Carlisle Companies Incorporated (NYSE:CSL) Q4 2023 Earnings Call Transcript

Carlisle Companies Incorporated (NYSE:CSL) Q4 2023 Earnings Call Transcript February 6, 2024

Carlisle Companies Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is J.P. and I will be your conference operator today. At this time, I would like to welcome everyone to the Carlisle Companies Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would like to turn the call over to Mr. Mehul Patel, Carlisle’s Vice President of Investor Relations. Mehul, please go ahead.

Mehul Patel: Thank you, and good afternoon, everyone. Welcome to Carlisle’s fourth quarter 2023 earnings call. I’m Mehul Patel, Head of Investor Relations for Carlisle. We released our fourth quarter and full year 2023 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. He will provide highlights of our results and accomplishments followed by Kevin, who will provide an overview on our financial performance and an update on our outlook for 2024. Following our prepared remarks, we will open up the line for questions.

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. With that, I will turn the call over to Chris.

Chris Koch: Thank you, Mehul. Good afternoon, everyone, and thank you for joining us on Carlisle’s fourth quarter 2023 earnings call. Turning to Slide 3. I would like to start by extending my sincere appreciation to all of our team members for their dedication and commitment in executing our Vision 2025 strategy over the past five years and helping to drive significant progress and value creation during 2023. The past year represented a challenging and dynamic year for Carlisle. The first half of the year was impacted by continued destocking in our markets and the related challenges driven by supply chain constraints for many building products, including ours in 2022. Despite those first half challenges, markets began a return to a more normalized order pattern beginning in the third quarter of 2023.

This resulted in the second half of 2023 that was marked by increasingly positive momentum. In addition to delivering a record fourth quarter, Carlisle finished 2023 with one of the most significant events in our 106-year history. The completion of our well-communicated pivot from a diversified industrial portfolio of businesses to a pure-play building products company. Accompanying that strategic pivot was the successful achievement of our goals under Vision 2025 and the much anticipated release of our Vision 2030 strategy, which builds on Vision 2025 as new key initiatives such as an increased emphasis on innovation, and further unlocks the full potential of our pure-play building products portfolio. We are very pleased to have finished 2023 on a record note despite the very dynamic and uncertain market conditions we experienced through the year.

Our fourth quarter results surpassed the expectations we communicated on our last earnings call in October, largely driven by better-than-expected CCM sales and better profitability in CWT. We achieved record fourth quarter adjusted EPS of $4.17, which was an increase of 30% year-over-year. Our EBITDA margin of 26.4% improved by an impressive 440 basis points year-over-year on 2% lower sales, clearly demonstrating our ability to maintain our margins through economic cycles. In the fourth quarter, we benefited from more favorable weather conditions, solid contractor backlogs, stronger operating efficiencies and the power of the Carlisle experience to drive favorable price to value in our businesses. CCM and CWT continue to produce industry-leading margin and EBITDA results despite lower volumes and continue to deliver consistent value creation.

The strength of our building products segment financials are now fully unmasked and on display with the pivot. Looking at our full year 2023 sales, despite a 16% decline in sales, we maintained an EBITDA margin in excess of 25%. Importantly, most of the lower volumes were mainly attributable to channel destocking, interest rate-driven project delays and weather headwinds we experienced predominantly in the first nine months of 2023. We are very pleased to be entering 2024 on a positive note with destocking behind us and with positive momentum. Furthermore, we achieved a stellar ROIC for the year of 27%, which is aligned with our stated goal under Vision 2030 of exceeding 25% per year. This performance is a testament to our focused execution at CCM and CWT.

The efficiencies derived through the Carlisle Operating System, the Carlisle Experience and our ability to price our products consistent with the value they create for our customers, reinforced daily by delivering an innovative and compelling value proposition. Now let’s turn to Slide 4 and 5. Following the release of our Vision 2030 strategy in December, we were pleased to announce in late January that we reached an agreement to sell our CIT business to Amphenol just over $2 billion. The sale of CIT represents the final step in our successful strategic pivot from a diversified portfolio of general industrial businesses to a premier pure-play building products company. This sale is an important milestone in that it showcases our financials and allows our building products segment’s historical track record of growth and best-in-class returns to be clearly seen.

