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Carlisle Companies, Inc. (NYSE:CSL)

Q4 2007 Earnings Call Transcript

February 11, 2008 9:00 am ET

Executives

David Roberts – Chairman, CEO Analysts

Carol Lowe – CFO

Analysts

Deane Dray – Goldman Sachs

Wendy Caplan – Wachovia Capital Markets

Peter Lisnic – Robert W. Baird

Saul Ludwig – Keybanc Capital Markets

Operator

Good morning my name is Jennifer and I will be our conference operator today. At this time I would like to welcome everyone to the Carlisle Companies Incorporated fourth quarter and yearend earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a questions and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Roberts, you may begin your conference.

David Roberts

Thank you very much, good morning and welcome to Carlisle’s fourth quarter conference call. What I’m going to do is turn the phone over to Carol Lowe, our CFO and Carol will walk us through a summary of the financial performance in the fourth quarter and year end and then I’ll explain the organizational changes that we made that were announced in the press release. So with that, Carol.

Carol Lowe

Thank you David, good morning to everyone. Carlisle’s sales increased 11% as compared with 2006 for the fourth quarter 2007. Organic sales growth for the quarter of 4% was largely attributable to higher sales volumes at construction materials. Sales from Insulfoam which was acquired in the second quarter 07 for $39 million. Income from continuing operations for the fourth quarter 07 was $41 million or $0.66 per share. This is an 8% increase over fourth quarter 2006 income of $38 million or $0.61 per share. Our construction materials group reported sales growth of 22% in the fourth quarter.

Organic sales growth was 7.4%. All major product lines experienced higher sales compared with the prior year. Operating earnings for the group increased 15% over 06 primarily on higher volume. We continue to face competitive pricing pressure partially due to additional TPO capacity. As we discussed last quarter, or Insulfoam business has been impacted by the softness in the residential construction market. Historically, approximately 40% of Insulfoam’s profit has been sold for residential construction. Carlisle is in the process of moving the expanded polystyrene insulation to higher commercial usage.

The industrial components group realized sales growth of 4% with increased sales for both our tire and wheel business and our power transmission belt business. Consumer outdoor power products sales were flat for the quarter while commercial outdoor power products sales increased. Recreational belt sales remained sluggish but agricultural belt sales help offset the decline. Operating margin declined 20 basis points largely due to higher raw material costs and higher manufacturing costs related to the wheel production transition from the closed Slinger facility to our Aiken South Carolina operation.

Our on highway and off highway braking businesses are reported in the special products segment. Fourth quarter 2007 on highway braking sales declined 1.6% over the prior year while off highway braking sales increased 2.6%. Our on highway OE business was down 55% as we continue to be impacted by the commercial truck pre buy and technology changes associated with the January 07 emissions regulations. The decline in OE sales for the on highway business has been largely offset by growth in aftermarket sales.

Operating income improved in the quarter for the segment as compared with a loss for the prior year. Our trailer business reported in the transportation products segment reported a 7% increase in sales for the quarter. Demand for our specialty trailers remained strong as does the demand for pneumatic bulk trailers. Market demand continues to be soft for small construction trailers and most of the material hauling trailers. Operating income increased 8% and operating margin increased 20 basis points to 14.9%.

We are pleased with this improvement in margins given the very tough year over year comparison on exceptionally strong results in 2006. While total sales for the general industry segment declined 3%, our wire and cable business grew 9% and our food service business grew 6%. Our refrigerated truck bodies business experienced a 54% decline in revenues partially due to the pre buy associated with the January 1, 07 regulatory emission changes. While we are disappointed with the fourth quarter results for Johnson Truck Bodies, their order backlog was very strong entering 2008.

Operating income increased 7% in the fourth quarter 07 with tensolite and Carlisle Food Service both significantly improving their operating margins. Our cash conversion for 07 was 120% as compared with 73% for 2006. Obviously our focus on cash has paid off. As we noted in the release, during 2007 we purchased 1.5 million shares for a total cost of approximately $60 million. We currently have approval from our Board to repurchase approximately 3.1 million shares. We will be opportunistic in our repurchase strategy, paying close attention to our cash flow, leverage and acquisition opportunities. With those comments, I’ll turn the call back over to Dave.

