Carlisle Companies Inc Q2 FY2021 Earnings Call

Good afternoon. My name is Zen and I will be your conference operator today. At this time, I would like to welcome everyone to the Carlisle Companies Second Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will conduct a question-and-answer session. I’d like to turn the call over to Mr. Jim Giannakouros, Carlisle's Vice President of Investor Relations. Jim, please go ahead.

Thank you, Zen. Good afternoon, everyone, and welcome to Carlisle's second quarter 2021 earnings conference call. We released our second quarter financial results after the market close today and you can find both our press release and earnings call slide presentation in the Investor Relations section of our website carlisle.com. On the call with me today are Chris Koch, Chairman, President, and Chief Executive Officer; and Bob Roche, our CFO. Today's call will begin with Chris discussing business trends experienced during the second quarter of 2021, views of what's to come, and context around our continued progress toward an unwavering commitment to achieving Vision 2025. Bob will discuss the financial details of Carlisle's second quarter performance and current financial position. Following Chris and Bob's remarks, we will open up the line for questions.

Thanks, Jim. Good afternoon everyone. And thank you for joining us on our second quarter 2021 earnings call. While we recognize that there are still many people suffering from the continued effects of the pandemic globally, and in an even recovery, we hope all of you, your families, co-workers, and friends are healthy and you're reengaging as global economies open. I'm also pleased to report Carlisle’s COVID-19 infection rates approached zero in the second quarter, which wouldn't have happened without our team's strict adherence to our safety protocols and commitment to each other across our global footprint. I'm also very pleased that Carlisle’s performance continues to strengthen as we further accelerate into the economic recovery. Please turn to Slide 3. Vision 2025 has provided the clarity and consistency of direction that proved to be essential in guiding our efforts during the depths of the pandemic last year. It continues to guide us today as we seek to leverage proven demand across our end markets in 2021 and beyond. Vision 2025 provides Carlisle and our stakeholders a clear and direct vision that unites us in a collective goal, which in turn drives our priorities in everyday actions. We are very much on track to exceed the $15 of earnings per share targeted in Vision 2025. Our performance in the second quarter of 2021 illustrates our continued solid execution toward our stated goals. Several highlights of this continued progress include CCM's continued rebound and sales from the bottom of the pandemic in the second quarter of 2020. As a reminder, CCM sales were down approximately 20% in the second quarter of last year. As we entered the third quarter of last year, we had already begun to see improvement sooner than many industries, and that has continued sequentially through today. That positive momentum drove 28% organic growth year-over-year at CCM in the second quarter of this year and added to a significant in growing backlog.

Thanks, Chris. As Chris mentioned earlier, we had a very solid second quarter. I'm especially pleased about the margin expansion of CCM, CIT coming off market lows and positioned to deliver sequential growth in the next few quarters. CFT’s order book is improving, our disciplined approach to capital deployment in the form of share repurchases and dividends continues, and investment in our high ROIC businesses is driving organic growth. Our portfolio optimization actions, including the divesting of CBF and the announced agreement to acquire Henry Company, are important. Please turn to Slide 8 of the presentation. Revenue was up 22% in the second quarter driven by CCM and CFT, offset by the well-documented commercial aerospace declines at CIT. Organic revenue was up 20.7%. CCM and CFT each delivered greater than 25% organic growth in the quarter. Acquisitions contributed 0.4% of sales growth for the quarter, and FX was a 90 basis point tailwind. On Slide 9, we have adjusted EPS where you can see second quarter adjusted EPS was $2.16, which compares with $1.95 last year. Volume, price, and mix combined were a $1.30 year-over-year increase. Raw material, freight, and labor costs were a $0.95 headwind. Interest and tax together were a $0.01 headwind. Share repurchases contributed $0.07, and COS contributed an additional $0.12. Higher OpEx was a $0.32 headwind year-over-year, half of which is related to the May vesting and cash settlement of stock appreciation rights granted to all Carlisle employees outside of the U.S. in 2018, with the remainder reflecting the resumption of more normalized expense levels versus last year's cost containment measures taken in the depths of the pandemic. Now let's turn to Slide 10 on the second quarter performance by segment in more detail. At CCM, the team again delivered outstanding results with revenues increasing 27.5% driven by volume and price along with 70 basis points of foreign currency translation tailwind. All of CCM's product lines delivered 20% growth with particular strength in architectural models and spray foam insulation. CCM effectively managed raw material inflation headwinds experienced in the quarter with disciplined pricing for active sourcing and allocation of products to strategic customers. The adjusted EBITDA margin at CCM was 21.5% in the second quarter, a 60 basis point decline from last year driven by higher raw material prices, partially offset by volume, price, and COS savings. Despite raw materials being a headwind in the second quarter, we continue to anticipate net neutral price raw materials for the full year. Adjusted EBITDA grew 24% to $201.2 million, again demonstrating the earnings power of our CCM business.

