Carlisle Companies Inc Q3 FY2025 Earnings Call

Good afternoon. My name is Kelsey, and I will be your conference operator for today. I would like to welcome everyone to the Carlisle Companies Third Quarter 2025 Earnings Conference Call. I will now turn the call over to Mr. Mehul Patel, Carlisle's Vice President of Investor Relations. Please proceed.

Thank you, and good afternoon, everyone. Welcome to Carlisle's Third Quarter 2025 Earnings Call. I'm Mehul Patel, Vice President of Investor Relations for Carlisle. We released our third quarter financial results today, and you can find both our press release and the presentation for today's call in the Investor Relations section of our website. On the call with me today are Chris Koch, our Board Chair, President and CEO; along with Kevin Zdimal, our CFO. Today's call will begin with Chris providing key highlights of the third quarter. Kevin will follow Chris and provide an overview of our Q3 financial performance and our outlook for the full year of 2025. 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 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. And with that, I will turn the call over to Chris.

Thank you, Mehul. Good afternoon, and thank you for joining us for Carlisle's Third Quarter 2025 Earnings Call. Let's begin by turning to Slide 3 of the presentation. Carlisle's third quarter results reflect the strength of the underlying CCM business, offset by the ongoing challenging environment in both residential and nonresidential new construction. This, along with the M&A activity in our commercial channel, was communicated in our early September commentary. The vast majority of the continued weakness in new construction is driven by the continuation of higher interest rates, affordability challenges, and economic uncertainty around inflation, coupled with job stability concerns and labor shortages. With respect to the post-M&A integration, as with any transaction, some turmoil and change was to be expected, and we anticipate that over the coming months, this will be resolved, and we will return to a more stable situation. Despite this turbulence, third quarter revenues came in at $1.3 billion, up 1% year-over-year, only slightly below the expectations we discussed on our July second quarter earnings call. This allowed us to achieve an adjusted EPS of $5.61. In Q3, CCM continued to execute on its Vision 2030 initiatives and delivered another solid quarter, maintaining an adjusted EBITDA margin of over 30% as recurring revenue from reroofing activity provided a stable foundation amid near-term order volatility due to the previously discussed pressures in new construction demand and the temporary setbacks associated with challenges at a key distribution partner. Notably, reroofing demand, which represents approximately 70% of CCM's commercial roofing revenue, remains strong. This momentum in reroofing activity is driven by the aging commercial building stock, a growing backlog of roofs reaching replacement age, energy efficiency mandates, new product solutions that reduce labor, and the trust our customers place in the Carlisle Experience and our premium warranties. Outside of new construction and distribution impacts, CCM's underlying business performance remained consistent with our expectations. While CCM's performance was a bright spot, we continue to face the well-known market challenges at CWT, which have negatively impacted the business over the last 6 quarters. Elevated mortgage rates have led to increased monthly payment levels contributing to suppressed demand. The imbalance in sellers and buyers of homes has made transactions more difficult. U.S. housing supply has also made it difficult to afford a home. One estimate has shown that housing prices have risen over 45% since 2020, resulting in the median home price of over $430,000, which is almost 5x higher than the median household income across the country. The measures of housing stock availability point to a growing gap between supply and demand, the root of the affordability problem, which is amplified by declining productivity and a shortage of skilled labor. As a result, it takes longer to build a house than it has in past decades. It's estimated that at least 3 million to 4 million additional homes need to be