With the expected proceeds from the CIT sale, combined with our 15% plus free cash flow margin, we now have an even stronger capital base that provides exceptional flexibility to execute on our highest returning capital allocation priorities and supports the investments contemplated in Vision 2030. In 2018, we embarked on our Vision 2025 journey with the goal of being superior capital allocators, while seeking to drive 5-plus percent organic growth, leveraging that growth into earnings, making synergistic acquisitions, driving efficiencies through the Carlisle Operating System, investing in talented people, returning capital to our shareholders and ultimately, creating value for all our shareholders. During 2021, to further demonstrate our desire to be a superior capital allocator, we made the decision to pivot our portfolio to our highest returning building products businesses.

Since the introduction of Vision 2025, we have nearly doubled revenue in our building products segment, more than doubled the EBITDA in those segments and increased free cash flow by over 200%. Furthermore, we exceeded our earnings target of over $15 per share three years ahead of our commitment in our Vision 2025 plan. We are proud of these accomplishments, which we view as significant milestones that validate our strategies and actions over the last six years. And clearly demonstrate our commitment to an ROIC-focused capital allocation strategy. One of our key drivers of success is our ability to offer a compelling value proposition through what we call Carlisle Experience. The Carlisle Experience can be defined simply as getting the right product to the right place at the right time.

In other words, delivering on our commitments to our customers. We complement the Carlisle Experience with a strong focus on innovation and specifically innovation that delivers energy efficient and labor-saving solutions. This focus has aligned well with the increasing demand for green buildings and products, the increasing need of customers to reduce GHG emissions and to conserve energy and the need for our customers to address the forecasted significant labor constraints through improved job site productivity. As we move on from the success of Vision 2025, we now turn our attention to Vision 2030 and our emphasis on our building products portfolio of businesses. As we stated in our Vision 2030 video released in December, we plan to continue to deliver on our foundational strategies that produce such positive results these last few years under Vision 2025.

Coupled with major secular tailwinds, we are committed to delivering innovative building envelope solutions, driving above-market growth and unlocking additional value for shareholders in this next important phase of Carlisle’s growth journey. The key pillars of Vision 2030 include enhanced levels of innovation, a continued emphasis on synergistic M&A, attracting and retaining top talent and holding steadfast to our sustainability commitments. As we look to fulfilling our commitments under Vision 2030, a key lever in our pursuit of higher margins will be increased spending on innovation. As such, Carlisle is differentiating itself with a goal of investing 3% of sales to drive the creation of new products and solutions that add value through advancements in sustainability, energy and labor efficiency.

Additionally, we aim to continue to enhance our customer relationships through continued investments in the Carlisle Experience. This includes advancing our digital experience for customers and is exemplified by our recently released mobile-friendly customer success portal at CCM. This portal provides Carlisle customers with a unified and mobile platform for real-time engagement, including access to product catalogs, personalized pricing, order status, delivery tracking and enhanced communication with our customer service and operations teams. Overall, we delivered a strong finish to 2023, maintained our historically strong margins and exited the year on an extremely positive note. Our Vision 2030 strategy is in place, and we are now a focused and simplified building products company.

We are motivated to leverage the industry mega trends, drive innovation and demonstrate margin resiliency through economic cycles to deliver superior ROIC and compounding EPS growth. With our solid foundation and a strong team in place, we are confident in achieving our goals set under Vision 2030. As we begin 2024, we are optimistic about the positive momentum building in our end markets. The inventory destocking headwinds we faced over the past year, largely in commercial roofing are now behind us, setting the stage for a more normalized buying profile in 2024. We expect combined benefits from the tailwind of prior year customer destocking and a strong backlog of reroofing projects due in part to constrained labor to collectively mitigate potential risks in the year ahead.

