Carlisle Cos. (CSL) Q4 2016 Results - Earnings Call Transcript

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Carlisle Cos., Inc. (NYSE:CSL) Q4 2016 Earnings Call February 9, 2017 5:00 PM ET

Executives

D. Christian Koch - Carlisle Cos., Inc.

Steven J. Ford - Carlisle Cos., Inc.

Analysts

Joel Gifford Tiss - BMO Capital Markets (United States)

Jim Giannakouros - Oppenheimer & Co., Inc.

Kevin Hocevar - Northcoast Research Partners LLC

Neil A. Frohnapple - Longbow Research LLC

Charles Brady - SunTrust Robinson Humphrey, Inc.

Liam D. Burke - Wunderlich Securities, Inc.

Operator

Good afternoon. My name is Latavia, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Fourth Quarter Results 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. Thank you.

Mr. Chris Koch, you may begin your conference.

D. Christian Koch - Carlisle Cos., Inc.

Thank you, Latavia. Good afternoon and welcome to the Carlisle Companies' year end 2016 conference call. On the phone with me this afternoon are Steve Ford, our Chief Financial Officer, and Titus Ball, our new Chief Accounting Officer. On this call, I will be discussing our full year 2016 overall performance and the 2017 outlook. Steve will review our segment performance, balance sheet, and cash flow.

Before I discuss our results in more detail, I would ask that you review slide 2 of our presentation entitled Forward Looking Statements and the Use of Non-GAAP Financial Measures. Reconciliations of U.S. GAAP to non-GAAP measures are provided in our earnings release and the Appendix to this presentation. Those considering an investment in Carlisle should read these statements carefully, along with reviewing the reports we file with the SEC, before making an investment decision. These reports explain the risks associated with investing in our stock, which is traded on New York Stock Exchange under the symbol of CSL.

As announced after the stock market close today, Carlisle reported record results in 2016. Excluding the $2.03 impact of the goodwill and intangible asset impairment charges related to our CBF business, full-year earnings per share increased 22% to $5.86. For the fourth quarter, earnings per share, excluding $0.15 of tax expense related to the non-cash impairment charge, were up 6% to a fourth quarter record of $1.32.

Please turn to the slide 3 of the presentation to view our full year 2016 highlights. This slide contains results reported on a non-GAAP basis to exclude the impairment charge that CBF recorded in the third quarter of 2016. The outstanding 2016 results are a direct result of the effort, execution, and daily focus on continuous improvement by Carlisle's more than 13,000 employees across the globe.

In 2016, we achieved record net sales of $3.7 billion, a 4% increase from 2015. Full-year adjusted EBIT increased 16% to a record $582.6 million, while EBIT margin improved 170 basis points to a record 15.9%. In addition, Carlisle generated a record $531 million in cash flow from operations and $422 million in free cash flow. The strong cash generation supported $294 million of investment in acquisitions and on capital expenditures to support our key strategic initiatives. Additionally, we returned $160 million in capital to shareholders through $85 million in dividends and share repurchases throughout the year, totaling $75 million.

Our 18% dividend increase in the third quarter was our 40th consecutive year of increasing the Carlisle dividend. With the cash generation capabilities of our businesses and an untapped $600 million credit facility, we remain well-positioned to continue to invest in Carlisle's future, fund strategic acquisitions, and return capital to Carlisle shareholders through dividends and share repurchases.

Now let's review our fourth quarter performance. Please turn to slide 4 in the presentation. As stated earlier, our earnings per share excluding the impairment charges were up 6% to a fourth quarter record of $1.32 per diluted share. Net sales were up 2% in the quarter, reflecting 0.5% organic sales growth and 2% contribution from the acquisitions of Micro-Coax and Star Aviation in the Interconnect Technologies segment, and MS Powder in the Fluid Technologies segment. Foreign currency had a negative impact of 0.5%.

Organic growth in the fourth quarter was driven by strength in our key markets of U.S. commercial roofing, global commercial aerospace, medical technology, and U.S. foodservice. We had a difficult sales comparison for our Construction Materials business due to favorable weather in the fourth quarter of 2015. We also faced headwinds at CCM in Canada. Further declines in the off-highway equipment markets at CBF also had a negative effect.

EBIT decreased 8% in the fourth quarter and EBIT margin decreased 140 basis points to 12.9%. Reported EBIT reflects $7.6 million of restructuring costs in the quarter at CIT, $2.3 million of relocation expenses at corporate and CFT and $1.3 million of costs related to the San Jamar acquisition.

By segment, CCM sales were up 1%. U.S. commercial roofing market remained strong, with volume increases in the mid-single digits. Growth in the U.S. market was partially offset by lower sales in Canada. The volume decline in Canada was driven by our continued price discipline and an overall soft new construction market. The relatively stable sequential selling price environment we have experienced in the U.S. commercial roofing markets over the past several quarters continued in the fourth quarter of 2016.

Despite the earnings headwind due to unfavorable price and raw material cost dynamics in the quarter, CCM achieved excellent earning results. EBIT margin improved 120 basis points to a record 19.1% in the fourth quarter, aided considerably by strong Carlisle Operating System performance.

