Carlisle Companies Incorporated (NYSE:CSL) Q1 2023 Earnings Call Transcript

Carlisle Companies Incorporated (NYSE:CSL) Q1 2023 Earnings Call Transcript April 27, 2023

Carlisle Companies Incorporated misses on earnings expectations. Reported EPS is $2.57 EPS, expectations were $2.62.

Operator: 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.

Jim Giannakouros: 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.

Chris Koch: 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 complementing 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 2 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 gives 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 nonresidential 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 2 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 pressures 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 find 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 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 drive mid-single-digit organic revenue growth, utilize the Carlisle Operating System, or COS, to drive continuous improvement and build greater efficiency in our operations, build scale with synergistic accretive acquisitions, maintain 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 3 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. Kevin?

Kevin Zdimal: 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 price. 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, price and efficiencies gained from COS. Slide 12 provides a year-over-year bridge items to 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 provide 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.

Chris Koch: 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, a 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 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.

Q&A Session

Operator: Our first question comes from the line of Bryan Blair with Oppenheimer.

Bryan Blair: I was hoping you could offer a little more color to frame the challenging start to the year and then the time line 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?

Chris Koch: Sure, a lot of things there. We’ll take them one by one. When you attribute the — most of the volume decline is destocking with some weather. I mean, if we put a 70-30, 80-20, somewhere in there, with the bulk being destocking. When you look at when it’s going to be completed, we look at out-the-door sales for our distributors, we look at contractor activity. In fact, over the last probably 2.5, 3 months, we’ve taken on a new initiative where we’re actually doing our own. I know you guys do these surveys. We’re doing our own surveys. We’ve contacted about 450 different endpoints across the company — country, excuse me, because we have regional differences. And what we’re seeing is that at the distributor out-the-door level, in a lot of cases, we’re at 90-plus percent of what they were in 2022 last year.

So when we look at that and we look at what’s happening with our incoming bookings from distribution and other sources, we’re seeing real positive momentum building right up from February through March and now into April, good positive trajectory. And so we believe that, that will take care of that destocking and that’s where we make our comment that it should be done and tapering off by the end of the second quarter. And then we’ll be back to that normal cadence with CCM.

Bryan Blair: 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?

Kevin Zdimal: I think price and we’re not breaking out price as much from volume but for the most part, flattish on price. And then — so it’s mostly revenue. And as far as second quarter and throughout the year, you’ll see in the second quarter, we still have about $100 million of destock, so that’s going to hit the second quarter. Third quarter, we’ll be back to right more equal to last year’s level and then fourth quarter last year were easy comp. So you should see double-digit improvement in the fourth quarter for CCM.

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

Kevin Zdimal: 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.

Operator: The next question comes from Tim Wojs with Baird.

Tim Wojs: Maybe just going back on price. Obviously, just given the challenges we’ve seen over the last couple of quarters of destocking and weather and things. I mean, how has the industry kind of reacted to that relative to kind of price? Have you — I mean, I know one of your competitors put through an incremental price increase for July. But I guess how are — how is the market on the price side? And have you seen anything get more competitive with the volume decline?

Chris Koch: Tim, maybe taking a couple of sections. I think, first of all, that you saw that price increase. And indeed, we had all — or we had had price increases in the fourth quarter we had hoped to implement in 2023. And I would say those are probably not getting the traction that we would have hoped. I mean, you do your work as well and I think you’re seeing that. In general, though, what I would say is that certainly pricing out of distribution in that for the bulk of the industry is pretty good. And as Kevin mentioned, we think it’s going to be flat for the year. And I think that goes back to some of the improvements we’ve made over the last 5, 6 years on us being a market price leader, on bringing price discipline, on bringing value, pricing and talking about how we create value.

And you heard in my comments about that and new products. And the interesting thing is with the changes in some of the leadership at other — at our other competitors, I think we’re also seeing a real desire to drive value and to get the value for that. So are there some deviations in price from time to time? Yes, they’ve happened. And we hear about them. I think on the whole, though, the market players are remaining pretty disciplined. And from time to time, people will cut deals or maybe they might go direct to a contractor and offer a special deal or something like that. We obviously try not to do that and have a price leadership position but there are those who do that. But for the most part, I think those things go on. And pricing, I’ve been pleased with where pricing is through April, that people have been holding in there.

