Q2 2023 Carlisle Companies Inc Earnings Call
Good afternoon, My name is Jamie and I will be your conference operator today.
I would like to welcome everyone to the Carlisle companies second quarter 2023 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. Jim Gianna chorus, Carlyle's, Vice President of Investor Relations. Jim. Please go ahead.
Thank you good afternoon, everyone and welcome to Carlyle's second quarter 2023 earnings Conference call. We released our second quarter financial results. After the market closed today and you can find both our press release and earnings call Slide presentation, and the Investor Relations section of our website Carlisle Dot com.
On the call with me today are Chris Koch Chair, President and Chief Executive Officer, and Kevin Simmel, Carlyle's Chief Financial Officer.
Today's call will begin with Chris providing highlights of our second quarter results and a discussion of our current business outlook and Kevin will discuss additional financial details and our updated outlook for 2023.
Following our prepared remarks, we will open up the line for questions, but before we begin please refer to slide two of our presentation, where we note that comments today will include forward looking statements based on current expectations.
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.
Carlisle provides non-GAAP financial information, we 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 with that I will turn the call over to Chris.
Good afternoon, everyone and thank you for joining us on our second quarter 2023 earnings call.
The second quarter proved to be a nice recovery story for Carlyle with our performance evidence of the team's collective efforts to improve earnings and create value for all our stakeholders we.
We are grateful to all of Carlisle employees for their continued perseverance in the face of significant challenges and for their contributions to making the second quarter a success.
Most important is our team's commitment to continuously improving our businesses.
As you know in 2021, we decided to pivot carlyle's portfolio of diversified industrial businesses towards becoming a building products pure play.
Our recently announced sale of CFT represents another important step towards fulfilling that goal.
Our building products businesses represented over 90% of our segment EBITDA from continuing operations in the second quarter of this year.
Providing further evidence that our pivot is almost complete.
We continue to believe that a pivot towards an innovative building products portfolio with a focus on providing energy efficient solutions will allow our shareholders to benefit from the significant trends and greenhouse gas reduction and increased demand for green buildings and products, especially the ones that require less labor.
To install.
Our recently announced sale of CFT continues one of the themes, we brought to Carlisle under vision 2025 that being our desire to be a superior capital allocator and in turn drive superior shareholder returns.
This goal was a primary factor in our decision to use the proceeds of the announced sale of CFT towards share repurchases. This year.
When combined with our share repurchases to date, our total capital devoted to buybacks in 2023 will be approximately $900 million.
At CCM. Despite continued channel destocking activity in the second quarter, our teams collectively drove improved sales and excellent profitability.
Margins improved significantly from a combination of volume increases price discipline cost management and efficiency gains through Pos.
The last three quarters of Destocking at our distributors and contractors has been a challenge that was made more difficult by the uncertainty related to its quantity and duration.
As we enter the second half of 2023, we have performed substantial work to understand the levels of inventory at distributors and contractors and reconcile that with current demand levels.
Based on this work, we believe that the vast majority of destocking issues related to supply chain constraints from 2021, and 2022 are now behind us.
In CCM as in all of our Carlisle segments. We entered the second half of 2023 with our efforts focused on leveraging solid underlying demand capturing raw material gains and maintaining a positive price cost relationship.
Taken together these areas of focus give us confidence that we will deliver another solid earnings performance for Carlisle shareholders in the third quarter.
Our outlook would be even more optimistic if it weren't for some near term headwinds impacting the building products businesses.
First and foremost well known and well published information about this year's extreme temperatures across much of North America have negatively impacted contractors days on the roof.
Here in the Phoenix area. For example, we have had over 26 days of 110 degree plus temperatures and excessive heat warnings.
These elevated temperatures it played a role in our contractor's ability to safely install roofs on schedule.
Certainly every roofing contractor in Carlisle sphere of business is putting employee safety and well being first.
In addition to the unique weather situation, we have seen an uptick in delays in projects due to growing economic uncertainty tighter financing conditions and the ever present tight labor market for roofing contractors.
Even with these headwinds we still anticipate continued strong demand for our energy efficient building products, particularly for nonresidential re roofing products.
We remain very bullish on carlyle's value creation runway, given strong and sustainable underlying re roofing demand.
Accelerating price to value gains through new and innovative products and an increasing awareness by architects building owners contractors local governments and others for the need to drive efficient energy usage upgrade the energy efficiency of our buildings and decrease carbon emissions.
Additionally, we believe that in both the nonresidential and residential construction markets, our ability to exceed the expectations of our customers and distribution partners through the combination of the Carlisle experience and our Carlisle operating system will drive significant opportunities for share and margin gains that will deliver increased returns.
For our shareholders.
Our confidence in carlyle's future rests on a multi year backlog of re roofing projects in the U S supporting a healthy baseline of activity for our largest business CCM, which has recently been further enhanced by the inflation reduction act and its emphasis on utilizing a significant pool of assets to drive investment in energy.
Savings.
Solid non discretionary repair and remodel demand throughout the residential building envelope that makes up approximately 50% of CWT revenue and provides reliable through the cycle sales growth.
Our industry, leading ability to meet the well known growing need for energy efficient solutions for buildings and to drive a reduction in carbon related emissions from buildings that as many of you know account for close to 40% of global energy emissions.
