Carlisle Companies Incorporated

Good afternoon. My name is Chantelle and I'll be your conference operator today. At this time, I would like to welcome everyone to the Carlyle Company's first quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will conduct a question and answer session. I would now like to turn the call over to Mr. Jim Giancoros, Carlyle's Vice President and Investor Relations and Financial Planning and Analyst. Jim, please go ahead.

Thank you, Chantel. Good afternoon, everyone, and welcome to Carlyle's first quarter 2020 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 on our website at www.carlyle.com in the investor relations section. Leading the call today are Chris Koch, President and Chief Executive Officer, and Bob Roach, our Chief Financial Officer. We will begin with Chris discussing COVID-19 impacts, the related economic reality for Carlisle, and the trends we're experiencing in our businesses as a result. Bob will discuss Carlisle's first quarter performance and current financial position. Following Chris and Bob's remarks, we will open up the line for questions. Before we begin, please refer to slide two of our presentation where we note that certain statements made during this call may be forward-looking and actual results may differ materially from our expectations due to a number of factors, including impacts from COVID-19. A discussion of some of the risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Forms 10-K and 10-Q. Those considering an investment in Carlyle should read these statements carefully, along with reviewing the reports we file with the SEC before making an investment decision. With that, I will turn over the call to Chris.

Thanks, Jim. Good afternoon. Everyone, please refer to slides three through five for these opening comments. I'd like to start the call acknowledging the obvious. The impact the COVID-19 pandemic has had on all our lives. Our thoughts go out to all those affected. It's not often in the human experience that we collectively face the same global adversary that will certainly change our notions of security, community, safety, and a mere day-to-day functioning for years to come. Even more rarely do we collectively come together to unite and exhibit our humanity, understanding, and compassion as human beings. One area in which Carlyle has directed its philanthropic efforts has been the cause of civility. In this crisis, we should all be mindful to observe the many examples of civility, which give us hope that when this is all over, we'll be a more understanding, civil, and compassionate society. All of us should take the time to express special gratitude for those on the front lines combating the coronavirus for our collective well-being as well. We know many of you on the call today reside in New York and the tri-state area, as well as many major metro areas hit hard by COVID-19. I'd like to thank you for joining us in your continued interest in Carlyle Companies and wish you and your families good health and safety during these challenging times. At Carlyle, our pledge has always been to provide a safe working environment for our employees. Our Safety First culture has reduced our incident rate well below industry standards for all our businesses. We are following best practices and guidance from recognized authorities on employee health and safety measures, including safe hygiene and social distancing, enhanced facility cleaning and disinfecting, travel and facility access restrictions, and telecommuting where practical. As of April 20th, We've had 29 confirmed cases of coronavirus out of nearly 16,000 employees since we were first impacted in our Chinese facilities well over three months ago. In these instances, we immediately followed or exceeded the procedures, protocols, and expectations of local governing authorities. After appropriate shutdown periods, we have and intend to reopen the affected facilities. We're pleased that our businesses remain operating and are considered essential in many countries, states, and local jurisdictions. This is evidence of the importance our products and the employees who design and produce them are. We're very pleased to be able to provide uninterrupted service to our customers who need our products to maintain critical infrastructure, support vital transportation needs, and supply critical medical products at this time. Most of our North American customers, particularly in construction, have also been considered essential and remain open for business as well. Today, nearly all of our over 100 sites globally are fully operational with the following exceptions. Nogales, Mexico, Orzanova, Italy, Chino, California, and two UK facilities in the cities of Pontypool and Belper. The crisis management protocols we follow today emerged as the coronavirus threat began to impact our facilities in China. As the virus spread across the globe, we were able to adapt and prepare for what has transformed from a regional health outbreak into a global crisis. and what has turned out to be a devastating impact on our health systems and on the global economy. As the crisis continues, we'll review and update our policies and responses accordingly. We're prudently adjusting our business operating norms in response to intensified and necessary health and safety guidelines and dramatic decline in demand as well. We intend to stay on a course of responsible business activity to maintain a stable foundation for the post-COVID-19 recovery we know will arrive. However, in the near term, all companies, including Carlyle, must brace for adjustments to business