Carlisle Companies Inc Q1 FY2023 Earnings Call

Good afternoon. My name is Frances and I will be your conference operator today. At this time, I would like to welcome everyone to the Carlisle Companies First Quarter 2023 Earnings Conference Call. I would now like to turn the call over to Mr. Jim Giannakouros, Carlisle's Vice President and Investor Relations. Jim, please go ahead.

Thank you. Good afternoon, everyone and welcome to Carlisle's first quarter 2023 earnings conference call. We released our first quarter financial results after the market closed today. And you can find both our press release and earnings call slide presentation in the Investor Relations section of our website, carlisle.com. With me today are Chris Koch, Chair, President and Chief Executive Officer; and Kevin Zdimal, our Chief Financial Officer. Today's call will begin with Chris providing highlights of our first quarter results and a discussion of our current business outlook and Kevin will discuss additional financial details and update you on our outlook for 2023. Following our prepared remarks, we will open up the line for questions. But before we begin, please refer to Slide 2 of our presentation, where we note that comments today will include forward-looking statements based on current expectations. Actual results could differ materially from these statements due to a number of risks and uncertainties which are discussed in our press release and SEC filings. As Carlisle provides non-GAAP financial information, we've provided reconciliations between GAAP and non-GAAP measures in our press release and in the appendix of our presentation materials which are available on our website. With that, I will turn the call over to Chris.