On January 31, Construction Materials announced the acquisition of Arbo, a well-established provider of sealants, coatings, and membrane systems based in England. Arbo complements our leading position in EPDM roofing systems in Europe and adds new products to our weatherproofing offerings used to improve the thermal performance of buildings. We're pleased to welcome the Arbo team to Carlisle.

At CIT, sales grew 10.9%, which includes 8.2% from the Micro-Coax and Star Aviation acquisitions, and volume growth of 3.6%, offset by lower selling prices and unfavorable foreign exchange rates totaling 0.9%. Organic growth in the quarter was driven by the medical technology and commercial aerospace markets.

The demand for satellite communication and product solutions in the commercial aerospace market continues to gain momentum, with the pace of retrofit activity accelerating. Demand for these solutions is expected to rise substantially over the next few years as airlines act to increase in-fight satellite connectivity and bandwidth.

CIT continued its focus on investments in the medical technology market. CIT's construction of its new state-of-the-art 260,000-square-foot production facility in Dongguan, China, which began in 2015, is on track and was the driver of the $7.6 million pre-tax restructuring cost recorded in the quarter related to facility rationalization efforts. These efforts will continue through the first half of 2018 and will be accompanied by an additional $4 million of costs to be incurred over the next six quarters.

CIT remains committed to improving operational efficiencies in its medical business. And we expect to generate approximately $6 million to $7 million of annualized savings from this project beginning in the second half of 2018.

We are pleased to recognize the CIT team for their recently received recognition from Airbus as the 2016 Electrics Supplier of the Year. This significant achievement and recognition by a key customer is a direct result of CIT's drive for continuous improvement and commitment to exceeding customer expectations.

At Carlisle FoodService focus on operational excellence continued to yield year-over-year sales and earnings growth now for a sixth consecutive quarter. FoodService sales grew 3.3% in the quarter and EBIT margin was 11.4%, including $1.3 million of nonrecurring costs associated with the San Jamar acquisition.

Acquiring San Jamar on January 9 added to FoodService's innovative new products, excellent brand recognition, and created opportunities for CFS to expand its presence in San Jamar's complementary sales channels. San Jamar has an excellent industry reputation and a history of profitable growth, and we are very pleased to welcome the San Jamar team to Carlisle.

The Carlisle Fluid Technologies sales were down 3.5% in the quarter, reflecting a 3.5% organic sales decline, a 2.2% contribution from the MS Powder acquisition, and a negative impact from foreign exchange rates of 2.2%. We achieved strong growth in the U.K. on a constant currency basis in the quarter, partially offset by sluggish industrial market conditions in the U.S. and lower sales in Japan due to the impact of a large automotive system shipment that occurred in the fourth quarter of 2015.

CBF's (sic) [CFT's] (9:18) EBIT of 13.2% in the quarter reflects continued investments at CFT and sales resources, expanding manufacturing capabilities, insourcing initiatives, and consolidation of their global footprint. All of these investments are consistent with CFT's stated growth strategy and will lead to the incremental margin improvements we expect from this business.

At CBF, sales declined 11% in the quarter as a result of ongoing weakness in the global commodity markets and corresponding weakness in demand for off-highway mobile equipment. EBIT was negative in the fourth quarter despite the significant actions we have taken over the last four years to reduce costs and improve efficiencies. As mentioned in today's earnings release, we are taking further cost realignment actions with the closure of our Tulsa, Oklahoma manufacturing facility and the relocation of production to our existing facility in Medina, Ohio.

As a result of Carlisle's overall strong operating performance, earnings per share increased 6% in the quarter to a fourth quarter record of $1.32, excluding the $0.15 of tax expense related to the previously announced non-cash impairment charges. We generated free cash flow of $144.6 million in the quarter.

Our disciplined approach to deploying cash from operations continued in the fourth quarter, returning $36.4 million in capital to shareholders and investing $31.5 million in capital expenditures. As Steve will detail in the comments, we have ample liquidity available to pursue further investments and acquisitions.

Slide 5 is a recap of our sales results. Total sales growth was 2% for the quarter comprised of 0.5% of organic growth and 2% acquisition growth. Foreign exchange had a negative impact of 0.5% in the quarter. Selling prices primarily at CCM had a negative 1.2% impact on sales, a lower impact than previous quarters this year. Sales volume was up 1.7%, driven by CCM and CIT, offset by CFT and CBF declines.

Turning to our margin bridge on slide 6, EBIT margin decreased 140 basis points in the quarter to 12.9%. The net impact of selling price and raw materials had a negative 30 basis point impact to our margin.

Volumes went positive 20 basis points and COS was positive 100 basis points. The impact of acquisitions made in 2016 was dilutive to our margin by 20 basis points. Restructuring cost in the quarter had a negative impact of 90 basis points. The category labeled other includes relocation expenses, costs related to San Jamar acquisition, and increased investment in sales staff.

Slide 7 and 8 provide our sales and margin bridges for the full year.

Steve, will now review our fourth quarter segment performance, balance sheet, and cash flow. And after Steve's review, I will discuss our outlook for 2017. Steve?

