Carlisle Companies - Q2 2023

Transcript

Operator (participant)

Good afternoon. My name is J.P. I will be your conference operator today. At this time, I would like to welcome everyone to the Carlisle Companies' Q2 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will conduct a question-and-answer session. I would like to turn the call over to Mr. Jim Giannakouros, Carlisle's Vice President of Investor Relations. Jim, please go ahead.

Jim Giannakouros (VP of Investor Relations)

Thank you. Good afternoon, everyone, welcome to Carlisle's Q2 2023 earnings conference call. We released our Q2 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, carlisle.com. On the call with me today are Chris Koch, Chair, President, and Chief Executive Officer, and Kevin Zdimal, Carlisle's Chief Financial Officer. Today's call will begin with Chris providing highlights of our Q2 results and a discussion of our current business outlook, and Kevin will discuss additional financial details and our updated outlook for 2023. Following our prepared remarks, we will open up the line for questions. 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. As Carlisle provides non-GAAP financial information, we provided reconciliations between GAAP and non-GAAP measures in our press release and in the appendix of our presentation materials, which are available on our website. With that, I will turn the call over to Chris.

Chris Koch (Chair, President and CEO)

Good afternoon, everyone, thank you for joining us on our Q2 2023 earnings call. The Q2 proved to be a nice recovery story for Carlisle, with our performance evidence of the team's collective efforts to improve earnings and create value for all our stakeholders. We are grateful to all Carlisle employees for their continued perseverance in the face of significant challenges and for their contributions to making the Q2 a success. Most important is our team's commitment to continuously improving our businesses. As you know, in 2021, we decided to pivot Carlisle's portfolio of diversified industrial businesses towards becoming a building products pure play. Our recently announced sale of CFT represents another important step towards fulfilling that goal.

Our building products businesses represented over 90% of our segment EBITDA from continuing operations in the Q2 of this year, providing further evidence that our pivot is almost complete. We continue to believe that a pivot towards an innovative building products portfolio with a focus on providing energy-efficient solutions will allow our shareholders to benefit from the significant trends in greenhouse gas reduction and increased demand for green buildings and products, especially ones that require less labor to install. Our recently announced sale of CFT continues one of the themes we brought to Carlisle under Vision 2025, that being our desire to be a superior capital allocator and in turn, drive superior shareholder returns. This goal was a primary factor in our decision to use the proceeds of the announced sale of CFT towards share repurchases this year.

When combined with our share repurchases to date, our total capital devoted to buybacks in 2023 will be approximately $900 million. At CCM, despite continued channel destocking activity in the Q2, our teams collectively drove improved sales and excellent profitability. Margins improved significantly from a combination of volume increases, price discipline, cost management, and efficiency gains through COS. The last three quarters of destocking at our distributors and contractors has been a challenge that was made more difficult by the uncertainty related to its quantity and duration. As we enter the H2 of 2023, we have performed substantial work to understand the levels of inventory at distributors and contractors and reconciled that with current demand levels.

Based on this work, we believe that the vast majority of destocking issues related to supply chain constraints from 2021 and 2022 are now behind us. In CCM, as in all of our Carlisle segments, we enter the H2 of 2023 with our efforts focused on leveraging solid underlying demand, capturing raw material gains, and maintaining a positive price-cost relationship. Taken together, these areas of focus give us confidence that we will deliver another solid earnings performance for Carlisle shareholders in the Q3. Our outlook would be even more optimistic if it weren't for some near-term headwinds impacting the building products businesses. First and foremost, well-known and well-published information about this year's extreme temperatures across much of North America have negatively impacted contractors' days on the roof.

Here in the Phoenix area, for example, we have had over 26 days of 110 degree plus temperatures and excessive heat warnings. These elevated temperatures have played a role in our contractors' ability to safely install roofs on schedule. Certainly, every roofing contractor in Carlisle's sphere of business is putting employee safety and well-being first. In addition to the unique weather situation, we have seen an uptick in delays in projects due to growing economic uncertainty, tighter financing conditions, and the ever-present tight labor market for roofing contractors. Even with these headwinds, we still anticipate continued strong demand for our energy-efficient building products, particularly for non-residential reroofing products.

We remain very bullish on Carlisle's value creation runway, given strong and sustainable underlying reroofing demand, accelerating price to value gains through new and innovative products, and an increasing awareness by architects, building owners, contractors, local governments, and others for the need to drive efficient energy usage, upgrade the energy efficiency of our buildings, and decrease carbon emissions. Additionally, we believe that in both the non-residential and residential construction markets, our ability to exceed the expectations of our customers and distribution partners through the combination of the Carlisle experience and our Carlisle Operating System, will drive significant opportunities for share and margin gains that will deliver increased returns for our shareholders.

Our confidence in Carlisle's future rests on a multiyear backlog of reroofing projects in the U.S., supporting a healthy baseline of activity for our largest business, CCM, which has recently been further enhanced by the Inflation Reduction Act and its emphasis on utilizing a significant pool of assets to drive investment and energy savings. Solid, non-discretionary repair and remodel demand throughout the residential building envelope that makes up approximately 50% of CWT revenue and provides reliable through the cycle sales growth. Our industry-leading ability to meet the well-known, growing need for energy-efficient solutions for buildings, and to drive a reduction in carbon-related emissions from buildings that, as many of you know, account for close to 40% of global energy emissions. Carlisle's robust pipeline of proprietary, innovative new products coming to market, accelerated by our increased investment in R&D.

