Carlisle Companies Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2024

There are 12 speakers on the call.

Operator

Good afternoon. My name is JP, and I will be your conference operator today. At this time, I would like to welcome everyone to The Carlyle Company's Q4 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 like to turn the call over to Mr. Mehul Patel, Carlyle's Vice President of Investor Relations. Mehul, please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. Welcome to Carlyle's 4th quarter 2023 earnings call. I'm Mehul Patel, Head of Investor Relations for Carlyle. We released our Q4 and full year 2023 financial results today, and you can find both our press release and the presentation for today's call in the Investor Relations section of our website. On the call with me today are Chris Koch, our Board Chair, President and CEO along with Kevin Zimmel, our CFO.

Speaker 1

Today's call will begin with Chris. He will provide highlights of our results and accomplishments, followed by Kevin, who will provide an overview on our financial performance and an update on our outlook for 2024. Following our prepared remarks, we will open up the line for questions. Before we begin, please refer to Slide 2 of our presentation, where we note that comments today will include forward looking statements based on current expectations. Actual results could differ materially from these statements due to a number of risks and uncertainties, which are discussed in our press release and SEC filings.

Speaker 1

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

Speaker 2

Thank you, Mehul. Good afternoon, everyone, and thank you for joining us on Carlyle's Q4 2023 earnings call. Turning to Slide 3, I would like to start by extending my sincere appreciation to all of our team members for their dedication and commitment executing our Vision 2025 strategy over the past 5 years and helping to drive significant progress and value creation during 2023. The past year represented a challenging and dynamic year for Carlyle. The first half of the year was impacted by continued de stocking in our markets and the related challenges driven by supply chain constraints for many building products, including ours in 2022.

Speaker 2

Despite those first half challenges, markets began a return to a more normalized order pattern beginning in the Q3 of 2023. This resulted in the second half of twenty twenty three that was marked by increasingly positive momentum. In addition to delivering a record Q4, Carlyle finished 23 was one of the most significant events in our 106 year history. The completion of our well communicated pivot from a diversified industrial portfolio of businesses to a pure play building products company. Accompanying that strategic pivot was the successful achievement of our goals under Vision 2025 and the much anticipated release of our Vision 2,030 strategy, which builds on Vision 2025 as new key initiatives such as an increased emphasis on innovation and further unlocks the full potential of our pure play building products portfolio.

Speaker 2

We are very pleased to have finished 2023 on a record note despite the very dynamic and uncertain market conditions we experienced through the year. Our 4th quarter results surpassed the expectations we communicated on our last earnings call in October, largely driven by better than expected CCM sales and better profitability in CWT. We achieved record 4th quarter adjusted EPS of $4.17 which was an increase of 30% year over year. Our EBITDA margin of 26.4 percent improved by an impressive 4.40 basis points year over year on 2% lower sales, clearly demonstrating our ability to maintain our margins through economic cycles. In the Q4, we benefited from more favorable weather conditions, solid contractor backlogs, stronger operating efficiencies and the power of the Carlyle experience to drive favorable price to value in our businesses.

Speaker 2

CCM and CWT continue to produce industry leading margin and EBITDA results Despite lower volumes and continue to deliver consistent value creation, the strength of our Building Products segment financials are now fully unmasked and on display with the pivot. Looking at our full year 2023 sales, despite a 16% decline in sales, We maintained an EBITDA margin in excess of 25%. Importantly, most of the lower volumes were mainly attributable to channel destocking, interest rate driven project delays and weather headwinds we experienced predominantly in the 1st 9 months of 2023. We are very pleased to be entering 2024 on a positive note with destocking behind us and with positive momentum. Furthermore, We achieved a stellar ROIC for the year of 27%, which is aligned with our stated goal under Vision 2,030 of exceeding 25% per year.

Speaker 2

This performance is a testament to our focused execution at CCM and CWT, the efficiencies derived through the Carlyle operating system, The Carlyle experience and our ability to price our products consistent with the value they create for our customers reinforced daily by delivering an innovative and compelling value proposition. Now let's turn to Slide 45. Following the release of our Vision 2,030 strategy in December, we were pleased to announce in late January that we had reached an agreement to sell our CIT business to Amphenol for just over $2,000,000,000 The sale of CIT represents the final step in our successful strategic pivot from a diversified portfolio of general industrial businesses to a premier pure play building products company. This sale is an important milestone and that it showcases our financials and allows our building product segments historical track record of growth and best in class returns to be clearly seen. With the expected proceeds from the CIT sale combined with our 15% plus free cash flow margin, we now have an even stronger capital base that provides exceptional flexibility to execute on our highest returning capital allocation priorities and supports the investments contemplated in Vision 2,030.