Steven J. Ford - Carlisle Cos., Inc.

Thank you, Chris. Please turn to slide 9 of the presentation. At CCM, sales increased 1% in the quarter, led by mid-single-digit volume growth in domestic commercial roofing sales. This growth was partially offset by lower sales in Canada. As Chris noted, most of the volume decline in Canada was from our continued price discipline, as well as an overall soft new construction market. Selling price at CCM was lower versus the prior year by 2%, but was relatively flat on a sequential basis, as the CCM team remained committed to price disciplined.

CCM demonstrated another quarter of excellent earnings leverage, as EBIT grew 7% in the quarter and EBIT margin increased 120 basis points to 19.1%, reflecting savings from the Carlisle Operating System and higher sales volume.

Please turn to slide 10 to review CIT's results. CIT's net sales increased 10.9% in the quarter, which includes 8.2% from the acquisitions of Micro-Coax and Star Aviation and 3.6% volume growth, offset by lower selling prices and unfavorable foreign exchange rates totaling 0.9%.

Sales in the commercial aerospace market increased 3%, sales to the medical market grew 5% in the quarter, sales to the industrial market, driven by automotive performance, increased 11%. Sales to the military defense market were flat year-over-year. CIT's reported EBIT margin of 12.4% in the quarter includes $7.6 million of restructuring costs. Offsetting the restructuring costs were positive contributions to CIT's margin from higher sales volume and savings generated by COS.

We expect to ratably incur an additional $4 million of restructuring costs over the next six quarters in connection with the China restructuring project. As Chris noted, we expect to generate approximately $6 million to $7 million of annualized savings from the restructuring beginning in the second half of 2018.

Please turn to slide 11 to review FoodService's results for the quarter. FoodService's sales increased 3.3% this quarter. Sales to the FoodService market grew 4%, driven by new product rollouts and higher sales to e-commerce customers. Sales to the healthcare market grew 2% on higher equipment sales. Sales to the janitorial sanitation market grew 2% on further penetration of large accounts. CFS's EBIT margin was 11.4%, as the current quarter included $1.3 million of one-time costs related to the San Jamar acquisition.

Turning to slide 12, CFT's sales declined 3.5% in the fourth quarter, representing an organic sales decline of 3.5% and the negative impact of foreign exchange of 2.2%, partially offset by 2.2% growth from the acquisition of MS Powder. Sequentially, sales increased 3%. CFT's EBIT margin declined 270 basis points from the prior year, primarily reflecting lower sales volume, ongoing restructuring costs, the MS Powder acquisition, which had an 80 basis point dilutive impact to CFT's margin, and additional costs from the investments in sales staff to support CFT's global growth strategy. These negative impacts were partially offset by higher selling price and savings from COS.

Turning to slide 13, CBF's sales declined 11% in the quarter on continued weakness in its primary end markets. Foreign currency fluctuations had a negative 1.5% impact on CBF's sales. Sales to the construction market declined 5%. Sales to the mining market declined 10%. Sales to the on-highway market declined 31%. On a more positive note, sales to the agriculture market grew 5%. CBF reported a pre-tax loss of $2.9 million as a result of lower sales volume and contractual selling price reductions, partially offset by COS savings and lower operating expenses as the result of cost reduction initiatives. CBF maintained its positive cash flow generation during the quarter.

As Chris noted, we are expanding our cost realignment actions by closing the Tulsa, Oklahoma plant and moving production to our existing Medina, Ohio facility. We expect to incur costs of approximately $16.5 million to $18.5 million in connection with this restructuring, approximately $6 million of which will be non-cash. We expect to incur these costs ratably over the next 18 months.

Slide 14 summarizes full-year results by segment in 2016. As Chris noted, we delivered record sales and excluding the non-cash goodwill and intangible asset impairment charges, we achieved record EBIT, record margin, and record net earnings. At CCM, sales grew 2.5% to $2.1 billion, EBIT was $431 million, a 23% increase over last year, and EBIT margin improved 350 basis points to 21%. All records.

Please turn to slide 15 of the presentation as we review our balance sheet. As of December 31, we had $385 million of cash on hand. In January, we used approximately $227 million of the cash on hand to acquire San Jamar and Arbo. We continue to have all $600 million of availability under our credit facility.

We returned $36.4 million to our shareholders in the quarter; $27.2 million in dividends and $13.7 million in share repurchases. Our balance sheet remains strong. At December 31, our net debt-to-capital ratio was 8%, our net debt-to-EBITDA ratio was 0.3 times, and our EBITDA-to-interest ratio was 22.5 times.

Turning to slide 16, our free cash flow for the fourth quarter was $144.6 million compared to $152.9 million the prior year, with the decline attributable to higher capital expenditures in 2016. For the full year, we generated free cash flow of $422.4 million compared to $457.1 million last year, with the decline again attributable to higher capital expenditures in 2016.

Turning to slide 17, our average working capital as a percentage of annualized sales for the fourth quarter 2016 was 18.3%, up slightly from 18.2% the prior year.

