Carlisle Companies Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 10 speakers on the call.

Operator

Good afternoon.

Speaker 1

My name is Constantine, and I will be your conference operator today. At this time, I would like to welcome everyone to The Carlyle Company's First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will conduct a question and answer session. I would like to turn the call over to Mr.

Speaker 1

Jim Giannakoulis, Carlisle's Vice President of Investor Relations. Jim, please go ahead.

Speaker 2

Thank you, and good afternoon, everyone. I want to welcome all of you today to Carlyle's Q1 2024 Earnings Call. I am Mehul Patel. I am Head of Investor Relations. We released today our Q1 2024 financial results, and you can find both our press release and the presentation for today's call in the Investor Relations section of our website.

Speaker 2

On the call with me today, we have Chris Koch. He is our Board Chair, President and CEO along with Kevin Zimmel, who is our CFO. Today's call will begin with Chris. He will provide highlights of our results along with an update on our key accomplishments, and then Kevin will follow-up with an overview on our financial performance and provide an update on our outlook for 2024. Following our prepared remarks, we will open up the line for questions.

Speaker 2

But 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 Carlyle provides non GAAP financial information, we've 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. And with that, I will turn the call over to Chris.

Speaker 3

Thank you, Mehul. Good afternoon, everyone, and thank you for joining us for Carlyle's Q1 2024 earnings call. To start, I'd like to direct your attention to Slide 3 of the presentation. We were pleased with our overall sales growth and margin expansion during the Q1, which reinforces the underlying themes and key strategies we've outlined in Vision 2,030. 1st quarter sales of $1,100,000,000 reflect a 23% year over year increase and were in line with our previous comments that destocking ended in Q4 of 2023.

Speaker 3

We also indicated that we expected a benefit of approximately $200,000,000 of year over year sales as a result of a return to normal ordering levels, rebounding as predicted from a Q1 of 2023 that had been negatively affected by destocking. This return to normal ordering patterns was primarily experienced in our CCM business, which demonstrated substantially year over year sales growth of 36%. Robust reroofing activity from pent up demand and favorable weather conditions fostering healthy construction activity were additional positive factors that assisted our Q1 performance and more than offset the impact from negative price in Q1 that we had stated in our year end earnings call. In addition to a positive sales story, the Q1 margin story was also a success. Our relentless focus on improving operational efficiency, our commitment to delivering the unparalleled value in the Carlyle experience to our customers and our COS efforts contributed to a strong bottom line result.

Speaker 3

Improved margins across both CCM and CWT drove adjusted EBITDA of over $260,000,000 marking an increase of well over 50% year over year. The focus on continuously improving adjusted EBITDA performance was underpinned in Q1 by robust margin expansion bolstered by the increased Henry integration synergies, our commitment to our lean Cigna initiatives under our flagship Carlyle operating system and efficiencies gained by leveraging our higher volumes in our operations. Pricing continues to be in line with our expectations where we anticipated pricing would be down 2% to 3% for the full year with substantially all of the impact in the first half of the year. We are bullish on the pricing outlook for the balance of the year based on the recent price increases announced by the major competitors in our industry. Additionally, we achieved substantial growth in adjusted EPS of over 80% year over year.

Speaker 3

Our steadfast dedication to the Carlyle experience, operational excellence, innovation, synergistic acquisitions and organic investments continues to contribute to our superior performance and solidify Carlyle's position for sustained success in the future. Carrying on with the theme of positioning Carlyle for sustained success in the future, we were pleased to follow the delivery of our Vision 2,030 plan in December of last year with the announcement that we are selling the Carlyle interconnect business and taking the final step in delivering on our commitment to become a pure play building products company. In January, we reached an agreement with the Amphenol Corporation to acquire our CIT business. We expect the transaction to close in the Q2 of this year. The anticipated proceeds from the sale of nearly $2,000,000,000 will be strategically deployed to fund further acquisitions, execute approximately $1,000,000,000 in share repurchases and fuel additional organic growth initiatives.

Speaker 3

In our pursuit of generating significant value creation through strategic investments, we're excited to announce the acquisition of MTL, a Wisconsin based specialty manufacturer of high performance metal edge and wall systems. The acquisition of MTL is perfectly aligned with Carlyle's Vision 2,030 strategy and our 4 criteria for all acquisitions. And as a reminder, those criteria are 1, a solid organic growth story 2, meaningful hard synergies 3, a talented management team and lastly, a clear and easily actionable integration playbook. Our acquisitions are always aimed at enriching and expanding our building envelope product offerings. The planned MTL acquisition and CIT divestiture reinforce our commitment to our pure play building product strategy, our philosophy of superior capital allocation and ultimately driving best in class ROIC.

