Carlisle Companies Incorporated (CSL) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Patrick and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to President, CEO, Chris Koch to begin the conference. Chris?

Thank you, Patrick. Good morning and welcome to Carlisle Companies’ first quarter 2016 conference call. On the phone with me this morning are Steve Ford, our Chief Financial Officer; Kevin Zdimal, our Chief Accounting Officer; and Julia Chandler, our Treasurer. On this call, I will be discussing our overall first quarter performance and 2016 outlook and Steve will review our segment performance, balance sheet and cash flow. Before I discuss our results in more detail, I would ask that you review Slide 2 of our presentation entitled forward-looking statements and the use of non-GAAP financial measures. Those considering an investment in Carlisle should read these statements carefully, along with reviewing the financial reports we filed with the SEC before making any investment decision. These reports explain the risks associated with investing in our stock, which is traded on the New York Stock Exchange under the symbol CSL. As we announced this morning, Carlisle reported earnings per share of $1.05 in the quarter, a record first quarter and a 78% increase over Q1 2015. We are extremely pleased with the strong start to the year as our divisions continue to execute on their core strategies and well-established objectives. Our CCM team maintained its selling price discipline in the commercial roofing market, where demand continues remain favorable. CIT is capitalizing on new product development and technology advancements in their key markets, while investing in global manufacturing capacity for future growth. Our Fluid Technologies segment continues to work on its integration efforts, while positioning the business for growth. The Carlisle operating system continues to generate high value and significant savings at all our segments. We also generated strong free cash flow of $90 million and returned close to $50 million in capital to shareholders. Please turn to Slide 3 of the presentation to begin our review of our first quarter results. Net sales were up 12% in the quarter, reflecting 8.6% higher sales from acquisitions in the Fluid Technologies segment and a 3.6% organic sales growth. Foreign exchange had a minimal negative impact of 0.3%. The Fluid Technologies segment, or CFT, contributed 8.6% of sales growth this quarter reflecting the acquisition of the Finishing Brands business that occurred on April 1, 2015. Results for CFT were in line with our expectations, with sales of our standard products up mid single-digits offset by lower system sales and FX headwinds. In February, we closed on our first bolt-on acquisition in CFT, MS, a premium Swiss manufacturer of powder coatings equipment. This is an exciting addition to the CFT platform as it adds powder coating technology to our world class lineup of highly-engineered finishing solutions. Organically, the divisions were led by CCM, which achieved 9% organic sales growth. We achieved growth in all major product categories in Q1 and sales volume for commercial roofing products was higher across all regions in the U.S. The exception was the Pacific Northwest, where a wetter than normal winter impacted Q1, but should recover as the year progresses. The commercial roofing market continues to experience relative pricing discipline. With raw material cost lower than last year, pricing stability led to excellent margin performance in the quarter and CCM’s EBIT of 17.9% was nearly double its prior year results. All indications are the market conditions will remain favorable for the balance of the year. Carlisle FoodService also had strong performance of 6% sales growth this quarter and 31% EBIT growth. This is the third consecutive quarter of increased year-over-year sales growth for CFS reflecting results from the sales and distribution initiatives begun last year. CFS achieved double-digit increases in the core foodservice market through gains with our larger channel partners and national chains and further leveraged these sales gains into exceptional EBIT growth. CIT sales were up 1% in the quarter. Total sales volume was up 3% in the quarter partially offset by pricing. As we indicated in our last conference call, pricing will be impacted in the first quarter as the contractual pricing reductions at one large aerospace end-user negotiated last year were rolled out throughout their supply chain. In addition, sales growth was offset by declines in the industrial markets and comparisons this quarter were challenging as CIT achieved double-digit growth in the first quarter of last year. The expansion of CIT’s Franklin facility to build capacity for its SatCom antenna adaptor plate is on track. As a reminder, this solution facilitates in-flight Wi-Fi access via satellite for major aerospace customers. We expect to start shipping in the second half of 2016. We are very pleased that demand for this solution has exceeded original estimates. I will discuss more when I review the outlook, but we continue to expect solid growth at CIT for the balance of the year. Carlisle Brake & Friction sales declined 17% in the quarter, most of which was due to lower volume in construction and mining markets due to the continued depressed state of the commodity markets. A number of large OEMs have recently lowered their outlooks for the year and the construction, mining and ag markets they serve are expected to remain depressed in 2016. The CBS team is doing an excellent job of reducing cost, generating positive EBIT and achieving greater than 100% free cash flow conversion despite the downturn in its markets. While we are not optimistic about a recovery to markets in 2016, as noted on our last call, the financial impact to Carlisle will be limited as CBS makes up 8% of our overall revenues. Overall, we achieved significant earnings growth this quarter. EBIT was up 67% and EBIT margin increased 450 basis points to 13.9%, a record for our first quarter. Income from continuing operations was up 73%. On a per share basis, earnings were up 78%, a higher percentage driven by a reduction in shares from our ongoing share repurchase program. Free cash flow of $90 million in the quarter increased by 197% over the same period last year. This is a record result for first quarter free cash flow. Please turn to Slide 4, our sales bridge, for a recap of our sales growth this quarter. As stated earlier, our 12% net sales growth was comprised of 3.6% organic growth and 8.6% acquisition growth offset by foreign exchange of 0.3%. Lower selling prices had a negative 1.7% impact to sales primarily from lower pricing at CCM and CIT. Sales volume was up 5.3%. Turning to our margin bridge on Slide 5, EBIT margin increased 450 basis points in the quarter to 13.9%. The net impact of selling price and raw materials had a positive 210 basis point impact to our margin primarily reflecting performance in CCM. Volume was positive 70 basis points and COS was positive 110 basis points. Steve will next review our first quarter segment performance, balance sheet and cash flow. After Steve’s review, I will discuss our outlook for 2016. Steve?

