Carlisle Companies Incorporated (CSL)

CSL 
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Carlisle Companies Inc (CSL)

Q3 2008 Earnings Call

October 21, 2008 9:00 am ET

Executives

David Roberts - Chairman, President and CEO

Steve Ford - CFO

Analysts

Mark Zeff - Goldman Sachs & Co

Peter Lisnic - Robert Baird & Co

Saul Ludwig - KeyBanc Capital Markets

Wendy Caplan - Wachovia Securities

Operator

At this time, I would like to welcome everyone to the Carlisle Companies Incorporated third quarter earnings conference call. (Operator Instructions).

Thank you. At this time, I’d like to turn the call over to the Chairman, President and CEO of Carlisle Companies, Mr. David Roberts. Sir, you may begin.

David Roberts

Thank you. Welcome to our third quarter 2008 earnings call. With me this morning is Carol Lowe, our new President of Trail King, obviously a previous CFO. Kevin [Zimo] who is our Treasurer and then Steve Ford, who was our General Counsel who has now become our CFO.

Before I turn the call over to Steve for a detailed explanation of the third quarter, what I’d like to do is, make a few comments on the Carlisle operating system, the performance of our acquisitions and then the raw material cost increases that we’re continuing to face.

We continue to make nice progress implementing the Carlisle operating system this quarter. It’s probably difficult for you to see the progress, but we took significant strides that really have put us on the path to our ultimate goal of 15% operating margins and the cash conversion rate in excess of 120%.

The visible steps are obviously the announced closing of the five manufacturing plants and the four distribution centers that were detailed in the press release. And we’ll talk a bit about that in more detail during the conference call.

You also know that we bought Dinex and Carlyle earlier this year and frankly we are very pleased with the performance of these acquisitions. Both businesses are contributing to our sales, adding 7% to our top line growth and both are positive on the operating earnings line. We’ll continue to integrate these acquisitions and expect them to make a significant contribution in the future.

On the negative side in the quarter, raw material costs were a nemesis again in this quarter. While we’re starting to see material costs relief in many of our businesses, we still have capitalized material variances that will have to be expensed over the next two quarters. These will continue to put short-term pressure on our margins. Steve will go to it in more detail, so with that I’ll just turn the call over to Steve.

Steve Ford

Thanks, Dave and good morning. Carlisle reported a year-over-year increase in sales of 14% for the third quarter 2008, with organic sales and acquisitions each contributing 7%. Of the total, $102 million increase in sales for the quarter, volumes represented 3%, price represented 42%, and acquisitions represented 53%.

Operating income decreased 8% for the third quarter 2008 compared with 2007. A 15% reduction in income from our core operation was offset by 7% of additional operating income from the Dinex and Carlyle acquisitions. The combination of unrecovered raw material cost increases and a decline in unit volume within the transportation products and Applied Technologies segments caused a reduction in our operating margins from 12.2% for the third quarter ‘07 to 9.8% for the third quarter 2008.

For the quarter, costs increased for almost all of our raw materials and due to market softness and competitive challenges, we were not able to pass along all of these increases. Although raw material costs appear to be stabilizing, our margins will continue to be under pressure over the next two quarters as we sell inventories that include these higher raw material costs. For the quarter, we reported net income from continuing operations of $50.6 million or $0.83 per diluted share. Income from continuing operations for the third quarter 2007 was $84.3 million and included an after tax gain of $29.4 million from the sale of our interest in Icopal.

Our Construction Material segments increased sales organically by 7% of which 4% was price and 3% volume. The decline in operating margin, 13.6% for the third quarter 2008 compared with 15.3% for the third quarter 2007 was attributable to the increase in raw material costs as price increases only covered approximately 75% of the raw material increases.

The Transportation Products segment reported a 6% increase in sales for the quarter from increased selling prices. Operating income of $8.7 million for the third quarter of 2008, compared with operating income of $15.5 million for the same period of 2007. The decrease was primarily attributable to un-recovered raw material costs, lower unit volumes, a $1.7 million inventory write-down, and $2.2 million of increased SG&A expense.

Our tire and wheel operation experienced third quarter year-over-year increases of 45% for natural rubber, 86% for synthetic rubber, 75% for steel, and 30% for carbon black. Applied Technologies reported a 70% increase in sales for the quarter, with the Dinex and Carlyle acquisitions accounting for all the growth.

We declined in operating margin from 13.9% for Q3 ‘07 to 9.7% for the current quarter, was primarily attributable to lower unit volumes resulting from the delay in the Boeing 787 program, and a slowdown in in-flight entertainment retrofits, as well as an increase in SG&A expense related to the Dinex healthcare operation. We are actively taking steps to reduce facility costs and SG&A expense.

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