David Roberts

Thanks Carol. In the press release you saw that we’ve added new talent to an already strong management team. Joining us from Graco is Fred Sutter who has been appointed the group president of our new transportation businesses. In his new role, Fred will be responsible for tire and wheel and our trail king business. I’ve worked with Fred at Graco where he was the vice president of applied fluid technologies and he was a pathfinder basically in being able to grow that business and seeking out acquisitions, so he did a very nice job there. Prior to being in the applied fluid technologies division, Fred was also the region vice president of Asia Pacific.

You know with that combination of division management experience and thorough understanding of global markets, he’ll be an excellent addition to our management team. In his first five days I can tell you he’s very excited about the opportunity for both sales growth and margin expansion in the tire and wheels business. Fred replaces Barry Littrell who held that position prior.

Also coming from Graco is Chris Koch. Chris has been appointed to the region president of Asia Pacific. As I looked at our businesses over the last six months it was evident that we needed additional experience and talent to grow our business in Asia. We also needed someone resident in Asia to be able to drive that growth. Chris is a person to do just that. He and his family currently live in Shanghai and he’s done a remarkable job at Graco in the region over the past four years. I have every expectation that he’ll do the same for us here at Carlisle.

Also a change to our organization is the appointment of Kevin Forster to group president of our specialty products group. Kevin’s focus will be on improving the profit performance of our most troubled businesses, those being motion control, power transmission and Johnson Truck Bodies. He’s held similar roles in the past and I’m excited at what he brings to this new assignment.

Our final change is also an internal appointment of Mike Popielec to the group president of food service in tensolite. I’ve asked Mike to do this job because these are two of our growth platforms and he has an exceptional talent at being able to grow businesses. Mike’s focus will be on the integration of Dinex, the acquisition that we made in late January into our food service business and also on the growth of tensolite, we’ve had some great opportunities there and frankly I think there’s some acquisition opportunities that we’ll be able to capitalize on over the next couple of years. He’ll be dedicating his attention to these businesses again seeking acquisitions and assuring that the acquisitions are integrated so that we get full value from those investments. With that I’d like to now open the call up to questions.

Question-and-Answer Session

Operator

If you would like to ask a question please press star and the number one on your telephone keypad. Again that is star and the number one. You do have a question from Deane Dray.

Deane Dray – Goldman Sachs

Thank you, good morning. Would love to get some color on the roofing business in the quarter, if you could just give us the next layer of detail regarding how pricing was and volume and what do you think has happened in terms of all this new capacity that has come on and has there been any change in market share? If we could just start there please.

David Roberts

Well the market share, I mean we don’t like to discuss market share on the call but I can tell you that there has been no erosion of market share in that period of time. You know pricing was difficult. There’s no question. People are still battling for jobs. There was minor amount of price that we’re able to get in the quarter. If you look at the margin performance it really was down slightly based on the fact that we now have insulation or insulation is a greater component of our business and that is a lower margin product line for us. You know all in all, it was not a bad quarter but it’s highly competitive and insulation is a lower margin business.

Operator

You have a question from Wendy Caplan.

Wendy Caplan – Wachovia Capital Markets

Thanks, good morning, briefly your 15% operating margin goal that you mentioned in the release by 2012, that’s before or after corporate expense, just to clarify.

David Roberts

That would be before.

Wendy Caplan – Wachovia Capital Markets

Before corporate expense?

David Roberts

Right.

Wendy Caplan – Wachovia Capital Markets

Okay and again the over capacity and the insulation issues in construction, how should we be thinking about this in terms of whether, is this going to continue, I would assume this will continue through 08 and continue to plague results. Should we thinking about it that way?

David Roberts

Well, Wendy I’m not so sure of that, I think that 2008 will still be a pretty good year for the construction materials business. There’s always going to be price pressures out there but there are still jobs that are being built or bid that we will be competing with other people for. But frankly I think 2008 will be a pretty good year from a construction materials business.

Wendy Caplan – Wachovia Capital Markets

Can you help us understand why you think that? I guess I’m looking at the pricing pressure in TPO, I’m looking at the Insulfoam residential construction business, I’m looking at insulation being a lower margin business. How do those three kind of equal better results in 08 versus 07?

David Roberts

Well what I said was I think it will be equal to what we’ve seen in 07. I think that there’s still jobs out there that are being bid as I said. We’re still competing on those. I don’t know what else to tell you other than we’re still optimistic about the construction business going forward.

Wendy Caplan – Wachovia Capital Markets

Okay and one more if I might. I was somewhat surprised in your press release this morning not to see any mention of divestitures. Can you speak to the portfolio issues and whether we should expect the new managers to be talking about this in the future or [overlay] okay.

