Atkore Inc (ATKR) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Atkore International First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Keith Whisenand, Vice President, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. With me today, to discuss first quarter 2018 results are John Williamson, President and CEO; and Jim Mallak, Chief Financial Officer.

I would like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or future financial performance of the company. Such statements involve risks and uncertainties such that actual results may differ materially. Please refer to our 8-K and today's press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. 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. Good morning, everyone. We're pleased with how the year has started and the results we delivered in Q1. Our reported numbers are showing momentum from our 2017 actions with year-over-year adjusted EBITDA up 17% and adjusted EPS up 64% as reported and about 20% before the impact of federal tax reform. Importantly, we delivered high single-digit organic volume growth, growing faster than the market. Jim will walk you through the first quarter results in detail. But first, I want to review our recent announcements highlighting Atkore's continued evolution, including the stock repurchase transaction we closed last week and the transition in our Board of Directors.

Atkore has made significant progress in our evolution. When we purchased Tyco's remaining interest in the company in April of 2014, we leveraged the business to about 6x EBITDA. I'm pleased to say that we completed Q1 of 2018 at about 2x leverage. Whichever metric you use, free cash flow, cash flow conversion or cash flow yield, Atkore has been a strong cash performer.

Our strategy has been to continue meeting the needs of our customers while deploying that strong cash flow generation to accretive acquisitions of businesses with products adjacent to our existing portfolio and sold through the same channels. As we have communicated consistently, we have an acquisition capital allocation target of $100 million to $150 million per year. And in 2017, we exceeded that target by deploying $186 million in solid bolt-on M&A.

Most recently, we took advantage of an attractive stock price, favorable debt market and our strong balance sheet to invest in ourselves by repurchasing just over $17 million of Atkore shares from Clayton, Dubilier & Rice, our largest shareholder. That transaction closed on February 2, and the shares will be retired.

The financing was accomplished with very favorable rates and terms and with no change to our credit rating. In fact, as part of obtaining financing for the repurchase of shares, we were able to reduce the interest rate on our existing term-loan debt in the process. The Atkore management team and Board of Directors believe this transaction to be clearly accretive for Atkore and our shareholders. We remain committed to our M&A capital allocation goal of $100 million to $150 million per year with acquisitions that add to our Electrical Raceway portfolio, bring above average margins and positively impact our EBITDA.

In concert with this repurchase of shares and as part of the natural evolution of unwinding their ownership in Atkore, 2 directors from CD&R have submitted their resignation from Atkore's board. We have begun the process of replacing them with 2 new independent board members.

Atkore's strategic direction and mission to be the customers' first choice remains the same. As you'll hear in more detail from Jim Mallak, we are seeing favorable momentum around our Electrical Raceway efforts with both revenue and volume up year-over-year.

We're pleased with the progress in the businesses we acquired in 2017, and the organic growth initiatives we have in place as they strengthen our Electrical Raceway position in the marketplace. The integration of all of the acquisitions remains on track and, in fact, ahead of our models. As always, we keep a keen eye out for and face head on areas of our business that are performing below expectation.

In Q1, our Mechanical Products & Solutions segment underperformed due to raw material and logistics costs rising faster than we could pass those costs to the market, coupled with an unfavorable mix of product sales.

Typically, our MP&S group requires longer periods of time to pass through raw material price increases. We're seeing signs of improvement, and expect to see the effects of our pass-through pricing in Q2 and the rest of 2018.

Overall, we had a strong quarter. We grew above market in volume and revenue. Adjusted EBITDA and EPS are up double-digits over last year, and we delivered strong cash flow. We are successfully integrating our acquisitions, and we deployed capital to repurchase shares in efficient and accretive manner.

With that, I'll turn the call over to Jim, who'll walk us through our financials in more detail and provide additional insights into the quarter.

Thanks, John, and good morning to everyone.

Moving to our consolidated first quarter results on Slides 4 and 5. Net sales were $415 million, up 15% organically after normalizing for acquisitions and foreign exchange. The impact of increasing average selling prices from passing through material cost increases and mix favorably impacted net sales by 6% year-over-year.

Net volume, excluding acquisitions, was up 9%, reflecting the momentum from our organic initiatives and strengthening in the markets we serve. Both segments delivered mid- to high-single digit volume growth. However, we are still experiencing timing delays and a general softness in the large data center space in MP&S and continue to expect that to recover over time.

The acquisitions completed in 2017 added 8% to the top line.