There’s been good price discipline.

Tim Wojs: 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?

Chris Koch: Where — and Kevin and Jim can talk about this, too but where I saw the biggest shift, I think, was actually last year and maybe some of its blood over here with quotes that it had happened last year. But when TPO, as you know, was constrained, at least for us, we were sold out right through the year, I do think there is some shift and some players that sell PVC and greater amounts benefited from that. So there might have been some shift in Q4, maybe Q1 and fulfilling orders where PVC replaced TPO but that’s kind of come back as the supply constraints came off. We had some issues for 2 years, all of us as an industry with fasteners — metal fasteners. They were at a premium and people may have substituted adhesives or different.

We do have a VELCRO roof we use and that might have seen some gains there. But I think on the margin, those were pretty minimal. And then we look at EPDM, our oldest brand. Things have remained relatively stable there. We don’t see much market shifts there. So I think as we get through the year, things will go back and they’ll normalize to that same type of mix around TPO, PVC, PDM, polyiso, EPS, those things. And really, all that disruption over the last 2 years will get sorted out.

Tim Wojs: And then just maybe last one. Just — how is the cost basket kind of performing relative to your kind of initial expectations? And what’s the expectation now for the year?

Kevin Zdimal: 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.

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

Operator: The next question comes from Saree Boroditsky with Jefferies.

Saree Boroditsky: Obviously, contractor backlogs remained strong but there appears to be a lot of skepticism right now in nonresi. 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?

Chris Koch: 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.

Saree Boroditsky: 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?

Kevin Zdimal: 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.

Operator: The next question comes from Garik Shmois with Loop Capital.

Garik Shmois: 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?

Chris Koch: I think, Garik, there may — whether actually a practice has changed, I don’t know. Obviously, one of the things that’s out there are interest rates and the banking and that has affected the — I think, the resi a bit. I don’t think that’s actually affected the nonresi in the quarter but certainly it creates concern. And again, destocking again, creates more anxiety in that. When we look at the places, I’d say, throughout the markets that are strong, if we got down to specific verticals, I think you’ve seen some decreases in warehouses have probably been a little bit under last year and we think that’s going to continue. It’s probably about where we thought it was. The educational side that we look at might be a little bit of a lower number than we had thought at the beginning of the year, not much, a percentage point or 2.

I think stores, again, maybe some impact there but maybe that’s more driven, too, by some of the move to online purchasing and doing the Internet sales thing. Healthcare has been good, been probably better than we thought. So when we look at it — and even one other segment I would just say is even kind of the residential buildings that we deal on the bigger multifamily and that, pretty much in line with what we had. So I think when we look at where we were even out of last year, I think if you take all that together, we’re probably flat right now. And I would say, where we are for this year, I don’t see that being affected. As we get again into ’24, there’s a lot of things happening out there, a lot of moving parts that could affect it. But obviously, we’ll have a call at the end of the second quarter.

We’ll be well into the season. And I think that, that call will be more telling than a first quarter call, well, with the destocking done and then with the season picking up.

Garik Shmois: 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.

Chris Koch: Yes. Go ahead, Kevin.

Kevin Zdimal: 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.

Chris Koch: 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.

Garik Shmois: 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.

Chris Koch: 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.

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

John Joyner: So I’ll ask about destocking. That’s — we can see how many times we can say that word. But I guess, other than areas like brake and friction, I mean, in the past, I don’t really ever recall much discussion historically around destocking or restocking for CCM. So has there been any changes at CCM, as it relates to your channel partners? Or is it simply that maybe they bought too much inventory over the past year? I mean, maybe just help me understand that because I just don’t recall discussions around destocking so much historically.

Chris Koch: Yes, I think you’re right. That’s a good one at CBF. I mean if we go back to 2008, 2009, I think there was a lot of inventory and then the bottom fell out on the — at the Cats and Komatsus and that it was left with inventory. So a good call. That’s a while ago. It brings back some memories. But as far as CCM is concerned, nothing has really changed. When we went into — in ’19, at least, we were still doing that kind of thing where in the winter, we make product for the season. Distributors will load in, we’d get through the season. And they’d have the inventory, they work it down, contractors work through the season. And once in a while, you’d see if we had an early spring or a late fall, our sales — or our shipments in Q4 and Q1 would be a little bit better.

