Carlisle Companies Incorporated

Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Carlyle Company's second 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 like to turn the call over to Mr. Jim Giannacortos, Carlyle's Vice President of Investor Relations and Financial Planning and Analysis. Jim, please go ahead. Thank you, Josh.

Good afternoon, everyone. and welcome to Carlyle's second quarter 2020 earnings conference call. We released our second 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. On the call with me today are Chris Koch, Chairman, President, and Chief Executive Officer, and Bob Roach, our Chief Financial Officer. Today's call will begin with Chris discussing business trends experienced during the second quarter and provide context around our confidence in achieving Vision 2025. Bob will discuss Carlisle's second 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 investing in Carlyle should read these statements carefully and review reports we file with the SEC before making an investment decision. With that, I turn over the call to Chris.

Thanks, Jim. Good afternoon, everyone. Please refer to slides three, four, and five for these opening comments. I'd like to begin by saying how proud I am of Carlyle's global team and their perseverance and ability to execute in these uncertain times. Carlyle's employees have rallied around each other, our customers, and their communities by supporting critical infrastructure, continuing to operate our factories and distribution centers at a high level despite limitations borne out of adherence to rigorous global health and safety guidelines, all the while remaining supportive and positive contributors to their families and local communities. Their dedication to a safe work and home environment is commendable. As I mentioned in the press release, while overall infections in our global organization have remained low, we are saddened, as we reflect on the loss of three Carlisle family members to the virus. Maria, Roy, Gilberto, they will be missed. As with any loss at Carlisle, we are all affected, and we all wish their families the best as they grieve their loss. I cannot leave this subject without also stating, as I've done through my weekly correspondence with our global employees since the start of the pandemic, that the reality is that this virus is a serious threat to our health and our economy. and that our efforts to protect ourselves and each other must have the highest of priorities. I'd like to now transition to the second quarter results. As we review the results, I want to reiterate that Carlisle has been deeply impacted by the virus in many ways, but we are fortunate to have a strong and solid foundation as a company. Throughout the second quarter, our businesses remained in operation as they were deemed essential, which we view as evidence of the importance of our products and the employees who design and produce them. We took pride in keeping layoffs and reduced hours to a minimum, which helped provide the uninterrupted service to our customers that they have come to rely on and allowed us to continue our progress on key initiatives related to Vision 2025. However, we did take actions that resulted in reductions to our global workforce in the quarter, most particularly in the United States. While the second quarter certainly was challenging, we are pleased with the resilience of the CCM business model. enabling Carlisle to weather a potentially prolonged economic downturn and allowing us to continue to invest in our high-growth platforms of architectural metals, polyurethanes, medical technologies, and fluid technologies, which will enable us to emerge out of the pandemic with strong growth prospects. We remain committed to emerging from the current market challenges in a strong financial position and able to leverage that financial position into future growth and earnings in our core businesses. Bob will provide more details later in the call, but I want to touch on some important areas of our current financial position. As of the end of the second quarter, we have $738 million of cash coupled with an untapped $1 billion credit facility. We expect strong free cash flow in 2020 with a conversion rate greater than 125% and fully expect to increase our dividends in September for the 44th consecutive year. Despite the unknown impacts and challenging dynamics of this current situation, I want to be direct in saying we remain absolutely committed to and focused on $15 in earnings per share as contemplated in Vision 2025. Some of the things that reinforce our conviction and our ability to deliver Vision 2025 include the following. CCM is well positioned to exhibit resilience during this global market downturn. We still foresee a robust and growing re-roofing market with positive trends continuing well through 2025, driven by the need for maintaining an aging U.S. roofing infrastructure. This distinction is important as most of CCM's sales are driven by replacement demand, not new construction. We also anticipate benefiting from CCM's variable cost structure and lower input costs near term. Due to our size and scale, we believe we have the lowest cost structure in the industry, create the most value through our Carlisle experience, and remain the disciplined price leader in the market. CCM's status as a best-in-class building envelope solution provider continues to be evidenced through price and market leadership, superior products and service, industry-leading innovation, a strong re-roofing backdrop, and an operating income profile approaching Vision 2025's targeted 20%. Over 60% of CCM's product is typically shipped directly to the job site, and in the second quarter, this percentage increased. As the industry came out of lockdown, the smaller window the contractors had to work with made the efficiency of the Carlisle experience that much more important. We reinforced our commitment to our customers of never failing to deliver the right product at the right place at the right time, every time. We remain very pleased with the progress we continue to make on our newer platforms of polyurethane and architectural metals within CCM. Within polyurethane, spray foam continued to regain significant market share. helping to drive flat year-over-year revenue in the quarter despite the challenging conditions. Architectural metals revenue exceeded overall CCM average percentage sales declines in the quarter. Architectural metals continues to progress on post-acquisition profitability improvements, including significant integration initiatives. Through June and into July at CCM, we continued to see improvement in daily sales volumes that began in May. Provided this trend continues, we anticipate third quarter sales at CCM will decline high single digits year over year, significantly better than the 20% decline during the second quarter of 2020. As expected, CCM's operating income margins of 18.7% during a very challenging second quarter exemplified its profitability resilience, and importantly, Carlisle's position in the market driven by the valued Carlisle experience. As for our interconnect business, Coming into the year, 2020 was already forecasted to be significantly burdened by ongoing issues surrounding Boeing 737 MAX, in addition to lower production of other Boeing and Airbus platforms. The emergence of COVID-19 and its impact on airline travel had an almost immediate and substantial effect on both aircraft production and airline investment in