Carlisle Companies Incorporated (CSL) Earnings Call Transcript & Summary

Good afternoon. My name is Megan, and I will be your conference call operator today. At this time, I would like to welcome everyone to the Carlisle Companies Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I would like to turn the call over to Mr. Mehul Patel, Carlisle's Vice President of Investor Relations. Mehul please go ahead.

Thank you, operator, and good afternoon. On behalf of Carlisle, welcome. Earlier today, we reported third quarter results. The press release and the slides are available on the Investor Relations page of our website. With me on the call are Chris Koch, our Chair of the Board, President and CEO; and our Chief Financial Officer, Kevin Zdimal. Chris will start with his perspective on pricing, raw materials, margins and competitive dynamics. Kevin will then review our financial results and fourth quarter outlook and Chris will follow with their Vision 2030 priorities, and then we'll take your questions. Before we begin, please turn to Slide 2. Today's remarks contain forward-looking statements that reflect our current expectations and are subject to risks and uncertainties. Factors that could cause actual outcomes to differ are described in our SEC filings and today's press release, and we undertake no obligation to update these statements except as required by law. We will also refer to non-GAAP financial measures with reconciliations in today's presentation and press release. With that, I'll hand the call to Chris, starting on Slide 3.

Thank you, Mehul, and good afternoon, everyone. Our third quarter results build on the strong demand we saw in quarter 2. Despite significant market volatility, we maintained high single-digit growth, and importantly, demand remained resilient through our pricing actions. We remain focused on superior capital allocation and our path towards $40 of adjusted EPS in 2030. With that, let me turn to the key areas of focus as we enter the fourth quarter, price cost, margins, demand and the competitive environment. Let me start with pricing. We addressed the cost increases that began in quarter 1 with multiple price increases and freight surcharges. Historically, price realization has lagged cost increases by approximately 3 to 6 months, primarily because we honor existing quotes and firm orders already in our system. On our quarter 2 call, we said we expected price cost to be close to parity in quarter 3 and then turned slightly positive in quarter 4. Unanticipated cost increases in quarter 3 did not change the shape or the direction of that curve but pushed the timing of achieving [ parity ] out by 1 quarter. Price realization and our freight surcharges are gaining meaningful traction, and we now expect to reach price cost parity as we exit 2026. Pricing has not had a detrimental impact on demand, and we saw no additional pre-buying in the quarter. Our July outlook assumed raw material and freight costs would stabilize. Instead, oil and diesel costs rose further pressuring petrochemical-based raw materials, freight and virtually all of our costs. U.S. diesel reached record levels of about $6.50 per gallon in late September and was approximately $6.35 as of yesterday, roughly 75% higher than 1 year ago. Reaching parity as we exit this year assumes stability in input costs and freight and no further deterioration in global markets. we would expect the pricing we now have in place to be a tailwind in 2027. That brings us to margins. Adjusted EBITDA held at $348 million on 9% revenue growth as volume leverage and Carlisle Operating System productivity helped offset inflation. Due to the unexpected cost increases in the third quarter margins declined more than we expected. We view the pressure as a timing issue, not a structural one. The drivers of margin expansion remain intact, and those are increasing price realization, freight offsets, Carlisle Operating System productivity, CWT efficiency programs, operating leverage and new products. As costs normalize, we would expect margin expansion to resume. And with that, our Vision 2030 targets are unchanged. On the demand side, re-roofing at CCM continues to be a consistent mid-single-digit contributor as it has been for decades. Despite seeing some pre-buying activity ahead of the price increases in Q2, our channel inventories remain at normal levels. We confirmed this through hundreds of [ Carlisle ] market survey interviews and real-time feedback from our almost 1,000 person sales force. Data centers continue to build momentum, driven by our newly formed and dedicated data center market team. Our premium TPO portfolio and our manufacturing capacity is benefiting data center customers as [ PVC ] supply remains constrained and as these customers discover the excellent attributes of [ TPO ] for data center roofs. We thus expect the trend towards premium TPO systems on data centers to continue to increase. These factors help offset softness in new construction, which is a positive as our near-term outlook does not assume a recovery in new construction markets overall. At CWT, where residential is roughly 45% of revenue. Share gains and cost actions are offsetting residential softness in sales. We also expect no near-term recovery in residential end markets as mortgage applications list price and home sales have declined sequentially. On the competitive front, our distribution relationships remain healthy, productive and aligned. We continue to monitor new market entrants in their investments, but we have not seen any meaningful impact them on our volumes. Finally, capital allocation. Our balance sheet is strong. Repurchases are on track for $1.2 billion this year, and we are proud to be a dividend king with 50 consecutive years of dividend increases. And of course, our M&A criteria have not changed. With that, I'll turn the call over to Kevin for the financials. And I will return to discuss our progress towards Vision 2030 before we end the call.