And with those remarks, I will turn the call back over to Chris.

D. Christian Koch - Carlisle Cos., Inc.

Thanks, Steve. Please turn to slide 18 as we discuss our 2017 outlook. As we begin 2017, our 100th anniversary year, the key operating philosophies that have been in place for many years at Carlisle are expected to continue to drive increased value to Carlisle shareholders. This year will be no different.

Looking forward into 2017, we expect high single-digit sales growth. By segment, we expect CCM to achieve mid-single-digit sales growth, leveraging a favorable U.S. non-residential construction environment, continuing to operate with the same commitment to maintain price discipline in their markets, and by further deploying the Carlisle Operating System throughout the business.

CIT is expected to achieve high single-digit sales growth for the full year, including sales contribution from the Micro-Coax and Star Aviation acquisitions. Demand for CIT products remains strong in the commercial aerospace and medical technology markets, and we are excited about the significant operational efficiency improvements underway.

At FoodService Products, we expect organic sales growth in the low single-digit range, with continued earnings leverage and significant positive contribution from the recent San Jamar acquisition.

At CFT, we will continue to invest in the previously noted key initiatives to drive improved financial performance and add scale to this platform. These investments will begin to provide returns in 2018 and put us on track for best-in-class operating performance in the coming years. The outlook across CFT's largest global end markets is positive as we enter 2017 and our expectations for sales growth are in the mid-single-digit range.

At CBF, we do not anticipate a significant recovery in the key end markets and expect a slight sales decline for the year. Throughout the prolonged downturn, CBF has aggressively addressed its challenging markets by realigning its cost structure. As noted, with the Tulsa closure, the CBF team has and will continue to position this business for a rebound in global mining, agriculture, and construction markets.

Corporate expense is expected to be $63 million and depreciation and amortization expense is expected to be $152 million. For the full-year, we expect capital expenditures will be approximately $125 million to $150 million.

We're expecting free cash conversion to be approximately 100%. Interest expense is expected to be $25 million. Our tax rate is expected to be 33% in 2017 versus an effective tax rate of 38.9% in 2016. We're pleased by the 2016 results and will continue to build on the positive momentum as we enter 2017. We expect to deliver another record year performance in 2017.

September 12, 2017 marks the 100th year anniversary of the Carlisle Companies, Incorporated, a time for celebration and reflection on 10 decades of unwavering commitment by employees past and present, to the lasting values and philosophy of the Carlisle Companies, which include an entrepreneurial spirit, a decentralized management model, an aggressive M&A strategy, and conservative capital approach in a never-ending pursuit of continuous improvement. These guiding principles will drive Carlisle through its next 100 years.

This concludes our formal comments on our 2016 results and 2017 outlook. Latavia, we're now ready for questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Joel Tiss with BMO.

Joel Gifford Tiss - BMO Capital Markets (United States)

Wow, I'm usually last or else I don't make it. I don't know what to say. I just wondered if you can give us a little flavor about the margins across the business. I know you gave us some characterizations, but I just wondered if you could give us a little more help just to be in the right direction.

D. Christian Koch - Carlisle Cos., Inc.

Joel, do you mean for 2016 or 2017?

Joel Gifford Tiss - BMO Capital Markets (United States)

2016's ancient history. Yeah, all for 2017.

D. Christian Koch - Carlisle Cos., Inc.

Excellent.

Steven J. Ford - Carlisle Cos., Inc.

Well Joel, we don't give specific guidance on that, but at a high level we'd expect the CCM performance to continue. We were expecting to be very disciplined with price, and to the extent there is raw material inflation, the challenge is to sort of get price, to cover that, so that we can maintain the margins that we've enjoyed in 2016 and we expect that to continue.

Joel Gifford Tiss - BMO Capital Markets (United States)

Okay.

Steven J. Ford - Carlisle Cos., Inc.

At CIT, margins were down a little bit in the fourth quarter for the reasons that we just described. But we expect performance to continue at a high level. We talk about that business, aspirationally, having margins in the high-teens and approaching 20%, and over the course of the year that's again where we'd expect those margins to end up.

At CFT, we've talked about the need to invest and we did a lot of investing and we continue to improve the platform. We made great progress in 2016. I think we're going to have continued investment in 2017, so I would expect margins in 2017 to resemble those in 2016, and then position ourselves for significant improvement from those levels beginning in 2018.

On the braking side, there we are challenged and we're going to have restructuring expense, so there the challenge will be just to sort of be at breakeven levels. And at FoodService, we've enjoyed continued margin improvement the last couple of years. We have a lot of momentum coming into 2017. We're very excited about the San Jamar acquisition, so I would expect margins to improve from what we've enjoyed here in 2016.

Joel Gifford Tiss - BMO Capital Markets (United States)

Okay. That's great. And then – yeah.

D. Christian Koch - Carlisle Cos., Inc.

One note. I would just say in CBF the operating margins in that business being flat, as Steve mentioned, but with that factory move, there will be that expense impact that will have impact on what I would consider to be the normal operating margins.

