Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

David Roberts – Chairman, President and CEO

Steve Ford – Chief Financial Officer

Kevin Zdimal – Chief Accounting Officer

Julia Chandler – Treasurer

Analysts

Peter Lisnic – Robert W. Baird

Deane Dray – Citigroup

Ivan Marcuse – KeyBanc Capital

Wendy Caplan – SunTrust

Ajay Kerjriwal – FBR

Carlisle Companies Inc. (CSL) Q3 2011 Earnings Call October 25, 2011 8:00 AM ET

Operator

Good morning. My name is Ashley, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Carlisle Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to our host Mr. David Roberts, Chairman, President and CEO of Carlisle Companies. Please go ahead, sir.

David Roberts

Thank you, Ashley. Good morning. And welcome to the Carlisle third quarter 2011 earnings conference call. On the phone with me are Steve Ford, our CFO; Kevin Zdimal, our Chief Accounting Officer; and Julia Chandler, our Treasurer.

We provided a presentation that details our performance in the third quarter on our website under the Investor Relations tab titled presentations. The slides will provide you with the backup data being presented today. We are prepared to get started, but let’s look at slide two before we begin. This is our forward-looking statement. We encourage you to review this slide before making any investment decisions.

Now onto to slide three. Our third quarter sales grew from $666 million in 2010 to $871 million, an increase of 31%. 15% of our growth was organic, 15% was combined with the results of the Hawk acquisition and the PDT acquisition which we completed in August 1st, slightly less than 1% of our growth can be attributed to FX. We continue to see strength in the third quarter in our Construction Materials segment which grew 25%.

Interconnect Technologies which grew 23% and our Braking business which grew organically 36%. Our Transportation Products segment grew 5% this quarter but their growth was mainly driven by price. Our FoodService segment whose markets continue to be negatively impacted by the economic downturn declined 4% in the quarter.

Company-wide EBIT grew to $82 million from $67 million or 23% growth in the quarter. Our EBIT margin percent was down 60 basis points from last year despite strong earnings in Braking and Interconnect Technologies.

The decline in margin can be attributed to a $9 million loss we reported in our Transportation Products segment, that loss was the result of severance cost and operating inefficiency. I’ll provide full color on this cost as we review the Transportation Products segment in detail.

Income net of tax was $54 million up from $47 million that we earned last year in the third quarter, earnings per share from continuing operations was $0.85.

Let’s turn to slide four and as you do you’ll find the sales bridge for the quarter which details the 31% sales increase, 6% of our growth came from price, 9% from volume, 15% from acquisitions and again, slightly less than 1% from FX.

You turn to slide five, we’ll take a look at our margin bridge for the quarter. Margin was positively impacted 7.5% through price, volume, COS savings and acquisitions. These positives were offset by 2.3% of operating losses and restructuring charges primarily a Transportation Products and 5.8% of negative raw material cost.

We’ve been able to offset approximately 80% of raw material cost increases with price and this trend continues we should be at price parity by the end of the year. As a reminder, many of our raw materials we buy are oil-based and while the intensity of raw material price increases subsided over the last two quarters, we have not seen any significant reductions in the cost of the materials that we use.

Please turn to slide six we’ll begin reviewing each business individually. Starting with Construction Materials, sales grew 25% as reroofing demand remains strong in the quarter. 21% of the growth was organic while PDT, the acquisition we made on August 1st contributed $13.4 million or 4% to our sales. Also 5% or $80 million of our growth came through price.

EBIT for Construction Materials increased 11% from $54 million in the third quarter last year to $60 million this year. The PDT acquisition contributed $2.2 million to EBIT which was a 16% EBIT margin. Raw materials were negative $27 million compared to 2010.

As you may recall price to raw material were negative in the first quarter and second quarter as well, while we’ve been moving close to the price parity throughout the year. The reported results for PDT during the third quarter excluded PDT’s profile’s business which has been classified held for sale and is reported in discontinued operations.

Slide seven details the Transportation Products segment performance in the quarter. Our sales were up 5% with selling price being up 12% and volume down 7%. The price increase is implemented throughout the year helped offset natural rubber increases of 47% and synthetic rubber increases of 66% over last year. The third and fourth quarters are traditionally lower volume quarters in this segment, reflecting the seasonality of this business.

In the third quarter, Transportation Products was $9 million due to restructuring charges, production efficiencies and lower volumes. Early in the quarter we reacted to the higher production cost by making managerial and organizational changes within the business.