Speaker 2

In 2018, we embarked on our Vision 2025 journey with the goal of being superior capital allocators, While seeking to drive 5 plus percent organic growth, leveraging that growth into earnings, making synergistic acquisitions, driving efficiencies through the Carlyle operating system, investing in talented people, returning capital to our shareholders and ultimately creating value for all our shareholders. During 2021 to further demonstrate our desire to be a superior capital allocator, We made the decision to pivot our portfolio to our highest returning building products businesses. Since the introduction of Vision 2025, we have nearly doubled revenue on our building segment more than doubled EBITDA in those segments and increased free cash flow by over 200%. Furthermore, we exceeded our earnings target of over $15 per share 3 years ahead of our commitment in our Vision 2025 plan. We are proud of these accomplishments, which we view as significant milestones that validate our strategies and actions over the last 6 years and clearly demonstrate our commitment to an ROIC focused capital allocation strategy.

Speaker 2

One of our key drivers of success is our ability to offer a compelling value proposition through what we call the Carlyle experience. The Carlyle experience can be defined simply as getting the right product to the right place at the right time. In other words, delivering on our commitments to our customers. We complement the Carlyle experience with a strong focus on innovation and specifically innovation that delivers energy efficient and labor saving solutions. This focus has aligned well with the increasing demand for green buildings and products, the increasing need of customers to reduce GHG emissions and to conserve energy and the need for our customers to address the forecasted significant labor constraints through improved job site productivity.

Speaker 2

As we move on from the success of Vision 2025, We now turn our attention to Vision 2,030 and our emphasis on our building products portfolio of businesses. As we stated in our Vision 2,030 video released in we plan to continue to deliver on our foundational strategies that produce such positive results these last few years under Vision 2025. Coupled with major secular tailwinds, we are committed to delivering innovative building envelope solutions, driving above market growth and unlocking additional value for shareholders in this next important phase of Carlyle's growth journey. The key pillars of Vision 2,030 include enhanced levels of innovation, a continued emphasis on synergistic M and A, attracting and retaining top talent and holding steadfast to our sustainability commitments. As we look to fulfilling our commitments under Vision 2,030, a key lever in our pursuit of higher margins will be increased spending on innovation.

Speaker 2

As such, Carlyle is differentiating itself with a goal of investing 3% of sales to drive the creation of new products and solutions that add value through advancements in sustainability, energy and labor efficiency. Additionally, we aim to continue to enhance our customer relationships through continued investments in the Carlyle experience. This includes advancing our digital experience for customers and is exemplified by our recently released mobile friendly customer success portal at CCM. This portal provides Carlyle customers with a unified and mobile platform for real time engagement, including access to product catalogs, personalized pricing, order status, delivery tracking and enhanced communication with our customer service and operations teams. Overall, we delivered a strong finish to 2023, maintained our historically strong margins and exited the year on an extremely positive note.

Speaker 2

Our Vision 2,030 strategy is in place and we are now a focused and simplified building products company. We are motivated to leverage the industry megatrends, drive innovation and demonstrate margin resiliency through economic cycles to deliver superior ROIC and compounding EPS growth. With our solid foundation and a strong team in place, We are confident in achieving our goals set under Vision 2,030. As we begin 2024, we are optimistic about the positive momentum building in our end markets. The inventory destocking headwinds we faced over the past year largely in commercial roofing are now behind us, setting the stage for a more normalized buying profile in 2024.

Speaker 2

We expect combined benefits from the tailwind of prior year customer destocking and a strong backlog of reroofing projects due in part to constrain labor to collectively mitigate potential risks in the year ahead. As such, we have a positive growth outlook 2024 that we believe is reasonable, achievable and fully supported by our Vision 2,030 strategic objectives. Kevin will touch further on our 2024 growth expectations and outlook later in the call. Now please turn to Slide 6 as I share some updates on our progress with Carlyle's sustainability initiatives. Sustainability is a core focus for our organization.

Speaker 2

We to positively impact the environment while creating value for all our stakeholders through our 3 pillar sustainability strategy. The 3 pillars are manufacturing energy efficient products, minimizing our value chain greenhouse gas emissions and diverting waste and end of life materials from landfills. Under our first pillar, we provide end users access to solutions that drive energy efficiency in their buildings. As an example, adding 1 inch of polyiso insulation to a 50,000 square foot roof can save building owners as much as $110,000 and avoided energy costs over the service life of the building. Our second pillar reducing our operational and value chain emissions helps Carlyle reduce our carbon footprint and the negative environmental impacts.