Thank you, Jim. Good afternoon, everyone and thank you for joining us on our first quarter 2023 earnings call. Please turn to Slide 3. Let me begin my commentary by complimenting the global Carlisle team on their effort and hard work during a challenging first quarter. Their commitment to our continuous improvement culture and steadfast dedication to delivering the Carlisle experience to our customers are some of our greatest assets and positions Carlisle extremely well in our efforts to continue to create significant value for all of our stakeholders. On our year-end 2022 call, we noted that the first quarter would be a challenge due to tough year-over-year comparisons for CCM, the normalization of buying patterns in the channel, significant inventory of both distribution and contractors and potential weather disruptions occurring in much of the country. Our financial performance as a company in the first quarter of 2023 reflected these challenges that were faced, in fact, by the entire U.S. building products industry. The U.S. building industry's normalization of buying patterns and destocking that began in Q3 of 2022 has taken longer than anticipated and we now expect it to be substantially resolved in Q2 of this year. This return to normalization of buying patterns left distributors and contractors with increased inventory positions driven by supply chain constraints that were experienced for much of 2021 and 2022. But supply constraints across the building products industry were, for the most part, resolved in the third quarter of 2022. During Q4 of 2022 and Q1 of this year, we saw continued strong demand at the contractor level as well-known positive market trends continued. However, we did see distributors and contractors adjust their orders to Carlisle, reflecting their higher-than-normal inventory levels. The efforts to effectively work down that excess inventory during the quarter have had a substantial impact on what remains in the channel and much progress has been made during the last two quarters despite the negative effects of cold weather and greater precipitation prolonging the process. The unusual and impactful weather experienced in the first quarter continued well into March. Looking at Q2, we see weather patterns becoming more favorable for contractors, demand continuing to improve as the season picks up and orders for our products increasing substantially over Q1 levels. These factors are what give us confidence in destocking effectively coming to an end in the second quarter. For the remainder of 2023 and longer term, we continue to see strong underlying demand in the non-residential and residential construction markets, with secular positives such as growing demand for energy-efficient solutions for buildings, a robust pipeline of new products coming to market, driven by our increased investment in R&D, a multiyear backlog of reroofing projects supporting a healthy baseline of activity, resulting in a very positive outlook for improved sales and profitability. With that said, we are mindful of the potential for further headwinds, such as increased tightening in the financial markets, even higher interest rates and related sentiment around anticipated deteriorating economic conditions. And we will continue to be vigilant in anticipating any negative impacts that could be forthcoming. We are also aware that constrained labor markets continue to limit contractors' ability to effectively address 100% of their potential demand, an impediment we do not see being resolved anytime soon. And as an aside is a significant driver of our new technology focus to reduce time on the roof for installation. Turning to our results. We delivered consolidated sales of $1.2 billion in the quarter, adjusted EBITDA of $214 million and adjusted EPS of $2.57. While results reflect a short-term disruption to our earnings growth expectations, particularly when compared against very difficult year-over-year comparisons, we do not believe recent trends, heavily influenced by temporary destocking impacted by inclement weather will impact our intermediate or long-term financial results. Instead, we are focused on benefiting from several tailwinds for our Building Products segments. Please turn to Slide 4. First, building codes are becoming more eco-conscious, resulting in increased demand for energy-efficient building products. At the core of this is the thought that insulation is perhaps the best source of energy savings across the building envelope and a way to reduce expected pressure on the nation's electrical grid which we know is in need of substantial investment. Our polyiso sales have grown 40% faster than traditional membrane growth and we expect that to continue for the foreseeable future as roofing our value requirements continue to increase. Notably, we have made investments in polyiso over the past few years to be able to service this growing demand, including investment in our new state-of-the-art manufacturing facility in Sikeston, Missouri which begins production this summer. Our Sikeston facility is also on track to achieve LEED Platinum certification, a reflection of our commitment to being a more sustainable company. Second, we continue to innovate around two significant pain points for our industry: sustainability and labor efficiency. Since Carlisle transformed the commercial roofing industry with the introduction of its Sure-Seal EPDM Single Ply membrane decades ago, we've remained committed to innovation that addresses contractor labor constraints that pressure their ability to service demand effectively and cost-efficiently. And by addressing those constraints, we improve contractor profitability. And helping our contractors become more profitable is a key way Carlisle can demonstrate the value of our products and services. Examples of recent product introductions that help our contractors become more profitable, can be found on Slide 5 and include our 16-foot TPO line where fewer seams reduce labor hours on the roof and deliver a faster installation. Our ReadyFlash coated glass phaser which reduces adhesion time, allowing work to be completed more quickly. And our XCI Class A plus wall insulation product that provides better fire resistance and competitive pricing. We look forward to introducing many more innovative products in the coming months and years, leveraging our growing investment in R&D. Third, given our commitment to our increasingly complex industry, we continue to invest in our training and education center in Carlisle, Pennsylvania, helping construction professionals specify and install more challenging systems every day. We offer innovative world-class hands-on training opportunities focusing on the installation of Carlisle warranted roofing systems and related products and the best field practices, all to help solidify and enhance our contractor relationships. We aim to be the contractor's manufacturer of choice, competing on and earning a fair price for the value we create and we are excited about our new product launches this year that will again demonstrate our commitment to helping facilitate ease of installation for contractors. A fourth tailwind supporting our positive outlook in building products is sustainability. Long-term opportunities continue to build with a large push to reduce the energy intensity of buildings and our products are squarely positioned within the solution set available to building owners today. We also believe the concept of circularity is an essential part of our product future and we're working hard to introduce recyclable products and increasingly recycled content into new products. Additionally, while still in the early innings, we expect that the Inflation Reduction Act tax benefit for building efficiency upgrades incentivizes commercial and residential building owners to invest in energy-efficient renovations and retrofits, a supportive tailwind for the next decade. And lastly, nondiscretionary reroofing and the corresponding well-found backlog of roofs to be reroofed in the next decade should continue to support a steady demand backdrop for CCM. Taken together with all of our tailwinds outlined, we believe Carlisle is truly a best-in-class differentiated building products company with a clear sustainable growth and value creation runway. And our portfolio pivot to building products reflects our confidence in this. Moving to Carlisle Weatherproofing Technologies. With balanced exposures between residential and commercial and repair and replace versus new construction, results in the first quarter came in slightly better than expected for our Carlisle Weatherproofing Technology segment. The CWT team continues to integrate Henry ahead of our original deal model plans, obtain the projected deal synergies and is executing very well on consolidating opportunities across business lines and geographies. The team is also driving greater efficiencies in our plants and managing price cost-effectively. Given this, we expect CWT's EBITDA to remain stable year-over-year despite the organic revenue declines we currently model for 2023. At CIT, backlog continues to grow, driven by increased airframe production. And more importantly, CIT continues to leverage their growth, capitalizing on the significant hard work done during the last few years in restructuring the business. These actions taken while in the COVID pandemic helped CIT emerge from this downturn stronger than before and are now paying off. With both wide and narrow-body aircraft production continuing to ramp, we should see reliable growth tailwinds in aerospace for the next several years at CIT. I'm also very pleased and proud that CIT was recognized recently as Airbus' Electrical Standard Parts Supplier of the Year for 2023. CIT received this recognition from Airbus for its robust commercial performance, high level of collaboration, strong project follow-up on new product introductions, operational performance and willingness to go the extra mile. CIT was chosen as this year's recipient out of 35 competing suppliers and is another example of customers benefiting and recognizing Carlisle's commitment to innovation and the Carlisle experience across all platforms. Now on to CFT. Carlisle Fluid Technologies continues to be an improving story with significant profitability gains this quarter. Backlogs at CFT also continue to grow with strong incoming order rates for standard products contributing to this growth. CFT remains focused on new product launches, operational efficiencies and proactively managing price and mix, all of which are contributing to attractive leverage on strong revenue growth in 2023. Please turn to Slide 6. Our results continue to demonstrate that Vision 2025 has been the right strategy for Carlisle. In addition to our world-class teams and proven business model, we benefited from a strong balance sheet and excellent cash flow generation to provide both financial and strategic flexibility to execute and achieve our ambitious goals. A significant portion of our success has been driven by the multiyear process of reshaping our portfolio to pivot from a diversified industrial products company to a higher returning building products portfolio of businesses, demonstrating our desire to be superior capital allocators. This transformation sets the stage for a more focused, higher returning and better understood path for future sustainable value creation at Carlisle. The pillars of Vision 2025 are well established and remain core to Carlisle's strategy going forward. Over the last few years, despite the multiple challenges our teams have faced, we continue to be guided by the clarity of mission as outlined by our strategic vision first announced in 2018, Vision 2025. As we approach the completion of many of the milestones and goals of Vision 2025 in the last year, we were simultaneously working on the successor to Vision 2025, a new strategic plan that will be introduced formally later this year. Vision 2030 will be a plan committed to many of the same principles and pillars we used to establish Vision 2025. And with it, will come new levels of performance and expectations that will represent our culture of continuous improvement. As a reminder, the foundational pillars for sustained value creation at Carlisle under Vision 2025 include driving mid-single-digit organic revenue growth, utilizing the Carlisle Operating System, or COS, to drive continuous improvement and build greater efficiency in our operations, building scale with synergistic accretive acquisitions, maintaining a returns-focused capital allocation strategy including organic investment to drive growth, a disciplined approach to our aforementioned M&A strategy and returning capital to shareholders. Notably, thus far in 2023, we've returned nearly $90 million to shareholders with share repurchases of $50 million and $39 million paid in dividends. And of course, none of this could be possible without continuing to invest in and develop exceptional talent. Through the execution of Vision 2025, Carlisle has built a solid foundation, leveraging a diversified workplace, decentralized management style, entrepreneurial spirit and a culture of continuous improvement which will continue to guide our value creation journey in 2023 and beyond and will absolutely be core to our Vision 2030 strategic plan. Turning to Slide 7. I mentioned our commitment to sustainable innovation but I'd like to highlight some of our recent steps taken towards our Net-Zero pledge. Carlisle has had a century-long legacy of responsible stewardship and stakeholder focus, all driven by our core cultural value of continuous improvement. We believe that creating a more sustainable environment is also productive for our shareholders. As an organization, Carlisle is committed to being a responsible environmental stakeholder with our three pillars of environmental sustainability. First, develop energy-efficient products and solutions to reduce the greenhouse gas, or GHG, emissions from building operations and help lower operating costs for our customers; second, reduce material waste going into landfills. Our history of recycling began in the 1920s when we incorporated scrap rubber into our inner tube production. We continue that tradition today. And third, focus on lowering the GHG emissions of our operations and manufacturing processes with the implementation of enhanced energy conservation measures. Several months into our journey after announcing our commitment to achieve Net-Zero GHG emissions across our entire value chain by 2050, we continue to take important steps towards achieving this ambitious goal. For example, we've committed to purchasing several million pounds of bio-MDI and bio-polyol to test and develop bio-based raw materials into our production. We've also replaced approximately 25% of our sourced prime carbon black in certain products with recycled material. And lastly, we're piloting end-of-life management of tear-off EPDM roofs, where we collect and process it into consumer rubber products. These steps all further our progress towards our sustainability mission and we're just getting going. And with that, I'll turn it over to Kevin to provide additional financial details as well as our updated 2023 outlook.