existing fleets. In response, our CIT team initiated an acceleration of restructuring actions that will right-size our manufacturing footprint in line with expected demand over the next few years. While CIT's commercial aerospace business, as expected, declined approximately 50 percent in the quarter, the team took actions to manage costs, which assisted greatly in delivering only a slight reported operating income loss for the overall division, despite restructuring costs incurred in the quarter. Ongoing actions to restructure and improve the efficiency of our manufacturing footprint over the past few years, combined with the accelerated actions we're currently taking, position CIT well to suffer minimal losses in the remainder of 2020, despite restructuring costs and once-in-a-lifetime declines in aerospace and markets. Despite aggressive action to maintain profitability, we continue to invest in new products, into talent, and into our manufacturing operations to ensure we are maintaining our industry-leading position and are able to execute our customer expectations when production of aircraft resumes. We expect similar year-over-year revenue declines in CIT Aerospace for the third quarter as experienced in the second quarter. As inventory in the supply chain continues to be worked down and forecasts for a recovery in global passenger travel remain muted. Recently, some positive signs have emerged in the aerospace markets. While we all know that the aerospace markets have been significantly impacted by the pandemic, we do remain confident that over time passengers will become comfortable with the safety measures airlines are implementing. And we're also encouraged by recent announcements of the progress towards the development of a COVID-19 vaccine, which once deployed should accelerate a return to higher levels of air travel. Additionally, Boeing 737 MAX moved closer to FAA approval with the completion of certification flights on July 1st. a key step in returning the aircraft to service. We remain a supplier of choice and will continue to invest in our assets that support the aerospace market. Despite the fact that the agreement with Prismium to purchase their Felica business expired in June, we remain committed to strategic acquisitions that broaden our product in geographic breadth and ultimately will benefit from a resumption of growth in both aircraft build rates and airline spending. To offset commercial aerospace declines, we are seeking new opportunities with space and defense customers, positioning CIT to take advantage of opportunities created by market disruption. The largest offsetting driver at CIT is, however, clearly its medical technologies platform. We entered the medical technology space several years ago through the acquisition of LHI, with the concept of leveraging our core wire and cable expertise into the medtech markets. We added MicroConnex, Red Group, and Providian in the last two years, and MedTech remains a key area of focus for both organic investment and bolt-on acquisitions. Organically, CIT medical technologies grew 15% year-over-year in the second quarter, driven by increased demand for COVID-19-related patient monitoring equipment. Recently acquired Providian, which expanded our component and vertically integrated device solution capabilities, and along with that, new market adjacencies and customers, continue to perform well. In addition, product rationalization actions taken in legacy medical product lines in 2018 and 19, coupled with ongoing COS efforts, have improved CIT medical technology margin profiles, which, as anticipated, will help CIT's overall margin as contemplated in Vision 2025. Our long-term bullishness on MedTech remains intact, and we see CIT's revenues trending towards a better balanced and more profitable mix. Near-term, While CIT Medical Technologies remains a positive offset to CIT Aerospace weakness, we remain watchful of key MedTech demand drivers such as Hospital CapEx. Elective surgery and procedure deferrals continue, and particularly in the U.S., they continue. Taken together, we expect third quarter revenue year-over-year declines for CIT overall to be of similar magnitude as reported in the second quarter. Turning to CFT. The impact of COVID-19 in the second quarter exacerbated an already challenging end market demand environment that had been impacted for the past several quarters by the U.S.-China trade negotiations and subsequent industrial production slowdowns. While year-over-year revenue declines of over 30% were greater than anticipated and weighed heavily on operating income results, CFT saw improvement each month throughout the second quarter as we continued our steady progress on the initiatives laid out in Vision 2025. We remain committed to the margin-enhancing actions, including pricing, market share gains, and new technology. Our new technology initiatives can be highlighted by the launch of our market-differentiated premium solution for spray foam applications launched in the second quarter. We are pleased to begin the third quarter with an industry first, combining CFT spray foam equipment with CCM spray foam insulation polyurethane products. We're also encouraged by the strategic acquisitions in sealant and adhesive we made in 2019 and the progress we're making to complete this product lineup. CFT also continues its focus on upgrading the customer experience through quality and delivery improvements in all our global locations. Notably, we are beginning to see positive signs in CFT's end markets, particularly in Asia, and are cautiously optimistic for an improved second half of 2020. We currently expect third quarter revenues to decline roughly 20% year over year and improvement versus second quarter 2020 results. Coupling a stabilization in market demand with our internal initiatives, we will deliver significant leverage once volume returns. Turning to CBF, the pandemic crisis extended the pressure CBF was already experiencing in the global off-highway vehicle markets, offsetting the significant actions taken the past few years in this business, including the Tulsa and Medina plant consolidation and the launching of new products. An excellent example of CBF's investment in innovation is our recent obtaining of FAA parts manufacturer approvals, or PMAs, for carbon aircraft brakes. The benefit of these actions, which position CBF to meet our revenue and profitability expectations in the future, are less visible given the current severe demand downturn, which drove sales down over 30% year over year in the second quarter. We anticipate CBF's third quarter sales to improve over second quarter sales declining mid-teens. Moving away from our business segments, M&A remains a key pillar of 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. Notably, and as discussed in the past, when acquisition activity is subdued, we remain committed to returning capital to shareholders. This is evidenced by our deployment of more than $190 million in share repurchases in the first half of 2020. And finally, we continue to focus on deployment of the Carlisle operating system. COS 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 in this challenging environment. COS remained on track in the second quarter, generating savings and efficiency gains exceeding 1% of sales, well within our projected 1% to 2% plan for Vision 2025. Bob will now provide operational and financial detail about our second quarter and review our balance sheet and cash flow. Bob?