Speaker 3

And lastly, we are very pleased to have continued our long standing tradition of returning value to our shareholders through dividends and share buybacks in Q1. During Q1, we completed $150,000,000 in share repurchases as part of our plan to repurchase $1,400,000,000 worth of shares in 2024. We also paid $42,000,000 in dividends in the Q1 as we continue to be proud of our history of having raised our dividend for over 47 consecutive years. These actions underscore our commitment to enhancing shareholder value and our confidence in Carlyle's long term growth trajectory. Please turn to Slide 4 as I discuss our Vision 2,030 value creation drivers and targets.

Speaker 3

After completing Vision 2025 3 years early, we are now fully engaged in building on Vision 2025 success and the execution of Vision 2,030. As outlined in our Vision 2,030 video, we plan to continue delivering on the foundational strategies that have produced such positive results 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 Carlyle's growth journey. The key pillars of Vision 2,030 include enhanced levels of innovation with a commitment to investing 3% of sales to drive the creation of new products and solutions that add value to our customers through advancements in sustainability, energy and labor efficiency. A continued emphasis on synergistic M and A as demonstrated by our recent agreement to acquire MTL, which aligns seamlessly with our strategy to enhance and expand our building envelope product portfolio.

Speaker 3

Attracting and retaining top talent to ensure we have the best talent to execute our strategic initiatives and drive above market growth and holding steadfast to our sustainability commitments as evidenced by our progress in 2023 against our stated objectives, which you can find in our latest corporate sustainability report. As we move forward, we are confident that the execution of Vision 2,030 will drive superior shareholder returns and position Carlyle as a premier investment opportunity in the building products sector. Turning to Slide 5. Our planned acquisition of MTL is directly aligned with our goal to invest prudently in high returning businesses with best in class building envelope products and solutions that expand and complement our existing system offerings. With an expected close in the Q2 of 2024, MTL reinforces Carlyle as an industry leader in the multibillion dollar architectural metal market and is expected to add approximately $0.60 of adjusted EPS in 2025 with over $13,000,000 of hard cost synergies expected within the 1st 3 years.

Speaker 3

MTL's values are highly aligned with Carlyle's, especially with respect to MTL's superior customer focus and solid track record of above market growth. Now please turn to Slide 6 as I share recent updates on our progress with Carlyle's sustainability initiatives. We seek to positively impact the environment while creating value for all our stakeholders through the 3 pillars of our sustainability strategy, which are: 1, manufacturing energy efficient products 2, minimizing our value chain greenhouse gas emissions and 3, diverting waste and end of life materials from landfills. Under our first pillar, we provide our end user customers access to solutions that drive energy efficiency in their buildings. As I mentioned earlier, in 2023, we made significant progress against this pillar with $3,200,000,000 in lead qualified product sales, representing an impressive 70% of our total revenue, which is up from 65% in 2022, reflecting the increasing demand and trends for more energy efficient buildings.

Speaker 3

Our second pillar, reducing our operational and value chain emissions helps Carlyle reduce our carbon footprint and environmental impacts. Carlyle began Phase 1 of metering the significant energy users or SEUs at our major manufacturing facilities. The data that results from metering this equipment will enable our plants to conduct real time energy analysis and make more informed decisions on energy efficiency. In Q1, Carlisle installed metering at our Tooele, Utah polyiso and membrane facility. Lastly, our 3rd pillar focuses on the reduction of construction waste entering landfills.

Speaker 3

In 2023, Carlisle's recycling initiatives enabled the diversion of over 90,000 metric tons of waste from landfills through operational scrap reduction, purchase recycled raws and rooftop takeoffs. Significant contributors were the purchased recycled content of polyiso facer paper and polyols as well as 30,000 tons of recycled metal from the CAM business unit. Sustainability is a very important focus for Carlisle. As an organization, we remain committed to being a responsible environmental stakeholder and our products continue to offer a strong value proposition in a world looking for energy efficient value added solutions. Our first quarter results reinforce many of the themes we discussed in our Vision 2,030 presentation, including being well positioned to leverage megatrends in energy efficiency, labor savings and growing re roof demand within the building envelope marketplace.

Speaker 3

With this in mind and in combination with the strength of our Q1 results, we are increasing our full year 2024 growth outlook. And with that, I'll turn it over to Kevin to provide additional financial details. Kevin? Thank you, Chris. Our first quarter financial results reflect the strength of our business model and the successful execution of our strategic priorities to start off 2024 on solid footing.

