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Carlisle Companies Incorporated (NYSE:CSL)

Q4 2011 Earnings Conference Call

February 2, 2012 8:00 AM ET

Executives

Dave Roberts – Chairman, President and CEO

Steven Ford – Vice President and Chief Financial Officer

Analysts

Peter Lisnic – Robert W. Baird

Deane Dray – Citi Investments

Saul Ludwig – Northcoast Research

Ivan Marcuse – KeyBanc Capital Markets

Ajay Kejriwal – FBR Capital

Operator

Good morning. My name is Donna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Carlisle’s fourth 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, Mr. Dave Roberts. You may begin your conference, sir.

Dave Roberts

Thank you. Good morning, and welcome to Carlisle’s 2011 fourth quarter and year-end conference call. On the call with me is our CFO, Steven Ford; our Chief Accounting Officer, Kevin Zdimal; and our Treasurer, Julie Chandler [ph]. On the website, you will find a slide deck that details our performance in the fourth quarter and for the full year. During this call, I’ll provide you additional color on the slides. But before I start reviewing the slides, let me just say that we consider 2011 as a very good year, both operationally and strategically.

In 2011, our sales were a record $3.225 billion. 2011 was also a record earnings year when the gain from the 2000 sale of Icapel [ph] is excluded from our 2007 earnings. 2011 earnings from continuing operations were also an all-time at $182 million.

Our sales and earnings came in a year where daily news reports constrain the economy brought uncertainty in all of our markets where raw material inflation was out of control during the first three quarters of the year where new non-residential construction continued to suffer its worse economic downturn since the Great Depression and where restaurants for the third year in a row saw store traffic lower than it was in 2007. Top that with the startup issues we had in our new tire factory in Jackson, Tennessee. I think most of you will agree our overall performance was very good in 2011. And 2011 performance is just setting the stage for a very good 2012.

Let’s turn to the slides that will provide with a background data for today’s conference call. As we get prepared to get started, please review slide two titled Forward-Looking Statements to help you understand the risks of investing in our company. After reviewing that, let’s turn to slide three.

The fourth quarter review begins on slide three. And our fourth quarter sales were up 26% to $790 million. 13% of our growth was organic, driven by strong demand for our braking, construction materials, and interconnect technologies products. 13% or $18 million of our growth came from the combined sales of the Hawk acquisition that was completed in December of 2010, the PDT acquisition completed in August of 2011, and the Tri-Star acquisition, which we completed in December of last year.

EBITDA was $53 million compared to $27 million in 2010, an increase of 97%. EBIT margin in the fourth quarter was 6.7%, positively impacted by selling price and raw material parity within construction materials and higher margin performance in CBS and CIT. Our gains in margin were offset by $4.2 million of one-time acquisition costs and lower volume in the food service business.

Slide four details the components of our revenue growth. Our growth by segment is detailed in this center of the graph. As can be seen, Interconnect Technologies enjoyed 20% growth, Construction Materials was up 18%, Brake & Friction 15%, and Transportation Products was up 5%. Sales growth in FoodService continued to be a challenge as its sales declined 5% in the quarter. We have not seen any economic recovery in the food service marketplace in 2011, but the most recent NRA Index has been above 100 for the past five months, and that should bode well for 2012.

As we turn to slide five, you will see our margin dollars growing 97% from $27 million to $53 million. Detailed in the bridge for the fourth quarter, you will see that net charges, which are the difference between the acquisition cost to purchase Hawk in 2010 and the cost to purchase PDT and Tri-Star in 2011 was a 1.3% gain to margin. EBIT generation from these acquisitions added 1.2%, volume represented 0.6%, and COS savings another 0.4%. Pricing net of raw materials was negative 1.2%, and the vast majority of that raw material variance came in Transportation products with smaller amounts in CIT and FoodService.

Please turn to slide six. We’ll begin reviewing each of the businesses individually. The first segment slide provides color on the performance of Construction Materials. The fourth quarter was a superb quarter in this segment. We reached price parity with raw material in the fourth quarter, allowing us to leverage our sales for the first time in 2011. With sales growing 23%, our EBIT grew 32%. Our leverage would have been even greater had it not been for the $2.1 million in step-up charge for the inventory from the purchase of PDT earlier in the year.

Warm weather across the country in the fourth quarter extended the roofing season, which was reflected in our sales. The vast majority of our sales growth was organic, with PDT contributing 5% overall in the growth – of the growth in the quarter. Another bright spot in Construction Materials was that PDT has grown 24% since we acquired the company in August. The EPDM market is growing in Northern Europe despite the soft economic conditions on the continent.

Turn to slide seven and we’ll take a look at Transportation Products, which grew 5%, but that growth was all price. Volume was actually down in the quarter as sales in outdoor power equipment and drive belts was lower than they had been during the fourth quarter of 2010. Outdoor power equipment continues to suffer from an anemic residential housing market.