built to address the affordable housing shortage in the U.S. Despite the near-term challenges, imbalances, and volatility, we remain confident in our ability to create value for our shareholders through our Vision 2030 strategies and initiatives. Carlisle remains a market leader, operating an imperative business in the most attractive market globally. The megatrends of energy efficiency, labor savings, growing reroofing demand, and the demand for residential housing will continue to drive superior, sustainable, and best-in-class financial performance for Carlisle. Carlisle's pivot in 2023 to a pure-play building products company has enhanced our focus on our industry-leading platforms, highlighted our leadership in attractive growth markets, and positioned us to deliver innovative building envelope solutions to our customers, all to drive superior financial returns for our shareholders. During the quarter, we also maintained our commitment to disciplined capital deployment. We repurchased 800,000 shares for $300 million and raised our dividend by 10%, marking our 49th consecutive annual increase. We also continue to integrate our recent acquisitions of Bonded Logic, ThermaFoam and Plasti-Fab, and they continue to meet our expectations. Innovation is a core pillar of Vision 2030's playbook to create value, increase margins, and drive market share growth. Our innovation pipeline continues to deliver tangible marketplace results. The new products we've introduced over the past 2 years, including RapidLock, SeamShield, APEEL, and VP Tech are gaining meaningful commercial traction. These products are proven solutions that address real contractor pain points around installation speed, energy performance, and long-term durability. With our increased investment and substantial focus on the understanding of the voice of the customer, we anticipate impactful and revolutionary new product introductions over the next decade. What's particularly encouraging about these new products is how these innovations align with broader industry trends. Building owners increasingly prioritize energy efficiency to reduce operating costs. Contractors face persistent labor constraints that make productivity-enhancing products more valuable. And our innovation road map specifically targets these market needs. This innovation strategy also directly supports our Vision 2030 objective of generating 25% of revenue from recently introduced products. It's a key driver of our plan to grow faster than our markets while expanding margins over time. Our M&A strategy is also creating meaningful value by expanding both our capabilities and our addressable markets. The MTL acquisition in 2024 has exceeded our expectations, allowing us to sell more content per roof through prefabricated metal edge systems, creating a more complete warranty and enhancing our reputation as providers of complete building envelope solutions. The Plasti-Fab and ThermaFoam integrations are also progressing and on track. We're capturing cost synergies while leveraging our national footprint to drive sales expansion. What's particularly powerful about our position in EPS insulation is our unique combination of in-house raw material production and the industry's most extensive geographic coverage in North America. This gives us structural cost advantages that enable us to serve national retail and distribution partners more effectively than any competitor. The Bonded Logic acquisition opens an entirely new growth avenue. UltraTouch recycled denim insulation addresses the large fiberglass insulation market with a differentiated value proposition focused on sustainability and performance. As building codes and consumer preferences increasingly favor environmentally responsible materials, we're positioned to capture share in a sizable category where we previously had no presence. As we move into 2026, we are optimistic that M&A markets will become increasingly more productive for Carlisle. As economic conditions improve, confidence in acquisition target financials will strengthen, and the valuation gap between buyers and sellers will close, and we should see deal activity increase. This will bolster our long-term strategy of deploying capital in M&A to drive growth and market share. Meaningful bolt-on acquisitions