Our collective team's subscription to delivering the best-in-class Carlisle experience to all our stakeholders, and the financial flexibility and strategic optionality afforded us by Carlisle's fortress balance sheet and excellent cash flow-generating ability. This strong financial position allows for Carlisle's disciplined, value-creating acquisition strategy, ability to comfortably fund internal growth initiatives, and consistent and reliable return of capital to shareholders in the form of a growing dividend and opportunistic share repurchases. Turning to our results, please turn to slide 3. In the Q2, we delivered consolidated sales of $1.5 billion, adjusted EBITDA of $385 million, and adjusted EPS of $5.18. I'm very pleased with the Q2 results, as they are a superb reflection of our earnings power as a company and have resumed the continuous improvement trends we were on, especially as it relates to margins.

CCM's channel destocking was, as we believe, transitory, and while it was a challenge and caused some temporary impacts to CCM, it did not affect our fundamental business model. We remain focused on delivering products that support increasing demand for energy-efficient buildings and meeting contractors' needs for innovative, labor-reducing products. Turning to CWT. Revenues in the Q2 were generally in line with our expectations, while profitability was exceptionally strong. The CWT team continues to execute exceptionally well on realizing the synergies planned with the Henry acquisition and an outstanding job of integrating the legacy CCM businesses into the new segment of CWT. Needless to say, these efforts are delivering returns ahead of the original deal model.

The team is also doing an excellent job of taking costs out through footprint reduction, leveraging customer relationships to drive increased sales across their businesses, improving efficiencies in our plants, and managing price cost effectively. Building on the solid performance in the Q2, we expect this positive EBITDA growth story to continue for the rest of the year and now expect CWT's EBITDA to grow year-over-year, despite the organic revenue declines expected for 2023. A truly outstanding accomplishment in a tough environment and with a relatively new management team. At CIT, we continue to benefit from the restructuring actions taken during the COVID-19 pandemic that are now returning significant margin dollars to CIT as aircraft build rates rebound.

The team has done an excellent job optimizing its manufacturing footprint and improving on its product mix, which positions us well to leverage the recovery that is underway in aircraft production. CIT's backlog is notably higher than pre-pandemic levels, giving us confidence that CIT has significant growth potential for the foreseeable future. Taken together, CIT is leveraging sales extremely well in 2023, with EBITDA up 520 basis points year-over-year in the Q2. We expect to continue that solid leverage going forward. Please turn to slide 4. In line with our strategy to pivot to a pure-play, premier building products company, we signed a definitive agreement to sell Carlisle Fluid Technologies for $520 million, with an intention to redeploy this capital into share repurchases in 2023.

The sale of CFT represents another significant step forward in our efforts to build a diversified portfolio of premier, energy-efficient, building envelope solutions, and demonstrates our commitment to being capital allocators of the highest order. On a pro forma basis, we now expect sales from our building products businesses to constitute approximately 84% of consolidated Carlisle revenue in 2023. This up from 56% in 2016. Please turn to slide 5. I'm pleased to share with all of you on the call today that our newest polyiso manufacturing facility in Sikeston, Missouri, is operational and began shipping product for sale in July. In addition to employing the latest advancements in green building technology, such as solar power generation and energy-based load control systems, the facility will lower the carbon footprint of our supply chain and will improve lead times to customers.

We're proud that Sikeston was designed and built to the highest current sustainability standards, including LEED Platinum specifications, which is a globally recognized symbol of certified sustainability achievement. Please turn to slide 6. Our results continue to demonstrate that Vision 2025 has been the right strategy for Carlisle. 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. Our business portfolio transformation sets the stage for a more focused, higher returning, and better understood path for future sustainable value creation at Carlisle. The pillars of Vision 2025 are really well established and remain core to Carlisle's strategy going forward.

Over the last five years, despite the multiple challenges our teams have faced, we continued to be guided by the clarity of mission, as outlined by our strategic vision, first announced five years ago. As we approach the completion of many of the milestones and goals of Vision 2025 last year, including exceeding our goal of $15 of GAAP EPS, we were simultaneously working on the successor to Vision 2025, a new strategic plan that will be introduced formally later this year. Vision 2030 will be a plan committed to many of the same principles and pillars we used to establish Vision 2025, and with it will come new levels of performance and expectations that are a required part of our culture of continuous improvement and of our Lean Six Sigma initiatives under COS.

As a reminder, the foundational pillars of sustainable value creation at Carlisle under Vision 2025 include: One, drive mid-single-digit organic revenue growth. Two, utilize the Carlisle Operating System, or COS, to drive continuous improvement and greater efficiency in our operations. Three, build scale with synergistic, accretive acquisitions. Four, maintain a returns-focused capital allocation strategy, including organic investment to drive growth, a disciplined approach to our aforementioned M&A strategy, and returning capital to our shareholders. Notably, thus far in 2023, we've returned $327 million to shareholders with share repurchases of $250 million and $77 million paid in dividends. Of course, none of these could be possible without continuing to rely on, invest in, and develop our exceptional talent.

Through the execution of Vision 2025, Carlisle 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, absolutely be core to our Vision 2030 strategic plan. With that, I'll turn it over to Kevin to provide additional financial details as well as our updated 2023 outlook. Kevin?

Kevin Zdimal (CFO)

Thank you, Chris. For segment highlights, please turn to slide 7. CCM delivered Q2 revenues of $948 million, down 15% from the prior year. The decline was due to continued destocking in the channel, disruptive weather, and some project delays. Adjusted EBITDA margin was strong at 31% as we had positive price costs in the quarter. Moving to slide 8, revenue at CWT decreased 20%, primarily due to continued softness in residential demand. Adjusted EBITDA margin was 22.5%, expanding 390 basis points from the Q2 of 2022. Echoing Chris's comments earlier, the team continues to benefit from its focus on the integration of Henry, accelerated capture of targeted synergies, effectively rolling out COS, and significant investment in operations throughout CWT to drive greater efficiencies in our businesses. Moving to slide 9.