David Roberts

Wendy, what we did is obviously we have some businesses that we’ve put into the specialty products group or those which are in the specialty products group. Now we had a lot of pain in 2007 with getting those businesses to a point where we think they will perform at a level or profitability. Frankly if strategic alternatives come up we would certainly consider them for that business.

Wendy Caplan – Wachovia Capital Markets

Okay, thanks very much Dave.

Operator

We have a question from Peter Lisnic.

Peter Lisnic – Robert W. Baird

Good morning Dave, good morning Carol. I guess first question is if you could talk about the cash generation in the quarter, it looked very strong relative to, at least what we were expecting. And just the sustainability of that, it looks like, I’m just trying to discern whether or not the cash generation profile of the businesses has changed markedly relative to a year ago or even a couple quarters ago. What did you do to kind of generate that cash in the quarter?

Carol Lowe

Pete, part of it has been as we’ve said historically as we were growing the construction materials business and adding the TPO facility and insulation operations, we had to add working capital on the balance sheet because we were growing organically where a lot of the diversified industrials were growing via acquisition and you don’t have that initial penalty on working capital. The primary contribution to the working capital generation has been just a focus on working capital. We believe it’s sustainable.

I guess what we would tell you is our goal for 2008 would be a minimum cash conversion of 110%. You know ideally if that’s all we achieve we’re going to be disappointed versus 120% that we achieved for 2007. But we believe being over 100% is certainly sustainable. We’re currently at an operating working capital level of 25% of revenue and we want to drive that number over the next few years to go down to 20% and then eventually be less than 20% to be world class. But we definitely think it’s sustainable.

Peter Lisnic – Robert W. Baird

Okay and what cap ex number are you using for your 08?

Carol Lowe

We are using $100 million. But now when we say cash conversion, that’s not net of cap ex. Cash conversions are operating cash divided by net income.

Peter Lisnic – Robert W. Baird

Right, right, no I understand that I just want to get the cap ex number. You’re saying $100 million of cap ex?

Carol Lowe

That’s what we’ve budgeted, now of course our budgets typically include some wish list items but that’s where we’re at right now.

Peter Lisnic – Robert W. Baird

And where would the incremental cap ex be allocated to I guess?

David Roberts

Well I think there’s going to be some integration with the Dinex operations. I think there’s going to be some look at perhaps process improvements in automation and tire and wheel I think are some of the places that you’ll see. We’ve got some distribution strategy going into tire and wheel that will require some capital for us. But those are the big projects that we’re looking at and then there will be a variety of smaller projects to improve operating margin.

Peter Lisnic – Robert W. Baird

Okay, alright and then if we could just talk about your goal for operating margin improvement in 08. It sounds like, well I think people are relatively concerned about construction materials and what might happen there margin wise with things that are going on there but how are you generating the margin improvement in 08 relative to 07?

David Roberts

Well first of all if you recall the write offs we had in 07. Those are going to help us substantially during the year. Now you know as Wendy had mentioned, you know and obviously you all are concerned about what’s going to happen with construction materials going forward, we know there’s going to be competitive price pressures there. We are going to battle to maintain the margin that we have in construction materials but we think there’s some upside in the other businesses, just through process improvement and focusing on effectively increasing operating margins.

Peter Lisnic – Robert W. Baird

Okay and then Dinex, are you willing to disclose profitability there?

David Roberts

Pete I don’t have it with me but it is a nice profitable business. It’s a great add to the food service area, it’s also a nice add in that it gives us a different look at the food service area. We’re talking about now going into health care in some of the areas that will continue to increase the use primarily because of the aging population.

Peter Lisnic – Robert W. Baird

Okay, safe to say it’s a double digit margin business?

David Roberts

It will be.

Peter Lisnic – Robert W. Baird

Okay, alright, I’ll get back in queue, thank you.

Operator

You have a question from Saul Ludwig.

Saul Ludwig – Keybanc Capital Markets

Good morning, hey Carol are you going to re-jiggle the reporting segments?

Carol Lowe

Well Dave in his comments in the earnings release we noted that we’re going to take a look at that. Ideally we want to, we just have to make sure from an accounting standpoint that we can. So we’ll be looking at that.

David Roberts

Right and Saul if we did that we would certainly restate so you’d have some comparisons to look at and so on.

Saul Ludwig – Keybanc Capital Markets

Okay. The tax rate sort of tumbled in the fourth quarter, why did that happen and what kind of tax rate do you think we should be thinking about for this year?