Carlyle's robust pipeline of proprietary innovative new products coming to market accelerated by our increased investment in R&D.
Our collective teams subscription to delivering the best in class Carlisle experience to all our stakeholders.
And the financial flexibility and strategic Optionality afforded us by Carlyle's fortress balance sheet and excellent cash flow generating ability.
This strong financial position allows for Carlisle as disciplined value, creating acquisition strategy ability to comfortably fund internal growth initiatives and consistent and reliable return of capital to shareholders in the form of a growing dividend and opportunistic share repurchases.
Turning to our results please turn to slide three.
In the second quarter, we delivered consolidated sales of $1.5 billion, adjusted EBITDA of $385 million and adjusted EPS of $5.18.
I'm very pleased with our second quarter results as they're a superb reflection of our earnings power as a company and have resumed the continuous improvement trends, we were on especially as it relates to margins.
Ccm's channel Destocking was as we believe transitory and while it was a challenge and caused some temporary impacts to CCM. It did not affect our fundamental business model.
We remain focused on delivering products that support increasing demand for energy efficient buildings and meeting contractor's needs for innovative labor reducing products.
Turning to CWT.
Revenues in the second quarter were generally in line with our expectations, while profitability was exceptionally strong.
The CWT team continues to execute exceptionally well on realizing the synergies plan with the Henry acquisition and an outstanding job of integrating the legacy CCM businesses into the new segment of CWT.
Needless to say these efforts are delivering returns ahead of the original deal model.
The team is also doing an excellent job of taking cost out through footprint reduction leveraging customer relationships to drive increased sales across their businesses improving efficiencies in our plants and managing price cost effectively.
Building on the solid performance in the second quarter. We expect this positive EBITDA growth story to continue for the rest of the year and now expect Cwt's EBITDA to grow year over year. Despite the organic revenue declines expected for 2023, a truly outstanding accomplishment in a tough environment and with a relatively.
New management team.
It's the I T. We continue to benefit from the restructuring actions taken during the Covid pandemic that are now returning significant margin dollars to C. I T. As aircraft build rates rebound. The team has done an excellent job optimizing its manufacturing footprint and improving on its product mix, which positions us well to leverage the recovery that is.
Under way in aircraft production.
Cit's backlog is notably higher than pre pandemic levels, giving us confidence that C. I T has significant growth potential for the foreseeable future.
Taken together C. I T is leveraging sales.
Dreamily, well in 2023 with EBITDA up 520 basis points year over year in the second quarter, and we expect to continue that solid leverage going forward.
Please turn to slide four.
In line with our strategy to pivot to a pure play Premier building products company, we signed a definitive agreement to sell Carlisle fluid technologies for $520 million with an intention to redeploy this capital into share repurchases in 2023, the sales C. F. T represents another significant step forward.
Forward in our efforts to build a diversified portfolio of Premier energy efficient building envelope solutions and demonstrates our commitment to being capital allocators of the highest order.
On a pro forma basis, we now expect sales from our building products businesses to constitute approximately 84% of consolidated Carlisle revenue in 2023, this up from 56% in 2016.
Please turn to slide five mm.
I'm pleased to share with all of you on the call today that our newest polyol. So manufacturing facility in Sikeston, Missouri is operational and began shipping product for sale in July .
In addition to employing the latest advancements in Green building technology, such as solar power generation and energy base load control systems. The facility will lower the carbon footprint of our supply chain and will improve lead times to customers. We're proud that sikeston was designed and built to the highest current sustainability standards, including <unk>.
Lead platinum specifications, which is a globally recognized symbol of certified sustainability achievement.
Please turn to slide six.
Our results continue to demonstrate that vision 2025 has been the right strategy for Carlyle and addition to our world class teams and proven business model, we benefited from a strong balance sheet and excellent cash flow generation to provide both financial and strategic flexibility to execute and achieve our ambitious goals.
Our business portfolio transformation sets the stage for a more focused higher returning and better understood path for future sustainable value creation at Carlisle.
The pillars of vision 2025 are really well established and remain core to Carlisle strategy going forward over the last few years. Despite the multiple challenges. Our teams have faced we continued to be guided by the clarity of mission as outlined by our strategic vision first announced five years ago.
As we approach the completion of many of the milestones and goals of vision 2025 last year, including exceeding our goal of $15 of GAAP EPS, we were simultaneously working on a successor Division 2025.
Our new strategic plan that will be introduced formally later this year vision.
Vision 2030 will be a plan committed to many of the same principles and pillars, we use to establish vision 2025, and with it will come new levels of performance and expectations that are a required part of our culture of continuous improvement and of our lean Sigma initiatives under C O S.
As a reminder, the foundational pillars of sustainable value creation at Carlisle under vision 2025 include.
One drive mid single digit organic revenue growth to utilize the Carlisle operating system or C. O S to drive continuous improvement and greater efficiency in our operations three build scale with synergistic accretive acquisitions.
Four maintain a returns focused capital allocation strategy, including organic investment to drive growth a disciplined approach to our aforementioned M&A strategy and returning capital to our shareholders, notably thus far in 2020 three we have returned $327 million to shareholders with share repurchases.
Of $250 million and $77 million paid in dividends.