Thank you, Chris, and good afternoon, everyone. I will review our third quarter results and then discuss our outlook for the fourth quarter. Let's begin on Slide 3. Our third quarter results demonstrate our team's ability to execute with discipline through macroeconomic challenges. Revenue increased 9% to $1.5 billion and adjusted EPS increased 6% to a third quarter record of $5.92. Demand remained healthy and our strategic initiatives once again drove above-market revenue growth in both segments. Price realization also contributed meaningfully and increased throughout the quarter. Importantly, we have not seen a material change in demand from our pricing actions or geopolitical developments. We have also not seen a meaningful increase in project delays or cancellations. Higher input costs remain the primary challenge in the quarter. Renewed escalation of the conflict in the Middle East drove petroleum-based raw material diesel and freight costs higher than we anticipated in our July outlook. On our July call, we expected price cost to be neutral in the third quarter and positive in the fourth quarter. However, costs continued to increase, which pushed our recovery time line out 1 quarter. We now expect to reach price/cost parity as we exit 2026. As we have seen in prior inflationary cycles, price realization typically lags rising costs, and that timing pressured our margins in the third quarter. Turning to Slide 4. Third quarter revenue increased 9% to $1.5 billion. Healthy reroofing demand, strong volume and price realization that increased through the quarter more than offset continued softness in residential and nonresidential new construction. Adjusted EBITDA was essentially flat at $348 million, with an adjusted EBITDA margin of 23.8%, down 210 basis points year-over-year as raw material and freight costs increased faster than price realization during the quarter. Higher volume, disciplined cost management and Carlisle Operating System productivity helped offset that inflation and held adjusted EBITDA in line with the prior year. Record third quarter adjusted EPS of $5.92 increased 6% year-over-year, driven by higher segment earnings and an 8% lower diluted share count from share repurchases, partially offset by higher interest expense from the notes we issued in August 2025 and higher corporate compensation and benefit costs compared to the prior year. Moving to CCM on Slide 5. CCM revenue increased 8% to $1.1 billion, driven by strong volume growth and price realization that built throughout the quarter. Reroofing demand remained healthy, growing mid-single digits, while new construction declined mid-single digits, and our end market grew low single digits overall. Chris will discuss the strategic initiatives behind our above-market growth. On our second quarter call, we noted that customer prebuying ahead of announced price increases contributed a couple of percentage points to CCM's growth. Our strong third quarter volumes confirm that the vast majority of that growth came from end market demand. Channel inventories are at normal levels for this time of year, and October bookings remained strong. CCM adjusted EBITDA increased 1% to $306 million, with an adjusted EBITDA margin of 28.2%, down 200 basis points year-over-year. The margin decline reflects further raw material and freight inflation from where we started the quarter, which outpaced our price realization. This was partially offset by operating leverage on higher volume, Carlisle Operating System productivity and cost controls. Turning to CWT on Slide 6. Revenue increased 9% to $379 million, as share gains and weather conditions that drove demand for roof coatings more than offset continued softness in residential and nonresidential new construction. CWT adjusted EBITDA increased 13% to $68 million, and adjusted EBITDA margin was 18%, up 60 basis points year-over-year. Structural cost savings and higher volume drove that improvement, more than offsetting raw material and freight inflation that outpaced price realization. Importantly, the structural efficiency initiatives at CWT are substantially complete and the benefits are building. Our investments in automation, footprint consolidation and in-house expanded polystyrene resin production are contributing and synergies from our recent insulation acquisitions are beginning to show in our results. Together with our October pricing and updated freight surcharges, these actions position CWT for stronger margin performance in the fourth quarter and into 2027. Turning to Slide 7 and our financial position. As of September 30, 2026, we had $547 million in cash and cash equivalents and $1 billion available under our revolving credit facility. Net debt to EBITDA was 1.8x within our target range of 1 to 2x. This balance sheet strength provides significant flexibility to continue investing in organic growth, pursue disciplined M&A opportunities and return capital to shareholders. Moving to cash flow on Slide 8. Third quarter operating cash flow from continuing operations was $314 million, and free cash flow from continuing operations was $277 million after $37 million of capital expenditures. The year-over-year decrease primarily reflects higher working capital to support increased sales and higher raw material costs. For the first 9 months, free cash flow from continuing operations was $407 million, and we expect a strong fourth quarter consistent with our normal seasonality. During the quarter, we repurchased $350 million of shares, bringing year-to-date repurchases to $850 million, including $140 million of dividends, we have returned $990 million to shareholders so far in 2026. We also increased our quarterly dividend by 14%, marking our 50th consecutive annual increase. We remain on track with our full year repurchase target of $1.2 billion, while preserving the capacity to pursue acquisitions that meet our criteria. Turning to our fourth quarter outlook on Slide 9. We expect consolidated revenue to grow high single digits year-over-year with both CCM and CWT up high single digits. At CCM, pricing and reroofing demand are expected to more than offset slower new construction. At CWT, pricing and share gains are expected to more than offset continued softness in end markets. We expect fourth quarter adjusted EBITDA margin to be flat year-over-year as the benefit of our pricing actions continues to build against elevated input costs. For the full year, we expect ROIC of approximately 25% and free cash flow margin of approximately 15%. In both segments, we expect price cost to improve as realization builds, and we expect the benefit of our pricing actions to carry into 2027. Consistent with our approach throughout the year, our outlook does not assume a recovery in new construction. Turning to our Vision 2030 financial goals on Slide 10. We remain confident in our long-term targets of $40 of adjusted EPS and ROIC above 25%. Our path is founded on above-market organic growth, Carlisle Operating System productivity, disciplined capital return through share repurchases and targeted synergistic M&A when the right opportunities are available at the right price. These are flexible, independent levers, and our strategy does not depend on all of them contributing significantly in every year. As we demonstrated under Vision 2025, when we exceeded our EPS goal 3 years ahead of schedule, the trajectory toward the target can accommodate choppy periods. With that, I'll turn the call over to Chris.