Looking at the impacts of our key input costs on our P&L in the quarter. Steel was up 9% year-over-year versus the first quarter of 2017 and up 6% sequentially. Copper was up 24% versus the first quarter of 2017 and up 6% sequentially. And PVC resin was up 8% versus the first quarter of 2017 and up 7% sequentially.

During the quarter, we incurred material input cost increases of just under $20 million year-over-year, and we successfully passed through the most of that to the marketplace in total dollars. Product mix and the type of customer, for instance, distribution versus OEM customers, are factors that can impact the time that it takes to pass through those cost increases to the market.

Net sales and cost of goods sold increased in equal amounts due to the pass-through of raw material costs unfavorably impacting the resulting margin percentages. Excluding the mathematical impact, adjusted EBITDA margin was up slightly year-over-year.

Gross profit was $97 million for the first quarter, up 6% or $5 million compared to the same period in 2017, driven primarily by volume and productivity savings in manufacturing, freight and warehousing. Those favorable impacts were partially offset on the gross profit line by the noncash lower-of-cost-or-market adjustment to inventory, which negatively impacted gross margin by $12 million year-over-year. Adjusted EBITDA, which we believe is a better measure of the profitability of our ongoing business, was $58.5 million and up almost $9 million versus last year. The 2017 acquisitions account for $5 million of the increase in adjusted EBITDA, and organic volume added $8 million.

These increases were partially offset by the small headwinds from raw material cost increases, slightly greater than the price and mix increases in the quarter, investments in the business, freight and cost increases and labor inflation, offset partially by productivity.

As I mentioned, the price versus raw material inflation gap in the quarter is due to a combination of product mix and timing of pass-through of those costs. However, as we have done in the past, we do expect to pass through these costs over time.

Our net income on a GAAP basis was $27 million, up $10 million or 57% versus the first quarter of 2017. And adjusted EPS was $0.46, up 64% from the first quarter of 2017.

Adjusted EPS would have been $0.34 or 21% higher year-over-year if our tax rate would have been at the pretax reform guidance of 35%.

Moving to our Electrical Raceway segment on Slide 6. Reported net sales increased by 31% to $317 million. The 2017 acquisitions, all of which are reported in Electrical Raceway, increased segment net sales in the quarter by $25 million or 10%. Organic volumes were strong in our conduit and armored cable products, driving total volume up about 10% versus last year. Higher average selling prices driven by passing through of material cost changes to customers had a favorable impact to revenue of about $22 million or 9%. Adjusted EBITDA was $56 million, up $14 million or 33% compared to last year.

The acquisitions account for $5 million of the increase, with volume and price and mix driving the majority of the remainder.

Reported adjusted EBITDA margin increased by 30 basis points with pricing execution, accretive acquisition margins and favorable mix lifting margins versus 2017.

Moving on to our Mechanical Products & Solutions segment on Slide 7. Reported net sales in the quarter were up 3% to $99 million. Volumes increased by 6%, reflecting a strengthening industrial market, but unfavorable product mix, net of price was a headwind to revenue by 3%. Adjusted EBITDA of $11 million declined by 32% as compared to the same period last year, driven by raw material inflation combined with an unfavorable mix of products and higher freight cost, which all were partially offset by strong productivity savings.

These unfavorable inputs resulted in a reduction in adjusted EBITDA margin of 560 basis points versus prior year. We expect a stronger second quarter from MP&S in dollars and margin, both on a sequential and year-over-year basis.

Turning to our balance sheet and cash flow on Slide 8. The balance of cash and cash equivalents at the end of the quarter was $40 million. We spent a total of $8.2 million in CapEx in the quarter. Net cash flow from operating activities was $49 million, and net debt decreased to $492 million. Our leverage, which we define as net debt to the trailing 12-month adjusted EBITDA, was 2.1x or about 2x on a pro forma basis calculated with the trailing 12-month impact of our 2017 acquisitions and adjusted EBITDA.

The continued strength in our cash flow and cash flow conversion helps support our efforts to obtain the additional financing needed for the share repurchase, which John has mentioned, closed on February 2. We borrowed an additional $425 million to repurchase 17.2 million shares from CD&R and pay off $42 million of the outstanding balances on our revolver.

Given the strength of Atkore's performance, the debt markets were very receptive to this financing transaction. We were able to secure favorable term, and our credit ratings remain unchanged. We were able to reduce the interest rate on both the incremental $425 million and the pre-existing $490 million of first-lien term loan from LIBOR plus 300 basis points to LIBOR plus 275 basis points after this transaction. Our pro forma leverage is 3.5x after this transaction.

As John mentioned earlier, this is still a strong balance sheet with significant liquidity to deploy $100 million to $150 million per year for acquisitions.

Moving to Slide 9. Based on our current understanding, the recent U.S. federal tax reform will be favorable to Atkore going forward. We expect our 2018 effective tax rate will now be between 22% and 23%, down approximately 12% from our tax guidance prior to the tax reform.

Since we have a fiscal September 30 year-end, we will only benefit from lower 21% federal rate in our second, third and fourth quarters of 2018. The main impact of the new tax law to our first quarter results is the noncash revaluation of our deferred tax liabilities at the full year tax rate. This onetime revaluation drove our first quarter effective tax rate down to 9%. And we expect quarters 2, 3 and 4 to be at 26% absent any discrete items.

Now I'll turn the call back to John for our guidance and his final comments and perspective.

Thanks, Jim. Moving to our guidance for 2018 on Slide 10. We are updating our view on volume based on our performance in Q1, the effective tax rate based on our current understanding of the federal tax reform impact and our share count and interest forecast for the impact of our share repurchase transaction. All other items remain unchanged from our prior guidance.

Our Q1 volume performance was evidence that our markets are improving. Market activity does look better than last year, but we'll take a wait and see view on the market's trajectory, as there are potential headwinds to the activity we saw in Q1.

First, some of the Q1 activity was driven by the hurricane recovery efforts, which will not repeat. Although that impact is difficult to quantify, we think it was worth at least $5 million on adjusted EBITDA in Q1.

Second, Q1 volume was partially driven by nonrecurring buying activity, which included a lower margin mix of product. With all of that in mind, we expect the construction markets will show modest growth in 2018 and our industrial markets will be up at least in line with GDP.

We are updating our full year guidance as follows. For the Electrical Raceway segment, we expect volume up in the low to mid-single-digit range and adjusted EBITDA to be in the range of $215 million to $225 million. For our MP&S segment, we expect volume also to be up in the low to mid-single-digit range and adjusted EBITDA to be between $60 million and $65 million. In total, we continue to expect 2018 adjusted EBITDA in the range of $245 million to $260 million.

After the stock repurchase and federal tax reform, we estimate our adjusted EPS range to be between $1.95 and $2.15. This range continues to incorporate a preliminary estimate for the amortization of intangibles for the acquisition of Flexicon and Calpipe. Amortization amounts will solidify in Q2 with the final purchase accounting.

Interest expense will be approximately $40 million, and our fully diluted share count will be 54 million shares. Based on our current understanding of the tax reform, our tax rate should be about 23% all-in. CapEx is expected to be about $30 million for the year.

And finally, turning to the second quarter 2018 guidance. This is the first time, we've given you a range for Q2. We expect our consolidated adjusted EBITDA to be between $58 million and $62 million and EPS between $0.42 and $0.48.

In summary, I'm proud of Atkore's accomplishments in the first quarter. We saw growth from organic initiatives, successfully passed through material cost increases and continue to drive additional savings with our productivity initiatives, just to name a few highlights. Our disciplined financial management enabled us to reinvest in Atkore through a significant stock repurchase while at the same time favorably repricing our existing term loan.

Our employees make all of this possible. As Atkore evolves as an independent company, their unwavering dedication to improving the business and taking care of customers continues to build our capability, strengthen our portfolio and drive value for shareholders. We're pleased that these results are also being recognized externally in the marketplace.

Brock, please open the line up for questions.

(Operator Instructions) Our first question today comes from Andrew Kaplowitz of Citigroup.

This is Seth Girsky on for Andy. So growth of 9% was pretty strong. And you talked about some of it being from the hurricane. But even, excluding the hurricane, it looks like you guys are seeing a pretty nice step up in volume growth. So can you talk about your expectations excluding the hurricane impact? And then, do you think it's possible to see a little bit more of a pickup from hurricane-related restoration work in Q2?