And of course, none of this could be possible without continuing to rely on invest in and develop our exceptional talent.
Through the execution of vision 2025, Carlyle has built a solid foundation leveraging a diversified workplace decentralized management style entrepreneurial spirit and a culture of continuous improvement, which.
Which will continue to guide our value creation journey in 'twenty, 'twenty, three and beyond and absolutely be core to our vision 2030 strategic plan.
And with that I'll turn it over to Kevin to provide additional financial details as well as our updated 20 twenty-three outlook Kevin.
Thank you Chris for segment highlights. Please turn to slide seven CCM delivered second quarter revenues of $948 million down 15% from the prior year. The decline was due to continued destocking in the channel disruptive weather and some project delays.
Adjusted EBITDA margin was strong at 31% as we had positive price cost in the quarter moving to slide eight revenue. It CWT decreased 20%, primarily due to continued softness in residential demand adjusted EBIT margin was $22 five per <unk>.
<unk>, expanding 390 basis points from the second quarter of 2022.
Echoing Chris's comments earlier the team continues to benefit from its focus on integration of Henry accelerated capture targeted synergies.
<unk> Rolling out C O S and significant investment in the operations throughout CWT to drive greater efficiencies in our businesses.
Moving to slide nine C. A T revenue increased 3% in the second quarter 2023, reflecting strength, primarily in our commercial aerospace platforms as we benefit from the rebound in demand for new aircraft adjusted.
Adjusted EBITDA margin expanded 520 basis points to 18% driven by price realization leverage on our restructuring activities and efficiencies gained from C. O S.
Slide 10 provides a year over year bridge items second quarter adjusted EPS moving.
Moving to slides 11, and 12 Carlisle ended the second quarter of 2023 with $379 million of cash on hand, and $1 billion of the hell ability under our revolving credit facility.
We generated cash flow from continuing operations of $196 million and invested $30 million in capital expenditures.
We deployed $200 million towards share repurchases and paid $38 million in dividends as.
As of the end of the second quarter, we have two 3 million shares available for repurchase under our share repurchase program.
Turning to slide 13, we have provided our updated 20 twenty-three financial outlook.
For both CCM and CWT, we now expect revenue to decline year over year in the low teens range for the full year 2023.
For C. A T. We now expect revenue to increase year over year in the mid single digit range for.
For total company, we now expect year over year revenue to decline in the low double digits.
We attribute the lower revenue expectations for the same items that proved to be headwinds in the second quarter, namely Destocking in the channel disruptive weather and some project delays.
Given the solid execution by our teams across Carlyle, we now have a more favorable outlook on full year EBIT margins.
Despite the double digit revenue decline, we expect consolidated margins to decline only 50 basis points year over year and 2023.
We remain focused on disciplined pricing, which is leading to better price cost capture this year operational efficiencies and managing costs through our continuous improvement efforts.
With that I turn it over to Chris for closing remarks.
Thanks, Kevin.
In closing I once again would like to express my thanks and appreciation for the excellent work by all of our Carlisle employees in the second quarter.
Their perseverance and just plain hard work has returned us to delivering the results we've come to expect.
I'd like to take a moment to share some important organizational changes that are occurring this week.
First all of you know Jim Jan occur as our vice President of Investor Relations.
Jim has decided to leave Carlisle to pursue other opportunities.
Jim was a covering analyst when I became CEO back in 2016.
And I remember the dinner, we had in New York in May of 2018.
Where I asked him if he wanted to join Carlyle and make our Investor Relations Department. The best there could be in the industry. Since then he has made significant contributions enhancing and professionalizing, our investor relations function here at Carlyle as well as having an extremely positive influence on the corporate and segment finance.
Teams, Jim has lived up to the promise of developing a truly world class Investor Relations Department and he will truly be missed I wish him nothing but success and happiness in his future endeavors.
And I know all of my fellow Carlisle employees feel the same way. Thank you Jim.
Stepping into the role of Vice President of Investor Relations will be Muhammad Patel, who joined US when we acquired Henry company in 2021.
Well, who was most recently vice president of finance for CWT and many of you may have already met him as he's been representing Carlyle at investor conferences, and Roadshows for the past year I am very excited to have Mckool backfill Jim's role and I know he will do an excellent job with the investment community.
Additionally, Kelly Kaminski, who has been at Carlyle since 2016, and most recently serving as our Chief accounting officer will be taking on the role of Vice President of Finance for C. W. T.
And replacing her in her role as C. E O will be Steve Alder at Schuh has been at Carlyle since 2012 in various finance positions. Most recently as our vice President of S. P N a.
I'd like to congratulate Kelly Mullen, Steve on all their accomplishments and wish them. The best of luck in their new roles.
[noise] with vision 2025 objectives in our core values well ingrained throughout Carlisle I remain extremely optimistic for the long term success of Carlisle.
We will continue to benefit from the flexibility afforded us by an incredible brand and reputation and take advantage of our strong capital position and superb cash flow generating capabilities.
Despite near term and potentially growing economic challenges, we will continue to drive a culture of first our pursuit of excellence in everything we do.
Continuous improvement of an entrepreneurial mindset and a commitment to superior capital allocation. We also believe the secular growth afforded us by both non discretionary re roofing demand and increasing needs for improving the energy efficiencies of buildings pave the way for long term and significant value creation.