Joel Gifford Tiss - BMO Capital Markets (United States)

Yeah. Well, whether good or bad, it's getting to be so small, it almost doesn't move the needle one way or the other anymore.

D. Christian Koch - Carlisle Cos., Inc.

Got it.

Joel Gifford Tiss - BMO Capital Markets (United States)

And I wondered inside of your Fluid business, is – the mid-single-digit growth, does that include the acquisitions or is that more of an organic number?

Steven J. Ford - Carlisle Cos., Inc.

No, that's an all in number.

Joel Gifford Tiss - BMO Capital Markets (United States)

Okay. All right. Thank you. I'll let someone else and I'll come back later.

D. Christian Koch - Carlisle Cos., Inc.

Okay. Thanks, Joel.

Operator

Your next question comes from the line of Jim Giannakouros with Oppenheimer.

Jim Giannakouros - Oppenheimer & Co., Inc.

Hi. Good afternoon, Chris, Steve,

D. Christian Koch - Carlisle Cos., Inc.

Hey Jim.

Steven J. Ford - Carlisle Cos., Inc.

Hey Jim.

Jim Giannakouros - Oppenheimer & Co., Inc.

One cleanup item. 4Q 2015, I think there was a headwind to EBIT from a warranty expense. How much was that? Was there any such expense in 4Q 2016? Just scrubbing there before I move on to...

Steven J. Ford - Carlisle Cos., Inc.

Yeah. We had about a $2 million or $3 million headwind in 2015, and we had a similar number in 2016. So year-over-year not much of an impact on warranty.

Jim Giannakouros - Oppenheimer & Co., Inc.

Okay. And as far as the price/cost equation, you broke it out on a consolidated basis. Can you get a little granular and strip out CCM? What price/cost look like there? You give the price side of it, but on cost inflation, what was that?

And then if you can – obviously, we'd love for you to segue into polyiso, is that price increase sticking? I think that the big four in the industry followed. I don't know about the little guys, but anything that you could say as far as what you're seeing so far this year?

D. Christian Koch - Carlisle Cos., Inc.

Jim, let me just – Steve – we could talk about that raw materials price impact in the fourth quarter and what we see going forward here in a second. But on the price increase, we did have that price increase on polyiso 5% January 1. It looked like everybody followed in theory, but I would say that the fact that we're again back with a price increase of 5% to 7% effective April 3, both on TPO and polyiso gives you some indication of how effective that first price increase was.

So while the industry may have publicly stated they were united on Jan 1, I think there has been some difficulty in getting that price increase. So we're back here April 3, and more momentum I think on the raw materials side will help support that price increase. And then back on the raws to price, Steve, you want to?

Steven J. Ford - Carlisle Cos., Inc.

Yeah. So for CCM specifically, pricing was down year-over-year 2%, or $10 million impact. Raws were favorable $3 million, so for a net negative impact of about $7 million, and that's the first time we've had a net negative impact from the price raw dynamic. But those were the numbers for the fourth quarter.

Jim Giannakouros - Oppenheimer & Co., Inc.

Okay. Thank you. I'll jump back in queue. Thank you, guys.

D. Christian Koch - Carlisle Cos., Inc.

Okay.

Operator

Your next question comes from the line of Kevin Hocevar with Northcoast Research.

Kevin Hocevar - Northcoast Research Partners LLC

Hey. Good afternoon, everybody.

D. Christian Koch - Carlisle Cos., Inc.

Hey, Kevin.

Kevin Hocevar - Northcoast Research Partners LLC

Wondered if you can – back to the raw material question, can you frame up for us if raws stay where they are at today – or what type of raw material headwind you would expect in 2017? Some of the precursors to the raw that you used have moved up even in the past week or so, so kind of wondering what you expect the raw material headwind could look like in 2017 as best as you can tell right now.

Steven J. Ford - Carlisle Cos., Inc.

I think, Kevin, let's just assume things stay somewhat stable, oil in that $40 to $60 range, in that I think we would see a continuation of the levels of the fourth quarter continuing through the year, so somewhere in that $7 million to $10 million range. So that would be, I think, our comment right now.

Kevin Hocevar - Northcoast Research Partners LLC

Okay, got you. And copper has also seen some inflation as of late, which I guess we really haven't seen in quite some time and I believe it's an important raw material in CIT. So I was wondering if you could update us on how the pricing mechanisms work in CIT and also how big of a raw material is it in that segment. And do you believe that based on how the pricing mechanisms work with your customers that you will be able to pass along any inflation in your raw materials, if it's material?

D. Christian Koch - Carlisle Cos., Inc.

Right. So I think the first thing I'd say is it would be extremely beneficial to CBF if we could see some increasing copper of some significant levels. But at CIT, copper and silver are less than 5% of the COGS. It's a small part. I think we do a pretty effective job of rationalizing that out in our pricing and making sure we're net-net okay at COGS. Gold is a pass-through for us. So it's really even though the pricing may fluctuate, that's not as impactful to us. So that's – Steve, do you want to add anything to that?

Steven J. Ford - Carlisle Cos., Inc.

No, I think that answers the question.

