Carlisle Companies Incorporated (CSL) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Aldus and I will be your conference operator today. At this time, I would like to welcome everyone to the Carlisle Companies, Inc. second quarter earnings conference call. All lines have been placed on-mute to prevent any background noise. After speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. At this time, I would like to turn today's call over to David Roberts, Chairman, President and CEO of Carlisle Companies. Sir you may begin.

Thank you. Good morning and welcome to Carlisle’s second quarter 2012 conference call. On the telephone with me is our CFO, Steven Ford, our Chief Accounting Officer, Kevin Zdimal and our Treasurer, Julie Chandler. On our website, you will find slides for today’s conference call. Those slides detail our performance in the second quarter. Before we start reviewing the slides let me say that we had a very good second quarter here at Carlisle. Our sales were up 13% and we generated 14.2% EBIT margins, putting us on-track to achieve our strategic goal of 50% margins by the end of 2014 assuming a growing economy. These were the highest margins we generated strictly from operations in our recent history. Let’s now turn to the presentation. As we do, please review slide two, titled Forward-Looking Statements, which details the risk involved in making an investment in Carlisle. I encourage everyone to read this statement and to refer to our SEC filings before making any investment decision. Please turn to slide three. Slide three is a summary of the total company’s performance in the second quarter. Sales were at $985 million, up 13% over 2011, a company record. Approximately 8% of our growth was organic, while 6% or $53 million came from the acquisition of PDT, Tri-Star and Hertalan that were made in late 2011 and early 2012. FX had a small negative impact on sales in the quarter. 22% of our quarterly sales came from outside the US putting us another step closer to our strategic goal of 30% of our sales coming from global markets. We gained tremendous leverage on our sales growth with EBIT margins of 64% to $140 million in the quarter. Our EBIT margins were up 440 basis points to 14.2%. And at Construction Materials, margins were…

Thanks Dave. Good morning. Please turn to slide 11 of the presentation. We currently have about $305 million of availability under our credit facility, an increase of about $65 million from our availability at the end of Q1 as we generated cash and reduced our borrowings in the quarter. Our balance sheet remains strong with the debt-to-capital ratio of 30% and a debt to EBITDA ratio of 1.5 times. We are well positioned for future growth. Turning to slide 12, our cash flow from operations for the quarter was $106 million, a $90 million improvement from Q2 2011 and as Dave noted, our free cash flow improved by $70 million over the same period. The significant improvement in cash flow resulted from higher earnings and improved working capital management. Turning to slide 13, our average working capital as a percentage of sales for the quarter was 21.8% compared to 21.7% for the second quarter of 2011. We remain committed to improving our management of working capital and achieving our long-term goal of 15% of sales. And with those remarks I will turn the call back over to Dave.

Thanks Steve. Aldus, can we open the floor for questions now please.

(Operator Instructions) Your first question comes from the line of Peter Lisnic with Robert W. Baird.

Dave, I guess first question if we look at the slowing or maybe the lower organic growth outlook that you have going from plus 10 to call plus nine. Can you give us the puts and takes where you are seeing the slowing, obviously maybe a little bit in Europe in brake and friction but just wondering if you give us kind of lay a land, of what exactly slowing and where?

You are talking about overall fleet or just Brake & Frictions?

Yeah, overall, I am sorry.

Well, construction materials, as I said, as we got, we came up a really great April. May was not, was good but wasn’t as good as what April was and then June slowed even more so. So we’re really watching that very closely. We think there will be growth in construction materials but certainly not at the rate that we had at the start of the year. So I think construction materials was slow. I think it will still grow but it will slow. The Brake & Friction business, I think we might be slightly lower in the third quarter than we were last year from our revenue side, but the fourth quarter still looks pretty good. We've got good orders in-house. So we think that might be a short-term correction of the inventory at our customers' location. The tire business, that’s a tough one to call. This is when we tick into the aftermarkets and aftermarket demand late in June looks pretty good. So while the OEs have slowed as they normally do at this period of time, I would think that we would probably see flat to slightly up growth in the tire and wheel business this quarter, being the third quarter compared to last year. Food service I think will be flat; we said along that business will be relatively flat. That market really never recovered after the downturn in 2009. We are just waiting for that to happen. And I think the aerospace business will grow probably at the rate enhancement organically and we still have the effects of the acquisition Tri-Star up until November of this year. So, I think the growth there will be very similar to what it was in the second quarter and the third quarter.

