Pinterest Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 12 speakers on the call.

Operator

Good afternoon. My name is Frances, and I will be your conference operator today. At this time, I would like to welcome everyone to The Carlyle Company's Q1 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.

Operator

I would now like to turn the call over to Mr. Jim Giannakouros, Carlyle's Vice President and Investor Relations. Jim, please go ahead.

Speaker 1

Thank you. Good afternoon, everyone, and welcome to Carlyle's Q1 2023 earnings conference call. We released our Q1 financial results after the market closed today, And you can find both our press release and earnings call slide presentation in the Investor Relations section of our website, carlyle.com. Call. On the call with me today are Chris Koch, Chair, President and Chief Executive Officer and Kevin Zimmel, our Chief Financial Officer.

Speaker 1

Today's call will begin with Chris providing highlights of our Q1 results and a discussion of our current business outlook, and Kevin will discuss additional financial details and update you on our outlook for 2023. Following our prepared remarks, we will open up the line for questions. 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.

Speaker 1

With that, I will turn the call over to Chris.

Speaker 2

Thank you, Jim. Good afternoon, everyone, and thank you for joining us on our Q1 2023 earnings call. Please turn to Slide 3. Let me begin my commentary by complementing The global Carlyle team on their effort and hard work during a challenging Q1. Their commitment to our continuous improvement culture steadfast dedication to delivering the Carlyle experience to our customers are some of our greatest assets and positions Carlyle extremely well in our efforts to continue to create significant value for all of our stakeholders.

Speaker 2

On our year end 2022 call, We noted that the Q1 would be a challenge due to tough year over year comparisons for CCM, the normalization of buying patterns in the channel, significant inventory of both distribution and contractors and potential weather disruptions occurring in much of the country. Our financial performance as a company in the Q1 of 2023 reflected these challenges that were faced in fact by the entire U. S. Building Products Industry. The U.

Speaker 2

S. Building Products Industry's normalization of buying patterns and destocking that began in Q3 of 2022 has taken longer than anticipated and we now expect it to substantially resolved in Q2 of this year. This return to normalization of buying patterns left distributors and contractors with increased inventory positions driven by supply chain constraints that were experienced for much of 2021 2022. The supply constraints The building products industry were for the most part resolved in the Q3 of 2022. During Q4 Q4 of 2022 and Q1 of this year, we saw continued strong demand at the contractor level as well known positive market trends continued.

Speaker 2

However, we did see distributors and contractors adjust their orders to Carlyle, reflecting their higher than normal inventory levels. The efforts to effectively work down that excess inventory during the quarter have had a substantial impact on what remains in the channel and much progress has been made during the last two quarters despite the negative effects of cold weather and greater precipitation prolonging the process. The unusual and impactful weather experienced in the Q1 continued well into March. Looking at Q2, We see weather patterns becoming more favorable for contractors, demand continuing to improve as the season picks up and orders for our products increasing substantially over Q1 levels. These factors are what gives us confidence in destocking effectively coming to an end in the second quarter.

Speaker 2

For the remainder of 2023 and longer term, we continue to see strong underlying demand in the nonresidential and residential construction markets with secular positives such as growing demand for energy efficient solutions for buildings, a robust pipeline of new products coming to market driven by our increased investment in R and D, a multiyear backlog of reroofing projects supporting a healthy baseline of activity, resulting in a very positive outlook for improved sales and profitability. With that said, we are mindful of the potential for further headwinds such as increased tightening in the financial markets, even higher interest rates and related sentiment around anticipated deteriorating economic conditions. And we will continue to be vigilant in anticipating any negative impacts that could be forthcoming. We are also aware that constrained labor markets continue ability to effectively address 100 percent of their potential demand, an impediment we do not see being resolved anytime soon and as an aside, is a significant driver of our new technology focus to reduce time on the roof for installation. Turning to our results.

Speaker 2

We delivered consolidated sales of $1,200,000,000 in the quarter, adjusted EBITDA of $214,000,000 and adjusted EPS of $2.57 While results reflect a short term disruption to our earnings growth expectations, particularly when compared against very We do not believe recent trends heavily influenced by temporary destocking impacted by inclement weather Will impact our intermediate or long term financial results. Instead, we are focused on benefiting from several tailwinds for our building product segments. Products. At the core of this is the thought that insulation is perhaps the best source of energy savings across the building envelope and a way to reduce expected pressure on the nation's electrical grid, which we know is in need of substantial investment. Our polyiso sales have grown 40% faster than traditional membrane growth and we expect that to continue for the foreseeable future as roofing R value requirements continue to increase.

Speaker 2

Notably, we have made investments in poly ice over the past few years to be able to service this growing demand, including investment in our new state of the art manufacturing facility in Missouri, which begins production this summer. Our Sikeston facility is also on track to achieve LEED Platinum certification, a reflection of our commitment to being a more sustainable company. 2nd, we continue to innovate around 2 significant pain points for our industry, sustainability and labor efficiency. Since Carlyle transformed the commercial roofing industry with the introduction of Shure Seal EPDM single ply membrane decades ago. We've remained committed to innovation that addresses contractor labor constraints that pressures their ability to service demand effectively and cost efficiently.