Thank you, Chris. Good morning. Please turn to Slide 6 of the presentation. At CCM, sales increased 9% in the quarter reflecting higher demand in the U.S. commercial roofing market for membrane, insulation products and coating and waterproofing applications. Sales in the quarter were favorably impacted by milder winter conditions in the first quarter compared to a harsher winter last year. As Chris noted in his comments, sales volume was up in all regions of the United States, except for the Pacific Northwest. The volume increase was partially offset by lower selling prices and a favorable raw material cost environment. CCM sales in Europe were flat on a constant currency business. CCM’s EBIT grew significantly by 97% and its EBIT margin increased 800 basis points to 17.9% reflecting continued selling price discipline, lower raw material costs, higher sales volume and savings from the Carlisle operating system. Please turn to Slide 7 as we discuss CIT’s results. CIT’s net sales increase of 1% in the quarter reflected higher volume of 3% offset by lower selling price of 2%. Sales to our aerospace customers increased 2% on higher demand for in-flight entertainment and connectivity applications net of lower selling price. Lower selling price primarily represented contractual reductions negotiated last year with one large aircraft OE and subsequently rolled out throughout its supply chain. Medical sales grew 6% in the quarter from new product development. Sales to the test and measurement market increased by 16%. Sales in the industrial market, which represent less than 5% of CIT’s total sales, declined 16% in the quarter on the weakness in the construction equipment industry. CIT’s EBIT margin increased 90 basis points to 18.6%, primarily due to savings from the Carlisle Operating System and higher sales volume, partially offset by lower selling price. Sequentially, from the fourth quarter 2015, EBIT margins rose 290 basis points. CIT’s projects to expand its Franklin, Wisconsin facility for its SatCom antenna adapter plate product and completion of a new 260,000 square foot production facility in Dongguan, China remain on track. The SatCom product is expected to start shipping in the third quarter of this year. As Chris noted, response to CIT’s SatCom solution has been very favorable as demand for satellite in-flight connectivity is expected to increase significantly over the next several years. Turning to Slide 8, CFT had sales of $61.2 million in the first quarter. On a pro forma basis, CFT’s sales were leveled with the prior year, reflecting 2% net sales growth, offset by a 2% negative impact from foreign exchange fluctuations. On a constant currency basis, CFT sales of standard products, practically in the auto refinishing market, were up mid single-digits on higher volume and higher selling price realization, offset by lower system sales, primarily in Europe. CFT’s EBIT margin in the quarter of 11.3% includes 750 basis points of intangible asset amortization expense and 200 basis points of restructuring and relocation costs. In the first quarter, CFT announced the consolidation of certain foreign sales and distribution offices as well as consolidation of certain administrative functions at its Toledo, Ohio location into its new headquarters in Phoenix, Arizona and incurred $1.2 million of cost related to these activities. Please turn to Slide 9 as we review CBF’s results for the quarter. CBF sales declined 17% in the quarter reflecting a 16% organic sales decline, primarily from lower volume and a negative impact from foreign exchange of 1%. Sales to the construction market were down 23%. Sales to the mining market declined 19% and sales to the agricultural market declined 6%. Demand in the global construction and mining markets for heavy equipment declined further in the first quarter on continued weakness in commodities and slower growth rate in China. CBF’s EBIT margin declined 440 basis points to 5.1% as a result of lower sales volume, offset by actions to reduce costs through sourcing efforts, operating efficiencies and reduction of SG&A. CBF reduced non-production related costs by $1.3 million in the quarter. Turning to Slide 10, FoodService’s sales were up 6% in the quarter, the third consecutive quarter of year-over-year growth for this business. Sales for the FoodService market grew 15% reflecting higher sales to large channel partners, in part due to order fill rate improvements as well as higher sales to national chains. Net sales to the healthcare market declined 8% from equipment orders from the prior year that did not repeat. Sales to the janitorial/sanitation market grew 2%. FoodService’s EBIT margin grew 240 basis points to 11.8% on the higher sales volume and lower operating costs. Please turn to Slide 11 of the presentation as we review our balance sheet. As of March 31, we had $451 million of cash on hand, a $40 million increase from cash on hand at year end. We continue to have all $600 million of availability under our credit facility. In the first quarter, we returned $48 million to our shareholders in dividends and share repurchases. We repurchased approximately 331,000 shares in the first quarter for $28.5 million at an average price of $85.85. This brings us to a total of 1.8 million shares repurchased since we began our systematic purchase program in the first quarter of 2015. Our balance sheet remains strong. At March 31, our net debt to capital ratio was 11%. Our net debt to EBITDA ratio was 0.5x and our EBITDA to interest ratio was 19.5x. In August of this year, our $150 million senior notes are due. We currently plan to repay these notes with cash on hand. Turning to Slide 12, our free cash flow for the quarter was $90.3 million, nearly 3x the free cash flow of $30.4 million generated in the first quarter 2015. This improvement is attributable to higher earnings and lower cash used for working capital. Turning to Slide 13, our average working capital as a percentage of annualized sales for the first quarter 2016 was 20.2%, a 20 basis point decrease from the 20.4% reported for 2015. And with those remarks, I will turn the call back over to Chris.