Asian.
We'll continue to take the necessary actions to navigate an increasingly complex operating environment continue to deliver the Carlisle experience to our customers and create value for all stakeholders of the company.
And that concludes our formal comments operator, we are now ready for questions.
Thank you, ladies and gentlemen, we will now conduct the question and answer session.
If you have a question. Please press star followed by the number one on your Touchtone phone you would hear at Toledo and prompt junior request.
Your first question comes from the line of Bryan Blair from Oppenheimer. Your line is now open.
Thank you good afternoon guys.
Afternoon.
So hoping you could provide.
Provide a little more color and walk us through how the quarter played out for CCM specifically in terms of Destocking, we know has been.
Headwind for a while.
How did that influence April and May operations relative to June .
What's your sense of where channel inventory now stands and how does that impact.
Year progression into Q3.
Yeah, several things there the first sign the destock, yeah, so that destock going into the quarter, we were expecting around 100 million and we're slightly above that for the quarter about $120 million in the second quarter of destock remaining destocking.
We have around 50 million to go in the third quarter that continues from some of that the weather and as Chris mentioned as far as labor on the roof spent a challenge for the contractors. So that's delayed a piece of that.
Going through the quarter April May June no significant different says ramped up in the second quarter as we'd expect versus the fourth or the first quarter. So nothing of note there.
Okay understood.
We can obviously back into our second half figure given your revised sales outlook for the full year, but how should we think of the sales cadence Q3, Q4, obviously, there's noise that has.
Impacted operations through Q2 into Q3 that you just walked through and then easy comps start to kick in in Q4.
Can you quantify expectations anymore.
Yeah, Bryan Chris I think that Q3 is going to look a lot like Q2 with a couple of exceptions, obviously, Kevin talked about that.
A little bit of continued Destocking obviously.
One of the things that we.
We haven't talked about the should be talked about is that.
In addition to the Destocking now we have this idea of restocking the demand is still there, but I think there are a couple of things that before Kevin gets into.
A few more items on this.
Please be aware of which is.
I think theres been a hesitation to load in the type of stock that we've seen in the past So my says.
But after doing the work is that.
We're going to see a little bit of a slow start post July 5th, but the demand will pick up as people get more comfortable with the quarter as we get closer to the end of the year jobs, obviously start to.
Weather has less of an impact on the jobs and those pick up as well as distributors get a bit more comfortable bringing inventory and I think with interest rates rising obviously, the carrying costs of having inventory.
Is higher.
Also we have this idea that that's been put out there you all analysts have talked about it too that there might be some pressure from some of our competitors to lower.
Price, which we didn't see in the quarter by the way.
<unk> was flat, but I think that might be causing people to pause a little bit to say will I be able we'll be putting in high cost inventory when there might be lower cost inventory coming I don't see that happening, but that concern could be there.
And then I think we also have to look that it's been a very good I think as you saw <unk> results with their residential shingle business, it's been a good.
For them, a bad for weather, but a good spring.
In terms of roofing.
Z side and I think that also has consumed a little bit of that working capital that goes to inventory in the form of increased.
Resi shingles that so I think when we look at the third quarter plays out the same as kind of the.
Second quarter demand underlying demand is still good pricing should be flat.
We see we still see those trends.
So just a little color from me there, but Kevin.
Anything.
Yeah, so that all shakes out to the third quarter being a couple of percent two 3% better in the second quarter and then as you look to the fourth quarter typically we're down fourth quarter versus the third about 15%, but without the destock in the fourth quarter, it will be less than that 15%.
In the fourth quarter.
All very helpful color.
Margin performance was.
It was definitely a highlight of Q2 and that was across the board.
But with our with the scale of CCM, obviously are needle moving to have some margin upside relative to expectations.
I assume that.
Price cost was a a.
Solid lever there.
Kevin I believe last quarter you had.
You guided to $40 million to $60 million full year benefit for price cost I'm wondering if you could give us an updated figure on that and also offer a little directional.
Insight as to how we should think about the.
And margin cadence through the year.
Yeah, and netting to a 50 basis points improvement on a consolidated basis relative to the prior guide.
Yeah. So on the price cost as you said, we were at 40 to 60 and as our previous.
Guidance. There now we think we're around $60 million to $80 million. So we've upped that number and that dropped right to the bottom line, where we're talking down 50 basis points. This year. So maybe looking at those margins. We think we can get to CCM margins rate to about 30% this year for the full.
Year.
And then as you look to CW T think we can get them too.
Up maybe $3 50 to 400 basis points on the year.
And then C. I T would be up to about 17% for the full year, So $2 50 to 300 basis point improvement there.
Excellent I appreciate the detail thanks again guys.
Yes, Thanks, Brian .
Your next question comes from the lineup the most from Baird. Your line is now open.
Yes, Hey, guys.
Good afternoon.
Yes, Hey, good working for you with you.
That's what she does.
On the new adventures.
Maybe maybe just starting off Chris just on the backlog.
I guess, how what are you hearing when you're talking to contractors and distributors about backlog and I guess.
When you think about days on the roof.
And maybe the heat playing having an impact on something that I mean, how how do you kind of triangulate between that versus just maybe kind of a weaker demand backdrop.
