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Executives

David Roberts - Chairman, President and CEO

Steven Ford - Vice President and Chief Financial Officer

Analysts

James Bank - Citi Investment Research

Joshua Chan - Robert W. Baird & Co.

Saul Ludwig - Northcoast Research

Ivan Marcuse - KeyBanc Capital Markets

Carlisle Companies Incorporated (CSL) Q1 2012 Earnings Conference Call April 24, 2012 8:00 AM ET

Operator

Good morning. My name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the Carlisle Companies First 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. David Roberts. You may begin your conference.

David Roberts

Thank you, Brandy. Good morning and welcome to Carlisle’s First Quarter 2012 Conference Call. Attending call with me is our CFO, Steve Ford, our CAO, Kevin Zdimal, and our Treasurer, Julie Chandler. On our website, you will find slides for today’s conference call. Those slides detail our first quarter performance. As in the past this call will provide additional color on our performance, but before we start the slide deck, let me say that our performance in the first quarter was nothing short of outstanding.

We made terrific progress in reaching our long term financial goals plus made another step in the globalization of our business, as we purchased the Dutch EPDM roofing manufacturer, Hertalan.

As we turn to the presentation please review Slide 2, titled forward-looking statements, which details the risk involved in making an investment in Carlisle.

I encourage everyone considering an investment in our company to read this statement and refer to our SEC filings before making any investment decision. Now let’s turn to Slide 3. Slide 3 is a summary of the company’s overall performance in the first quarter. Sales are $890 million, up 28% over the previous year, a first quarter record. 22% of our growth was organic, led by Construction Materials growing organically at 34%, Interconnect Technologies at 29%, Transportation at 15%, Brake & Friction at 12%, and Food Service at 5%. 6% of our total growth or $44 million came from the acquisitions of PDT, Tri-Star, and Hertalan. As a reminder, PDT was purchased on August of 2011, Tri-Star was purchased in December of 2011, and Hertalan was purchased in March of this year.

We gained tremendous leverage on our sales growth with EBIT earnings being up 74% to $96 million in the quarter. Our 28% sales growth and the 96 million we have earned, which included 4.6 million of related acquisition cost was especially strong for our first quarter performance.

Our EBIT margin percentage was 10.8%. Since 1994, we reported double-digit margins in the first quarter three [ph] of the times, but the 10.8% this quarter was the highest margins we have generated in any first quarter in that 18-year period. In addition, our EPS was up 77% to $0.94.

Slide 4 is the sales bridge for the first quarter. Price contributed 6.6% to our growth, volume contributed 15.5% and acquisitions contributed 6.3%. FX had very little impact with a negative 20 basis points.

Slide 5 details our increase in margin from 8% in 2011 to 10.8% this quarter. 1.1% of our margin increase came from volume, 1.1% came from price debt of raw materials, 0.8% came from the improvements through the Carlisle operating system, while other costs negatively impacted our margin 0.2%.

Slide 6, begins our review of the individual business segments, starting with our largest segment, Construction Materials. On March 9, we acquired Hertalan, which is headquartered in the Netherlands. When Hertalan and PDT which was acquired in 2011 are combined, we are now one of the largest manufacturers of the EPDM roofing in Europe.

These acquisitions added 7% to our 41% sales growth in the quarter. When analyzing our 34% organic growth, you will see that 10% came from price and the remaining 24% was volume. Considering the volume was up 24%, you get a feel for the strength of our Construction Materials market.

EBIT was up a 133% with the business earning $42 million compared to $18 million last year. Reaching price parity with raw material cost at the end of 2011 enabled us to increase our profitability compared to last year during the quarter. Negatively impacting the 42 million of EBIT was $3.1 million of expenses associated with our acquisition of Hertalan.

Slide 7 gives you a snapshot of the progress we’ve made improving the profitability in our transportation products segment. Our sales grew 15% in the quarter with 8% of that growth coming from price. We’re seeing strong volume coming from our Ag markets. Our largest customer in this segment continues to increase their forecast, which in turn drives higher demand for our products that we are supplying them.

We’re also seeing strong growth in our high speed trailer business, driven by the penetration of a large national tire retailer with our new radial trail RH trailer tire. Our power sports customers are also enjoying strong sales of their ATV and UTV products which drive the demand of our tires and wheels.

EBIT was up 46%, from $13.5 million in 2011 to $19.7 million in 2012. We received price increases that offset our raw material cost increases and our Jackson plant is running at forecasted level of efficiency with scrap rates slightly below our original planned rates. As a reminder, we had $2 million with the plant restructuring cost in the first quarter of 2011 last year, which didn’t repeat.