Slide eight details the expenses we incurred, which include management change costs of $4 million, Jackson plant inefficiencies of $5.9 million and plant restructuring costs of $1.3 million.

The management change in plant restructuring charges we took in the third quarter are one-time costs. With these one-time costs behind us and with the productivity gains we are seeing in the Jackson plant we remain confident in realizing the savings plan when we began to consolidate the three tire plants into Jackson.

We are not planning for any additional restructuring charges and expect to see continued improvement in Jackson’s plants operating efficiencies in the fourth quarter of this year.

As you can see on slide eight, improvements are being made in tire building efficiency and scrap rates. Tire builder efficiencies improved 42% over the past quarter and scrap rates are down 60% over the second quarter scrap rate of 6%. We do expect the fourth quarter to continue to be challenging in this segment as our lowest volume occurs due to the seasonality in the fourth quarter of the year. But we will be operating more efficiently as we move into 2012.

Slide nine details the results of our integration of our Hawk acquisition to our Brake & Friction business. The results just keep getting better. In the third quarter, our sales grew 334%. When you exclude the acquisition our sales grew organically 36%. The demand for heavy duty off-road braking systems continued to be strong we do not see it weakening in the foreseeable future. The real news is the EBIT margin improvement that we’ve seen in this segment.

In 2010, the EBIT margins in our old Brake & Friction business were 16.8% and the pre-acquisition margins at Hawk were approximately 17%. In the third quarter of this year, combined business margins were 19.1% up sequentially 290 basis points from the second quarter. The CBF management team has done a great job integrating this acquisition. As a reminder, we began to anniversary our Hawk acquisition sales and profit on December 1st of this year.

Turning to slide 10, where we review our Interconnect Technologies business. Sales were up 23% with aerospace growth from legacy aircraft up 38%. Military sales declined 22% in the quarter. Legacy aircraft owners continue to install new IFE systems and we are starting to see an increase in chip sets for the 787. Speaking of the 787, Boeing has informed its suppliers to ramp up for a build schedule of 60 airplanes in 2012 and 10 a month in 2013.

EBIT performance continues to improve in this segment. EBIT margins for the quarter were 14.4%, up from 13.4% in 2010. Volume increases and COS savings continue to be a positive impact on margins. Over the next few quarters, margins should continue to improve as volumes increased in our factory.

On slide 11, we see the results for FoodService. Overall sales declined 4%. The core FoodService business was up 3% despite the fact that restaurant traffic continues to lag pre-2008 levels, but our Healthcare FoodService business was down 22% as the industry continues to be very cautious in their buying habits. We’re also starting to see additional comparative pressures in the Healthcare market.

Raw material increases early in the year and a reduction of volume in our FoodService plants continues to have a negative impact on our EBIT margin. In the third quarter margins declined from 9.9% to 7.3%. Lower volumes way on our margins in the fourth quarter as well. Effective price increase in FoodService during the quarter was 3.5%.

I’ll now turn the meeting over to Steve Ford who will take us through the balance sheet, cash flow statement and working capital slides. Steve.

Steve Ford

Thanks, Dave. Good morning. Please turn to slide 12 of the presentation. Our balance sheet remained strong with the debt-to-capital ratio of 26% and debt-to-EBITDA ratio of 1.4. Last week we replaced our $500 million credit facility with a $600 million multi-currency facility.

We currently have $464 million of availability under our new revolver, as well as $80 million of cash on hand leaving us well-positioned to continue to focus on our growth objectives.

As Dave noted, during the quarter we closed on the PDT acquisition. The purchase price was funded primarily by the cash flows generated by our businesses in the quarter.

Turning to slide 13, you can see our strong performance as we generated $90 million of free cash flow resulting in a cash conversion rate of just under 170%. We remain focused on free cash flow generation and currently expect to convert cash at 90% for the full year.

Turning to slide 14, our average working capital as a percentage of sales for the first nine months of 2011 was 21.5%. This compares 21.4% for the comparable period of the prior year.

And with those remarks, I’ll turn the call back over to Dave.

David Roberts

Thanks Steve. Ashley, we want to open it up for questions please.

Question-and-Answer Session

Operator

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

Peter Lisnic – Robert W. Baird

Good morning, everyone.

David Roberts

Hey. Good morning, Pete.

Peter Lisnic – Robert W. Baird

Dave, I guess first question on the transportation profitability, can you maybe give us a roadmap, it looks like productivity and scraps improving, give us a roadmap as to what profitability there might look like as we enter from fourth quarter into 2012 savings, restructuring, all sorts of details will be great?