Speaker 2

And by addressing those constraints, we improve contractor profitability. And helping our contractors become more profitable is a key way Carlyle can demonstrate the value of our products and services. Examples of recent product introductions that help our contractors become more profitable can be found on Slide 5 and include our 16 foot TPO line where fewer seams reduce labor hours on the roof and deliver a faster installation. Our ReadyFlash coated glass facer, which reduces adhesion time, allowing work to be completed more quickly and our XCI Class A plus wall insulation product that provides better fire resistance and competitive pricing. We look forward to introducing many more innovative products in the coming months years, leveraging our growing investment in R and D.

Speaker 2

3rd, given our commitment to our increasingly complex industry, we continue to invest in our training and education center in Carlyle, Pennsylvania, helping construction professionals specify and install more challenging systems every day. We offer innovative, world class hands on training opportunities focusing on the installation of Carlyle warranted roofing systems and related products and the best field practices, All to help solidify and enhance our contractor relationships. We aim to be the contractors' manufacturer of choice, competing on and earning a fair price for the value we create and we are excited about our new product launches this year that will again demonstrate our commitment to helping facilitate ease of installation for contractors. A 4th tailwind supporting our positive outlook in building products is sustainability. Long term opportunities continue to build with a large push to reduce the energy intensity of buildings and our products are squarely positioned within the solution set available to building owners today.

Speaker 2

We also believe the concept of circularity is an essential part of our product future and we're working hard to introduce recyclable products and increasingly recycled content and the new products. Additionally, while still in the early innings, we expect that the Inflation Reduction Act's tax benefit for building efficiency upgrades incentivizes commercial and residential building owners to invest in energy efficient renovations and retrofits, a supportive tailwind for the next decade. And lastly, non discretionary reroofing and the corresponding well defined backlog of roofs to be reroofed in the next decade should continue to support the steady demand backdrop for CCM. Taken together with all of our tailwinds outlined, we believe Carlyle is truly a best in class differentiated building products Company with a clear sustainable growth and value creation runway and our portfolio pivot to building products reflects our confidence in this. Moving to Carlyle Weatherproofing Technologies.

Speaker 2

With balanced exposures between residential and commercial and repair and replace Results in the Q1 came in slightly better than expected for our Carlyle Weatherproofing Technology segment. The CWT team continues to integrate HENRY ahead of our original deal model plans, obtained the projected deal synergies and is executing very well on consolidating opportunities across business lines and geographies. The team is also driving greater efficiencies in our plants and managing price cost effectively. Given this, we expect CWT's EBITDA to remain stable year over year despite the organic revenue declines we currently model for 2023. At CIT, backlog continues to grow driven by increased airframe production.

Speaker 2

And more importantly, CIT continues to leverage their growth, capitalizing on the significant hard work done during the last few years in restructuring the business. These actions taken while in the COVID pandemic helped CIT emerge from this downturn stronger than before and are now paying off. With both wide and narrow body aircraft production continuing to ramp, we should see reliable growth tailwinds in aerospace for the next several years at CIT. I'm also very pleased and proud that CIT was recognized recently as Airbus's Electrical Standard Parts Supplier of the Year for 2023. CIT received this recognition from Airbus for its robust commercial performance, high level of collaboration, strong project follow-up on new product introductions, operational performance and willingness to go the extra mile.

Speaker 2

CIT was chosen as this year's recipient out of 35 competing suppliers. It is another example of customers benefiting and recognizing Carlyle's commitment to innovation and the Carlyle experience across all platforms. Now on to CFT. Carlyle Fluid Technologies continues to be an improving story with significant profitability gains this quarter. Backlogs at CFT also continue to grow with strong incoming order rates standard products contributing to this growth.

Speaker 2

CFT remains focused on new product launches, operational efficiencies and proactively managing price and mix, all of which are contributing to attractive leverage on strong revenue growth in 2023. Please turn to Slide 6. Our results continue to demonstrate that Vision 2025 has been the right strategy for Carlyle. In addition to our world class teams and proven business model, we've 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. A significant portion of our success has been driven by the multiyear process of reshaping our portfolio to pivot from a diversified industrial products company to a higher returning building products portfolio of businesses, demonstrating our desire to be superior capital allocators.

Speaker 2

This transformation sets the stage for a more focused, higher returning and better understood path for future sustainable value creation at Carlyle. The pillars of Vision 2025 are well established and remain core to Carlyle's 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 in 2018 Vision 2025. As we approach the completion of many of the milestones and goals of Vision 2025 in the last year, we were simultaneously working on the successor to Vision 2025, new strategic plan that will be introduced formally later this year. Vision 2,030 will be a plan committed to many of the same principles and pillars we used to establish Vision 2025.

Speaker 2

And with it will come new levels of performance and expectations that will represent our culture of Continuous Improvement. As a reminder, the foundational pillars for sustained value creation at Carlyle under Vision 2025 include: drive mid single digit organic revenue growth, utilize the Carlyle Operating System or COS to drive continuous improvement and build greater efficiency in our operations, build scale with synergistic accretive acquisitions, maintain a returns focused capital allocation strategy, including organic investment to drive growth, a disciplined approach to our aforementioned M and A strategy and returning capital to shareholders. Notably thus far in 2023, we've returned nearly $90,000,000 to shareholders with share repurchases of $50,000,000 $39,000,000 paid in dividends. And of course, none of this could be possible without continuing to invest in and develop 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 will continue to guide our value creation journey in 2023 and beyond and will absolutely be core to our Vision 2,030 strategic plan.