Another positive noted concerning transportation products is that cash flow is positive in the first quarter, which is typically a cash consuming quarter due to the seasonality of the tire business. Our cash conversion rate was 93%. We were cash positive in the quarter for the first time in 6 years.

Slide 8 is an explanation of our results in our Brake & Friction business. Sales were up 12%. Sales growth was driven by our Ag business, which was up 34%, mining which grew at 16% and construction which grew at 15%. Our growth in Europe was up 39%, driven primarily by the Ag markets worldwide. Borrowing a quote from Mark Twain, the rumor of the death of the European economy is greatly exaggerated, we just aren’t seeing it. As a reminder, we grew organically more than 30% in 2011, so growing 12% in the first quarter is a testament to the strength of the heavy equipment markets.

EBIT was up 28% from $19.7 million in 2011 to 25.2 million this quarter. Our EBIT margins were up 230 basis points to 18.8% with additional margin expansion to come later in the year. This business continues to perform at a very high level.

Interconnect Technologies is detailed on slide 9, which shows sales growing 68%. 39% of that growth comes from the acquisition of Tri-Star, which was completed in December of 2011. The remaining 29% came organically. Our aerospace market continues to enjoy a very strong demand, while our test and measurement markets are recovering from the economic downturn we suffered over the past three years.

Our growth in aerospace and Test & Measure were partially offset by a decline in our military sales which were off 20%.

EBIT was nearly doubled in the quarter, growing 88% to $16.7 million. Margin percent was up 160 basis points to 15%. The acquisition of Tri-Star contributed 3.4 million of EBIT dollars despite including a $1.5 million charge for acquisition related cost.

Slide 10 provides color on our first quarter performance in food service. Sales were up 5% which was aided by a 2% price increases that we got in the quarter. We saw volume growth in January and February, with a growth moderated in March. This business is still impacted by slower traffic and restaurants, which some restaurant operators contributed to higher gasoline prices. We also think restaurant traffic has found a lower cost meal alternative, as sales to our quick served customers has grown. While we do provide QSRs with products, the Carlisle food service dollar value per sale to the QSRs is considerably less than they would be to a typical casual dining restaurant.

EBIT performance in food service was flat with 2011 at $5.5 million of EBIT and EBIT margins declining from 9.7% to 9.3%. While margins have declined slightly in the quarter-to-quarter comparisons, the real indicator of improving performance is looking at the first quarter sequentially, with the fourth quarter of 2011.

Margin dollars have improved from a $2.1 million loss in the fourth quarter of 2011 to a $5.5 million profit this quarter. We still have work to do to get the business to where it consistently generates double-digit margins. We have changed most of the management team and they are making strides in improving the profitability of this business. But it will be a year-long journey. This business should operate with margins similar to the first quarter for the remainder of the year.

That concludes my review of the business segment. I’ll now turn the meeting over to Steve Ford, who will review our balance sheet, cash flow statements, and working capital slides. Steve?

Steven Ford

Thanks, Dave. Good morning. Please turn to Slide 11 of the presentation. As Dave noted, during the first quarter we closed on the Hertalan acquisition. The purchase price was funded by utilizing about $28 million of overseas cash and borrowing the balance under our credit facility. We currently have about $240 million dollars of remaining availability under that facility. Our balance sheet following the acquisition remains strong with a debt-to-capital ratio of 33% and debt-to-EBITDA ratio of 1.8.

Turning to Slide 12, our cash flow from operations for the quarter was $48.3 million, a $48.6 million improvement from the first quarter 2011. Our free cash flow improved by $43.5 million over the same period. The increases resulted from the higher earnings, as well as improved working capital management.

Turning to Slide 13, our average working capital as a percentage of sales for the quarter was 22.3% compared to 23.4% for the first quarter 2011. We remain committed to improving our management of working capital and achieving our long-term goal of 15% of sales.

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

David Roberts

Thanks, Steve. Before I open the floor for questions, please turn your attention to Slide 14. We provided you with a number of planning assumptions for the remainder of the year. If you have any questions related to this information we’ll be able to answer them for you during the question-and-answer period, which begins now.

Brandy, if you would open the floor for questions, we would appreciate it.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Your first question comes from Dean Dray.

James Bank - Citi Investment Research

Hi, good morning. This is James filling in for Dean.

David Roberts

Hey James, how are you?

James Bank - Citi Investment Research

Very good, very good. I was wondering if you could break down in construction materials the difference between the price increase that went into effect on April 1, and the pull forward in orders that you guys experienced?