Speaker 2

As an example, let's take our blowing agents and our spray foam operations. We finished the year converting over 50% of our HFC legacy spray foam products to a more environmentally friendly HFO HFO formulation amounting to over 250,000 metric tons of greenhouse gases avoided, a compelling achievement. As a reminder, HFCs are 1,000 times more carbon intensive than HFOs. Carlisle also obtained 5 additional ISO 14,001 certifications through 2023, bringing our enterprise wide total to 26. Additionally, our Montgomery Polyiso Plant recently obtained ISCC Plus Certification, clearing the plant to run bio based MDI and polyol on a mass balanced approach.

Speaker 2

This is a pivotal achievement in Carlyle's ability to manufacture and extend the credits of bio based polyiso to its customers. Lastly, our 3rd pillar focuses on the reduction of construction waste entering landfills. As an update here, Carlisle's rooftop takeoff program diverted over 1,000,000 square feet or 120 metric tons of reclaimed insulation and membrane materials from landfills throughout 2023. We have also expanded incentives for the program, which we believe will further expedite its growth and adoption amongst our customers. I personally take great pride in Carlyle's sustainability legacy spanning over 100 years.

Speaker 2

Carlyle's commitment to operating efficiently, minimizing waste and offering solutions to empower end users in reducing energy consumption has been ingrained in our culture and will be essential to our success in the future. And with that, I'll turn it over to Kevin to provide additional financial details as well as our 2024 outlook. Kevin?

Speaker 3

Thank you, Chris. Looking at our 4th quarter results on Slide 7, Despite a 1.9% decline in revenue, we were able to expand our EBITDA margins by 4.40 basis points to 26.4%. Furthermore, we achieved record 4th quarter earnings with an adjusted EPS of $4.17 an increase of 30% year over year. Looking at our segment highlights Starting with CCM on Slide 8. CCM delivered 4th quarter revenues of $816,000,000 up 1.9% from the Q4 of 2022.

Speaker 3

The increase was driven by favorable weather and the return to normalization of order patterns, including the end of destocking in the channel. CCM EBITDA increased 12% to $255,000,000 with EBITDA margin up 270 basis points to 31.2%. This was driven by a combination of leveraging higher volume growth, favorable input costs and realizing cost savings through the Carlyle operating system. Moving to Slide 9, Revenues at CWT decreased 11% year over year, primarily due to the well known declines demand and the exit of a non core business in the Q1 of 2023. However, Despite the revenue decline, we were able to drive EBITDA growth of 54% to $69,000,000 This represented an EBITDA margin of 22.2 percent, expanding an impressive 9.40 basis points From the Q4 of 2022, the margin improvement was bolstered by operational efficiencies gained through targeted restructuring actions, strategic sourcing and the realization of synergies from the Henry acquisition.

Speaker 3

Synergies now exceed $50,000,000 significantly above our deal model estimate of $30,000,000 Slide 10 provides a year over year 4th quarter adjusted EPS bridge items for your reference. Moving to slides 11 through 13. Carlyle ended the 4th quarter of 2023 with $577,000,000 of cash on hand. We had $1,000,000,000 of availability under our revolving credit facility. We generated operating cash flow from continuing operations of $1,000,000,000 and invested $142,000,000 and capital expenditures.

Speaker 3

Our free cash flow margin was 20% in 2023 And we ended the year with a solid net leverage of 1.6 times comfortably below our 2 to 3 times Long term target. Our disciplined capital allocation framework remains focused on delivering ROIC in excess of 25%. As stated in Vision 2,030, we continue to focus on being a superior capital allocator by investing in our high ROIC Building Products businesses, making synergistic acquisitions that deliver significant opportunities for value creation and repurchasing shares given our attractive valuation. We deployed $900,000,000 towards share repurchases during 20 $3,000,000 and paid $160,000,000 in dividends. This represented our 47th straight year of dividend increases.

Speaker 3

Expanding on share repurchases, at the end of the Q4, we have 7,400,000 shares available under our share repurchase program. Notably, the $2,000,000,000 of expected proceeds from the CIT sale provides us with additional dollars and flexibility to execute further share repurchases and fund our high returning capital allocation priorities. Overall, we believe our Steen balance sheet, conservative leverage profile and ample liquidity positions us to drive additional value creation in 2024 and beyond. Turn to Slide 14 to see our full year 2024 financial outlook. We expect 2024 revenues to increase by approximately 5% versus 2023 and EBITDA margins to expand by 50 basis points.

