Carlisle Companies Incorporated

Good afternoon. My name is Ralph, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Carlyle Company's third 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 Giannacoros, Carlyle's Vice President of Investor Relations and Financial Planning and Analysis. Jim, please go ahead.

thank you rob good afternoon everyone and welcome to carlisle's third quarter 2020 earnings conference call we released our third 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.carlisle.com in the investor relations section on the call with me today are chris coke 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 third quarter and context around our continued confidence in achieving Vision 2025. Bob will discuss Carlisle's third 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 under 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 will turn over the call to Chris.

Thanks, Jim. Good afternoon, everyone. As we enter the 10th month of operating in this COVID-19 pandemic, I hope everyone out there is healthy and staying safe. I'd like to first say how proud I am of the Carlyle team and how grateful I am for their continued passion, dedication, and commitment to serving our customers, to protecting each other, and to supporting our communities through these uncertain times. We all know that this virus continues to be a threat to our health and economy and want to assure everyone that safety has, and always will be the number one priority at Carlisle. And protecting ourselves and each other against this virus is at the forefront of our thoughts, even more so as the winter and flu seasons approach. If we all do our part, we can help manage this pandemic and get us all back to a healthy and productive state, both in our professional and personal lives. And while being safe and healthy is always our first priority, we also have a commitment to keep all our stakeholders in mind and to deliver on our key objectives including Vision 2025 and our ESG initiatives. By doing this, we ensure that we will continue to be a positive contributor and long-serving member of our communities. Now let's turn to slides three and four. While the COVID-19 pandemic has affected our 2020 results, our proactive approach has allowed us to continue to operate at a high level of efficiency and capacity. Our operating income generation and cash position at the end of the third quarter speak to the hard work, discipline, and perseverance of the entire Carlyle team. These same attributes will allow us to further improve the efficiency of our businesses through the Carlyle operating system, to continue to make the investments necessary to deliver a world-class Carlyle experience well into the future, and ensure we maintain discipline and rigor in our capital allocation process. When taken with our other initiatives, these actions will provide the horsepower to drive our success in achieving our vision 2025 goal of $15 of earnings per share. Reinforcing and demonstrating our ability to deliver on this commitment, we have generated $1.9 billion of free cash flow and the 25% CAGR over the last five years ending in 2019, or basically the pre-pandemic period. This track record of success supports our confidence in this team's ability and capability to execute on the components of Vision 2025, including our capital allocation strategy, and to create value through our business model. Our confidence is built on, first, the significant and proven annuity contained in the U.S. non-residential re-roofing market segment, which is estimated at between $5 to $6 billion per year today and growing to approximately $8 billion in the next decade. Two, a reframing of our pricing approach, which since mid-2017 has delivered a new paradigm tied to our enhanced value proposition in the marketplace. Three, the financial flexibility to access up to $3 billion for acquisitions. Four, operational efficiencies from our culture of continuous improvement. And lastly, the revenue growth opportunities in several key areas, including European construction markets, our medical technologies platform within CITs, highly engineered fluid technology solutions, and aerospace markets returning to pre-COVID levels of demand. Most of all, it's our belief in our employees' ability to deliver for Carlisle customers as they have for over 100 years through the ever-improving Carlisle experience that allows us to accelerate through the recovery. Transitioning to our third quarter results, we believe the third quarter reflects the remarkable strength and resilience of the CCM business model and Carlisle's balance sheet. Carlisle's cash-generating ability ensures that we can continue to invest organically and via acquisitions, particularly in our high-growth platforms of building envelope solutions, medical technologies, and fluid technologies. Coupled with returning capital to shareholders via dividend increases, which we increased 5% in September, the 44th consecutive year of increases, and share repurchases, we continue to demonstrate a strong underlying foundation. In the face of the pandemic, our team has taken many proactive steps across our businesses to position Carlyle for an improved 2021 and beyond. We have taken tough but necessary restructuring actions at CIT, including the announced closures of our Mobile, Alabama and Kent, Washington facilities. We also took the difficult actions of reducing headcount by approximately 550 employees in our Nogales, Mexico factory and by over 100 employees in our Dongguan, China aerospace factory. In our other businesses, we continue to optimize our footprint and drive efficiencies to manage costs through the pandemic. At CCM, we reduced shifts starting early in the second quarter. At CBF, we consolidated our Solon, Ohio headquarters into our Medina, Ohio manufacturing facility and made a lot of other cost reductions at CBF around the globe. Despite challenging dynamics across several markets, I want to be direct in saying we are facing them head-on and absolutely remain committed to and and focused on achieving $15 in earnings per share by the end of 2025. Our conviction and our ability to deliver on Vision 2025 is supported by several factors. I'll start with CCM, which continues to exhibit resilience, and we believe it's set up extremely well to continue on its path of both attractive, sustainable top-line growth and margin improvement. We continue to see sequential improvement in daily sales volumes throughout the third quarter at CCM, with September sales ending slightly positive year over year for the first time since the pandemic began. 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 and continuous cycle of replacement of U.S. roofing infrastructure. This distinction is important as most of CCM sales are largely driven by replacement demand, not new construction. And importantly, at times of financial stress are not canceled but deferred, as maintaining a commercial roof is not a discretionary item. Year to date, we have benefited from CCM's variable cost structure and notably lower input costs versus last year. Due to our size and scale, We believe we have the lowest cost structure in the industry, that we create significant value through the Carlyle experience, and we continue to demonstrate price leadership, connecting pricing to our value proposition. In summary, our commitment is to deliver the right product at the right place at the right time, every time. We're very pleased with the progress we continue to make on our newer platforms of polyurethane and architectural metals, as well as our specialty roofing materials produced and sold in Europe. Within polyurethane, spray foam continues to regain market share, notably by a refocus on core customer relationships and launching new differentiated products, all under a new consolidated brand structure. These improvements help to drive year over year revenue growth in the third quarter and year to date. Architectural metals was a bright spot in the quarter, delivering relatively flat sales in a challenging environment. Architectural metal margins continue to improve with solid progress on integration initiatives. And in Europe, the small to medium-sized roofing market remains steady, supporting overall year-over-year growth in the quarter and year-to-date. Profitability in Europe continues to improve as well. We continue to believe that Europe provides an opportunity for meaningful expansion for CCM, and we are committed to taking the necessary steps to ensure that growth potential is realized despite the headwinds of COVID. We anticipate fourth-quarter sales at CCM will grow low single digits, barring any weather or COVID-related disruptions. Turning to our interconnect business, as has been well publicized and as you are all aware, global air travel and aerospace financial health have both been severely impacted by the COVID-19 pandemic. The impact on aircraft manufacturers such as Boeing and Airbus has been momentous, with build rates continuing to decline substantially this quarter. Since the beginning of March, the CIT team has been focused on dealing with the rapid declines and fallout that all suppliers in the aerospace industry have felt. Our focus has been on taking actions that will position CIT Aerospace to support the strong recovery we anticipate will occur as global air travel returns in the coming years. Despite aggressive action to minimize losses in the near term to right-size our footprint, we continue to invest in new products and capabilities that will enable us to maintain our industry-leading position and exceed our customer expectations when growth in aircraft production rates resumes. We are maintaining a close eye on our aerospace competitors and remain positioned to be opportunistic should a strategic and appropriate asset become available. 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. In support of this, TSA passenger screenings have increased dramatically since March, and we believe will continue to rise in the fourth quarter. Additionally, recent data show that the risk of transmission of COVID-19 on an aircraft is quite low. We are also encouraged by the global efforts and progress towards the development of a COVID-19 vaccine, which once deployed should drive passenger confidence and safe travel and accelerate a return to higher levels of passenger miles. And additionally, on a bright note, Boeing's 737 MAX 8 has been approved for a return to flight by European regulatory bodies and is moving closer to FAA approval. Transitioning to our medical platform within CIT, we entered medical technologies several years ago through the acquisition of LHI with the concept of leveraging our core wire and cable expertise into the MedTech markets. The acquisitions of MicroConnex, Red Group, and Providian over the last two years have contributed significantly to our platform, and MedTech remains a key area of focus for both organic investment and bolt-on acquisitions. CIT Medical Technologies has proven stable in this uncertain environment, benefiting from increased demand for COVID-19-related patient monitoring equipment, partially offset by deferred hospital capital investment. Recently acquired Providium, which expanded our component and vertically integrated device solutions