Atkore Inc (ATKR) 2017 Q1 法說會逐字稿

Greetings and welcome to Atkore International first quarter fiscal 2017 results. At this time, all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Keith Whisenand, Vice President of Investor Relations. Please go ahead.

Thank you and good morning everyone. Welcome to the Atkore International fiscal 2017 first quarter financial results conference call and webcast. With me today are John Williamson, our President and CEO, and Jim Mallak, our Vice President and CFO. Earlier this morning, we released our financial results for the quarter ended December 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.

During this call, we will refer to certain non-GAAP financial measures for which you can find reconciliation to the comparable GAAP financial measure in our earnings release and the supplemental slide presentation. As referenced on slide two, we may make statements related to expected future results and are therefore considered forward-looking statements. The actual results may differ from those and from our forecasted projections due to a number and range and -- of risks and uncertainties that we described in both our earnings release, the presentation, and are also outlined in our most recent 10-K.

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'll turn it over to John.

Thanks, Keith and good morning everyone. Similar to our last call, I will open the discussion with a few key takeaways on our results and activities in Q1 2017 and then I'll turn the call over to Jim. Jim will discuss our first quarter results in more detail including commentary on segment performance and we'll finish prepared comments with what we're seeing in the market and our forecast for fiscal year 2017.

We believe you'll again come away confident that we have delivered on our guidance and are in line with expectations for 2017 and our managing the business and strategies the way we told you that we would. For those of you who are new to Atkore, there are four high-level elements to the Atkore investment thesis. First, we are a strong company with industry-leading market positions including superior customer value propositions, a compelling product portfolio with brands that are meaningful to our end users and scale that provides barriers to competitive entry.

Second, we have a compelling and multifaceted growth strategy centering on the growth of the markets we serve and leveraging our electrical raceway portfolio as well as our ability to serve the market with innovative products to save our customers time and money and the ability to deliver incremental growth through acquisitions.

Third, we have momentum in driving results and a runway for more, a strong culture of productivity, our ability to transform our portfolio through future M&A as well as our high levels of performance in product quality, on-time delivery, and creating customer value will add up to meaningful improvements in margins, EBITDA, and EPS.

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 potential downside positions us to drive shareholder value.

Moving to slide two, there are few key takeaways I'd like to touch on for the quarter. First, we delivered Q1 adjusted EBITDA in line with our prior guidance and we are increasing our full-year adjusted EPS guidance by $0.15 primarily due to our favorable debt refinancing. As we discussed on our last call at the end of November, our Q1 started slow with similar activity levels to what we saw in the fourth quarter of 2016 and despite a favorable post-election sentiment, remained at that pace throughout the quarter.

On a year-over-year basis, our volume performance in electrical raceway was in line with the Q4 2016 pace when you exclude the favorable impact of the 53rd week we saw at the end of our fiscal year in September. In our mechanical products and solutions segment, we saw some strengthening in the industrial market volumes outside the impact of the solar tax credit extension we talked about last quarter. We have already seen an uptick in activity in Q2 reflecting the positive momentum in that market.

The forward indicators for the non-residential markets we serve including Dodge and the Architectural Billing Index data as well as input from our channel partners continues to give us confidence for the remainder of 2017. The big drivers of our earnings improvement in the quarter were our self-help initiatives, our productivity programs as well as innovative new product development and our price and excellence initiatives.

On productivity, which is driven by our Atkore Business System, we saw strong traction in our conversion costs and freight reduction initiatives. Additionally, we announced the closure of our Carrollton, Ohio PVC pipe plant. That manufacturing capability will be transferred to our other plants in an effort to rebalance our manufacturing capacity in the Eastern US. We also saw significant increases in our year-over-year raw material costs in the quarter, but we continue to react quickly to these changes and we're able to pass [these drew as price] managing our sales pricing in response to raw material cost changes is ingrained in our everyday standard work.

I mentioned last quarter that our strong balance sheet and cash flow profile would allow us options in paying down and managing outstanding debt and afford us significant M&A firepower. We executed a successful refinancing of our debt at the end of Q1. I'll let Jim add in the details a little later. This will save us [approximately $16 million in cash interest on an annual basis or $0.13] in adjusted EPS in 2017.

On the M&A front, the number of projects in our funnel continues to grow and we have two to five targets with the potential to be executed during 2017. We will only move forward on these if they meet our deal criteria and must fit strategically, have short-term profit and cash accretion, and be debt responsible. Our team has significant bandwidth to execute and integrate any transaction.