David Roberts

Sure. I’ll give you some general comments and I’ll let Steve take you through some of the numbers. We think the fourth quarter will still be challenge for us, we’ve got still high price raw material that will be coming out of inventory, but we’re very pleased by what we’re seeing by the scrap rates and the productivity of the tire builders.

We’re looking for anywhere from 47% margins next year in the business and frankly, if we’re lucky we should be on higher end of that scale. I think the new management team has made nice improvements there over the last month and half.

Peter Lisnic – Robert W. Baird

Okay. And then that would assume that there are no further efficiency costs or restructuring costs, correct?

David Roberts

Yeah. I don’t see any additional restructuring that will take place. We basically got the business back to the size that it needs to be. And as we look at the tire builder productivity, we think that’s going to be in the 75% to 80% range where it is in most of our tire plants.

And frankly, the scrap rate we like to see it come down a bit but its running a much closer to where we’re doing again in all of our tire plants. So we’re getting very close to where we need to be.

Peter Lisnic – Robert W. Baird

Okay. Perfect. And then on the Construction Materials business it looks like your net price costs headwind has kind of held at 9 or 10 million bucks last few quarters at least, sorry, if I missed this. But at what point can you annualize the cost headwind and get us back to neutral here? Thanks.

David Roberts

Yes. We think third -- our fourth quarter we should be at price to cost parity. We’ve implemented another price increase actually one that we follow, one of our competitors with which should help us. We hope to be again price parity by the end of the quarter…

Peter Lisnic – Robert W. Baird

Okay.

David Roberts

… fourth quarter that is.

Peter Lisnic – Robert W. Baird

Okay. Is that across the company or just CM?

David Roberts

No. The Construction Materials, I think that we’re still going to have a bit of headwind. We had some headwind in Interconnect Technologies. We’ve had some certainly headwind in the FoodService business. It’s really tough to get price there right now. We’ve got a price increase that’s going out first of the year, we think that would help us really depending on what happens with raw. Oil was up 5% yesterday, I’m not sure that’s going to mean to us. But that continues to climb again, we could have raw material pressure again.

Peter Lisnic – Robert W. Baird

Okay. And then just two quick ones on construction as well, just the magnitude of the price increase, were there any step up charges for PDT in the quarter?

David Roberts

Price increase was 4% to 5% Steve -- step up charges in the --…

Steve Ford

In the quarter, we had about $700,000 of cost associated with the acquisition and we’re in the process now Pete of finalizing the purchase price accounting. Substantially all of the purchase price will be allocated to goodwill and intangibles, but at this point we’re still in the process of finalizing that allocation and coming up with useful lives and determining just exactly what those step-up charges are going to be.

Peter Lisnic – Robert W. Baird

Okay. That is very helpful. Thank you very much for your time.

David Roberts

Okay Pete. Thanks.

Operator

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

Deane Dray – Citigroup

Thank you. Good morning everyone.

David Roberts

Good morning, Deane.

Deane Dray – Citigroup

Hey. In construction materials at 21% organic revenue growth jumps out, just kind of take us through how much of that is coming through on either a competitive dynamics and the idea what’s the visibility over the next couple of quarters, I know it’s usually pretty limited, but what your storm damage that you think is going to be a benefit over the next couple of quarters?

David Roberts

No, Deane. We don’t see anything out there that there the weather created. Again, as you said its visibility is very limited as you go forward in re-roofing. We think we probably picked up a small bit of share but not significant. So we think that the market is probably growing at that rate. Now keep in mind, I think 5% of that was price as well so but still organic growth was very nice in the business during the quarter.

Deane Dray – Citigroup

How about the outlook for new construction and it’s not just that there’s -- we can look at the Dodge Reports in starts but is there a further penetration of the synthetic roofing as an alternative?

David Roberts

Well, we -- as we looked at new construction it was up about 5%, but again that’s on a very small base. We think we’ll probably grow at very modest rates in new construction next year and it will be probably at the benefit of TPO, is where we’ll see that growth. EPDM we think will grow much slower than what TPO does.

Deane Dray – Citigroup

Got it. And then over on PDT the decision to move the profiles business and to discontinued ops and just was this always going to be a non-core business, I know it address different markets than what Carlisle is focused on, but just kind of take us through that whole fab process?

David Roberts

Sure. When we went through the acquisition process our interest obviously was the EPDM business. We had very limited interest at the time in the profiles business. We figured we’d run it, since we couldn’t separate them during the purchase, we since have been approached by a company that would like to purchase the profiles business. We are early in those stages we hope that we get that done. But we felt that it was appropriate to moving into discontinued ops because of that.