Thanks, Bob. Entering the third quarter, we continue to be very optimistic about the remainder of 2021 from record backlogs at CCM to supportive trends in CIT aerospace markets to growing strength at CFT, coupled with excellent sourcing and price discipline and significant traction on our ESG journey. We're confident in our ability to deliver solid results for all Carlisle stakeholders. For full year 2021, we anticipate the following: At CCM, as previously mentioned, the trends that began in Q3 2020 gained momentum as we moved into 2021. We anticipate this momentum to carry over into the third and fourth quarters of 2021. Considering this momentum, coupled with record backlogs stemming from project deferrals that occurred in 2020, positive momentum in our newer businesses of architectural metals and spray foam, and expansion of our European business, we are increasing our anticipated revenue growth to high teens in 2021. At CIT, we are encouraged by leading indicators trending positive, but it remains difficult to gauge when complete recovery in commercial aerospace will occur. Given a very difficult year-over-year comparison in the first and second quarters, we continue to expect CIT revenue will decline in the mid-to-high single-digit range for full year 2021. At CFT, with end market strengthening and improvements in the team's execution of our key strategies, we now expect mid-teens revenue growth in 2021. And finally, for Carlisle as a whole, we are now increasing our expectations to mid-teens revenue growth in 2021. As we pass the midpoint of 2021, we are tracking to deliver our Vision 2025 goals of $8 billion in revenues, 20% operating income and 15% ROIC, all driving to exceed $15 of earnings per share by 2025. Despite lingering uncertainties around COVID, supply chain constraints, and what we perceive as near-term raw material inflation, Carlisle's employees across the globe remained focused on the execution of the strategies and key actions that support Vision 2025. Our team continues to embody a positive and entrepreneurial spirit, a commitment to continuous improvement, and a focus on delivering results for the Carlisle shareholder. Given our 100-year plus history and the resilience this company has shown in times of adversity and uncertainty, we remain confident in Carlisle's outlook, our strong financial foundation, cash generating capabilities, unwavering commitment to our Vision 2025 Strategic Plan, and to providing products and services essential to the world's needs. This concludes our formal comments. We're now ready for questions.

Your first question comes from the line of Bryan Blair of Oppenheimer.

Thanks, good afternoon guys.

Yes, good afternoon Bryan.

Bryan.

Great performance in CCM. We actually were flirting with normal seasonality sequentially, which I didn't think was possible?

Yes.

Given the supply chain constraints that the EU called out and that are so pervasive, to what extent did raw material availability and freight or other constraints impact CCM's ability to meet demand in the quarter?

Well, as we discussed, the team did a great job managing it, I don't think it really impacted their ability to meet the demand that was present in the quarter. Obviously, the surge in orders takes into account some orders that are for the third and fourth quarters, and we continue to work to fulfill all those but the team did a great job in meeting all the demand that was put to it in the second quarter.

Understood. And thinking about the third quarter, are there any incremental watch items in terms of the listed constraints that we think about in terms of CCM's ability to meet demands? And an extension of that? What kind of growth rate are you assuming as we bridge to the pipe teens guide?

Yes, Bryan, we don’t anticipate significant changes as we move from the second quarter to the third, despite ongoing challenges like the Delta variant. We expect raw materials to become a bit more accessible, as they have been gradually loosening since the start of the year, especially following the issues in Texas. We foresee this trend continuing slightly. Overall, we don’t have many concerns as we head into today. We expect normal growth, with the third quarter set to perform somewhat better than the second. Therefore, the growth rate should continue into the third quarter, following the usual pattern where the third quarter is larger than the second, tapering off slightly in the fourth as we enter the winter months.

Yes. And Bryan, I would just add one thing that I think the results were encouraging. It's interesting to talk about normal seasonality, but we are still experiencing an extraordinary time that is just as impactful as the declines we faced last year. The recovery has been unusual. I believe the CCM team has done a superb job managing through these challenges and getting close to normal seasonality, but it's important to emphasize that the environment remains very difficult across the business, from supply chain issues to order entry, as we discussed.

Completely understood. One last one for me. In the revised high teens sales growth guide for CCM. How should we think about volume versus price contribution for the year?