Thanks Steve. Please turn to Slide 14 as we discuss our 2016 outlook. The record results achieved in the first quarter provides a solid foundation for what we expect to be another excellent year at Carlisle. For 2016, we expect Carlisle’s total sales growth to be in the mid single-digits. By segment, at CCM we expect the market to remain favorable with moderate growth for the remainder of 2016. We expect sales to grow in the mid to high single-digit range for the full year. While pricing pressure will continue due to the current raw material cost environment, we expect the market will remain disciplined with respect to pricing. Given the solid outlook and strong Q1 start, we expect CCM to deliver another record year. At CIT, we are expecting mid to high single-digit growth for the full year. Backlogs at both major aircraft manufacturers remain strong. Demand for in-flight entertainment connectivity also continues to be robust. Higher sales are also expected from CIT’s new product pipeline. As stated at the beginning of the call, CIT is continually reinvesting in this business to develop and deliver high value solutions for its technologically advanced end markets. At CFT, we are planning for mid single-digit growth. We expect to see continued progress on CFT’s integration efforts and growth initiatives. As a reminder, CFT incurred acquisition costs of $9.3 million in the second quarter of last year that will not repeat, resulting in a favorable comparison for the second quarter of 2016. CFT will incur additional relocation expenses as some functions are transferred from Toledo to its new Phoenix headquarters, which will be ready in the second half of this year. As we indicated on our last call, while CFT is expected to become our highest margin segment, 2016 margins will be impacted as CFT executes on its global integration and growth strategy, which includes footprint rationalization, additional personnel, the MS acquisition and vertical integration activities. At FoodService, we are very pleased with the improvements this team has made in generating increased sales and margin improvement. We expect improvements to continue with sales growth in the low to mid single-digit range and corresponding EBIT improvement. At CBF, we expect sales in 2016 will decline from 2015 in the high single-digits. The team at CBF continues to focus on sales and new product initiatives as well as operating efficiencies to offset this lower demand. Corporate expense is expected to be $61 million and D&A is expected to be $136 million. For the full year, we are planning for capital expenditures of between $90 million and $110 million. We expect free cash conversion will be greater than 100%, providing additional liquidity to pursue strategic growth opportunities and return capital to the shareholders. Interest expense is expected to be $30 million and our tax rate is projected to be 33% versus 31.7% in 2015. 2016 is off to a great start. I am extremely proud of the dedication and commitment of our 12,000 global employees that they put forth everyday to deliver these record results. With their continued efforts, we expect 2016 to be another record year for Carlisle. This concludes the formal comments on our first quarter 2016 results and the 2016 outlook. Patrick, we are now ready for questions.

