Carlisle Companies Incorporated (CSL) Q4 2012 Earnings Report, Transcript and Summary

Good morning. At this time, I would like to welcome everyone to the Carlisle Companies Incorporated fourth quarter earnings conference call. [Operator instructions.] I will now turn the call over to your host, Mr. David Roberts, chairman, president, and CEO of Carlisle Companies. Sir, you may begin.

Good morning, and welcome to Carlisle fourth quarter and 2012 year end conference call. On the phone with me is our CFO, Steven Ford; our chief financial officer, Kevin Zdimal; and our treasurer, Julie Chandler. On our website, you will find slides for today’s call. Those slides detail our performance in the fourth quarter and for the full year 2012. I will review our overall performance for 2012 later in the presentation, but let me start by saying we are extremely pleased and proud of our 2012 results. During the year, we established new record highs for annual sales and earnings, with sales growth of 13% and EBIT growth of 54%. This is the second year in a row we have established sales and earning records. I can’t say enough about the performance of our employees throughout 2012. Their ability to generate sales of $3.6 billion and earn $424 million earnings before interest and taxes, was nothing short of remarkable. Let’s now turn to the presentation. I encourage everyone to read slide two, titled “Forward Looking Statements.” Slide two details the risks associated with making an investment in Carlisle. I also encourage anyone who’s considering an investment in our company to also review our SEC filings. Let’s now move on to the details of the quarter. Turning to slide three, you see that our sales in the fourth quarter grew 7% to $845 million, while EBIT was up 46% as we earned $77 million. This was a new fourth quarter record for sales and earnings, despite continued weakness in our braking business. Organically, we enjoyed 4% growth, with interconnect technologies, construction materials, and transportation products all contributing to our organic growth. An additional 4% of growth is attributable to the acquisitions of Tri-Star, which we completed late in 2011, Hertalan,…

Thanks, Dave. Good morning. Please turn to slide 14 of the presentation. On November 20, we issued $350 million of 10-year senior notes at 3.75% to fund the Thermax acquisition. We currently have all $600 million of availability under our credit facility, as we repaid all of our revolver borrowings in the quarter, with generated cash flow and the remaining proceeds from our bond issue. Our balance sheet remains strong, with debt-to-capital ratio of 30%, and a net debt to EBITDA ratio of 1.2. We remain well-positioned for future growth. Turning to slide 15, our cash flow from operations for the quarter was $162 million, a $91 million improvement from the fourth quarter was $162 million, a $91 million improvement from the fourth quarter 2011. As Dave noted, we generated $116 million of free cash flow in the quarter for a conversion rate of 241%. For the year, we generated $346 million of free cash, compared to $112 million in 2011, for a conversion rate of 128%. Very strong performance, especially in light of the year over year increase in capital expenditures. Turning to slide 16, our average working capital as a percentage of sales for the quarter was 22.2%, as compared to 21.9% for the fourth quarter 2011. We remain committed to improving our management of working capital, and achieving our long term goal of 15% of sales, with a particular focus on inventory turns. And with those remarks, I’ll turn the call back over to Dave.

Thanks, Steve. Operator, would you open the floor for questions please?

Of course. [Operator instructions.] And our first question comes from Pete Lisnic with Robert W. Baird & Company. Pete Lisnic – Robert W Baird: Dave, if you can give us a little feel for 2013 in terms of your mid to high single-digits kind of growth, top line. You talked a bit about brake and friction. Just wondering what the other businesses look like in terms of either accelerate or deceleration in organic demand, as you kind of look to ’13.

The construction materials business, CIT, are off to very good starts. We’ve got some challenges in the fourth quarter with comparisons, but frankly we’re very pleased with what we’ve seen in those two businesses at the start of the year. Food service will be fine. It will grow at mid-single digits. And I think transportation products will also grow at mid-single digits. I think the challenge for us is going to be the braking business. What we’re being told now is that it should be a first two quarter issue, by our customers. I’m not ready to turn on the production levels at a level where we’re starting to build inventory, but I think we’re feeling a little better about what we’re hearing about the second half of the year in the braking business. Pete Lisnic – Robert W Baird: And the margin commentary that you gave on brake and friction with margins kind of lower than what you saw in the fourth quarter, is there a mix issue there? It looks like that [decremental] looks a little bit more severe than what we saw in the fourth quarter.

There will be a little bit of mix. Realistically, I think we’ll probably be high single digits on the margin lines for the first quarter. I would expect a little bit of pickup in production in the second quarter, and we should be bouncing around that 10% range. But we’re just cautioning everybody that we’re not quite sure what’s going to happen there. So we’re basically giving you conservative guidance on mid-single digits. Pete Lisnic – Robert W Baird: And then if I could just switch to roofing really quickly. A couple of questions there. As you put these new plants online, can you give us a feel on whether or not you’re going to see any sort of incremental types of costs in 2013, in the first half of the year? Any sort of startup costs there?