To sum up the quarter, our value creation strategy is on track with our performance in Q1 reinforcing that Atkore's team, culture, and business system is built outperform and provides a runway for long-term growth and EBITDA expansion. With that, I'll turn the call over to Jim, who will walk us through our first quarter financials in more detail.

Thanks, John and good morning to everyone. Continuing to our consolidated first quarter results on slide three, total net sales were $338 million, down year-over-year from $358 million primarily due to lower volume in our mechanical pipe product line and the absence of sales related to the Fence and Sprinkler product lines that we exited in the first quarter of 2016.

Our adjusted net sales normalized for the Fence and Sprinkler exit declined by 4% in the first quarter. Increasing average selling prices, which reflect our focus on selling higher value products and the pass through of increasing material cost to our customers favorably impacted revenues by 6% year-over-year. As a reminder, the majority of our customer transactions are priced to the current spot rate 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-day to 60-day time span.

Net volume unfavorably impacted sales by 8% reflecting the artificially high solar comparison created by the federal tax credit extension last year, which we estimate at 5% and the softness seen in our other markets. These volume headwinds more than offset the favorable impact of improved sales from our international locations and construction services.

As John mentioned, our year-over-year volume performance was materially equal to our fourth quarter 2016 performance after adjusting for the impact of the 53rd week in the fourth quarter of 2016. On that basis, the fourth quarter 2016 volumes are down about 7% year-over-year and our first quarter volumes were down about 8%. So the soft level of activity continued into the first quarter with net incremental headwinds from solar. Also offsetting the revenue increases from higher average selling prices was a $5 million reduction in revenue due to foreign currency and decreased freight revenue billed to our customers, which is offset in freight cost.

As you think about some of the external metrics for our key input costs in the quarter, steel was up 40% year-over-year versus the first quarter in 2016 and down 9% sequentially versus the fourth quarter of 2016. Copper was up 16% versus the first quarter of 2016 and up 13% sequentially versus the fourth quarter of 2016 and PVC resin was up 10% versus the first quarter in 2016 and down 4% sequentially versus the fourth quarter of 2016.

Our gross profit increased to $92 million for the first quarter, up 27% compared to the same period in 2016. Approximately $15 million of the gross profit increase was due to the year-over-year difference in the non-cash lower of cost or market inventory reserve adjustment. You can see in our EBITDA reconciliation, we back out these non-cash impacts, but they remain in our GAAP gross profit. The remaining increase in gross profit was attributable to improved productivity and manufacturing, freight, and warehousing cost as well as our ability to move our pricing to cover material cost changes.

Offsetting these increases was a loss of the gross profit contribution from our Fence and Sprinkler product lines and the decline in volume primarily from the artificially high solar comparison. Adjusted EBITDA, which excludes non-recurring, non-cash and extraordinary items increased to $50 million, up 4% compared to the same quarter last year. Our net income on a GAAP basis increased to $17 million, up $9 million versus the first quarter of 2016 and adjusted net income increased to $18 million, up $4 million versus the first quarter of 2016. Adjusted basic and diluted EPS were $0.29 and $0.28 respectively for the quarter as compared to $0.23 in the prior year for both measurements. Included in these numbers are a favorable tax rate adjustment in the quarter of about 11% due to the excess tax benefits from stock option activity compared to the prior Black-Scholes estimate.

Now I'll walk through our segment results in more detail. On slide four, you will see that net sales for our electrical raceway segment was about flat or $223 million. Higher average selling prices driven by passing through material cost changes to customers and higher value products had a favorable impact to revenue of 7%, almost offsetting the impact of soft volume, which again was materially in line with the fourth quarter of 2016 activity excluding the 53rd week. Improved delivery, quality, and service along with the increasing focus on innovation and higher productivity enabled us to expand our profitability in the quarter. Adjusted EBITDA increased to $40 million, up $6 million or 17% as compared to the same period last year. Adjusted EBITDA margin increased 270 basis points to 18%.

Moving on to our mechanical products and solutions segment on slide five, reported net sales in the quarter declined $20 million or 15% to $115 million. Excluding $8 million of sales related to the exit of our Fence and Sprinkler product lines during the same period last year, adjusted net sales were down 9.5%. Total volume declined by 9% driven by a decline in our mechanical pipe product due to solar, but was up about 4% excluding the year-over-year impact of solar reflecting another strong quarter in our international locations and construction services.