Thank you, Chris. For segment highlights, please turn to Slide 8. CCM delivered first quarter revenues of $576 million, down 35% from the prior year. The decline was due to the reasons Chris previously mentioned, including tough comps, destocking in the channel, and project delays due to severe weather across the U.S. These were partially offset by positive pricing. Adjusted EBITDA margin of 24% was negatively impacted by lower year-over-year volumes and lower cost absorption, partially offset by price realization and savings from COS. Moving to Slide 9. Sales at CWT decreased 12% due to continued softness in residential demand, partially offset by strength in our retail businesses and price realization. Adjusted EBITDA margin was 17%, notably down just 60 basis points from the first quarter of 2022. The team continues to focus on the integration of Henry, realizing the $30 million of stated synergies from the acquisition, and rolling out COS and significant investment in operations throughout CWT to drive greater efficiencies in our businesses. Moving to Slide 10. CIT revenue increased 15% in the first quarter of 2023, reflecting strength primarily in our commercial aerospace platforms, as we continue to see orders ramp up and momentum build as global passenger demand continues to approach pre-pandemic levels. Adjusted EBITDA margin expanded more than 400 basis points to 14%, driven by favorable volume, price realization, leverage on restructuring activities, and efficiencies gained from COS. Turning to CFT on Slide 11. CFT generated growth of 2.3%, driven by positive pricing and favorable volume, partially offset by a 4% year-over-year headwind from FX. Adjusted EBITDA margin expanded more than 700 basis points to 22%, driven by favorable volume, pricing, and efficiencies gained from COS. Slide 12 provides a year-over-year bridge items to the first quarter adjusted EPS. Moving to Slides 13 and 14. Carlisle ended the first quarter of 2023 with $424 million of cash on hand and $1 billion of availability under our revolving credit facility. We generated cash flow from continuing operations of $147 million and invested $40 million in capital expenditures. We deployed $50 million towards share repurchases and paid $39 million in dividends. As of the end of the first quarter, we have 3.2 million shares available for repurchase under our share repurchase program. Turning to Slide 15. We have provided our updated 2023 financial outlook. As a result of our challenging first quarter and destocking persisting into the second quarter at CCM, we now expect consolidated revenue to decline mid-single digits for the full year 2023. The change in our revenue outlook is entirely in our CCM segment, as our revenue outlook for CWT, CIT, and CFT remain unchanged. As a result of the revenue decline, we now expect margins to decline by approximately 100 basis points for the full year 2023. We remain focused on disciplined pricing, operational efficiencies, and managing costs through our continuous improvement efforts. As a result of the revenue decline, we now expect margins to decline by approximately 100 basis points for the full year 2023. We remain focused on disciplined pricing, operational efficiencies, and managing costs through our continuous improvement efforts. We also continue to invest in our businesses with expanding our R&D operations, improving the Carlisle experience that provides our customers with best-in-class customer service and cutting-edge information systems. Despite the deeper and longer period of destocking occurring in the first half of 2023, we are seeing momentum in the business with April orders showing very strong sequential improvement over the first quarter levels. This gives us confidence that the inventory in the channel will be level set by this summer and our shipments in the second half will better mirror the strong end market demand. With that, I turn it over to Chris for closing remarks.