Thank you, sir. [Operator Instructions] Our first question will come from Jim Giannakouros from Oppenheimer.

Hey, good morning guys. Congratulations on the great quarter.

Thanks, Jim.

Couple questions on CFT. Can you remind us what the mix is there standard products versus system sales and your original equipment versus aftermarket?

Yes, the systems vary from quarter to quarter, Jim, I would say somewhere 10% to 15%, 20% systems.

Okay. And a follow-up with Asia how did that track in the quarter there?

Asia for CFT, actually, we saw double-digit increases in our Asia business, specifically our heaviest concentration is in Japan and China.

Okay, that’s helpful. Thanks. And sorry if I missed it, but as far as your expectations for restructuring, relocation cost, added investment in sales, etcetera, is that – are they all going to be confined to 2016 or do your plans go into 2017? I guess, the question really is when are we going to start seeing that operating margin expansion that many of us have subscribed to in that segment specifically?

Yes, I think when we first bought the business we talked about it being a couple of your process to begin with. The acquisition activity, I would say not confused because it complicates it a bit, because as we acquire businesses obviously there is additional work there, but I would say, we are going to – consistent with our statement when we first bought the business, it will be a couple of years as we rationalize this footprint just our factory production for CFT.

Thank you.

Our next question is going to be from Matt McConnell from RBC Capital Markets.

Thank you. Good morning and congrats on a great quarter.

Good morning, Matt. Thank you.

Could you quantify the roofing pricing headwind? I know you mentioned there was 1, but maybe compare it to the 1.5%ish headwind you saw last quarter?

Yes, Matt, it was less than 2 and a little bit more than 1.5.

Okay. So, even the margin expansion was much greater than the price cost benefit in the quarter. So, is that just normal operating leverage on a nice volume improvement in construction materials or what else might be contributing to a margin? It looks like it’s more than just price cost.

Yes. Well, certainly volume was a big contributor and COS has been a big factor at this business as well. I think COS savings in the quarter were approaching $5 million, a little bit above $4 million. So, we had a lot of things go our way at CCM, but you are right, it’s more than just the price raw dynamic.

Okay. And Construction Materials margins usually see a fairly meaningful improvement from 1Q to 2Q just as volume increases. Is that what you would expect this year?

Yes, I think, Matt, as the year goes on, if the pricing raw ratio holds, I think we would expect to see improvement as we move through the year.

Okay. Alright, great. I will leave it at that. Thank you.

Yes. You bet.

Our next question is from Ivan Marcuse from KeyBanc Capital.

Hey, guys. In terms of raw materials in the CCM, were you able to do a bit of a pre-ride before oil started to accelerate or have you increased during March and have you seen any sort of pricing inflation starting in the second quarter in your raw materials?

Yes, the price – the raw materials, we do some buying that is set for future periods. I think we have seen fairly stable pricing in raws as we entered the first quarter and we had the negotiations with our material suppliers. So, I would say the impact has been minimal on that rise in oil.

Great. So, you haven’t seen any sort of – there has been no price increases that have come out from here, the chemical guys, etcetera, into the second quarter?

Yes. Ivan, I can’t specifically – I don’t know specifically down to each supplier, but I would say in general, we have been – it’s been a relatively little impact.

