for a while that we'd get 100 basis points a year.

So -- and we're still on track for that.

There was no magic bullet that happened.

I think it was volume coming through, good mix and overall, the restructuring pieces that we've done over the last year coming through.

Your next question comes from the line of Bryan Blair of Oppenheimer.

Just wanted to circle back to CCM volume a little bit more.

In terms of weather impact, could you parse that out for the fourth quarter?

Yes.

We're -- I mean, we're not going to get into specific days on the roof.

I think that'd be very hard to do.

I can talk to you a little bit about where the weather was.

If you look at the upper Midwest, if you had a map and you looked at that, I mean obviously, the upper Midwest and then I'd say the mid-Atlantic states were pretty heavily hit for us, and obviously, we've got a lot of market share in the Northeast.

And then previously to that in the third quarter, there was still some carryover from the heavy rains that we saw in the Texas area, and Texas has been a pretty strong growth market for us.

So in terms of actual days, I don't have a number for you.

We could probably follow up with you and get you a ballpark, but we don't have one right now.

Okay.

That's fair.

And then obviously, we had some challenging weather in the first quarter as well.

Is it fair to assume that's the pushback to project activity, assuming that the labor shortage does not get in the way, will benefit your second and third quarter, the seasonally stronger periods?

Yes.

I think the big thing again is how much incremental labor can we get.

If the days are there, we deftly have the pricing backlogs.

The ones that are delayed by whether have to be done.

These are not projects that are on a blackboard, they're projects that need to be completed.

So one would think that there'll be every effort by the contractors to clear that backlog as we move into Q2.

And obviously, first quarter for us is fairly light, it's highly impacted by weather.

But as we move into the warmer months, and our bigger volume months are quarters of 2 and 3, yes, I think we would expect to see people trying to make that up.

There are no further questions at this time.

I will turn the call over to the presenters for closing remarks.

Well, Cheryl, thanks very much.

Thanks, everyone, for being on the call today.

We appreciate that.

And we look forward to talking to everyone after we release our Q1 results later this year.

Thank you, Cheryl.

This concludes today's conference call.

You may now disconnect.