Speaker 2

Turning to Slide 7. I mentioned our commitment to sustainable innovation, but I'd like to highlight some of our recent steps taking towards our net zero pledge. Carlyle has had a century long legacy of responsible stewardship and stakeholder focus, all driven by our core cultural value of continuous improvement. With our 3 pillars of environmental sustainability. 1st, develop energy efficient products and solutions to reduce the greenhouse gas or GHG emissions from building operations and help lower operating costs for our customers.

Speaker 2

2nd, reduce material waste going into landfills. Our history of recycling began in the 1920s when we incorporated scrap rubber into our inner tube production. We continue that tradition today. And 3rd, focus on lowering the GHG emissions of our operations and manufacturing processes with the implementation of enhanced Energy Conservation Measures. Several months into our journey after announcing our commitment to achieve net 0 GHG emissions across our entire value chain by 2,050, We continue to take important steps towards achieving this ambitious goal.

Speaker 2

For example, we've committed to purchasing several £1,000,000 of BioMDI and BioPolyol to test and develop bio based raw materials into our production. We've also replaced approximately 25% of our sourced prime carbon black in certain products with recycled material. And lastly, we're piloting end of life management of tear off EPDM roofs where we collect and process it into consumer rubber products. These steps all further our progress towards our sustainability mission and we're just getting going. And with that, I'll turn it over to Kevin to provide additional financial details as well as

Speaker 3

our updated 2023 outlook. Kevin? Thank you, Chris. For segment highlights, please turn to Slide 8. CCM delivered 1st quarter revenues of $576,000,000 down 35% from the prior year.

Speaker 3

The decline was due to the reasons Chris previously mentioned, including tough comps, destocking in the channel and project delays due to severe weather across the U. S. These were partially offset by positive price. Adjusted EBITDA margin of 24 set by price realization and savings from COS. Moving to Slide 9.

Speaker 3

Sales at CWT decreased 12% due to continued softness in residential demand, partially offset by strength in our retail businesses and price realization. Adjusted EBITDA margin was 17%, notably down to 60 basis points from the Q1 of 2022. The team continues to focus on the integration of Henry, realizing the $30,000,000 of stated synergies from the acquisition and rolling out COS and significant investment in operations throughout CWT to drive greater efficiencies in our businesses. Moving to Slide 10, CIT revenue increased 15% in the Q1 of 2023, reflecting strength primarily in our commercial aerospace platforms as we continue to see orders ramp up and momentum build as global passenger demand continues to approach pre pandemic levels. Adjusted EBITDA margin expanded more than 400 basis points to 14%, driven by favorable volume, price realization, leverage on restructuring activities and efficiencies gained from COS.

Speaker 3

Turning to CFT on Slide 11. CFT generated growth of 2.3% driven by positive pricing and favorable volume, partially offset by a 4% year over year headwind from FX. Adjusted EBITDA margin expanded more than 700 basis points 22% driven by favorable volume, price and efficiencies gained from COS. Slide 12 provides a year over year bridge items to Q1 adjusted EPS. Moving to Slides 13 and 14.

Speaker 3

Carlyle ended the Q1 of 2023 with $424,000,000 of cash on hand and $1,000,000,000 of availability under holding credit facility. We generated cash flow from continuing operations of $147,000,000 and invested $40,000,000 in capital expenditures. We deployed $50,000,000 towards share and paid $39,000,000 in dividends. As of the end of the Q1, we have 3,200,000 shares available for repurchase under our share repurchase program. Turning to Slide 15, we have provided our updated 2023 financial outlook.

Speaker 3

As a result of our challenging Q1 and destocking persisting into the Q2 at CCM, we now expect consolidated revenue to decline mid single digits for the full year 2023. The change in our revenue outlook is entirely in our CCM segment as our revenue outlook for CWT, CIT and CFT remain unchanged. As a result The revenue decline, we now expect margins to decline by approximately 100 basis points for the full year 2023. We remain focused on disciplined pricing, operational efficiencies and managing costs through our continuous improvement efforts. As a result of the revenue decline, we now expect margins to decline by approximately 100 basis points for the full year 2023.

Speaker 3

We remain focused on disciplined pricing, operational efficiencies and managing costs through our continuous improvement efforts. We also continue to invest in our businesses with expanding our R and D operations, improving the Carlyle experience that provide our customers with best in class customer service and cutting edge information systems. Despite the deeper and longer period of destocking occurring in the first half of twenty twenty three, we are seeing momentum in the business with April orders showing very strong sequential improvement over the Q1 levels. This gives us confidence that the inventory in the channel will be level set by this summer and our shipments in the second half will better mirror the strong end market demand. With that, I turn it over to Chris for closing remarks.

Speaker 3

Thanks, Kevin. In closing, I would once again like to express my thanks and appreciation for the excellent work by All of Carlyle's employees, especially over the

Speaker 2

last few years. From the onset in 2020 of the COVID pandemic to the fast and furious recovery in 2021, 2022 to the recent challenges accompanying the destocking and return to normal buying patterns. Carlyle employees have shown incredible resilience, remarkable flexibility and a deep concern for one another. Those characteristics contributed in no small way to the accomplishments the team has achieved since the launch of Vision 2025. As we move deeper into the year and with Vision 2025 objectives well ingrained throughout Carlyle, I remain extremely optimistic for the long term success of Carlyle as we leverage the flexibility afforded us by an incredible brand and reputation, strong capital position and superb cash flow generating capabilities.