Speaker 3

We remain focused on disciplined pricing as we leverage greater operational efficiencies and effectively manage costs through our continuous improvement efforts. Additionally, We expect to deliver free cash flow margins of 15% and ROIC in excess of 25%. As such, we expect double digit EPS growth in 2024. This is directly aligned with outlined in our Vision 2,030 strategy and a positive first step towards a $40 plus EPS target. Looking at the components of the outlook.

Speaker 3

For CCM, we expect year over year revenue to grow approximately 6% in 2024. The primary drivers are the tailwinds from the return to normalization in order patterns that was absent during 2023 due to destocking. For CWT, we expect year over year revenue to grow Approximately 4% in 2024. Strong sales execution on key growth initiatives And stronger trends in residential should more than offset any headwinds posed by non residential markets. With that, I turn it over to Chris for closing remarks.

Speaker 2

Thanks, Kevin. In closing, I am grateful for the hard work and dedication of Carlyle's employees that was demonstrated throughout 2023. As they have in the past, our teams demonstrated their resilience, perseverance and a commitment to excellence and delivering value in a difficult environment. I would also like to specifically call out and thank John Berlin and the entire team CIT for their many years of significant contributions to Carlisle. CIT was one of the longest owned assets in the Carlisle portfolio and began with our acquisition of the TensorLyte Company in 1959 through a commitment to innovation, Industry leading operations and a unique combination of organic growth and synergistic acquisitions, CIT He embodied the key tenants of value creation at Carlisle.

Speaker 2

We wish John and the entire team the best as they become part of the Amphenol family. Turning to 2024, we have entered the year with significant positive momentum and a clear focus on the goals outlined in our recently launched Vision 2,030 Growth Strategy. We are confident that our ability to innovate with a focus on energy efficiency and labor saving solutions puts us on the right path to drive above market growth and in return drive superior financial results. The improved profitability by our simplified building products portfolio, a robust free cash flow engine And the expected proceeds from the sale of CIT leave us well positioned to achieve significant value creation for shareholders and deliver another year of industry leading ROIC in excess of 25%. That concludes our formal comments.

Speaker 2

Operator, we're now ready for questions.

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. Your first question comes from the line of Tim Wojs from Baird. Your line is now open.

Speaker 4

Hey, guys. Good afternoon. Good afternoon. Maybe just To start on CCM, is there a way to maybe bridge some of the underlying assumptions on the 6% revenue growth. So just really kind of interested in how much you're kind of baking in for the lapping of destocking, kind of what the underlying implied kind of volume growth is, what would kind of be on the roof or sell through and then how are you thinking about pricing as well?

Speaker 3

Yes, Tim. So overall expecting CCM to be up about 6 percent in 2024, we have the destock benefit, that's about 11% benefit. And then pricing, we expect to be down really from the carryover from 2023, which is about 2% to 3%. And then the overall end market also down about 2% to 3%.

Speaker 4

Okay. Okay, good. And then I guess on pricing, where do you think the industry kind of stands there? I guess we've heard mixed anecdotes around where kind of pricing stands. I'm just kind of curious how you see it.

Speaker 4

I mean, you said carryover pricing, which would assume that maybe things have stabilized, but Just kind of curious on your comments on price.

Speaker 5

Yes. I think, Tim, we thought 2023, given the significant sales declines, we thought Pricing held up really well. Through most of the year, it fluctuated, but I would say it was stable. When we look back, we've got a couple of components in there too. We've got the core roofing, we've got the CAM, we've got Europe and we've got some mix.

Speaker 5

And so I think Overall, I'd characterize it as stable. And we go into this year, I think it'll be pretty much the same thing. That's what Kevin is talking about with the 2% to 3%. But again, it's early. It's Q1, it's January.

Speaker 5

But I think definitely given all the declines last year, I thought the pricing held in there and maybe that gets to some of this pricing to value and what we're providing and others are providing.

Speaker 4

Okay. Okay, good. And then just on, I guess, reroofing, how much visibility do you kind of walk into a year with On the reroofing side, I'm just trying to kind of think through the ability of a building owner or a contractor to kind of push that around Based on other dynamics, but how would you think about The underlying reroofing backlog and just your visibility to that as you go into 2024?

Speaker 5

Well, I think it's still there's a good backlog. Obviously, when new Construction was cooking there. We had some backlog. We've got the labor constraints. We tend to look at a macro level.