Foreign currency and lower freight billing negatively impacted sales by an additional 4%, which was offset by the higher average selling prices of 4%. Excluding the impact of Fence and Sprinkler, adjusted EBITDA declined by 9% as compared to the same period last year to $18 million with productivity and pricing only partially offsetting the sales decline. Adjusted EBITDA margin was about flat at 15.3%.

Turning to our balance sheet and cash flow on slide six, cash and cash equivalents at the end of the quarter was $88 million, year-to-date CapEx totaled $4 million, net cash flow from operating activities was $32 million, and net debt decreased $24 million to $406 million. Our leverage, which we define as net debt to the trailing 12 month adjusted EBITDA was 1.7 times. So we continue to make maintain a very strong balance sheet with significant liquidity to fund our strategy of accretive M&A.

Before I hand it back to John, I would like to quickly take you through our recent debt refinancing. We used $155 million of cash in a new $500 million term loan facility to amend and replace our prior term loans. We were able to reduce our interest rates from LIBOR plus 350 basis points and the previous first lien and LIBOR plus 675 basis points and the previous Second Lien to LIBOR plus 300 basis points on the new loan facility. This will save us $16 million of cash interest on an annual basis. This will also favorably impact our adjusted EPS by $0.13 in 2017. Now I'll turn the call back to John for comments on the market and our outlook.

Thanks Jim, moving to what we see in the market, the three big markets that drive our business are non-residential construction, general industrial, and residential construction. Non-res has the biggest influence and impacts both of our segments as approximately 60% of our metal framing business and MP&S is sold into the same electrical distribution channel.

The non-residential construction activity stayed soft in our channels during Q1. However, the feedback from our channel partners and customers continues to be favorable based on the projects they see in their funnels and that seems to be backed up by the [banter] from both Dodge and the Architectural Billing Index. Remember our business typically lags non-residential construction starts by six to nine months on average.

Moving to the industrial markets, they continue to be soft, but minus the impact of the solar headwinds, we've seen an uptick compared to the second half of 2016. We don't plan on giving quarterly guidance on a regular basis, but as we did guide on our last call to be about flat in EBITDA for the first half and due to the various puts and takes we have seen and project seeing in the first half, we will give some more detail on our expectations for Q2.

For the electrical raceway segment in Q2, we expect volume to be about flat year-over-year and revenue up mid-single digits. For our mechanical products and solutions segment, we expect volume to be flat to slightly down and revenue to be up in the low-single digits. In total, we expect revenue to be up mid-single digits and adjusted EBITDA in the range of $53 million to $57 million.

Looking to the remainder of 2017. We continue to expect the construction markets will provide low-to-mid single-digit growth for the full-year and we expect to see continued choppiness in the industrial markets. Those inputs drive our 2017 outlook on slide seven.

For the electrical raceway segment, we expect volume to be up in the low-to-mid single-digit range when 2016 is adjusted to eliminate the 53rd week and adjusted EBITDA to be in the range of $182 million to $192 million. For our mechanical products and solutions segment, 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 and adjusted EBITDA to be between $83 million and $88 million.

In total, we continue to expect adjusted EBITDA in the range of $235 million to $250 million. There are two favorable impacts to our prior adjusted EPS guidance. First, the debt refinancing Jim took you through gives us about $0.13 per share from lower interest expense and second, we're lowering our 2017 tax rate to 33% due to the favorable stock option tax benefit we saw in Q1. With those adjustments, we are increasing our adjusted EPS range to between $1.55 and $1.70 per share for 2017.

There is no change to the CapEx plan, which is still expected to be $32 million for the year. A few key points to make on our full-year guidance. First, none of these numbers include M&A and we have a very active M&A pipeline backed by a very strong balance sheet to support that strategy.

Second, when comparing 2017 to 2016, 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 in EBITDA will not repeat in 2017. Third, we have a strong culture and process around countermeasures driving out cost in the face of market challenges as required.

To sum up on slide eight, I'm proud of what the team has accomplished in Q1 and the capabilities we've built for the future. We continue to improve upon our product quality, availability, and delivery through the 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 going 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. Rob, please open the lines for questions.

(Operator Instructions) Julian Mitchell, Credit Suisse.