Thank you, Kevin. The third quarter again demonstrated our focus on managing what we can control. Despite renewed escalation in the Middle East driving higher input costs and soft new construction both CCM and CWT grew faster than their end markets. Revenue increased 9%, and we delivered record third quarter adjusted EPS. Our teams price for value, maintain spending discipline delivered the Carlisle experience and continued investing for long-term growth. Now I'd like to cover our progress on Vision 2030, starting with growth and innovation and then pricing actions behind our fourth quarter and 2027 outlook. Reroofing anchors our business, and this quarter has returned to the consistent multiyear mid-single-digit growth that we are used to experiencing from a dip to the low single-digit growth that we saw in the first half of this year. Since we introduced Vision 2030, reroofing has grown every year through very different market conditions. Why is that? Because more than 70% of the nonresidential building stock in North America is over 25 years old and for a building owner, replacing a roof is not a discretionary decision. That recurring demand gives us a steady base in any market. New construction remains soft in geopolitical developments and recent interest rate increases have made the timing of a recovery less certain, but our plans do not depend on a market recovery. Carlisle was built to outgrow its markets and perform throughout the cycle, not just at the peak, and that strategy is delivering results. CCM revenue increased 8% and CWT increased 9% ahead of their end markets all the while price increases were moving through the market. Customers continue to choose Carlisle for the Carlisle experience, which is the right products in the right place at the right time, supported by our experienced employees. Of all our Vision 2030 levers, innovation is the one I'm most excited about because its impact compounds over time. And importantly, innovation clearly delivers on the idea that price to value is a key attribute of differentiation and margin expansion, especially when customers experience the value to their business that new products provide. Over the past year, our voice of the customer process grounded in outcome-driven innovation has generated hundreds of new product ideas and validated active projects in our stage gate pipeline, and those products will drive measurable benefits to our customers. That work is translating into more new products in the market. We have launched 9 of our 12 planned projects for 2026. The remaining launches are on schedule, and we remain on track to generate 25% of total sales from products introduced in the past 5 years. A solid example of innovation can be found in 2 of this fall's launches that will take [ Primer ] out of the job. [ BlueSkinSA-HPX ] for commercial walls which can be applied without [ primer ] year-round and [ vapor CL TRs ] for roofing, which requires no primer unapproved substrates, both eliminate an installation step and create value for our contractors. On the retail front, Home Depot now carries Henry's UltraTouch made with 100% recycled denim insulation in over half its stores and sales continue to improve in stores that have carried it for a year or more. This month, we also launched a [ pay-per ] faced version for markets where building codes require moisture control with a broader rollout plan for February. Our other recent inductions, including SeamShield, [ RapidLock, VP Tech and Appeal ] continue to gain traction with contractors looking to get their crews to the next job faster. The expansion of our Research and Innovation Center that we broke ground on earlier this year will help us sustain an increasing cadence of new product introductions, shorten our time to market, expand margins and strengthen the proprietary capabilities that differentiate Carlisle. That work now has new leadership and has demonstrated our commitment to a robust succession planning process. Dr. [ Justin Scape ] joined Carlisle in September as Senior Vice President of Research and Development, succeeding Dr. [ John Dobson ], who retired as planned after roughly 15 years across Henry and Carlyle. I want to thank John for his contributions and welcome Justin to the team. Turning to the pricing actions