Great. And Texas and everything has been fairly well and I mentioned it’s going to be good for your replacement demand in the future. Did that have any impact in the quarter or have you seen any impact in the beginning of this quarter and how big is Texas for you?

Well, Texas is a large region for us. And I think our Texas sales were actually pretty strong in the first quarter. It’s just really the Pacific Northwest that was impacted by weather. So, I would expect sort of the strong conditions that we enjoyed in the first quarter to continue on here into the second quarter and that will cover Texas as well.

Great. And then last question, second quarter of last year was a pretty wet quarter as well. So, do you expect sort of the similar type of volume growth that you saw in the first quarter just sort of repeat into the second quarter on a year-over-year basis?

I would say – let me put it this way, I think the third quarter was a little bit weaker than we would have liked to see in the third quarter of last year and I think this year, we would expect to see some improvement.

The second quarter or third?

I am sorry, in the second quarter – we did have a strong second quarter last year. And I don’t think we will see as robust year-over-year increase on the second quarter, but we would expect to see growth.

Great, thanks.

You bet, Ivan.

Our next question will be from Kevin Hocevar, Northcoast Research.

Hey, good morning guys and congrats on a great quarter. You guys have talked about the SatCom product continuing to exceed expectations. Could you remind us maybe what – or at least what your expectations are at this point for 2016 and 2017 sales for that product? And just wondering what the competitive landscape is like for that product as well? Is it – do you have the same competitors as the rest of CIT or is it different or do you have patents that give you an advantage in this particular product line? Just wondering if you can give us some thoughts there.

Sure. Well, let’s talk about the second half of the year. I think we were – you said somewhere in the $10 million to $15 million range in the second half of this year. As the product rolls out, the reception has been very good and so we are expecting obviously that run-rate to increase as we get into ‘17. When we get into the competitive landscape, it is not all across the board the same competitors. Typically, I would say, the wire and cable manufacturers are not getting into structural products like this and CIT has done a nice job in finding this, what I would say, common adaptor plate solution market. So, we will be competing against a few different competitors there. And I think we are going to have good success, because I think it’s a universal solution that really gives the aerospace customers a lot of flexibility and they like the new supplier in CIT. So, good initiative for us.

Okay, great. And then in terms of – the winter was pretty mild winter that we had here, do you have any – do you believe that any volume was pulled forward from spring or summer and commercial roofing into kind of this quarter, which could cause the growth rates to slow or do you not think that, that’s a dynamic that’s occurring?

Yes, I don’t – I can’t quantify how much was brought forward if any was brought forward. But I would say I agree with you that the favorable winter weather, especially compared to last year allowed for more days on the roof and obviously that drives demand. Since we are expecting some good growth in the markets, I would say that a good start to the year isn’t going to hurt anyone and won’t impact the demand in the second or third or fourth quarters of this year.

Okay, great. And then can you – I guess last question, could you – looking at CBS, what’s your long-term outlook here? I mean, are you seeing any signs or do you have any thoughts that this can improve over the next – it doesn’t sound like this will be the year, but next 2 to 3 years, any thoughts that we could see some improvement over that timeframe or is this going to continue for several years kind of being at these low levels of earnings?

I think that the future has been very obviously just to look at in this market. We tend to look at the major ag, mining and construction OEs. We listen to Caterpillar and others. I would say, some people are thinking there might be recovery in ‘18. We see some of that. But I think in general, while we are not declaring a bottom, we would think that there is some stability right now at these very low commodity prices and that there is greater likelihood that there will be an increase in the commodity prices than a further decline. So we would hope to see some improvement. And I would say, CBF is not just a victim of the markets, but there are initiatives going on now to drive sales in other segments and segments that aren’t impacted by commodities as much and we would like to see those mature over the next couple of years and add to the sales growth potential for the business.

Alright, great. Thank you very much.

And you’re welcome. Thank you.

Thank you. And our next question is from Tim Wojs from RW Baird.

Hey guys, nice job.

Thank you.

Just on CCM, any sense is – are you guys able to kind of tell us what new construction look like versus re-roof in the quarter?

I don’t think we have a lot of granularity yet on the re-roof. I would say, probably it was a little bit higher given the weather and more days on the roof. I think there is some opportunity there to make prepares for the winter and come out early, so that will be my guess.