Speaker 5

We've gone through the chart with looking back 20 years and what's coming due. We know we have Our share of the market that when it is warrantied, we also know when those roofs are coming due. We think that the average roof in the industry is a 20 year roof based upon our warranties. I mean, there longer warranties you can buy, but on average it can be about 20 years. So we track all that.

Speaker 5

I think the thing is you're talking about a very Dispersed demand pallet across the entire United States is this reroofing. And you've got some things in there where you can patch and Some people will repair and replace early. Others may delay a variety of functions. But I think overall, we try to get a sense through Surveys, we talked about 2 surveys we did last year with about 600 contractors talking about what was happening in their markets around the country. And then obviously, Steve Schorr, Frank Grete and their sales teams are out there every day talking to them.

Speaker 5

So we think the visibility is pretty good. I think those other things just create some difficulty in pinning it down. So as we go in, as Kevin said, we're looking That 11% on the tailwind from destocking and I think if we looked at the industry in general, we're back at that mid single digits that we've been at historically, The combination between reroofing and new construction and we think reroofing is holding up well.

Operator

Okay. So then just

Speaker 4

to confirm, If volumes should be down 2% to 3% and then just based on your mix, I mean, you probably have reroofing flat to up some and then new construction Kind of down in the high single digits or something like that?

Speaker 5

Yes. I think going in the year, that's how we're thinking about it. A little pressure on new construction from the streets and The economy and then reroofing picking that up with the backlogs. Yes, exactly.

Speaker 6

Cool. Awesome. Thanks for

Operator

the time guys. We'll talk soon.

Speaker 5

Yes. You bet. Thanks Tim.

Operator

Your next question comes from the line of Brian Blair from Oppenheimer. Your line is now open.

Speaker 7

Nice afternoon, guys. Nice finish to the year.

Speaker 6

Hey, Brian. Thanks.

Speaker 7

Your guidance Strikes us as a touch conservative, especially given the momentum you have coming through Q4 and knowing the comps that you face, but it's early and leading some uncertainty To the upside, it's certainly fine. But the level set on the framework, maybe walk us through how you're thinking about the cadence of sales and margins throughout the year. And if you can speak to those dynamics by segment, that would be extremely helpful.

Speaker 3

Yes. So let's Start with sales and how we're looking at sales is really what our historical seasonality has been. So if you go back pre COVID, The 3 year average on sales at CCM, the Q1 is typically about 20% of full year sales, Then the 2nd quarter is about 29%, 3rd quarter was 27%, And the Q4 was 24%. And those were the historical averages and we think 2024 is going to be a more normal year that's what we're expecting on the CCM side. For CWT, they're pretty much the same on the quarterly.

Speaker 3

The only difference is The first half of the year where CWT historically has been a little bit stronger in the Q1, so about 22% of sales And then 27% of sales in the second quarter and then the second half of the year was the same as CCM. Then if you look at the EBITDA margin, overall, we would expect the really the incrementals that we've talked about to drop through based on those sales numbers at CCM, it's about 40% incrementals. CWT's low to mid-30s and the incrementals, only difference out of all of that is the Q1 for CWT. That one just based on just how the numbers are playing out. If you look at it, CWT should increase a couple of 100 basis points in Q1.

Speaker 3

So that's one exception to what I just talked about. And that improvement is really from the carryover of all the synergies that they picked up in 2023.

Speaker 7

Okay. Appreciate the detail there. It's very helpful. How did price cost shake out for CCMN, CWT in 2023? And then what have you baked into guidance on that front?

Speaker 7

And just running the simple math, we assume that all of growth is volume based. And thinking about the normalized incrementals that you just referenced, the 50 basis points seems to come exclusively from growth and that drop through, but I suspect price cost remains a good guy for you guys coming into the year, and it's certainly Typically a lever for the Carlyle story. So just curious how you're thinking about that, But starting with how price cost shook out last year? Yes.

Speaker 3

For 2023, we had given a range In the Q3 and we hit the top end of that range where we came in for CCM at $80,000,000 benefit, That's for the full year. CWT for the full year was $40,000,000 benefit. As we get into 2024, As you said, maybe a little of the numbers were conservative. This is one where we're pretty much looking at price Raw is to be flat for both segments. And that's offsetting that 2%, right, 2% to 3% price down.

Speaker 3

So obviously, there's a benefit of the raws to make that a flat number.

Speaker 7

Okay, understood. Appreciate the clarification. And then last one, staying on the margin bridge, how much of a step up in R and D Expense are you factoring in for this year? We know the 3% target kind of medium to long term. How is that being phased in?