will continue to play a significant role in our path to growth, and we hope to return to a pace of 2 to 3 acquisitions each year. Our operational initiatives continue to deliver solid returns on capital as well. Packaging automation investments in Kingman and Fernley, footprint consolidation initiatives, and expanding in-house solutions for adhesive applications through our new flexible fast adhesive product are three specific examples of key initiatives that are utilizing capital to create a fundamentally more efficient cost structure that will drive even stronger margin expansion when higher volumes return. Beyond cost actions, we're executing growth initiatives that diversify our revenue streams. Our Home Depot relationship is expanding to include single-ply roofing, insulation, flashing, and air barriers, creating new selling channels for our products. Our cross-selling efforts in retail continue to build momentum, and the Bonded Logic addition gives us an entry into attractive insulation categories where we can leverage our existing relationships. The combination of these operational improvements and strategic growth initiatives are positioning CWT to expand margins as we move through 2026, especially if end market recovery accelerates. Our capital allocation approach remains a core competitive advantage. The $1 billion bond issuance we completed in the third quarter provides significant strategic flexibility and cash for near-term opportunities while keeping our net debt-to-EBITDA ratio comfortably within our 1 to 2x target range. This enhanced financial capacity positions us to pursue multiple value creation paths simultaneously. Year-to-date, we've deployed $1 billion in share repurchases, taking advantage of valuation opportunities, and we are now raising our share buyback target to $1.3 billion for the year. The 10% dividend increase, our 49th consecutive annual increase, demonstrates our confidence in the business's ability to generate cash flow. We expect to generate approximately $1 billion of cash flow from operating activities this year, providing substantial capacity for continued innovation investments, strategic M&A that meets our disciplined criteria, and ongoing capital returns to shareholders. Our track record of balanced opportunistic capital deployment reflects our commitment to maximizing long-term value creation. Looking ahead and keeping in mind the near-term transitory headwinds our markets are facing, we are revising our full year 2025 guidance to flat revenue with adjusted EBITDA margin down 250 basis points. While macroeconomic and distribution channel uncertainties persist, we remain confident in our Vision 2030 targets and ability to drive value creation through our recurring reroofing leadership, operational improvement initiatives, and consistent execution of our Vision 2030 initiatives. As a reminder, the structural advantages underpinning our businesses remain fully intact. We compete in attractive end markets with favorable long-term fundamentals. The secular trends supporting our growth, recurring reroofing demand, energy efficiency requirements, adoption of labor-saving technologies, and the persistent housing shortage all continue to create meaningful tailwinds. As a reminder, our Vision 2030 strategy provides clear direction through four key pillars: product innovation to drive differentiation and above-market growth, operational excellence through COS, exceptional customer service via the Carlisle Experience, and strategic M&A to enhance capabilities and expand our addressable markets. We remain firmly committed to our Vision 2030 targets of $40 of adjusted EPS and maintaining an ROIC of 25% or greater, which we expect will generate over $6 billion in cumulative free cash flow through 2030, along with our anticipated organic revenue CAGR exceeding 5%, and we have multiple pathways to achieve these ambitious goals. In summary, Carlisle's third quarter performance once again showcased the earnings power of CCM. Despite the significant challenges in the new construction market and distribution channels, sales grew and adjusted EBITDA margin remained above our Vision 2030 target of 25%. With that, I'll turn it over to Kevin to provide additional financial details and color on our outlook for 2025.