Yeah, Tim Thanks for that question by the way and thanks for acknowledging Jim.
I appreciate that.
We did a lot of work in the second quarter I'm not going to get all of the detailed too long in this call, but we can take it up later around.
Spent a lot of money and a lot of time and effort into understanding that in a lot of that came out of the fourth quarter and the first quarter, where we were.
Yeah.
It didn't feel we had all the information we should have had so we've done a couple of things one was we.
The net promoter score for Carlyle and Thats been very helpful to us that's ties in to what was actually happening in our perception vis vis our competitors done by a world class organization, we talked over 600 contractors distributors in other points. So we've got a very good.
Data set there started that basically back in April at the same time, we started to look at.
This backlog, saying, we really wanted to understand obviously, we didn't understand completely in Q4.
Evel of inventory that was out there we think we had a good handle on distribution I think what we missed in some ways was the inventory there was other contractor and maybe at the job site. So we went through we did that and that also was about probably about 600 context 500, 600 context that we've been updating through the quarter. So I think we've got a good handle on where that backup.
Log is I get a good confidence there.
On this statement that people have been reducing it I think it would be.
Misleading to say, it's over that's attempting thing to say the destocking is over it will spill into <unk>.
Q3, what I would say is there are pockets of that though obviously all distributors are not alike and you go to the northeast and there was a lot of rain in the second quarter, we think that impacted it so maybe they didnt destock as fast as somebody who might have somewhere else. So I think we've got a good handle on backlog I think the backlog is.
As I said.
Coming down and I really do believe that part of this issue with a little bit lower demand.
To us in Q3, and Q4 is really going to relate to that idea of how quickly to distributors wanted stock back up and we're getting back to normal when we look at the fourth quarter. We just see the same demand patterns going we.
Kevin has talked about on numerous occasions in the all of the graphs on that but I think we will get to 'twenty four we're going to see that normal cadence.
See that idea of that a more traditional load in from distribution as we get into the season in 'twenty four it really as you know that's kind of been missing through the whole thing we missed it when COVID-19 hit it in February we never got the big load and then we really rolled right into that heavy demand through 'twenty two where.
Everything went out to distribution and not really in an organized fashion that was more of whatever you could get so I feel pretty confident about about what we're seeing in that the underlying demand is really good I'll give you two other things on that I know I'm extending the question but.
This demand when Jim talked about re roofing I mean, we know thats there we've talked about it we understand the length of a life of a roof. We understand how roofing building owners feel about warranties of that I think are re roofing estimates are pretty good.
When we moved to this.
This energy efficiency thing I, just saw a couple of data points that.
Air Conditioners for example department of Energy just released today, 6% of all electricity consumed in the United States or produce it goes electric or goes to air conditioners.
You are putting that on a grid that already has issues and then we've got significant warming trends and then I saw that GM Hyundai and Honda are building. Another 30000 plugs by 2030, but it takes a 60030 2032 drive electric vehicles, but in fact, we need 182000, and so I think when we look at what the solution.
It's going to be it's going to be around.
Green installation it is going to be around making buildings tighter and that falls right into what at CCM.
And Henry deliver and so I think we've seen that and I feel very good about that underlying demand and that that will continue and then just quickly on the days on the roof and a couple of data points people. We've heard throughout the southern states from Southern California, South, Florida, we've heard that they are trying to work earlier, but shortened days as you start to get into the <unk>.
One o'clock, it's just too hard on a roof and so we've seen some compression there and you can't really do it in the dark so you get some.
Compression around the Workday and then something I heard recently was people are also trying to get the work done in three days and that there may be some changes in order pattern. During the summer here, where we're seeing a lot of activity Monday Tuesday, Wednesday, but then as we get to a Thursday Friday. The crews are just not as effective they're worn out their hot and people are handling it that way.
When we think about how many days on the roof I can't give you a number for that but it's got to be kind of like what we would see.
Heavy rain or something like that where we would.
Probably say two to three days in the quarter.
Okay. Okay.
Alright, that's all helpful. I appreciate that and then and then maybe just on CWT, just I guess, what drove the margin upside I guess there in the quarter.
I guess as you think about kind of the full year kind of margin expectations in that business.
That a good jumping off point.
On a go forward basis.
AI.
Tim we have a whole with us we didn't announce them in the beginning of the call and I think I'm going to turn that call over there to have a whole lot of amount of shadow it and that'll get Kevin back them up.
Perfect. Thanks, Chris Tim Nice to meet you.
Great question, Tim So overall for CWT as Kevin mentioned, just overall really strong performance on margin to your first question in terms of what's driving it.
Factors, one is really strong pricing discipline, while leveraging our investments in sales excellence and ability to influence in market demand with Dara, mostly internal sales force. So in a declining raw material environment that is creating a positive tailwind for us.
The second thing is dampening out inefficiencies from 'twenty 'twenty. Two obviously there are significant supply chain challenges that sub optimized our ability to supply the optimal plant. So that's correct and now and we're doing a good job of.
Getting back to normal there.
Sure thing.
Kevin and Chris talked about synergies, we're doing a really good job.
Executing that above the deal model. So that's creating a positive tailwind and then lastly, really strong outperformance on our plant in a declining volume environment, we're really taking advantage and making the right calls right adjustment.