In fact, I think prior to ’19, Q1 had gotten successfully better every year for a few years by a single-digit improvement. So we go through COVID and things decline and then the surge comes back and there’s supply chain issues that everybody had and were well known. And we saw what others saw as well which was people tended to, I’d hate to use the word hoard but I think they tended to do a couple of things: order — putting multiple jobs at multiple suppliers to ensure they got product. They would grab product when they could and stock it. I think the idea that we had contractors building inventory was a very new concept for us. And that was one that we really missed, John, in the fourth quarter when we gave you the first estimate. I mean bad on us.

We hadn’t anticipated that other people were stocking as well. So to me, it’s just going to take time to get through it which it has. And we now think we have good visibility to it. Once it’s done, I think, unless we have another supply chain crisis of the magnitude we did under COVID which I don’t anticipate, we’ll be back to that normal cadence because really that system of how we order and how we introduce products and how we supply the market, I mean, CCM has been doing it for a lot of years, contractors, distributors. And I would think over time, they’ve gotten pretty efficient at it. So I would think we would go back to the way we used to do it which was probably the best practice. So I think it’s just — let’s call it, a 1-year onetime aberration.

John Joyner: 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?

Chris Koch: No. I think it would be — I think you’re right to recognize the hard work that Fred Sutter and the team have done since he came into the business in terms of introducing new products, in terms of improving the sales force and operations and everything. And obviously, that’s what we had in mind for CFT when we initially bought it. But I think when we look at being superior capital allocators and look at what the runway for ROIC performance and also magnitude in terms of effect on the P&L, it’s still within the Building Products segment in CCM. That history and you know it, you have the data, it’s hard to fight against. And while CFT is performing well, it’s still a pretty small part of our business at $300 million.

And it would be a tough time for them to get to the point where it would make better sense to allocate in a big way to that as opposed to driving to that core pivot to building products. So we think we’ve done the work and we think in terms of where we put our capital, the pivot to building products makes the most sense for us for the foreseeable future.

John Joyner: I figured I knew the answer but I just wanted to ask.

Chris Koch: But thanks for recognizing the team. That’s been a really nice turnaround from where we were a couple of years ago.

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

Adam Baumgarten: So just given some of the surveys you’ve done and do you have a better sense for — of that, I think you said $100 million of inventory that needs to come out in 2Q, kind of how that splits between contractors and distributors. And then also just are there any specific products where within that $100 million, where they’re more elevated than others within the portfolio?

Chris Koch: No breakdown on the contractor distributor. I don’t think we got to that level of granularity and I apologize. We will continue to drive on these things. It’s a new addition that we’re going to do regularly, so we’ll have — we’ll get better at it. But at this point, we don’t have that breakdown. I still think the bulk of it, though, if I’m going off my gut, is the distribution and that the contractors probably at major contractors. And so I would say it’s the bulk of its distribution. As far as products and any one that’s out there, that’s another one I couldn’t — I wouldn’t want to even guess and I apologize.

Adam Baumgarten: And then just the other one, maybe more high level. Just can you give a sense for the percentage of reroofing projects that are — that you’re financing?

Chris Koch: Jim and I just had a discussion on that. And I think on the reroofing, it’s mostly coming out of kind of an expense budget. Remember, I think on the — you know this, when a new construction, it’s all part of a big project that’s coming under one capital request and then there — however they do it and the roofs included in that, it gets financed. But once it’s sold to a customer and then it’s at year 20 or 15 or 35 or whatever, that typically comes out of their operating budget to reroof the roof or the building owner’s budget. So I would say it’s probably pretty low as a specific percentage that are financed.

Adam Baumgarten: 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.

Kevin Zdimal: As we talked — so you have the first quarter, obviously. What we did for margins and I guess you’re looking overall at the business, when we see on margins by quarter that a lot of it’s going to be absorption and you can just do it off of the volume, so whatever you’re projecting by quarter for volume. You should be able to drop that to the bottom line. We’re probably high 40s on decremental margins for the CCM business and that should help you get there by quarter.

Operator: The next question is from David MacGregor with Longbow Research.