There will be a little bit, but it won’t be noticeable by you all. They’ll start up very smoothly. We started up the Seattle plant late in December. It’s up making iso board today, and frankly I think the New York plant will come up as smoothly, because that will be employees from the old plant transferred to the new plant. So we don’t really see anything that would suggest there’s going to be startup costs associated with those. Pete Lisnic – Robert W Baird: And you gave us a little color on U.S. I’m just wondering what the trends look like in Europe, and just how EPM adoption there is evolving.

It still looks very good. We’re forecasting certainly slightly above 10% growth, perhaps 15% growth in the year, in Europe. Now, it’s a small segment. But it’s growing very nicely.

And your next question comes from Matt McConnell with Citi. Matt McConnell – Citi: To follow up on the outlook question, how do you think about margins from here? I know you never say full operating margins, but construction material is at 16% for 2012. That’s the high mark. So how are you thinking about margin expansion into 2013 for construction and maybe then for the whole company as well?

We expect margins to be up slightly this year, with the exception of the drag we’ll have with the braking business. So we’re a little conservative in what we’re looking at based on not knowing what’s going to happen in braking. And keep in mind, braking really drove a significant amount of our earnings in the first quarter last year. So we’re cautious as we look at that, but the 16% that we earned in construction materials, I think that was driven by a very disciplined pricing environment, and I think that the manufacturing guys just did a wonderful job of executing in the business in the fourth quarter. Sixteen is the high water mark for us. We’re looking at 15% on an operational basis. If the volume picks up, we could get there, to 16%, but we’re looking at 15% or so. Matt McConnell – Citi: And you had great price costs there. You’re lapping some of the price increases there. So is that going to be positive into 2013 for construction materials?

We certainly think so. We’ve seen our competitors have issued some price increases. We’ve issued a price increase on TPO. And really to recover some of the raw material cost increases that we’ve seen, but we don’t see the breadth of raw material cost increases that we saw in 2011. I think they’re more manageable this year. And that increase in TPO was really to recover what we’re seeing on the raw material side. But our competitors are doing the same. Matt McConnell – Citi: And you mentioned the tough comp. Construction materials had a huge start to the year last year. So just to help frame expectations, do you expect that to be up organically in the first quarter of ’13? Or will there be a little decline on that tough comp?

You know, January, which we usually never talk about, the month that we just finished, but January was really a strong month. Now, you never know what’s going to happen in February or March, but we would expect it to be a tough comp, I guess is the best way to put it.

And your next question comes from Glenn Wortman with Sidoti & Company. Glenn Wortman – Sidoti & Company: In interconnect technologies, are you seeing any demand slowdown, just due to the issues around the Boeing 77?

No. Conversely to that, they’ve told us not to slow production at all, that they don’t expect this to be a long term issue, and they’re actually expecting to increase demand mid-year. Glenn Wortman – Sidoti & Company: And then on brake and friction, just as far as expectations for the first quarter, looking at it sequentially, do you expect revenue to be about in line with the fourth quarter? Do you expect it to be up a little bit?

I think it might be down slightly in the first quarter, revenue-wise. I think they’ll be okay on the margin side. But it really depends upon what the heck happens with production obviously, or the demand at our customers’ locations. But I wouldn’t expect it to be much different than the fourth quarter, I guess is probably the way to put it. Glenn Wortman – Sidoti & Company: And then back to interconnect technologies, just on margins, can you just talk a little bit about the outlook there, with the recent acquired, I think there’s some higher-margin products there. Just maybe kind of frame the outlook expect over the next year or two.

Don’t forget, there’s still some inventory step-up costs. We have other things that are going to occur in the first quarter that you really won’t see that margin in the first quarter from the acquisition. But certainly as we get into the year, we think we’ll be 15% or greater in CIT this year.

And your next question comes from Ivan Marcuse with KeyBanc Capital Markets. Ivan Marcuse – KeyBanc Capital Markets: If you look at your total units sold, or your volume, in construction materials in 2012, is it even, or down? How much down from your past peak? I guess ’07 or ’08 would be your strongest year. How far down would you say you are on total units?

You know, I just don’t have that information in front of me. Volume was down a little bit, but I just don’t have the information in front of me. I can’t answer that. Ivan Marcuse – KeyBanc Capital Markets: And would you still say that your total demand is kind of about 75% replacement? Right now in ’12?