Really variable lighting, our cost as much as possible, which is helping us in a declining volume environment Lastly.
Lastly to your question in terms of a jumping off point.
All of these things I mentioned.
Theyre going to stay so I think this is.
A good margin for us for 2024, and this continuing to be upside as well Ray as we try to continue to drive continuous improvement a Pos system that Carla has Henry team is embracing it that's going to continue to provide.
<unk> for us to drive margins up even further.
Year, two year three and forward.
Okay. Okay sounds great. Thanks, so much guys I appreciate it you bet.
Tim.
Your next question comes from the line of Gary Smalley from Loop capital. Your line is now open.
Oh, hi, thank you.
To follow up just on the CCM margins.
3%.
That youre speaking to for this year just curious if you could speak to maybe your confidence in that as a jumping off point moving forward in light of some of the competitive pressures Kristen.
Knowledge, recognizing your pricing is flat right now, but it seems like maybe the market is bracing for for a little bit more.
Price.
Yes, I think it's a good.
I think its very sustainable in fact, I would be disappointed if we didn't return to some of the <unk>.
Margins, we've seen than we saw in 'twenty two I think some of the things that we've talked about number one.
I know there are.
One off.
Bidding that people are talking about in terms of pricing electric pricing discipline, but what I would tell you is those tend to be infrequent and that the general consensus out. There is that there is good pricing discipline and I think we have as we talked about earlier when we saw we saw some management changes at one of our competitors and we saw a different organization.
It's one of our competitors I think I'll give them both complements I think those were upgrades into both situations and so both of those parties are understand what value creation is about and how to drive value creation for those companies, which I'm assuming they wanted to do.
We also look and new products, we've got things like the 60 foot line.
Got our cab group two we've got the appeal product, we continue to work on new <unk>.
Coatings and Henry we continue to make gains in different channels and I think what we're finding is that.
Our products and the value proposition, we have are really becoming ROI based this idea of energy efficiency in that a roof is not just a roof, but a roof now is a key component of lowering energy consumption and driving an ROI see.
Means you start to shift off of this idea that we have some some way of roof can be exchanged between carlisle or someone else I mean, each one of us is going to bring added value through that we've talked about the Carlisle experience I think Carl experience to a certain degree was a very positive in terms of pricing I think in the pre 2019, we used to say we would get there was a five.
Five years to 7% premium to our products on the Carlisle experience, just because contractors could rely on the right.
The right place the right time, and when you were spending a third on materials and two thirds on labor if you add labor sitting around it wasn't a good value would be better to pay the 5% to accompany that got you the product when you need it obviously COVID-19 came along and changed that up ended it there was a lot of confusion and as we return and as we talk about this third quarter and people wanted to be.
Efficient with your inventory, obviously, we pay kind of a penalty because if you deliver faster than you could split just in time product.
Kind of a weird benefits that benefit the penalty on that which is that people then we'll rely on us and not put us into inventory. So we're still going to be working on the Carlisle experience and we still think in an increasing demand.
World like we have around ESG and other things that new products superior customer service.
We will continue to differentiate products and so I like that on the other side on the Cogs side, you can see what we're doing in raw materials, we're using them a lot more efficiently.
You can see what we're doing on automation and <unk>.
You visit which we hope people will visit decisive facility you are seeing the latest generation of ISO polyester production and it is extremely.
Efficient and so I think when you look at those things we look at the margins in 'twenty, two and think Thats what were aspirational too so I don't.
Really look out to the next few years and think we will see any.
Lower than the margins we've seen this year a 30%.
Got it.
Helpful.
Follow up questions Im CWT I was wondering if you could maybe go into the revenue guidance revision a little bit more detail.
I appreciate that.
I guess weaker housing market, but.
The builders have been slightly more optimistic.
So just wondering if youre seeing any of that.
An opportunity.
And.
And just any additional color on the change in the CWT revenue are going to be great.
Yeah.
Couple of things one is <unk>.
Delays that is impacting the CWT business, both on the commercial and residential side. So that's a key driver for.
The change in overall.
Guidance.
Thank you for being there is still some destocking as to a lesser degree not even close to what we're seeing on the CCM side, but nonetheless similar reasons is is negatively impacting CWT and then lastly, with the raws coming down there are still parts store, reducing price, but nonetheless, it's still a positive.
From a price cost.
Standpoint.
Got it okay.
Yes.
By the way.
Yes.
Hi.
I appreciate the answer and of course, I'll give my best agenda, as well and look forward to catching up down the road and working with the hole in the future.
Thanks, Gary.
Your next question comes from the line of sorry, Borucki from Jefferies. Your line is now open.
Hi, Thanks for taking my question. So maybe switching has focused on planning for that so given the impact of Destocking Michelle <unk>.
Should we think of this as a tailwind into next year. If we're in a flattish demand environment, what could you see from the sales guys.
Right.
Sure.
Sorry, Chris Thanks, all over to Jim for a more technical answer to this but.
I think right now.
And you know what my answer is going to be and I'm, sorry, but it's like 24, it's too far out we don't really want to make any statements around I don't think the getting to refine what I would say is I think directionally you are correct I mean, obviously with the if we think about legacy.