Speaker 3

Looking at our Q1 results on Slide 7, we grew revenue by 23% year over year to $1,100,000,000 driven by normalization of inventory in the channels, growing reroofing activity, which benefited from pent up demand, increasing residential starts and favorable weather across the U. S. We leveraged our strong top line performance to expand our EBITDA margins by 5.30 basis points to 24.2%. Furthermore, we grew our earnings 85% year over year to an adjusted EPS of $3.72 The EPS increase was driven by sales growth, margin expansion and share repurchases. Looking at our segment highlights starting with CCM on Slide 8.

Speaker 3

CCM delivered 1st quarter revenues of $784,000,000 up 36% from the Q1 of 2023. The increase was driven by return to normalization of order patterns, including the end of destocking in the channel, positive reroof activity and favorable weather. CCM adjusted EBITDA increased 66 percent to $227,000,000 with adjusted EBITDA margin up 5 10 basis points to 28.9%. This was driven by a combination of leveraging higher volume growth and continued operating efficiencies through the Carlyle operating system. Moving to Slide 9.

Speaker 3

Revenues at CWT decreased 1% year over year, primarily due to lower carryover prices from 20 23 in select categories. However, despite the revenue decline, we were able to drive adjusted EBITDA growth of 20% to $65,000,000 This represented an adjusted EBITDA margin of 20.7%, expanding 370 basis points from the Q1 of 2023. The margin improvement was driven by operational efficiencies gained through COS, lower input costs through strategic sourcing and the realization of synergies from the Henry acquisition. Synergies from the Henry acquisition are expected to exceed $50,000,000 in 2024, significantly above our deal model estimate of $30,000,000 Slide 10 provides a year over year Q1 adjusted EPS bridge items for your reference. Moving to Slides 11 through 13, Carlyle ended the Q1 of 2024 with $553,000,000 of cash on hand.

Speaker 3

We have $1,000,000,000 of availability under our revolving credit facility, which we amended in April to extend the maturity to 2029. We generated operating cash flow from continuing operations of $156,000,000 and invested $24,000,000 in capital expenditures. We achieved solid cash flow performance for the quarter with a free cash flow margin of 12% and we remain on pace for a free cash flow margin of over 15% for the full year. We ended the quarter with a net leverage ratio of 1.4 times within our target of 1 to 2 times. We are already making significant progress against the capital allocation goals outlined in our Vision 2,030 strategy.

Speaker 3

We are doing so by reinvesting in our high ROIC building products businesses through continued investment and growth CapEx and returning value to shareholders through dividends, including $42,000,000 in dividends paid and repurchasing $150,000,000 of shares during the Q1 of 2024. We are also making synergistic acquisitions that will deliver significant opportunities for value creation such as our recently announced agreement to acquire MTL for $410,000,000 These actions are collectively aligned with our disciplined capital allocation framework, which forms an integral part of delivering ROIC in excess of 25% and ultimately reaching $40 plus of adjusted EPS by 2,030. Following the repurchase of $150,000,000 of shares during the Q1, we have 6,900,000 shares remaining under our share repurchase program. Our robust financial position is underpinned by a solid balance sheet and a prudent approach to leverage. This conservative capital structure affords us the ability to strategically allocate resources in pursuit of superior returns.

Speaker 3

Complemented by our substantial liquidity of approximately $1,600,000,000 we are well equipped to capitalize on opportunities that arise, unlocking additional value for our stakeholders in the coming quarters years. And as a reminder, we expect to receive an additional $2,000,000,000 of gross proceeds from the CIT sale in the 2nd quarter, further enhancing our financial flexibility. We believe we are well positioned to drive additional value creation in the quarters and years ahead. Turning to Slide 14, I will discuss our full year financial outlook. We are raising our full year 2024 revenue outlook to approximately 10% growth over the prior year, which is double our outlook at year end when we were expecting a 5% increase.

Speaker 3

This increase in outlook is driven by a combination of our solid first quarter and stronger reroofing demand for the balance of the year. Leveraging the additional revenue through the Carlyle operating system along with a more positive outlook on pricing, we now expect adjusted EBITDA margins to expand by at least 100 basis points as compared to our previous guidance of 50 basis points. Additionally, we maintain our expectations to deliver free cash flow margins of at least 15% and ROIC in excess of 25%. As such, we continue to expect double digit EPS growth in 2024. This is directly aligned with the objectives outlined in our Vision 2,030 strategy, and we are experiencing a strong start towards our 2,030 goal of $40 plus of adjusted EPS.