CIT revenue increased 3% in the Q2 of 2023, reflecting strength primarily in our commercial aerospace platforms as we benefit from the rebound in demand for new aircraft. Adjusted EBITDA margin expanded 520 basis points to 18%, driven by price realization, leverage on restructuring activities, and efficiencies gained from COS. Slide 10 provides the year-over-year bridge items, the Q2 adjusted EPS. Moving to slides 11 and 12. Carlisle ended the Q2 of 2023 with $379 million of cash on hand and $1 billion of availability under our revolving credit facility. We generated cash flow from continuing operations of $196 million and invested $30 million in capital expenditures. We deployed $200 million towards share repurchases and paid $38 million in dividends.

As of the end of the Q2, we have 2.3 million shares available for repurchase under our share repurchase program. Turning to slide 13, we have provided our updated 2023 financial outlook. For both CCM and CWT, we now expect revenue to decline year-over-year in the low teens range for the full year, 2023. For CIT, we now expect revenue to increase year-over-year in the mid-single digit range. For total company, we now expect year-over-year revenue to decline in the low double digits. We attribute the lower revenue expectations to the same items that proved to be headwinds in the Q2, namely, destocking in the channel, disruptive weather, and some project delays. Given the solid execution by our teams across Carlisle, we now have a more favorable outlook on full year EBITDA margins.

Despite the double-digit revenue decline, we expect consolidated margins to decline only 50 basis points year-over-year in 2023. We remain focused on disciplined pricing, which is leading to better price cost capture this year, operational efficiencies, and managing costs through our continuous improvement efforts. With that, I turn it over to Chris for closing remarks.

Chris Koch (Chair, President and CEO)

Thanks, Kevin. In closing, I once again would like to express my thanks and appreciation for the excellent work by all of our Carlisle employees in the Q2. Their perseverance and just plain hard work has returned us to delivering the results we've come to expect. I'd like to take a moment to share some important organizational changes that are occurring this week. All of you know Jim Giannakouros, our Vice President of Investor Relations. Jim has decided to leave Carlisle to pursue other opportunities. Jim was a covering analyst when I became CEO back in 2016. I remember the dinner we had in New York in May of 2018, where I asked him if he wanted to join Carlisle and make our investor relations department the best there could be in the industry.

Since then, he has made significant contributions, enhancing and professionalizing our Investor Relations function here at Carlisle, as well as having an extremely positive influence on the corporate and segment finance teams. Jim has lived up to the promise of developing a truly world-class Investor Relations department, and he will truly be missed. I wish him nothing but success and happiness in his future endeavors, and I know all of my fellow Carlisle employees feel the same way. Thank you, Jim. Stepping into the role of Vice President of Investor Relations will be Mehul Patel, who joined us when we acquired Henry Company in 2021. Mehul was most recently Vice President of Finance for CWT, and many of you may have already met him as he's been representing Carlisle at investor conferences and roadshows for the past year.

I am very excited to have Mehul backfill Jim's role, and I know he will do an excellent job with the investment community. Additionally, Kelly Kamienski, who has been at Carlisle since 2016 and most recently serving as our Chief Accounting Officer, will be taking on the role of Vice President of Finance for CWT. Replacing her in her role as CAO will be Stephen Aldrich, who has been at Carlisle since 2012 in various finance positions, most recently as our Vice President of FP&A. I'd like to congratulate Kelly, Mehul, and Stephen on all their accomplishments and wish them the best of luck in their new roles. With Vision 2025 objectives and our core values well ingrained throughout Carlisle, I remain extremely optimistic for the long-term success of Carlisle.

We will continue to benefit from the flexibility afforded us by an incredible brand and reputation, and take advantage of our strong capital position and superb cash flow-generating capabilities. Despite near-term and potentially growing economic challenges, we will continue to drive a culture of first, a pursuit of excellence in everything we do, of continuous improvement, of an entrepreneurial mindset, and a commitment to superior capital allocation. We also believe the secular growth afforded us by both non-discretionary reroofing demand and increasing needs for improving the energy efficiencies of buildings, pave the way for long-term and significant value creation. We'll continue to take the necessary actions to navigate an increasingly complex operating environment, continue to deliver the Carlisle experience to our customers, and create value for all stakeholders of the company. That concludes our formal comments. Operator, we are now ready for questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press star followed by one on your touch-tone phone. You will hear a 3-tone prompt acknowledging your request. Your first question comes from the line of Bryan Blair from Oppenheimer. Your line is now open.

Bryan Blair (Managing Director and Senior Analyst)

Thank you. Afternoon, guys.

Chris Koch (Chair, President and CEO)

Afternoon.

Bryan Blair (Managing Director and Senior Analyst)

Just hoping you could provide a little more color, walk us through how the quarter played out for CCM, specifically in terms of destocking, we know has been a headwind for a while. How did that influence April and May operations relative to June? What's your sense of where channel inventory now stands, and how does that impact your progression into Q3?

Kevin Zdimal (CFO)

Yes, several things there. The first on the destock. That destock going into the quarter, we were expecting around $100 million, and we're slightly above that for the quarter, about $120 million in the Q2 of destock. Remaining destocking, we think we have around $50 million to go in the Q3. That continues from some of that, the weather, and as Chris mentioned, as far as labor on the roof's been a challenge for the contractors, so that's delayed a piece of that. As far as going through the quarter, I mean, April, May, June, no significant differences. I mean, it ramped up in the Q2 as we'd expect, versus the fourth or the Q1, so nothing of note there.