Demand in the CCM markets being in that let's call. It that mid single digit historical as a market growth and then we saw Covid take it down and then we saw that rebound in 'twenty, two and we get back to that mid single digits for the market.
And we see that happening obviously not.
Not having the inventory and getting through the Destocking should produce a nice tailwind.
In <unk>.
2024 for US and then we still do think that with.
With the macro trends around the investment reduction act things like this the reassuring the things we're hearing that.
24 should be.
I'll call it a more normal and also a more productive year than I'd say 23 was on the top line.
Given that more productive outlook into 2020.
Four how do you see margins.
You mentioned, 30% for this year, how do we think the operating how do we think about operating leverage as we head into next year.
Yep.
Yeah, we should see a 40% incrementals on that growth.
And as you said and adding that Chris as he said the top line at the auctions have a plus 10% impact on 24 versus 23.
Got it I appreciate the color.
Okay, Jamie I'll be very honest and we wish you the best of luck in your next endeavor.
Okay.
Your next question comes from the line of Dan Oppenheim from Credit Suisse. Your line is now open.
Great. Thanks, very much I was wondering if you can talk a little bit more in terms of CWT.
In terms of I'm, just curious about the project delays that were mentioned I think residential is what a quarter of CWT, but only a portion of that is in new residential and I guess.
So wondering about it overall the significance of sort of in the revenue guidance of.
Lower volumes from residential versus product delays versus some of the pricing.
Yes. So this is a make whole here again for.
For CWT the project delays.
Overall, I mean, it's not like a cigna.
Significant amount of the.
The change I would say from extended standpoint, how it is.
Can you maybe 20% of it.
Articulate and that's going to come through a combination of a labor stability of labor.
Construction site and the challenge is getting labor some projects are getting <unk>.
And it out and it is taking longer to get onto the next project.
The second thing is financing right.
Both on the commercial side, which is also another 25% of our end market exposure for commercial starts.
Financing is creating.
Project delay just from taking longer to get projects finance.
Got it.
That's great and then on the margin side, you talked about some of the continuous improvement and sort of being a tailwind with some of the restructuring are all the benefits of the restructuring sort of in place now is that what we saw on the margins. This quarter will sort of be set or was that sort of.
Still some to come as we go into <unk> here.
Yes, they will continue to benefit us as we go forward and that was my earlier comment on we still have continuous.
Runway to continue to expand margins on CW team.
Great. Thank you.
Your next question comes from the line of Adam Baumgarten from Zelman and Associates. Your line is now open.
Hey, good afternoon, everyone.
On the project delays maybe.
On the commercial side are there any specific end market verticals that are weaker than others. As you look across it and also are you seeing flat out project cancellations at this point.
Adam Yes. Good question Havent seen really anything on on cancellations I'm sure. There are probably some out there, but I would say they would probably be the third Sigma where somebody it's not really related to anything other than they're just not good business people and that's a bad joke, but.
We do as I say, there aren't any there somebody will find one when we look at the segments.
I think this year.
We've seen some some negative impact on the warehouses I think that's been somewhat.
Well publicized around what's happening with Amazon warehouses and things like that so it's been a little bit down there. Although we've got places around the country like Phoenix year warehouses continue to be established so there might be some.
Moving their regionally.
Education has been a good story this year, especially starting the year educational work has actually improved pretty significantly since 2021 and is it about the same pace of growth is 2022, we look at office buildings. Obviously, that's another one that's pretty well advertised around work from home and that although I would say.
The decline is less than I would've thought and I think we attribute that a lot of that too when you're putting a flat roof on an office building like us that we think of they tend to be three four story buildings, one storey building, maybe manufacturing attached or something like that or warehousing and so I think we have a little bit of a less of a work from home impacted say.
<unk>.
Central business district of San Francisco, or Manhattan, where we're seeing some tough times and office buildings, but doesn't really it's like the low slope group.
Stores have been kind of a.
Little bit down, but but.
Not too bad and then health care has actually been a good story and I think thats. Another vertical that is we look at an aging population and will it get extended care and we look at our health care system I think.
We will continue to see money put into expansions I know here in town. We have got a lot of expenses with the Mayo clinic, and I think in Rochester, as well they've talked about a big building expansion. So that ones are doing well and then I think when you look at <unk>.
More of the multifamily housing and that obviously theres not enough of that stuck in this country and I think that will continue to be a good.
Tailwind with the impact though of interest rates, probably causing some of those projects too.
Come under question if rates stay at their 22, <unk> 20 or highlight there as announced today.
That gives you enough color.
Yeah. That's great. That's helpful. And then just on the step up in share repurchases you guys are implying in the back half any guidance on how that you expect that to phase in in <unk> and <unk>.
Relatively balanced based on what we have remaining to purchase.
Okay, great. Thank you.
You bet Adam.
Your next question comes from the line of David Macgregor from Longbow Research. Your line is now open.
Yes, good afternoon, everyone.
Jim.
Good luck to you on that.
Thank you so I still believe.
[laughter].
Exactly.
I wanted to just ask you about the main components within your cost basket and we talk about price cost and thank you for the detail on that but if we just isolate the cost basket for a second and just talk about how prices.
Trending on the main components there.
Well I don't think we really like to get into that but.
You know I.