Fourth quarter EBIT was a loss of $4 million, as we sold inventory containing higher priced natural and synthetic rubber, which was purchased earlier in the year, plus lower volumes in our factories as the outdoor power equipment does struggle to growth. The good news coming on our Transportation Products is related to our Jackson, Tennessee plant where productivity continues to climb and our scrap rates are dropping like a rock.

Our fourth quarter scrap rates were less than 2% and our January 2012 scrap rate was 0.7%, all while our operating efficiency reached 74% in the fourth quarter. For comparison purposes, in the second quarter of 2011, our scrap rate was in excess of 6% and operating efficiency approximately 50%. Our current levels of productivity are now on par with the outputs in our other tire manufacturing facilities. These improvements will pay dividends in way of higher earnings in 2012.

Turn to slide eight and we’ll review Brake & Friction. Brake & Friction continued to operate at a high level in the fourth quarter. The information contained on this slide reflects the value we got from Hawk during 2011. As a reminder, December 1 was the anniversary date of the Hawk acquisition. Fourth quarter sales increased 126% to $116.2 million from $51.4 million in 2010.

Organic sales grew – growth was 15%, reflecting continued global demand for construction and mining equipment. EBIT for Brake & Friction was $15.4 million compared to a loss of $10.7 million during the prior year. The loss last year was driven by the acquisition cost incurred while purchasing Hawk. Hawk contributed $11.4 million of the EBIT in the fourth quarter. EBIT at CBF in the fourth quarter was also positively impacted by higher organic sales volume and partially offset by $1.7 million in charges for additional warranty expense and other related integration expenses, mainly severance costs.

Turn to slide nine and we’ll take a look at Interconnect Technologies, which was another shining star in the fourth quarter. Sales were up 32%, with organic growth being 20% and the acquisition of Tri-Star contributing the other 12% of growth. As a reminder, we purchased Tri-Star in December 2, so we had less than one month of the results in the fourth quarter of last year.

The aerospace retrofits business continues to be a strong driver of growth along with the ramp-up of the 787 production. EBIT increased 17% in the quarter to $10.4 million, keeping EBIT from growing at a higher rate where the integration costs of $2.1 million, which are one-time costs related to the acquisition of Tri-Star. The integration of Tri-Star will follow the same process that we use while integrating Hawk.

We began the COS blitz shortly after completing the Hawk deal, and we are following the same price process with the Tri-Star US plants, followed a month later with a similar blitz in the Tri-Star Swiss plant. We hope to gain the same efficiencies at Tri-Star that we achieved at Hawk the 12 months following the acquisition. Tri-Star should generate margins in the high-teens and their sales should be in excess of $100 million in 2012.

Please turn to slide 10 and we’ll review our FoodService business. FoodService sales continue to lag the economic recovery we have seen in three of our other five businesses. The restaurant industry continues to suffer from slow store traffic and a drought of new restaurants being built. Consequently, our sales were down 5% in the fourth quarter. This decline included a 2% realization of selling price.

Demand is down in both FoodService and health care. Our EBIT performance was a loss of $2.1 million, with the vast majority of that loss coming from severance charges, as we made changes to the FoodService management team and business structure. In the quarter, we changed many in the top management group at FoodService hoping to bring new ideas to the business. We also closed our Oklahoma City distribution center to lean out our operations and eventually reduce inventory required to support the business without impacting customer deliveries.

Let’s turn to 2011 and we’ll basically summarize the year of 2011. Our net sales grew 28%, driven by strong demand in Construction Materials, Brake & Friction, and Interconnect Technologies. Organic growth of 14% was superb in a year in which the media questioned out of the economy most of the year. The acquisitions of Hawk, PDT, and Tri-Star added $340 million or 13% to our annual sales.

EBIT margin of 8.5% is 70 basis points higher than 2010 despite having underperforming Transportation Products and FoodService business. I think this performance shows that the strategic steps we have taken over the past three years to grow our high margin businesses are starting to pay dividends. As we improve both FoodService and Transportation Products, our margin improvement will be pushing closer to our long-term goal of 15%. Our effective tax rate for the full year was 28.4%, down from 30.5% in 2010, and EPS was up 37% to $2.88 a share.

Slides 12 and 13 provide you with sales and margin bridge for the year, and I think they are self-explanatory. If you have any questions on the data contained on these slides, we’ll gladly answer those for you in the question-and-answer period that immediately follows our remarks. I’ll now turn the meeting over to Steve, who will take us through our balance sheet, cash flow statement, and working capital slides. Steve?