Bryan Blair (Managing Director and Senior Analyst)

Okay, understood. And we can obviously back into a H2 figure, given your revised CCM sales outlook for the full year. How should we think of the sales cadence Q3, Q4? Obviously, there's, you know, noise that has, you know, impacted operations through Q2, a bit into Q3 that you just walked through, and then easy comps start to kick in in Q4. If you could, you know, quantify expectations anymore, that would be helpful.

Chris Koch (Chair, President and CEO)

Yeah, Bryan, Chris, I think that Q3 is going to look a lot like Q2, with a couple of exceptions. Obviously, Kevin talked about that. A little bit of continued destocking. Obviously, one of the things that we haven't talked about that should be talked about is that in addition to the destocking, now we have this idea of restocking. The demand is still there, but I think there are a couple of things that before Kevin gets into a few more items on this, that I think you should be aware of, which is that I think there's been a hesitation to load in the type of stock that we've seen in the past.

My assessment after doing the work is that we're going to see a little bit of a slow start post 5th July 2023, but the demand will pick up as people get more comfortable with the quarter, as we get closer to the end of the year and jobs obviously start to. You know, weather has less of an impact on the jobs, and those pick up, as well as distributors get a bit more comfortable with bringing inventory in. I think with interest rates rising, obviously, the carrying cost of having inventory is higher. Also, we have this idea that's been put out there, you all analysts have talked about it, too, that there might be some pressure from some of our competitors to lower price, which we didn't see in the quarter, by the way.

Quarter, pricing was flat. I think that might be causing people to pause a little bit to say, "Will I be putting in high-cost inventory when there might be lower-cost inventory coming?" I don't see that happening, but that concern could be there. I think we also have to look that it's been a very good, I think as you saw by OC's results with their residential shingle business, it's been a good for them, bad for weather, but a good spring in terms of roofing in the Resi side. I think that also has consumed a little bit of that working capital that goes to inventory in the form of increased resi shingles and that.

You know, I think when we look at the Q3, it plays out the same as, you know, kind of the Q2. Demand, underlying demand is still good, pricing should be flat, and you know, we still see the trends continuing. Just a little color from me there, Kevin, I don't know if you want to add anything.

Kevin Zdimal (CFO)

Yeah, that all shakes out to the Q3 being, you know, a couple percent, 2%, 3% better than the Q2. As you look to the Q4, typically, we're down Q4 versus the third, about 15%, but without the destock in the Q4, it'll be less than that 15% down in the Q4.

Bryan Blair (Managing Director and Senior Analyst)

All very helpful color. Margin performance was definitely a highlight of Q2. That was across the board.

Chris Koch (Chair, President and CEO)

Yep.

Bryan Blair (Managing Director and Senior Analyst)

With the scale of CCM, obviously, very needle moving to have some margin upside relative to expectations. I assume that price cost was a solid lever there. Kevin, I believe last quarter you know, guided to $40 million-$60 million full year benefit for price cost. I wondered if you'd give us an updated figure on that and also offer a little directional insight as to how we should think about the, you know, margin cadence through the year and, you know, and then netting to the 50 basis points improvement on a consolidated basis relative to the prior year.

Kevin Zdimal (CFO)

Yeah. On the price cost, as you said, we were at 40-60 in this, our previous guidance there. Now, we think we're around $60 million-$80 million. We've upped that number, and that dropped right to the bottom line, where we're talking down 50 basis points this year. Maybe looking at those margins, we think we can get the CCM margins right to about 30% this year for the full year. If you look to CWT, think we can get them to up maybe 350-400 basis points on the year. CIT would be up to about 17% for the full year, so 250-300 basis point improvement there.

Bryan Blair (Managing Director and Senior Analyst)

Excellent. Appreciate the detail. Thanks again, guys.

Chris Koch (Chair, President and CEO)

Yeah. Thanks, Bryan.

Operator (participant)

Your next question comes from the line of Timothy Wojs from Baird. Your line is now open.

Timothy Wojs (Senior Research Analyst)

Yeah. Hey, guys. Good, good afternoon.

Chris Koch (Chair, President and CEO)

Good afternoon.

Timothy Wojs (Senior Research Analyst)

Jim i'ts been good working with you, and, you know, best wishes on the new ventures. Maybe just starting off, Chris, just on the backlog, I guess how, what are you kind of hearing when you're talking to contractors or distributors about the backlog? I guess when you think about days on the roof, and maybe the heat playing, you know, having an impact on some of that, I mean, how do you kind of triangulate between, you know, that versus just maybe kind of a weaker demand backdrop?

Chris Koch (Chair, President and CEO)

Yeah, Tim, thanks for that question, by the way, and thanks for acknowledging Jim, appreciate that. We did a lot of work in the Q2. I'm not going to go into all the detail, it'd be too long on this call, but we could take it up later around. We spent a lot of money and a lot of time and effort into understanding that. A lot of that came out of, you know, the fourth quarter and the Q1, where we didn't feel we had all the information we should have had. We've done a couple of things. One was we enacted a Net Promoter Score for Carlisle, and that's been very helpful to us.

That's ties into what was actually happening in our perception vis-a-vis our competitors, done by a world-class organization. We talked to over 600 contractors, distributors, and other points, so we got a very good, you know, data set there. Started that basically back in April. At the same time, we started to look at this backlog thing. We really wanted to understand. Obviously, we didn't understand completely in Q4 the level of inventory that was out there. We think we had a good handle on distribution. I think what we missed, in some ways, was the inventory that was on the contractor and maybe at the job site. We went through, we did that, and that also was about, probably about 600 contacts, 500-600 contacts that we've been updating through the quarter.