Okay. And then on the just go back on the roofing side, can you give us a little color on the acquisitions in Europe and kind of what you are seeing from a volume perspective there versus the volume trends that you are seeing in the US or North America?

Yes, the volume was actually good in Europe. It was up not as high as it was in the first quarter, but it was still up very high single digits in both of the acquisitions and we are pleased with what we are seeing there. So that’s not an issue for us, it’s just appears that we had a low here in the May and June timeframe where we normally get a lot of school work that comes out when there were regrouping schools in the summer months we saw less of that this year than we have in the past here in the US but everything else looks okay.

Okay. And any chance of the very hot weather could have had an impact on that school piece or no?

Well I think hot weather no so much weather but the drought definitely had an impact. If it’s not raining, roofs [not] leaking and people just don’t know that they need to replace them.

Okay. And then just last question, on roofing I guess the bifurcation between growth in polyiso and membrane being down seems may imply I guess may be you are gaining some share in polyiso or just can you give us some colors to why that happens?

It’s just as you said, we are getting a little bit of share that’s a product that we actually sell it under the Hunter brand and we sell it to some of our competitors and I think we have just gained share from some of the other polyiso manufactures.

Okay. Perfect, I will jump back in queue, thanks for your help.

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

Can we stay in construction, can you comment on that very healthy 6% points in price, just comment on what price you had put through whether the competition match this in the sustainability of this price increase?

Yes, I think the price quarter-to-quarter was relatively flat, what we are doing is we have price increases that flow through in the first quarter. We had a price that we are going to put through or we did put through in April. I think there was little enthusiasm for that price because the raw material is declining; still we got very little in price that went through in April. We had one scheduled for July frankly, that just did not go through. So I think that while we are on parity with raw material, I think there will be very little interest in the marketplace for price increases.

Okay and then the comment on raw, just take us to the next layer detail we saw rubber pricing has come down, energy has come down but not sure whether some of your forward purchasing had, was already at the higher prices but just comment specifically construction?

Deane, we have seen a leveling of prices granted natural rubber is down we use very little natural rubber in construction materials. It’s primarily a synthetic product and we still have some of the raw materials that we use EPDM polymers so on and so forth still add and they haven't declined. They are still at the prices they were coming out of the first quarter.

Okay and then in transportation, what was the plant consolidation charge and is that related to Jackson and what's the status on the operating efficiencies there?

No that's, its consolidation charges that we were putting together. We are going to move a little work back out of China into our Springfield and Fort Scott business, so it's power transmission as compared to the tire business.

And that was included in these operating results, correct?

Yes.

And then just last one for me on the Interconnect business, it's encouraging to see both core revenue growth outlook you expect to stay strong, meanwhile you are investing pretty significantly in this business. So just frame for us what that growth path should be, obviously it's not all the 787, but just how come and how you are investing for growth, adding sales people, investing more in R&D?

Yeah, we are adding sales people. Obviously we are just trying to cover the market better and some of those are in Europe to cover the Airbus market. We are looking at new product development. Frankly, we have underinvested in this business over the years in product development. We've got some ideas primarily focused on aerospace that we are working on. Whatever that is, it won't be for another year or two. We still expect that this market is going to be relatively strong. I would guess it to grow at the rate it has been growing at for the first half of the year and the second half of the year. The 787 has ramped up. I think it’s at six planes a month now, which is the highest rate they have been at and it's just general aerospace across the globe. What we call the Line Fit business is still doing well and new aircraft build is doing well.

Your next question comes from the line of Glenn Wortman with Sidoti & Co. Glenn Wortman - Sidoti & Co.: Just focusing on the operating margin for Construction Materials; I think that was the highest quarterly result going back to at least 2005, but just the ability to maybe hold those margins assuming from 2Q to 3Q if I recall. I think you’re protecting on some lower prices for some of your raw materials in 2Q that goes away in 3Q. So I think we might see some higher price cost there and if you could and probably first if you could comment on that please?