David Roberts

Hold on a second Saul.

Carol Lowe

We think for 2008, Saul, it’s going to be about 33% will be the tax rate. I’m looking for some of the effects for the tax rate for the fourth quarter.

Saul Ludwig – Keybanc Capital Markets

It was only about 30%.

Carol Lowe

Right, some of it was just some adjustments related to having some production from China for the new trailer capacity, trailer tire capacity that we’ve added and starting to realize some of the imports there because we have to adjust our tax rate quarterly to reflect what actually happened in the quarter. And during the third quarter as you know the tax rate was a little off because of the [Ikapal] gain and the fact that we had not shipped that much in from China from the operation. But that’s the primary reason, it’s just that benefit from those trailer tires coming in.

Saul Ludwig – Keybanc Capital Markets

But wouldn’t you get more of that this year?

Carol Lowe

We hope to but we’re not [overlay].

Saul Ludwig – Keybanc Capital Markets

[Overlay] why wouldn’t the tax rate be a little lower to the extent that you’ll be making money in China and probably not paying any tax on it.

Carol Lowe

Well you have to remember construction materials is still a big piece of our business Saul and we’re conservative when we look at our tax rate and what we’re going to do and what we’re going to import and right now we feel comfortable with 33%.

Saul Ludwig – Keybanc Capital Markets

Talk a little bit about interest expense which really tumbled in the fourth quarter even when you look at your net debt. Why was interest so low and what do you expect interest to be this year Carol?

Carol Lowe

Well the interest was down in the quarter because we had interest income in the cash that was invested offshore for [Ikapal]. And you know it all kind of depends on what happens with interest rates but for 2008 we would look at our interest expense of being somewhere around $23 million.

Saul Ludwig – Keybanc Capital Markets

And that’s after expensing the cash for Dinex?

Carol Lowe

Well, yes that’s after expensing the cash for Dinex and not anticipating returning the cash that’s offshore until the very end of 2008.

Saul Ludwig – Keybanc Capital Markets

Does that include the interest that you’ll earn on that cash offshore?

Carol Lowe

Yes that’s a net expense.

Saul Ludwig – Keybanc Capital Markets

Okay because that’s like $6 million a quarter which is a lot more than the $1.5 million you had in fourth quarter.

Carol Lowe

Well you know we’ve baked into that, Saul, spending the $100 million on cap ex and we’re conservative when we forecast.

Saul Ludwig – Keybanc Capital Markets

Gotcha. Dave one point I’d need to clarify, when you talked about expecting margins to be higher in the 08 versus 07, when you look at your release and you see that your bold numbers per segment operating margins was 12.9 or 11.5% with corporate, that included the [Ikotel] gain? That isn’t the margin number that you expect to improve upon is it?

David Roberts

That is correct Saul it does have the gain in. Now we’ll be improving off something that would be ex the gain. Again it goes back to the fact that we plan on maintaining margin in our construction materials business, we aren’t going to have the write offs that impacted the margins in 07 in the businesses that are in our specialty products group and we expect margin improvement in the other businesses. Frankly the outlook in the other businesses looks pretty darned good going forward.

Saul Ludwig – Keybanc Capital Markets

Did you have any write offs in the other businesses or special items in the fourth quarter. I thought that in the third quarter there was going to be some lingering effects with the braking, the realignment of the facility.

Carol Lowe

It’s not a huge number Saul.

David Roberts

It was not worth even talking about to be honest. There’s nothing significant in there.

Carol Lowe

Yeah I mean we had you know the change in management was about a little over a million that hit the quarter and that shows up in the corporate EBIT but nothing in really large. Specialty products was about a net of expense of about $700,000 pretax.

Saul Ludwig – Keybanc Capital Markets

Okay, so that was a $700,000 item and there was a million for the change in management in tire and wheel.

Carol Lowe

No, the change of management was a previous change in management, the CEO change.

David Roberts

Not in tire and wheel.

Saul Ludwig – Keybanc Capital Markets

CEO, we know him. Finally, Dave, you said that you expect organic growth for the company to be similar to the 7% organic growth that you had in 07. Does that sound a little optimistic given the economic environment that we’re all expecting to face, slower growth maybe recession. 7% organic sounds pretty hefty, why do you feel so confident?

David Roberts

Well, I was going to cover it in my closing comments but if you look at our businesses, those businesses that have backlog, we still have hefty backlogs in those and we aren’t a heavy backlog business obviously. Construction materials has still got a very healthy outlook on what’s happening in 08. You know there’s still buildings out there that have been built over the last couple of years that are being roofed. We’ve got wet weather up in the Northeast up through the Midwest.