I think we've got a good handle on where the backlog is. I got a good confidence there on this statement that people have been reducing it. I think it would be misleading to say it's over. That's a tempting thing to say, that destocking is over. It will spill into Q3. What I would say is there are pockets of that, though. Obviously, all distributors are not alike, and you go to the Northeast, and there was a lot of rain in the Q2. We think that impacted it, so maybe they didn't destock as fast as somebody might have somewhere else. I think we've got a good handle on backlog.

I think the backlog is, as I said, coming down, and I really do believe that part of this issue with a little bit lower demand to us in Q3 and Q4 is really going to relate to that idea of how quickly the distributors want to stock back up. We're getting back to normal. When we look at the fourth quarter, we just see those same demand patterns going. That Kevin has talked about on numerous occasions, and you all have the graphs on that. I think when we get to 2024, we're going to see that normal cadence and see that idea of then a more traditional load-in from distribution, as we get into the season in 2024. It really, as you know, that's kind of been missing through the whole thing.

We missed it when COVID-19 hit. Hit in February, we never got the big load-in, then we really rolled right into that heavy demand through 22, where, you know, everything went out to distribution and not really in an organized fashion. It was more of whatever you could get. I feel pretty confident about what we're seeing and that the underlying demand is really good. I'll give you two other things on that. I know I'm extending the question, you know, this demand, when Jim talked about reroofing, I mean, we know that's there. We've talked about it. We understand the length of a life of a roof. We understand how roofing building owners feel about warranties on that, I think our reroofing estimates are pretty good.

When we move to this energy efficiency thing, I just saw a couple of data points that air conditioners, for example, Department of Energy just released today, 6% of all electricity consumed in the United States, or produced, it goes to electric, or it goes to air conditioners. You're putting that on a grid that already has issues, we've got significant warming trends. I saw that GM, Hyundai, and Honda are building another 30,000 plugs by 2030, but it would take us to 60,000 2030 to drive electric vehicles. In fact, we need 182,000. I think when we look at what the solution is going to be, it's going to be around green insulation.

It's going to be around making buildings tighter, and that falls right into what CCM and Henry deliver. I think we've seen that, and I feel very good about that underlying demand and that that'll continue. Just quickly on the days on the roof, you know, a couple of data points. People we've heard throughout the southern states, from, you know, Southern California out to Florida, we've heard that they're trying to work earlier, but shortened days, as you start to get into the noon, 1:00, it's just too hot on a roof. We've seen some compression there, and you can't really do it in the dark, so you get some compression around the workday.

Something I heard recently was people are also trying to get the work done in 3 days, and that there may be some changes in order pattern during the summer here, where we're seeing a lot of activity Monday, Tuesday, Wednesday. As we get to Thursday, Friday, the crews are just not as effective. They're worn out, they're hot, and people are handling it that way. When we think about how many days on the roof, I can't give you a number for that, but it's got to be kind of like what we would see, you know, with a heavy rain or something like that, where we would, you know, probably say 2-3 days in the quarter.

Timothy Wojs (Senior Research Analyst)

Okay. Okay. All right. No, that's all helpful. I appreciate that. Then maybe just on CWT, just, I guess, what drove the margin upside, I guess, there in the quarter? I guess, as you think about, you know, kind of the full year kind of margin expectations in that business, I mean, is that a good jumping-off point, you know, on a go-forward basis?

Chris Koch (Chair, President and CEO)

Hey, Tim, we happen to have Mehul with us. We didn't announce him in the beginning of the call, and I think I'm going to turn that call over there to Mehul Patel, let him have a shot at it, and then we'll have Kevin back him up.

Mehul Patel (VP of Investor Relations)

Perfect. Thanks, Chris. Tim, nice to meet you. Great question, Tim. Overall, for CWT, as Kevin mentioned, just overall, really strong performance on margin. To your first question, in terms of what's driving it, there are several factors. One is really strong pricing discipline. We're leveraging our investments in sales excellence and ability to influence in-market demand with our mostly internal sales force. In a declining raw material environment, that's creating a positive tailwind for us. The second thing is dampening out inefficiencies from 2022. Obviously, there are significant supply chain challenges that suboptimized our ability to supply from the optimal plant. That's corrected now, and we're doing a good job getting back to normal there. The fourth thing, Kevin and Chris talked about synergies.

We're doing a really good job executing that above the deal model. That's creating a positive tailwind. Lastly, a really strong performance on our plants in a declining volume environment. We're really taking advantage and making the right calls, right adjustments, really variabilizing our costs as much as possible, which is helping us in a declining volume environment. Lastly, to your question, in terms of a jumping-off point, all these things I mentioned, they're gonna stay. I think this is a good margin for us for 2024, and there's continuing to be upside as well, right? As we try to continue to drive continuous improvement, the COS system that Carlisle has, the Henry team is embracing it.

That's gonna continue to provide tailwinds for us to drive margins up even further, Y2, Y3, and forward.

Timothy Wojs (Senior Research Analyst)

Okay. Okay, sounds great. Thanks so much, guys. Appreciate it.

Chris Koch (Chair, President and CEO)

You bet, Tim.

Operator (participant)

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

Garik Shmois (Managing Director and Senior Equity Analyst)

Hi. Thank you. Just wanted to follow up just on the CCM margins and the 30% that you're speaking to for this year. Just curious if you could speak to maybe your confidence in that as a jumping-off point moving forward, in light of some of the competitive pressures, Chris, that you acknowledge, recognizing your pricing is flat right now, but, you know, it seems like maybe the market is bracing for a little bit lower price.