Deane Dray – Citigroup

That certainly makes sense. And then how about the fact, it was interesting that you gave us the EBIT margin of Hawk coming in, you said that is 17% EBIT. And we can do the math on this quarter it looks like that came in 600 basis points above that a 23% EBIT. So are these -- is this all just on volume or is there have been any other operating changes that you would have made that would have enhanced the profitability of Hawk?

David Roberts

Yeah. We -- certainly volume has helped us, but we have made some changes to the operations, we announced just here two weeks ago we’re closing a small Canadian facility that we had which will help the operating margins of the business that was part of the Hawk acquisition. It’s just a matter of implementing COS across the board and every one of the plants.

You walk in the factories today and frankly they are just more efficient than they were when we bought the business and nothing against the Hawk management group because they frankly they did a nice job with the business. It’s just that we’re just slightly more efficient than they were.

Deane Dray – Citigroup

Great. And then how about for Steve it looks like you’re going to come in below your free cash flow conversion target coming in at 90% just take us through the dynamics there -- is it all working capital use?

Steve Ford

Yes. It is Deane. I mean our sales -- our organic sales are quite strong and we’re forecasting our receivables and our inventory to be up about 12% at the end of the year and that’s what’s driving a little bit of a decline in our conversion ratio.

For the most part, we are sort of maintaining DSOs at or about 53 days. So we’re not really losing anything there and we’re -- we’ve done a nice job extending our DPOs but the volume is what is pushing our working capital needs.

Deane Dray – Citigroup

I got that. Thank you.

David Roberts

You’re welcome.

Operator

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

Ivan Marcuse – KeyBanc Capital

Hey guys. Thanks for taking my question.

David Roberts

You’re welcome.

Ivan Marcuse – KeyBanc Capital

On the Transportation segment you say that’s going to continue to be challenged in the fourth quarter does that mean you continue to lose money or do you think you’ll getup to a breakeven?

David Roberts

Ivan we’re -- frankly we’re planning for a small loss in the business in the quarter. Obviously, we’re working hard not to have one but it’s our low volume quarter and it really makes it difficult to breakeven in that environment. The efficiencies continue to improve, but I would bet on a small loss.

Ivan Marcuse – KeyBanc Capital

Do you -- is the mixer up and going or are you still shipping in material?

David Roberts

No. We are still shipping in material from the other plants.

Ivan Marcuse – KeyBanc Capital

When do you expect the next that’s going to be up?

David Roberts

Well, there are two stages. There is a master mixer which we really never put into the operation and then there is the other mixer that frankly will be -- is up and running today, we’ve got some control issues with it, but it is running -- it runs better everyday basically, the one way I can say it.

Ivan Marcuse – KeyBanc Capital

Got you. And then on the brick business, do you -- is there any seasonality into the fourth quarter or do you expect volumes to sort of maintain where they are at the third quarter and would you expect profitability to -- I guess with the closure of the Canadian plant improve a little bit or stay about the same?

David Roberts

There will be a little bit of seasonality, but really it isn’t seasonality as much as our customer’s shutdown at the end of the year for the holidays. And so we loose some volume there but it’s pretty much relatively flat with what we would do this year or for the remainder of the -- or earlier part of the year, I guess. So there shouldn’t be a dramatic seasonal impact in the business is what I’m trying to say.

Ivan Marcuse – KeyBanc Capital

Thanks. Thanks for taking my questions.

David Roberts

You are welcome.

Operator

Your next question comes from the line of Wendy Caplan with SunTrust.

Wendy Caplan – SunTrust

Good morning.

David Roberts

Good morning.

Wendy Caplan – SunTrust

First, can you remind us of the mix between aerospace and defense and CIT and give us your outlook for the defense side going forward?

David Roberts

Yeah. It’s 80% commercial, not quite 20% military, we have some tested measure in there, but the vast majority of our business is commercial. Military, frankly we think is going to be challenging over next year. But despite that with the 787 and the legacy aircraft that we’re outfitting today and into next year we should still have a pretty darn good year in Interconnect.

Wendy Caplan – SunTrust

Okay. And you mentioned Boeing’s production plans for the 787 when do you expect to see, what’s the timing of that in terms of when you should first be shipping product?

David Roberts

Yeah. Wendy, we should start to see, I mean we’re starting to build today. We’ll start to see that volume pickup as we get into 2012. I think it will have a limited impact on the fourth quarter but it was feared in the -- certainly early next year is when the volumes really start to flow into their plants.

