Atkore Inc (ATKR) 2016 Q3 法說會逐字稿

Greetings and welcome to the Atkore International third-quarter fiscal 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Kim Sansone, Communications Specialist for Atkore International. Thank you. You may begin.

Good morning and welcome to the Atkore International fiscal 2016 third-quarter financial results conference call. Participating on the call today are John Williamson, President and Chief Executive Officer, and Jim Mallak, Vice President and Chief Financial Officer. We will refer to a brief slide presentation posted to our website this morning to supplement our prepared comments.

Before we get started, I'd like to point out that this conference call contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks are outlined on slide 1 and in the press release that was posted on our website.

This presentation also contains non-GAAP financial measures. Reconciliations of non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are included in the press release and the appendix to the presentation.

Finally, when we refer to the information relating to a quarter or a year during this call, we are referring to the corresponding fiscal period. Any reference to a year is a full fiscal year, which runs October through September.

With that, I would like to introduce John Williamson, President and CEO of Atkore International.

Thanks, Kim. Thank you, everyone, for joining our third-quarter 2016 earnings results conference call. I'm especially pleased to welcome you to our first quarterly conference call as a public company following our IPO in June.

I'd like to start the call with a brief overview of Atkore International for those of you that might be relatively new to the story. I'll move into some of the highlights from our third-quarter results and provide an update on our current market conditions.

Then I will turn the call over to Jim, who will discuss our results in more detail, including commentary on the segment performance as well as our outlook for the remainder of the year. I'll wrap up with some brief closing comments before opening the lines to take your questions.

I'll begin on slide 3. Atkore International provides mission-critical products and value-added services enabling customers to depend on us for a broad range of solutions. We operate in two reportable segments: Electrical Raceway, and Mechanical Products & Solutions, or MP&S. We maintain the number-one or number-two market position in several product categories as measured by our adjusted net sales.

We have established a reputation as an industry leader through quality, availability, delivery, value, and innovation as we offer products through electrical distribution, industrial and specialized distribution, as well as direct to OEM customers. Both of our reportable segments have large addressable markets and close adjacent opportunities. Across both segments, we predominantly serve the electrical portion of the US construction demand, which primarily consists of new nonresidential construction and maintenance, repair and renovation, or MR&R spending on existing nonresidential structures.

Moving to slide 4, our Electrical Raceway segment offers must-stock products for over 12,000 US electrical distributor branches. These products deploy, isolate, protect a structure's electrical circuitry from the original power source to the final outlet. We have the number-one market position in steel conduit, PVC conduit, and armored cable while occupying the number-three market position in flexible and liquid-tight conduit, and cable tray, cable ladder, and fittings.

Turning to slide 5, our MP&S segment manufactures products that frame, support, and secure component parts in a broad range of structures, equipment, and systems in electrical, industrial, and construction applications, including in connection with our Electrical Raceway products. The segment includes two well-positioned, attractive, high-margin product lines: metal framing and fittings, and in-line galvanized mechanical tube. We have the number-one market position for in-line galvanized mechanical tube and the number-two market position in metal framing and value-added fittings.

We have experienced quite a significant turnaround in our business since 2011, which is worth noting. On slide 6, you can see that in 2011 Atkore had a limited strategic vision, a go-to-market strategy which lacked an alignment of our Electrical Raceway product lines with our customers, and really no growth or M&A strategy. From that time through 2015, the Company has undergone a significant transformation.

We upgraded a large majority of the senior leadership team with a combination of people brought in from the outside and promotions of people who were with us, and we developed and executed a clear business strategy. During those four years we have also transformed our business mix, strategically rebalancing our portfolio to focus on our core markets, core customers, and strongest market positions through six acquisitions, four divestitures, and four closures.

We improved our operational efficiencies during this time, and we invested in new product development while improving quality, delivery, and service. These improvements have allowed us to change our pricing strategy from a volume-first mentality to a more balanced and strategic approach, guided by our commitment to providing value to our customers.

This transformational period has set the foundation for our strategy, and we believe that we are in the early stages of our growth story. There are three components to our business strategy.

First, we expect to drive growth in a variety of ways including expansion of our market position into high-growth segments. We plan to innovate with new product development and to transform our portfolio by executing accretive M&A opportunities.

Second, we will expand margins through our strategic pricing initiatives, focusing on our product mix while leveraging raw material usage savings and manufacturing productivity savings. And third, we will deliver cash flow through strong earnings growth, maintaining our disciplined CapEx deployment and efficiently managing our working capital.

Slide 7 highlights the Atkore Business System. We are proud of what we've accomplished at Atkore and the hard work it took to get where we are. Our success is not just the result of hard work, but is a direct result of the Atkore Business System, or ABS, as we refer to it.

Based on the best business systems we have collectively been part of, ABS is the mindset, skill set, and toolset that drives every element of our business. We focus on strategy, people, and process across the entire organization with the engine of our business system being Lean Daily Management, how we run the business we have today, and the Strategy Deployment Process, which drives critical resources to the initiatives that create the business we aspire to be tomorrow. Our results are a direct correlation of institutionalizing ABS.

Now moving into our third-quarter highlights on slide 9, our adjusted net sales, which removes the impact from our fence and sprinkler product lines exited in the first quarter, increased 2.2% to $396 million driven primarily by volume growth of 5.3%. Adjusted EBITDA margin increased 490 basis points due to our strategic pricing initiatives and manufacturing productivity. Our strategic pricing initiatives allow us to pass through raw material input costs and earn a premium due to our service levels, including product availability, delivery, and our ability to co-load and ship multiple products from a single order.

In the third quarter, we demonstrated our ability to manage and grow margins in a rising commodity price environment. On a sequential basis, compared to the second quarter of 2016, we experienced rising raw material input costs. During that period, our gross profit margin expanded 230 basis points from 25.9% to 28.2% and our adjusted EBITDA margin expanded 310 basis points, a function of volume growth, strategic pricing efforts, and productivity gains.

These improvements are due in part to our ability to pass through the change in raw material input costs, but are also a credit to our achievements in our customer service performance, including product availability, delivery, and our co-loading capabilities.

Our net income on a GAAP basis increased by 8.3% compared to the prior year's quarter. This figure was negatively impacted by one-time costs largely associated with our IPO. Our adjusted net income increased 34%, excluding the impact of these items.

Our earnings per share increased 10%, while our adjusted earnings per share, which excludes those nonrecurring items, increased 35.5% compared to last year's third quarter.

Finally, our recent successful initial public offering is testament to the hard work and dedication of our more than 3,200 employees. As excited as we were for our market debut on Friday, June 10, we were as excited to get back to work the next Monday, focusing on our customers and running our business.

With that, I'd like to turn the call over to Jim, who will walk us through our financials in more detail.

Thanks, John, and good morning to everyone. Continuing on slide 9, total sales were $396 million, down year-over-year from $432 million, primarily due to the exclusion of $45 million of sales related to the fence and sprinkler product lines that we exited in the first quarter of 2016. Excluding the fence and sprinkler product lines in the prior period, our adjusted net sales grew 2.2%, bolstered by volume growth of 5.3%.

We experienced a $20 million increase in volume of PVC electrical conduit fittings, medical electric conduit and fittings, armored cable and fittings, as well as improved sales from our international locations and construction services. Offsetting volume growth, sales declined by $8 million due to: lower net average selling prices, reflecting the year-over-year declines in raw material input costs; $2 million due to the impact of a stronger US dollar on reported foreign currency sales; and $2 million due to decreased freight revenue billed to our customers.

As a reminder, the majority of our customer transactions are priced to the current spot rate of the commodities from which they are made. As material input prices increase, we are generally able to pass through those increases in higher pricing over a 45- to 60-day time span.

On a sequential basis, our average selling prices increased during the third quarter from the second quarter, a reflection of the pass-through of raw material costs in the quarter. As you think about some of our key input costs, steel was down 4.8% year-over-year in the third quarter and remains down 18.8% year to date. Copper was down 20.6% in both the third quarter and year to date; and PVC resin was down 2.4% in the third quarter and down 1% year to date.

While input costs declined compared to the same period last year, they increased sequentially compared to the second quarter of 2016. To be more specific, our cost of goods recognized in our financial results increased 11.3% for steel, 2.7% for PVC resin. Our cost of goods for copper declined 1.5% quarter over quarter.

We continue to see increases in our cost of goods for steel in the first part of the fourth quarter. While our input costs increased sequentially for steel and resin, so did our average selling prices, as pricing for our steel-based products increased 10% and pricing for our PVC-based products increased 4.9%. Despite a decline in underlying copper costs, we were still able to increase the average selling prices of our copper-based products by 2.2%.

Gross profit increased to $112 million for the third quarter, up 41.6% compared to the same period in 2015. The increase was primarily attributable to three factors: higher volumes; our ability to improve our pricing over material costs, including a premium we earn by meeting expectations of product availability, delivery service levels, and co-loading capabilities; and improved productivity in manufacturing and freight and warehousing costs. Offsetting these increases was the loss of the gross profit contribution from our fence and sprinkler product lines, which we exited in the first quarter of 2016.

As John mentioned, our ability to consistently meet and exceed our customer's expectations regarding product availability, quality, and delivery has enabled the success of our pricing strategy and helped expand our margins. Operating income increased $42 million, up 50.7% compared to $28 million in the third quarter of 2015. The increase in operating income reflected gross profit improvement of $33 million, offset by an increase in SG&A expenses of $18 million and intangible asset amortization of less than $1 million.

The increase in SG&A was due in part to nonrecurring costs associated with our IPO, including a $13 million termination fee related to our prior consulting agreement with CD&R, and $2 million of accounting, legal, and other professional fees. Additionally, we recorded $4 million of noncash stock-based compensation to revalue our outstanding stock option awards on a mark-to-market basis.

Adjusted EBITDA, which excludes nonrecurring, noncash, and extraordinary items, increased to $67 million, up 44% compared to $47 million during the same quarter last year. Net income increased to $21 million, up 8.3% versus the third quarter of 2015; and adjusted net income increased to $26 million, up 34% versus the third quarter of 2015.

Basic and diluted earnings per share were $0.33 for the quarter as compared to $0.30 for the prior year. Excluding the impact of the consulting fees paid to CD&R, stock-based compensation expense, and inventory adjustments to market value, our adjusted earnings per share was $0.42 for the quarter, an increase of 35.5% compared to $0.31 in the prior year..

Next I will walk through our segment results in more detail. First, for our Electrical Raceway segment on slide 10, we experienced volume growth of 5.3% in the third quarter. Net sales increased $8 million or 3.2% to $260 million. The increase was due primarily to higher net volume of $13 million related to increases in our metal electrical conduit and fittings, PVC electrical conduit and fittings, and armored cable product categories.

Adjusted EBITDA for the quarter increased $21 million or 68.6% to $52 million. Improved delivery, quality, and service enabled us to expand our profitability in excess of the year-over-year decreases in our raw material costs. Adjusted EBITDA margin increased 790 basis points to 20.2%.

Moving on to our Mechanical Products & Solutions on slide 11, volume grew 5.2%, driven by sales from our international locations and construction services. Net sales in the quarter declined $44 million or 24.5% to $136 million. Excluding $45 million of sales in the prior-year quarter related to the exit of our fence and sprinkler product line, adjusted net sales increased just under 1%.

Adjusted EBITDA increased 3.2% to $23 million. Higher volume from our international operations and construction services drove our growth. Adjusted EBITDA margin increased 40 basis points to 16.9%.

Turning to our balance sheet and cash flows on slide 12, we continue to maintain a very strong balance sheet with significant liquidity that provides us with the flexibility to fund our growth initiatives. Cash and cash equivalents at the end of the quarter was $131 million.

Year-to-date CapEx totaled $13 million. Net cash flow from operating activities was $85 million, and net debt was lowered $71 million to $500 million. Our leverage, which we defined as net debt to trailing 12-months' adjusted EBITDA was 2.2 times.

As we turn to the full-year outlook on slide 14, we have confidence in the continued momentum that our business has experienced over the first nine months of 2016. For the full year, we now expect adjusted EBITDA in the range of $226 million to $236 million for the full-year 2016.

For the Electrical Raceway segment, we expect adjusted EBITDA of the range of $170 million to $180 million. For our MP&S segment, we expect adjusted EBITDA between $76 million and $86 million.

Overall volume growth in the fourth quarter, which is a 14-week quarter in 2016 compared to 13 weeks in 2015, is expected to be between 4% and 8%. Our Electrical Raceway segment is expecting growth between 9% and 13%, and our MP&S segment is expecting a low single-digit contraction, principally due to headwinds in industrial and manufacturing end-markets such as solar, OEM customers, and the Department of Transportation. We do not see a prolonged contraction in most of these end-markets.

CapEx is expected to be approximately $22 million for the year. Full-year interest expense is expected to be approximately $41 million. And finally, we expect a tax rate of 36%.

Now I will turn the call back to John, who will provide some summary remarks.

Thanks, Jim. Turning to page 15, we have demonstrated our ability to deliver volume and profitability growth in the quarter, even with sequential headwinds from underlying raw material input costs. With that, I'd like to reiterate four key themes that we addressed throughout today's call.

First, Atkore is well positioned within the industry, occupying the number-one market position in several key product categories including both steel and PVC conduit, armored cable, and in-line galvanized mechanical tube. We believe we offer a superior customer value proposition through our commitment to product availability, delivery, and co-loading capabilities.

Second, we believe Atkore has strong growth potential, based on the markets we serve and where those markets are heading. Our opportunity for share gains include operational and commercial improvements, most recently demonstrated from our productivity improvements in manufacturing, freight, and warehousing costs in the current quarter. And we are committed to identifying and executing accretive M&A opportunities.

Third, we have momentum with demonstrated results, posting a 490 basis point improvement in adjusted EBITDA margin and a 34% increase in our adjusted net income over the same period last year. On a sequential-quarter basis, our average selling prices increased above the average rise of our input costs. We believe we have a clear runway for more gains.

Lastly, our team, our culture, and the Atkore Business System are built to outperform, and we have the bandwidth to take on even more. In closing, I want to thank all of Atkore's employees for their hard work and commitment to our customers, as well as welcoming and thanking all of our new shareholders for their support. Our best days are in front of us as we continue to build and grow our business for the future.

Melissa, please open the lines for questions.

(Operator Instructions) Andrew Kaplowitz, Citi.

Good morning, guys. How are you doing today? John, US construction spending, if you look at the quarter itself, the calendar quarter of 2Q, it slowed a bit as the quarter evolved. And as you know, Dodge starts have been all over the place this year.

So could you talk about the overall environment that you see both for US nonresidential and residential construction? And maybe within nonresidential, the new starts versus the MR&R market that you see.

Yes, we see the choppiness, certainly in the press and the starts for non-res construction. Overall, we're pretty bullish on non-res construction and for the shorter-term residential construction. We see that underpinned by the activity levels and the mood of our agents, distributors, and OEM customers as well.

So we think -- I think the consensus forecast for non-res construction spending as updated in this month is for a 45.8% growth in 2016 and 5.6% growth in 2017. And then we feel that that's what we're seeing and expecting as well.

We correlate to a more narrow group of verticals in non-res construction. Think lodgings, office, commercial, healthcare, educational, manufacturing to some degree. And we think that those verticals are basically holding up the kind of growth rates that we're talking about.

MR&R is growing faster than non-res construction in general, and we think the electrical component of MR&R is growing even better than that. Think of that is up to a third of our business, the maintenance repair and renovation. And as you think of things such as upgrading of LED lighting systems and a broader trend of digitization of buildings, we think that drags through a lot of our volume very well.

Okay, that's helpful. Then just shifting gears, how do we think about your margin performance in Electrical Raceway moving forward? If we look at your adjusted EBITDA guidance for FY16, it appears that you're suggesting down sequential margins for the segment into the fourth quarter, even at the higher end of your range.

You seem to be able to price pretty well versus higher raw material costs. So why would you get down sequential margin in the quarter? Is it just some conservatism in your thought process?

Yes, the big picture is we're marching toward a 20% EBITDA margin across all of that core, and so Electrical Raceway will definitely hold up its end of that. So over numerous quarters, we're going to continue to expand our margin.

Sequentially, though, there's a couple things you have to keep in mind in terms of absolute margin and in terms of percentage. Number one, as we pass through rising commodity costs, our revenue will go up while we do not necessarily expand the actual margin dollars that go with that.

Right? That's the pass-through effect. So, you can get compression in just the margin percentage by that dynamic.

Another important dynamic that's important to keep in mind is that our costs will typically go up -- our commodity costs, our input costs will go up quicker than our average sales price does, on average. But we will -- we are able to capture rising commodity prices passed through to the customer within, say, 60 days. And we have to pass declining commodity costs on to the customer within 90 days.

So there's a little bit of lag there. When you compare that to a sequential quarter, that lag can get you; it's kind of single-digit millions of dollars impact on our business.

The lag can get you. And then when you compare to the prior year's lag, you can get a quarter-over-quarter comparison that in the short run can look a little odd at first.

It's not meaningful when you think about our march towards 20%. But sequentially you just have to keep those two things in mind.

Generally, we feel very strong about our pricing initiatives and really everything that's driven by the Atkore Business System, seeing productivity really across the whole organization.

Okay. Thanks for that, John.

Julian Mitchell, Credit Suisse.

Hi; good morning. I just wanted to circle back on that overall Firm-wide EBITDA guide for the year. I guess if I look at it year-on-year, you're looking at the EBITDA growth slowing to maybe 6% or 7% I think in Q4. It was up over 40% in Q3.

Is that solely just to do with this pass-on of input costs? Or is there something else happening with other costs within the COGS or something on the SG&A line?

Yes, Julian, we think that's a good range and the appropriate range to give on the entire year. The bigger impact is going to be that lag effect of how commodities move through the P&L. I think that's going to be the bigger effect.

There's other things that happen at the end of the year where we true things up for medical costs and other things that can, at the end of a quarter, end of the year, the final quarter of the year, can move that number around a little bit, which is built into that range.

I would say nothing to worry about fundamentally, though. It's the appropriate range to give you guys. But I think the fundamentals are solid throughout that.

Got it; thank you. And then just secondly on the MP&S segment, it's clearly pretty lumpy. But I guess if you look at some of the comments from electrical peers over the last 10 days, Eaton or Rockwell, for example on the project or solutions and service side of things, it does seem like the US market's been pretty soft for the past few months.

I understand your own revenues in MP&S are jumping up and down quarter to quarter. But maybe just talk a little bit about the overall project and ordering environment within MP&S.

Yes, great question. And keep in mind for the Electrical Raceway business, that's fundamentally the same market, the same customers, and the same dynamics. For MP&S, it's a broader group.

Certainly it's all of our international business, so that's important to keep in mind. We have an English business; it does little bit of work outside of England on the Continent in Europe. And then we have in Asia-Pacific business which is mostly sales and Australia and New Zealand.

That business also -- MP&S also has the largest amount of projects. In our Asia-Pac business, in our Unistrut Construction business here in the US, this is project-based where we're getting large orders for literally millions of dollars and then billing for that over as much as a half a year or more.

So it's just by its nature more lumpy, by its nature more international, by its nature tied to different primary drivers.

The US business for MP&S -- we think of Raceway as non-res construction; we think of MP&S, some construction exposure, but in general we'll refer to it as industrial. But the drivers there, you have the renewable energy, such as solar. We do a lot of work to Department of Transportation, as Jim mentioned earlier. And we sell framing, steel framing, into off-road vehicles.

Right now, all of those are a little bit soft. We like all of those markets long term, and typically they don't all move in the same way. But right now they're a little bit soft.

We'll see that in the fourth quarter. We might see a little bit of softness in the first quarter of 2017. But overall, just keep in mind it's a lot broader business; different drivers than Raceway; and I think right now just a little soft in a couple segments that we basically do like over the long period.

Very helpful. Thank you.

Matt McConnell, RBC Capital Markets.

Thank you. Good morning. So, appreciate the fiscal 2016 outlook, but if we look think forward to next year, could you just give high-level comments on some of the key margin drive buckets? So between volume leverage, price/cost, productivity, just maybe some high-level comments about how those three would contribute to year-over-year margins next year?

Yes, let me frame it up and Jim will probably help with some specific numbers as well. Matt, it's the same stuff we're driving now. Growth is going to be the biggest driver of our margin improvement.

There is still some opportunity on pricing. What we've done over the Raceway products -- which is just more disciplined pricing, where you're choosing which product lines and how you're going to price per product line, so your mix, your geography and which customers you're going to win with. That's going to deliver some more savings as well.

Productivity, we're really happy with the momentum we have driven by the Atkore Business System in productivity. So volume, pricing, and productivity are the big pieces there.

Yes, Matt, and when we take a look at growth for next year, we expect our base market growth to be between 2% and 3.5%. We have other growth initiatives also that could add anywhere from 0.5% growth to 2% growth on top of that. So we're looking anywhere -- call it 2.5% to 5% growth next year.

And we're coming in this year -- our guidance is $226 million to $236 million on EBITDA margins. Obviously, we're going to get the fall-through from the additional volumes there next year and everything.

So we're not ready to give full-year guidance on in 2017 yet, but we expect our continued improvement that we saw this year.

Okay, great. Thanks; that's helpful. Then relative to the 2.5% to 5% volume growth, you discussed non-res being up something like 5% to 6%. So what's the disconnect there, or how do you bridge those two?

Yes, we do take a little bit more conservative approach to the starts numbers, I think just as a matter of our process. I think our number, as Jim said, anywhere between 2.5% and, say, call it 4% is depending on the segment.

Our different product lines correlate more strongly to different verticals in non-res. So there might be a little bit of conservatism there, but it's just based on the primary driver and then the lag that we will see in our business.

A lot of -- the volume doesn't really hit us to as much as nine months or a year after the starts occur. So we play that lag in there a little bit as well.

And don't forget the MR&R impact mutes any growth from the overall market. It mutes it on the top side and on the downside because that tends to be a more constant demand.

Okay. All right, great. Then one quick follow-up on M&A. John and Jim, you mentioned it a couple times in the prepared remarks.

Can you just give us an update on the pipeline and what you believe the capacity is for Atkore right now, both maybe on an organizational basis and on a financial basis?

Yes, as you know, we have a pretty strong mindset for this and a pretty good track record certainly in our careers, but more importantly here at Atkore. We have over 25 targets that we are -- currently in what we call our pipeline, which means we're doing some work on it, which represents as much as $2 billion of sales on an annual basis and $300 million of EBITDA.

But more importantly than that, what we would call closer-in, in-process, actionable within 12 months, we have a half-dozen deals, which are approximately $500 million of sales and $75 million of annual EBITDA that we are actively working. And of those six, there's two that we're actually in due diligence on, a combination of about -- it's a little bit more than $250 million of sales and $50 million of EBITDA.

As you know, we can't control these outcomes entirely and they may happen, they may not. If we do a deal in the next six months, nobody should be surprised. If we don't do a deal in the next six months, nobody should be surprised.

But be assured we are actively working on it. We believe we have $100 million to $150 million per year that we could deploy for M&A. As we've spoken in the past, we have a very strict criteria: it has to be strategic; it has to be accretive within a reasonable amount of time; everything we do is debt responsible; and we have to have the bandwidth as a team to pull it off. What I will tell you is we have tremendous bandwidth with the team we have now, not only for M&A but especially for M&A and integration.

Great. Thank you very much for that answer.

Steve Tusa, JPMorgan.

Hey, guys. Good morning. Congratulations. Way to start off on the right foot here.

Thank you.

There was an inventory cost adjustment of around $10 million. It was backed out of adjusted EBITDA.

It's unclear. Is that included in the gross margin calc that you guys talk about? I know that there is the gross margin you guys talk about and adjusted EBITDA may be on a like-for-like. So I'm just curious as to how you treat that within the discussion of the gross margin.

Yes, that is included our gross margin. That adjustment is a lower cost of market adjustment that we make, and it can go up or down as commodities move up and down due to our being on LIFO.

So there's a reserve that floats up and down based on how commodities float. It's all noncash, so it does take gross margin, but we back it out for adjusted EBITDA.

Okay. Then just on free cash flow. I think the way we calculated it, it was modestly negative in the quarter. What's the outlook on free cash going forward?

We will -- we look to be back -- the third quarter was really impacted with the IPO costs and having to settle the CD&R consulting agreement. So when we -- and it was also timing of the quarter. So we see our after-tax cash flow being about $47 million in Q4. (multiple speakers)

Yes, okay. Makes a ton of sense. Thanks a lot. That's it.

Rich Kwas, Wells Fargo Securities.

Good morning. This is Deepa Raghavan for Rich Kwas. I have a couple of questions.

One of your peers was pretty bearish on the environment out there. They noted a decrease in copper spreads, inability to get price, distributors' unwillingness to stock on inventory, etc. Just curious what you are seeing with regards to inventory, price realization?

And I know you mentioned favorable copper spreads. I'm just curious how you were able to see something as favorable versus what was provided in their bearish outlook.

Yes, it's a great question. Not everyone who sells to the same customers is a perfect comp for Atkore. I think the one you're referring to -- keep in mind that they basically are only making copper-based products. They don't have the broad portfolio that we have and the ability to package our portfolio.

I can't talk about somebody else's pricing strategy per se, but I can talk about ours. We are never doing anything to drag volume in for a month or a quarter.

We're always thinking value. We're making very purposeful decisions on product mix, on customer mix, on geographical mix. So we think our pricing performance will be different than other people in the industry.