Speaker 2

Despite near term and potentially growing economic challenges, We will continue to drive a culture of continuous improvement and entrepreneurial mindset and commitment to superior capital allocation. We will take the necessary actions to navigate this complex operating environment, continue to deliver the Carlyle experience to our customers and create value for all stakeholders of the company. And that concludes our formal comments. Operator, we're now ready for questions.

Operator

Thank you. Our first question comes from the line of Brian Blair with Oppenheimer. Please go ahead, Brian.

Speaker 4

Thank you. Good afternoon, guys.

Speaker 2

Hey, good afternoon, Brian.

Speaker 4

I was hoping you could offer a little more Color to frame the challenging start to the year and then the time line to normalize CCM order patterns. Is there any way to quantify the impact To normalize seasonality, it's understandable that there's an inflection relative to a weak Q1, but relative to a normalized seasonal path What are you seeing and what are you hearing from the channel early construction season?

Speaker 2

Sure. A Lot of things there. We'll take them 1 by 1. When you attribute the most of the volume decline is destocking with some weather. I mean, if we put, say, seventythirty, eightytwenty, somewhere in there with the bulk being destocking.

Speaker 2

When you look at when it's going to be completed, we look at, out the door sales for our distributors, we look at contractor activity. In fact, Over the last, probably 2.5, 3 months, we've taken on a new initiative where we're actually doing our own. I know you guys do these surveys. We're doing our own surveys. We Contacting about 450 different endpoints across the company country, excuse me, because we have regional differences.

Speaker 2

And what we're seeing is that at the distributor out the door level. In a lot of cases, we're at 90 plus percent of what they were in 2022 last year. So when we look at that and we look at what's happening with our incoming bookings from distribution and other sources. We're seeing real positive momentum building right up from February through March Yes, now into April, good positive trajectory. And so we believe that that will take care of that destocking and that's where we make our comment that it should be done and tapering off by the end of the second quarter And then we'll be back to that normal cadence with CCM.

Speaker 4

That's very helpful. Kind of natural follow on. In terms of the revised CCM sales guide, how should we think about Q2 and back half growth rates and what's contemplated for volume and price along the way.

Speaker 3

Yes, I think price and we're not breaking out price As much from volume, but for the most part flattish on price and then so it's mostly revenue. And as far as Q2 and throughout the year, You'll see in the Q2, we still have about $100,000,000 of destock, so that's going to hit the 2nd quarter. Q3 will be back to probably more equal to last year's level and then Q4 of last year We're easy comps, so you should see double digit improvement in the 4th quarter per CCM.

Speaker 4

Okay. And with the inflection to growth in the back half, stability Q3 and rebound relative to a weak comp Q4, can CCM drive consolidated earnings growth, return to EPS growth during the back half with that setup?

Speaker 3

In the second half of the year, certainly, as we look at the full year, we think we'll come up a little below Our 30% EBITDA from last year, so we might be below that. Our new targets for CCM long term or 30% plus EBITDA margins. We expect to be back there in 2024.

Operator

The next question comes from Tim Wojs with Baird. Please go ahead, Tim.

Speaker 5

Hey, good afternoon, guys.

Speaker 6

Good afternoon, Tim.

Speaker 5

Maybe just going back on price. Obviously, just given the challenges we've seen over the last couple of quarters with destocking and weather and things. I mean, how has the industry kind of reacted to that relative to kind of price. Have you I mean, I know one of your competitors put through an incremental price increase for July. But I guess, how is the market on the price side?

Speaker 5

And have you seen anything get more competitive with the volume declines?

Speaker 2

Tim, maybe taking a couple of sections. I think first of all that you saw that price increase and indeed we had all or we had had price increases in the Q4 we had hoped Implement in 2023. And I would say those are probably not getting the traction that we would have hoped. I mean, You do your work as well and I think you're seeing that. In general though, what I would say is that certainly pricing out of distribution in For the bulk of the industry is pretty good.

Speaker 2

And as Kevin mentioned, we think it's going to be flat for the year. And I think that goes back to some of the improvements we've made over the last 5, 6 years on us being a market price leader, on bringing price discipline, on bringing value pricing and talking about how we create value and you heard in my comments about that and new products. And the interesting thing is with the changes in some of the leadership at our other competitors, I think we're also seeing a real desire to Drive value and to get the value for that. So are there some deviations in price from time to time? Yes, They've happened and we hear about them.

Speaker 2

I think on the whole though, the market players are remaining pretty disciplined and From time to time, people will cut deals or maybe they might go direct to a contractor and offer a special deal or something like that. We obviously try not to do that and have a price leadership position, but there are those that do that. But for the most part, I think Those things go on and pricing, I've been pleased with where pricing is through April that people have been holding in there. There's been good price this month.

Speaker 5

Okay. Okay. And then just maybe from a mix perspective, I mean, have you seen any variance kind of the roofing systems that you're selling between like EPDM or TPO. And I'm just trying to think if One of the membranes is a higher install cost versus the other one. Have you seen any sort of like share shift or mix shift kind of happened within your portfolio.