Okay. And then how do you guys feel about just internal capacity and maybe broadly just industry capacity in the CCM business, is this – if demand stays pretty good, I mean we are going to look at 2017 as the year where we might see some added capacity?

Tim, I don’t think so. We recently added a fair amount of capacity. I think we are good for the next couple of years. So I am not interested on any capacity adds, certainly on our end. Not based on where we are today.

Okay. And then just a housekeeping question, on the – in the CIT business, how much was the startup costs in the first quarter?

It was under $1 million.

Okay. And is that kind of first half, I think it was maybe $3 million or $4 million for the year?

Yes. We have a little bit more in subsequent quarters than we had in Q1, that’s correct.

Okay, great. Nice job. Thank you.

You’re welcome. Thank you.

[Operator Instructions] Your next question is from Liam Burke from Wunderlich.

Thank you. Good morning. On the CIT sector, you talked out aerospace, but you had good numbers coming out of both test and measurement and medical, what’s the outlook for those verticals both this year and do you have similar types of runways as you have in aerospace?

Yes. I think in medical, we have got a very good runway there. We are very positive on the medical segment. We think that the innovation and the, I would say complete supplier position of CIT to some of these end users it puts in a really unique position to gain shares. So we like that space. We are not highly penetrated into it and so we think there is a very significant runway in medical. Test and measurement I would say, the segment is smaller as a percent of sales for our business, less than 5% for sure. And I would say the runway there is more limited. Although we do look for those unique applications where we can apply CIT’s skill set and unique product development capabilities and if we see something that’s unique with the right customer, obviously we would pursue that.

Great. And on the Fluid Technologies, how is the new product introduction pipeline?

New product introduction pipeline is good. That’s one of the things we talked about when we acquired the business. We were pleasantly surprised that during the whole separate period, the multiple years there this team did not slowdown on new product development. Two new products that came out that just have continued to be high performers has been the electric pumps and the electrostatic guns that the team launched. And they have also launched a pro-component mixing unit, which is in its second quarter of introduction has been well received and there are more products behind that. So the team has done a really nice job of maintaining effort in product development.

Great. Thank you, Chris.

You bet.

You have one follow-up on the line from Matt McConnell, RBC.

Thank you. Could you talk about the deal in powder coating and I know it’s pretty small, but what’s the long-term strategy there and is this a foothold to get to know the market and maybe could do something bigger, just how are you thinking about the opportunities in powder coating?

Yes. Sure, Matt. Exactly right, it’s a foothold. When we bought the business, I think we articulated a few different segments we felt were essential for us to get into if we were going to be a full-line supplier of finishing products globally. And powder coatings was one that was we just view to be essential. I think you noticed Graco got into it recently with the Gama acquisition. They determined it was essential. And powder coatings, is a technology that is viable. It has its position in the market and we really need to be there. So, MS was a great opportunity to get into that segment to learn more about the business, more about the technology. The owners of MS have been in the business for 20 years. They are very systems focused. They are very new product and innovation focused. And so the next phase is really to complete their systems products with some what we would call manual boot-side products. That fills out the product suite. And then begin to take our distribution network and our contacts and the leverage of those across the MS line and penetrate the market with these new products.

Okay, great. Thanks, that helps. And could you develop a meaningful presence in powder coating organically, there are three fairly large players here and as far as I know, none of them are for sale, so would this be smaller deals or something bigger or organic?

We think that, while we would like to obviously grow through acquisition, I think we see the market similar to you with the construction of the players and who they are and their ability to be acquired. So this isn’t organic play for us. We feel very good about the organic play. We think we can have a meaningful presence in the market. And again, I would go back to why we think we can have a meaningful presence. And that is, we have some unique technology that MS has developed. We think they have great knowledge into customers and what they can do from an innovation perspective. And so we are really excited to get out there and show customers that difference and MS just hasn’t been globally penetrated as much is as they should. And so we are going to get out there and compete and we think we will win.

Great, it sounds good. Thank you.

You bet.

And at this time, there are no further questions in queue. I would now like to turn it over to management for any closing remarks.

Thanks Patrick. No closing remarks. We are now concluding the first quarter 2016 earnings call and we really thank everybody for their questions and participation. And we look forward to speaking with you on our next call. Thanks again.

Thank you. And this does conclude today’s conference call. You may now disconnect.