Speaker 3

Looking at the components of the outlook for CCM, we now expect year over year revenue to grow in the low double digits in 2024. The primary drivers are tailwinds from the return to normalization and order patterns that was absent during 2023 due to destocking and strong contractor backlogs from the pent up reroofing demand. For CWT, we now expect year over year revenue to grow in the mid single digits in 2024 from strong sales execution on key growth initiatives as well as stronger trends in our markets. With that, I turn it over to Chris for closing remarks. Thanks, Kevin.

Speaker 3

In conclusion, I want to reiterate our confidence in Carlyle's strategic direction under Vision 2,030 and reinforced by our strong first quarter results. As we move forward, our ability to innovate with a focus on energy efficiency and labor savings solutions puts us on the right path to drive above market growth and in return drive superior financial results. The simplification of our building products portfolio combined with a robust free cash flow engine and the anticipated proceeds from the sale of CIT places us in an excellent position to create further significant value for our shareholders. Would also like to take this opportunity to once again express my sincere gratitude to all of Carlyle's employees. The exceptional efforts of all of our team members have ensured a strong start to what we expect will be another exceptional year for Carlyle in 2024.

Speaker 3

And with Vision 2,030 already deeply embedded in our operations, I'm incredibly optimistic about Carlyle's long term success. Our strong brand, solid capital position and superb cash flow generation provides us with the flexibility to successfully execute our strategy and unlock additional value for all our stakeholders. Thank you everyone for your continued support. Together, we are building a brighter future for Carlisle. And that concludes our formal comments.

Speaker 3

Operator, we are now ready for questions.

Speaker 1

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Tim Wojs from Baird. Please go ahead.

Speaker 4

Hey, guys. Good afternoon. Nice job.

Speaker 3

Thank you.

Speaker 4

Maybe just my first question. So when you look at CCM, I mean, it just seems like the tone around reroofing is a lot better than what it was 16 to 90 days ago. So I guess what have you seen in your business to kind of get comfort or confidence that there is kind of pent up demand on the reroofing side?

Speaker 3

Yes. Tim, it really goes back to COVID. I mean, we've been talking about this for a while that during COVID with reroof, you weren't able or contractors weren't able to get on the roofs initially. And then when we came out of COVID, we had a strong period of new construction the last couple of years. And we talked about just due to the lack of labor that some of the reroof was being deferred.

Speaker 3

They were doing some patchwork and some of that resulted in this pent up demand that we're now seeing come through. And frankly, that's the reason we raised our forecast that a good chunk of the increase, about half of it was due to the re roof improvement.

Speaker 4

Okay. Okay. Got you. And I guess on that point, Kevin, just if you can maybe kind of go through the revenue bridge just within CCM. I mean, last quarter, it was 6 percent.

Speaker 4

Now it's kind of low double digits. Kind of what are the pieces if you kind of go through the restocking, kind of the underlying volume and then just your kind of updated price assumptions?

Speaker 3

Yes. The destocking didn't change. We had at about 11% increase for the full year. We still expect it to be about 11%. We had said the dollar amount was 3 $75,000,000 for the year, dollars 200,000,000 in the Q1, and that's what we saw, the $200,000,000 in the Q1.

Speaker 3

So nothing changed on the de stock. What did change is both the volume and the price. On the volume side, I just talked about the rerouting coming in to the year. We had said we thought the total end market would be down 2% to 3%. Now, we think it will be up slightly.

Speaker 3

We still think new construction will be down high single digits, but re roof, we think will be up mid single digits. And then on pricing, we recently announced some price increases and we now think that will only be down about 1% for the full year on price, where as you may recall, at the beginning of the year, we thought we'd be down 2% to 3%. So when you sum that all up, we pretty much doubled that 6% of what we're talking about at the beginning here for CCM.

Speaker 4

Okay, great. And then maybe just the last question just to kind of sneak in here. I mean, how would you kind of characterize the pace of what you're seeing on the input cost side, MDI, polyols? I guess, does the price cost math change or are you just seeing a little bit more inflation and say net net on the EBITDA line and it kind

Speaker 3

of sums to 0? Yes. When we came into the year, we had said that cost was going to be pretty flat for the year. The raws has been a little bit of a bag on raw materials. Some raw materials are up, some are down.