Glenn, I think that it really depends upon just what you’re seeing, what happens with the raw materials. Today, we’re sitting with tremendous amount of pressure with increasing raw material costs, but who knows what the next month and a half or two months holds. If we’re able to hold on to price where we are today and if we’re able to have raw materials be relatively stable, I think margins will be good in the third quarter as well. Generally third quarter is equal to or slightly better than what our first quarter or second quarter is. So I think the third quarter should be good for this business. Glenn Wortman - Sidoti & Co: Again, and maybe can you comment on the pricing environment, just assuming maybe flat volumes as you move forward because the back half of the year, let's say raw materials kind of hold steady, I mean, do you think that the pricing declines kind of backhand?

You know, Glenn, I just don’t have a good feel for that. I mean it really depends upon what's going on in the market. If volumes decline, I think you’ll see pricing become a little more difficult. If volumes remain at the level they are today, I think we’ll probably be okay. I think you’ll see probably greater pressure in TPO than you will in EPDM, but that’s purely speculation on my part. It’s tough for me to give you an idea what the pricing environment is going to look like. I just don’t have a good feel for it. Glenn Wortman - Sidoti & Co: Okay, and then just assuming your other businesses, you know the price of all has come down, are you starting to see any easing on any of your input costs in your other segments?

Well, we’ve seen a bit, but keep in mind that the price of a barrel of oil isn’t directly correlated to the price of our materials. It’s something that we watch obviously because it gives a bit of an indicator, but it really goes with a level of demand for the type of chemical that we’re buying or the products that we’re buying. As I said earlier, EPM polymers have not come off prices, carbon blacks have been remaining high, just a variety of resins continue to be at the levels they were as we came into the year. So we aren’t seeing a tremendous amount of decline in raw material costs.

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

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

I don’t have those numbers in front of me, Saul, but I mean if you think about the business, the membrane is probably half of what we sell, insulation is maybe 40% of the remainder. You know that includes polyiso and EPS insulations. So I just don’t have that information in front of me. So I can’t give it to you.

Okay, in terms of the outlook for a new non-res, I know you guys, the way the business works, as you get the request for quotes, you make proposals to contractors or for new buildings, then some of those come to pass or they don’t come to pass. How would you characterize the outlook for new non-res and its impact on your construction material business because I am sure it hasn’t been much of a factor up to now?

Now, and you are right it hasn’t been and that's exactly the activity. There is a lot of quoting activity going or that's under way today, but we see very few people willing to pull a trigger on a new project. Seemingly what we have heard in the marketplace is they are waiting for the election in November. I don’t know why, but that’s what we are hearing from the marketplace. So people do start willing to go ahead and finally pull the trigger on new construction even though they are quoting a number of projects.

Okay. What do you expect if any and let’s talk about the slide up cost, the integration cost, you know similar to couple of million dollars that you had this quarter. I know you got some new ISO plants starting up and if there is anything further planned in transportation products. What you have got teed up or virtually be aware for the second half special cost?

Yes, so there shouldn’t be a lot. The ISO plants come on next year, so what we are doing basically today is building the buildings, so there will be no start up cost until 2013 and the transportation business, you might see some minor adjustments like we had this quarter, but nothing significant.

Okay. Then finally you alluded to a higher material cost in the information technology sector, what raw material costs were in the Interconnect technology or what raw material costs were going up?

Yeah they were basically sheathing for wires, so if you think about teflon coatings, anything that goes into a coating of a piece of wire, so chemical based, rough resin based materials we saw go up.

Would you think that these are largely the, I mean the wires are made out of copper?

Yeah it was copper, but the sheathing is also a, you know the cost associated with the product, copper aluminum, a variety of different things.

So all of those things are heading lower, the chemicals, we got oil prices down. Would you expect raw material costs in this sector to sort of trend down a little bit?

Yeah if all of that holds true, yes.

Well just based on what we have seen today?

Right, yes.

So that could be a sort of plus if you will on your margins because there you are selling on kind of fixed price. They are not linked to raw material cost, you either win or loose depending on how they go.

Correct.