Speaker 2

Where and Kevin and Jim can talk about this too, but where I saw the biggest shift, I think Actually last year and maybe some of its blood over here with quotes that it happened last year. But when TPO, as you know, was constrained, at least for us, we were sold out right through the year. I do think there is some shift and some players that sell PVC See in greater amounts benefited from that. So there might have been some shift in Q4, maybe a little Q1 and fulfilling orders where PVC replaced TPO. But that's Kind of come back as the supplies constraints came off.

Speaker 2

We had some issues For 2 years, all of us as an industry with fasteners, metal fasteners, they were at a premium and people may have substituted adhesives or different. We do have a Velcro roof we use and that might have seen some gains there. But I think on the margin, those were pretty minimal. And then when we look at EPDM, our oldest brand, Things have remained relatively stable there. We don't see much market shifts there.

Speaker 2

So I think as we get through the year, things will go back and they'll normalize to That same type of mix around TPO, PVC, PDM, polyiso, EPS, those things. And really all that disruption over the last 2 years will get sorted out.

Speaker 5

Okay. And then just maybe last one, just how is The cost basket kind of performing relative to your kind of initial expectations and what's the expectation now for the year?

Speaker 3

Yes. So costs, we're not seeing as much on the raw material that we thought we'd see entering the year. And that certainly is factored into our change in margin guidance for the full year. I mean, we're still seeing probably $40,000,000 to $60,000,000 of benefit this year versus what we were higher than that going into the year.

Speaker 5

Okay. Okay, very good.

Speaker 2

And Tim, most of that would be I think in the second half.

Speaker 7

Okay, got it.

Speaker 5

Thank you.

Operator

Thank you for your questions. The next question comes from Saree Boroditsky with Jefferies. Please go ahead.

Speaker 8

Hi, thanks for taking my question. Now obviously, contractor backlogs remain strong, but there appears to be a lot of skepticism right now on non resi. So could you just help frame a very the downside scenario for us like maybe what would CCM look like today in a 2,009 type scenario? Thanks.

Speaker 2

Yes, Ria, I appreciate the question. I completely understand and agree with you. There's a lot of anxiety and concern. And I think Part of it is this destocking occurring in Q4 and Q1, but those are the lowest months of the year for roofing for in North America. And I think as we look into 2023 with what we see at the contractor and the backlog they have, and what's happening out there, I just can't see a 2,009 scenario occurring in 2023.

Speaker 2

I can't forecast obviously out into 2024, but We're backlogged. There isn't enough labor. Again, I mentioned that in the commentary. So when we have these days off the roof due to weather, That just adds to the backlog and contractors need to get that work done too. So again, there's a lot of angles we can go on how we're helping them with that.

Speaker 2

But I just don't see, that type of downside. It would have to be something pretty dramatic that would occur in the second half. And As Kevin mentioned, things improve from a comps perspective as well as we get into Q4. But to answer your question, Carlyle has always performed well On an EBITDA margin basis in the downturns, you can look at the data in 2020 and then we can go back to 9% and we've in fact We had great EBITDA margins and improved. So, I would say that while I don't see it happening, if it did occur, We'd still be producing good cash flow and good EBITDA margins through that.

Speaker 8

Appreciate it. And then maybe skipping to another segment, CWT Margins Helen Strong, given the organic growth declined, how are you thinking about margin performance there as you go through the remainder of the year? Thanks.

Speaker 3

Yes. We look at year over year, we think there's definitely benefit and pickup we're going to get in the second half of the year. We could see a couple of 100 basis points full year, year over year improvement for CWT.

Speaker 8

Sounds good. Thanks for taking my questions.

Speaker 2

Thanks, Doreen.

Operator

Thank you. The next question comes from Derek Schmois with Loop Capital. Please go ahead.

Speaker 7

Hi. Thanks for taking my questions. I wanted to ask on the demand side for CCM. Just given there's a lot of distortions with inventory destocking, both for you, manufacturers, distributors. Just wondering though, if you have a sense, just given your comments around strong contractor backlogs, what the underlying market demand is This year, for contractors and roofing installations and has that changed at all since the beginning of the year?

Speaker 2

I think, Gerrick, there may whether it actually practices change, I don't know. Obviously, one of the things that's There are interest rates in the banking and that has affected the I think the resi a bit. I don't think that's actually affected the non resi in the quarter, but certainly it creates concern. And again, destocking again creates more anxiety in that. When we look at the places, I'd say, throughout the market that are strong, If we got down to specific verticals, I think you've seen some decreases in warehouses have probably been a little bit under last And we think that's going to continue.

Speaker 2

It's probably about where we thought it was. The educational The side that we look at might be a little bit of a lower number than we had thought at the beginning of the year, not much percentage point or 2. I think stores again maybe some impact there, but maybe that's more driven too by some of the move to online purchasing and doing the Internet sale thing. Healthcare has been good, been probably better than we thought. So when we look at it and even one other segment I would just say is even kind of the residential buildings that we deal in the bigger multifamily and that pretty much in line with what we had.