Well, addressing the hurricanes, I think we're trying to build the hurricane recovery into the long-term projections, but just a comment on that is that, the hurricane recovery is continuing. We believe it will -- as these things do take a long amount of time for it to be fully realized. So we think that that's accretive to the growth rate. I think we're reluctant to try to guess what that's really going to be. We were encouraged with the volume in Q1. We -- I think we're being cautious about extrapolating that over the rest of the year. And I think we're being appropriately prudent in looking at the rest of the year, maybe planning for a lower growth rate and being ready for a higher growth rate. We think there is some upside. But we will remind everybody that over the last couple of years, the volume has been characterized by fits and starts. And I think we're just going to watch that pretty critically as the year unfolds.

That makes sense. And then turning to price, cost. You guys look like you did a pretty good job of getting price to offset material cost in the quarter. But you called out commodity timing a little bit. And we've seen steel prices continue to rise throughout the quarter and into 2018. So can you talk about your expectations for price, cost in the near term for Atkore?

Yes, most importantly, I think it's the effect of our -- on our Mechanical Products & Solutions business. The -- there's 2 product groups there, our mechanical pipe business and our metal framing business, that are essentially made of steel. So it's a challenge, as steel has really grown fast or the prices have gone up fast. It's a challenge. But our team is completely on it. For metal framing, we have the opportunity to pass it through a little bit quicker, just the way pricing is handled. For mechanical, where we're dealing with a higher percentage of OEMs and a higher percentage of longer-term purchase orders that have an indexing function on pricing, that typically takes longer for it to pass through on the up or the down side. We believe, we're able to pass through commodity cost, and we've shown that over the last couple of years with the normal effect of timing. I think we will see the pass through of steel ticking up a little bit in Mechanical Products & Solutions in Q2, just as a function of the indexing on the purchase orders. But it remains something that's a challenge every day for us. We'd like to just point out that copper has been moving up pretty strongly as well. That's a big -- it's used our armored cable business as part of our Electrical Raceway business. And that's something we've typically done pretty well in moving that up, but it's something that we highlight as well, and something that every day a challenge to make sure we pass that through.

The next question comes from Chris Belfiore of UBS.

So I just want to -- just to kind of touch on this, the markets in general. I mean, could you just provide some color on where you're seeing your strength or weakness across just the general construction market?

Yes, I think it's really consistent with what we have been talking about just as -- it's a -- residential has been really strong. Within the -- in the non-res segments, I think we have been seeing pretty good rebound in a number of verticals. I think institutional has been on the plus side of things, while commercial has been a little bit down. Multifamily, which is going to be apartments, condos has been on the downside after a number of years of being very much on the plus side. So I think that's -- where we're seeing manufacturing showing a little bit of improvement, this would be investment in factories, as in the U.S. people have held back on investment as exports went down with the exchange rate pressures, and oil & gas ripple through the manufacturing and processing industries, constrained spend. So we see that rebounding a little bit as well.

Okay. And then just kind of like dovetailing off of that, you mentioned some potential for upside during the year. Are you carrying anything from your customers around increased CapEx spending, given lower tax rates or any benefits from a potential infrastructure bill if that in fact is passed through. Is there any kind of buzz from your customer base?

Yes, a little bit in that last comment I made on the verticals with manufacturing and processing. As oil & gas was challenged and exporting was challenged, people did cut back on their investment in factories and in processing plants. And I think just a rebound -- just a pent-up demand there has been favorable. In all honesty, it's hard for us to sort through what our customers are saying with regards to what they are going to do with the tax benefit. Most people don't see the same magnitude of tax benefits we are seeing. But quite a few people do, it's just hard for us to really -- it's really hard for us to kind of put that -- to layer that over our market expectations for 2018. So I think we just kind of consider it another positive. And see it just more as a positive as opposed to something we could quantify.

And I think also on those, if they are going to be putting in additional programs or anything by the time they engineer them and get them all planned out it's going to push it out quarters before we actually see it. So we got to give it time for them to plan and get things on the drawing board first, because I don't think they have those there right now.

Okay. And then, if I could, just kind of a clarification. In MP&S, you guys talked about increased freight cost. Could you just provide a little like color on why that was more of an impact in MP&S versus like Electrical Raceways? Is it just like the mix of business or the customer base?

Yes, we can. Freight has gone up, obviously, for all of our businesses. And -- so it's a big issue. It's something we're working hard to pass through to the market. But in MP&S, there's a couple of things. We had a little bit of a favorable impact of some freight allocations last year that's making the comparison a little bit more unfavorable this year. But fundamentally, it goes back to the same issues that we talked about with steel. Where we have longer-term purchase orders in Mechanical Products & Solutions, it takes longer for us to pass through freight and raw material costs just because of the purchase orders that are in place are just longer term in nature compared to just Electrical Raceway. So pretty much, it's just timing.