Steven Ford

Thanks, Dave. Good morning. Please turn to slide 14 of the presentation. As Dave noted, during the fourth quarter, we closed on the Tri-Star acquisition. The purchase price was funded by borrowing under our new credit facility. We currently have about $265 million of remaining availability under that facility. Our balance sheet following the acquisition remains strong with a debt-to-capital ratio of 34% and debt-to-EBITDA ratio of 2.

Turning to slide 15, our cash flow from operations for the year was $191.2 million compared to $107.4 million last year, a 78% increase. Our free cash flow increased from $42.8 million last year to $111.6 million for 2011, a 161% improvement.

Turning to slide 16, our average working capital as a percentage of sales for 2011 was 21.9% compared to 22.0% for 2010. 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’ll turn the call back over to Dave.

Dave Roberts

Thanks, Steve. Before we open the phone lines for questions concerning 2011, let’s turn to slide 18. It will give us some idea of what we’re planning for, for 2012. I’m sure you’re going to have questions on 2012 during the question-and-answer period. I think many of these would be answered by this slide.

Our performance in 2011 combined with the start we’ve seen in January, we are very optimistic about 2012. While one month doesn’t make a year, we were off to one of the strongest starts in company history. And if raw material prices don’t begin to escalate like it did in 2011, if non-residential construction activity continues to improve as we’ve seen over the last few months, if the aerospace industry delivers the number of aircrafts forecast for 2012, and if construction and mining equipment customers have the year they are forecasting, and if the Transportation Products continues to improve their operations and we make the necessary improvements to FoodService, 2012 will be another record year for sales and earnings.

We think sales will be up approximately 10% in the year. And with the improvements we’ve made at Transportation Products and the changes we’ll be making early in FoodService and the volume increases that we’ll see in Construction Materials, Brake & Friction, and Interconnect Technologies, we should see a corresponding increase in our EBIT margins.

We will increase our capital spending in 2012 to support the organic growth of Construction Materials, Brake & Friction, and Interconnect Technologies. We are expanding our brake plan in Italy. We are completing the expansion of our St. Augustine Interconnect Technologies plant to support the ramp-up of the 787. We will be building two new polyiso plants this year. One new plant will be located in the Seattle area and the second plant will be a replacement facility for our Kingston, New York factory. And we will also be building a new brake plant in India that serves our customers in Asia. Growth in each of these businesses is dictating the need for new manufacturing space.

The remainder of slide 18 gives you an indication of our budget in the following categories. Corporate expenses should be $44 million. Depreciation and amortization will be $107 million. Interest expense should be $24 million. Our tax rate is planned at 33%. And our cash conversion rate will be 75% due to the higher capital spending that will occur in 2012.

With that summary, let’s go ahead and open the phone lines for questions. Donna, if you could do that, 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.

Dave Roberts

Good morning, Pete.

Peter Lisnic – Robert W. Baird

I guess first question, Dave, if I could, the outlook for mid-single digit growth for ’12, can you maybe give us how the moving parts work there by segment? I’m guessing stronger growth in Interconnect and maybe Brake & Friction and then the start-off at Food?

Dave Roberts

Yes, exactly. If you look at certainly the Brake & Friction business, we think it will be very high-single digits, maybe low-double digits. Interconnect I think will be double digits, probably mid-teens growth with the ramp-up of the 787. And now this is organic growth. Obviously, you throw in the acquisition of Tri-Star, it could be up 45% or 50% with that addition. And within Construction Materials, we can never predict what’s going to happen there. So we’re budgeting a high-single digit growth area – growth in the business. We’re really starting to see a very active new construction quoting market. And it looks as though non-residential is starting to turn a bit. And if that starts to turn, Pete, we could actually be up higher than the single-digit that we have forecast.

Peter Lisnic – Robert W. Baird

Okay. All right. And –

Dave Roberts

And FoodService is going to – I think will continue to be in the zero growth or flat growth in that area. And I think Transportation will be in the 3% to 4% to 5% growth range.

Peter Lisnic – Robert W. Baird

Okay. Great. That is perfect. And then if I just look at the Interconnect business, can you maybe give us a sense as to what the military headwind is that you are facing there? I think it was down 30 in the fourth quarter –

Dave Roberts

Yes. But actually we were down about 15% this year in military. Now it’s a small component of our total sales. Our people really think it’s going to be flat next year. And what they are looking at is – many of the projects that we’re on or the equipment that we’re on we think will continue at a lower rate at that 15% decline that we’ve seen, but we think it will be flat next year.

Peter Lisnic – Robert W. Baird

Okay. And then the fourth quarter for Brake & Friction, if I just look at the op margin sequentially, revenue down 10 and your EBIT number was down about the same. Just wondering if there is some adverse mix in fourth quarter versus third to kind of push that margin down to where it was.