Thank you, Chris, and good afternoon. I'll review our third quarter financial results starting on Slide 4. We generated revenue of $1.3 billion in the third quarter, an increase of 1% compared to the third quarter of 2024. The acquisitions of Plasti-Fab, ThermaFoam, and Bonded Logic contributed $39 million of revenue in the quarter. Organic revenue declined 2% from the previous year as solid commercial reroofing was offset by the continuation of soft new construction activity in both residential and commercial end markets as well as residential repair and remodel. Adjusted EBITDA for the quarter was $349 million, resulting in an adjusted EBITDA margin of 25.9%, a decrease of 170 basis points from the prior year. This decrease was mainly due to lower volumes at CWT and our continued investments in innovation and enhancements to the Carlisle Experience. Adjusted EPS was $5.61, down 3% compared to last year. This year-over-year decline was the result of low organic earnings from the previously mentioned market challenges and additional net interest expense, partially offset by the benefit of share repurchases and contributions from our strategic acquisitions. Turning to our segment performance on Slide 5. CCM reported third quarter revenue of $1 billion, essentially flat year-over-year, reflecting the current construction environment. Reroofing growth has remained stable as building owners continue to address aging roof systems that must be replaced. However, headwinds exist as macroeconomic uncertainty has continued to put pressure on new construction as cautious builders delay project starts and the impact from near-term volatility caused by the consolidation of distributors, manufacturers, and contractors in our industry. CCM's adjusted EBITDA was $303 million, down 8% compared to the prior year. Adjusted EBITDA margin for the quarter was 30.2%, which declined 260 basis points, primarily due to materials inflation driven by ongoing supply disruptions on ATO out of China and antidumping duties on TCPP from China in addition to our continued investments in innovation and enhancements to the Carlisle Experience. Moving to Slide 6. CWT reported third quarter revenue of $346 million, up 3% year-over-year with the contributions from recent acquisitions. Organic revenue declined 8% from the prior year due to lower volumes resulting from continued softness in commercial new construction and residential end markets as affordability challenges and higher interest rates continue to negatively impact demand. CWT's adjusted EBITDA was $60 million, a 13% year-over-year decline. CWT's adjusted EBITDA margin decreased 330 basis points from the prior year to 17.4% for the third quarter. This decrease was primarily the result of the impact of volume deleverage. Turning to Slide 8. Our financial position remains strong with flexibility to execute our superior capital allocation strategy. As of September 30, we had approximately $1.1 billion of cash and cash equivalents and $1 billion available under our revolving credit facility. During the third quarter, we issued $1 billion of debt. This strategic financing enhances our liquidity and provides additional capacity to pursue growth initiatives while maintaining our net debt-to-EBITDA ratio of 1 to 2x. As of September 30, our net debt-to-EBITDA ratio was 1.4x, well within our target range. Moving to Slide 9. We have generated free cash flow of $620 million in the first 9 months of 2025, and we are on track to exceed our free cash flow margin target of 15% for the full year. Our strong, consistent cash generation continues to support our balanced approach to capital deployment. Year-to-date, we have invested $199 million in the business through $91 million of capital expenditures and $108 million in acquisitions. We also returned over $1.1 billion to shareholders through $1 billion of share repurchases and $135 million of dividends. As Chris previously mentioned, we are now increasing our share buyback target to $1.3 billion for the full year of 2025. Our revised full year outlook for 2025 is on Slide 10. We now expect full year consolidated revenue to be flat year-over-year. This more conservative sentiment is based on our third quarter results and the fourth quarter outlook from our recent Carlisle market survey, which includes softer conditions in nonresidential construction compared to the prior survey. We expect CCM fourth quarter revenue to be down low single digits as continued strength in reroofing will be more than offset by new construction and distribution channel headwinds. CWT fourth quarter revenue is expected to increase low single digits as recent acquisitions are expected to more than offset continued market softness. We anticipate full year adjusted EBITDA margins to decline approximately 250 basis points compared to 2024, with fourth quarter adjusted EBITDA margins expected to be approximately 21%, primarily due to volume deleverage and strategic investments in the business. Before I close, I'd like to provide perspective on our current performance by highlighting Carlisle's long-term track record, as shown on Slide 11. Over the past 17 years, from the 2008 global financial crisis through the pandemic and subsequent supply chain disruptions, we've consistently delivered resilient, strong margins across multiple economic cycles. This steady advancement reinforces our confidence in navigating today's dynamic market. Our business fundamentals remain strong. We are executing well on our key initiatives and maintaining our focus on investing in innovation, enhancing the Carlisle Experience, and driving operational excellence through the Carlisle Operating System. Our strong balance sheet, superior capital allocation, and our proven track record of performing through challenging economic cycles gives us confidence in our ability to achieve our Vision 2030 targets and create substantial value for our shareholders.