The next question comes from John Inch of Deutsche Bank.

So just to pick up actually on that freight theme in MP&S. My understanding is freight costs actually in industry, so U.S. economy are actually positioned to increase significantly in the next 6 months. So I'm curious, given, Jim, you talked about the lag there, I mean, how does that play out? Have you already tried to be proactive with respect to these rising costs? Or do we expect margins to still come under a little bit of pressure in that segment until you can do your catch-up?

Yes, a quick comment on freight. We have actually a really strong logistics team here that we put in place over the last 3 years. And we're really happy with the contributions they've made to our business. We're looking at fuel being up 4% over the year and rate being up 4%. So we've been very proactive at interfacing with our business leaders to make sure we're doing the communications with customers and that we're working that into our pricing protocols. So we feel strong about that. But John, it will -- in Mechanical Products & Solutions, it will take longer to pass through any kind of cost increase. But we believe we've been proactive about it. We've been talking to customers on it. We've been pushing pretty hard on it. And we do have the mechanisms, we think, to improve on that pass-through rate. So it is going to be a challenge, but we -- I think, we're in front of it.

Okay. So you think freight is up 4% for your fiscal '18, is that ...

It's going to be up -- it will be up high single digits actually.

Okay. That seems a little low, but that's fine. Can I ask you, so core growth was up 9%. What do you estimate your industries that you serve did?

Just below that. 7.5% to 8%.

Okay. Anything noteworthy on that front. Like, in other words, how did you -- is there any spot, in particularly, where you thought you had taken some share?

Yes, I think, one thing, we're really happy about is, in our Electrical Raceway business, we've been talking about this for a while. Where we used to run those businesses as individual, separate businesses, historically at Atkore, we've been operating under Bill Waltz, our Group President of Electrical Raceway, as one Raceway segment going out to the customers. And just a great example of, in our Chino, California facility, people are talking about a truckload that went out with 7 different Atkore products on it. It saved customers administrative and logistics costs and got us business that arguably we wouldn't have gotten, if we weren't able to do that all in one fell swoop, one invoice, one truck, one phone call. So I think it would be more around that type of thing, leveraging our Raceway portfolio.

Okay. The release on January 22, you say that your long term -- so the tax rate, basically the ETR beyond fiscal '18, you expect to be 25% to 27%. I was little confused by that. I mean, you are basically a U.S. company, why is your long-term tax rate going to be 26%? Why isn't it 21%?

Well, when you bring in the state tax and those also have to go in there. The reason you see it going down and then back up '18 to '19 is because our fiscal year begins in October. We get 3 quarters of the new rate. But we also get some deductions that were under the old code that were grandfathered for 1 year on those. And so we kind of straddle the fence between the 2 different rates. But really, when you get to '19, our long-term rate has state tax rates help and bring it up also.

And what's an example of a deduction that you no longer get?

Like the 199 manufacturing credit, we'll get that for 2018, but we won't get that in 2019.

Yes, the domestic manufacturing credit, it's almost 3% impact.

Okay. Just lastly for me. I mean, there's, obviously, rising inflation or that's only been the #1 concern here. You guys called out some wage pressures. What is the scope of the labor inflation that you're facing today? And John, how do you -- how are you going to deal with that? Because it's one thing to pass along cost increases based on raws or freight costs, but if your own cost pressures are due to labor are under pressure, how do you manage that? Can you step up the productivity or just how should we think about it?

Yes, well, it's a great question. I don't think we called out labor pressure in the script, but let us address it. We're seeing, just basically salary overall in the 2.5% generalized range. This is how we incorporate this into our pricing mechanisms. It's something that we -- first thing we try to do is offset it with productivity. And we have in our pipeline $10 million to $15 million of productivity on an annualized basis. Not all those happen in a year and you don't get the full effect of that. But I think we have a decent track record of passing through productivity that generally offsets inflation. And then it has to be incorporated into the pass-through as well. I wouldn't say our labor situation either at a direct labor or even at a salary employee level is anything different than is generally being experienced and anything different than we have been prepared to handle. One thing that, John, maybe what you're referring to is our compensation for our incentive plan. We -- depending on how the incentive plan for salaried employees pays out every year, there can be a favorable or unfavorable comparison at 100% to what we actually paid out. And I think that's probably what you're referring to in terms of compensation.