Yes, certainly the channel will move inventory in and out, and they'll buy ahead of price increases if they think that they need to or there is an opportunity to. In all honesty, we don't see the channel as being overleveraged right now. We see that they can't hold out for a long period of time, so we don't see it being really that disadvantageous of a competitive environment for our product lines.

But for that exact comp, I would be very cautious about thinking that Atkore and that business are very good comps.

Okay, thank you. In your fiscal quarter three, just curious, adjusting for the lag effects and your year-on-year compares, etc., were you able to pass on all of the raw material price changes? I'm asking this specifically with regards to how you are thinking about your ability to get commodity price increases, especially with regards to steel and potentially PVC ahead, which means you're expecting to pass all of the raw material price changes, right?

Are there any other dynamics that we should be thinking about? That's pretty much what the question was pointing to, is like in F-Q3 were you able to get -- were you able to pass on all price? And how should the forward outlooks point?

Yes, yes, great, Deepa. The answer is yes. I'm going to give you a couple dynamics around that as a reminder and then some nuance too, this quarter.

Keep in mind that the we pass through on the upside commodity increases with price within usually about 60 days. It takes a little bit of time then for that to come through the P&L, as we have inventory and it runs through our cost of goods. And then I think everyone understands that.

When commodities go down, we hold on to it a little bit longer, but really it's about 90 days that we have to pass it on. So keep in mind there's always this 60- to 90-day lag -- sometimes favorable to our margins, sometimes unfavorable -- but in both cases, very short term. So just keep that in mind.

If commodities went really volatile at the very end of a quarter, there'd be a lag that could be -- that lag could be favorable or unfavorable in a way that you wouldn't really expect to see carry on through other quarters.

So we have been able to pass along changes in commodity pricing within the dynamic I just explained, with one exception, and that would be PVC conduit. But we see a lot of PVC pipe manufacturers or a meaningful amount of PVC pipe manufacturers selling a higher percentage into the conduit.

It hasn't been -- I wouldn't want to overstate it, but the impact on the quarter is really in the single-digit millions in our inability to pass through, like we have in other commodities, raw material costs.

Okay, thanks. My last one is -- you talked about potential solar-driven weakness in the first half of fiscal 2017. (technical difficulty) bit comps, but just curious if your views are the same or if you have any updated thoughts. That's it for me. Thank you.

Just Q1 in general?

Solar.

Oh, solar? Yes, yes, yes; thank you, Deepa. Yes, we like solar long-term. It's a pretty dynamic market, and we are very active with all OEMs and with multiple solutions.

We think that the fourth quarter and then the first quarter will be down sequentially from third-quarter levels as much as double-digit in volume. Now that's solar; we have the ability to redeploy our capacity that makes solar products into other in-line galvanized tube products that we can sell elsewhere.

So before our ability to sell that capacity elsewhere, we think the solar impact, isolated, compared to a Q3 level in the fourth quarter and the first quarter, could be about a double-digit volume hit.

We think over time it's -- 2016 was a pretty strong, especially in our first quarter, which was the end of calendar 2015 -- pretty strong business for us. And although we don't see that rebounding to the 2015 levels for a few years, we still consider it a very good market and a market we serve well.

Shannon O'Callaghan, UBS.

Morning, guys. Hey, thanks for the color on the M&A pipeline. Other than the numbers, just maybe a little, few thoughts around what you're trying to accomplish with the M&A that you see out there. Are you targeting higher-growth, higher-margin areas? Just a little more your goals there.

Yes, Number one is going to be around our Raceway portfolio; it's a great franchise we have. We play real strong there and getting stronger. So fleshing out that Raceway portfolio where we can -- either consolidating in core or moving into close adjacencies, where we're selling more products to the same customers delivered on the same trucks, that's 1A of our M&A philosophy.

1B would be to look at things in Mechanical Products & Solutions, where we're serving the same customers, mostly in the US. There's a couple in the pipeline that are around that.

So it's going to be close to core, near adjacencies, leveraging market and commercial presence that we already have. As you get into the next level of priorities, it's going to be leveraging our manufacturing capabilities.

I'm going to give you an example, and it's just an example. We have to have steel tube, in-line galvanized steel tube capabilities for steel conduit. It's a core product for us; it's a cornerstone of our Raceway portfolio.

Well, we're also able to leverage that by selling in-line galvanized steel tube too many different other verticals, such as solar. So that's leveraging a core competency we need for our core.