Kevin Hocevar - Northcoast Research Partners LLC

Okay, great. And with the CCM segment, you commented on mid-single-digit growth expectations in 2017. How much of that is the Arbo – I guess, acquisition – is Arbo about 1% or so of that? And then what – if you could kind of break it out from there to – is it mainly volume or do you assume that you get some price in there? And then within volume – sorry, it's a compound question, but within volume, I know the international markets have been a lot different than the U.S. markets, so what are your expectations out of the U.S. non-res roofing market versus the international markets? I know you've had some tough comps, so are things better there or what are your thoughts there?

D. Christian Koch - Carlisle Cos., Inc.

Steve and I'll both weigh in on this question. It's kind of a big one, which is good. Arbo is a small acquisition. I would say, you will not see the impact on the sales this year any more than a very, very small amount. But the product line and the enhanced presence it gives us in the U.K. and in Europe, we think that's a good base to build on, especially the building envelope in Europe.

With respect to volumes, we're seeing projections in the mid-single-digit out of Dodge (34:17) in the verticals we talk about, warehousing, education, office buildings, retail. We see some pretty good growth in the educational and in the office space, even getting into the double-digits there. I think volumes in the U.S. will be in that mid-single-digit range. We talked about the impact recently here of raws, and then pricing TBD. It's early days. These increases are going out here in the first quarter. But as you know, the construction activity, the bidding is now, but the real work doesn't start in the U.S. at least until March and April.

As far as the impact of the foreign part on our business, Europe is, obviously, the biggest impact, and we see a stable market in Europe. I think we'll have good results in Europe. The Middle East probably will still stay in some turmoil, and I don't think the Canadian market will change much in terms of improvement this year, but we wouldn't expect much decline either. We think we've suffered that over the last year.

Kevin Hocevar - Northcoast Research Partners LLC

Got you.

Steven J. Ford - Carlisle Cos., Inc.

I think that captures it.

Kevin Hocevar - Northcoast Research Partners LLC

Okay. Great. And just last question on, so COS contributed 1% to your total company margins here in 2016. What's your expectations for that in 2017? Would you expect a similar level of contribution, or something more or less?

D. Christian Koch - Carlisle Cos., Inc.

We would expect something more. I think long term we look to continue to have COS provide an increasing level of savings in the business certainly as a percent. And we continue to make good headway on COS every year. Even though we've had it in place now, I think, almost eight years, it's still really early days for a Lean Sigma program. We focus mostly on our factories and we're beginning to broaden into business processes. So I think you'll see a good improvement on a year-over-year basis, and that's our expectation going forward, Kevin, is that it continues to be a bigger part of our savings every year.

Kevin Hocevar - Northcoast Research Partners LLC

Okay. Great. Thank you very much.

D. Christian Koch - Carlisle Cos., Inc.

You bet.

Operator

Your next question comes from the line of Neil Frohnapple with Longbow Research.

Neil A. Frohnapple - Longbow Research LLC

Hi. Good evening, guys.

D. Christian Koch - Carlisle Cos., Inc.

Good evening, Neil.

Neil A. Frohnapple - Longbow Research LLC

Just a clarification on my friend Kevin's question there. Chris, you mentioned the $7 million to $10 million range each quarter, I think, from a headwind within CCM from higher raw materials. Just to be clear, is that net of price changes too?

D. Christian Koch - Carlisle Cos., Inc.

Yeah. That's net. Sorry, I should have mentioned that.

Neil A. Frohnapple - Longbow Research LLC

Okay. I think you alluded to difficulty getting the January 1 price increase within CCM. I mean, is that just because it's the seasonally weak period from volumes or is it just the competitive environment is getting more difficult? Any more color there?

D. Christian Koch - Carlisle Cos., Inc.

Yes, I think it could be a combination of both of those. Yeah, in its early days, like we say, we are quoting, we get quoting activity out of the fourth quarter, you're going into the year, I would just attribute it to good competition and we think it's still – again, I still think it's a good sign for the industry that people are talking about price increases. I think with the slight increases in raw materials that we have seen to react so quickly to that is a positive sign, and the fact that we saw it from all four competitors on Jan 1 is a positive sign as well. So it's a tough market. Obviously, we have good competitors and it's always a battle.

Neil A. Frohnapple - Longbow Research LLC

That's helpful. And then, Chris, could you just provide some thoughts on the San Jamar acquisition? I mean, just strategic rationale behind that, given the acquisitions you guys have done more over the last five years or so than more focused on CIT and CCM.

D. Christian Koch - Carlisle Cos., Inc.

Yeah, we've been talking now, I think, for about four years almost since we made our last management change at CFS about what we wanted to do in FoodService. We thought there was more opportunity to get a consistent growth rate in that market plus a little bit at a minimum. And we also thought we could apply COS and drive some serious operational improvement out of that, and the leadership team that's there has done that. Through the years we've looked at different assets. They have not always been available to us, but we've been in this industry a long time and we really know the high quality players that are out there.