Thanks, Kevin. In closing, I would once again like to express my thanks and appreciation for the excellent work by all of Carlisle's employees, especially over the last few years. From the onset in 2020 of the COVID pandemic to the fast and furious recovery in 2021 and 2022, to the recent challenges accompanying the destocking and return to normal buying patterns, Carlisle employees have shown incredible resilience, remarkable flexibility, and a deep concern for one another. Those characteristics contributed in no small way to the accomplishments the team has achieved since the launch of Vision 2025. As we move deeper into the year and with Vision 2025 objectives well ingrained throughout Carlisle, I remain extremely optimistic for the long-term success of Carlisle, as we leverage the flexibility afforded us by an incredible brand and reputation, a strong capital position, and superb cash flow-generating capabilities. Despite near-term and potentially growing economic challenges, we will continue to drive a culture of continuous improvement, an entrepreneurial mindset, and a commitment to superior capital allocation. We will take the necessary actions to navigate this complex operating environment, continue to deliver the Carlisle experience to our customers, and create value for all stakeholders of the company. And that concludes our formal comments. Operator, we're now ready for questions.

Our first question comes from Bryan Blair with Oppenheimer.

I was hoping you could offer a little more color to frame the challenging start to the year and then the timeline to normalize CCM order patterns. Is there any way to quantify the impact of destocking and weather, respectively, in the first quarter and perhaps offer a little more detail on April order trends relative to normalized seasonality? Understandable that there's an inflection relative to a weak Q1 but relative to a normalized seasonal path to the year, what are you seeing? And what are you hearing from the channel early construction season?

Sure, there are several points to address. Firstly, most of the volume decline can be attributed to destocking, with some impact from weather. If we were to estimate, it could be around a 70-30 or 80-20 split, leaning more towards destocking. To assess the timeline for completion, we are monitoring out-the-door sales from our distributors and contractor activity. Over the past couple of months, we’ve launched a new initiative to conduct our own surveys across the country, reaching out to about 450 different endpoints to understand regional differences. What we’re finding is that at the distributor out-the-door level, many are operating at over 90 percent of their sales compared to 2022. Analyzing our incoming bookings from distribution and other sources reveals a positive momentum building from February through March and into April, showing a good upward trend. We believe this will help address the destocking issue, and we anticipate it will taper off by the end of the second quarter, returning us to our normal cadence with CCM.