As such, we have a positive growth outlook for 2024 that we believe is reasonable achievable and fully supported by our Vision 2030 strategic objectives. Kevin will touch further on our 2024 growth expectations and outlook later in the call. Now please turn to Slide 6 as I share some updates on our progress with Carlisle’s sustainability initiatives. Sustainability is a core focus for our organization. We seek to positively impact the environment while creating value for all our stakeholders through our three-pillar sustainability strategy. The three pillars are: manufacturing energy-efficient products, minimizing our value chain greenhouse gas emissions and diverting waste and end-of-life materials from landfills. Under our first pillar, we provide end users access to solutions that drive energy efficiency in their buildings.

As an example, adding 1 inch of Polyiso insulation to a 50,000 square foot roof can save building owners as much as $110,000 in avoided energy costs over the service life of the building. Our second pillar, reducing our operational and value chain emissions helps Carlisle reduce our carbon footprint and the negative environmental impacts. As an example, let’s take our blowing agents in our spray foam operations. We finished the year converting over 50% of our HFC legacy spray foam products to a more environmentally friendly formulation amounting to over 250,000 metric tons of greenhouse gas is avoided, a compelling achievement. As a reminder, HFCs are 1,000x more carbon-intensive than HFOs. Carlisle also obtained five additional ISO 14001 certifications through 2023, bringing our enterprise-wide total to 26.

Additionally, our Montgomery Polyiso plant recently obtained ISCC+ certification, clearing the plant to run bio-based MDI and polyol on a mass balanced approach. This is a pivotal achievement in Carlisle’s ability to manufacture and extend the credits of bio-based Polyiso to its customers. Lastly, our third pillar focuses on the reduction of construction waste entering landfills. As an update here, Carlisle’s rooftop takeoff program diverted over 1 million square feet or 120 metric tons of reclaimed insulation and membrane materials from landfills throughout 2023. We have also expanded incentives for the program, which we believe will further expedite this growth and adoption amongst our customers. I personally take great pride in Carlisle’s sustainability legacy spanning over 100 years.

Carlisle’s commitment to operating efficiently, minimizing waste and offering solutions to empower end users and reducing energy consumption has been ingrained in our culture and will be essential to our success in the future. And with that, I’ll turn it over to Kevin to provide additional financial details as well as our 2024 outlook. Kevin?

Kevin Zdimal: Thank you, Chris. Looking at our fourth quarter results on Slide 7. Despite a 1.9% decline in revenue, we were able to expand our EBITDA margins by 440 basis points to 26.4%. Furthermore, we achieved record fourth quarter earnings with an adjusted EPS of $4.17, an increase of 30% year-over-year. Looking at our segment highlights, starting with CCM on Slide 8. CCM delivered fourth quarter revenues of $816 million, up 1.9% from the fourth quarter of 2022. The increase was driven by favorable weather and the return to normalization of order patterns, including the end of destocking in the channel. CCM EBITDA increased 12% to $255 million, with EBITDA margin up 270 basis points to 31.2%. This was driven by a combination of leveraging higher volume growth, favorable input costs and realizing cost savings through the Carlisle Operating System.

Moving to Slide 9. Revenues at CWT decreased 11% year-over-year, primarily due to the well-known declines in residential demand and the exit of a noncore business in the first quarter of 2023. However, despite the revenue decline, we were able to drive EBITDA growth of 54% to $69 million. This represented an EBITDA margin of 22.2%, expanding at an impressive 940 basis points from the fourth quarter of 2022. The margin improvement was bolstered by operational efficiencies gained through targeted restructuring actions, strategic sourcing and the realization of synergies from the Henry acquisition. Synergies now exceed $50 million, significantly above our deal model estimate of $30 million. Slide 10 provides a year-over-year fourth quarter adjusted EPS bridge items for your reference.