Dave Roberts

Yes. What happened – the margin was extremely high first of all. But if you look at the fourth quarter, I think there is a little more seasonality to this business and perhaps we had anticipated the – most of the customers are customers closed for the holiday period just before Christmas through New Year. And so consequently, they are not taking as much in volume. We had some cost that flow through the margin line related to a Canadian operation that we closed that was part of the Hawk acquisition. We had some people that we asked to stay with us for a year, and they got severance charges – or severance payment that at the end of the year. They are now gone. I think all the charges that we have related to Hawk are now behind us. And I think going forward, that margin – the margin should jump right back up to where it as.

Peter Lisnic – Robert W. Baird

Okay. Perfect. I will jump back in queue. Thank you.

Dave Roberts

Okay.

Operator

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

Deane Dray – Citi Investments

Thank you. Good morning, everyone.

Dave Roberts

Hey, good morning, Deane.

Deane Dray – Citi Investments

Before – I definitely want to cover the outlook for 2012, but before we close the books on 2011, I just want to step through a couple of the charges. And just to make sure I’m clear – you're including all of these charges in your operating results, right?

Dave Roberts

Yes, we are, Deane.

Deane Dray – Citi Investments

Okay. So that’s – it's interesting because you see some companies just very quickly exclude inventory step-ups and some of these acquisition charges. So, kudos to you to include all these. The one I would like a little more explanation on is on the Brake side, the additional warranty expense. Is this a legacy issue, something you inherited or is this something more recent?

Dave Roberts

Yes. It’s probably a combination of all that. We had – the operation that we have in Pontypool, Wales, they are effectively manufacturing brake boosters and master cylinders. And we had a vendor that supplied us with some master cylinders that have porosity in the castings. Some of those got out into the marketplace. We’re replacing those. And to ensure that we were adequately covered, we went ahead and took a charge for that problem we have with the castings primarily. And it’s a – Deane, it’s one of those one-time – seriously, is one of those one-time charges that frankly we don’t see reoccurring.

Deane Dray – Citi Investments

Good. And that was above what you’d – a customary reserve you would have had for warranty. Is that right?

Dave Roberts

Yes, that’s correct.

Deane Dray – Citi Investments

Okay. And then I know it’s in it, but Steve, could you take us through what was the – tax came in lower versus expectations in the fourth quarter. There’s some – you called out some foreign tax credit. What were the dynamics that brought you in at a lower tax rate?

Dave Roberts

Deane, it really related primarily to a restructuring that we commenced in the third quarter of our European operations. It was a fairly complicated transaction, but that restructuring resulted in a dividend that freed up some excess foreign tax credits that were previously generated by the Hawk business that were sort of an unutilized asset in Hawk’s hands, but we were able to free those assets up and they benefited us here in the fourth quarter.

Deane Dray – Citi Investments

Okay. That’s a real good explanation. And then over on the roofing business, I mean, organic revenue growth that was at 18%, could you just kind of take us through the business mix for the quarter? It came in nice. It looks like you got the raw materials issue, you got pricing, but could you take us through what was remarkable in the mix that drove the upside?

Dave Roberts

Yes. I think with not so much the mix, Deane, but just the fact that we had such a warm winter or fourth quarter that the roofers were still on roofs and doing a lot of re-roofing, it’s probably – and I didn’t really look back. It’s probably – if it’s not one of our strongest fourth quarter, it’s probably one of the fourth quarters that we’ve had in Construction Materials. And that trend continues if the weather continues to be warm.

Deane Dray – Citi Investments

Yes. A year ago, we also had a pretty mild December too. So maybe that’s the new trend. But either way, just the fourth quarter operationally was a lot stronger because you did include all these charges and we’re just noting that. And then back of the envelope, Dave, on your organic revenue growth at mid-single digits at the outset seems the math doesn’t work for us because –

Dave Roberts

Deane, we’re trying to be somewhat I guess you’d say cautiously optimistic. I think the year could be better than that. It really depends upon, I think, Construction Materials and what happens there. If I had better visibility in Construction Materials, I think we would be slightly more optimistic. It’s just that you never know what’s going to happen with the re-roofing market. It continues to be strong. It’s just a question of what really happens to it over the entire year. But from what we see today, we could certainly be higher than that.

Deane Dray – Citi Investments

Yes. We can see that and – but our math can get you into – back into low-double digits on a core revenue growth if we see some of these trend lines continue and particularly in Brake. So – and this one, you do have a little bit more visibility in terms of what the OEs are telling you in terms of production. So based upon that, do you think you can do something a bit higher than you thought, high-single digit, low-double digit? You’ve been closer – above 20% in multiple quarters. So –

Dave Roberts

Yes, but – I think the – that ramp-up that was occurring, I think that was slow a bit. If I look at Caterpillar, their forecasts are very optimistic for the year. If those forecasts materialize, then I think it could be higher than what it is. Again, we frankly budget conservatively. So we don’t allow expenses to get out of control. But we’re certainly well-equipped to be able to handle any increase above what we’re planning.