Speaker 2

So I think when we look at where we were even out of last year, I think if you take all that together, we're probably flat right now. And I would say, where we are for this year, I don't see that being affected. As we get again into There's a lot of things happening out there, a lot of moving parts that could affect it, but obviously, we'll call at the end of the second quarter. We'll be well into the season and I think that that call will be more telling than a Q1 call well with the destocking done and then with the season picking up.

Speaker 7

Okay. Thanks for that. I wanted to follow-up just on the pricing expectations just to maybe get a little bit more clarity on The comment that you may be that you expect pricing to be flat. Is that a comment for the second half of the year as you've anniversaried The price increases in 2022 specifically or are you expecting year on year pricing for 2023 To be flat and if that's the case, I think that might be a little bit different than what was communicated on the last quarter call.

Speaker 2

Yes. Go ahead, Kevin.

Speaker 3

Yes. So that's flat for the full year. I think on the earlier call, I mean, we were maybe up slightly. It wasn't a whole lot that we were putting the price that we had some carryover, but yes, what we're looking at now is flat for year over year. Yes.

Speaker 2

And Garrick, when you look at that, the difference would be that we had that 4th quarter price increase and I think it's all attributed to we thought there would be destocking ending sooner. We thought that price would gain a little more traction. I think you saw as was mentioned earlier, one of our competitors adding a price in there as well. And I think there was Thought that that would hold and that was what was our original assumption on the year for pricing being up. I don't know what we have 1% or 2%.

Speaker 2

And then now we're back to flat and it really centers around that price increase not holding.

Speaker 7

Okay. No. Thanks for that. Just one last question for me. Just on switching to CWT, the strength in the retail in the quarter.

Speaker 7

Was that related to any channel fill or timing benefits? Just wondering if you could provide a little bit more color on what happened there?

Speaker 2

Yes. On the retail channel, if we're talking about retail in the same way, kind of big box thinking like that, most of the improvement there was around Weather and what happens after weather, especially in the West where we've got a lot of population was affected by rain. We tend to see a surge in our CWT products and the Henry products and that team addressed it in an unbelievable way because they have to pick production. They've got to reallocate and divert product out there to make sure that those big box and retail stores get it. They did a heck of a job doing it.

Speaker 2

But that's really what that was attributed to and not any type of rollout. We have had some new product introductions occur, But those don't tend to have the big load in like maybe you see some other companies. So yes, all related really to that weather.

Speaker 7

Okay. Thanks again and best of luck.

Speaker 2

You bet. Thank you very much.

Operator

Thank you for your questions. The next question is from John Joyner with BMO Capital Markets. Please go ahead, John.

Speaker 9

Excellent. Thank you for taking my questions. So I'll ask about destocking. That's We can see how many times we cannot say that word. But I guess other than areas like break and friction, I mean in the past, I don't really ever recall much discussion historically around destocking or restocking for CCM.

Speaker 9

So has there been any changes at CCM as it relates to your channel partners or is it simply that maybe they bought too much inventory over the past year? I mean, maybe just help me understand that because I just don't recall, discussions around Destocking so much historically.

Speaker 2

Yes, I think you're right. That's a good one on CBF. I mean, if we go back to 2,008, 2,009, I think there was a lot of inventory and then Fell out on the at the cats and commodities and that and it was left with inventory. So good call. That's a while ago.

Speaker 2

Brings back some memories. But as far as CCM is concerned, nothing has really changed. When we went into in 2019 at least, we were still doing that kind of thing where in the winter we'd make product for the season, distributors would load in, we'd get through the season and They'd have the inventory, they'd work it down, contractors will work through the season. And once in a while, you'd see, if we had an early spring or late fall, our sales or our shipments in Q4 and Q1 would be a little bit better. In fact, I think prior to 2019, Q1 had gotten successfully better every year for a few years by a single digit improvement.

Speaker 2

So we go through COVID And things decline and then the surge comes back and there's supply chain issues that everybody had and were well known. And we saw what others saw as well, which was people tended to I'd hate to use the word hoard, but I think they tended to do a couple of things, order Put in multiple jobs at multiple suppliers to ensure they got product. They would grab product when they could and stock it. I think the idea that we had contractors. Building inventory was a very new concept for us and that was one that we really missed John in the Q4 when we gave you the I mean bad on us.

Speaker 2

We hadn't anticipated that other people were stocking as well. So, to me, It's just going to take time to get through it, which it has, and we now think we have good visibility to it. And once it's done, I think unless we have another supply chain crisis of the magnitude we did under COVID, which I don't anticipate, we'll be back to that normal cadence because really that system of how we order and how we introduce products and how we supply the market. I mean, CCM has been doing it for a lot of years, Contractors distributors and I would think over time they've gotten pretty efficient at it. So I would think we would have go back to the way we used to do it, which was Probably the best practice.

Speaker 2

So I think it's just a let's call it a 1 year or one time aberration.

Speaker 9

Okay. Got it. That's very helpful. Good color. And then maybe just one more.

Speaker 9

And I think I know the answer to this. But I realize that you intend to focus on the kind of core building products businesses, but maybe just looking at TFT, the business actually performed Well, I mean people who are focusing on CCM, I get it, but CIT, CFT performed quite well. So with the operational improvements that You know, have implemented at CFT, you know, a lot of heavy lifting for that business. Have you possibly rethought How you view CFT going forward with regard to how it fits within your portfolio strategy?