Chris Koch (Chair, President and CEO)

I think it's a good. I think it's very sustainable. In fact, I would be disappointed if we didn't return to some of the margins we've seen that we saw in 2022. I think some of the things that we've talked about, number one. I know there are one-off bidding that people are talking about in terms of pricing, lack of pricing discipline. What I would tell you is those tend to be infrequent and that the general consensus out there is that there is good pricing discipline. I think we have, as we talked about earlier, when we saw some management changes in one of our competitors. We saw a different organization purchase one of our competitors.

I think, and I'll give them both compliments, I think those were upgrades into both situations. Certainly, both those parties understand what value creation is about and how to drive value creation for those companies, which I'm assuming they wanna do. We also look in new products. We've got things like the 16-foot line. We've got our Cab Group, too. We've got the APEEL product. We continue to work on new coatings in Henry. We continue to make gains in different channels, and I think what we're finding is that our products and the value proposition we have are really becoming ROI-based.

This idea of energy efficiency and that a roof is not just a roof, but a roof now is a key component of lowering energy consumption and driving an ROIC, means that you start to shift off of this idea that we have in some way, a roof can be exchanged between Carlisle or someone else. I mean, each one of us is gonna bring added value through that. We talked about the Carlisle experience. I think the Carlisle experience, to a certain degree, was a very positive in terms of pricing. I think in the pre-2019, we used to say we would get there was a 5%-7% premium to our products on the Carlisle experience just because contractors could rely on the right product, the right place, the right time.

When you were spending a third on materials and two-thirds on labor, if you had labor sitting around, it wasn't a good value. You'd be better to pay the 5% to a company that got you the product when you need it. COVID-19 came along, changed that, upended it. There was a lot of confusion. As we return and as we talk about this Q3 and people wanting to be more efficient with their inventory, obviously, we pay kind of a weird benefit to... not benefit, but penalty on that, which is that people then will rely on us and not put us into inventory.

We're still gonna be working on the Carlisle experience, and we still think in an increasing demand world like we have around ESG and other things, that new products, superior customer service, will continue to differentiate product. I like that. On the other side, on the COS side, you can see what we're doing on raw materials. We're using them a lot more efficiently. You can see what we're doing on automation in Sikeston. If you visit, which we hope people will visit, the Sikeston facility, you are seeing the latest generation of ISO, you know, polyester production, and it is extremely efficient. I think when you look at those things, we look at the margins in 2022 and think that's what we're aspirational to.

I don't really look out to the next few years and think we'll see anything lower than the margins we've seen this year of 30%.

Garik Shmois (Managing Director and Senior Equity Analyst)

Got it. No, that's helpful. My follow-up question is on CWT. I was wondering if you could maybe go into the revenue guidance revision in a little bit more detail. You know, can appreciate, you know, the, I guess, weaker housing market, but, you know, the builders have been certainly more optimistic of late. Just wondering, you know, if you're seeing any of that as an opportunity, and, you know, just any additional color on the change in the CWT revenue guidance will be great.

Mehul Patel (VP of Investor Relations)

Tim, a couple of things. One is, project delays that is impacting the CWT business, both on the commercial and residential side. That's a key driver for the change in overall guidance. The second thing, there is still some destocking. It's to a lesser degree, not even close to what we're seeing on the CCM side, but nonetheless, similar reasons is negatively impacting CWT. Then lastly, with the raws coming down, there are still pockets where we're reducing price, but nonetheless, it's still a positive from a price cost standpoint.

Garik Shmois (Managing Director and Senior Equity Analyst)

Got it. Okay, thanks.

Chris Koch (Chair, President and CEO)

Garrett, that was Mehul, by the way.

Garik Shmois (Managing Director and Senior Equity Analyst)

Yes. I appreciate the answer, and, you know, of course, I'll give my best to Jim as well, and look forward to catching up down the road and working with Mehul in the future.

Chris Koch (Chair, President and CEO)

Thanks, Garrett.

Operator (participant)

Your next question comes from the line of Saree Boroditsky from Jefferies. Your line is now open.

Saree Boroditsky (Equity Research Analyst)

Hi, thanks for taking my question. Maybe a little switch to kind of focus on 2024 a bit. Given the impact of destocking this year in CCM, you know, how should we think of this as a tailwind into next year? If we're in a flattish demand environment, what could you see from sales growth in that segment?

Chris Koch (Chair, President and CEO)

Saree, Chris, thanks. I'll turn it over to Jim for a more technical answer to this, but I think right now, you know, and you know what my answer is gonna be, and I'm sorry, but it's like 2024 is too far out. We don't really wanna make any statements around. I don't think getting too refined. What I would say is, I think directionally, you are correct. I mean, obviously, with if you think about legacy demand in the CCM markets being in that, let's call it that mid-single digit, historical as a market growth, and then we saw COVID-19 take it down, and then we saw the rebound in 2022, and we get back to that mid-single digits for the market, you know. We see that happening.

Obviously, not having the inventory and getting through the destocking should produce a nice tailwind in 2024 for us. We, we still do think that with the macro trends around ESG, the Inflation Reduction Act, things like this, the reshoring, the things we're hearing, that 2024 should be, I'll call it a more normal and also a more productive year than I'd say 2023 was on the top line.

Saree Boroditsky (Equity Research Analyst)

Given that more productive outlook into 2024, obviously margins, I think you mentioned 30% in CCM for this year. How do we think about operating leverage as we head into next year then, as you start to see the benefit of some growth?