Deane Dray – Citi Investments

Great. That’s really helpful. Thank you.

Dave Roberts

Okay.

Operator

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

Saul Ludwig – Northcoast Research

Hi, good morning, everybody.

Dave Roberts

Good morning, Saul.

Saul Ludwig – Northcoast Research

In the Construction Materials, what was the split between volume and price as part of your revenue growth?

Dave Roberts

Do you have it with you?

Steven Ford

Yes, it was about half-and-half. So –

Saul Ludwig – Northcoast Research

Could you review for us the last price increase that went into effect, when did that take place and the magnitude of it? And what’s on the docket for this year?

Dave Roberts

Well, the best way I can tell you is we had seven price increases in 2011, the last one occurring – I think it was November. It was just the constant ramp-up of price trying to keep up with raw material. We’ve finally got the parity. We are seeing carbon black continue to escalate in price. That’s one of the key components that we put in our material obviously, and we’re planning a price increase probably in the early second quarter, Saul, is what we probably are seeing.

Saul Ludwig – Northcoast Research

What was the order of magnitude of the November hike?

Dave Roberts

Saul, I don’t have it in front of me. I’m guessing 5%.

Saul Ludwig – Northcoast Research

Okay. And given the great weather, do you think that that is going to impact you negatively in the second quarter where re-roofing jobs may have all been put off normally in the first quarter that are getting done in the first quarter.

Dave Roberts

Like I said, I have no visibility in the re-roofing. My biggest concern is that we get everything early in the year and then if the weather – you – while we don’t wish any ill will on anyone, cold weather and freezing and fine helps the roofing business. And we haven’t seen that yet. So it’s too early to predict. But I can’t answer that, honestly. But it could (inaudible) effect.

Saul Ludwig – Northcoast Research

A bad weather is your friend, and we haven’t had that.

Dave Roberts

Exactly right.

Saul Ludwig – Northcoast Research

Okay. And so as part of your – what you think about Construction Materials, you said it would be up maybe 8%. It looks like there’s a lot of price in there and maybe not a lot of volume. Is that the way to think about that?

Dave Roberts

Yes, only because, Saul, I think what we’re anticipating is just what you’re saying is that because the weather has been so mild that, you know, will the business grow at an 18% rate or whatever organically in 2012 that it did in ’11. So I think that – again, we are being cautious not knowing what the warm weather will do to us at the latter part of the year.

Saul Ludwig – Northcoast Research

Where in the company did you have a negative price raws and what magnitude?

Dave Roberts

Well, we had that in our Transportation Products group. We had negative raws. We had some in FoodService and a slight amount in CIT.

Saul Ludwig – Northcoast Research

How much – you said you sold off some high cost inventories and saying you’re on FIFO, the stuff that you would have sold in the fourth quarter was cost that you incurred when prices were higher in the third quarter. How much do you think the blowing out a high cost inventory cost you, and are you now in a position where you’re not going to have the price raws negative at least as it appears now –?

Dave Roberts

Yes. So I think you’re right. I think that the high priced materials should be gone or a slight amount of it perhaps in January. As far as the total amount, do you have a feel for that, Steve?

Steven Ford

Yes. So it was about $10 million negative to Transportation Products, just for the reason you described, selling inventory that we manufactured in the third quarter and higher costs in the fourth quarter. And a similar amount will negatively impact the first quarter, but we do think we’ve got price to offset that.

Saul Ludwig – Northcoast Research

I want to make sure I understand it. In the fourth quarter, in Transportation Products, you had a $10 million negative hit on the product that you blew out from inventory, which was not any pricing recovery. And so we could look at that $10 million as sort of a one-time –

Steven Ford

Well, there was a little bit of pricing recovery, but we had about $10 million of sort of negative capital variances that we’re sort of flowing through the P&L in the fourth quarter. It was only partially offset by the price.

Saul Ludwig – Northcoast Research

And then – so let’s say that could have been $8 million net negative.

Steven Ford

Yes, okay. $7 million or $8 million, yes.

Saul Ludwig – Northcoast Research

Okay. And where do you see that happening in the first quarter?

Steven Ford

I see in the first quarter substantially all of it being offset by price.

Saul Ludwig – Northcoast Research

So the first quarter we should have none of that $10 million. That $10 million, lot of us have put model together. You came in real short on the operating income. It was offset by the lower tax. And this $10 million or $8 million, that’s a big number. You didn’t call that out in your tax plus all the other $1 million and $2 million items. It’s like –

Steven Ford

Saul, we don’t see that as one-time. I mean, that was a cost of doing business. That’s the reason why didn’t sort out. We knew we had high priced material. I mean, I think we talked about in the third quarter going into the fourth, but we don’t see that as one-time. That was, to us, operating expenses. Now –

Saul Ludwig – Northcoast Research

That’s a cost of doing business, I understand –

Steven Ford

Right. Exactly.