behind our fourth quarter and 2027 outlook. At CCM, 3 price increases are now in the market from April, July and August, and we have executed freight surcharges for a third time. At CWT, our second waterproofing increase is in effect in October, along with updated freight policies. On the supply side, the force majeure declarations on [ MDI ] and polyols that were declared in May have begun to lift. Because of this, we expect MDI pricing to ease as we exit the year. We are hopeful that as we exit 2026, we will also see resolution to the global conflicts currently underway. And with that resolution, a meaningful cost relief as we move through 2027. As those costs normalize, the pricing now in place should become a tailwind for our margins next year. Our experience would suggest that margin expansion follows cost normalization after a period of raw material inflation. However, if costs remain elevated or increase, we will evaluate further pricing actions as we have in the past cycles. Our approach remains disciplined and deliberate and we like where we stand heading into 2027. Through all the volatility of 2026, Carlisle continued to generate substantial cash flow. We view capital allocation as a core competency, not a byproduct of the business. Whether we are investing in our businesses, pursuing acquisitions or repurchasing shares, our objective is the same, deploy capital where it creates the greatest long-term value for our shareholders. In August, our Board raised the quarterly dividend 14% to $1.25 per share, our 50th consecutive annual increase. We're pleased to reach this milestone and join the fewer than 60 companies that are part of this class known as Dividend Kings. This milestone reflects the durability of our business model and our long-standing commitment to returning capital to shareholders. On the M&A front, we remain focused on acquisitions within the building envelope that support our market leadership position add to our system selling approach and increase our content per square foot. We seek deals that fit our 4 criteria: an existing organic growth story, tangible hard cost synergies, a strong management team ready to take on more and the ability to deploy the Carlisle Operating System, the Carlisle Experience and our integration playbook. Our commitment to being superior capital allocators will not change, and our shareholders can count on it. Stepping back and simply putting it, demand held through our pricing actions and price is catching up with cost inflation. We are growing faster than our markets, funding innovation and returning substantial capital to our shareholders, all in a volatile cost environment, and we expect the benefit of our pricing to keep building through the fourth quarter and into 2027. Carlisle operates an imperative business model. Buildings have to be built, maintained and improved over time, and we serve that need largely in North America, we believe, is the best building products market in the world. Reroofing gives us a recurring foundation of demand, and our cash generation allows us to keep investing through the cycle. The structural drivers behind our business from energy efficiency and the push for labor savings to a persistent housing shortage remain opportunities for long-term growth. Our priorities are unchanged heading into 2027, operational excellence, a better Carlisle experience, accretive M&A and value-creating innovation. We expect these growth initiatives to help offset end market conditions that could remain similar to those today. That focus keeps us on the Vision 2030 path, and we remain confident in our targets. And I repeat this a lot, but it's a good reminder to all of us none of this happens without dedicated and driven people. From our sales teams in the field to our innovators in the labs, to our teams and our plants and in customer service. Thank you. You stayed focused on our customers through a demanding quarter and it shows in our results. That is why 3 times in the past 10 years, we have issued broad-based equity grants to give our employees a personal stake in Carlisle's performance were driven by shared success. Thank you all for your time and continued interest in Carlisle. And with that, I'll turn it back to the operator to open the line for questions.