Speaker 7

And What's the near term focus for the team? We've kind of come to the conclusion that it's More evolutionary focus in terms of product development for the time being and perhaps more revolutionary over time. Just curious about the sales.

Speaker 3

Yes. So R and D expense overall is about 80 basis points as a percent of sales And we're looking to nearly double that in 2024.

Speaker 5

Everyone can hear the operator was dropped from the call. So we're just waiting To have the operator rejoin and then we'll resume the questions. So if you can hear, please be patient and we will get this technical

Operator

Thank you. And your next question comes from the line of Saree Boroditsky from Jefferies. Please go ahead.

Speaker 8

Hi. Glad we had the technical issues fixed. So I want to talk a little bit about cash. You're about to receive almost $2,000,000,000 in proceeds. So just and you did a lot of share buybacks already, but what's the type this year for share repurchases and then what are you seeing from an M and A pipeline perspective?

Speaker 8

And then just ultimately, How are you thinking about the optimal capital structure for your business?

Speaker 3

Yes. So From the cash, one piece we do have in 2024 is $400,000,000 of debt coming due in the Q4. So we'll use Some of the cash there, we have dividends, that's about $160,000,000 And then at that point, we'll invest in the R and D and some of the capital Capital expenditures, we put out $160,000,000 to $180,000,000 And then it comes down to share buybacks versus acquisitions. We've Been doing about $400,000,000 a year in share buybacks. We'd expect to do that, plus We're allocating right now is about a half of the CIT proceeds to put that also towards share buybacks this year.

Speaker 5

I can talk about the pipeline if you want. Marie, did you want to ask any more about the share repurchases? You had 3 things there. I think maybe just and make sure you got everything you need on share repurchases.

Speaker 8

No, that's good. M and A pipeline next would be great. Thanks.

Speaker 5

Yes. And then we'll get this optimal capital structure. Yes, the M and A pipeline has been a little bit, I think, all the way around slow. We are seeing deals. We'd like to see more.

Speaker 5

Hopefully, we see Things free up a little bit more as the spring gets here, interest rates change a little bit. But I think we're following kind of the same pattern you're seeing With everyone else, the just 23% was not a great year for M and A and probably not a great year for people selling their businesses. So we're still optimistic there are things out there we can add to the building products portfolio in the envelope. I mean, as a reminder, as we said in Vision 2030, we're going to be really we have some really specific hurdles for them. We want to have an organic growth story within the asset that we're buying.

Speaker 5

We want to make sure that there are really hard synergies like we had with Henry, not just sales synergies and things that are hope for, but real raw material savings and plant savings like we did with Henry. We want to have a really good management team. And this is the one that I think in the Henry acquisition has been the hardest in the past is to get that type of management team that we had coming in with Henry that just right off the bat picks up The integration playbook, which is number 4, and then they run with it and we get I don't know if you've heard recently, but the Synergies we estimated of $30,000,000 with the Henry deal. Now we've exceeded $50,000,000 And a lot of that really is to that great management team, that great integration playbook and no pause once they were acquired. So when you layer those things on, I think we're a little bit more picky than most.

Speaker 5

But I think Henry is a great example of what we want to do with M and A and I think there are more out there like that, just harder to find. And then Kevin will pick up on the capital structure.

Speaker 3

At Capital Structure, we're looking to have net debt to EBITDA in the range of 1 to 2 times. And the times looks like it's above that, if it's the right acquisition like we did with Henry, and then our plan is to pay that back Within 18 to 24 months to get us back in that 1 to 2 times net debt to EBITDA ratio.

Speaker 8

And so I guess given where kind of the M and A pipeline is, you talked about half of the proceeds for buybacks. So within your guidance, you have about $20,000,000 of net interest expense. But given that you're expecting to hold on to some of these cash proceeds, Should you not realize some interest income on that? And how do you think about earnings interest income within your guidance? Thanks.

Speaker 3

Yes. So interest expense is around $70,000,000 and then yes, we have about $50,000,000 of interest income. So, 70, 50 and then the net $20,000,000

Speaker 8

Okay. Thanks for the questions.

Operator

Your next question comes from the line of Garik Shmois from Loop Capital. Your line is now open.

Speaker 9

Hi, great. Thanks for having me on. Just wondering, if you could just speak to a little bit more of your view of the market And CCM being down 2 to 3 points. I appreciate that the view is that the repair side could be flat and slightly up and then new down high single digits or so. But just curious as where are you seeing maybe some upside or downside risk To that market outlook, would it be more repair versus new or anything you could add as to how you're assessing the variance around the market outlook?