structures, employment, and pay policies as the timing remains unclear of a return to acceptable levels of safety to allow increased personal and economic activity. While Carlyle is in a strong position to weather a prolonged economic downturn, we are making necessary adjustments to our cost structure where appropriate to maintain that strength. We remain committed to emerging in a very strong financial position and in a position to leverage anticipated future growth. UB will provide more granularity, but I want to touch on some important areas of our financial position. Due to our strong balance sheet in the first quarter, we were able to avoid layoffs and disruptions in our operations outside of health and safety or government mandated shutdowns. We paid our dividend of $28 million, deployed $23 million into capital expenditures, and invested close to $15 million into R&D. As of the end of the quarter, we have a strong cash position of $1.2 billion with an additional $500 million undrawn on our credit facility. We fully expect to pay our dividend in June and anticipate increasing our dividend in September for the 44th consecutive year. We remain committed to and focused on Vision 2025, our strategic guide to achieving $15 in earnings per share. This goal remains very much intact. Some of the specifics about our businesses that reinforce our conviction include CCM is well-positioned to exhibit resilience during this global market downturn. We still foresee a significant need for maintaining an aging U.S. infrastructure. We see a strong and growing backlog, as we believe the vast majority of re-roofing demand is merely being delayed, not canceled. And we will benefit from lower input costs and a highly variable cost structure. Due to our size and scale, we believe we have the lowest cost structure in the industry. CCM status as a best-in-class building product supplier continues to be evidenced through price and market leadership, superior products and service, industry-leading innovation, a strong and increasing re-roofing backdrop, and a high teens operating income profile. Over 60% of CCM's product is shipped directly to the job site, reinforcing the Carlisle experience daily to our contractor base. Through February, the mid-single-digit growth rate CCM experienced were in line with our expectations for 2020. However, as government-mandated shutdowns and quarantining efforts intensified in March, volumes in our core U.S. commercial roofing business began to drop nearly 10% in the last two weeks of the quarter, with Europe seeing double those declines. We anticipate second-quarter sales in North America will be impacted somewhere between 20% and 30%. There have been some bright spots. We're very pleased with recent results of our newer platforms within CCM. Spray foam was able to grow in the quarter and notably through March, which we view as momentum that should continue after the current malaise in the U.S. construction market dissipates. Architectural metals maintained its momentum and was up mid-single digits organically in the first quarter with profitability improvements both in leverage and integration efforts gaining traction. For our interconnect business, we entered 2020 already significantly burdened with declines driven by the issues surrounding Boeing 737 MAX. The emergence of COVID-19 and its impact on airline travel had an almost immediate and substantial effect on aircraft production expectations and aerospace manufacturing. We've all been exposed to daily information on the significant commercial aerospace downturn and its details, as what has transpired in the airline industry has been front page news for weeks. Accordingly, we are actively seeking to accelerate and complete restructuring actions, many of which were contemplated in Vision 2025. Our commercial aerospace business declined approximately 20% in the quarter accelerating into March, which saw sales levels down roughly 35%. We're anticipating declines of up to 50% in the second quarter and we will be right sizing our commercial aerospace business to meet the reality of what we believe will be a longer recovery by eliminating variable costs and optimizing our footprint. CIT Aerospace customers are not sharing forecasts at this time, and both Boeing and Airbus are operating at extremely limited production levels. These declines were already underway in Q1, with the fully disclosed impact from the 737 MAX certification delays, which we previously estimated at $50 million in sales impact in 2020. Essential to any aerospace recovery will be a return to flying by the general population. In April, all airlines were impacted to levels previously unseen, with one airline indicating a 95% drop in air travel demand. With most of the major U.S. airlines recently agreeing to terms with the federal government on a bailout, we feel some clarity and stability has returned. However, it's unclear when business and personal travel will completely recover. To offset expected commercial aero declines, we are seeking new opportunities with space and defense customers, positioning to take advantage of opportunities created by undercapitalized competitors, and driving product innovation. Despite the current situation, we are encouraged by the fact that aircraft manufacturers, including Boeing and Airbus, went into this downturn with a multi-year backlog of over 13,000 planes. We're hopeful that air travel will return to normal levels by mid-2021 and that airlines will continue to defer, not cancel orders, allowing the multi-year backlog to be realized. CIT's medical technologies platform, a key focus area for both organic investment and bolt-on acquisitions, is currently benefiting from increased demand for critical medical equipment to combat COVID-19. As a result of actions we are taking both in aerospace and the positive sales in medical, we believe CIT's end market mix will improve dramatically, potentially to a more balanced and more profitable mix than outlined in Vision 2025. Turning to CFT, as I mentioned on our quarterly calls throughout 2019, CFT entered 2020 already experiencing the impact of uncertainty surrounding Brexit and the unresolved U.S.