Yes, Bryan, that's mostly going to be price, but there is some volume increase in there as well.

Okay, so the step up from low double-digits to high-teens is mostly price?

Yes, primarily price, as raw costs have continued to rise. We needed to keep increasing prices to match that. Got it.

Okay, thanks again.

Thanks, Bryan.

Your next question comes from the line of Tim Wojs of Baird Equity Research.

Good afternoon.

Good afternoon, Tim.

Hey Tim.

Nice work. I guess, first question, could you just talk a little bit about how you're managing the backlog? There's chatter that people are double ordering and trying to get products from anybody they can. So how are you kind of controlling that just to make sure that you actually have real backlog?

We cannot determine what's a genuine order and what's not, since we cannot read the minds of our customers. We treat all orders equally and prioritize them based on shipping needs. Long-time customers are prioritized over opportunistic ones. We are striving to maintain the Carlisle experience by ensuring that contractors receive the products they need without any inventory sitting idle on job sites or in warehouses. The team is managing this well, but it requires significant effort from both our sales force and customer service to coordinate these activities. Regarding the extra orders, as we progress through the year, we don't anticipate this affecting our forecasts, as things should balance out when orders are fulfilled. We will reassess as we approach winter to understand our status better. The recovery has been rapid, and demand is robust across many sectors, so we are focusing on the short term to ensure we are providing the necessary support for contractors today.

Okay, good. And then I think you guys are definitely taking share, where would you kind of peg the market at relative to your high-teen sales growth? And I guess, what's your confidence that once some of these supply chain issues settle down that you can hang on to some of that share gain longer term?

Well, I'll take the last one first. I think we view these last year and this year as opportunities and probably the best opportunity for contractors, distributors, end users, and architects to see the really true Carlisle experience and the work that our team does. I mean, when everything's going smoothly, people understand how powerful that experience is. And so what I would hope is that as we are introduced to new customers, as people that are with other suppliers decide to try Carlisle, that they are overwhelmed by the experience and decide to make that permanent shift. Is that always the case? I can't tell you what level of people or what percentage of the people that get material from us for the first time stay with us. But my guess is that it's contributed to our growth over the last few years and will continue to do that. So that's our goal: continue to perform well, continue to perform better than anyone else and make sure that people see that and want to be part of that team. I think on the other side, the growth side, Bob may have some comments on that. But I think that the industry right now and the recovery probably market shares have not moved much relative overall demand just because demand has been so heavy. So again, what I would look for is to run through the year, and let's sort out those orders you talked about that there may be some over ordering and then get into 2022. Hopefully, we'll have a more normal year. And then we'll be able to assess our progress versus the industry and versus our competitors. Bob, do you want to add anything?

Okay, good. Well I hop back in queue. Thanks, guys.

Yes, thanks Tim.

Thanks Tim.

Next question comes from the line of Joel Tiss from Bank of Montreal.

Hey, guys, how's it going?

Hey Joel.

All right. So I'm going to switch gears a little bit. I wonder, it's kind of an off-the-wall question. But do you think it wouldn't make any sense for you guys to think about like spinning out everything that's not CCM that would kind of accelerate your move to 2025? Maybe not on the revenue side, but certainly on the margin side?

I don't think it makes sense at this moment. The reason I say that is it's difficult to find meaningful valuations for any business due to CCM's declines and the fact that CFT may not have reached its full potential despite the effort we've invested. However, there is still more to come. So, that's not really a consideration for us right now. We intend to enhance the building products aspect of our business around CCM, and bringing in Henry contributes to that; it provides us with plenty to manage and concentrate on. We plan to wait until CIT and CFT achieve sustainable growth recovery. As we've always done, we will evaluate the portfolio. This process has been in place throughout my time at Carlisle, from divesting certain segments to making acquisitions. We consistently assess the portfolio, making decisions based on what's in the best interest of Carlisle shareholders. While we remain vigilant, I don't anticipate any actions in the near term.

And then as you build out your building envelope and it's starting to get pretty serious. Is there any way to team up with like a carrier or train or someone who is doing sort of building assessments to help the buildings get more efficient and lower their costs and all that? Is there any way to team up with those guys to get spec'd into being part of that energy audit and helping them get to their goals?