David Roberts

Yes. James, there was a little pull forward we think. We don’t think it was dramatic to be honest, I can’t really quantify it. But we know there was a little bit of pull forward.

James Bank - Citi Investment Research

Okay. Are they any more price increase expected this year in that group?

David Roberts

Well, it depends on our raw materials. We do have a couple of raws that are increasing at dramatic rates, we’ll have to wait and see but at this point there are nothing planned.

James Bank - Citi Investment Research

Okay. And also sticking with reroofing, what was the magnitude would you gauge in terms of the impact from the warm weather and dry weather this past winter?

David Roberts

Yeah. I think there was some impact but I don’t think it was dramatic. I think while our roofers were on the – the roof is certainly longer into the winter, but we don’t really think that it was that dramatic. There was a little bit because of warm weather, a little bit because of the -- but that would have occurred mainly in March and frankly January and February were good months as well.

James Bank - Citi Investment Research

Okay. Terrific. And then one last one and then I’ll let others jump in. Brake & Friction, were the plant cost synergies still from Hawk this year, I believe this was the $13 million year and last year you guys were able to get about 7 million cost synergies, am I still correct on those numbers?

Steven Ford

You know I think last year, James, this is Steve. We were very, very effective in sort of accelerating a lot of those savings. So a lot of those savings that we talked about, that we anticipated from the integration, we achieved substantial all of those savings last year.

James Bank - Citi Investment Research

Okay. So no more cost synergies from Hawk this year then?

Steven Ford

As I say, in terms of just general efficiencies but no more specific cost efficiencies that relate to the integration.

James Bank - Citi Investment Research

Right, okay. Alright, great, thank you. I’ll jump back in line. Thank you.

Steven Ford

Okay.

Operator

Your next question comes from Joshua Chan.

Joshua Chan - Robert W. Baird & Co.

Hi Good morning, congrats on the quarter.

David Roberts

Thank you.

Joshua Chan - Robert W. Baird & Co.

I guess the first question is on the selling price matching or exceeding raw materials. I am sure it’s a welcome relief. Based on what you are seeing in incoming input cost, how comfortable are you that you can at least hold that relationship at parity going forward?

David Roberts

Yeah, we think so. It really depends upon what’s going to happen with raws, but what we are seeing today, as I said, there are a couple of categories that are ramping up, but we think that we can at least keep very close to parity with those, with price increases.

Joshua Chan - Robert W. Baird & Co.

Okay. And then on Construction Materials, you are starting your third year of pretty significant volume growth and the re-roof market has obviously been strong for you despite a soft, macro fundamentals. So are you taking share in that business or what is that that is driving the re-roof strength for you?

David Roberts

We honestly just think that, if you look at, I think we said it a number of times that the population or the number roofs that are out there were on the second generation of replacement EPDM roofs and on the first generation of replacement for TPO roofs and the population is just very large of roofs that will have to be replaced. I think it is just a very favorable dynamic that is in the market and I don’t see it subsiding certainly over the next couple of years, I think the re-roofing market will continue to be very strong.

Joshua Chan - Robert W. Baird & Co.

Okay. And then the last question is on the Transportation business, you aligned a 4% to 7% operating margin goal for the full year, I know a volume is typically low in to second half, but does the first quarter margin performance, is that in line with your expectations or does that put it a little bit above?

David Roberts

No, I think that we were 8 plus percentage points of margin in the first quarter. We expect to be close to that in the second quarter, then it will decline in the third and fourth quarters. I think we said on the call in February, for our year-end call, we expect the Transportation Products business to be somewhere in the mid-single digit margin and I think that is still a pretty good number.

Joshua Chan - Robert W. Baird & Co.

Okay, great. Thank you for your time.

David Roberts

You are welcome.

Operator

Your next question comes from Saul Ludwig.

Saul Ludwig - Northcoast Research

Good morning. Nice to see you eek out a gain there.

David Roberts

Thanks Saul.

Saul Ludwig - Northcoast Research

To an earlier question with the price increase on the roofing, in the first couple of weeks of April, did you see any noticeable slowing in the pulse of business because of the price increase or is that the volume growth that continues to – business continues to be potent?

Steven Ford

Well, first Saul, as you know we don’t provide guidance, but the start of April was down slightly but not significantly.

Saul Ludwig - Northcoast Research

Okay. Talk about the outlook for new construction, you indicated that it is still weak, what are you seeing there in order, in coating, etcetera, how do you see that shaping up?

Steven Ford

I would breakdown, it’s still about 85% re-roof, 15% new. Coating activity is up, but nothing has turned to orders yet Saul. Now we would expect that that would occur later this year or very early next year, but nothing that indicates that new construction is coming back in certainly in the next quarter or two quarters will have an impact on the revenue line.