Yeah, about 75% is what it was. Ivan Marcuse – KeyBanc Capital Markets: You mentioned in the Southwest, Southeast, you saw some nice new construction sales. Are you seeing backlogs increase, or bids, or anything, all over new construction? How are you looking at new construction going out in 2013/14 versus what it has been?

Maybe just a bit by region, we think that the Northeast will probably be mainly reroofing because of the storm. We think the Southeast/Southwest and the West Coast, up through Washington, will be driven by new construction. We think the Midwest will still be relatively soft. But we think the perimeters of the U.S. will be okay. Ivan Marcuse – KeyBanc Capital Markets: And then on the food service business, now that you’ve restructured a little bit, how are you looking at margins going through the year? And do you think that you could get up to the mid-teens in this level?

Yes. Ivan Marcuse – KeyBanc Capital Markets: On a full year basis for ’13? Or is that just the ultimate goal?

It’s the goal. It might be slightly lower than 15%, but I think we’re really confident that this business can be a 14-15-16% margin business. Ivan Marcuse – KeyBanc Capital Markets: On transportation, how much do you think, if demand was to be low to mid single digit, up to your expectations, and now with the Buji facility consolidated in there, where do you think you get the margins in this business, keeping the momentum going that you’ve created this past year?

I think they’ll be higher than this year. We’ve got the Buji closing. We’ve got the two mixers that are now up and running, one in Clinton and one in Springfield, which will bring some cost savings to us. There are a few other cost savings that we have. We’re looking at a good year by transportation products terms, I guess. Margins should be in that 8% range, maybe slightly higher, but not much higher than the 8-9%range.

And your next question comes from Neil Frohnapple with Northcoast Research. Neil Frohnapple – Northcoast Research: As a follow up to Peter’s question, assuming we see a recovery in brake and friction in the second half of ’13, do you think for the full year you guys could still achieve organic growth? Or do you think that the revenue declines we’ll see in the first half will preclude this from happening?

Just in braking, or the company? Neil Frohnapple – Northcoast Research: Brake and friction.

It depends upon when it recovers. I think if it recovers, and it normally recovers very quickly when it does, you could see maybe a flat year to last year. But we still have not seen signs that incoming order rate is going to start to improve. They’re telling us second half of the year, but we’re being a bit cautious about that at this point. Neil Frohnapple – Northcoast Research: And is that across the board between mining, ag, and construction? Or is there any differences between what you’re seeing with order boards, i.e. is construction going to recover a little bit sooner? What are you kind of seeing there?

I think construction will come back more quickly than what mining will. But we would expect ag to recover. We were down in the fourth quarter. I think ag would be the first we would see recover. Then construction, and then probably mining. Neil Frohnapple – Northcoast Research: And then one last one. How is the integration of the Thermax acquisition progressing? And any additional color you could provide there would be helpful, such as margin profile versus the rest of the CIT business.

Yeah, the margin profile of Thermax was actually at a higher rate than what the remainder of the business was. Now we’ll have some integration costs in the first half of the year, but we would expect that that business, with the amortization that we have, with the costs that we have in the first quarter related to the purchase of the business, that we think that margins will probably be in the low teens to maybe mid-teens.

And your next question comes from James Kawai with SunTrust Robinson Humphrey. James Kawai – SunTrust Robinson Humphrey: Relative to Thermax, have you given out the goodwill amortization run rate, so we can dial into the margin there?

I think for modeling purposes, the business after the amortization should be at about 15%. So that would suggest about $8 million or so of additional [DNA] by virtue of purchase price accounting. James Kawai – SunTrust Robinson Humphrey: And then Steve, while I have you, it looks like working capital was about a $100 million benefit to free cash flow for the year. Can you kind of walk us through the dynamics there? And also maybe prospectively working capital as we go into 2013?

Year over year, our receivables and inventory were both down. And that contributed to about half of that working capital improvement. And the balance of the improvement came from payables and some of our other prepaid type assets. We expect that momentum to continue, and we’re very focused on improving our terms, and we’re looking forward to working capital benefit to the cash conversion calculation in 2013 as well. James Kawai – SunTrust Robinson Humphrey: And on brake and friction, I think most of the OEMs, it sounds like they’re giving out maybe two to three months of lead time on orders and such. And I was just kind of curious, when do we get an indication about the second quarter? Because that seems to be the point of inflection that most people are focused on.

As of today, we have seen nothing that would suggest the second quarter is getting any stronger. And our lead times are just as you said. They’re anywhere from 8 weeks to 12 weeks, and we just haven’t seen any further decline in order rate, but we’ve seen a flattening of the order rate, and nothing to suggest that second quarter’s going to be any better than the first. James Kawai – SunTrust Robinson Humphrey: And then I just wanted to frame construction materials in Europe for a moment there. It looks like Hertalan improved sequentially from the beginning of the year, if you seasonally adjust things. And can you kind of give us a sense for what the organic growth rates are there? And also, now that you have two businesses over there, kind of the total size of that business and maybe what your plans are strategically over the next couple of years? Because it seems like that’s one of your best organic growth opportunities.