Thank you, Kevin. In conclusion, Carlisle delivered third quarter results that demonstrate the resilience and strength of our imperative business model. While we continue to navigate the unanticipated volatility and challenges of 2025, our focus remains clearly on our Vision 2030 strategy and the factors within our control: innovation-driven organic growth, operational excellence through the Carlisle Operating System, exceptional service through the Carlisle Experience, attracting and retaining top talent, and superior capital allocation. As always, our results of future success would not be possible without the extremely talented and hard-working teams we have here at Carlisle. Their perseverance and commitment to stakeholder success shines exceptionally bright in these challenging times. I'd like to thank you for listening today and for your continued support and interest in Carlisle. That concludes our formal comments. Operator, we are now ready for questions.

Your first question comes from Tim Wojs from Baird.

I'll stick to one question as you asked. But I guess on destocking, could you just kind of frame the impact in the third quarter and what's included in the fourth quarter? And I guess, as you've had discussions with your channel partners, what's driving the destocking? And as we think about next year, do we kind of enter 2026 with a clean slate from a channel inventory perspective?

Yes, Tim, regarding destocking, as we approach Q4, we typically see this trend. Q4 and Q1 are our lightest quarters of the year, and there's usually a reduction in inventory following the second and third quarters. We build inventory towards the end of the first quarter and into the second quarter for the season. In our market survey for Q4, we observed normal seasonal patterns, approximately 1.5 to 2 months. Overall, we perceive this as normal destocking, though some distributors may experience a bit more as they navigate certain challenges. We've discussed this M&A transaction, and at Carlisle, we've engaged in significant M&A activity and are aware of the difficulties in the early years, including management adjustments. So there could be some impact from that. However, we do not foresee a major effect from destocking. It might actually turn beneficial as we enter 2026 if we can resolve some macroeconomic issues, see a recovery in new construction—both residential and nonresidential—and address the interest rate situation, which could lead to a positive shift as we move into Q2 '26.

And your next question comes from Susan Maklari from Goldman Sachs.

My first question is talking a bit about the Carlisle Experience and how you can leverage that in this kind of environment to gain share? And with that, can you talk a bit about what you're seeing in terms of the competitive backdrop and how you're leveraging the Carlisle Experience to respond to that?

You've got several factors at play. We've noted a decrease in new construction in both areas. People aim to use their labor more efficiently, and there remains a labor shortage. The impact of recent immigration actions on construction and builders has been widely reported. The Carlisle Experience, which focuses on delivering the right product at the right place and time, demonstrates value by assisting contractors and builders in operating more effectively. This also benefits our distributors, enabling them to react more swiftly to jobs and provide better customer service, possibly by maintaining lower inventory levels. For example, a key strength in our relationship with Home Depot was the 24-hour national response time, which has proven to be a significant competitive edge. This advantage has allowed us to reduce competition in our product space at Home Depot. We're enhancing the Carlisle Experience by improving our tracking capabilities, allowing contractors to see the status of their shipments, similar to tracking can be done on the retail side. This will enable contractors and roofers to schedule labor more efficiently—if a shipment is delayed, they can allocate their workforce to other jobs. We gain insights into our service effectiveness through our Net Promoter Score, and we continue to see improvements from our investments in customer service.

Okay. That's great color. And then following up on that, can you also talk a bit about your willingness to invest in the business given the current environment relative to the robust cash flows that you're seeing? I also noticed that it looks like you took the guide for CapEx down a bit this year. Can you just talk about the interplay between R&D, the investments long term, and what you're seeing near-term and how that fits in with the cash generation?

Sure. Well, we're very lucky to generate a lot of cash flow. I think the $1 billion that we've done, I think, the last 3 or 4 years certainly helps us when we have to pay increased dividends, invest in CapEx, M&A and share buybacks and that. And I think on the R&D side, we're applying dollars right now. But when you think about what the front end on R&D is, at least enhancing what we've been doing now, a lot of the investment is in people, processes. I'll tell you one area where we've put a lot of money is in VOC. So for probably the last 9 months to a year, we have a new leader in our voice of the customer area, a Vice President, name is Julie Eno. She's brought in a new process, and we're spending quite a bit of money proportionately to where we were on really working through customer insights. We've got a process for doing that. It takes time. So it's really a people-process kind of investment right now. The goal there, obviously, to develop a consistent pipeline of strong concepts that are really ready for concept testing and then to move through our stage gate process. And the goal there is to generate the type of R&D outcomes that you would want to see that are hundreds of millions of dollars in revenue, not tens. So super pleased with what we're doing there. And on top of that, I think we've talked before about how we're investing in our R&D campus, enhancing our testing ability, enhancing our ability to test projects instead of taking out factory time to put it in a pilot line and things like this. So that investment will increase. That's more mechanical is that and concrete and burgers and roofs and things like that. And that will take more time to build, but that will show up here in 2026 and beyond. And I think all of that, again, to take out labor from the job and increase energy efficiency. And I think we've got a good pipeline going there. But it's got to be based on that voice of the customer. That's a big component we want to add because we want to make sure they hit the mark when we launch them.