I would say you can look at MDI.
That's obviously a big one.
We track I think Theres a mistaken corp.
Correlation there there are a lot of people have to the price of oil I mean, MDI really more correlates to what's happening in the cracking facility and what demand.
Sure.
Major chemical companies are seeing in petroleum companies on other feedstocks that come off of that but MDI is seeing some reduction I think we look at polyethylene that's another one.
<unk>.
Is a big one we've got our synthetic and natural rubbers that we see some oils I think just overall.
Again.
We're seeing very positive there I mean in a sense, it's it relates to <unk>.
Some of the demand factors that are occurring throughout the world I don't think that.
Or.
Poor European economy Hurts us because I think that takes out some demand and people are looking for places to put their production I think China is certainly the chemical petrochemical industry in Taiwan and in China is probably also looking for places to flip that so I think generally we're seeing those declines again MBA has been a pretty good one and I'll leave it at that but I think overall as you look to the second half.
For the year, you can see why we've upped that.
Kevin's point at 60 to 80, but we're probably looking more at the upper end of that range more like the 80, then the 60.
So I know that didn't give you enough but.
Hopefully that helps you from a directional perspective.
Yeah, Okay. Thanks for that.
And then just with respect to CWT you talked about the fact that.
We will talk about the fact that there were some.
Still some inventory there.
To deal with I'm, just wondering if we see an upturn in residential orders coming through how much of a delay are we looking at before you will actually see.
That business that you book.
I guess nothing is how much do we have to burn.
Typically for us once a residential project started or products would go on somewhere between five and six months. After the start. So you kind of think of that in terms of what residential starts are an improvement there in terms of how long it takes us to trickle through for our products that go on the project.
I think as far as inventory goes yes, I think as the residential market. It seems like it kind of bottomed right now as it improves it should help us on the inventory side definitely.
David the only thing I would say on the call. There's a heck of a lot more about it than me, but I think one of the things we have to segregate CWT is this idea of putting it on new construction and then this idea of repair and remodel so we.
We can see and half of our business upticks in demand as quickly as.
A a weather event occurred in California on a Friday and Saturday.
Saturday morning, or Sunday morning, we could have an out of stock position at home depot and be happy to respond to that so I think as you spend more time with my whole understanding that the difference between that new construction in that whole side of it then that repair and remodel that we we do a lot of work.
Taken care of roofs before they get a new roof put on so I think that's an important.
No relationship to understand because it does impact.
What happens to sales I think of five to six month delay I'd, probably is a little bit of a long and Avi when you aggregate the whole business yeah, absolutely. So when we talk about US residential starts you got to remember that's 25% of the business.
They're 25% on the residential side and is also 25% on.
The commercial side, it's all R&R and a big component of that is really non discretionary roof coating projects products that when you have a leak on your roof, you're not gonna have a choice but.
Use those products the demand should be stronger in those areas, especially when there is weather events and high rain events.
Right right. Okay last question for me. Thank you for that detail last question for me is just on the on the operating leverage and clearly you guys have done a tremendous job this quarter managing decremental margins.
Theres been quite a bit of discussion on price cost. So I think we're good there, but just on the on the volume leverage.
I know there was a previous question, maybe I'll come at a slightly different way here, but I'm just trying to get a sense of you've clearly found something different in terms of managing your fixed costs and your leverage.
Just try to get a sense of how sustainable that might be going forward.
And whether we should be talking about updating our central what volume Leverages. These individual businesses.
Yeah and at CCM side, certainly I think that new number for Incrementals for sure is that 40%.
Some of that was a little bit higher than that on some of the decrementals just from some of the absorption issues that you have there, but going forward, we're expecting that 40% on the CCM side.
And as far as city. They should also be in the 40% plus range, and then cwt's little bit lower than that probably more in the 30%.
Yes, and David I would look back to when we started in 16, it where we werent adjusted EBITDA. When we talk about sustainability I think this is really where and I'm glad you brought it up because it talks about the power of Pos and the power of what we're doing from a lean Sigma perspective, what our leadership is doing around continuous improvement on.
<unk> things like this I mean, those margins those adjusted EBITDA margins at CCM back in 2016 were probably in that 21% range.
We're now <unk>.
To Europe over 30, and it's been a pretty steady progression to get there and go from 21 to 30 went through 'twenty, three and 'twenty four in that and so I think that to me when I look back at that almost eight year run of continuous improvement across a variety of volume levels tells.
Tells me that these are very sustainable and the team knows for me that we've got to get better every day. So I think we would continue to think we will have more gains and obviously as you get into the thirty's, they get tougher and tougher to get but the team continues to.
Add to that.
Remarkable EBITDA.
Journey positive journey that they've had.
Great. Thanks, guys.
There are no further questions at this time I will now hand over to Chris. Please continue.
Well, thanks J P. Appreciate it. This concludes our second quarter 2023 earnings call I want to thank everybody for their participation I do want to once again, thank Jim for all the good.
Good times and the great work he has done and everything he has contributed a been a big part of Carl and I know going forward. It will be very interested in and what we do and we'll be keeping in touch and then most of all thanks for being on the call in and taken up those questions. So quickly you're you're in so here. We go and thanks, everybody look forward to speaking to you at the next earnings call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.