Saul Ludwig – Northcoast Research

It’s Steve saying it’s not going to be repeated in the first quarter.

Steven Ford

Right.

Saul Ludwig – Northcoast Research

So that’s a positive delta in –

Steven Ford

Right.

Saul Ludwig – Northcoast Research

Right. And then you had all these other $1 million and $2 million items for severance cost, integration cost. It seems like you could have had maybe $15 million to $18 million of expenses in the fourth quarter that should not repeat going forward. Is that correct?

Dave Roberts

If you’re including that raw materials, yes.

Saul Ludwig – Northcoast Research

You called that out as an item. So that’s why I wanted to just –

Dave Roberts

No question. That’s –

Saul Ludwig – Northcoast Research

Just to clarify that.

Dave Roberts

That’s why we’re optimistic about 2012.

Steven Ford

Saul, we provided it in response to your question. The items that we called out that we think are more one-time in nature were the acquisition-related costs and some of the severance items. But we also – obviously we were talking about the cap variance and the negative raw material impact in response to your question.

Saul Ludwig – Northcoast Research

Okay. And finally, your goal of 100% cash conversion has been in a loose of target. You’d clearly come out and say you’re not going to get there in 2012. Where do you see that happening or are we just not going to see that for several years because you’ll probably make more acquisitions and how can we think about that?

Dave Roberts

Yes. I think that certainly not this year with the capital we’re investing back in the business. We continue to pursue acquisitions. If the business – the other thing, if the business grows at double digits, we consume a lot of cash in receivables, inventory and so on. So I think if the business slowed to a single-digit growth, if the capital investment was what it has been traditionally at maybe $70 million, then I think we would see it.

Saul Ludwig – Northcoast Research

And then finally, ex anymore acquisitions, these inventory step-ups are done, the severance costs are done, do you see any need for any special-type items that you have included in your budget for 2012 that we could at least be cognizant of?

Dave Roberts

Yes. The only thing we’ll have, Saul, keep in mind, we bought Tri-Star in early December. There will be some cost that will flow through in this year as a result of Tri-Star step-up, other material or other acquisition costs that will end up taking. But barring any other acquisitions, that would be it.

Saul Ludwig – Northcoast Research

And that might be $2 million, $3 million, $4 million?

Steven Ford

Closer to $2 million. There’s about $2 million more of inventory that then steps up and amortize that will run through the P&L in the first quarter.

Saul Ludwig – Northcoast Research

And then finally, what was the COS savings?

Steven Ford

For the year?

Saul Ludwig – Northcoast Research

Yes.

Steven Ford

$20 million, $20.5 million.

Dave Roberts

Yes.

Saul Ludwig – Northcoast Research

And what do you expect for this year?

Dave Roberts

We usually budget around $20 million.

Saul Ludwig – Northcoast Research

Okay, great. Thanks a lot, guys.

Dave Roberts

Okay. Thanks, Saul.

Operator

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

Ivan Marcuse – KeyBanc Capital Markets

Hi, guys, thanks for taking my questions. I just have a –

Dave Roberts

You’re welcome, Ivan.

Ivan Marcuse – KeyBanc Capital Markets

A couple quick ones. In the FoodService business, that was probably a little bit worse than anyone was looking for. So do you expect with the transition that you’re doing now with the closure of distribution centers, should this business turn profitable in the first quarter – first half of the year, or do you expect sort of the, you know –?

Dave Roberts

No. Ivan, we’ll make money in FoodService. The volume was up a little bit in January already. We’ll have some additional costs that will probably be incurred in the first quarter. I don’t think I would be very surprised if the business was not profitable in the first quarter. I would expect it to be in a mid-to-high single-digit margin for the year.

Ivan Marcuse – KeyBanc Capital Markets

Okay. And then in – you also called out in your slide deck that you had higher customer rebates. Is that – was that in the $1 million, $2 million range? What was that related to? Or is that just part of the –?

Dave Roberts

We had – what it was is that there were some customers that were close to their rebate levels, and they bought in product in the fourth quarter to drive that rebate and then obviously there were some that weren’t. So we actually had higher rebates than we anticipated. Primarily we didn’t expect these customers to buy to that level in 2011.

Ivan Marcuse – KeyBanc Capital Markets

Okay, great. And then for Transportation, now with the plant sort of up to where you want it to be, what kind of margins are you targeting for next year? Are you thinking mid-single digits is a possibility?