Kevin Zdimal (CFO)

Yeah, we should see, you know, 40% incrementals on that growth. As you said, on the adding to Chris's piece on the top line, that destock should have a +10% impact on 2024 versus 2023.

Saree Boroditsky (Equity Research Analyst)

Perfect. I appreciate the color and I have to say, Jim, you'll be very missed, and we wish you the best of luck in your next endeavor.

Kevin Zdimal (CFO)

Thank you.

Operator (participant)

Your next question comes from the line of Daniel Oppenheim from Credit Suisse. Your line is now open.

Daniel Oppenheim (Director of Equity Research)

Great. Thanks very much. Was wondering if you can talk a little bit more in terms of CWT, in terms of, I guess, curious about the project delays that were mentioned. I think residential is, what, a quarter of CWT, but, you know, only a portion of that is then new residential. I guess, sort of wondering about it overall, like, the significance of, sort of in the revenue guidance of, lower volumes from residential versus product delays versus some of the pricing. Yeah. This is Mehul here again. For CWT, the project delays overall, I mean, it's not like a significant amount of the change.

Mehul Patel (VP of Investor Relations)

I would say from a percentage standpoint, I would attribute maybe 20% of it to project delays, and that's gonna come through a combination of labor, just availability of labor on the construction sites. The challenge is getting labor, projects are getting extended out, and it's taking longer to get onto the next project. The second thing is financing, right? Both on the commercial side, which is also another 25% of our in-market exposure for commercial starts. Financing is creating project delays just from taking longer to get projects financed. Got it. That's great. Then on the margin side, you talked about some of the continuous improvement and sort of being a tailwind. With some of the restructuring, are all the benefits of the restructuring sort of in place now?

Is that what we saw in the margins this quarter will sort of be set, or was that sort of, still some to come as we go into Q3 here?

Chris Koch (Chair, President and CEO)

Yeah. It will continue to benefit us as we go forward. Now with my earlier comment on we still have continuous runway to continue to expand margins on CWT.

Daniel Oppenheim (Director of Equity Research)

Great. Thank you.

Operator (participant)

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

Adam Baumgarten (Managing Director)

... Hey, good afternoon, everyone. Just on the project delays, maybe on the commercial side, are there any specific end market verticals that are weaker than others as you look across it? Also, are you seeing flat-out project cancellations at this point?

Chris Koch (Chair, President and CEO)

Adam, yeah, good question. Haven't seen really anything on cancellations. I'm sure there are probably some out there, but I would say they'd probably be the third sigma, where somebody, it's not really related to anything other than they're just not good business people, and that's a bad joke. You know, we, you know, if I say there aren't any there, somebody will find one. When we look at the segments, you know, I think this year, we've seen some negative impact on the warehouses. I think that's been somewhat, well-publicized, you know, around what's happening with Amazon warehouses and things like that. It's been a little bit down there, although, you know, we've had places around the country like Phoenix here, where warehouses continue to be established, so there might be some movement there regionally.

Education has been a good story this year. Especially starting the year, educational work has actually improved pretty significantly since 2021, and is at about the same pace of growth as 2022. We look at office buildings, obviously, that's another one that's pretty well advertised around work from home, and that although, I would say that the decline is less than I would have thought, and I think we attribute a lot of that to when you're putting a flat roof on an office building like us, that we think of, they tend to be 3, 4-story buildings, 1-story building, maybe manufacturing attached or something like that, or warehousing.

I think we have a little bit of a less of a work-from-home impact than, say, you know, the central business district of San Francisco or Manhattan, where, you know, we're seeing some tough times in office buildings, but doesn't really affect the low slope group. You know, stores have been kind of a little bit down, but, you know, not too bad. Then healthcare has actually been a good story, and I think that's another vertical that as we look at an aging population and we look at extended care and we look at our healthcare system, I think, we'll continue to see money put into expansions.

I know here in town, we've got a lot of expansions with the Mayo Clinic, and I think in Rochester as well, they've talked about a big building expansion. That one's doing well. I think when you look at more of the multifamily housing and that, obviously, there's not enough of that stock in this country, and I think that will continue to be a good tailwind with the impact, though, of interest rates probably causing some of those projects to come under question if rates stay at their 22 highs- 20-year high like they are as announced today. Hopefully, that gives you enough color.

Adam Baumgarten (Managing Director)

Yeah, it's great. That's helpful. Just some of the step up in share repurchases you guys are implying in the back half, any guidance on how that you expect that to phase in Q3 and Q4?

Chris Koch (Chair, President and CEO)

Relatively balanced, based on what we have remaining to purchase.

Adam Baumgarten (Managing Director)

Okay, great. Thank you.

Chris Koch (Chair, President and CEO)

You bet, Adam.

Operator (participant)

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

David MacGregor (President and Senior Analyst)

Yes, good afternoon, everyone.

Chris Koch (Chair, President and CEO)

Hey, David.

David MacGregor (President and Senior Analyst)

Jim, good luck to you, man.

Chris Koch (Chair, President and CEO)

Thank you, sir.

David MacGregor (President and Senior Analyst)

I still believe. Exactly. I wanted to just ask you about the main components within your cost basket. We talked about price cost, and thank you for the detail on that. If we just isolate the cost basket for a second and just talk about how prices you may see trending on the main components there.

Chris Koch (Chair, President and CEO)

I don't think we really like to get into that, you know, I would say you can look at MDI. That's obviously a big one that we track. I think there's a mistaken correlation there that a lot of people have to the price of oil. I mean, MDI really more correlates to what's happening in the cracking facility and what demand, you know, major chemical companies are seeing and petroleum companies on other feedstocks that come off of that. MDI is seeing some reduction. I think we look at polyethylene, that's another one. EPSB is a big one. We've got our synthetic and natural rubbers that we see, some oils. I think just overall, you know, again, we're seeing very positive there.