Speaker 2

No, I think it would be I think you're right to recognize the hard work that Fred Sutter and the team have done since he came into the business in terms of introducing new products and In terms of improving the sales force and operations and everything. And obviously, that's what we had in mind for CFT when we initially bought it. But I think when we look at being Spirit Capital Allocators and look at what the runway for ROIC performance and also magnitude In terms of effect on the P and L, it's still within the building product segment in CCM. That history and you know it, you have the data. It's hard to fight against and while CFT is performing well, it's still a pretty small part of our business at $300,000,000 and it would It'd be a tough time for them to get to the point where it would make better sense to allocate in a big way to that as opposed to driving to that core pivot to building products.

Speaker 2

So we think we've done the work and we think in terms of where we put our capital, the pivot to building products makes the most sense for us for the foreseeable future.

Speaker 9

Okay. I figured I knew the answer, but I just wanted to ask. Thank you.

Speaker 2

Thanks for recognizing the team. That's been a really nice turnaround from where we were a couple of years ago.

Speaker 9

All right. Thank you, Chris.

Speaker 7

Thank you.

Operator

Thank you for your question. The next question comes from Adam Baumgarten with Zelman and Associates. Please go ahead, Adam.

Speaker 10

Hey, thank you. Good afternoon. So just given some of the surveys you've done and You have a better sense for of that, I think you said $100,000,000 of inventory that needs to come out in 2Q. Kind of how that splits between contractors and distributors. And then also just are there any specific products where within that $100,000,000 where they're more elevated than others within the portfolio?

Speaker 2

No breakdown on the contractor distributor. I don't think we got to that level of granularity and apologize. We'll continue We'll continue to drive on these things. It's a new addition that we're going to do regularly. So we'll have we'll get better at it.

Speaker 2

But at this point, we don't have that breakdown. I still think the bulk of it Though if I'm going off my gut as a distribution and that the contractors probably, at major contractors. And so, I would say it's the bulk of its distribution. As far as products and any one that's out there, that's another one I couldn't I wouldn't want to even guess that. I apologize.

Speaker 10

Yes, no worries. And then just the other one maybe more high level. Just Do you have a sense for the percentage of reroofing projects that are that use financing?

Speaker 2

Jim and I just had a discussion on that. And I On the reroofing, it's mostly coming out of kind of an expense budget. Remember, I think on the you know this, when a new construction, it's all part of a big project It's coming under one capital request and then they're or however they do it and the roofs included in that and it gets financed. Once it's sold to a customer and then it's at year 20 or 15 or 35 or whatever that typically comes out of their operating budget to reroof the roof or the building owner's budget. So I would say it's probably pretty low as a specific percentage that are financed.

Speaker 10

Okay. Got it. And then just maybe some help on EBITDA margins were down about 500 basis points year over year in the Q1 and you guys are guiding Down 100 for the year, maybe some help on kind of the quarterly progression there to get back to that down 100 would be great.

Speaker 3

Yes. We talked, so you have the Q1, obviously, on what we did for margins and I guess you're looking overall at the business. Let me see on margins by quarter. A lot of it's going to be absorption and you can just do it off of the volume. So whatever you're projecting by quarter For volume, you should be able to drop that to the bottom line.

Speaker 3

We're probably high 40s on decremental margins for the CCM business And that should help you get there by quarter.

Speaker 7

Great. Thanks a lot.

Operator

Thank you for your question. The next question is from David MacGregor with Longbow Research. Please go ahead.

Speaker 6

Yes. Good afternoon, everyone. Hey. I wanted to ask Hey, Good afternoon. I wanted to just ask about the guidance provision here.

Speaker 6

And when you go from kind of low single digit revenue growth to high single digit revenue declines. It implies about a $400,000,000 differential. I'm trying to reconcile that with the first Quarter where you said $300,000,000 obviously was the revenue delta. You said 70% to 80% of that would have been the destock. You got another $100,000,000 coming in 2Q.

Speaker 6

I guess, I'm trying to get a sense of just whether there's any catch up coming here in the second half of the year from the weather portion or whether you're just being conservative with that $400,000,000 change to their guide. Can you help me just think through that?

Speaker 3

Yes. I think one of

Speaker 2

the things just in general and certainly Jim or Kevin can weigh on it, but I think there's a little conservative nature going into Q3 and Q4 around how much we can catch up. 2 things that I think about are very relevant here. We just talked about the weather and we always worry how long does that Fall continue. The longer it continues, the better we can do, because we've got contractors on the roof putting roofs That's probably the biggest one for well, maybe not the biggest, the other one is then the labor. And we keep discussing labor and that really is a constraint around how much can we put down.

Speaker 2

And so again, the CCM team. I think we're almost tripling R and D investment to deal with that so we can help with the catch up because it's really been there's that multiyear backlog and we don't see Labor situation getting any better. And then we see all these positive drivers around the Investment Act, around reshoring, around energy efficiency. And we think to ourselves, not only we have to catch up every year from weather and that, but now we have other things that are stimulating demand for future, and we think are going to consume labor. So I mean that's really what drives a lot of our effort into new products and the investment there.

Speaker 2

But Those are the two things that I would say make us a little conservative about how much we can catch up. Although, like you and like all of our shareholders, we'd love to do some catch up as quickly as possible.