Yes. Karen's signaling -- or Yvonne is signaling me that is what I was saying. So you're not giving any kind of bonus are you for the -- just out of curiosity to the workers because of the tax reform?

No, that's not -- I would say, we haven't made a final we are not, but there is nothing planned at this point.

(Operator Instructions) Our next question comes from Deane Dray of RBC Capital Markets.

I really like seeing the orderly sell-down of the CD&R ownership position here and the creativity in issuing stock or issuing bonds, buying back stock. One of the things that surprised me is, you've got really favorable terms on the debt in a period of higher rates. So what's driving? It was LIBOR plus 300, now it's LIBOR plus 275. How did that end up more favorable?

When we went out to the marketplace on the new term, we wanted to make it fungible so it was just an amendment or add-on to the existing term. There was very good response and demand for it. We were heavily oversubscribed, and with that oversubscription, we were able to be able to get favorable pricing on the existing term and the new money. So we had both new money and existing term note holders extremely interested in the credit. And I just think it hit in the market at the right time and being a good -- we've demonstrated we can manage our balance sheet, and everyone was very favorable to jump on board.

And I would just add to that. Over the 7 years, going on 8 years that CD&R has been a major stakeholder in this business, we've established quite a bit of credibility with the ratings agencies, with the banks, with investors. And I think it's the credibility as much as everything else. Along with that credibility is the transparency that we try to maintain with everyone. And Jim, and Chuck Cohrs, our Treasurer and Keith Whisenand, who is very much involved with this, have done a very good job of just establishing a credibility as well, out there. So I think it's all of that.

It's real good to see. And I think you called out balance sheet capacity for M&A of $100 million and $150 million. Is that right? And what's the total capacity on the debt side? Is there still demand for the Atkore name as a credit? And what kind of terms could you be issuing here further in the market?

Yes. Let me handle the second one. I'll let John handle your first one. I think given the response to the refinancing, as I said, it was significantly oversubscribed. So there is a demand out there over respected credit. We still have good liquidity. Our entire ABL is dry with this refinancing. So we have the liquidity available to us now on our balance sheet going forward.

Yes, and I think with regards to M&A, I think the way we look at what's possible or the possible constraints on M&A would be capital availability, opportunities or targets in the market, and also the ability of the leadership team to integrate it. And we really believe that capital is not a constraint and the ability of our leadership team to manage and integrate is not a constraint. We have a very strong pipeline that is in excess of our stated deployment goals of $100 million to $150 million. As always, those are things that they happen or they don't. And you don't always control the timing of them. But yes, we feel pretty confident in that capital availability is not an issue at all. We were at 3.5x EBITDA in terms of debt. If there was something that was just the absolute right M&A and accretive, we would be open-minded to extending that, if there were clear paths to paying that down. So I think we're in really good shape on that front.

Yes, just as a follow-up there. Free cash flow conversion by our estimates this quarter was strong at 135%. What's your expectation for the year? I don't see it in the outlook. You're not calling out a specific free cash flow conversion. What's your expectation?

Yes, we normally don't guide on that, but if we were -- we are going to be north of $100 million a little bit, and probably similar to what we have been in prior years.

North of $100 million cash? Are you talking about free cash flow? Or are you talking about conversion?

Free cash flow.

Got it.

And then conversion is going to be north of $100 million, which is something that we really -- that's something we pay attention to, and probably in the $120 million range, as a percentage.

The next question is from Rich Kwas of Wells Fargo Securities.

Jim, just a follow-up on that, so that includes the conversion rate in the dollar amount for free cash flow that includes the benefits from tax correct? The cash flow benefits?

Correct, correct.

Okay, okay. What's the assumption for...

Now that's going to be offset, don't forget we're going to have increased interest in there too with this financing.

Right, right. Okay, and then, on price recovery, what with the lags and whatnot, what should we assume for the year for '18? Are you going to be able to fully offset? Or is there going to be some dilution with regard to that development?

Yes, Rich, obviously, something that we have spoken with everyone about a lot and always a challenge. The hardest thing about answering that question is, we really don't know what commodities are going to do. If steel flattens out, kind of peaks out where it is right now and we think it's going to go up a little bit into April and then start coming down, then we would be able to recover all that in a year. If hypothetically or theoretically if steel and copper continued to rise all the way through the fiscal year, there would be -- we wouldn't pass it all through in the year, because that 60- to 90-day lag that we typically talk about. So we believe that, if you look at steel, and we have a projection on steel that we feel more confident than we do about our projection on copper, we think we will pass it all the way through in the year. But a big part of that is the profile of your volatility over the time period and then you superimpose those typical lags on top of that and you could have a quarter or you could even have a fiscal year that's advantaged or disadvantaged by timing.