Saul Ludwig - Northcoast Research

Got you. And then if you think about in Europe, what about the potential there for growth over the next couple of years? And the way the market is, is there a shift in the market from other types of roofing materials to EPDM? I think, I was under the impression EPDM was a pretty small player in Europe and now you have got a base of business there, but what is the competitive landscape like in EPDM and what is the prospects for a transformation to EPDM and your capacity to meet that demand should it occur?

David Roberts

Saul, I think that our view of Europe is very similar to our view of the US 30 years ago. EPDM is still less than 5% of the market. We recognized that it is now becoming more favorable to put a EPDM roof on, but it is going to take quite number of years for us to become a major player in the roofing market, what it would be replacing would be modified bitumen. The first few months that we have own PDT and Hertalan, they both have grown at double digits, but they are all small basis. We anticipate this as a long term investment and we vision that as you look down the road 10 to 15 to 20 years we think this market will be the same size as what the US was and the growth prospect is very similar to what the US was when we started back in the ‘70s with EPDM, but it is replacing the asphaltic roof for modified bitumen which is the major player in the market place.

Saul Ludwig - Northcoast Research

So, do you see this business – between the two businesses what are your annualized sales there now? And what is your capacity? And is this a place where some of your cap spending is going?

David Roberts

Saul, today we are about a $125 million to $135 million in sales. We certainly have capacity, we are running -- we have got two EPDM plants primarily, we are actually one of those is being expanded, when I say expanded another line is going in, and we have plenty of capacity to fulfill the market over the next few years.

Saul Ludwig - Northcoast Research

Great. Okay, thank you.

David Roberts

You are welcome

Operator

(Operator Instruction). Your next question comes from Ivan Marcuse.

Ivan Marcuse - KeyBanc Capital Markets

Thanks guys for taking my question.

David Roberts

You are welcome Ivan.

Ivan Marcuse - KeyBanc Capital Markets

The first question, on a per ton basis, how much were your raw materials up in Construction Materials?

David Roberts

On a per ton basis –

Ivan Marcuse - KeyBanc Capital Markets

Or a unit, however you want it, how much were they up to in total for you? However you want to break it up.

David Roberts

In the quarter?

Ivan Marcuse - KeyBanc Capital Markets

Yeah.

Steven Ford

Well, in terms of dollars, Ivan, about $10 million.

David Roberts

We are looking at this year, Ivan we are going to be $30 million to $40 million is the projection that raws will go up.

Ivan Marcuse - KeyBanc Capital Markets

Okay, and then you mentioned that your investing in new businesses, I know you are putting in ISO plants, a couple of different ISO plants, how would you breakout, when would you expect these to come online and how much in sales would you expect the new plants to generate versus what you are generating now?

David Roberts

Yeah, I don’t think – first of all they will come online both of them, probably sometime early next year, so 2013. I don’t expect that you will see a dramatic impact in revenue coming out of the Kingston, New York plant. In basic, we are calling it Orange County, New York. At this point, we are in Kingston today. It is a situation where we are just moving into a more efficient facility, what we expect is it was perhaps improved margin there more than anything. The plant in the Northwest will provide some incremental revenue, but that is not what it was being built for, it is primarily allowing us to be more cost competitive in the Northwest part of the US and the Southwest part of Canada. We are now shipping product out Tooele, Utah, when you ship insulation you are shipping air primarily and the freight cost basically eat into all the competitive pricing advantage that we have in that market. So, it was more a competitive pricing play than anything allowing us to be competitive in that market. Now, I think we will pick up some share, but that is not the reason that we ended up building that facility.

Ivan Marcuse - KeyBanc Capital Markets

Got you. And then, just real quick back to raw materials, I think you mentioned that a couple are going up and I know EPDM, the material that goes in that has been tied, is that continuing to be tied, and is there any other materials that are escalating at a pace above others?

Steven Ford

Well the EPDM is really the one area that we are talking about, the polymers have gone up, average cost has increased 40% to 50% of EPDM polymers and we have done some hedging , we have bought ahead but that hedge runs out sometime mid-year. So, we will have raw material cost increases that flow through probably as we get in to the early third quarter, late second quarter, we will start to see some raw materials flood through.

David Roberts

And Ivan, as you know, we sell a lot of insulation and they are one of the key inputs as benzene and some pressure on that commodity as well.

Ivan Marcuse - KeyBanc Capital Markets

Great, okay. And then moving over to the Break & Friction, one of the things that was sort of surprise there, and maybe this is just a shipping difference is, why was your aerospace down in Brakes and then it is up in Interconnect Technology, is there a more of a replacement factor or is it just shipments?