-China trade negotiations. Added to these issues was a meaningful downturn in global automotive production that has continued to linger. These pressures were exacerbated by the pandemic spread and will likely result in a second quarter revenue decline of over 20%. We are pleased that all CFT locations are currently operational and delivering important products to our customers. A few silver linings for CFT include the multiple acquisitions to create a sealants and adhesive platform we made in 2019 that are integrating and performing above expectations. For the most part, customers are postponing orders, not canceling. We are seeing the emergence of post-COVID demand in China, and new product launches are in line with expectations despite market headwinds. Turning to CBF, CBF was the most affected by the coronavirus. In January, our factories in Hangzhou and Suzhou, China, were impacted by the government mandates. Quickly following was a complete shutdown of our Orzanovi, Italy facility, which as a reminder is located in the heart of the Lombardy region, the hardest hit area of Europe. Our team in Orzanovi continues to be on a government shutdown with a minor exception for critical spare parts for agriculture. We're encouraged by the fact that outside of Italy and our facility in Pontypool, Wales, our employees are safe and now back to work. Long periods of plant idling had an obvious negative effect on CBF's first quarter performance and we expect similar declines in the second quarter. As contemplated in our 2020 operating plan, CBF was undertaking restructuring actions to right-size the business in line with anticipated global mining, ag, and construction growth rates through 2025. These actions will position CBF to be able to meet our profitability expectations in the future. Moving away from our business segments, M&A remains a key pillar for Vision 2025, and we continue to evaluate opportunities to deploy capital into strategic and synergistic acquisitions across CCM, CIT, and CFT. Our financial strength and cash flow generating capabilities afford us flexibility, and we intend to remain opportunistic. Another pillar of Vision 2025 is COS, the Carlisle operating system, which has delivered significant savings over the last decade and will continue to be an essential tool for our businesses to rely on as they seek new opportunities to make our operations and business processes more efficient. COS continues to generate savings and efficiency gains equaling 1.4% of sales in the first quarter that will position Carlisle well when we emerge from this downturn. Now I'd like to point out a few key highlights of the first quarter of 2020. First, CCM exhibited its resilience both in profitability and in maintaining positive volume growth year over year despite the immense pressures felt in March due to COVID-19. Even though volumes were only up 0.8 percent in the quarter. Operating income grew almost 16 percent year over year, and operating margin expanded more than 200 basis points to 15.9 percent in the quarter. These gains were driven by our continued commitment to deliver a premium Carlisle experience to our customers, given strong underlying re-roofing demand, solid price discipline, favorable raw material trends, and strong COS execution. Second, I'm pleased that the integration of Providian within CIT, which we acquired in the fourth quarter of 2019, is going extremely well. Specifically, the rapid deployment of COS, including quickly training the team and conducting Kaizen events at all four of our Providian facilities. These events are aimed at improving safety, capacity, and material flow. We've begun integrating finance, HR, and IT with all initiatives tracking really well. And we've begun a customer integration process to drive cross-selling, Revitium brings significant scale and adds thermoforming, injection molding, and precision metal machining capabilities to our expanding component and vertically integrated medical device solutions. It opens up market adjacencies such as robotics, drug delivery and oncology, and establishes focused new product development for CIT's growing medical platform. Third, we're very excited to have published our first ever ESG report in the first quarter of 2020, and I welcome all of you to visit our website and download a copy. While Carlyle has been a responsible corporate steward for over a century, we are at the beginning of our ESG reporting journey. We're eager to share our progress to date and plans for the future with investors, customers, and the communities in which we operate. Lastly, we're extremely pleased with the progress we have made on our center-led initiatives, none more so than our supply chain work, which has dramatically improved our communications among the divisions and has helped facilitate a real-time pulse on all of our suppliers, very few of which have had any delivery issues in the first quarter were thus far into the second. Bob will now provide operational and financial detail about the first quarter and review our balance sheet and cash flow. Bob.