So, San Jamar has been one that has been on the list for a while and we had the opportunity to acquire it. It gives us a great brand name. It's a great fit for our distribution. It broadens that portfolio. It gives us another great asset for our representatives when they go in to sell our major customers. So it just made sense for us. And I would say it was opportunistic, but it was a good acquisition and we're really pleased to have the team with us. We really have high expectations for the business.

Neil A. Frohnapple - Longbow Research LLC

Okay. Thanks. I'll pass it on.

Operator

Your next question comes from the line of Charles Brady with SunTrust.

Charles Brady - SunTrust Robinson Humphrey, Inc.

Hey. Evening, guys.

D. Christian Koch - Carlisle Cos., Inc.

Evening.

Charles Brady - SunTrust Robinson Humphrey, Inc.

Just a question on CIT. The high single-digit growth rate is, obviously, an all-in number. I wonder if you could parse or give us a sense of maybe what you're looking really for the core growth rate on that business, and any meaningful kind of changes from the kind of sub-pieces of that, the end markets that you saw in 2016?

Steven J. Ford - Carlisle Cos., Inc.

Well, most of that growth is from the acquisitions.

Charles Brady - SunTrust Robinson Humphrey, Inc.

But you are expecting the base business to be up low single digits then would be a fair...?

Steven J. Ford - Carlisle Cos., Inc.

Yes. That's primarily acquisition growth is driving that high single-digit expectation.

Charles Brady - SunTrust Robinson Humphrey, Inc.

Okay. I was just trying to parse out, I guess, a little bit more on the – because you had obviously more of a product rollout in the latter half of 2016, so you're comping against that as well. I'm just trying to get a sense of the underlying...

Steven J. Ford - Carlisle Cos., Inc.

That rolled out and I think we're very excited about that product launch. It is taking a little bit longer than we would have liked. I think we're expecting to see more of an impact in the second half of the year, so we don't want to get out in front of ourselves with respect to the guidance that we're providing. And we are having – we've got a large commercial aerospace customer that is insourcing some of its product. So that is providing a bit of an offset to what we are going to enjoy on the SatCom ramp.

Charles Brady - SunTrust Robinson Humphrey, Inc.

Got it. Okay. And just one more for me on the Brake business. I know it doesn't really move the needle much anymore, but seeing the ag up in the quarter a little bit surprising, given that ag is kind of lousy everywhere else. What do you think is driving that, and was it kind of a one-time pop and we kind of go back to slow to negative growth in 2017, or what's happening there?

D. Christian Koch - Carlisle Cos., Inc.

And we did have – we mentioned through the year that the team has been working on their sales initiatives. We continue to invest in new product development. We've continued to invest through this cycle. We had some new product launches on hydraulic actuation side. I think the team has made some good headway there, that's contributing, and also we have seen some positive year-over-year growth the last two months. And we're not declaring a bottom or anything. I think we still think there are going to be some slight declines this year, but for some reason there was a strong finish to the year and a good start. So we'll see what happens. It's early days. Again, I don't think anything has really improved that much, but for us again it's such a small percentage that a new product one or two can have net positive impact.

Charles Brady - SunTrust Robinson Humphrey, Inc.

Yeah, fair point. Thank you.

Operator

Your next question comes from the line of Liam Burke with Wunderlich.

Liam D. Burke - Wunderlich Securities, Inc.

Thank you. Good evening, Chris. Good evening, Steve.

D. Christian Koch - Carlisle Cos., Inc.

Good evening, Liam.

Liam D. Burke - Wunderlich Securities, Inc.

Chris, on the Fluid Technologies business, how have the new product cycle been going? And how has the take-up been and how has that affected the revenue growth?

D. Christian Koch - Carlisle Cos., Inc.

New products have been really well received. We've talked about it now. Since we've owned on the business we talked about the fact that during the hold separate, there was still good investment in the pumps and still good investment in our electrostatic business and other things. So we've seen – I think we've seen some good product rollouts on the pumps, specifically in the Asia-Pacific region and now coming into North America. Certainly Europe has been there as well. It's just been some difficult times, I think, across the board for organic growth in North America. So I think from a new product perspective, we've been good there and it's met our expectations, I should say.

Liam D. Burke - Wunderlich Securities, Inc.

And on the medical front, in the CIT business, it seems to be stepping up. Are you continuing to get traction in that space? I know, heavier weighting is in aerospace in that part of the business.

D. Christian Koch - Carlisle Cos., Inc.

Yes. We like what we are seeing out of our medical technology business in CIT. That started with an organic business within CIT and we added the LHi to it. That acquisition has proven to be good. We continue to have solid sales growth there, despite the fact that we hold the same type of sales and price discipline in that market as we do in CCM. So there have been some products that we've decided to exit because of their margin profile, and we've still been able to drive some nice growth there. So that's a segment we like.

We're getting good traction with the investments we've made in engineering resources and at the customer there to begin to work on new products, and this is a long sales cycle. We know we have to go in and work on the new product development, get the certification with these OEs, but there is a lot of activity in that pipeline and we're pleased and, obviously, we continue to look for non-organic growth as well in the form of acquisition for this space. So we're happy with it.

Liam D. Burke - Wunderlich Securities, Inc.

Thank you, Chris.