[Operator Instructions] Your first question comes from the line of Tim Wojs from Baird.

Guys, good afternoon. Thanks for the time. Maybe just the first question I have, just -- can you talk about just what price realization was in Q3 and kind of what you exited the quarter with and what's in the guide for Q4, specifically for CCM? And you guys both mentioned that price cost to be positive in 2027. Is that just the timing dynamic of kind of pricing catching up to inflation? Or are you explicitly assuming that costs come down?

Yes. Tim, I think we made clear that we're seeing that price catch-up costs as we move through the third quarter and then into the fourth quarter. And I think as we exit '26, I said we're going to reach this parity. And then it will catch up and the pricing will exceed the cost. And I think even if [indiscernible] stay where they are today, we would expect to see some pricing tailwinds and then if they go down, obviously, it's even incrementally better. And then Kevin will touch on this specific pricing.

Yes. And the price realization, it's spot on to what we said in the Q2 call. We were about 4% in Q3 for CCM price increases. And then Q4 we're looking at about 7% of price realization on a year-over-year basis. So nothing has changed from a price realization. Obviously, the thing that changed was the raw material costs and freight that continue to escalate in Q3?

Okay. And then just on data centers, like is there a way to size the benefit that you're getting on the volume side from just kind of being more involved in the data center business this year? And is it just because capacity is constrained in [ PBC ]? Or is there really a more structural opportunity for TPO there?

[Operator Instructions]

Megan, I'll answer this question. Thank you for that reminder. And Tim and group, I think there's 3 things of data centers that are helping us. I'm not going to exactly give you the total dollar impact because I don't want to give that to competitors, obviously. But our business in the third quarter, I think, was up something like 200%. And 3 things that are really driving it. One, we assembled quite maybe almost a year ago, a dedicated data center team. That was one of the actions that we committed to. And included in that are some [ BOC ] things that are going to help us there. Two, we're obviously benefiting from the constraint in the industry on TPO and that kind of thing. And then three, I would say that we're benefiting from a greater awareness of Carlisle just being in the market and being a better provider and people take advantage of the Carlisle Experience. And I think it was pretty obvious earlier that we weren't there to the level we needed to be. And once we got in the game, people are seeing, yes, we have alternatives and other solutions as well as we've got a lot of capacity to be able to address their needs. And in really in a market where I think right now, speed is of the essence the Carlisle Experience of that right product, right place, right time and being able to exceed expectations is really benefiting us. So I think those are the 3 things that drove that growth in the third quarter. And then as we go into fourth quarter next year, we want to get more on the front end of this and be a key part of the specifications that we do in all the other areas that we serve to. So that sums it up.

Your next question comes from the line of Susan Maklari with Goldman Sachs. Please go ahead.

Thank you. Good afternoon, everyone. Hello, everybody. My question is on the competitive environment that you're seeing? And how you're thinking about investing in the Carlisle experience and your service levels. And what that means for your ability to compete, especially in this kind of an environment that we're seeing and drive the outperformance that you've delivered for the last 2 quarters now relative to the market.

Thanks, Sue. I think -- it's a difficult environment for every. The volatility that's there. It doesn't contribute to anyone's planning and they don't want to have any waste out there. And I think that really hits on the Carlisle Experiences. It's just Carlisle has built up over all these years, just wonderful relationships on specifications. People can rely on our teams coming in there. While others may be looking to have cost cutting or maybe not adding as much as we mentioned, we continue to invest through the cycle. I think we have something like over 1,000 salespeople. I was just reading our NPS scores and there was a great correlation between frequency of contact with your salesperson and success at your job site. So I think at your office. So I think this idea that Carlisle has an unbelievable structure put in place, and we continue to enhance it and just continue to drive that relationship, that steadiness, that reliability when it starts with order entry and getting -- being in a specification and then taking that out and being having your call answered right away or having a great rep call on you with immediate answers to your problems. And then moving it through our factories and seeing our team deliver something like let's say, 98% on-time delivery plus. So you know it's going to be there. And then really warranty plays a big role as well. I think the investment in the warranty and the service we do in terms of inspections and things like that. Obviously, it gets you paid quicker, gives you confidence as an end user that you've got a great product on the roof and then the service afterwards in terms of training and other things like that. So I think when we look at competition, I think we want to continue to invest to be the leader because we believe that I think it showed in the third quarter that even in a rising pricing environment where we tend to be the price leader, we're not seeing any suffering demand because I think people are seeing the value and that points right to innovation again. And what we want to do is drive innovation that provides value that we can actually monetize both the distributor of the contract or everyone in the system and can monetize that value creation we can to in terms of greater content per square foot in terms of greater margin per square foot.