My first question would just be around the balance sheet deployment. You've very successfully cut down net leverage in the balance sheet, you talked about an active M&A pipeline. So maybe give us some sense as to how much available to deploy capital do you think you have over the next 12 or 18 months and how you assess the attractiveness of deal valuations just given what multiples in public markets have done in the last year?

Yes, Julian, I'll handle the first one and then I'll turn it over to John for the pipeline. We're sitting with about $88 million of cash right now and our ABL is fully undrawn and that has a capability of about $200 million. So I would say that comfortably over the next 12 months and given the cash flow we're going to generate that we could be able to fund acquisitions in the range of $125 million to $175 million given our liquidity position.

Yes and M&A is by far the first priority for deploying our capital. We have a good strong pipeline. We're looking -- certainly putting preference on our existing business especially electrical raceway. We think there's a good environment out there to accomplish deals. In the past we've done multiples at 6%, I'm sorry, six times LTM and five times once synergies are worked in.

We think the multiples will be higher than that going forward just because of what we're seeing in the market, but still at reasonable multiples and we wouldn't do a deal just based on a multiple, we do a deal based on how accretive it is and how strategic it is. So we think it's a good strong pipeline. Most likely, we'll deploy our capital in M&A and we think we have the team to not only make the right decisions on the acquisitions, but to integrate it into the business and be successful with it as well.

Great, thank you and then just my follow-up question would be around the -- a bit more detail on your non-residential market commentary. As you said, they are a bit sluggish still, have been for sort of six or nine months now. You sound sort of fairly optimistic on the second half acceleration. So maybe give any color as to whether the sort of cadence of demand or conversations with channel partners, if that's improved in recent weeks or months.

Yes, really important topic. First of all, I would say what we've experienced in our quarter and the last quarter of last year is we believe exactly in line with what the market is giving us. So we're not performing worse or better with regards to the market. We think all the things we see the market share and market activity that we are privy to, real numbers are mid-single digit down year-over-year. So very consistent with what we saw as a base.

What gives us encouragement is there are a lot of projects in the cities that are underway whether they are digging the holes or they're sitting out the electrical raceway in a building that's three quarters done in New York, Boston, Chicago, San Francisco. There's a lot of activity that will continue. It's on the boards, it's happening and we know that work is going to happen, but when you talk, what's more exciting is, when you talk about -- when you talk to our agents, the distributors, and the contractors and we talk to all of them in a pretty formal fashion really daily, they are talking about the bid activity being pretty strong.

We think it's going to be a pretty strong construction season, think of that starting in April when the weather gets a little bit better and going all the way into really through October. So the activity, the bids we're doing with contractors for specific jobs and specific locations really is [of the hill] that gives us a lot of confidence. We think that's all backed up with the longer range data whether it be Dodge, McGraw-Hill, the Architectural Billing Index, we think all that backs it up and we're pretty confident that not only will non-res construction be strong through the build season of this year and into next year, but that we're going to get our share plus as it all sorts out.

Andrew Kaplowitz, Citigroup.

John or Jim, can you talk about your margin performance in 1Q? Margin in both segments was above last year's 1Q despite lower sales. Maybe can you give us a little more color on what's helping you to boost your margins, you've talked about productivity gains, obviously pricing, maybe better product mix, or these all sort of equal contributors in the quarter and specifically you mentioned in MP&S that productivity initiatives are helping conversion costs, freight and warehousing, is there any way to quantify the impact of these productivity initiatives?

Sure, when we take a look at our gross profit margin, definitely improvement there, but year-over-year there was about a $15 million change in our lower cost of market reserve, which improved it significantly. If you restate that gross profit margin to back out the lower cost of market, you still are looking at an improvement going from an [adjusted 16% of 21.3% to 23.9%], still a good impact. What's driving that is productivity and again, it's harder to quantify the real specifics of these initiatives as we get down, but productivity and driving freight improvement has really been a key focus there as well as we continue to efficiently pass through our pricing on our material cost.

And maybe just looking back at the first quarter, obviously you did execute well, but you had suggested -- I think you suggested generally flattish overall revenue and revenue did come in down for MP&S down [10%]. We know that solar -- you told us solar was going to be a big drag, but you also told us that growth initiatives would be able to offset the industrial weakness. So you [didn't] mention industrial starting to improve, but was weakness in the quarter worse than you thought in industrial business or something else happen in the quarter around revenue?