And then, kind of a natural follow-on. In terms of the revised CCM sales guide, how should we think about Q2 and back half growth rates? And what's contemplated for volume and price along the way?

I think pricing is mostly stable, not significantly affected by volume changes. Revenue is primarily what we're focusing on. In the second quarter, we anticipate around $100 million of destocking, which will impact that quarter. By the third quarter, we expect to align more closely with last year's levels, and since the fourth quarter of last year was an easier comparison, we should see double-digit growth in that quarter for CCM.

And with the inflection to growth in the back half, stability Q3 and rebound relative to a weak comp Q4, can CCM drive consolidated earnings growth, return to EPS growth during the back half with that setup?

In the second half of the year, certainly. As we look at the full year, we think we'll come up a little below or 30% EBITDA from last year. So we might be below that. Our new targets for CCM long term are 30% plus EBITDA margins. We expect to be back there in 2024.

The next question comes from Tim Wojs with Baird.

Going back to the topic of pricing, given the challenges we've faced in recent quarters such as destocking and weather issues, how has the industry responded in terms of pricing? I've noticed that one of your competitors implemented a price increase for July. How is the market currently behaving regarding pricing, and have you observed increased competition due to the decline in volume?

Tim, I think it's worth noting the recent price increase and that we had anticipated implementing price increases in 2023, which haven't gained the traction we expected. However, in general, the pricing out of distribution for most of the industry remains strong. As Kevin mentioned, we expect it to remain flat for the year, largely due to the improvements we've made over the past five to six years in becoming a market price leader and maintaining pricing discipline while emphasizing value. You may have noticed changes in leadership among our competitors, which seems to be driving a greater focus on value as well. While there are occasional price deviations, generally, market participants are staying disciplined. Some may offer special deals directly to contractors, but we aim to maintain our price leadership position. Overall, I've been satisfied with the pricing stability through April, and there has been solid price discipline in the market.

And then just maybe from a mix perspective, I mean, have you seen any variance in kind of the roofing systems that you're selling between like EPDM or TPO? And I'm just trying to think if one of the membranes is a higher install cost versus the other one. Have you seen any sort of like share shift or mix shift kind of happen within your portfolio?

Where Kevin and Jim can discuss this as well, I believe the most significant change occurred last year, possibly influenced by events from that time. When TPO was limited, we were sold out for the entire year. There were some companies selling PVC and larger quantities that seemed to take advantage of the situation. Thus, there may have been a shift in Q4 or Q1 in fulfilling orders where PVC was used instead of TPO, but now that supply issues have eased, things have returned to normal. For two years, the industry faced challenges with metal fasteners, which were scarce, leading some to use alternatives like adhesives. We utilized a VELCRO roof that may have gained some traction, but overall, those changes were minor. Looking at EPDM, our oldest brand, things have remained stable with no significant market shifts. As we progress through the year, I expect a return to the usual mix of TPO, PVC, EPDM, polyiso, and EPS, with all the disruptions from the past two years being resolved.

How is the cost basket performing compared to your initial expectations, and what is the updated expectation for the year?

So costs, we're not seeing as much on a raw material that we thought we'd see entering the year and that certainly is factored into our change in margin guidance for the full year. I mean, we're still seeing probably $40 million to $60 million of benefit this year versus what we were higher than that going into the year.

And Tim, most of that would be, I think, in the second half.

The next question comes from Saree Boroditsky with Jefferies.

Obviously, contractor backlogs remained strong but there appears to be a lot of skepticism right now in non-residential. So could you just help frame a very downside scenario for us? Like maybe what would CCM look like today in a 2009-type scenario?

I appreciate the question. I completely understand and agree with you. There's a lot of anxiety and concern. And I think part of it is this destocking occurring in Q4 or Q1. But those are the lowest months of the year for roofing for us in North America. And I think as we look into 2023, with what we see at the contractor and the backlog they have and what's happening out there, I just can't see a 2009 scenario occurring in 2023. I can't forecast obviously out into '24 but we're backlogged. There isn't enough labor. Again, I mentioned that in the commentary. So when we have these days off the roof due to weather, that just adds to the backlog and contractors need to get that work done, too. So again, there's a lot of angles we can go on how we're helping them with that but I just don't see that type of downside. It would have to be something pretty dramatic that would occur in the second half. And as Kevin mentioned, things improved from a comps perspective as well as we get into Q4. But to answer your question, Carlisle has always performed well on an EBITDA margin basis in the downturn. You can look at the data in 2020 and then we can go back to 9%. And we've, in fact, had great EBITDA margins that improved. So I would say that while I don't see it happening, if it did occur, we'd still be producing good cash flow and good EBITDA margins through that.

