Carlisle Companies Incorporated (CSL)

CSL 
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Carlisle Companies Inc. (CSL)

Q1 2008 Earnings Call

April 22, 2008 9:00 am ET

Executives

David Roberts - Chairman, President and CEO

Carol Lowe - VP and CFO

Analysts

Wendy Caplan - Wachovia Securities

Saul Ludwig - KeyBanc Capital Markets

Deane Dray - Goldman Sachs

Peter Lisnic - Robert W. Baird

Presentation

Operator

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

Thank you, Mr. David Roberts, Chairman and CEO of Carlisle Companies, you may begin your conference.

David Roberts

Thank you. Good morning, everyone. Before I ask Carol to go through the first quarter, I want to comment on our strategic progress during the quarter.

We took the next steps in the implementation of our plan with the movement of Motion Control, our on-highway braking business and Power Transmission into discontinued operations. We also made the acquisition of Dinex in Carlisle for our Applied Technologies Group.

Speaking about Motion Control and Power Transmission, these are two businesses that don't fit our strategic direction. If you recall, we are looking for four core segments that have a minimum of $500 million in sales and are generating operating margins in the mid to high teens. We think they are just a better natural owner of these businesses outside Carlisle.

While the movement of these two businesses into discontinued ops generated $90 million loss in the quarter, this was a non-cash loss. And we are confident that it will be cash-positive over the next 12 months, we think, generating in excess of about $100 million in cash. That cash will be used to continue invest in businesses like Dinex and Carlisle.

We also had our challenges in the quarter when it came to raw material costs. As you saw in the press release, these cost increases had a negative impact, primarily in our Construction Materials business on earnings during the quarter. Carol will be going through this in some detail in her comments, and then I'll add some color during our question-and-answer period.

With that, Carol, if you take us through the quarter please?

Carol Lowe

Thank you, Dave, and good morning, everyone. Before we review the financial results for the quarter, I would like to note that we have revised our financial reporting segment to match the new operating management structure Dave introduced during the fourth quarter '07 earnings call on February the 11th.

We have posted the quarterly results for '07 and '06 for the new segmentation on the Carlisle internet under the Investor Relations tab. Just select the segment data and the dropdown box, and you will see those revised numbers.

As noted in this morning's release, sales grew 13% in the first quarter as compared with '07. Organic sales growth of 4% was largely attributable to higher sales volume by Construction Materials and to a lesser extent increased volumes for Power Transmission belt business and our Specialty wire and cable business. Sales growth from the Insulfoam and Dinex acquisitions contributed approximately $49 million or 8% of the sales growth.

Operating income, which excludes other income and expense, was $44 million for the first quarter of '08 versus $51 million for '07. Operating margin of 6.2% in 2008 declined to 190 basis points from 8.1% in 2007. The year-over-year margin comparison was impacted largely by increased raw material costs, operating inefficiencies at several tire and wheel plant, and increased SG&A expenses.

On absolute dollars, SG&A increased 16.8%. As a percent of sales, SG&A was 11.4% for the first quarter 2008 versus 11% for the first quarter 2007. The increase is largely due to SG&A and our recent acquisitions, Insulfoam and Dinex. Excluding Insulfoam and Dinex, SG&A would have been 11% of net sales for the first quarter of '08 comparable to '07.

Insulfoam has historical run at higher SG&A than our Construction Materials business. Dinex also currently operates at a much higher SG&A level than our FoodService business.

First quarter 2008 includes integration costs for both Insulfoam and Dinex, including converting Insulfoam to Construction Materials' ERP system. Once fully integrated, we expect SG&A for both of these businesses to be more in line with Carlisle's historical levels as a percent of revenue.

SG&A for the first quarter '08 also included $2 million in pretax expense for an increase in customer reserves for a Florida Construction Materials distributor that just filed for bankruptcy. We believe this bad debt experience is specific and isolated to this customer, as we have had no other significant customer credit issue.

We have summarized for you in this morning's release the decision that was recently made to sell the Power Transmission belt business and the on-highway brake business, which are both currently presented in the Specialty Products segment. The decision to sell these businesses within the next 24 months triggered a fair value analysis based on anticipated market valuation versus a fair value based on ongoing operating results.

The market valuation analysis resulted in a pretax impairment charge of $124 million. The after-tax impairment of $90 million that Dave referenced reflects the tax benefit of 28%, as a portion of the goodwill write-off is not deductible for tax purposes.

The decision to sell was made in April, but this is a type-1 subsequent event, which requires that the impairment loss be recorded in the first quarter 2008. Unfortunately, the accounting rules do not allow reclassification as operating results and impairment charges from continuing operations to discontinued operations. This will occur in the second quarter.

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