Yes, the activity in industrial was down to what we expected and in all cases, our electrical raceway and our mechanical products and solutions, we performed we believe exactly with what the market gave us. Solar was a headwind that we called out and anticipated and it was what we expected, but to answer the general industrial, that includes a lot of stuff. As an example, this can be rollers we make out of steel pipe for conveyor belts, this could be framing for off-road vehicles that we sell to OEMs directly. So what we call general industrial can be pretty broad and I think what surprised us is that we were expecting a little bit more of a rebound than what we actually saw. OEM business was weaker than we thought. Some of that's driven by ag, some of that's driven by discretionary spending on recreational vehicles. It just was below what we are projecting and what our customers were projecting as well.

So when we talk about industrial, it's pretty broad based and it was just sluggish really across the board. With so many segments we usually have an offset where one might do worse than the others and really everything sagged a little bit on us. With regards to the raceway, that's all driven by construction and I think it's very consistent with what we've seen. In comparable companies, it's what we've seen. We participate in a number of share indexes that happen on a month or a quarter and everything we've seen says that what we experience is what the market experiences.

Why it was that way? Anybody's guess, kind of an election hangover or just maybe a change in direction after for some people a surprising election result. Maybe that was part of it. What I would say though is that everything we see on the horizon points to both the non-res construction and the general industrial markets rebounding really from here on through the end of the year and we're seeing some favorable signs in kind of the day-to-day right now.

John that's helpful and just one quick follow-up on something you just said, you mentioned two to five M&A targets now for this year. I think last quarter you mentioned two to three. I mean it's a bit nitpicky to pick up on that, but it's interesting. Are you at all more confident that you can close deals here in FY17? Is that what that is?

Yes, I think we're confident we can close deals. Where we haven't closed deals, there's always there's got to take two for the deal to happen. There's got to be valuation that makes sense and I would say we are selective. I think we have a criteria we are not too tight on. We're very open in what we look at and how we analyze, put a lot of effort into M&A, but there is a number -- we could be on the high side of that. We could do all of those plus or it could be something that we just do, we just closed a couple this year with the others following quickly behind it.

So I think the best way to characterize it is, we have many -- over a half dozen that we're very actively involved in right now, which means we're talking to people, we're doing analysis. These are deals we could pull off, but they have to go at their pace. The buyer has to be -- I mean the seller has to be ready. You have to come to terms and you know all of this. So I would say substantially the M&A picture hasn't changed quarter-over-quarter. 2017 is getting shorter. So the chances of getting something done in 2017 probably changes, but I'd say it's very active, we're very involved, we have the organizational capability, we have the balance sheet to pull it off and I think M&A has been, is, and will be a huge part of the Atkore story.

Just a follow-up to Andy's question on the market. One thing we're really good at talking about the solar impact on the mechanical products and solutions business and that's very quantifiable because we sold to OEMs and we could just count it. Keep in mind though as well solar has a pretty big impact on the raceway sales as well or a meaningful impact. It's all sold through distribution, it's harder for us to quantify that. So we avoid quantifying it specifically for raceway, but there is an impact of solar that filters through the electrical raceway market and naturally to our sales as well. Something to keep in mind.

Deane Dray, RBC Capital Markets.

I would like to start on the price actions that you took this quarter, up 7% in raceway and the 4% you got in mechanical. How did that play out in terms of the timing of the quarter? Did you get the full price that you were looking for? Any push back and just give us some context please?

Yes, it's a great question. The vast majority of the pricing impact was us passing through higher commodity costs and I would say it fell in line with what we've talked about very regularly, which is when we're pushing price up, we push it through pretty fast. We're usually able to get to pass through a commodity change on the upside between 45 days and 60 days. We push it pretty hard, we try to hold on to it longer on the way down, but eventually have to give it all back, but on the upside, we push it between 45 days and 60 days. That's mostly what you're seeing there.

In some instances, we continue to manage our mix. We always look at our geographies, we look at our product mix, and we look at our customer mix and we make decisions on where we're going to be very competitive price wise or we're just not going to try to be as competitive based on who the customer is, based on the products and the margins that come with that and based on the cost of serving specific geographies. So I would say thematically, that's the price story for this quarter.

Great and then you mentioned the election, maybe for Jim to give us some sense on where Atkore would stand on cross border?