Okay and then finally what's the magnitude of the additional fixed cost that you are adding at, it's some sales people. I don’t know, if I retain sales people or something like that, it won’t --

It is minor, so all there is, in total we will probably end up with ten people in total and it is the cost of ten people you know at sales and engineering people.

You alluded to that, but that's not going to be really much of a factor?

No, no.

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

Real quick on the Interconnect technologies, will those, so would you expect those margins sort of continue to back to the high teens, going into the back half of the year?

Yeah, I would think so. Certainly as the – oh you said high teens?

Right; I am sorry, like the -- higher than they were this quarter?

Yeah, I think they will be higher than they were this quarter. I don't think they will be in the high teens. I think they will be in the…

16, 17….

Yeah, that's probably a good number.

And then and the organic growth rate, so you are looking, so if you are at 14% in the first half sort of to get to the 9% thing you know in the service, I guess 4 to 5 type range in the back half of the year?

Yeah, that's where are looking at now. We are looking at activity in the second quarter and what we think the third quarter is going to look like. Anything can happen, but that's what we are forecasting today, yes.

And then my last question is on the acquisition front; what's the backlog looking like and is there -- do you think there's any opportunity for the deals to be completed maybe in the back half of the year or over the next 12 months?

Certainly over the next 12 months I think that we would hope to do something. There's nothing that, you are not going to wake up tomorrow and see us in acquisition, but you know you would hope by the fourth quarter and perhaps in the first quarter next year we would add something.

And then is there any reason why the margins would be, you know back to the question on the margins for roofing, if I mean the third quarter looks a lot like the second quarter usually so there shouldn't be a big difference in profitability right?

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

And where we stand today pricing is, you are not getting price increases, but it’s not declining?

Well, there's a bit of pressure on TPO; EPDM has been okay.

(Operator Instructions) your next question comes from the line of Ajay Kejriwal with FBR.

Just a couple from me, on the growth in Europe in Brake & Friction that's surprising given all the macro, so is that more reflective of share gains for you or is that customers exporting a lot of that product, any color there would be helpful?

Yeah, Ajay really what it is, is customers that are exporting outside of Europe, they are going either into Russia or into South America and that demand appears to be holding up, I agree with you, I mean 20% growth there is pretty darn good growth in that business.

Got it. And then in roofing impressive price gains there, volumes slowing down a little bit and I know you talked about expectations for the second half but maybe just what you are seeing with your customers is that slowdown more reflective of just construction activity or is there an element of higher prices, maybe hoarding demand a little bit, are you see anything?

I don't think price has anything to do with demand. I think really what's hurt the business certainly in the second quarter has been the drought. We just haven't seen a lot of rain around and like I said earlier if there's no rain, roofs don't leak and people don't replace them.

(Operator Instructions) At this time sir, there are no further questions.

Okay, thank you. If everybody would turn to slide 15, it gives you an idea of what we’re planning for the year. As you look at this, we’re planning for the yearly sales growth to be in the mid-teens and for the year-over-year margin improvement for the remainder of they year. Corporate expense will be approximately $48 million, G&A will be approximately $105 million, interest expense will be $25 million and our planning tax rate is 33%. Our cash conversion is up a bit from what we’re forecasting last year, we think that will be 80% to 90%, which suggest the cash flow will be higher in the second half of the year. Our capital expenditure should be around $140 million that we talked about in the first quarter. In closing, many of you may recall that I said that our Brake & Friction business, that it will first to see an economic slowdown and that’s exactly what we saw in the second quarter. We anticipate third quarter in Brake & Friction will be softer than the third quarter of 2011 but the fourth quarter still shows signs of growth. While high levels of orders are in-house for the fourth quarter, we are being very cautious with our inventory bill and any employee hiring as we’re anticipating that these orders maybe reduced as we get deeper into the third quarter and our customers see inventory sitting in their lots and in their locations. Despite a slowing of revenue in Brake & Friction, we will maintain a high level of profitability with margins in the high-teens. After construction materials started the second quarter with a very strong April, we saw volumes slip in May and June as I said earlier. Talking to our customers, it seems the dry weather has negatively…

This concludes today’s conference call. You may now disconnect.