Speaker 3

So not too much has changed there. But now with pricing, getting a little bit better pricing, we'll think that number will be positive for the full year, maybe a full year up of about $20,000,000 on price cost.

Operator

Okay, okay, perfect. All right, I'll hop back

Speaker 4

in queue. Thanks guys. Good luck.

Speaker 3

Thanks Tim.

Speaker 1

Your next question comes from the line of Susan Maklari from Goldman Sachs. Please go ahead.

Speaker 5

Thank you. Good afternoon, everyone. Good afternoon,

Speaker 3

Susan. My first. My

Speaker 5

first yes, it's good to be here. My first question is on CCM as well. Appreciating that you've got this reroofing tailwind that is coming through, but can you also talk a bit about some of your own initiatives around some of the products and the work that you've done with the customers? And do you think that that's also incrementally adding to this? And how do you think about the sustainability of that through this year and maybe the cadence as we move through the next couple of quarters for the revenues there?

Speaker 3

Overall, Susan, we really look at 3 areas on the initiatives. I think we talked about margin, for customer intimacy, really this involves a lot of contractor training, architect training, our digital experience is getting better and better. We've done a lot of work with the enhancing the sales excellence of our teams, things like optimizing our quote process, really cross selling, trying to increase dollars per square foot. And I think it is taking a hold. We really got into a lot of the selling initiatives last year and I do think they're starting to show up in sales.

Speaker 3

We also talked about innovation. Innovation is for us under Vision 2,030 is a longer obviously a much longer total play, but we're already seeing new products hit the market at a higher rate. We're investing a little bit more as you can see in our SG and A, And I think that will continue to gain momentum. Last year in January, we introduced the 16 foot TPO. We had a product called Ready Flash in April.

Speaker 3

We're going to introduce some other products coming out. One of them is SeamShield that's going to be introduced in Q2 of 2024. So we continue to build momentum there. Obviously, our commitment to moving up to 3% is going to take a couple of years, but we should see increased momentum every quarter as we continue to drive innovation through CCM and frankly CWT. And then lastly, it's really this operational excellence and that's just an ongoing expectation that we're getting that 1% to 2% of sales through COS every year.

Speaker 3

AI in our factories is are starting to work on to improve efficiency, everything from the quote process to actually how we deal with data coming off the line to become a little bit more maybe anticipate any quality issues that may come about by looking at the data. We also are trying to do a better job of forecasting through using AI and then really driving the sustainability efforts through our factories to drive efficiency. So trying to use less product in the whole process, trying to have less waste throughout it, whether it's freight or whether it's actually moving the goods within the factories, trying to reduce waste and in turn I think that produces a nice efficiency program there not just for energy but in all ways and we're starting to see returns there. So when we look at the gains that we've had over the last 5 to 10 years, a lot of these things have played into it. I think we're doing a better job of articulating it, but we've continued to see some pretty good margin expansion.

Speaker 3

And I think Henry is probably the latest best example where in each quarter we continue to see margin expansion and in this last one even on down sales. So a bit of a long answer here for you, but try to be a little more comprehensive, maybe Kevin wants more granularity. Yes. 2nd part of your question, 2024 is playing out to be a more normal year for us From the seasonality standpoint at the beginning of the year, we had said sales would be for the Q2 about 29% of full year sales and Q3 we said about 27% of full year sales and that seasonality still looks to be holding strong for us. So that would be the best estimate for quarterly revenue for the CCM business.

Speaker 3

And as far as CWT, that's still consistent with what we talked about in the year end call as well.

Speaker 5

Okay. That's great color. That's very helpful. And then maybe just following up on that, I think you mentioned that you expect to now exceed $15,000,000 in synergies at Henry versus the $30,000,000 guide that you had given before. Can you just talk about what's driving that incremental $20,000,000 in there?

Speaker 5

And any thoughts on how that will come through?

Speaker 3

Yes. In terms of what we're working at, the cross selling is helping some new initiatives around sales, automation within the factories. We're doing a better job of, I think, managing our efficiency within our factories. How it comes through on the P and L? I would defer to Kevin on that one.

Speaker 3

Yes. So the $50,000,000 that we see, that's pretty well. We're at that run rate in the Q1. So about $14,000,000 a quarter is what we're going to get. Q1 of last year was about half of that number.

Speaker 3

So we did see those synergies in Q1, but we did ramp up as the year went on last year.

Speaker 5

Okay. Thanks for the color and good luck with everything.

Speaker 3

Thank you and great to have you with us, Carla. We appreciate it.

Speaker 6

Yes.