Yes, you know most of our products are predominantly all in the US. So any of the cross-border has very little impact on us. What we are waiting for to see is what changes happen in the tax regulation now. I think before they can do anything, it's going to be some time out there probably won't be 2017, but I think any potential tax changes impact us more than any cross-border trade initiatives.

Thank you. (Operator Instructions), Rich Kwas, Wells Fargo.

John, could you kind of give us a lay of the land around distribution here early part of calendar 2017 in terms of inventory, how you feel about it. You have January in the books now, how did business trends play out in January versus going into year-end and what are you hearing from distributors in terms of status and inventory and appetite to order and flow through?

Yes, really important subject. So basically distributors -- there is an ebb and flow of distributor inventory, which could actually have a very meaningful impact on a quarter. If there's deleveraging the sell through could be lower than what the market is demanding and if they are building inventory for a particular reason of which there's two reasons, they usually do that, you could sell more in a quarter than the actual market demand. Distributors are going to put inventory in fundamentally for two reasons. They believe that market activity is increasing and they want to be ready for it or they believe there is a meaningful uptick in commodity costs and they're going to try to buy at a lower commodity cost and put that on the shelf. They tend to do that more with copper products than with other products, but they will do it with steel conduit and to a lesser extent, they'll do it with PVC conduit.

We think in the first quarter, there actually was a little bit of distributor inventory build based on anticipation of higher commodity costs. We don't think they've built a lot of inventory for market activity and they typically won't in that particular quarter. Going into the winter season, it's not the heavy duty. So we think there is a little bit of inventory build in distribution, which is pretty important.

Where you would see that I think is, March and April where -- we don't know what's going to happen with commodities, but that's typically where they start to build inventories. So March and April might be a little bit more sell-through than the actual market demand and then that changes towards the end of the fiscal year. So little bit of inventory buildup by distribution based on anticipation of higher commodity costs.

Would you characterize January as pretty normal for your business?

Yes, I think so. January was pretty normal. They're not -- commodity costs have -- they're still moving a little bit, but they're not moving sharply right now and generally, they don't build for business activity in January. So January, February I think and then beginning of March are pretty true where the market demand sells through distribution and then you'll start to see a little bit higher activity at the end of March and early April as they build for the build season and then commodities, it just depends on what people think is going to happen.

And then a quick one for Jim on just a follow-up to Deane's question around border adjusted tax. Is there a [net import/export] number that we can think about for you. I mean, my recollection is you don't have any operations in Mexico, but is there any kind of number we should think about from an export standpoint?

We really have very little, I mean nominal imports. Our exports are very nominal, a little bit going up into Canada. We have some fittings coming in from China, but again all-in-all, it's a very nominal number. So we really don't even look for any type of material impact from anything that happens on the border.

So any change on the corporate tax rate is really the flow-through that we should think about in terms of tax?

Exactly (multiple speakers).

Steve Tusa, JPMorgan.

What's the driver of the lower EBITDA again in Q2, looks like it's down on flat volume, I may have missed this before. Just curious as kind of the high level driver there?

Yes the biggest driver there by far is in 2016, we had a really good quarter in solar, not only in volume, but as people were rushing at still at that point to complete jobs to get these tax credits, it was a higher margin business as well. So the biggest thing is going to be that solar and then generally, we started Q2 little bit slower than prior year in raceway, some of that is solar as well, a little bit of that. So it's just going to be fundamentally the -- I think really the math is that it's solar is the difference.

Okay and other than kind of what you've already called out was there any material drag from business that you're walking away from, exiting, outside of what you've already kind of discussed for the quarter?

No, nothing there.

And then one last question, just to follow-up to kind of the capital deployment question, but again I may have missed this, but is there any -- in the discussions with any sellers, is there anything around the kind of political environment that may be holding things up here. What's kind of the appetite for people to get stuff done with this backdrop of uncertainty around tax and everything else that's going on out there or is that just not really a factor?

Well, I would say that the uncertainty typically and in this case encourages people to have the conversation. When we're looking at -- the acquisitions we're looking at in the grand scheme of things would be smaller companies than -- they're smaller than us basically as a way to look at that and I think the uncertainty makes people talk.

They make people consider other options depending on their certain situation, cross-border dynamics et cetera. So we would say, the first thing we're seeing from the uncertainty of the political climate is that many, many more people are talking and taking the conversation. I would say it hasn't filtered farther into the process than that at this point though.