And then, maybe skipping into another segment. CWT margins held in strong given the organic growth declines, how are you thinking about margin performance there as you go through the remainder of the year?

Yes. As we look at year-over-year, we think there's definitely benefit and pick up we're going to get in the second half of the year. We could see a couple of hundred basis point full year, year-over-year improvement for CWT.

The next question comes from Garik Shmois with Loop Capital.

I wanted to ask on the demand side for CCM just given there's a lot of distortions with inventory destocking, both for you, manufacturers, distributors. Just wondering, though, if you have a sense, just given your comments around strong contractor backlogs, what the underlying market demand is this year for contractors and roofing installations? And has that changed at all since the beginning of the year?

I think there may have been some changes in practices, although I'm not certain. Interest rates and banking issues have certainly had an impact on the residential market, although I don’t believe it's affected the non-residential sector in this quarter, but there is definitely some concern. The ongoing destocking process adds to that anxiety. When we analyze the strong markets, we’ve noticed some decreases in warehouses, which are probably lower than last year, and we expect that trend to continue. The educational sector may also see slightly lower numbers than we initially anticipated, by a point or two. As for stores, there may be some impact, possibly influenced by the shift towards online and internet sales. The healthcare sector has performed well and better than we had expected. Furthermore, our dealings in larger multifamily residential buildings remain consistent with our expectations. Overall, when I reflect on our position compared to last year, we seem to be flat at the moment. For the upcoming year, I don't anticipate any changes. As we move into 2024, a lot of factors are in play that could influence this. We will have a more informative call at the end of the second quarter, as we will be further along in the season and after the destocking is complete.

I wanted to follow up just on the pricing expectations, just to maybe get a little bit more clarity on the comment that you made that you expect pricing to be flat. Is that a comment for the second half of the year, as you've anniversaried the price increases in 2022, specifically? Or are you expecting year-on-year pricing for '23 to be flat? And if that's the case, I think that might be a little bit different than what was communicated on the last quarter call.

Yes. Go ahead, Kevin.

Yes. So that's flat for the full year. I think on the earlier call, I mean, we were maybe up slightly. It wasn't a whole lot that we were putting to price that we had some carryover. But yes, what we're looking at now is flat for year-over-year.

Yes. And Garik, when you look at that, the difference would be that we had that fourth-quarter price increase and I think it's all attributed to. We thought there would be destocking ending sooner. We thought that price would gain a little more traction. I think you saw, as was mentioned earlier, one of our competitors adding a price in there as well. And I think there was thought that, that would hold. And that was what was our original assumption on the year for pricing being up. I don't know what we have, 1% or 2%. And then now we're back to flat and it really centers around that price increase not holding.

Just one last question for me. Just on switching to CWT, the strength in retail in the quarter, was that related to any channel fill or timing benefits? Just wondering if you can provide a little bit more color what happened there.

Yes. On the retail channel, if we're talking about retail in the same way, kind of big box thinking like that, most of the improvement there was around weather and what happens after weather, especially in the West where we've got a lot of population that was affected by rain. We tend to see a surge in our CWT products and the Henry products and that team addressed it in an unbelievable way because they have to pick up production. They've got to reallocate and divert product out there to make sure that those big box and retail stores get it. They did a heck of a job doing it. But that's really what that was attributed to and not any type of rollout. We have had some new product introductions occur but those don't tend to have the big load and like maybe you see some other companies. So yes, all related really to that weather.

The next question is from John Joyner with BMO Capital Markets.

I'll ask about destocking. We can see how often we can mention that term. Besides areas like brake and friction, I don't remember much historical discussion about destocking or restocking for CCM. Have there been any changes at CCM regarding your channel partners, or did they simply accumulate too much inventory over the past year? Please help me understand this, as I don't recall much discussion about destocking in the past.