Regarding your CapEx question, the CapEx is still up 30% year-over-year from '24 to '25, increasing from $100 million to $130 million, as we invest in automation, AI, and factories along with preventive maintenance. This investment will continue. The reduction in our outlook is simply because we were a bit too ambitious with some projects we anticipated completing in '25, which are now expected to slide into 2026.

This is Joe Nolan on for David. I just wanted to ask within CCM, if you could talk about price versus volume? And if you could just give any detail on price cost in the quarter?

In the quarter, pricing was flat for us in the CCM segment. So all the offset would have been in volume, which was also flat. So both the volume and pricing flat in the quarter. On the raw materials, as I talked about on the ATO and TCPP, those had a negative impact of $12 million, which was right in line with what we expected for Q3 on the raw materials.

Okay. Great. And if you could just give an update on how to think about price cost into 4Q, if there's anything changing there?

Yes, it's quite similar to what we experienced in Q3. We anticipate that prices for CCM will remain flat in Q4. Raw material costs may decrease slightly because the volume in the fourth quarter is typically lower than in the third quarter. Therefore, you can expect that trend in raw materials for CCM.

Just following up on that. I was wondering if you could provide the outlook for EBITDA margins in the fourth quarter by segment.

As we analyze CCM, we're anticipating a modest decrease in volume, around low single digits. While reroofing remains robust, it is largely counterbalanced by weaker new construction and some ongoing volatility in the distribution channels we've previously mentioned. Regarding pricing, we expect it to remain flat, although we are facing some negative impacts from raw materials which contribute to a potential EBITDA margin of approximately 26% for CCM in the fourth quarter. On the CWT side, we project revenues to increase by low single digits overall, but organic revenue is expected to decline by mid-single digits. However, the acquisition is positively influencing our numbers, lifting us to low single-digit growth. Pricing in CWT is down slightly, less than 1%, with no significant effects from raw materials this quarter. This situation will lead to margins decreasing by 250 to 300 basis points compared to the prior year due to the lower organic volumes.

That's helpful. And I just wanted to follow up on the destocking piece. Can you speak to your market share in CCM, how you're viewing that relative to the industry and what the outlook is just given the distributor dislocation that's happening right now?

Yes, Garik, thanks. Pretty much, as we said, the underlying situation in CCM is pretty much the same. I don't see any long-term market share changes that have occurred right now. If we look at what happened in Q3, and I touched on the things that can occur when you do a transaction and you also have significant management turnover at really all levels. We did lose some share in certain areas because of really just being tied to that distributor channel partner. And so very hard for us to change that because at least one of those situations, we can confirm that we don't really have any other vehicle to get that to market as direct. They are our choice. So that old adage of when they sneeze, we catch a cold. That's what happened there. But as I said and as we believe this is temporary. It happens. We would have expected some turbulence after a big deal like that. It may continue in the third or fourth quarter. But overall, we think they're a great distribution partner. We think it will all get sorted out, and we'll be right back in the game where we should be. So a little minor effect, maybe Q3, Q4, but long term, no real changes.

Your next question comes from Bryan Blair from Oppenheimer.

If the combination of channel dynamics and competitive influence leads to a more direct sales model in the industry moving forward, how do you see your teams positioning themselves? What are the pros and cons if that happens?

Well, Bryan, I think it's already happening. One of our competitors has said they are currently doing around 30% of their business directly. We estimate that many other competitors are in a similar position. So that dynamic is already established. In comparison, Carlisle has lagged behind. Looking back over the past few years, as recently as five years ago, we were likely doing between 3% and 5% direct sales. Our preference has been to collaborate with our distribution partners, who have performed admirably for us. We still believe that's the best approach. However, as our competitors have shifted towards a more direct strategy, we have adapted as well. Our team has taken steps to engage directly with the end user, as seen in the Carlisle Experience, where contractors can access information on shipments, quotes, and similar services. We currently ship 70% of our product directly to job sites, allowing us to interface directly in that process. While we are fully capable of this model, we prefer selling through distribution and our value distribution partners. Currently, our direct sales are likely in the mid-teens, about half of what our competitors achieve. We wish to continue collaborating with our distributor partners, but as you pointed out, the landscape is changing, and we are prepared to adapt. One of the strengths of Carlisle is our scale, factory presence, warehousing capabilities, and our outstanding sales team with over 600 representatives nationwide. We believe we can remain flexible, adapting to whatever direction the market takes and following the lead of the contractor regarding their purchasing preferences.