Speaker 1

Your next question comes from the line of Garik Shmois from Loop Capital. Please go ahead.

Speaker 7

Hi, thanks. Decent quarter. Wanted to ask, first off, I think in the release you spoke to lower carryover prices in CWT. Was there any new downward pricing pressure during the quarter? And how should we think of pricing moving forward and potentially when would you anniversary some of the carryover pricing pressure?

Speaker 3

Yes, I don't think there's any price pressure you weren't aware of that came through. We just lapped that and as we detailed that it the way pricing would work, we were probably down around 4%, 5% in the Q1, we'll move to probably 2%, 3% in the second. Then do you think about the Q3 will be flat and then based upon what we're seeing on the pricing increases that have come out or is in others, Garrick, I think how it works, it doesn't hit on day 1. It takes a little bit to get into the bidding in that. And so we would anticipate then that we might be up 1% to 2% in the 4th quarter.

Speaker 7

Got it. And wanted to just kind of circle back to the 1Q volume strength in CCM, recognizing it's a decently slower quarter, but I think the variance was pretty notable relative to what we were expecting. You saw the lapping of the destock that tracked as expected. But you also cited weather as being favorable. So just wanted to see, do you think some of the benefit was weather?

Speaker 7

How much of the 1Q outperformance was a stronger market? Did you see any inventory build at either distribution or the contractor level? Just any additional color as to the 1Q strength would be great.

Speaker 3

Yes. Let me hit a couple of those and Kevin will pick some up too. I think on weather maybe 2 to 3 days, depending on where you were in the country, obviously, that has a big whether you're in the northwest or your volume, I mean, compared to some others, I know some people have announced that they had weaker impact due to weather. So I think that depends on where you are. But for us, about 2 to 3 days.

Speaker 3

The destock being over, that was a big deal going into the end of the year. I think we were a little conservative around that. Now we had talked about $200,000,000 in Q1. As you're sitting there in the Q1 call and you're not seeing much of it unfold yet, you want to be conservative and I was pretty pleased that we got all of that. And then the destocking was over.

Speaker 3

We also picked up, we think, some extra reroofing, which was good. That seemed to build in the quarter. So overall, I think that might have had a little bit to do, especially the conservatism around the $200,000,000 around why we might be a little bit heavier than expected.

Speaker 7

Got it. Okay. That's great. You

Speaker 3

asked about inventory build in. I think what we're what our data, what our conversations in that are showing in the Q1 is that really a lot of the channel while the destock is over, we're not seeing a huge build in inventory. I think as we get closer to the season, people are still concerned about, obviously, the carrying cost of inventory are higher now than they have been, maybe a little bit of conservatism around getting burned again on having too much inventory. So if demand holds up, obviously, there will that will need to be addressed and we think we're in a good position to be able address that increased demand even if distributors aren't carrying and contractors aren't carrying as much inventory as maybe we'd like them to have going into the season.

Speaker 7

Got it. Okay. No, thanks for that. I'll pass it on. Yes, you bet.

Speaker 1

Your next question comes from the line of Brian Blair from Oppenheimer. Please go ahead.

Speaker 8

Good afternoon. Rest of start to the year.

Speaker 3

Thanks, Bryan. Good afternoon.

Speaker 8

Kevin, you walked through the full year bridge for CCM revenue. And I apologize if in all the detail that you offered during the script and Q and A, I missed this. But can you do the same for CWT, so we have that kind of level set? And then it would be great if you guys could offer some more color on what you're seeing in commercial versus residential applications specific to the CWT set?

Speaker 3

Yes. Let me take the first one. Kevin can get you that walk through the year. What we're seeing out in the CWT market is really on the resi side, just this idea that there still is an underlying need for additional housing units. When we look out and we see builders still buying land and still making investments in that, addressing that demand, we're optimistic about that for the year.

Speaker 3

I think could there be a blip? Could there be some hesitation as people digest things around the stuff we've seen today like the GDP or first word 2 or 3 cuts and now we're headed perhaps to not as many. But I think resi again that underlying demand is going to continue to be a drumbeat as we go through the year or that need for additional housing units. You get to the commercial, I think it's really depends on the segment. Obviously, the office and retail side for CWT has been a bit tough, not to be, I think expected I think it should be expected, excuse me, warehousing a little bit tough too.