Sure. I’m not familiar with those two specific companies, but I can say that every day our teams in CCM are connecting with industry organizations, architects, and large building owners dealing with warehousing, data centers, and similar projects. As environmental, social, and governance factors and energy efficiency gain importance for these users, it’s likely they will encourage collaboration. This means that when we're constructing the building envelope and ensuring it has excellent insulation, vapor, water, and air barriers, these building owners will also seek participation from the energy providers for heating or cooling in a coordinated way. Much of this discussion happens at the design stage with architects and specifiers. As we noted, both our Carlisle and Henry teams are dedicating significant time to these interactions. I believe you’re on the right path. However, I can’t speak to Carrier and Train specifically because I lack information, but I would expect those discussions are taking place.

Well, that's great. Thank you very much.

Thank you, Joel.

Thank you.

Your next question comes from the line of Saree Boroditsky of Jefferies.

Hi, good afternoon.

Good afternoon.

Within CIT, could you talk about what you saw in the quarter from medical versus aerospace? And then how do those growth rates are expected to look for the remainder of the year? And then any color as we start to think about 2022?

Yes, I think the last one first Saree. I mean, I don't think we're ready to talk about 2022 yet now. Certainly, we expect growth at CIT and continued ramp in our profitability. But we're a long way from what's going to happen with aerospace getting into 2022 at this point in time. Medical versus aerospace in the quarter were almost the same decline. And that's largely due to the massive orders or, I’m going to say, revenue we saw last second quarter remember, we talked about a big spike in orders when COVID hit in shipments in the quarter. So in medical. So that's why it was relatively flat, but we expect acceleration, faster acceleration in medical going to the end of the year than we do in aerospace, but we expect some growth in aerospace.

Got it. And then you raised the outlook for CFT. Could you talk about the outlook for industrial CapEx and projects? What are you hearing from customers? And then again, I'll just ask, should this strength continue as you think about going into next year?

I believe we are seeing the industrial sector continue to improve following the challenges of 2020, along with an uptick in production. It's also important to note that when we initially acquired CFT, there were some challenges, and we experienced some losses. Part of the recent gains can be attributed to reclaiming their rightful share through innovation, new products, and the excellent work by the teams in communicating their value proposition. This reflects both the overall improvement in the industrial markets and CFT regaining its footing to become a strong part of Carlisle. Bob, would you like to add anything?

No, that was clear Chris.

Thanks for taking my questions. I'll pass it on.

Thanks, Saree.

Your next question comes from Kevin Hocevar of Northcoast Research.

Hey, good afternoon, everybody. Nice job there. Chris, I'm trying to wrap my head around one of the comments you made I think in your prepared remarks. I think you'd mentioned in the CCM business, you'd receive 65,000 orders in the quarter, which is double the usual amounts. I guess I'm just trying to understand what that means. I mean, is that again a sign that there's some double-ordering going on? Is that maybe distributors trying to build some inventory, and even maybe contractors get some product on the job site even if they don't need it yet just because things are so tight? Is it backlogs building in a pretty material way? I guess does that mean there'll be less orders in the third and fourth quarter? Is it some panic buying? I guess I'm just trying to understand because that seemed like a pretty interesting stat that got my head around. I am curious if you could just elaborate on that a little bit?

I think it's important to reference what happened in 2019 as a benchmark. Without that reference, it's challenging to assess our performance accurately. Regarding the issue of double ordering, we should be cautious. Last year, many were reluctant to place orders due to distribution challenges and restrictions on contractors in various regions. States like Pennsylvania and cities like Boston had limitations that affected job sites, with increased safety protocols complicating matters. Inspections were happening virtually, and permits were hard to obtain because of government shutdowns. While we believe that we're in a better position now in the second quarter, there were still concerns in the first quarter. We prepared by ramping up production and adjusting our pricing strategies. However, there was a lag in the market until confidence returned among contractors and distributors. This led to a surge in orders, and I believe that the majority of the orders coming in this quarter are legitimate. There is clearly pent-up demand as people were holding off, and as we discussed, that demand continues to grow. Even if we exclude a portion of orders, we would still expect a significant uptick in the second quarter this year. We'll need to keep an eye on the situation as we approach the third quarter, where we can make further comparisons based on our experience in the peak of the season. Overall, I want to emphasize that demand is robust, and we're recovering from the pandemic, with people regaining confidence and placing orders as they catch up on backlog.

Yes.

Yes, okay. That's helpful. And in terms of the increased guidance, just one quick question there that so the low double-digit, the high-teens increased in CCM. And it sounds like the majority of that is pricing. Is that pricing increase based on what you've currently kind of realized between price increases that have already taken effect or I know, there's also like an August increase you have out there for a lot of roofing products. Is there some assumptions of future pricing as well baked into that guidance?

No, that includes obviously the announced price for August, but nothing beyond that at this point.