D. Christian Koch - Carlisle Cos., Inc.

You bet.

Operator

And we have a follow-up question from the line of Jim Giannakouros.

Jim Giannakouros - Oppenheimer & Co., Inc.

Hey. Thanks for taking my follow-up. I actually have a couple. The CapEx step-up, the expectation is for $125 million to $150 million. Can you just kind of call out what the big buckets are in the step-up year-over-year?

Steven J. Ford - Carlisle Cos., Inc.

Well, some of it relates to projects that were approved in 2016 that are carrying over to 2017. There is additional capital that relates to the SatCom launch. There is an R&D facility that we are – I'm sorry – an R&D facility at CCM, and the restructuring in China that we took the charge for, there is capital associated with that. So those are some of the larger projects.

Jim Giannakouros - Oppenheimer & Co., Inc.

Got it. Okay. And then you mentioned the $7 million to $10 million in price/cost headwind quarterly in CCM is kind of how you are thinking about the equation there. But if the price sticks or half of it sticks in April going into your seasonally stronger periods, I mean, how should we be thinking about that if raws stay where they are?

Steven J. Ford - Carlisle Cos., Inc.

Well, if raw stay where they are and we get a good chunk of the price, that would sort of reduce the numbers that Chris gave earlier. I think right now we're planning for sort of a combined pricing raw material quarterly negative impact throughout next year, similar to what we experienced in Q4. But certainly, if we're more successful on price, and/or if raw materials sort of moderate, then there could be upside to that.

Jim Giannakouros - Oppenheimer & Co., Inc.

Okay. And just to make sure I understand. I mean, you guys gave the guidance for sales growth. I don't know if that was a volume number, but price, I mean, are you contemplating flat year-over-year? I know you've been talking about sequentially stable certainly since this summer. But if I recall, last year's 1Q price was down 2 or 3 percentage points, and that year-over-year comparison had kind of eased into that down 2% throughout the year. So are we entering this year's pricing in 1Q? How it's tracking? Is it flat year-over-year? Is it down 2%? How should I be thinking about – I mean, just trying to bridge your comments with that it reflects 4Q. I don't know if you mean sequential or year-over-year.

Steven J. Ford - Carlisle Cos., Inc.

Yeah. So for the full year, we gave that revenue guide of mid-single-digits. That assumes relatively flat pricing.

Jim Giannakouros - Oppenheimer & Co., Inc.

Okay.

Steven J. Ford - Carlisle Cos., Inc.

There may be a little bit of year-over-year decline in Q1. We're forecasting pricing to remain sequentially flat. Again, that may be a little bit of a decline in Q1. It's our seasonally weakest quarter, but for the full year there is very little price that's reflected in the earnings guide that we've provided. So to the extent we're able to get price in connection with the recent announcement, again, that's not in the number that we've provided.

Jim Giannakouros - Oppenheimer & Co., Inc.

Got it. That's extremely helpful. Thank you. And one last one, if CBF does stabilize, I know we have been thinking that if it stabilize or bounce off the bottom and we had actually organic growth, again, just bouncing off the bottom, we were applying an incremental picture of – incremental margin picture of about 30%, 35%. How should we be thinking about incrementals when demand actually does stabilize or you actually start seeing organic growth post the facility consolidation there? Thanks.

D. Christian Koch - Carlisle Cos., Inc.

I think it would be a little bit higher. I would take it to 35% to 40%, and I think we feel pretty good about the 40%.

Jim Giannakouros - Oppenheimer & Co., Inc.

Thank you.

Operator

And we have a follow-up question from the line of Kevin Hocevar.

Kevin Hocevar - Northcoast Research Partners LLC

Hey, everybody, again. So with all the acquisitions you've made, what type of accretion, when you set them altogether, would you expect in 2017 from those acquisitions?

D. Christian Koch - Carlisle Cos., Inc.

About – I don't know, $0.20 or so, Kevin.

Kevin Hocevar - Northcoast Research Partners LLC

Okay, perfect. And then how do you view this first quarter with commercial roofing? It was your strongest quarter last year. Volumes, I think, were up 10% or 11%. We had pretty favorable weather. Is that a tough comp to overcome in your view? Or, I guess, how are things started and do you think you can still grow volumes in the quarter in commercial roofing?

D. Christian Koch - Carlisle Cos., Inc.

You're right. First quarter of last year was, I think, the high mark on the growth. And we saw things level out over that. But going into this year, and certainly what we've seen so far, I think we feel positive about Q1. It's very weather dependent. It's also early days. I mean, not a lot of volume, so don't read anything into early start. But what we've been saying is, I think you can hear it on the pricing and you can hear it on the raws and that is kind of more of the same. We think it's pretty stable and I would anticipate a good start to the year.

Kevin Hocevar - Northcoast Research Partners LLC

Okay great. Thank you.

Operator

And there are no further audio questions.

D. Christian Koch - Carlisle Cos., Inc.

Thanks, Latavia. This concludes our fourth quarter 2016 earnings call. Thanks everyone for your participation, and we look forward to speaking with you all at our next earnings call.

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