Wendy Caplan – SunTrust

Okay. And do you care to size that for us?

David Roberts

Well, I mean they are talking 60 airplanes next year and our consent is again depending on configuration $850,000 to $1 million per airplane. It really -- if they build 60 it’s just a huge opportunity for us.

Wendy Caplan – SunTrust

Sure. And finally, I know you’ve had some management changes in a couple of places but just to focus on FoodService for a minute. As you look at the strategy there, should we anticipate that all kind of three pieces of that hospital restaurant [Jackson] should all be part -- will all be part of this segment going forward or are we looking at it strategically in terms of the mix?

David Roberts

No. I think, we’re still okay with the three segments. The issue we’ve got in the Healthcare for some reason they have backed off purchasing plans in that entire industry and I’m not quite sure what they are waiting for. On top of it, we’ve seen some -- a new competitor come into the market.

Now we don’t think we’re losing share but we think we’re having some negative impact on price because of it. I think long-term its still going be a -- Healthcare will still be a good business and we’re certainly comfortable with the core FoodService in [Jackson]. So I think the mix of that business will remain the same.

Wendy Caplan – SunTrust

Okay. Thanks very much.

Operator

(Operator Instructions) Your next question comes from the line of Ajay Kerjriwal with FBR.

Ajay Kerjriwal – FBR

Thank you good morning.

David Roberts

Good morning Ajay.

Ajay Kerjriwal – FBR

So just maybe a follow-up on the efficiency question at Jackson, so it looks like you’ve had good improvements in October and I know you said fourth quarter is a low volume quarter, but just thinking or into next year, at these efficiency levels would you be making money or is there more wood to chop here?

Steve Ford

Yeah. We will be making money, okay I mean we’ve -- those efficiency levels certainly as I said earlier the margins should be 4% to 7%, when I think it will just get better as the year goes on. The issue with Jackson is frankly just taking us too long to get it up and running, what’s disappointing is we make tires and we make tires in other factories as efficiently as anybody does, we just haven’t been able to get the efficiency up in this plant and yeah we will make money in the tire business next year.

Ajay Kerjriwal – FBR

Good to hear. And then on the Hawk business, it continues to do very well, maybe just a read into your expectation for the ag, construction and mining markets going into fourth quarter and any early thoughts on 2012?

David Roberts

Yeah. The market still looks strong, in fact I watched the share of Caterpillar yesterday on CNBC and he remains very bullish, they are our largest customer in that segment and honestly everything we hear from them is that all markets look strong and will be strong in 2012.

Ajay Kerjriwal – FBR

Good. And then maybe in Construction Materials, how do you feel about the pricing raw spread in the fourth quarter looks like you had a good pricing in the third quarter and raws have come down a little bit. So maybe comment on the spread.

David Roberts

Yeah. It really depends upon what happens with oil over the next couple of weeks was up again yesterday. I’m not sure what its doing today. But if we don’t get any additional raw material price increases, we should be able to get the parity by the end of the year. And that has been our objective all along is that we continue to implement price try to catch up to raw and we should very -- be very close to that parity as I said by the end of December.

Ajay Kerjriwal – FBR

Thank you.

David Roberts

You are welcome.

Operator

At this time there are no further questions. I would now like to turn the call back over to Mr. David Roberts.

David Roberts

Thank you, Ashley. Despite profit challenge in the Transportation Products saw volumes in FoodService. Outstanding performance in Braking, Interconnect business and strong demand in our construction business leave us optimistic for the fourth quarter and 2012. Our Hawk acquisition continues to perform at high levels with double-digit growth and we also saw PDT grow at double-digit, which validates our acquisition strategy.

Organically Construction Materials, Brake & Friction and Interconnect Technologies continue to show strength, CIT had a great third quarter and now the business will only strengthen with the ramp up of the 787. The Braking business is and will continue to enjoy strong demand for products, as our customers continue to book orders for mining, construction and ag equipment worldwide.

Construction Materials has demonstrated that they can grow and grow at robust rates in a weak non-residential construction market. While it’s difficult to forecast how strong the business will be in 2012 we know see, no saw -- or signs of it softening.

Despite the challenges facing us in Transportation Products in the fourth quarter, we are seeing daily improvement initiated by the new management team that gives us the higher level of confidence going into 2012 for that business.

With this in mind, I think 2011 will end on a strong note and we should be well positioned for a strong 2012. Again, thank you for attending our third quarter conference call. Operator, you may now end the call.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Carlisle's CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts