Carlisle Companies Incorporated

Good afternoon. My name is Annie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Carlisle Company's fourth 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, Carlisle's Vice President of Investor Relations. Jim, go ahead.

Thank you, Annie. Good afternoon, everyone, and welcome to Carlisle's fourth quarter 2020 earnings conference call. We released our fourth 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 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 fourth quarter of 2020, views of what's to come in 2021, and context around our continued confidence in achieving Vision 2025. Bob will discuss Carlisle's fourth 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 comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which would cause actual results to be materially different. A discussion of some of these risks and uncertainties 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 the call over to Chris.

Thanks, Jim. Good afternoon, everyone. Entering what is now the second year of operating in this COVID-19 pandemic, I hope everyone is healthy and staying safe. I'd like to open by saying how proud I am of the global Carlyle team for their perseverance and ability to execute in these uncertain times. Our COVID statistics reflect the strong compliance to the CDC guidelines and safety measures all Carlyle employees have followed. In 2020, we suffered 470 infections, 15 hospitalizations, and sadly, three deaths. We continue to do our part to combat the spread of the virus. In combination with further progress on the vaccination rollout, we anticipate that we will continue to show our safety measures are working. Because at Carlisle, maintaining health and safety is always our first priority. Vision 2025 provided clear direction and consistency of mission during a tumultuous 2020 and will continue to guide our efforts as we accelerate into the recovery. As we pass the mid-year mark and entered the third quarter, we continued to build on the momentum started in late Q2 when our employees, customers, and supply chain partners increasingly were able to work safely and efficiently. and begin to get back to contributing to economic growth. As the global community returned to work, strong underlying deferred demand became more evident, especially in our building products business. While we expect this momentum to continue as vaccines help decrease risk, the construction industry is still contending with uneven regional disruptions due to COVID restrictions, severe weather in certain areas, and tight labor dynamics, which is resulting in deferred demand continuing to build the backlog of work. Turning to slide four, 2020 demonstrated yet again the exceptional and sustainable earnings power of the Carlyle business model. Over the past several decades, Carlyle has been categorized as a diversified industrial company, and rightly so, as evidenced by our portfolio content, multiple acquisitions in a variety of segments ranging from fluid handling to medical technologies, and our legacy strategic goals. However, since CCM introduced the first single-ply EPDM roofing membranes to the market in the early 1960s, Carlisle's growth and earnings have increasingly been powered by our construction materials business. With over a half-century of outstanding performance, CCM's influence on our overall performance has consistently expanded despite our diversification efforts, peaking in 2020 when it accounted for over 70% of revenues and over 90% of earnings. In the past three years, CCM has accelerated their world-class performance, leveraging consistent organic growth focused on providing the ultimate in customer service, the Carlisle experience, and instituting greater price discipline, developing sophisticated sourcing and purchasing capabilities, and maintaining a continuous improvement culture, all aiming to drive increased profitability and shareholder value. In 2017, when we first contemplated Vision 2025, we turned a critical eye to our capital deployment efforts and started a pivot to a more disciplined ROI focus. It was that critical assessment and objective view of value creation that drove our focus under Vision 2025 to apply a greater investment spotlight onto CCM. A consistent 30%-plus returns business, CCM's performance warranted and earned the right to share the majority of investment dollars that were allocated to portfolio diversification, at that time a key strategy of Carlyle's legacy approach of building out higher growth and presumably higher margin platforms as a path to sustainable value creation. With the official rollout of Vision 2025 in February of 2018, our evolution was actualized, evidenced by our recent extensive M&A and capital investments at CCM. As shown on slide five, CCM has continued to evolve from its roots in the early 1960s of a simple single-ply roofing membrane division to today, where we deliver innovative, easy-to-install, and energy-efficient solutions through the Carlyle experience for customers who are creating the sustainable building of the future. With our extensive line of building envelope products, CCM offers a complete set of solutions and systems to aid in the design of efficient building envelope construction projects backed by industry-leading warranties and a focus on green principles. On slide six, you can see how this building envelope concept can deliver substantial energy savings for building owners. CCM products provide a substantial offset to the estimated 40% of greenhouse gases globally generated from the construction and maintenance of buildings. And our teams are focused on continuing to support the growing efforts in global energy efficiency. It's because of this history of innovation, investment, and continuous improvement that we have more conviction than ever that CCM's future success is secure. We believe the extensive planning of Vision 2025 identified the strengths of CCM's core markets, demonstrated the consistent re-roofing revenue stream, and elevated the power of CCM's sustainable business model. 2020 only served to crystallize our confidence. Turning to slide seven, I'd like to spend a few minutes talking in more detail about CCM's future and what drives our confidence in the CCM business model. First, as you've heard us speak about at length, CCM's core business is predominantly driven by replacement roofing demand. Non-residential buildings built 10 to 20 years ago make up over 25% of current infrastructure, and those roofs will need replacing in the next decade. As a reminder, roof replacements are not discretionary. Aided by the Carlisle experience and our market position, CCM should continue to capture replacement of installed roofing systems and grow share with new energy-efficient, labor-reducing, and cost-effective product and solutions in the $6 billion and growing market. While the majority of our core CCM business revenue comes from re-roofing, past construction cycles evidence residential construction as a strong leading indicator of new commercial construction, which augments core CCM growth. Growing residential construction demand, which accelerated in 2020, coinciding with urban relocation due to COVID-19, will require increased commercial