Speaker 5

Yes. I think, Eric, the biggest thing for me is this idea that This interest rate environment that we've been facing in the economy, I mean, we're not unique in this idea that we're going into the year. First, we hear there's going to be 3 interest rate cuts. Okay, that's super positive. We like that.

Speaker 5

Then we hear no, we're going to pull back on that. I think Neil Casquari came out, Minneapolis said and said, maybe it's too soon to talk about that. So we've got that. We've got the economy that everybody's on pins and needles about with Obviously, employment and other things like that. So I think as we sit here, the hard thing for us to do is to be sitting in January, which is in the Q1 our lightest, as Kevin mentioned, 20% of overall sales and trying to forecast that with the real construction season is going to be in the Spring and summer.

Speaker 5

So right now, we're saying, as we did On the 2030 video that things are relatively stable and they're moving along as we expect. And so we're kind of looking at historical averages, we're looking at what we get From the market, what our sales teams are telling us, what we're seeing in project pipeline, we also get the things like Dodge report. We actually read your reports when you do your surveys and your pulse checks and those kind of things that take all into account. So I think the biggest thing for us is just, it all feels optimistic right now and We like that, but when we get down to granularity, looking at the economy be the biggest variable. And then we look at specifically into some of the verticals.

Speaker 5

And when you look at 2024, we see that continued, I'd say, pressure on warehouses specifically, I had to call out one that seems to be the biggest decliner would probably be warehouses. I think Dodge has it somewhere in the High teens, low 20s forecast for 24. Education looks pretty good. Retail stores, healthcare, we still think there's a And there and it seems to be happening with an aging population that we'll see more long term care. Medical seems to be good.

Speaker 5

There seems to

Speaker 3

be a lot of money

Speaker 5

in medical. And then we get the reassuring on manufacturing, which I think Dodge estimated it was somewhere around 8% in 2023%. And then I think the last one really is the office We don't deal on the tall buildings that we had city cores and there was a lot of distress there with the work from home. But we're more in the low 3, 4 storey buildings and we think that's good. Suburban office buildings have been pretty good.

Speaker 5

So that's kind of how we see the verticals. And then I think we just layer in the reroofing on top of that. And obviously, that's a little bit less vertical dependent and more dependent on the age of the roof. So again, optimistic about 2024. I think specifically if we are continue to see the economy perform as it is and we do get a couple of cuts, it could be A pretty good year going forward, especially with the fact that I would say that there's been we had the destocking, but we haven't really had in this winter period of return to restocking, which typically back 4 or 5 years ago before COVID, There was always a load in, in the spring, in the March April timeframe.

Speaker 5

So there may be some of that too, if the economy turns around and things look good.

Speaker 9

Thanks for all that and I appreciate the plug. I guess, follow-up question is just on CWT, Maybe similar, you touched on some of these things in the prior answer. But coming down to 3Q, you specifically indicated that were some more project delays than we anticipated in CWT. It certainly is more on the commercial side than residential. But just curious, Has that maybe pacing continued or maybe from the sounds of it, you're seeing some stabilization.

Speaker 9

But just wondering if you could address some of those project delays in CWT and what occurred in the Q4?

Speaker 10

Yes. Hey, Garik. It's Mehul here. I'll take that one. So overall, to your point, 2023 was very challenging, given the dynamic nature of the macro environment.

Speaker 10

That's what impacted The project delays in 2023, the way we see it now, it's basically stabilized. I think more or less the economy is kind of What it is around higher interest rates and what's going on with non residential, so I characterize it as being stable. And then overall, On the CWT side, specifically on the commercial side, we're mainly focused around the institutions, All education and government, so those tend to be a little bit more stable as well.

Speaker 9

Understood. Thanks for that. I'll pass it on.

Speaker 3

Thanks, Gerrick.

Operator

Your next question comes from the line of David MacGregor from Longbow Research. Your line is now open.

Speaker 6

Yes. Good afternoon and thanks for taking my questions. Just to start off with a quick one. Hey, Chris, Any sense of what benefit the extended days in December may have represented this quarter?

Speaker 3

Yes, we think it picked up probably about 2 days of positive weather.

Speaker 6

Secondly, I wanted to ask you about market share in CCM. And clearly, during the pandemic, you guys want share. And so I guess the question is, if the market is stabilizing now, how do you defend that share now that they want it back And they're likely prepared to use price to get it. And then maybe within the context of the answer, you can just talk about what you're expecting in terms of CCM market share in 2024?

