Atkore Inc (ATKR) 2016 Q4 法說會逐字稿

Greetings and welcome to Atkore International's fourth quarter FY16 results.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Keith Whisenand, Vice President, Investor Relations for Atkore International. Please go ahead.

Good morning and welcome to Atkore International FY16 fourth-quarter financial results conference call and webcast. Earlier this morning, we released our financial results for the full year and quarter ended September 30, 2016, along with a supplemental slide presentation. The presentation should be viewed in conjunction with the earnings release, both of which can be found on our website under the investor relations section on Atkore.com.

With me today are John Williamson, President and Chief Executive Officer, and Jim Mallak, Vice President and Chief Financial Officer.

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.

The presentation also contains non-GAAP financial measures. Reconciliations of the 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'd like to introduce John Williamson, President and CEO of Atkore International.

Thanks, Keith, and good morning, everyone. I will open my comments by reiterating our investment thesis, noting key takeaways from 2016, updating you on the progress of our strategies to drive shareholder value, and touching on the full-year results before turning the call over to Jim Mallak. Jim will discuss our fourth-quarter results in more detail, including commentary on the segment performance, and will finish prepared comments with what we're seeing in the market and our outlook for FY17.

We believe you'll come away confident that we have delivered on our promises for 2016 and are in line with expectations for 2017, and are managing the business and strategies the way we told you we would.

For those of you who are new to our story, there are four high-level elements to that core investment thesis. First, we're a strong Company with industry-leading market positions and brands, including superior customer value propositions, a compelling product portfolio, and scale that provides barriers to competitive entry.

Second, we have a compelling and multifaceted growth strategy, centering around the growth of the markets we serve, as well as our ability to serve the market with innovative products that save our customers time and money.

Third, we have momentum in driving results and a runway for more, continuing our improvements in quality, delivery, and productivity; getting traction on pricing initiatives; and managing our working capital, adding up to meaningful improvements in EBITDA, earnings per share, cash generation, while maintaining line of sight to even better results.

Fourth, we have a team, a culture, and a business system that is built to outperform so that no matter the business environment we encounter, our ability to move with agility to maximize opportunities or to mitigate down side positions us to continuously drive shareholder value.

Moving to slide 3, there are a few takeaways I want to point out from 2016. First, our strategy to grow shareholder value by expanding margins, delivering cash flow, and driving growth is progressing as planned. We delivered 490 basis points improvement in adjusted EBITDA margins in 2016, with productivity and pricing initiatives having the biggest impact.

The productivity gains were driven across the organization by the Atkore business system, with the pricing improving the result of improved delivery and availability and a purposeful focus on geographies, customer mix, and product mix. Most exciting, and a big part of our product mix, is the momentum we gained on our innovative new products, which not only add value to our customers, but bring with them accretive margins.

A couple of key areas of new product focus; labor efficiency, addressing the shortage of skilled labor, like our Super-Kwik Couple Conduit and couplings, which helps our contractors reduce total labor and time on site. As well, products targeting industries with-above average growth, like the LED lighting market with our Luminary MultiZone cable, allowing for ease of installation in this strong market.

Or our MASSH-400 sign post product line focused on the Federal Highway Authority standards for improved driver safety in the event of a crash, and worker safety during construction and installation. Our momentum and innovation and new product development is increasing, with our innovation funnel showing over $100 million in potential new product sales.

We have been successful in translating our earnings growth into strong cash flow by maintaining a disciplined capital deployment process and efficiently managing our working capital. In 2016, we reduced net debt by $142 million, and a total reduction of almost $300 million since we purchased Tyco's 40% minority ownership in 2014. With cash on hand of around $200 million, our leverage ratio is 1.8 times at year end.

Our strong balance sheet and cash-flow profile afford us significant M&A firepower and allow us options in paying down and managing outstanding debt. Specifically on the M&A front, we have a robust acquisition funnel with over 50 targets, about half of those past the identification stage, where we have made an approach.

Two to three of these have the potential to be executed during 2017, but only if they meet our deal criteria of fitting strategically, having short-term profit and cash accretion, and are debt responsible. Our team has significant bandwidth to execute and integrate any transaction.

2016 marked a year that Atkore team expanded adjusted EBITDA and year-over-year margins. We are continually able to outperform, regardless of materials cost going up or going down in times of brisk or sluggish volume.

Critical to the customer and an enabler to our financial improvements we'll talk about today, we improved our quality, delivery, and availability. We improved our on-time and in-full delivery metric, or service factor to 94%, a number that a few years ago was in the low 80s. We also improved our quality to our customers by reducing defective parts per million by 36%, as compared to 2015.

The process-based culture core to the Atkore business system is the cornerstone of the improved customer experience. With these improvements enabling our go-to-market and our strategic pricing initiatives that have driven our financial results. To sum it up, our value-creation strategy is on track, with our performance in 2016 reinforcing that Atkore's team, culture, and business system is built to outperform and provide the runway for long-term growth and EBITDA expansion.

Moving to the 2016 financial highlights on slide 4, these results were delivered despite the challenges of volatility in material costs and soft market dynamics at the end of the year, including the choppiness seen in the industrial markets that our mechanical pipe products are sold into, like transportation and solar, where we are lapping the federal solar tax credit extension we mentioned on the last call.

Net sales adjusted for the 2015 divestiture of our fence and sprinkler product lines were down 2%, reflecting less than 1% volume growth in both segments, offset by material cost declines that were passed on to our customers. Adjusted EBITDA of $235 million delivered at the high end of our guidance and improving 43% year over year. Adjusted EBITDA margin was up 490 basis points to 15.5%, with electrical raceway up 710 basis points and mechanical products and solutions up 210 basis points.

While we are proud of these results, we need to point out that EBITDA saw lift in 2016 from the 53rd week of about $5 million, and the timing of the solar tax credit extension created a one-time benefit we estimate between $5 million and $10 million. Even without those one-time impacts, EBITDA grew 34%, but these points will be important to recall as we compare our outlook on 2017 to our 2016 results.

Choppy volume, and especially volatile input costs, are a challenge for any team. In 2016, we performed well in all combinations of inputs. We are strongly positioned with a multifaceted growth strategy. We have momentum on results and a runway for more. And we are built to outperform.

With that, I will turn the call over to Jim Mallak, who will walk us through our fourth-quarter financials in more detail.

Thanks, John, and good morning to everyone. Continuing to our consolidated fourth-quarter results on slide 5, total sales were $416 million, down year over year from $438 million, due to the exclusion of $41 million of sales related to the fence and sprinkler product line that we exited in the first quarter of 2016. Thus, our adjusted net sales grew 5% in the fourth quarter.

Our net volumes were flat as the last six weeks of the year weakened, compared against a stronger industrial market in 2015. And we lapped the extension of the solar tax credit John mentioned. These volume headwinds offset most of the favorable impact of the 53rd week, as well as improved sales from our international locations and construction services. Higher net selling prices drove the bulk of increased sales, reflecting our focus on selling higher value products and our strategic pricing initiatives in the pass-through of increasing material costs in the quarter versus the prior year and quarter.

Our strategic pricing initiatives allow us to pass through raw material input costs and allow us to earn price due to our service levels, including product availability, delivery, and our ability to co-load and ship multiple products from a single order. As a reminder, the majority of our customer transactions are priced to the current spot rates at the time of the order.

As material input prices increase, we are generally able to pass through those increases and higher pricing during a 45- to 60-day time span. Offsetting those increases was a $3-million reduction in sales due to decreased freight revenue billed to our customers, offset through lower freight costs.

Input costs increased sequentially in the fourth quarter for steel and resin and were close to flat for copper. Following that trend versus the third quarter, our average selling prices for our steel-based products increased 14%, and pricing for our PVC-based products increased 2%. The average selling prices for our copper-based products declined by 2%, floating back a little after increasing in the third quarter.

As you think about some of the external metrics for our key input costs for the quarter, steel was up 35% year over year versus the fourth quarter in 2015, and up 8% sequentially versus the third quarter of 2016. Copper was down 2% versus the fourth quarter of 2015, and about flat sequentially versus the third quarter of 2016. And PVC resin was flat versus the fourth quarter of 2015 and up 4% sequentially versus the third quarter of 2016.

Gross profit increased to $93 million for the fourth quarter, up 32% compared to the same period in 2015. The increase was primarily attributable to three factors: slightly higher volumes, including the 53rd week; our ability to improve our pricing over material costs, including a premium we earned by meeting expectations of product availability, delivery service levels, and co-loading capabilities; and improved productivity in manufacturing, freight, and warehousing costs. Offsetting these increases was the loss of the gross profit contribution from our fence and sprinkler product line of $1.8 million.

Adjusted EBITDA, which excludes nonrecurring, non-cash, and extraordinary items, increased to $61 million, up 14% compared to the same quarter last year. Our net income on a GAAP basis increased to $16 million, up $43 million versus the fourth quarter of 2015; and adjusted net income increased to $23 million, up $34 million versus the fourth quarter of 2015. Adjusted basic and diluted earnings per share were $0.36 and $0.35 respectively for the quarter, as compared to a loss of $0.19 in the prior year for both.

Next, I'll walk through our segment results in more detail. On slide 6, net sales for our electrical raceway segment increased $19 million, or 7%, to $273 million, as compared to the same period last year.

We experienced sales volume growth of 1.4% in the fourth quarter, including the 53rd week. The sales increase was due primarily to higher average selling prices driven by material cost changes and our pricing initiatives. Improved delivery quality and service, along with an increasing focus on innovation enabled us to expand our profitability in the quarter.

Adjusted EBITDA increased $13 million, or 38%, to $46 million, as compared to the same period last year. Adjusted EBITDA margin increased 380 basis points to 16.7%.

Moving on to our mechanical products and solutions segment on slide 7, volume declined by 1%, driven by tough comps in the industrial markets at the end of the year focused on our mechanical pipe products. That softness was partially offset by another strong quarter in our international locations and construction services, as well as the 53rd week.

Reported net sales in the quarter declined $40 million, or 22%, to $143 million. Excluding $41 million of sales related to the exit of our fence and sprinkler product lines during the same period last year, adjusted net sales increased just under 1%, with higher average selling prices offsetting the volume decline.

Excluding the impact of fence and sprinkler, adjusted EBITDA declined 11% to $24 million, as compared to the same period last year, and adjusted EBITDA margin decreased 220 basis points to 16.6%, driven by a shift in end markets and product mix. The fourth-quarter adjusted EBITDA margin came in roughly flat with the full-year rate of 16.7%.

Turning to our balance sheet and cash flow on slide 8, cash and cash equivalents at the end of the quarter was $200 million. Year-to-date CapEx totaled $17 million. Net cash flow from operating activities was $157 million, and net debt decreased $71 million to $430 million.

Our leverage, which we define as net debt to FY16's adjusted EBITDA was 1.8 times. So we continue to maintain a very strong balance sheet with significant liquidity to fund our strategy of accretive M&A. Now I'll turn the call back to John for the market and 2017 outlook.

Thanks, Jim. Turning to the market dynamics on slide 9, let me start on the left side of the chart with the three big markets that drive our business: non-res, general industrial, and residential. We've tried to give you an indication of the impact we estimate each of these markets has on our two segments based on the number of check marks. Clearly non-res has the biggest influence and it impacts both of our segments.

Remember, approximately 60% of our metal framing business in our mechanical products and solutions segments is sold into the electrical distribution channel that all of our electrical raceway products are sold to.

Moving to the Q4 2016 column, we did see the construction indicator soften as Q4 finished. The feedback from our channel partners and customers surrounded speculation that the market was on hold, waiting for the US presidential election results. However, nearly everyone's feedback was positive on the near- and longer-term activities based on projects in the funnel.

Moving to the industrial market, we knew going into Q4 they would be bumpy, including the year-over-year headwinds mentioned earlier. But the industrial markets were very sluggish in the quarter, even more than what was originally expected.

Looking forward into 2017 our expectation based on the input from our channel partners and the data we see from Dodge and others, is that construction markets will provide low to mid single-digit growth, and we expect to see continued softness in the industrial markets. Those inputs drive our 2017 outlook on slide 10.

There is forward indication that the market softness seen in Q4 will not continue for the full-year 2017. However, we are mindful of the bumpiness we saw in late Q4 and what we are seeing early in Q1 2017, our FY17, and we're factoring that into our outlook.

For the electrical raceway segment, we expect volume to be in the low to mid single-digit range net of the loss of the 53rd week, adjusted EBITDA to be in the range of $175 million to $190 million. For our mechanical products and solution segments, we expect volume to come in close to flat, with our share in growth initiatives offsetting the sluggish industrial markets and additional headwinds from solar in the first half of the year. Adjusted EBITDA will come in between $85 million and $90 million in that segment.

In total we expect adjusted EBITDA in the range of $235 million to $250 million and adjusted EPS between $1.40 and $1.55 per share for the full-year 2017. Keep in mind that you need to adjust the view of 2016 results to account for the 53rd week and the tailwinds we saw from a very favorable solar market in the first half of 2016, which added as much as $15 million to 2016 that will not repeat in 2017.

As well, with the year-over-year headwinds from lapping the solar tax credit extension and the sluggish start the market has had in the new fiscal year, we expect EBITDA for the first half to be about flat when compared to 2016. CapEx is expected to be $32 million for the year. Interest expense is expected to be $39 million, and finally, we expect a tax rate of 36%.