And your next question comes from Tomo Sano from JPMorgan.

I'd like to ask about the pricing. You mentioned that for Q4, CCM is expected to be flat, while CWT may decline by about 1%. Looking ahead to 2026, do you expect new products, innovative products, and high-end product launches or other factors to support price increases? I understand that this depends on demand and volume, but could you provide some insight into that outlook, please?

Yes. One of the expectations we have for new products and improved customer services is that we can derive value from them. That's the purpose behind our efforts. We are aiming to maximize the pricing and value we offer per square foot, and we will price accordingly. As we approach 2026, if volume levels can recover to a healthy state, I believe we can anticipate being compensated for those advantages. However, we must first demonstrate the value to building owners, contractors, and architects. It's crucial to communicate that the enhancements we've made or our Carlisle Experience and operational excellence provide real value. I think we've made significant progress in that regard. Our key focus is really on volume. Historically, we've noted that a moderate level of new construction—around 0.5% to 1%—is necessary for a strong performance, but a declining new construction market is not viable. Additionally, we want to see rational capacity utilization, which we have observed. The market has added factories thoughtfully, which is a positive sign. Although we are still facing labor shortages, we believe this will help drive pricing. Lastly, the ongoing demand for reroofing remains a consistent positive factor for us. Overall, while the situation for new construction isn't favorable at the moment, a turnaround in 2026 could lead to notable upward momentum in pricing.

And your last question comes from Keith Hughes from Truist.

This disruption with distribution, was this something about inventory levels or price? Or what was the nature of it? And is it fully resolved that we won't feel it again in the first quarter in your results?

I don't really know exactly what it was in those situations. I mean, I think each location probably was affected differently and integration is going on, like I said, management team changes, things like that. So across the country, it could be a variety of issues. You just know that in those situations, we didn't capture the sale. So I think I would expect because of the group and their expertise and their past experience that they'll get this resolved rather quickly. So we've got it going into Q4 and having some effect still. But my guess is they'll get it resolved and that '26 will be a year where they're going to want to come out and be fully intact and operational.

Okay. And just one question on pricing in CWT specifically. There's a lot of stuff going on with MDI and tariffs and antidumping and all that kind of stuff. Are you seeing pricing go up there or expected to go up near term with some of these cost pressures?

When we look at the raw material trends, I and Mehul can comment on this in maybe more detail. But when I look at the trends, it's been kind of a mixed bag. Certainly, MDI in '25 has seen an upward trend on price. But then you've got polyol that's seen maybe a lower trend. And then we go to EPDM polymers, and they're on an increase. So in general, when I look across our raw material basket, it's probably a little bit more biased towards increases as we go into Q4. Do you want to add anything to that?

Yes. Keith, just to add a little bit in terms of MDI and the antidumping duties that have been added. So while MDI prices have gone up through the first 3 quarters, and it's up year-over-year, I would say quarter-over-quarter now, it's still flat. So we're not seeing further increases. Just to add a little bit more on your CWT pricing question, Kevin noted that pricing is down less than 1% for CWT. So we're seeing some pricing pressure on select categories, mainly underlayments, which plays in the residential roofing segment, where there's some softer demand as well as on the insulation categories, but it's a very small amount of price.

There are no further questions at this time. I'll hand the call over to Mr. Chris Koch for closing remarks. Please go ahead.

All right. Thanks, Kelsey. Hey, this concludes our third quarter earnings call. I want to appreciate everyone's time. We know you're busy. Thanks for your participation. Thanks for the great questions and look forward to speaking with you at our next earnings call.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect. Have a great day.