David Roberts

Now, it is strictly as you said replacement. The business that we have at Hawk, the aerospace business is strictly old technology braking systems that go on older generations 737s. And as the new planes come out they are equipped with a different style of brake and I am not sure who is manufacturing that brake, but my guess is their sales are up and ours will continue to be relatively strong, but I think it will decline quarter-to-quarter ever so slightly.

Ivan Marcuse - KeyBanc Capital Markets

Got you. So your brakes aren’t on the new 787’s and the new aircrafts?

David Roberts

No, that is a different type of braking system that we aren’t playing in today.

Ivan Marcuse - KeyBanc Capital Markets

Got you. And then the last question and I will get back in the queue, is this time last year the Transportation also started off fairly strong and then the second quarter is, I guess the story is derailed a little bit.

David Roberts

Derailed a lot.

Ivan Marcuse - KeyBanc Capital Markets

Yeah, a lot. What is different this year versus last year and what do you expect at least, because I know the first half is really that makes or breaks the year for this business, so what is your expectation for the second quarter? And what gives you confidence that you will be able to accomplish it this quarter and the second quarter versus not accomplishing it last year?

David Roberts

I think there are a few things. First of all demand still looks very strong. As we got into the second quarter of last year demand really started to dry up. Driven primarily by our inefficiencies and ability to deliver product on time and that was driven by the efficiencies coming out of our manufacturing plant in Jackson. So, Jackson is running today equal to what our other manufacturing facilities are, as I said, the efficiencies are equal to the other plants, scrap rate is a little lower than what we would have planned on there. So they have done a very nice job in getting that facility up and running and running at a rate that we would expected it to do last year. So, I think we are more comfortable with that. What it allows us to do now, is last year because we were inefficient we had a number of changeovers in the line would put us behind the eight ball [ph] in our aftermarket. And the aftermarket is generally what we sell, after market tyres are generally what we sell as we get into the later part of the second quarter then into the third and fourth quarter. Well the good thing is that we don’t have those inefficiencies, we will be able to serve that aftermarket issue which we weren’t able to service well last year.

Ivan Marcuse - KeyBanc Capital Markets

Got you, so volumes keeping all is the same, just going to replace but your volume should be up every quarter?

David Roberts

No, volume I think would be relatively flat Q1 to Q2.

Steven Ford

Right.

Ivan Marcuse - KeyBanc Capital Markets

I meant on a year-over-year basis.

Steven Ford

Year-over-year there is probably some improvement year-over-year. But Ivan, recall, I mean all of last year’s inefficiencies in the first quarter were effectively capitalized because of our inventory turns and hit the P&L in the second and the third quarters. That’s the big change year-over-year.

Ivan Marcuse - KeyBanc Capital Markets

And that is not going to happen this year.

Steven Ford

No.

Ivan Marcuse - KeyBanc Capital Markets

Got you. Great quarter, thanks for taking my question.

David Roberts

And you are welcome

Operator

And at this time there are no other questions, I would like to turn the floor back over to David for any closing comments.

David Roberts

Alright thank you. The optimism I expressed during our year-end conference call on February is now subsided. As indicated by our performance in the first quarter, 2012 should be breakout year for us baring any unexpected economic conditions that would negatively impact certainly any of our businesses or all of our businesses. If our markets continues to support the momentum we saw in the first quarter, we do not and we don’t see any signs that it won’t the company will continue to deliver double-digit sales growth and double-digit EBIT margins for the year.

Our Construction Materials, Interconnect Technologies, and Brake & Friction businesses should continue to perform at a very high level. I expect Construction Materials and Interconnect to deliver double-digit growth for the year and we will leverage the sales growth in the two businesses with incremental margins of approximately 30%. Well, I do not expect Brake & Friction to grow at double digits for the remainder of the year, I am confident their growth rate will be in the high-single-digit range and they will continue to improve their margins throughout this year.

Transportation and Products should generate second quarter sales similar to the first quarter and we will have the normal sales slowing and earnings slowing in the third and fourth quarters of the year, due to the seasonality of the business. But, I do expect year-over-year improvement in the second half of the year as we just were discussing with Ivan.

I anticipate that Foodservice will continue to show improvement generating mid-single-digit sales growth and should deliver mid to high single-digit margin performance for the remainder of the year. This will be a significant improvement over last year.

With that I would like to draw the call to a close and thank you all for attending.

Operator

Thank you. That concludes today’s conference call, you may now disconnect.

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