Speaker 6

All right, all right. Okay. And I just want to clarify, you talked A number of different calls in the past about the fact that a good percentage of your business does not go through distribution, but goes directly to contractors. And You've already, I guess, commented in passing earlier in the call that the inventory surplus is occurring both at distributors and at contractors. And I guess I just was hoping you could give us an update in terms of just how should we think about the percentage of your business that is actually going through distributors with the products being I was being delivered to a distributor versus direct to the job site and how that maybe has changed since maybe a year ago.

Speaker 2

Yes, that's a good question. I really appreciate the fact that you clarified that statement around how much we sell to A contractor and how much we deliver direct because there is a difference and that's what I made a comment earlier on pricing that I'm going to say 90 plus percent of our sales go through distribution, while delivery is probably in the 60% to 70% are shipped direct to the contractor. Did that change during COVID? I don't know that that did. My guess is it may have just because of some of the local constraints around PP and E on A job site with masking and that kind of stuff that it might have been more beneficial for the contractor to take it directly as opposed to come to a distributor and pick it up or interface with Employees delivering to the site, but I don't have any details on that.

Speaker 2

So my guess is it hasn't changed much over than that.

Speaker 6

Okay. Last question for me is just the extent of production curtailments that you've undertaken here to compensate for this. How would you quantify those production curtailments visavis the actual shipment reductions? In other words, I guess, what's happened to Your finished goods inventories.

Speaker 3

Yes, we've cut back shifts and we've Cut back temp labor, that piece of it, but trained labor, we're holding on to that piece of it. We still are Domestic for the second half

Speaker 2

of the year and going into 2024. Yes. Your comment about inventory, we really, As I mentioned earlier, we build in the winter months and so our inventory has not gone down. If anything, it's gone up of the needs we're going to have in Q2 and Q3.

Speaker 6

Okay. So if you do get a catch up, you've got inventory ready to go?

Speaker 2

Absolutely. And more capacity with Sykes and coming on in the TPO, the 16 foot line that gives us some additional capacity too.

Speaker 6

So Yes. Good luck with that. Thanks, Chris.

Speaker 7

Thank you. Yes.

Operator

Thank you for your questions. The next question is from Dan Oppenheimer with Credit Suisse. Please go ahead.

Speaker 11

Thanks very much. Was wondering on the CTM side, given the weather issues that occurred in the Q1, which obviously prevented some of the reroofing, but also the inventory issues since delaying. As you As we get to sort of more normal conditions here in the Q2 with better weather and such and we work through some of the inventory, do you think there's Essential that there is that more pent up demand with it. And if so, is there the ability to service it in terms of labor and such? Or is there not so much of a catch up?

Speaker 11

How do you sort of view the potential for that?

Speaker 2

Yes, I think that's what we just talked about and I'll just repeat it though, which is that we think there is a labor constraint. There is demand, but the demand is really on top of probably some demand that was built up during COVID as Well, and so this all has contributed to a backlog that already existed for roofs that were aging Yes, hitting their 17, 18, 19 year age and we're needing to be re roofed. So the labor constraint probably in that case is the biggest one in Q2 And just can you get crews to put it down. So my guess is and maybe I'm being conservative, but that there won't be much catch up in Q2. For contractors on job sites, most of what we're talking about is there's catch up from us being able to serve out of our inventory rather than serve that demand from distributor inventory that's already on hand or the contractor.

Speaker 2

So again, when we look at opportunities for catch up, I'd point Q4 and Q, Q4 of 2023 and Q1 of 2024, where a shortened, winter season on either end would help give some days and some opportunity to catch up there.

Speaker 11

Great. And I guess on the CWT side, given what we've seen, some decent signs in terms of residential construction here. Any sort of more positive view, like I was still a little early, but just, are you feeling any better there in terms of trends over the course of this year than you might have recently.

Speaker 2

Yes, definitely. I mean that was a tough blow to the resi Okay, Andrew, to CWT on the resi side, but we're optimistic coming into the season. I think a couple of things that also really bolster my excitement around CWT. Our one, COS is getting fully implemented at Henry and Frank Reddy and the team there have Just become believers in that and our factories are getting more efficient. We've actually had a couple of sites that have been Eliminated and we've put that production into other sites, so we're getting more efficient there.

Speaker 2

We're driving automation there. And then new products are taking hold and we've got some new products coming out this spring that are that have been introduced before a couple of new ones coming out now that really again increase the efficiency and effectiveness of what the contractor is doing. So that coupled with good Exposable income and people that are interested in investing in their homes again for the summer months and making repairs in that. Yes, we're very positive on it. We still Again, even with all the issues, the team is still delivering on their synergy number and along a lot of the other initiatives we had under the deal model.

Speaker 2

So yes, we're very optimistic about what they can do.

Speaker 11

Great. Thank you.

Operator

Thank you for your question. There are no questions waiting at this time. So I'll pass the conference back over to Chris Koch for any additional remarks.

Speaker 2

Well, thanks, Francis. And that does conclude our Q1 2023 earnings call. I want to thank everyone, Thank you for their participation, the great questions and the interest in Carlyle, and we look forward to speaking with you at our next earnings call. Thank you.

Operator

That concludes The Carlyle Companies Q1 2023 earnings call. Thank you for your participation. You may now disconnect your line.

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