A couple of key points to make. First, none of these numbers include M&A, and we have a very active M&A pipeline backed by a very strong balance sheet. Second, our strong balance sheet provides the opportunity to pay down and manage our debt in a way that could meaningfully reduce our interest costs. Third, we have a strong culture and process around countermeasures, driving cost takeouts proactively in the face of market challenges, including potential restructuring activity.

To sum up slide 11, I'm proud of what the team has accomplished in 2016 and the capabilities we have built for the future. We continue to improve upon our product quality, availability, and delivery through our Atkore business system, and are gaining traction in our commercial and innovative efforts. We have proven we can grow EBITDA dollars and margins, regardless of the market conditions we encounter, notably regardless of whether material costs are going up or down.

Finally, we know our team, our culture, and the Atkore business system are built to outperform, and we have the bandwidth to take on even more in the future.

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 and existing shareholders for their support. Our best days are in front of us as we continue to build and grow our business for the future.

Operator, please open the lines up for questions.

Thank you.

(Operator Instructions)

Deane Dray with RBC.

Thank you, good morning, everyone.

Good morning, Deane.

Maybe we could start with the tone of business. This came up a couple of times in your prepared remarks, last six weeks being softer. Not surprised to hear it was somewhat on business activity on hold, pending election results.

Just give us a sense of how that played out and your commentary how the first quarter has started in light of what the funnel would suggest to you. And maybe this on hold as people wait to see what kind of spending and tax implications might this on hold persist further. So let's start there please.

Yes, well, as far as the business tone now, as everyone has seen in many different sectors, pretty choppy fourth quarter, our fourth quarter, third quarter calendar. We see that persisting, although with some bright spots and some rebound in our first fiscal quarter. So really nothing very different to report there.

What we do see though is that the forward indicators are positive, and what we expect would be our first quarter to be a little like we're seeing already, and then start to see an improvement based on just the progression of projects that are already in the pipeline in our second quarter. And we see a pretty strong second half of our fiscal year.

As far as the administration change, I think the best way to sum that up is we see nothing negative coming from that for Atkore, and we see nothing short term coming from that for Atkore. We believe that most likely where we will benefit, and we do believe we will benefit, is from infrastructure plays.

It's going to be probably a little bit more on what you might call soft infrastructure, educational, medical facilities, data centers, places that are high in electrical content. But even on roads and bridges, which do have electricity of lighting that, or water and sewage facilities, we think there will be an impact for us. Again, nothing short term there, that's -- nothing is going to show in our 2017 based on the administration change.

We do think we will fair better than other people in -- that you would compare us to in a couple of ways. We don't do any labor arbitrage, we don't have any low-cost labor in Mexico or really anywhere else. So if there were a backlash to that where it was disadvantageous to do that arbitrage, we're not going to see a negative effect, where other people may.

And in the case of more favorable tax policy, we think we would disproportionately benefit as most of our business, certainly the vast, vast majority of our profitability is in the US, and so we pay a relatively high tax rate right now, higher than most of the people you would compare us with.

So, choppy in the short window with some bright spots. We think good, strong, based on activity already in the pipeline, second half of our fiscal year. Nothing negative, nothing short term on the administration change. And most likely, in 2018, seeing the benefit of infrastructure spend in a way that makes a difference to our business.

John, that was really helpful. And can we get some more specifics on your raw material outlook. Copper has had a significant rally here, so this is going to be your first real test to see how quickly you can adjust prices for copper. And maybe just give us a sense of how that process is going, and then in the other of your raws, stainless steel, et cetera.

Yes, I will answer at a high level, and then we can follow up with any specific deltas you might have a question on. Yes, I think to some extent, copper has been pretty stable for a while.

And I think if you were talking a month ago, the 30-day, 60-day, 100-day and 200 average for copper was something like $2.20; it was very stable. And now I think the-30 day average is about $2.50.

I wouldn't say it's our first test. We've been passing pricing along on copper for about nine decades now, but as a public Company, it's our first test. And what you're going to see is exactly what we've talked about in the past, with you, Deane, and with the analysts who have followed us through the IPO process is when price -- when our input costs go up, we were able to pass that along, usually within about 60 days. And we're seeing -- we're projecting the ability to do that.

And now if at the end of a quarter, pricing spikes up, we won't recover that in the quarter. So there is the timing of where that 60 days fall. But we're seeing the price moving up in the market, and that should follow the model that we've established that we're able to move prices up in about two months.

Steel has gone way up in this fiscal year, or in 2016, and then came down and is moving up a little bit now slowly. And in all environments, we've been able to pass along and maintain a dollar spread that's the right spread for our business, So we've been passing those tests.

Long term, and I think when you think of long term, think about this as 36 months, we think steel and PVC resin is going to be pretty stable. There's going to be some seasonality, some up and down, but I think it's going to be pretty stable.

Copper tends to draw more speculation than the other commodities for a number of reasons, and so you will see that we think there's speculation, interest in copper right now. And that can drop -- drive it a little bit more volatile than the other commodities. But we do have a long history in this industry of passing along copper to the customer.

A bigger impact in pricing is going to be volume, and if volume is at the levels we believe it will be certainly in the last three quarters of this year, then I think that it's a good balance pricing power and that we'll be able to pass through the commodity changes and maintain dollar spreads, really without any issue.

And then, there's the other part of pricing that's important, we like to stress is we called it earned pricing increases, where we're actually -- we're providing value that competitors aren't necessarily. And we're are able to get slight differences in pricing for our ability to co-load or our innovative products, and that's critical as well.

One other point on pricing is what we call pricing is a pretty macro number. It includes mix shift from lower end product lines to higher-margin product lines, which is happening through innovation and selective pricing. And we are -- so any mix shift, geographical shift, innovative shift in the product line is going to show up as pricing as well. We feel good about passing on commodities, deltas.

That's real helpful. And just last question for me. We appreciate the 2017 specifics that you've provided. I know you're not giving quarterly guidance. But maybe if Jim could highlight anything unusual in terms of the timing of expenses, the corporate expense in particular, taxes, anything that might make the first quarter a little bit either less linear or a bit usual.

I don't see anything right now that we're -- take a look at that will really impact through here. And again, I just want to reiterate that I think the way we're taking a look at this is that we are going to see the first flat be flat to the prior year.

That's helpful. Thank you.

Julian Mitchell, Credit Suisse.

Hello, good morning. This is actually Lee Sandquist on for Julian Mitchell.

How you doing?

Good. You just mentioned adjusted EBITDA will be -- is expected to be flat year over year in the first half of 2017. Can you just quickly discuss the cadence you expect in terms of sales growth for next year? Thank you.

Yes, I think Jim mentioned it a little bit here, in that the first half is going to be flat to -- or the first quarter is going to be pretty much flat where the impact of our growth and innovation initiatives are going to be offset by some headwind we're seeing in the industrial. So think of the first quarter in terms of volume flat, picking up a little bit in the second quarter, and then a pretty strong second half of our fiscal year with our fiscal year running October to September.

Keep in mind that our second half of April through September is the construction season, and typically, over many, many, many years has been meaningfully stronger than the first half of the year. So we see that happening as well.

When you're talking about our mechanical products and solutions, which serves a host of more narrow verticals than our electrical raceway, things such as recovery in oil and gas, things such as just manufacturing strength, which can be quite a bit impacted by exports to other parts of the world, those can have impacts as well. And basically, the statement on that is we don't expect that to change and improve meaningfully in 2017.

Keep in mind that a pretty large portion of our revenue is what we attribute to what we call maintenance repair and renovation, especially in electrical raceway but in mechanical products and solutions as well. So depending on a particular quarter, we could see as much as one-third of our business being driven by more maintenance repair and renovation.

And what that does is it creates a little bit of a balance for us where we don't enjoy the peaks that non-res construction can sometimes bring, or the valleys. So there's a little bit of a moderating effect by that high percentage of maintenance repair and renovation. I think that's how we would see the cadence of growth for the year.

Understood. Then in terms of gross margins, they expanded another 620 bps in Q4 after 1000 bips in Q3. What level of gross margin expansion is embedded in the 2017 guidance? And also, what gross margin would Atkore ideally generate in the medium term?

I want to take you to EBITDA margin, because that's an easier one for us to talk about. I think we're probably going to see just a slight uptick in our EBITDA margins for 2015. And what we aspire to is -- and we think that we can get to over the long term is a 20% EBITDA margin.

Great, I will pass along. Thank you.

John Lynch, Deutsche Bank.

Thank you, good morning, everyone. Could we just start with the sales results. If you were to, maybe it's for Jim, if you were to exclude the extra week, what was the core volume in the quarter? And if you could also do that same exercise if you exclude the impact of solar. I'm trying to understand what's -- if you didn't have this extra week what's the core volume? And then what is it roughly speaking, ex the solar business year over year?