Shannon O'Callaghan, UBS.

Hey, just give us an update maybe on new product activity in trying to work on higher gross margin products, how is that progressing?

We're very happy with it. It's ramping up. It starts with a couple of things. Over the last two years, we put in an stage gating process, doesn't sound that exciting, but it's the foundation of it. We've built a very strong product management standard work set and added talent to the organization. So the combination of those two things have really resulted in what we have -- we have $100 million funnel of new products.

The products that we have released really over the last 12 months have been very successful, meaning they're hitting their mark with regards to saving contractors time and money. The concepts are easy to sell and we are selling them. We've changed how we interface with our distribution partners with regards to year-end rebates to encourage them selling through new product. That seems to be gathering traction. I would say in the grand scope of things, we're more in the earlier innings of innovation and new product development success but we see that as the good news because that $100 million funnel will evolve and it'll move a vitality index in the mid-single digits that we had a couple years ago into the high-teens and low-20s in just a matter of a couple years. So we're very encouraged with it.

I would have to say from an actual dollar point of view, the sales and then the fall through of those sales into actual profit is still on the lower side. It's not driving the needle yet, but from a margin percentage, they're all higher margin and those sales will go up.

And then just, maybe I missed this, but on the kind of tweak up to the raceway EBITDA and the tweak down to the MP&S, just a little color there on what's driving those?

Yes, when we take a look, we had a real good -- on the tweak up in raceway, we did very good with covering our costs and productivity coming in and that offset some of the volume. In MP&S going down, John mentioned earlier the comp year-over-year with strong solar -- solar going away although they did a very good job with even stronger productivity and freight improvement as part of their productivity also. So while we did see volume drop in both the segments, we did see very good cost recovery on the pricing line and productivity and freight improvement.

And just additional color just to repeat. Usually in mechanical products and solutions what we serve in that general, what we call the general industrial market, it's a combination of conveyor belt OEMs, off-road vehicle OEMs, sign post for Department of Transportation and usually there is a little bit of an offset when somebody's down, somebody else is up and they were sluggish in the quarter. We believe we are coming out of that in a couple of the sub-segments, but that was something that started us on the first quarter a little bit below where we thought we'd be.

(Operator Instructions) John Inch, Deutsche Bank.

You guys mentioned the closure of the Ohio plant? How many more of these facilities across your network would you have to potentially repurpose if you were to whiteboard this stuff or based on your three-year plan?

Yes, it really wouldn't be a lot more. We did a lot of this heavy lifting over the last five years. In our PVC pipe plants, we had eight plants, we went down to seven. We made numerous acquisitions in those spaces in relatively recent years. So that's why that one just had to be reconciled and it was appropriate to do it. We're still retaining the capacity.

We're redeploying it into other facilities. It will save us freight. It will be more productive et cetera, but we've already done a lot of the work on that, so it would be the -- we're kind of in that what we call the hygiene stage now on our facilities where a lot of the heavy lifting is done and it's just kind of just the continuous rationalization you do over as many plants as we have, but wouldn't expect without acquisition a lot more.

John, what's going on with competition right now in terms of their behavior? Is there any noteworthy trend you would call out and the context I think I'd like to sort of juxtapose this against what are still some soft markets right for construction against a backdrop of sort of rapid rising commodity costs. What's happening in terms of your competitors? Are they -- I don't want to lead your answer, but maybe you could give us a little color and how that represents either an opportunity or just an area you've got to focus on more. Anything would be helpful.

First of all, I would say that we don't see any kind of sea change where there's a meaningful change in competitive behavior in the market. A lot of this -- it's all the same players, they're all very good companies and they didn't become very good companies without just being good operators. So nothing really meaningfully different there. Always John, in a situation where there is suppressed demand where volume is a little low, it becomes a little bit more intricate dance on who takes what volume at what price, but we don't see anything there that's noteworthy.

This is a every hour, every day capability that all of us, all the competitors possess and use. So everyone is making smart individual decisions as we are. So I wouldn't say there's anything there that's alarming to me or even noteworthy. I think it's pretty much the way the business always operates and has operated.

Usually what will happen, this is a more general comment is when volume is low, the pricing power shifts a little bit to the distributor and they take advantage of that. When volume ticks up a little bit, the pricing power shifts back a little bit to the manufacturer and the manufacture takes advantage of that and that's all playing out the way it has and was really definitely within the range of expectations.