Moving to Slides 11 through 13. Carlisle ended the fourth quarter of 2023 with $577 million of cash on hand. We had $1 billion of availability under our revolving credit facility. We generated operating cash flow from continuing operations of $1 billion and invested $142 million in capital expenditures. Our free cash flow margin was 20% in 2023, and we ended the year with a solid net leverage of 1.6x, comfortably below our 2x to 3x long-term target. Our disciplined capital allocation framework remains focused on delivering ROIC in excess of 25%. As stated in Vision 2030, we continue to focus on being a superior capital allocator by investing in our high ROIC building products businesses, making synergistic acquisitions that deliver significant opportunities for value creation and repurchasing shares given our attractive valuation.

We deployed $900 million towards share repurchases during 2023 and paid $160 million in dividends. This represented our 47th straight year of dividend increases. Expanding on share repurchases at the end of the fourth quarter, we have 7.4 million shares available under our share repurchase program. Notably, the $2 billion of expected proceeds from the CIT sale provides us with additional dollars and flexibility to execute further share repurchases and fund our high-returning capital allocation priorities. Overall, we believe our pristine balance sheet, conservative leverage profile and ample liquidity positions us to drive additional value creation in 2024 and beyond. Turn to Slide 14 to see our full year 2024 financial outlook. We expect 2024 revenues to increase by approximately 5% versus 2023 and EBITDA margins to expand by 50 basis points.

We remain focused on disciplined pricing as we leverage greater operational efficiencies and effectively manage costs through our continuous improvement efforts. Additionally, we expect to deliver free cash flow margins of 15% and ROIC in excess of 25%. As such, we expect double-digit EPS growth in 2024. This is directly aligned with the objectives outlined in our Vision 2030 strategy and a positive first step towards a $40-plus EPS target. Looking at the components of the outlook. For CCM, we expect year-over-year revenue to grow approximately 6% in 2024. The primary drivers are the tailwinds from the return to normalization in order patterns that was absent during 2023 due to destocking. For CWT, we expect year-over-year revenue to grow approximately 4% in 2024.

Strong sales execution on key growth initiatives and stronger trends in residential should more than offset any headwinds posed by nonresidential markets. With that, I turn it over to Chris for closing remarks.

Chris Koch: Thanks, Kevin. In closing, I am grateful for the hard work and dedication of Carlisle’s employees that was demonstrated throughout 2023. As they have in the past, our teams demonstrated their resilience, perseverance and a commitment to excellence and delivering value in a difficult environment. I would also like to specifically call out and thank John Berlin and the entire team at CIT for their many years of significant contributions to Carlisle. CIT was one of the longest owned assets in the Carlisle portfolio and began with our acquisition of the Tensolite Company in 1959. Through a commitment to innovation, industry-leading operations and a unique combination of organic growth and synergistic acquisitions, CIT embodied the key tenets of value creation at Carlisle.

We wish John and the entire team the best as they become part of the Amphenol family. Turning to 2024. We have entered the year with significant positive momentum and a clear focus on the goals outlined in our recently launched Vision 2030 growth strategy. We are confident that our ability to innovate with a focus on energy efficiency and labor-saving solutions puts us on the right path to drive above-market growth and in return, drive superior financial results. The improved profitability by our simplified building products portfolio, a robust free cash flow engine and the expected proceeds from the sale of CIT leave us well positioned to achieve significant value creation for shareholders and deliver another year of industry-leading ROIC in excess of 25%.

That concludes our formal comments. Operator, we are now ready for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Tim Wojs from Baird.

Tim Wojs: Maybe just to start on CCM. Is there a way to maybe bridge some of the underlying assumptions on the 6% revenue growth? So just really kind of interested in how much you’re kind of baking in for the lapping of destocking kind of what the underlying implied kind of volume growth is? What would kind of be on the roof or sell-through? And then how are you thinking about pricing as well.

Kevin Zdimal: Yes, Tim. So overall, expecting CCM to be up about 6% in 2024. We have the destock benefit. That’s about a 11% benefit — and then pricing, we expect to be down really from the carryover from 2023, which was about 2% to 3%. And then the overall end market also down about 2% to 3%.