The core week is worth around 2% growth when you take a look at -- yes, the 53rd week. So I'm just trying to flip through here to give to you. Yes, so not counting the 53rd week, our volume growth in the fourth quarter was 2%.

2% okay. What about if you ex out the impact of the solar business year over year, if you can do that?

John, go ahead enough and ask that question again.

Solar drag did it not in this quarter or is it dragging in the December quarter? When does the drag -- so I'm just wondering if the slow volumes are being disproportionately impacted by the solar market or is that still to come?

Yes, so, John, just a clarification on the answer we just gave. The 53rd week was worth about 2% of volume and it offset 2% of decline, so we are flat in the quarter volume. The meaningful portion of that is solar.

Where we're seeing -- our fourth quarter over prior fourth-quarter declines in solar of roughly double digit, I think, consistent with what we had said last time, about double digit. So think of that as a little bit more than 10%. And we expect that comp will get a little bit worse in the first and second quarter, as those were very strong quarters for us in 2016 on solar. So that could get, really even up into a year-over-year comparison for solar, of around the 20% range decline.

That's helpful. And then your guidance, the volume 1 to 5. When you say net of loss of 53rd week for raceway, 1 to 5 for raceway minus 2, or call it flat for mechanical products, what do you mean by net of loss? Do you mean that's pro forma as if it's like a 52-week to 52-week compare? Is that what you mean? Or do you mean it's 52 weeks versus 53 weeks?

No, just think of it as pro forma.

Okay, these are pro-forma numbers, okay.

My other question is just in terms of rising interest rates, I went back to a couple of the filings. It does assume that you make commentary around LIBOR rising 1% and the impact, but you're assuming that your interest charges go from $42 million to $39 million per your guide. I'm just wondering why is that? Because rates are already going up. So what are your assumptions in 2017 based on interest rates and maybe your -- is the offset paying down debt or what's going on here?

No, I think two things on that. One, we have a LIBOR floor of 1%, and while we do see interest rates increasing, we're thinking that we're still not going to top that 1% LIBOR mark. So it will stay -- that will be effective. And while it's not built in here, we are analyzing our loan situation, and given our cash situation, what's going to be the best use of employing that against possibly some of our debt structure.

So the assumption, Jim, is that debt states flat and that --

That's right, for right now. In that guidance that we have, flat to debt.

Okay, and then what about CapEx? CapEx looks like it's going up a ton, right, from $17 million to $32 million. But maybe there's something that was already programmatic that was anticipated, maybe you could just talk about why is CapEx going up so much?

Yes, our normal maintenance here ranges $15 million to $20 million. So figure $20 million for maintenance is where we're at. We're going to be investing in our IT infrastructure to the tune of about $5 million, and then we have other productivity expenditures built into that number.

I think, John, if you look at it over a three- or four-year period, the $32 million is more consistent with an average than the $17 million. Keep in mind we closed our Philadelphia manufacturing facility, which itself was due for a lot of the regular maintenance-type capital that would go into that. So that artificially pushed 2016 down to that $17 million. This is a regular year. It's very much in the same tone of what we've had over the -- really, the five years of the last five years of Atkore.

So $32 million is normalized. Are you starting new IT projects that have a long-term tail or are you just ramping back IT spending to a maintenance level? I don't remember, are you doing a big --

We talked about this a little bit. Instead of doing a big bang, multi-multi-tens of millions of dollar IT project, we have a longer seven-year plan where we're putting consistent -- we need to upgrade our IT infrastructure, mostly around productivity within the business and ease of doing business with customers. And we're doing all of that.

So every year -- it's been behind the scenes, every year, we've been putting meaningful spend into IT. And in the five that's earmarked for this year is typical with what we've been spending per year. We're making great progress on our IT infrastructure upgrades, but we are doing it in a very ratable way.

And then, just lastly, your margin runway to the 20%, John, over time, is it -- I assume there's not another facility like Philadelphia to shutter, right? Again, what's the -- can you get this without volume? Like, we got tepid volume and choppy construction markets and so forth. Is there a volume assumption that's baked into that or do you think based on internal productivity, you can get there over time without that volume help?

I think there is no other philly, per se, like that. We have a lot of factories, we have 25 factories. And over time, some become more productive than others. So there's always going to be a little bit of opportunity to look at facilities, but not to the magnitude that we've done over the last five years.

Volume is important. Without market growth, I think it takes us longer to get to the 20%. Although, I think we still can get it just with the productivity we get from our IT infrastructure improvements, our constant focus on process improvement through kaizen in the Atkore business system. So volume is an important part of that. We think with productivity and pricing and innovation -- innovative growth, we can get to the 20% without meaningful volume improvement, but it would be accelerated if we have a more robust market to serve.