Yes, I think you're right. That's a good point regarding CBF. Reflecting back on 2008 and 2009, there was a lot of inventory, and then everything collapsed with the Cats and Komatsus, leaving us with excess inventory. It’s a memorable situation from long ago. Regarding CCM, not much has changed. Back in 2019, we were still following our typical patterns where we produce for the winter season, distributors stock up, and then they work through that inventory. Occasionally, if we had an early spring or a late fall, our sales or shipments in the fourth and first quarters improved a bit. Before 2019, Q1 had been steadily increasing each year by a small percentage. Then we faced COVID, which caused a decline, followed by a resurgence and subsequent supply chain challenges that everyone experienced. We observed that others were, to some extent, stockpiling—ordering from multiple suppliers to secure products and accumulating stock. The idea of contractors building inventory was new for us, and we underestimated this trend in our initial estimates for the fourth quarter. That was our oversight. It will take time to work through the current situation, but we now have a clearer view of it. Once this is resolved, I believe we will return to a regular cadence, assuming we don't face another major supply chain crisis like we did during COVID, which I don’t expect. CCM has a long history of managing orders, product introductions, and market supply efficiently, so I think we will revert to our previous best practices. This has been a unique situation that I would classify as a one-time aberration.

And then, maybe just one more and I think I know the answer to this but I realize that you intend to focus on the kind of core building products businesses. But maybe just looking at CFT, the business actually performed quite well. I mean people were focusing on CCM, I get it but CFT performed quite well. So with the operational improvements that you have implemented at CFT, a lot of heavy lifting for that business, have you possibly rethought how you view CFT going forward with regard to how it fits within your portfolio strategy?

No. I think it's important to acknowledge the hard work that Fred Sutter and the team have put in since he joined the company, particularly in introducing new products and enhancing the sales force and operations. That was part of our vision when we acquired CFT. However, when we assess our ability to allocate capital effectively and consider the potential for return on invested capital along with its impact on the profit and loss statement, we see that the best opportunities still lie within the Building Products segment in CCM. The historical data supports this, and although CFT is performing well, it remains a relatively small component of our business at $300 million. It would be challenging for them to reach a scale where significant investment would be more beneficial compared to focusing on our core building products. Therefore, we believe that our capital allocation strategy should prioritize building products for the foreseeable future.

The next question comes from Adam Baumgarten with Zelman & Associates.

Based on the surveys you've conducted, do you have more clarity on the $100 million worth of inventory that is scheduled to be released in the second quarter? Specifically, how is this inventory divided between contractors and distributors? Additionally, are there certain products within that $100 million inventory that are particularly elevated compared to others in your portfolio?

We don't have a detailed breakdown on the contractor distributor at this time, and I apologize for that. We will continue to improve our efforts in this area as it's a new addition that we plan to implement regularly. Currently, I believe the majority is related to distribution, particularly with major contractors. Regarding specific products within that $100 million inventory, I can't provide any guesses, and I apologize for that as well.

Can you provide an estimate of the percentage of reroofing projects that you are financing?

Jim and I just talked about this. Regarding reroofing, it mainly comes from an expense budget. In new construction, it's part of a larger project funded under one capital request, including the roofs. Once it's sold to a customer and it's at year 20, 15, 35, or whatever, the costs for reroofing typically come from their operating budget or the building owner's budget. So, I would say the percentage that is financed is probably quite low.

And then just maybe some help on EBITDA margins were down about 500 basis points year-over-year in the first quarter and you guys are guiding to down 100 for the year. Maybe some help on kind of the quarterly progression there to get back to that down 100 would be great.

As we discussed, in the first quarter, we focused on margins. Overall, when evaluating the business, it's important to note that many margin impacts will result from absorption, which directly correlates to your volume projections for each quarter. You should expect to translate that into your bottom line. For the CCM business, we are likely looking at decremental margins in the high 40s, which should assist in achieving your quarterly goals.

The next question comes from David MacGregor with Longbow Research.

I wanted to ask about the guidance revision. Moving from low single-digit revenue growth to high single-digit revenue declines suggests a $400 million difference. I'm trying to understand this in the context of the first quarter, where you mentioned a $300 million revenue delta, with 70% to 80% attributed to destocking. You also mentioned an additional $100 million expected in the second quarter. I'm trying to figure out if there will be any catch-up in the second half of the year related to weather, or if you are being conservative with the $400 million change in guidance. Can you help clarify this?