Speaker 3

And then when you get into the healthcare, education, government spending, those tended to be positive. So as we look across that portfolio segments, it's kind of a mixed bag. And then really when we look down at the margin, we continue to anticipate driving improved margin. It's really around automation, first of all, and that's something that I think Carlisle brought to the table and you've seen it in CCM and you're going to see it run through CWT this year, next year is just this idea that we're improving the factories. We've talked about it before being more efficient, applying COS and Lean Sigma.

Speaker 3

And then innovation, we've got innovation running as well in building in CWT. And then lastly, this positive price cost spread that they're seeing should be helpful in the year too. I think we were probably a little bit more to the cost savings side on raw materials in the Q1 than the negative impact in price. So and we should also see as volume continues to improve that 1% volume, we get more volume through the factories, we see some benefits from that too. So Kevin, do you want to talk about the walk?

Speaker 3

Yes. And the seasonality, you know that both our businesses very much the summer months is the stronger months. But as we look at CWT specifically, it's really the same as we talked about at the end of the year where we think about 22% of the full year sales would be in Q1 and then Q2 and Q3 are both about 27% and then you exit with the balance into Q4. As far as EBITDA drop through, we still see CWT in the low to mid-30s for incrementals and CCM, they're at about 40% on the incrementals.

Speaker 8

Understood. Very helpful detail. Perhaps offer a little more on the strategic fit of MTL and how the asset strengthens the product suite of the metals platform and growth potential looking forward?

Speaker 3

Right. Well, MTL is just a great company. The leader of MTL, Tony Mallings, has done a great job over the years of driving some wonderful performance and it really centers around edge metal, which as we've talked about before, edge metal goes on basically every low slope roof that we put on. And so that's something that MTL brings to us. We think that's a big benefit to get that into the Carlyle specification, to get that into the Carlyle warranty, what happens there.

Speaker 3

Also, there's some architectural and other metal products that they have that are value accretive. They actually have patents on a lot of things, something that you wouldn't expect in a edge metal or perhaps an architectural metal business, but this patented technology just shows you the type of innovation that Tony and his team have been bringing to the market through the years. So the addition really fits when we look right down the line from the specification, integrating it into our portfolio, being able to train our contractors, being able to offer to our contractors. And we also think there are going to be some good synergies by bringing MTL into the Drexel and Peterson Group as well and having a much, much more complete product line in metal as well as the synergies when we think about raw material purchases, the volume of that metal adds when we think about shipping and other things like that. So, a good addition and I think when we look back to what we said it would be I think we had about $0.25 accretion on EPS in 20 20 $4 and then something like $0.60 in 2025.

Speaker 3

So right away, some good benefits there. And I think our targeted and stated savings and synergies was going to be around $13,000,000 But my expectation and I think as the team gets into it is that we'll exceed that just like we did with Henry.

Speaker 8

Got it. Again, very helpful. Thanks guys.

Speaker 3

Yes. Thanks, Brian.

Speaker 1

Your next question comes from the line of Saree Boroditsky from Jefferies. Please go ahead.

Speaker 6

Just a couple of cleanup questions here. So first, just to build on the price cost, you talked about a positive $20,000,000 Could you just provide any detail on how that plays out through the year?

Speaker 3

Yes. The Q1, we got about half of that. And then through the balance of the year, it's pretty much pro rata.

Speaker 6

Perfect. And then going on MTL, could you just provide more details on the architectural metals market? I believe in the past you talked about a growing 2x GDP, but it would be great to get an update on that.

Speaker 3

Yes, I definitely think that it's growing at a higher rate. I think you could probably say probably stick with your 2 times GDP. One of things that the metals business brings to us is obviously cyclability of the product line and that's something that obviously is a huge benefit. The metals market is I think it was more we had $800,000,000,000 market, so there's plenty for us to go after. We also want to go after more, what I would say, prefab applications where we're doing it in the factory and we're getting more standardization along product lines and shipping that out.

Speaker 3

So I can give you more information, Suri, if you want to ask. That's about where I would stop or I'll just keep talking about the metal business, but it's a good business. It's very complementary. We talked about edge metal. The other thing I would just add this that when we look at a lot of the buildings that have flat roofs on them, especially warehouses and small manufacturing facilities and things like that, a lot of the time people will put on an office building on the side and the front, maybe it's 2 stories on the warehouse or 3 and they'll put a 1 store office building.

Speaker 3

A lot of the time when they seek to add differentiation there, they'll do it with an architectural metal setup either on the roof or the roof and the wall. And again, value add, highly specified and wrapping it into that whole warranty system that Carlyle can provide really gives us some great expanded market potential to go after.