Got it. Thanks very much.

Thanks, John.

Andrew Kaplowitz, Citigroup.

Hey, good morning guys. John, if I could follow-up on your pricing within electrical raceway. It looks like your ability to price in 4Q has gone a little faster than we would have thought, given the usual lag in price versus cost. Is pricing in line with your expectations?

And then usually price is a bigger portion of revenue than expected, that should pressure margin. But you still came in very close to our adjusted EBITDA estimate and your margin was slightly better than we expected. So is this just really better strategic pricing efforts than you thought or was productivity better than you thought? Maybe a little more color on the quarter itself.

Great question. We're always real -- try to be real explicit about this. We -- by the way, we just add things up. What will show up as pricing will be situations where we literally ask and we get it. But it will also be a mix shift. And mix shifts can be purposefully targeting customers that are geographically advantageous to us, where we actually -- it just costs us less to serve them or product lines that are higher margin, so we price to win the higher-margin business, and if you had to lose business, you would lose the lower margin business.

And then we have our innovation as well, where very slowly and picking up speed, we're blending in new products that save contractors time and money, and that's showing up as price accretion. It's actually a favorable margin mix shift.

But also, the big foundation of our pricing initiatives is, and I can't emphasize this enough, when we had very poor delivery and relatively less quality than we have now, we never had bad quality, pricing was a lot more difficult for us. In many respects, by operationally improving quality, delivery, availability, ease of doing business, and then being much better at using our national footprint on distribution centers to provide a range of electrical raceway products to our customers. We're actually finding we can get little slivers of advantageous pricing.

And so, in all honesty, a big part of our improvement in pricing is not having to be so apologetic with our pricing in the past. And so it maybe a tough concept. So all of that adds up to better pricing.

So that gives you a little bit of understanding of why we've just improved on that. We think from a price -- there are some pricing opportunities left in Atkore; they tend to be in mechanical products and solutions and they tend to be in segments we haven't hit strongly yet. But that's some color on pricing.

Okay, so that's very helpful. Let me just shift gears and ask you about the 2017 guidance for electrical raceway, the difference between 1% and 5% is obviously somewhat significant. But last quarter, you talked about potential out performance of 0.5% to 2%, depending on new products and penetration in the market. So maybe you could talk about how much of your volume guidance in 2017 is under your control, with you being at the whim of the overall nonres and res construction market.

Obviously, it's going to be a lot easier to get volume when the markets you serve are growing. I would say, in all honesty, it's a little bit of a tough question. But without any market growth, we would still grow based on our innovative and share initiatives. But I would say it's in the ballpark of one-third of our growth is going to be driven by internal, one-third to one-half is driven by internal initiatives and the rest is market growth.

Okay. That's helpful. John or Jim, cash flow, I think you had guided to after-tax cash flow in 4Q being a high $40 million range. But it does seem like cash flow came in better than that. So how do we think about cash flow as we go into 2017, specifically working capital conversion? Any specifics you can gives on that as we going into 2017, and should free cash flow conversion be close to net income?

Obviously, we're not going to give -- or as you've seen, we have not given guidance on that. But I think for working capital, I think there will be a slight improvement. But I think we've made a lot of great improvements over the last three or four years. It won't be flat, but we ought to be able to give 1% or 2% improvement in our working capital.

Okay. Thanks, guys.

Thanks, Andy.

Rich Kwas, Wells Fargo.

Good morning. This is Deepa Raghavan for Rich Kwas. Question on non-res construction. Your FY17 outlook of low to mid single digits, that seems slightly lower than your prior forecast of 5.6% a few quarters ago. If you could help us understand what changed. And within your current outlooks, if you can talk about what your expectations are by verticals, like commercial institutional infrastructure, that would be pretty helpful.

None of this has any impact of the election and what that might bring. So what's changed is the fourth quarter of 2016 flowing into -- our fourth quarter, flowing into this first quarter of our 2017. That's really what's changed. So we've done is we've taken a little bit more of a pessimistic -- we think reasonably pessimistic view of the first half of our year. And that's really the change, really nothing more than that.

Keep in mind a pretty high percentage of our business is maintenance, repair, and renovation. So -- and there is a little bit of a timing impact of when you're comparing starts to how it impacts our business. But the big change is that our first half is we're seeing our first that be a little bit more towards the flat than we saw in the -- six months ago or three months ago even.

When you look at the different verticals of non-res, we think educational and medical data centers are things that will be doing well and we do well in. Those are the ones that we would highlight as being verticals that probably would be a little bit stronger.