Dave Roberts

Yes, I think that’s very possible. The volume in January was actually slightly above what we had budgeted for. We think February will be a good quarter for us. This is a business you have to make it in the first half of the year. I think we’ll be in the mid-single digits of margin in the business.

Ivan Marcuse – KeyBanc Capital Markets

Okay. So, with the combination of all these sort of the rebates and all these one-time charges that were just discussed and then (inaudible), you should see some significant EPS earnings growth next year?

Dave Roberts

Yes, sir.

Ivan Marcuse – KeyBanc Capital Markets

Got you. And then last question, just a quick one. I know it’s small. But EPDM growth in Europe, I know that’s mostly an asphalt market. What’s sort of driving that? Is that the new construction or is it more –?

Dave Roberts

Yes, it’s re-roofing. There’s obviously a little bit of new construction, not a lot. But most of it is re-roofing applications and people moving to EPDM. So that’s been a pleasant – but we anticipated it, but it’s been a pleasant surprise for us since we bought it.

Ivan Marcuse – KeyBanc Capital Markets

Is the EPDM considered at least in Europe more environmentally friendly or does it go better with the building codes than asphalt and that’s what’s driving it or is it just more of what the cost is [ph]?

Dave Roberts

It is considered a more environmentally friendly product. If you think about asphalt and the way it has to be applied and then some in PVC, there has been some discussion about PVC roofing over the last few years in Europe as far as not being environmentally friendly. That really is what’s driving it. And it’s a very small slice of the market today. It’s less than 5% of the market. We view Europe in the EPDM market now that we have a EU and more consistent building codes across the continent itself is really in the stages where EPDM was in the US back in the early ‘70s when we introduced the product. So that’s why we’re making investments there.

Ivan Marcuse – KeyBanc Capital Markets

Got you. Thank you very much.

Dave Roberts

Okay.

Operator

Your next question comes from the line of Ajay Kejriwal with FBR Capital.

Ajay Kejriwal – FBR Capital

Good morning.

Dave Roberts

Good morning.

Ajay Kejriwal – FBR Capital

Just so I understand on that inventory issue, so – were you carrying inventory at a cost that was higher than the market price? I mean, what was the issue?

Steven Ford

It’s just – it's based on the inventory turns. So the inventory that we’ve built in the third quarter was sold in the fourth quarter, and the inventory tended to be a little more – the price of the raw material tended to be a little bit higher in the third quarter and that was kind of rolling through the P&L as part of that.

Ajay Kejriwal – FBR Capital

Okay. So, for a $10 million impact on the EBIT, that’s nearly 600 basis points, is that – it sounds like it was a substantial amount in dollar terms. And in January, it looks like continuing, but are you – will you be done post-January in terms of that liquidation?

Steven Ford

Yes. Based on our turns, if raw material stays at these current levels, at the end of the first quarter, really at the end of February, all of the higher priced inventory will be off our balance sheet, right.

Dave Roberts

Ajay, what we’re doing there is we turn inventory about five times a year in Transportation. So after you get through 2.5 months effectively, the high priced material is gone.

Ajay Kejriwal – FBR Capital

Got it. Okay. And then on Hawk, it looks like there is nearly 40% sequential decline in the EBIT dollars. And I know you said seasonality. Any color on what you’re seeing in the Ag market? We heard earlier this week from CNH on some pricing issues. Are you seeing any of that at all?

Dave Roberts

We have not yet at this point. Now Ag is not a big component of what we do in the Hawk business. Ours is primarily mining and construction equipment. But we do have a small component of Ag, but we have not seen a dramatic impact on pricing.

Ajay Kejriwal – FBR Capital

So that decline is purely seasonal?

Dave Roberts

Yes. There is nothing there that should alarm anybody.

Ajay Kejriwal – FBR Capital

Got it. And then on the leverage ratios, maybe could you talk about where we are versus your target and then appetite for any affordable deals?

Dave Roberts

Well, I mean, I’ll let Steve talk ratios, but – yes, we’re – what I would love to do is to continue to expand the Construction Materials business in Europe. So we would look to Europe. And if we found certainly a – we've said this all along. If we found something in Braking or Interconnect, we would certainly have appetite to go after those. Frankly, there is nothing on our plate that is near-term at this point.

Steven Ford

Yes. Ajay, we’re certainly comfortable with a 34% debt-to-capital ratio and a debt-to-EBITDA of 2. We think we’re going to have strong cash flow performance year in 2012 and we would certainly, in the absence of acquisitions, see those numbers improving. So we’re comfortable with where we are. And for the right transactions, we’d be willing to go a little bit higher.

Dave Roberts

Ajay, when I said there is nothing on the plate near-term, that was in the Braking business and also the Interconnect business. We’re pursuing some things on the construction side. If anything came in the short-term, it would be construction as compared to the other two.