David MacGregor: I wanted to just ask about the guidance revision here. When you go from kind of low single-digit revenue growth to high single-digit revenue declines, it implies about a $400 million differential. I’m trying to reconcile that with the first quarter where you said $300 million, obviously, was the revenue delta. You said 70% to 80% of that would have been the destock. And you’ve got another $100 million coming in 2Q. I guess — I’m trying to get a sense of just whether there’s any catch-up coming here in the second half of the year from the weather portion or whether you’re just being conservative with that $400 million change to their guide. Can you help me just think through that?

Chris Koch: Yes. I think one of the things just in general and certainly, Jim or Kevin can weigh on it. But I think there’s a little conservative nature going into Q3 and 4 around how much we can catch up. Two things that I think about are very relevant here. We just talked about the weather and we always worry how long does that fall continue. The longer it continues, the better we can do because we’ve got contractors on the roof putting roofs in. That’s probably the biggest one for — well, maybe not be not the biggest. The other one is then the labor and we keep discussing labor and that really is a constraint around how much can we put down. And so again, the CCM team, I think we’re almost tripling R&D investment to deal with that, so we can help with the catch-up because it’s really been — there’s that multiyear backlog and we don’t see the labor situation getting any better.

And then, we see all these positive drivers around the Investment Act around reshoring, around energy efficiency. And we think for ourselves, not only do we have to catch up every year from weather and that but now, we have other things that are stimulating demand for the future and we think we’re going to consume labor. So I mean that’s really what drives a lot of our effort into new products and the investment there. But those are the 2 things that I would say make us a little conservative about how much we can catch up. Although like you and like all of our shareholders, we’d love to do some catch up as quickly as possible.

David MacGregor: 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 just 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.

Chris Koch: 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, 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.

David MacGregor: 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?

Kevin Zdimal: 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.

Chris Koch: Your comment about inventory, we really — as I mentioned earlier, we build in the winter months. And so our inventory has not gone down. If anything, it’s gone up in anticipation of the needs we’re going to have in Q2 and Q3.

David MacGregor: So if you do get a catch up, you’ve got inventory ready to go…

Chris Koch: Absolutely TPO, the 16-foot line that gives us some additional capacity, too.

Operator: The next question is from Dan Oppenheim with Credit Suisse.

Dan Oppenheim: I was wondering on the CCM side, given the weather issues that occurred in the first quarter which obviously prevented some of the reroofing but also the inventory issues . As we get to sort of more normal conditions here in the second quarter with better weather and such and work through some of the inventory, do you think there’s a potential that there is that more pent-up demand with it? And if so, is there the ability to service it in terms of labor and such? Or is there not so much of a catch-up? How do you sort of view the potential for that?

Chris Koch: Yes, I think that’s what we just talked about and I’ll just repeat it, though which is that we think there is a labor constraint. There is demand but the demand is really on top of probably some demand that was built up during COVID as well. And so this all has contributed to a backlog that already existed for roofs that were aging out, hitting their 17, 18, 19 year age and were needing to be reroofed. So the labor constraint, probably in that case, is the biggest one in Q2 and just can you get crews to put it down. So my guess is and maybe I’m being conservative about that, there won’t be much catch-up in Q2 for contractors on job sites. Most of what we’re talking about is there’s catch-up from us being able to serve out of our inventory rather than serve that demand from distributor inventory that’s already on hand of the contractor.

So again, when we look at opportunities for catch-up, I’d point to Q4 and — Q4 of 2023 and Q1 of ’24 where a shortened winter season on either end would help give some days and some opportunity to catch up there.

Dan Oppenheim: 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 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?

Chris Koch: Yes, definitely. I mean, that was a tough blow to the resi market or to CWT on the resi side but we’re optimistic coming into the season. I think a couple of things that also really bolster my excitement around CWT are: one, COS is getting fully implemented at Henry and Frank Ready and the team there just become believers in that. And our factors are getting more efficient. We’ve actually had a couple of sites that have been eliminated. And we’ve put that production into other sites. So we’re getting more efficient there. We’re driving automation there. And then new products are taking hold and we’ve got some new products coming out this spring that are — that haven’t been introduced before. A couple of new ones coming on now that really, again, increase the efficiency and effectiveness of what the contractor is doing.

So that coupled with good disposable income and people that are interested in investing in their homes again for the summer months and making repairs in that. Yes, we’re very positive on it. We still — again, even with all the issues, the team is still delivering on their synergy number and along a lot of the other initiatives we had under the deal model. So yes, we’re very optimistic about what they can do.

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

Chris Koch: 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.

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