Okay, I understand. For my last question, can you elaborate on the price cost dynamics for the second quarter? It seems like the expectation is to maintain a neutral position for the year. Have there been any changes in the expectations compared to three months ago, especially regarding inflation and pricing? It appears that the overall trend might remain consistent. I'm interested to know what occurred in the quarter and how you foresee this evolving for the remainder of the year.

Yes, certainly the net’s not different. But certainly, with our increase in revenue based on price, we've gotten a lot more cost pressure and assumed a lot more price traction over the last three months, as costs have continued to rise and be up there. We are a lot more confident that we need the price to cover it. Q2 was about $25 million negative as we expected, and we expect to make that up in the second half of the year, more in the fourth quarter, in the third quarter, but positive in both those quarters to make up for what we were short this quarter.

Okay, our Thank you very much.

Thanks, Kevin.

Thank you.

Thanks for taking my question. Chris, just curious, you made a comment in your prepared remarks around allocating products to strategic customers or just wanting to get a spin on that. Is it really more of a function that because you're effectively at full capacity, you can be selective and service or I guess higher margin higher quality customers or any kind of additional color that or comment would be helpful?

Yes, I think that our customers, we have some loyal customers that work very hard to make sure Carlisle is specified and chosen throughout the world actually. We don't want to make decisions in a quarter and we want to have share gains, but we want to make sure that the work we're doing with people, because it is pretty extensive. We spent a lot of time working with our contractors on things like warranty inspections and on helping prepare quotes, and that we always want to strategically give our efforts to those distributors and contractors that are with us for the long run and have invested significantly in the Carlisle brand. So I don't think it's anything. While we stated, I don't think it's anything other than our normal practice there that we expect a lot out of our partners and they would expect a lot out of us in terms of loyalty as well.

Thanks. And just on the building envelope business, you called out spray foam, metal roofing growing over 40% in the quarter. It sounds like the entire building envelope business was up over 20% in the quarter. What's the outlook there? I guess what I'm asking is given that business has been more exposed to housing, is there any pause that you might be seeing at all just with the pause in new housing just given the escalation in the market and the builders pulling back a bit? Any help on the building envelope side will be helpful.

I think on the metal side, Peterson is a pretty much a commercial metal business. And I think there we're seeing a lot of movement into metal as it becomes architecturally more attractive, as it has some renewable and recyclable aspects to it. We're just finding it's gaining traction, there's some very positive trends there. And Peterson has done an excellent job of adopting the Carlisle experience, which they probably called it the Peterson experience before and, but it's a great brand with great coverage and good relationships. On the Drexel side, which is a little bit more on the residential side, again, we're seeing people choosing metal roofs in a lot of cases. There’s more interest in Drexel, which has a very unique value proposition where they are actually preparing that work right on site and driving a lot of value. So as that team gets out and demonstrates a value proposition, they're gaining a lot of traction. On the spray foam side, we originally bought Accella. We talked about that high single-digit industry growth rate as people would adopt foam as a far superior insulator and some in certain cases, vapor barrier components to it. What we're really seeing is that continued traction versus other forms of insulation, and certainly here in the southwest with the heat and even in the north. I know being from Minnesota and living in Arizona, spray foam insulation just provides a superior solution for the space in the wall cavity and it just drives great performance. We see it just continuing to gain share in the marketplace. So I think the trends are positive for both, and then we, on top of that, we're adding very positive unique value propositions with this business. And I would be remiss if I didn't say that the partnership between CFT with their newly launched spray foam equipment, which provides superior on ratio performance and better heating capabilities in the competition and a much better performing product, coupled with our spray foam coming out of CCM has also created a lot of interest with end users and is helping us drive a preference for our brand. So it's actually we're excited about all of those businesses and what they've done.

Okay, and I guess just one follow-up. In the guide, you took your CCM guidance up largely on price. Was there any change to the underlying assumptions on the envelope side of CCM?

No, Garik. They are mostly in line and those are up in price as well.

Right. Commodities as they go into metal roofing and spray foam are just as volatile as the flat roofing commodity. So we need to get price in those as well to keep up with our flat price cost.

Okay, fair point. Thanks again.

Yes, thank you, Garik.

There are no further questions at this time. I would now like to turn the call back to Chris. Please go ahead.

Thanks, Zen. And thanks, everybody. This concludes our second quarter 2021 earnings call. We appreciate your participation. We look forward to speaking with you at our next earnings call.

This concludes today's conference call. Thank you for participating. You may now disconnect.