Tim Wojs: And then I guess on pricing, where do you think the industry kind of stands there? I guess we’ve heard mixed anecdotes around where kind of pricing stands. I’m just kind of curious how you see it. I mean, you said carryover pricing which would assume that maybe things have stabilized, but just kind of curious on your comments on price.

Chris Koch: Yes. I think, Tim, we thought 2023, given the significant sales declines, we thought pricing held up really well. through most of the year, it fluctuated, but I would say it was stable. When we look back, we’ve got a couple of components in there too. We’ve got the core roofing. We’ve got the CAM we’ve got Europe and we’ve got some mix. And so I think, overall, I’d characterize it as stable and going to this year, I think it will be pretty much the same thing as what Kevin was talking about with the 2% to 3%. But again, it’s early. It’s Q1. it’s January. But I think definitely, given all the declines last year, I thought the pricing held in there and maybe that gets to some of this pricing to value and what we’re providing and others are providing.

Tim Wojs: And then just on, I guess, reroofing, how visibility do you kind of walk into a year with on the reroofing side? I’m just trying to kind of think through the ability of a building owner or a contract that kind of pushed that around based on other dynamics. But how would you kind of think about kind of the underlying reroofing backlog and just your visibility to that as you go into ’24.

Chris Koch: Well, I think it’s still — there’s a good backlog. Obviously, when new construction was cooking there, we had some backlog. We’ve got the labor constraints. We tend to look at it at a macro level. We’ve gone through the chart with looking back 20 years and what’s coming due. We know we have our share of the market that when it is warranted, we also know when those roofs are coming due. We think that the average roof in the industry is a 20-year roof based upon our warranties. I mean there are longer warranties you can buy, but on average, it could be about 20 years. So we track all that. I think the thing is you’re talking about a very dispersed demand pallet across the entire United States is this reroofing. And you’ve got some things in there where you can patch and some people will repair and the place early.

Others may delay a variety of functions. But I think overall, we try to get a sense through surveys. We talked about two surveys we did last year with about 600 contractors talking about what was happening in their markets around the country. And then obviously, Steve Schwar, Frank Reddy and their sales teams are out there every day talking to them. So we think the visibility is pretty good. I think those other things just create some difficulty in pinning it down. So as we go in, as Kevin said, we’re looking at that 11% on the tailwind from destocking. And I think if we look at the industry in general, we’re back at that mid-single digits that we’ve been at historically, the combination between reroofing and new construction, and we think reroofing is holding up well.

Tim Wojs: So then just to confirm, if volumes should be down 2% to 3%, and then just based on your mix, I mean, you probably have reroofing flat to upsell and then new construction kind of down in the high single digits or something like that?

Chris Koch: Yes, yes. I think going in the year, that’s how we’re thinking about it. A little pressure on new construction from interest rates and the economy and then reroofing, picking that up with the backlogs Yes, exactly.

Operator: Your next question comes from the line of Bryan Blair from Oppenheimer.

Bryan Blair: Nice finish to the year.

Chris Koch: Bryan, thanks.

Bryan Blair: Your guidance strikes us as a touch conservative, especially given the momentum you have coming through Q4 and knowing the comps that you’ve asked, but it’s early in leading some of certainty to the upside is certainly fine. But the level set on the framework, maybe walk us through how you’re thinking about the cadence of sales and margins throughout the year. And if you can speak to those dynamics by segment, that would be extremely helpful.

Kevin Zdimal: Yes. So let’s start with sales. And we’re looking at sales is really what our historical seasonality has been. So if you go back pre-COVID, the three-year average on sales at CCM. The first quarter is typically about 20% of full year sales than the second quarter is about 29%. Third quarter was 27% and in the fourth quarter was 24%. And those were the historical averages, and we think ’24 is going to be a more normal year, and that’s what we’re expecting on the CCM side. For CWT, they’re pretty much the same on the quarterly. The only difference is the first half of the year, where CWT historically has been a little bit stronger in the first quarter, so about 22% of sales. And then 27% of sales in the second quarter and then the second half of the year was the same as CCM.