I mean, in a sense, it relates, too, to some of the demand factors that are occurring throughout the world. I don't think that a poor European economy hurts us because I think that takes out some demand, and people are looking for places to put their production. I think China, certainly the chemical, petrochemical industry in Taiwan and in China is probably also looking for places to put that. I think generally, you know, we're seeing those declines. Again, MDI has been a pretty good one. I'll leave it at that.

I think overall, as you look to the H2 of the year, you can see why we've upped that, and, you know, to Kevin's point, it's 60 to 80, but we're probably looking more at the upper end of that range, more like the 80 than the 60. I know that didn't give you enough, but hopefully, that helps you from a directional perspective.

David MacGregor (President and Senior Analyst)

Yeah. Okay, thanks for that. Then just with respect to CWT, you talked about the fact that or Mehul talked about the fact that there was still some inventory there to deal with. I'm just wondering, if we see an upturn in residential orders coming through, how much of a delay are we looking at before you'll actually see that business hit your book? I guess another way, how much inventory do you have to burn?

Mehul Patel (VP of Investor Relations)

Yeah, typically for us, once a residential project is started, our products would go on somewhere between five and six months after the start. You kind of think of that in terms of where residential starts are and improvements there in terms of how long it takes us to trickle through for our products to go on the project. I think as far as inventory goes, yeah, I think as, you know, the residential market, it seems like it's kind of bottomed right now. As it improves, it should help us on the inventory side, definitely.

Chris Koch (Chair, President and CEO)

Yeah. David, the only thing I would say, and Mehul knows a heck of a lot more about it than me, but I think one of the things we have to segregate in CWT is this idea of putting it on new construction, and then this idea of repair and remodel. We can see in half of our business, upticks in demand as quickly as a weather event occurred in California on a Friday, and on Saturday morning or Sunday morning, we could have an out-of-stock position at The Home Depot and be having to respond to that.

I think as you spend more time with Mehul, understanding that the difference between that new construction and the, that whole side of it, then that repair and remodel, that we do a lot of work, you know, taking care of roofs before they get a new roof put on. I think that's an important, you know, relationship to understand, 'cause it does impact, what happens to sales. I think a 5- to 6-month delay on it probably is a little bit at the long end on the when you aggregate the whole business.

Mehul Patel (VP of Investor Relations)

Yeah, absolutely. When we talk about those residential starts, you gotta remember, that's 25% of the business. The other 25% on the residential side, and there's also 25% on the commercial side, that's all R&R, and a big component of that is really nondiscretionary roof coating projects, products that when you have a leak on your roof, you're not gonna have a choice but to use those products. Demand should be stronger in those areas, especially when there's weather events and high rain events.

David MacGregor (President and Senior Analyst)

Right. Right. Okay, last question for me. Thank you for that detail. Last question for me is just on the operating leverage. Clearly, you guys have done a tremendous job this quarter of managing decremental margins. There's been quite a bit of discussion on price costs, so I think we're good there. Just on the volume leverage, I know there was a previous question. Maybe I'll come at it a slightly different way here, but I'm just trying to get a sense of... You've clearly found something different in terms of managing your fixed costs and your leverage. I'm just trying to get a sense of how sustainable that might be going forward, and whether we should be talking about, you know, updating our sense of what volume leverage is in these individual businesses.

Kevin Zdimal (CFO)

Yeah, on the CCM side, certainly, I think that new number for incrementals, for sure, is a 40%. I mean, some of that was a little bit higher than that on some of the decrementals, just from some of the absorption issues that you have there. Going forward, we're expecting that 40% on the CCM side, and as far as CIT, they should also be in the 40%-plus range, and then CWT is a little bit lower than that, right? More in the 30%.

Chris Koch (Chair, President and CEO)

Yeah, David, I would look back to, you know, when we started in 2016, at where we were on adjusted EBITDA. When we talk about sustainability, I think this is really where, and I'm glad you brought it up, 'cause it talks about the power of COS and the power of what we're doing from a Lean Six Sigma perspective, what our leadership is doing around continuous improvement, automation, things like this. I mean, those margins, those adjusted EBITDA margins at CCM back in 2016 were probably in that 21% range. You know, we're now, you know, 22. You're up over 30, and it's been a pretty steady progression to get there. It didn't just go from 21 to 30. It went through 23 and 24 and that.

I think that, to me, when I look back at that eight-year run of continuous improvement across a variety of volume levels, tells me that these are very sustainable. You know, the team knows from me that, you know, we gotta get better every day, so, I think we would continue to think we'll have more gains. Obviously, as you get into the thirties, they get tougher and tougher to get, but the team continues to add to the remarkable EBITDA, you know, journey, positive journey that they've had.

David MacGregor (President and Senior Analyst)

Great. Thanks, guys.

Chris Koch (Chair, President and CEO)

Yep.

Operator (participant)

There are no further questions at this time. I will now hand over to Chris. Please continue.

Chris Koch (Chair, President and CEO)

Well, thanks, JP. Appreciate it. This concludes our Q2 2023 earnings call. I wanna thank everybody for their participation. I do wanna once again thank Jim for all the good times and, you know, great work he's done and everything he's contributed. Been a big part of Carlisle, and I know going forward, he'll be very interested in what we do, and we'll be keeping in touch. Mehul, thanks for being on the call and taking up those questions so quickly. You're in. Here we go. Thanks, everybody. Look forward to speaking to you at the next earnings call.

Operator (participant)

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