I believe there is a cautious outlook heading into Q3 and Q4 regarding how much we can make up for our losses. Two key factors come to mind. First, we have been discussing the impact of the weather; the longer favorable conditions last, the better our performance will be, as we have contractors busy installing roofs. Second, we continue to face labor constraints that limit our output. To address this, the CCM team is significantly increasing our R&D investment to help with the backlog, which has built up over several years, and we do not anticipate the labor situation improving. Additionally, we are seeing positive influences from the Investment Act, reshoring efforts, and energy efficiency initiatives that will drive future demand, which will further require labor. This is what motivates much of our focus on new product development and investment. These two factors make us a bit cautious about how quickly we can recover, but like you and all our shareholders, we are eager to catch up as soon as possible.

And I just want to clarify, you've talked on a number of different calls in the past about the fact that a good percentage of your business does not go through distribution but it goes directly to contractors. And you've already, I guess, commented and passing earlier in the call that the inventory surplus is occurring both at distributors and at contractors. And I guess I was hoping you could give us an update in terms of just how should we think about the percentage of your business that is actually going through distributors with the products being distributed or is being delivered to a distributor versus direct to the job site and how that maybe has changed since maybe a year ago.

Yes, that's a good question. I really appreciate the fact that you clarified that statement around how much we sell to a contractor and how much we deliver direct because there is a difference and that's what I made a comment earlier on pricing that I'm going to say 90-plus percent of our sales go through distribution, while delivery is probably in the 60% to 70% are shipped direct to the contractor. Did that change during COVID? I don't know that that did. My guess is it may have just because of some of the local constraints around PP&E on a job site with masking and that kind of stuff that it might have been more beneficial for the contractor to take it directly as opposed to come to a distributor, pick it up or interface with the distributor's employees delivering to the site. But I don't have any details on that. So my guess is that it hasn't changed much other than that.

Last question for me is just the extent of production curtailments that you've undertaken here to compensate for this. How would you quantify those production curtailments vis-à-vis the actual shipment reductions? In other words, I guess, what's happened to your finished goods inventories?

Yes. We've cut back shifts and we've cut back temp labor, that piece of it. But train labor, we're holding on to that piece of it. We still are optimistic for the second half of the year and going into '24.

Regarding your comment about inventory, as I mentioned earlier, we typically build our inventory during the winter months. Therefore, our inventory levels have not decreased; in fact, they have increased in preparation for the anticipated needs in Q2 and Q3.

The next question comes from Dan Oppenheim with Credit Suisse.

I was curious about the CCM side regarding the weather challenges we faced in the first quarter, which limited some reroofing, along with the inventory issues that were unclear. As we enter what seems to be more normal conditions in the second quarter with improved weather and progress on inventory, do you believe there might be an increase in pent-up demand? If that's the case, will we have the necessary labor to meet it? Or is there not that much of a backlog? What is your perspective on this potential?

Yes, I think we just discussed this, but to reiterate, we believe there is a labor constraint. Demand exists, but it's likely compounded by demand that built up during COVID. This has led to a backlog for roofs that are aging and need to be replaced. The labor constraint is likely the biggest issue in Q2, particularly in terms of getting crews to complete the work. It seems that there won't be significant catch-up for contractors on job sites in Q2. Our ability to meet demand is more about utilizing our inventory rather than relying on inventory that contractors already have. Therefore, when we consider opportunities for catching up, I would highlight Q4 of 2023 and Q1 of 2024, where a shorter winter season could create additional opportunities to catch up.

And I guess on the CWT side, given that we've seen some decent signs in terms of residential construction here, any sort of more positive view? Like is it still a little early but just are you feeling any better there in terms of trends over the course of this year than you might have recently?

Yes, definitely. It was a tough blow to the residential market for CWT, but we remain optimistic as we approach the season. There are a few factors that enhance my excitement about CWT. Firstly, COS is being fully implemented at Henry and Frank, and the team there has become strong advocates for it. Additionally, our operations have become more efficient; we've eliminated some sites and redirected their production to others, which enhances our efficiency and drives automation. We also have new products set to launch this spring that haven't been introduced before, which will increase the efficiency and effectiveness of contractors. Coupled with good disposable income and the renewed interest from people looking to invest in their homes during the summer months, we are very positive about the outlook. Despite the challenges, the team is consistently achieving their synergy targets and making progress on several initiatives under the deal model. Therefore, we're very optimistic about our potential moving forward.

There are no questions waiting at this time, so I'll pass the conference back over to Chris Koch for any additional remarks.

Well, thanks, Frances. And that does conclude our first quarter 2023 earnings call. I want to thank everyone choosing for their participation, the great questions, and the interest in Carlisle. And we look forward to speaking with you at our next earnings call. Thank you.

That concludes the Carlisle Companies first quarter 2023 earnings call. Thank you for your participation. You may now disconnect your lines.