Ajay Kejriwal – FBR Capital

Excellent. Thank you very much.

Dave Roberts

You’re welcome.

Operator

(Operator instructions) Your next question is a follow-up question from the line of Peter Lisnic with Robert W. Baird.

Peter Lisnic – Robert W. Baird

Hey, guys. I just wanted to run through the CapEx forecast again, $120 million to $150 million. Can you run through just the couple new plants you’re putting up for polyiso in West Coast and East Coast?

Dave Roberts

Yes.

Peter Lisnic – Robert W. Baird

I thought that you are maybe fully capacitized at this point, but what’s the –?

Dave Roberts

No, actually polyiso has done very well for us this year and last. What we have been able to do is to serve the market in the Northwest out of our Tooele, Utah plant. It’s getting to a point where it’s very difficult. Just because of transportation, it’s difficult to do that. So what we’re doing is going to put a plant in Seattle area to not only cover the Northwest in the US but also the southern part of Western Canada out of that facility. The plant growing in Kingston, New York, or near Kingston, New York, we currently have a facility there today that’s leased and we’re out of capacity. It’s one of the – in fact, it is the first polyiso plant that we had and it’s just outlived its usefulness and we just need to move into a new facility to further expand that business. But polyiso has been doing very well for us over the last couple of years.

Peter Lisnic – Robert W. Baird

Okay. So it sounds like it’s just running at full capacity basically and you need more.

Dave Roberts

Exactly.

Steven Ford

And Pete, this business has a particularly strong track record with respect to organic growth. I mean, almost all of the growth that we’ve had over the last 10 years has been organic. They have built the number of factories. They have put product through existing distribution and leveraged their brand. And at the end of the day, they are generating returns on invested capital at north of 30%. So this has been a very successful model for us.

Peter Lisnic – Robert W. Baird

Okay. All right. That is very helpful. And then I just want to get a little bit of insight on the new construction comments, CM, that you made a little bit earlier saying, what I call, I guess better quoting activity. I’m just wondering if you could give us a feel for how that quoting is converting the actual orders.

Dave Roberts

It’s still a bit too early, but what we saw in the fourth quarter was architects starting to – and contractors starting to quote new projects that are on the books. I don’t think we’ll see a lot of it certainly early in the year. I think if it develops, it would come mid to latter part of the year. But we are seeing more activity than we’ve seen in the last three years.

Peter Lisnic – Robert W. Baird

Okay. And then, is it safe to say that as you look at ’12, the mix between re-roof and new is still plus-80% re-roof, 20-ish or maybe even less than that on the new construction side?

Dave Roberts

No, I think that’s probably a good number. It would be a good news if it was actually 70/30 because I think we’ll hold on to the re-roofing if we just get more new.

Peter Lisnic – Robert W. Baird

Okay. But without any sort of margin plus or minus, correct?

Dave Roberts

Absolutely.

Peter Lisnic – Robert W. Baird

All right. All right. Thanks again for your time. I appreciate it.

Dave Roberts

You’re welcome.

Operator

And there are no further questions at this time. I would now like to turn the call back over to Mr. David Roberts for any closing remarks.

Dave Roberts

Thanks. 2011 was a very good year for us. Not only did our sales and earnings grow to record levels, we completed a number of strategic acquisitions led by the purchase of PDT and Tri-Star. We successfully integrated Hawk, achieving higher sales and higher margins than we originally forecast in our acquisition model. When we bought that business, we were paying about 8.5 times EBITDA. At the end of the year, that price looked like it was a little less than five times EBITDA. So that was a very successful acquisition and actually helped 2011 for us.

We’ve made great progress in Transportation Products. The new management team has made significant strides in Jackson. Our productivity levels are up to where our other tire manufacturing facilities are. And frankly, we’re at this point starting to plan to bring work back from China and put it in both of our Tennessee plants, both Clinton and Jackson. We found that we can actually manufacture as cheaply or cheaper here in the US than we can in China in our tire facilities.

While FoodService was a drag on our earnings in the fourth quarter, I think we quickly recognized the issues and we made a number of management changes very early on and the new management has identified a number of cost savings that they will be implementing in the first quarter. There will be some charges in the first quarter. We don’t know how big, but we will have some charges. But I still think the business will be a single-digit – mid-single digit EBITDA or EBIT contributor in 2012.

One final comment on 2012, frankly, it’s stacking up to be a very good year, again, one month in the books, but we’re very optimistic at this point about 2012. With that, I’ll now end our year-end conference call. I want to thank everybody for attending. We look forward to reviewing our results for the first quarter early in the second quarter of this year. Donna, you can now end the call.

Operator

This concludes today’s Carlisle’s fourth quarter earnings conference call. You may now disconnect.

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