capabilities, continue to perform well, and integration is on track. In addition, product rationalization actions taken in legacy medical product lines in 2018 and 2019 have improved CIT Medical Technologies' margin profile. Our long-term bullishness on medtech remains intact, and we see CIT revenues trending toward a better balance and more profitable mix over time. Near-term, while CIT medical technologies remains a positive offset to CIT aerospace weakness, we remain watchful of key medtech demand drivers, such as capital spending in hospitals, elective surgery and procedure deferrals, particularly in the United States. Taken together, we expect CIT's revenue in the fourth quarter of 2020 to decline approximately 35% versus the fourth quarter of 2019, reflecting significant inventories of aircraft in the channel, limited new orders, and reduced production rates. At CFT, operating income grew 5% due to solid pricing gains, operational improvements, and cost discipline, despite revenues declining 5%. While the pressures from subdued industrial capital expenditures remain, CFT continues to execute on internal initiatives laid out in Vision 2025. Our new technology initiatives can be highlighted by the launch of our market-differentiated premium solution for spray foam applications, which gained traction throughout the third quarter. We're proud to be delivering a spray foam insulation industry first, the combination of application equipment with polyurethane foam material. this combination will allow us to provide the spray foam contractor builder and homeowner with greater application efficiency tighter ratio tolerances and ultimately a better foam insulation product in the wall we're also encouraged by our latest strategic acquisitions and sealants and adhesives within cft including echo shineng and ids this combination of market leaders and specific niche products coupled with cft's legacy products bring cft closer to offering a comprehensive sealants and adhesives product portfolio for our global customer base. We are also extremely proud of the progress CFT made in the third quarter, continuing to upgrade the customer experience from our order entry capabilities to our quality and delivery improvements in all our global locations. We are beginning to see positive signs in CFTN markets, particularly in Asia and Europe, and we are optimistic we are past the worst of the COVID-19 impact to our industrial customers. We remain committed to our original long-term margin goal of 20-plus percent for CFT and are confident the multifaceted plans we put in place, including developing and introducing innovative new products, capturing the value of these products in enhanced pricing, applying COS rigorously, and maintaining hyper-focus on plant safety, quality, delivery, and cost management, will result in significant improvements in 2021. We currently expect fourth quarter revenue to decline mid-teens year over year, reflecting sequential improvement over the third quarter of 2020, but up against a relatively strong fourth quarter 2019. Turning to CBF, CBF sales were down 9% in the quarter, reflecting the additional impact of the pandemic on top of the multi-year downturn CBF was already experiencing in the global off-highway vehicle markets. And especially impactful COVID-related contributing factor to CBS results was, similar to CIT, its exposure to the aerospace industry, where it supplies high-margin metallic and carbon aircraft breaking products. Significant progress in business improvement actions taken in the past few years in this business, including the Tulsa Medina plant consolidation and many new product introductions, have not been enough to offset volume declines, especially in the high-margin aerospace business. CBF has made substantial progress in lowering its cost base, refining its production processes, and reducing its footprint, all actions that will help us reach our targeted margins as demand improves. We believe global demand for CBF products will continue to be pressured in the fourth quarter of 2020, and as such, we expect fourth quarter sales 2020 to be down low single digits. Reflecting on capital deployment, accretive and synergistic acquisitions remain a key pillar of Vision 2025. Despite the temporary impacts of COVID-19, we continue to aggressively track opportunities to deploy capital into our strategic segments of CCM, CIT, and CFT with returns in excess of cost of capital as our guide. Our financial strength and cashflow generating capabilities afford us flexibility, and we intend to remain opportunistic. Notably, and as we've 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 $340 million in share repurchases year-to-date in 2020. And finally, we continue to be relentless in the expansion of our decade-plus Carlyle-wide operating system based on the principles of Lean and Six Sigma, or COS. COS, or the Carlisle Operating System, will continue to be a unifying cultural imperative, providing an essential toolkit for our businesses to rely on as they seek new opportunities to make our operations and businesses more efficient. In the third quarter, COS once again delivered savings and efficiency gains, this time approximately 1% of sales. This result was a remarkable feat given our very challenging volume environment. And COS has proven to be more than a cost savings program, providing the tools, the training, and the clear goals and objectives for our teams to remain focused on quality, safety, and delivery in their operations. Bob now will provide operational and financial detail about the third quarter and review the balance sheet and cash flow. Bob?