Generally what that leads to is roofing replacement so we think there’s going to be revenue driven by that. The tensolite business remains very strong, food service we think its slowed a bit but we’ve got the acquisition of Dinex and we think that’s going to help us drive growth as well. Frankly our people are still relatively positive on all of the businesses that we would consider core. Now if you look at our motion control business, that’s going to be a very tough market going into 2008 and throughout 2008 our industrial brake and friction business is actually forecasting very nice growth. Frankly, 7%, I think we’ll all be disappointed if we don’t achieve that.

Saul Ludwig – Keybanc Capital Markets

Great, thank you very much.

Operator

You have a question from Deane Dray.

Deane Dray – Goldman Sachs

Thank you, question on the power transmission business and that being moved and separated from tire and wheel. It’s my understanding there is a lot of synergies at least in terms of the manufacturing and raw materials and so is there a give off there and is this in any way the fact that you’ve put power transmission in this group a reflection of disappointing in their operating results?

David Roberts

Well first of all Deane, as far as synergies there are some synergies but they’re not significant. Both of the businesses are run separately. There’s some synergy that comes out of the Springfield Missouri plant where we’re manufacturing our large or the long linked belts. There’s some synergy in our Chinese manufacturing facilities but frankly they’re minimal to be honest. As far as moving out, yes we are disappointed in the performance of power transmission and that’s why it’s being moved under Kevin and we expect it to be managed for profitability.

Deane Dray – Goldman Sachs

Great and then for roofing did you say what the impact of raw materials was on margins?

David Roberts

Yeah it’s about flat Deane there was some raw material cost increases that we got that we offset with operating efficiencies. It was relatively flat.

Deane Dray – Goldman Sachs

Okay and then how about an update in tire and wheel in terms of big box inventory levels and the outlook beginning in 08 here.

David Roberts

Well I think all in all the lawn and garden sector is still okay, it’s relatively flat. The replacement market is going to be up, we think that business, the certainly lawn and garden sector, it most is going to grow maybe a couple of percentage points but we have some other tire opportunities that we think is going to drive growth for us. Plus global expansion is going to drive growth for us in that area.

Deane Dray – Goldman Sachs

Alright if you have 95% revenue exposure to US, how should that look end of 08 end of 09?

David Roberts

Oh geez, you know Deane I don’t think I can give you a number, we’re certainly in 08 I don’t think we’ll see a tremendous change in the geographic expansion. I think in 09 and 010 we will see changes. I mean internally we’re driving to have 30% of our sales offshore over the next five years and today we’re about 5%, so there is a lot of work that’s got to be down to be able to allow us to capitalize on those global markets.

Deane Dray – Goldman Sachs

Fine and then on guidance was there, what’s the thinking behind not giving a specific EPS range? Is that something that you’ll revisit at the end of the first quarter or will you stay towards the [overlay].

David Roberts

No I think what we’re going to end up doing is we’re going to give you a general feel of what we think the business is going to do. I just want to get away from guidance. I think it drives us to, not that we did anything wrong trying to achieve guidance but I think it drives us, looking at that number and at what our people are focused on, the entire year and the year after and so on and I think quarterly guidance just tends to give you a short term focus.

Deane Dray – Goldman Sachs

Thanks for that clarification.

Operator

And you have no further questions at this time.

David Roberts

Okay. Let me just wrap up and I think I’ve already given the outlook but we’ll go through it again. As I said in the press release we think 2008 sales growth will be equal to what the organic growth was in 2007. Now we’ve had some raw material increases that occurred in the first month of this year, certainly petroleum products have gone up, anything petroleum based and also steel prices have escalated during the first month of 2007. If those, if we’re able to control those and at least offset them, we think that margin rate will improve during the year as well.

So we’re expecting leverage this year on the margin line. The businesses we think that have the best opportunity for growth as I said earlier, construction materials, certainly tensolite, tire and wheel, trail king, our industrial brake friction business and our food services businesses and those that are challenged certainly are going to be motion control as demand for class A trucks remain depressed, power transmission and Johnson Truck Bodies but we think Johnson Truck Bodies will certainly be better this year from a growth standpoint than we were in 2007. So in closing I want to thank you all for attending our call, we look forward to doing this again in the first quarter and this concludes our fourth quarter 2007 call. Thank you for attending.

Operator

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

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