Okay. That's very helpful. And just in general, how would you contextualize the competitive backdrop today?

I think the competitive backdrop is, I'm going to say, relatively unchanged. We've got some very good competitors that are out there. We've competed against them for a long time. They're well known. They have good leadership teams. You know the names. They're extremely professional. We mentioned years ago when [ John Omar ] went over to [ GAF ] and we saw the team at [ Ameris ] be created that we knew those were improvements in the management team. So I'd say the competitive environment is still quite robust. I think the team's competitors do a good job every day. We have seen a couple of new entrants, but as we mentioned, as of yet, no real impact on us and our teams.

Your next question comes from the line of Bryan Blair from Oppenheimer.

You noted that structural cost savings continue to ramp at CWT from automation footprint consolidation, in-house resin capacity, likely some other factors as well. If we were to assume flat volume going forward, which is hopefully conservative given the share gains that your team is experiencing there. What would be the carryover cost savings or equivalently, the margin lift in 2027 under those circumstances?

Yes, I'll take that one. So Bryan, thanks for the question. As we talked about these investments that we made to improve operating efficiency at CWT, those were all substantially completed at the beginning of this year. So just as a reminder, for this year, we expect somewhere between $20 million and $30 million of contribution from these investments. We'll get a little bit of benefit carryover in Q1. And from these specific investments we made, the [indiscernible] gets that many more. But with that said, there are a big runway where there's a lot more opportunities through similar types of investments and more automation, more maturity in COS and other things that we could do there. So we still believe the runway to get up to 30% is there through 2030 to get to our Vision 2030 targets, we have CWT getting up to 25%.

Yes. And Bryan, I'll just add and Mehul can jump in on this, too. But the progress that we made really got masked. I mean the team did an excellent job. And if they -- some are situation at CCM, if the cost has kind of continued to increase and overwhelm some of CWT's progress in the third quarter. I think Mehul told me it was multiple hundreds of basis points that without that rise, if we had just been where we were at the end of the second quarter, I think we would have had I mean what would you say, 500 basis points or something CWT improvement. So it's real, it's there. Unfortunately, that continued escalation around materials and that lagged the pricing and certainly the diesel and freight [ search ] situation, took a lot of that good press that would have been in CWT and would have shown the great progress the team is making kind of masked it and so they didn't get credit for it.

Your next question comes from the line of Tomo Sano from JPMorgan.

Maybe on CCM, reroofing grew mid-single digit this quarter. So given everything that's changed recently, are you seeing any change in removing activities, whether in project timing, customer behavior or the pipeline as you look into 2027?

No, Tomo, we're not. Thanks for the question. As we mentioned, I think, in every one of these conference calls, that's a significant part of our business. We view it almost in a annuity-like manner in the sense that when you tend to work with Carlisle on your original roof, I think, and it's probably true with our competitors as well that you tend to stay with that when you do the reroof you set of distributors are doing a great job of paying attention to [indiscernible] age. Our contractors are providing service every day on those roofs and making repairs and that. And so there's quite a relationship there. As well as we have the warranty data. And so we keep a really good track record of where we are with these jobs and when they need to be reverted and as many people, not just me even at other companies. They've said, reroofing is just not an option. You can delay it a little bit, but ultimately, you got to do that. So I don't see any change in reroofing demand as we go into the fourth quarter and as we go into 2027. And obviously, we like to see new construction to because that means more roofs to be roofed in 17 to 25 years as we keep going forward. I won't be around for that. But obviously, the building stock that we had 15 to 20 years ago, as Mehul articulated, is still moving through the system and providing great demand on that 70% of business of ours that is reroofing.