All right, that's helpful color, John. So just the going assumption right now is that steel goes up through April and then you'll be able to get recovery for the full year?

That is the going assumption.

And do you have an assumption for copper at this point?

Usually, with copper, what we do is, it's driven by much more global dynamics than steel, which is kind of Midwest U.S. steel. What we basically do is, we assume some inflation, and we assume it flattening out. In general, I think, and it is built in to our numbers, we're showing headwind of about $5 million in the year for commodity pass through. Most of that's probably going to be around copper, I'd say.

Okay, all right. And then as we think about the OEPs within mechanical, what percentage of sales does that make up? I mean, it sounds like its meaningful enough here that it affects mix and pass-through.

Yes, it's meaningful. I think it's in the ballpark of about 50-50.

Okay. 50-50. All right. And then, just a clarification. With regards to the adjusted EPS guidance. Jim, does that include the onetime benefit, this $4 million or $5 million for the deferred tax liability reval?

It does.

Yes. It does.

Okay, so that's nonrecurring. So we got -- so really on a run rate basis...

That's nonrecurring. If you take a look at our ETR for the first quarter we're going to be down around 9% due to that deferred revaluation.

The next question is from Patrick Baumann of JPMorgan.

I'm on for Steve Tusa. Just had one quick question. I'm not sure if you addressed this at the beginning. Just wanted to ask about it. The volume growth expectations for the year look like you have some stronger expectations now. I know you had very strong volume quarter in the first quarter. And just curious, how that flows through to the EBITDA because the EBITDA guidance wasn't changed. So I'm just curious what are the offsets to the what looks higher volume growth expectations now for 2018.

Okay, thanks. Great question. Fundamentally, the volume was strong but mix was a little unfavorable in Q1. I think we are taking a wait and see position on volume over the rest of the year. We do feel that volume does couple of great things for us. Number one, just uses our fixed costs better, allows us to pass through pricing a little bit quicker, which is valuable for us and then just the higher sales. One point I want to really emphasize here is that, without the effects of a rising commodity and rising revenue based on us passing through the commodity, our margins for the first quarter would have been -- in Electrical Raceway would have been 19%. And would have been higher in Mechanical Products & Solutions. So the one thing I always want to make sure we emphasize is that the margin percentage will be -- will have pressure in a rising commodity situation just based on the math of the denominator and the numerator, the cost and the sales going up at the same rate. So I think to summarize, volume, nice, strong volume in Q1. An unfavorable mix, part of that was some, we believe, distributors buying lower-margin products to attain some rebates at the end of the year partially, but that mix brought down the fall-through on that volume. We still are optimistic about volumes going through the rest of the year. Taking a little bit of a wait and see before putting it through to the P&L. And as we think about margins, there is going to be a natural compression of margin percentage in a rising commodity environment, even when the economic earnings, the EBITDA number itself, is staying the same or improving.

Got it. That makes sense. So when I think about those year-over-year components you gave last quarter around the 2018 adjusted EBITDA growth projections, have any of those moved around at all? I think you said acquisitions, you're looking at $20 million year-over-year, net productivity was $6 million, you have like $4.5 million of spread contraction, you had $4 million of investments and then you have volume dropping through it, I guess high single digit millions, have any of those components changed at all or is that kind of still the framework around year-over-year EBITDA bridge?

Yes, Pat, I think it's a really good framework. I think what probably will happen you will see volume go up a little bit. We might be challenged a little bit with spread depending on what the commodity profile over the year is. But I think the rest of it is in place where we're feeling good about our productivity, might be some upside on that to offset some of the inflation pressures. But I think it's still pretty good model.

(Operator Instructions)

All right. In the absence of more questions, we'll summarize. First of all, thank you for your interest in Atkore. We're really -- we're proud of the business we have, and we are excited about the first quarter and like what we believe it means for the rest of this year. We are being cautious on volume, but there is a lot of really strong performance showing through in what we have been able to do with growth, with productivity and how we have deployed our balance sheet. We look forward to updating you on our progress in the next quarter. Thank you very much.

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