infrastructure including big-box retailers, hospitals, warehouses, and educational buildings to support a growing population of suburban families and workers. Second, as shown in slide eight, the recent addition of our polyurethane platform to CCM included spray foam insulation, which is a sustainable, high single-digit growth market. Our top-performing formulations provide unmatched energy efficiency in both residential and non-residential applications. Driven by our industry-first concept of a combined material and equipment solution, which we call IntelliSpray, and was developed and introduced with engineering support from Carlisle Fluid Technologies, Carlisle CCM is uniquely positioned to grow at above market levels in spray polyurethane foam insulation. This innovative new system will allow us to provide the contractor, builder, and homeowner with greater application efficiency and control, savings from application efficiency improvements, and ultimately, a better foam insulation product. Third, like polyurethane, architectural metals is an exciting new platform for CCM. This billion dollar market growing at approximately two times GDP provides an attractive opportunity to diversify into the sloped roof market with a highly sustainable product. Our metals platform is seeing healthy organic growth as it offers a lasting high ROI system solution to building owners, generating solid pull through sales of CCM insulation and underlayment products. To support our regional growth strategy, we are expanding our metals footprint in 2021 by opening three new locations in the US. Metal roofing systems also complement our drive to deliver solutions to support the construction of an efficient building envelope. Metal roofs are 100% recyclable, increase energy efficiency of a building up to 20% versus traditional materials, and reduce waste in the manufacturing process. Fourth, we are committed to accelerating growth in Europe, a 10 billion euro addressable market. To drive this growth, we recently changed leadership in the region and announced the investment of over $25 million to expand capacity in our German manufacturing facility. Increasing demand and regulations for improved thermal performance along with integrated roofing systems are driving a shift to single-ply membranes in Europe. CCM's leading environmental and energy-efficient solutions lend themselves well to trends in the European market. Recent industry dynamics reinforce our belief that increasing our focus on our building products platform is the right strategy. The new ownership of a recently acquired competitor and an announced management addition at another competitor shows the widespread belief of the strong prospects for the non-residential building product space. Industry dynamics also support our strategy to accelerate growth in Europe. And finally, as was widely discussed after the recent acquisition, our increased focus on delivering the Carlisle experience for the sustainable building of the future is in line with macro industry trends. Before moving to our three other businesses, I want to reiterate how remarkable our CCM Business M team performed in 2020. CCM was largely the story for Carlisle in 2020. And we expect that to continue into 2021 and beyond. Regarding our other three businesses on slide nine, 2020 was obviously a difficult year due to the pandemic. In the face of significant declines, the teams did a commendable job managing through the crisis, taking actions to reduce costs and position their businesses for the future, including leveraging COS, investing in new product development, and right-sizing footprints. While the results did not meet our expectations, these remain good, very good businesses with solid management teams committed to weathering the current macroeconomic challenges. We are optimistic that the actions taken in 2020 to improve CIT, CFT, and CBF will position these businesses for a solid recovery, especially in 2021 for CFT and CBF where markets have signaled the bottom. And while we believe CIT will recover over a longer timeline, We are confident that there will be a recovery. With higher inoculation rates from rapid vaccine rollouts, easing of COVID travel restrictions, and an improved outlook for both aerospace and hospital capital spending, CIT will drive exceptional leverage with a resumption of growth. Before Bob gives the financial details of the quarter, I'd like to touch on a few other notable achievements of 2020. Please turn to slide 10. We've generated $2.5 billion of free cash flow over the last six years and recently accelerating significantly with almost half that was generated in 2019 and 2020. This track record of success supports our confidence in this team's ability to execute on our capital allocation strategy and to create value. While 2020 was a subdued year for M&A, we are managing an active pipeline for creative and synergistic acquisitions to rapidly scale our high-returning businesses. As always, our financial strength and cash flow 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 $380 million in share repurchases in 2020, totaling approximately $1.5 billion in share repurchases since 2017. And at our latest board meeting, our board approved an incremental $5 million share repurchase authorization for Carlisle. We also returned over $112 million to shareholders in the form of dividends in 2020, raising our dividend in August for the 44th consecutive year. Finally, we spent $96 million of CapEx in 2020, and that plans to significantly increase that in 2021. On slide 11... We touch on our continued and expanded actions around ESG, where Carlyle remains steadfast in our commitment. Supported by COS, we are continually examining ways to improve the design and manufacture of our products, seeking to better engage our employees and communities, and improve an already strong regulatory framework. In 2020, we also made progress in diversity and inclusion, exiting 2020 with 50% of our board of directors identifying as gender, racially, or ethnically diverse. and meeting our 2020 target for percent of females in senior leadership positions. As we've stated many times before, ESG is part of Carlyle's culture of continuous improvement, and we look forward to sharing more progress with you in the future. We also encourage you to read more about Carlyle's ESG efforts on the sustainability pages of our website. Please turn to slide 12, where we cover the Carlyle operating system. In 2020, COS delivered savings of 1.3 percent of sales well within our vision 2025 annual target of 1% to 2%. A remarkable feat considering 2020's challenging conditions and proving that Carlisle employees truly embody and live our continuous improvement culture every day. Another major milestone in 2020 was the launch of the Path to Zero, which represents our commitment to creating the safest possible work environment and features the goal of zero accidents and zero injuries. COS will continue to be a unifying cultural imperative for our businesses to rely on as they seek new opportunities to make our operations and business processes more efficient. Bob will now provide operational and financial details about our fourth quarter and review our balance sheet and cash flow. Bob?