Speaker 5

Yes. I think for market share, I don't know, I don't want to get contentious. I would say that during COVID, I would say there were a couple phases to it. And maybe in the first phase when we came out, if you might recall, we had actually built inventory going into When others were declining and when we came out, we captured a lot of share. So there was demand we had it, others weren't able to provide and that was part to our belief of the Carlyle experience providing a lot of value to our contractors, right place, right product, right time, right.

Speaker 5

So we picked up share then. Then we did get through and as the time went on. We had others that implemented different types of techniques to get out into the market and to sell things. They handled their approach to direct sales to contract or maybe different or they funded distribution in a different way. And I think you're right, as we chose a path under, I think we called it our MSP program.

Speaker 5

We made some decisions and one decision was we felt it was better to, I would say being more democratic in our approach to funding distributors, we didn't put all the eggs with the biggest Distributors and contractors, we made sure that all of our long standing customers got a little bit so that everybody could survive. So we may have suffered a little bit there. And then I think there were some pricing as we came out into 'twenty three that some attempts to gain share through that in the first So quarter of the year, which exacerbated the destocking, but ultimately things guide as we've already touched on. It was a very stable year for pricing, so things came back. And so really when I look at the time I've been at COO to now 2014 to 2024, I would say that overall market shares have remained relatively stable.

Speaker 5

There's ebbs and flows and each segment is very Specific TPO is different than EPDM. EPDM is different than PVC. But on the whole, I think one of the reasons it stays relatively Stable for us is our great network of architect specifications, distributors and then the warranty, and specifying these things and viewing the whole is a system, which is what Mehul talks a lot about with Henry as well, and this idea that we're having a specified system. So I don't think 2024 will be any different. I think 2024 will probably play out in a similar way and market share will be relatively consistent around the big buckets of our business.

Speaker 5

The 3 roofing membranes, the insulation, so the accessories, adhesives and

Speaker 6

Great. Thank you for that. And then the last question I have for you was just with regard to the backlog that you referenced in your prepared remarks. Can you size that roofing backlog for us? And what would it normally be?

Speaker 6

So to what extent are you above normalized levels? And How are you thinking about the operating

Speaker 5

rate on that? I guess without I don't want to share too much and I would go back to maybe more of a public figure and I think ABI, I think has ABC, sorry, contractor bill. ABC. So that's that 8.6 that Kevin references is Pretty similar to what we've seen for the last few years. 9.1%, I think was there for a while.

Speaker 5

I don't think it's really dipped below 8.5%. So I think backlog has remained relatively consistent, which is kind of what we talked about with labor constraints that people are putting roofs on, but there's a healthy backlog of demand there.

Speaker 4

Got it. Thanks very much.

Speaker 3

You bet. Thank you.

Operator

Your next question comes from the line of Adam Baumgarten from Zelman. Your line is now open.

Speaker 11

Hey, good afternoon. Just looking at the margin guidance, The EBITDA margin expanding overall 50 bps, is that a bit more weighted or higher than the total company at CWT given the stronger start or is it relatively balanced across both businesses for the year?

Speaker 3

That's relatively balanced across both CCM and CWT.

Speaker 11

Okay, got it. And then just a couple others. 1, you mentioned the positive weather in 4Q just a

Speaker 5

moment ago. Was weather a

Speaker 11

headwind perhaps in January? And then also just on CapEx, kind of coming up a good amount and I know you guys noted some growth investments. Can you give maybe some more specifics on where you're spending that incremental CapEx?

Speaker 3

Yes. CapEx is going to be a couple Key areas, 1, R and D, we're going to continue to invest in the innovation and doing expansion there. We have certainly with COS, there's always cost reduction programs, whether it's through automation and those types of investments. And we also for future growth, there will be some capacity, not new lines or anything like that, but additional investments that will enhance some of our growth overall.

Speaker 11

Okay. I just thought the January weather, if that was anything notable.

Speaker 5

Not really. I would say, not that we've heard from the division. I think one thing is this rain in California And this atmospheric river that they talk about, I know Frank and the CWT team do a lot there on the retail side. Once those kind of things hit, obviously leaks appear and things like that, and that tends to be something that gets stocked up. So probably would have more of an impact here as we get into February a little bit further.

Speaker 7

Got it. Thanks. Yes.

Operator

There are no further questions at this time. Please continue.

Speaker 5

Thanks, operator. Well, that concludes our Q4 'twenty three conference call. Appreciate all the questions and the interest and look forward to talking to everyone soon. Thanks very much.

Operator

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

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Earnings Conference Call
Carlisle Companies Q4 2023
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