It is, but certainly we’ll not equal what happens in the U.S. Hertalan and PDT we think will grow probably 10-15% this year. I think it would be safe to probably model 10%. But still, it’s a couple hundred million dollars of $1.6 billion in revenue. So it’s still relatively small. The organic growth will come from the U.S., and we’ll see good organic growth here, driven by a nice add-on in what’s going on in Europe. While it will grow at a faster rate than the U.S., it’s still relatively small compared to the U.S. James Kawai – SunTrust Robinson Humphrey: And the profitability profile there, is there any structural difference in the margin rate there? Or is the potential kind of similar to the U.S.? Mid teens.

It’s very similar to what the U.S. is. It was slightly lower last year, but not significant. But it’s a margin profile that would be very similar to what the U.S. would be.

And your next question comes from Ajay Kejriwal with FBR.

Within brake friction, so the construction business down 41%, any sense on how much of that was customer build rate versus destocking? Did you see any inventories being used by customers, resulting in those numbers for you?

You mean are they using inventory that they’re carrying in their build rate rather than buying?

Exactly. I mean, that 41% I thought looked a little high. And then the other question is, it sounds like you expect things to come back in the second half. Is that comps? Are you kind of hearing stuff from your customers? Any color there would be helpful.

The reason I think it probably looks high to you is because we’re supplying equipment to the braking system, so the really large equipment, and that’s down more so than smaller construction equipment. So I think it will take a little while for the large construction equipment business to come back. No, we’re not seeing anything in order rates. All we’re hearing is from our customers that they expect the second half of the year to be better than the first half, but they’ve given us no indication of what that means as far as number-wise. But again, keep in mind that our products go into mainly really heavy, large pieces of equipment as compared to the smaller pieces of equipment.

And then in the quarter, you think this was more reflective of build rates? Or your customers were buying less than they were actually building?

I think it’s a combination of the both. But I think it’s really more build rates being down as them using inventory. But there’s no question they use some inventory off the floor. That’s why, as I said in my comments, we’ve held on to all of our skilled tradespeople, because normally when they start up, you have very little notice, and you’ve got to be producing parts very quickly to be able to supply their demand. So we’re making sure that we have the availability of skilled labor available when that happens.

And then in your [unintelligible] wheel business, maybe any update on the year end contract negotiations and how does that make you feel about ’13?

We feel good about ’13. Our contracts are indexed for raw materials. We think we’ll see some slow demand in outdoor power equipment, primarily because the drought last year, the channel was full of inventory, and the drought really had a depressing effect on sales in the retail channel. And we think that will roll into 2013 just as the channel gets cleared out. But other than that, we feel pretty good about the business. And I said it will probably grow at about the same rate it did this year. And I think margins will be up.

On that growth rate, good color on [unintelligible] wheel. Could you maybe talk about the top line organic growth rate for the other segments?

You know, I haven’t done that, but I’m going to mention it in my closing comments if you want to wait.

Sure. Then maybe just one more from me, on your restructuring expenses. Any cost there? What should we be expecting by way of one-timers or restructuring expenses. I know you said for the new startup plants there’s not much by way of additional cost, but food service, sounds like you’re done with consolidation. Anything else we should be thinking about?

We mentioned that at CIT and Thermax there will be some additional inventory step up in acquisition capitalization. That has about a million dollar negative impact. There will be a small additional restructuring expense at food service, nothing significant. And with the startup of the iso plants, there will be some incremental cost. But again, we’ll be able to manage through that, and that should not be significant to reported results in future periods.

You have an additional question from James Kawai with SunTrust Robinson Humphrey. James Kawai – SunTrust Robinson Humphrey: Just a follow up. We just went through the Beacon numbers. I know they’re a distributor for your construction materials business, and it looks like their organic growth was down 9% or so in the quarter. And I wouldn’t expect you to comment specifically on them, as they’re a customer, but any thoughts on what’s happening in the channel? Or is there any dynamic going on that would be helpful for us to understand the split?

Obviously I can’t comment, other than what we know about Beacon. But was that commercial? James Kawai – SunTrust Robinson Humphrey: Yeah, on the commercial side, stripping out the acquisitions.

I honestly can’t respond to that, because we actually saw organic growth in the regions that I talked about. Can’t respond to that. I honestly don’t know why their numbers would be down.

And at this time, I’m showing no other questions. Do you have any closing remarks?