And there are some other opportunities there as well. If you think of PVC piping, there is some PVC piping opportunity that would leverage our eight plants, our strong capabilities around buying and then manufacturing PVC pipe. That's not necessarily Raceway, so that would be the second circle, if you would.

And then I think we've opened up the aperture a little bit, but just a little bit, to consider acquisitions that were broader than that, that would really leverage the really tremendous bandwidth and capability we have with our team, our culture, and our business system.

This would be something that wouldn't be very far afield from what we're capable of doing, but might actually be a strong position on a third segment down the road. Certainly, we're spending 90% of our time on 1A and 1B, and 9% of our time on 2, and 1% of our time on 3. But the aperture is about that broad.

Okay, great. Then as you think about this component of market outgrowth when you were giving the comments around 2017, what do you see as really driving that next year? Are there new products that are going to drive that, or some of these markets that you've been targeting that are a little higher growth areas? What do you think is going to drive the market outgrowth next year?

Yes, three things. Leveraging our Raceway portfolio; we think we've just scratched the surface of being able to really create true customer value by how we deliver our entire portfolio through our distribution network and really take care of the distributors and the contractors. So that's number one.

Innovation is a big one. Currently, new product sales as a percentage of our business is in the single digits, mid single-digit, call it 5%. Our goal is to get it to 15% over a couple years.

We have 30 products in the pipeline right now that's actively being managed. The first-year revenue for each of these is about $40 million to $50 million combined, so that's a good start, not near where we need to be, but we're really happy about the success we've had with our Luminary and our follow-on Luminary Cable products.

And then we have a new product coming out which is the Super Kwik-Fit, which is a Kwik-Fit connector attached to the end of steel conduit -- and the super-coupling, the super-fitting, which is the same product sold individually to contractors through distribution -- that we feel are going to be very, very -- they are being well received and we are into launch now.

So leveraging the Raceway portfolio, new product innovation, and then thirdly it's going to be moving into specific verticals that are growing a little bit faster. Data centers, where we do business over our construction business as well as our parts businesses; and healthcare, where we do business over those two pieces of our business as well. Growing faster and we are well positioned with the decision-makers to get a better growth rate in those segments.

Okay, great. Thanks.

Andrew Casella, Deutsche Bank.

Hi. Thanks for taking the questions and congrats on the quarter. As we look at the M&A pipeline, can you talk a little bit about what type of valuations you think you'll end up paying for some of these acquisitions? And then what are the potential synergy opportunities?

And I guess the follow-on to that would be: How do you think about the balance sheet and the capacity to acquire those, and what type of releveraging impact that might have?

Obviously, we're still working on a lot. The best thing I can do on prices is look backwards on our six acquisitions that we've done to date. We've paid close to 6 times gross multiples on those, close to 5 with fully loaded synergies. So I would expect maybe to be a little bit richer than that, but not a lot.

I think when we come down, as we said, from free cash flow we can fund $100 million to $150 million, we think, a year from out of cash flow, which will end up being that we need to take on a little more debt. We would do that.

I think we would like to keep our leverage definitely, as long as we have a clear sign of how the delever in the -- keep it under 4, but with a clear sign of how we're going to delever before we put debt back on the balance sheet.

Got it; that's helpful. Then just my follow-up question is, can you talk a little bit about working capital expectations? I saw AR came up a little bit; inventory really didn't react much. Just how we should think about it for the year and I guess as we look forward.

Yes, AR, based on when -- because a lot of our payments come in from the buying groups on the 25th, we closed -- our quarter ended on the 22nd this year, so we had a little bit of timing difference there. I think, in general, where you're going to see it is at the end of the fourth quarter all those payments will be in, because we'll close on the 31st.

So we'll be fine. Working capital will be in line with our normal year projections.

Yes, and as far as working capital in general, if you look over the last couple years, we've pulled as much as --

30 days out of working capital.

Yes, 30 days out of working capital. And this is with our delivery levels going up literally 1,500 basis points. So we've had really a couple years of strong delivery and strong working capital performance under our belt.

We think we're going to continue at the levels we are now, with some incremental improvement. But we're feeling pretty strong about our working capital management.

Thank you. There are no further questions at this time. I'd like to turn the floor back to management for final remarks.

Great, then we'll conclude the call. First of all, thank you very much for your interest in Atkore. We feel that it starts with our team, our culture, our business system.

We've built the Company over five years to outperform. We feel we are outperforming and we'll continue to do so. And we look forward to updating you on our business next quarter.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.