I guess I was wondering if there had been, I mean I'm thinking of your own company in the past under Tyco would be pretty aggressive in a couple of product lines and as you've had these fairly substantial structural changes in pricing, does someone ultimately come out and try and eat some of that to recapture some lost traction that they had had or whatever. I mean obviously business doesn't move smoothly quarter-after-quarter and everyone behaves themselves. You've got a lot of competitors and a lot of channel partners. It's hard to sort of believe that you get this much change in pricing and there's not some other form of competitive disruption in some manner, but you're suggesting that's not necessarily (multiple speakers).

John, great question and a question I think all of us have talked about a lot. These are very competitive markets in every sense of that word. They're very competitive and they have to be. So when we have the advantage because we have it in our warehouse in the Pacific Northwest and we have armored cable and strut and PVC conduit that can ship on the same truck from that warehouse and get to that contractor in British Columbia or Coeur d'Alene, Idaho, we win that and we take it at a sliver of premium. If we get 1% or 2% premium on that, because we had it, that's a big win for us and we will execute that when we can and how we can every day and that's the essence of what we do, I think way better than we used to do is when we have that advantage and when the customer can and is willing to pay that slight premium, we take at a much higher percentage of time than we did in the past.

So on those, it's hard for someone to take that away from us because we have the material in the right spot and we can produce, we could deliver it at a much more efficient logistics cost than the competitors or a combination of competitors could. So that's the essence of what we're doing different, John. Yes, absolutely, if there's some factory in some part of the country that makes one of these raceway products and their plant manager is getting a little nervous because they don't have the absorption that they planned on having, they might be encouraging their sales force to go out and take some volume at a lower rate. Sometimes we match that and take that, sometimes we don't. So that happens every single day.

Just keep in mind one thing, I think if you compared our markets to five years ago, I think there is -- all the individual competitors are stronger than they used to be. The worst thing is when you have a competitor that's very weak in maybe delivery or quality and they're competing just on price because it's the only way, but all the competitors in our space are good, strong capable companies who don't have to compete on price. So unless the volumes -- volume is important, less volume a little more competitive, but it's definitely in the realm of what we expect and what we see every day is we win our share and when we do, it's because we have an advantage to the customer and they pay us a little bit more for that advantage.

Thanks for that answer. One more I'm going to throw at you. We're all sort of hopeful that the economy is going to get better and signs look so far so good. Where do you guys stand with respect to your own payroll and compensation and I make the comment in this context. I think a lot of companies over the last and I get it -- [you are more of a construction company], a lot companies over the past two to three years of this industrial slump, right, have really cut a lot of cost, they've paired back bonuses, I mean some companies you hear stories, you got to buy your own pencils. So it's great. Things come back, but then companies have to probably start to pay more money and then lo and behold, these margins that were very high, they struggled to kind of sustain them. Where do you guys stand because I know you are a little bit different than the average industrial and certainly the average industrial company that perhaps those of us on the sell side who follow you tend to look at. So could you talk a little bit about your own cost situation and sort of what happens when business starts to come back or you going to feel some pressure to kind of let loose some higher compensation or where does that stand?

Yes, it's a great question. Jim and I over our lunch meeting yesterday just had this conversation. He had a lot of numbers forming on SG&A that we look at all the time. What's interesting about Atkore is over the last five and a half years, we've been adding capability and if you characterized Atkore five years ago, I think it would be under-capable. Our metrics weren't good. We didn't have the people. We've been adding people. We've been adding talent. We've been adding capability and the theme that Jim and I talk about all the time and the team's heard this to the point where they can say it for me is we've added capability, now it's time for capability with productivity.

We actually think that we're in a unique position vis-a-vis the concept you're driving where we're actually going to be more productive with our SG&A going forward. It was all about building capability in the past. Every year for the last four years, we've had a multi-million dollar IT investments that we've put in place, as those come together better people, better standard work, better tools, we believe actually we're going to be more productive going forward. So we're not in that camp of having starved capability and now we're going to have to add it back in, we're in the camp of having built capability and now being able to drive productivity on top of that.

Thank you. There are no additional questions at this time gentlemen.

All right, great, then we'll call it a call at that point. I want to thank everybody for your interest in Atkore and your support and we look forward to speaking to all of you about the next quarter. Thank you.

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