Okay. Just looking at the inventories at the distributor, any -- how is the channel inventory looking? And just given that Q4 was slightly weaker, any thoughts on FY17 plays out in terms of MRR versus new construction? Thanks.

The channels inventory we think is actually pretty low. We think the channel delevered in -- over FY16 and have stayed at very low levels. And I think the implication of that is when there is a rebound in volume, the channel will have to buy. And so there will actually be a bit of packing up the channel. So that's a favorable impact to come we believe.

As far as the MR&R, LED lighting is driving a lot of maintenance renovation and repair. When people go in and there's a very good business case for putting LED lighting in. And when they put LED lighting in, generally, they put -- they upgrade their electrical systems and other systems within the biz -- that's the building at the same time. So that continues very strong for us.

So we do consider that, maintenance, repair, and renovation, but sometimes, it's hard to sort that out from the new sales. That's a good -- that's going to stay strong. Usually when new starts and new business is sluggish, you'll see maintenance, repair, and renovation pick up a little bit, and we have seen a little bit of that in this last quarter of sluggishness.

Okay. Last question from us. Your leverage ratio is obviously down pretty nicely. Last call, you mentioned you had a pretty active M&A pipeline with 2 billion due diligence more. Just curious if you could give us any updated thoughts on that, and if that will be a priority of cash or debt repayment in 2017 and 2018? Thank you.

Thanks, Deepa. M&A is our number one priority for using our balance sheet. And we have a very active funnel. Very good process. We have over 50 targets in there, half of which we've approached and spoken to. These happen when they happen. There has to be a willing seller, a willing buyer, and evaluation that makes sense. And we won't do a deal just to do a deal, but we think it's probable we do a deal in 2017, and that could range from really small to larger, as we've spoken in the past.

But with our strong balance sheet, we really have some flexibility of about how we address our debt situation, as well with some more obvious opportunities around the second lien that aren't built into our numbers, but become more probable as our balance sheet strengthens.

We are analyzing our different options around that now. Remember that we have a fully undrawn ABL, so we're taking a look and so one of the options that could be forthcoming is a reduction in our [second lien] facility in the near future.

That's it for me. Thank you.

Thank you.

Steve Tusa, JPMorgan.

Hi guys, how's it going? It's Pat [Bammon] on for Steve Tusa.

Good morning.

Good morning, I had a couple questions. One on just looking at the intra-quarter moving steel. I'm just curious of whether there's any impact on profits at all versus your expectations that you laid out in August. Because you mentioned a lag on input costs go up but steel moved down pretty sharply intra-quarter. And curious if there was any impact on that versus the initial guidance. Just trying to triangulate the weaker value versus expectations with the EBITDA at the high end of the range.

Yes, we did -- and the commodities fluctuated. We still were seeing during the quarter increasing steel costs, and over the last couple of weeks, they were coming down. We've talked about the lag, the 45- to 50-day lag to pass those through. So while we were aggressive when those things first came up, we were still trailing, as we had expected. So I think the margins that we actually experienced in the actual results were right in line with what we had expected with the material input costs changes.

Okay. Makes sense. If you were to look at the year-over-year EBITDA growth, is there a way to quantify how much of that was -- well, volume was down, so how much of that was mix versus spreads versus productivity?

You're saying the impact of volume on our EBITDA?

I'm just trying to -- you guys had given us bridges year over year a few months back, and I'm just trying to triangulate how much of the EBITDA growth is still coming from spreads versus your productivity versus you mentioned mix being a positive factors, as well. I'm just trying to understand that.

Yes. We are -- we improved year over year from 2016, 2017 due to our pricing following our material costs by about $60 million.

Are you talking volume or on our material spread improvement?

That was total spreads was $50 million in 2016 you're saying?

Yes.

Okay. Then last question for me, just on the outlook for commodities into 2017, I think you mentioned you expect scale in resin to be subdued and copper to be volatile. Just curious, embedded in the guidance, what do you guys have in there for average selling price increases? Just trying to get a sense of what the actual revenue outlook is. That's all I have.

We've got our material input costs as basically flat, with little impact from the timing, maybe a couple of million but relatively flat.

All right, well great. We're at time, so let me close the call here. Thank you very much for your interest in Atkore. We're proud of what we've done and what we continue to do, but would emphasize that everything we've accomplished we've built -- we've accomplished it by building a capability to do it. And it's a capability that will sustain our results and continue to allow us to outperform going forward. Thank you very much, and we look forward to updating you on our business in another quarter.

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