Speaker 6

I appreciate the color. And then just one last one, just so I was on the same page. You have net interest expense guidance for the year of $20,000,000 You had $10,000,000 of interest expense this quarter. So, just how you're getting to build that interest income through the year would be helpful.

Speaker 3

Yes, it really comes down to the timing of CIT. When we close, we're expecting to close at the end of May sometime in that range. As far as CIT, hard to say with regulatory approvals out of our control, but all is going well there and we have no concerns. But as far as forecasting interest income, when you're getting $2,000,000,000 makes it a little bit more challenging. So what we had this year, we did have the consideration as well that we expect to close early May.

Speaker 3

And then the interest rates, we're not expecting the cuts now that we might have been looking at the beginning of the year. So that will increase our interest income. So net that positive against the MTL use of cash, we still think the net interest expense around $20,000,000 is a good number to use.

Speaker 6

Okay. Thanks for the color.

Speaker 1

Your next question comes from the line of David MacGregor from Longbow Research. Please go ahead.

Operator

Yes, good afternoon. Thanks for taking the questions. Congratulations on a great quarter.

Speaker 3

Thank you.

Operator

Yes, really strong results. I guess on the CWT business, I just wanted to get a sense of the lower carryover prices for 2023. What percentage of segment revenues would that have represented?

Speaker 3

So as far as the carryover in the Q1 was down mid single digits?

Speaker 2

Hey, David. From the segment side of it, it's probably roughly 30% of the business. That's where the selected price decreases were last year.

Operator

Right. Okay. That was the question, 30%. Thanks. And then Kevin has provided a little bit of granularity around kind of the price cost and you talked a little bit about the volume leverage, but just trying to piece it all together here.

Operator

So let me just ask you, if you could just talk directly on that 66% EBITDA growth, how much of that was volume leverage? How much of it was favorable price cost?

Speaker 7

Can I get you

Operator

to go back and just provide some numbers around that?

Speaker 3

You're looking at Q1? Q1, yes. Yes. So on Q1, yes, substantially all of it. On the CCM side, you can just put the 40 percent incrementals in there and then price costs pretty much offset each other on the CCM side.

Speaker 3

And that number would drop right to the bottom line on EBITDA on the 40% and that explains that segment. On the CWT side, also that slight volume increase, but then most of their pickup was combination of these operating efficiencies with the synergies that we talked about and then the balance is price cost, so that they had positive price cost at CWT in the Q1, close to 10,000,000

Operator

dollars $10,000,000 Yes, you referenced that earlier. Okay, terrific. That's it for me. Thanks very much.

Speaker 3

Thanks, David.

Speaker 1

Your next question comes from the line of Adam Baumgartner from Zelman. Please go ahead.

Speaker 9

Hey, guys. Thanks for taking my question. Just thinking about the full year outlook and maybe how it tracks back to 1Q, it looks like you're expecting kind of flattish end markets ex the destocking and pricing. And if I back out the destocking in 1Q and CCM and there's some little modestly negative price, It looks like volumes were up maybe 5% or so or mid single digits. So do you expect that to kind of as you get tougher comps maybe come down throughout the year, just given the strong start to the year?

Speaker 3

So as you remove the destock number, we just we won't talk about that, but just talking end markets, we're expecting reroof to be up mid single digits and then we do expect new construction down high single digits. So overall, that might be a slight positive on the end markets?

Speaker 4

Yes. I'm just trying to get it.

Speaker 9

I think the Q1 was a bit better than that it seems, right?

Speaker 3

Yes, we had some positive weather in the Q1 as well. I think if you take that out, then it's going to be pretty consistent.

Speaker 9

Okay, got it. And then just on pricing, it sounds like it's playing out as you expected, things have been stable since year end last year throughout the Q1?

Speaker 3

Yes, I think pricing is playing out. I mean, there's a couple of things. 1, the destock, we're super pleased that it ended up being around $200,000,000 We think our projections there on the pricing was right in line, the carryover. And things seem to be there's a lot of turmoil out there around in the broader economy that you know about. I don't need to tell you about that from GDP or that.

Speaker 3

But in our markets, things are progressing pretty much as planned and I'd say stable.

Speaker 1

There are no further questions at this time. I'll hand the call over to Chris Cope for closing remarks. Please go ahead.

Speaker 3

Thank you. This concludes the Q4 and full year I'm sorry, it's Q4 full year I'm sorry, it concludes our Q1 call. And thanks for your participation. And obviously, we look forward to speaking with you on our second order call coming up. Thank you.

Speaker 1

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Carlisle Companies Q1 2024
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