Atkore Inc (ATKR) 2021 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Atkore Second Quarter Fiscal 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) Thank you.

I would now like to hand the conference over to John Deitzer, Vice President of Treasury and Investor Relations. Mr. Deitzer, Please go ahead.

Thank you, and Good morning, everyone. I'm joined today by Bill Waltz, President and CEO; as well as David Johnson, Chief Financial Officer. We will take your questions after comments by Bill and David.

I would like to remind everyone that, during this call, we may make projections or forward-looking statements regarding future events or financial performance of the company. Such statements involve risk and uncertainties such that actual results may differ materially. Please refer to our SEC filings in 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. In addition, any reference in our discussion today to EBITDA means adjusted EBITDA.

With that, I'll turn it over to Bill.

Thanks, John, and Good morning, everyone. Starting on Slide 3. In the second quarter of 2021, Atkore again delivered outstanding performance across our businesses in what shaped up to be another record quarter. Revenue was $640 million, and adjusted EBITDA was $193 million in the quarter. We had very strong results in both metal conduit and our focused product categories. In addition, we continued to see exceptional performance from our PVC business, driven by continued high demand in key end markets, such as residential and data centers.

Across the whole company, volume has rebounded to pre-COVID levels. We ended Q2 up $1 million in terms of volume, led by high single-digit volume growth in our international business.

We are also very excited to announce that our new MC Glide armored cable product has recently been recognized by EC&M magazine as Product of the Year in the Wire and Cable category. We are committed to developing innovative products that help improve the experience for contractors on the job site, and we're thrilled with this recognition.

These tremendous financial results and operational achievements were driven by the focus and dedication of our team. The culture of teamwork across approximately 4,000 employees is core to who we are as a company. Our market remains robust, and we continue to deliver results today and invest for the future. Therefore, we are increasing our FY '21 outlook and now expect to achieve adjusted EBITDA in the range of $700 million to $750 million.

I'll provide more detail on our outlook after David walks through this quarter's financials. But before I pass it off, I want to share an update regarding our recent acquisition of FRE Composites on Slide 4. This acquisition shows our proven bolt-on M&A strategy at work. We continue to acquire high-quality companies to expand our product portfolio, and FRE Composites does just that. FRE is widely recognized as a market leader for their innovative and high-quality fiberglass conduit systems, and this acquisition is a perfect fit for Atkore. With FRE as part of our portfolio, we gained increased exposure to large-scale infrastructure, transportation, data center and utility projects, all of which are poised for solid growth for the next few years.

We're so pleased to welcome the great team to Atkore. Together, we'll re-focus on [leveraging] our collective strengths and growing this business.

With that, I'll turn the call over to David to discuss the quarter.

Thank you, Bill, and Good morning, everyone. Moving to our consolidated results on Slide 5. Net sales increased 40% year-over-year, primarily due to higher average selling prices across many parts of our business. Adjusted EBITDA increased to $193 million, which drove our adjusted EBITDA margin to 30% in the quarter, up significantly from the prior year. Our adjusted EPS of $2.79 increased 182% from the prior year. As you look at our year-over-year comparisons, also recall that we had very minor negative impacts from temporary shutdowns related to the pandemic in Q2 fiscal 2020.

Turning to Slide 6 and our consolidated bridges. Net sales increased by $184 million due to higher selling prices, largely in our PVC and metal conduit products and the impact from our recent acquisitions. We also had double-digit revenue growth in our focused product categories, which contain many of our fittings products. Through outstanding operational and commercial execution, our team was able to fully overcome the impact from higher input cost inflation, and we grew adjusted EBITDA by $106 million. This profit growth was driven by our ability to service our customers and execute the Atkore business system despite the challenges associated with COVID-19 and raw material supply.

Shifting to our segment results on Slide 7. The electrical segment led our profit and margin improvement year-over-year, with adjusted EBITDA up $111 million and adjusted EBITDA margins above 38% due to strong performance from our PVC and metal conduit products as well as our focused product category growth. One other positive to call out is the volume growth that we had in our international business this quarter, which was driven by the rollout of new products and solid demand recovery in key markets in Western Europe.

In our safety and infrastructure segment, net sales increased nearly 15% from the prior year as the business was able to fully pass through the increases from rising steel input costs. Adjusted EBITDA margins declined in the quarter. But on a constant input cost, we would have anticipated margins to be higher by 180 basis points at just over 12%. We believe this segment is well-positioned for growth and margin expansion as overall economic conditions continue to improve.

And now, moving to our consolidated cash flow review on Slide 8. We ended the second quarter with $304 million in cash and generated $55 million in free cash flow in the quarter, or a $65 million increase versus Q2 of 2020. This is really strong performance from a cash flow perspective, as many of you know that we have multiple factors that generally impact our cash flow in the quarter, such as dual tax payments, dual interest payments, and the impact of annual rebate program incentives.

In general, we target free cash flow to be approximately 100% of net income on an annual basis. For FY '21, though, we expect that cash flow will lag net income due to the recent large increases in both our average selling prices and input cost inflation. All that being said, we have made tremendous progress on our journey to strengthen our balance sheet from the cash flow we generate, and we remain committed to our disciplined approach to capital allocation. Consistent with this, through the first half of 2021, we've had a very balanced approach to capital deployment, with over 40% going to either organic or inorganic investments to grow our business for the future.

And now let me turn it back to Bill.

Thanks, David. Turning to our outlook on Slide 9. We are raising our outlook for net sales, adjusted EBITDA and adjusted EPS for the fiscal year based upon the better-than-expected results we experienced in Q2 as well as how we expect the back half of the year to unfold. Our third quarter 2021 outlook is for net sales to be up approximately 80% to 100% and adjusted EBITDA to be in the range of $200 million to $220 million. In addition, we expect to grow our adjusted EPS up to $2.80 to $3.10. For FY '21, we now expect our net sales to be up approximately 40% to 50% and adjusted EBITDA to be in the range of $700 million to $750 million, which is up $260 million to $290 million versus our prior estimate. In addition, we expect our adjusted EPS will be in the range of $10.00 to $10.70.

As evidenced by the results we delivered through Q2, we are successfully navigating this continued period of unusual supply-demand dynamics. As we've discussed previously, by optimizing our supply chain, we're able to not only serve our customers reliably, but we're able to do so with shorter lead time than others. That's a direct credit to the sustained efficiency of the Atkore business system. This high demand paired with constrained supply in PVC and other categories is creating a very favorable pricing environment that is ultimately driving significant value and outperformance in our results.

That said, in the long-term, we do not expect this level of industry-wide supply constraints to be the new normal. To date, in the third quarter, though, we are continuing to see strong PVC conduit demand and an elevated pricing environment. This is partially due to our ability to manage the market supply constraints that resulted from the Texas winter storms.

Moving to Slide 10. I want to take a moment and reflect on the tremendous growth of the business over the past several years and frame our recent results and outperformance. You'll recall last quarter, in addition to giving our guidance for FY '21, we also provided some additional early perspective on FY '22. While we caution that we would not be making a habit of providing long-term guidance, we do want to communicate today our latest perspective has increased from what we outlined for you on our last call.

While we continue to expect more normal historical levels in PVC demand and pricing as well as other parts of the business as we approach the late fall and winter months, we have adjusted our expectations for FY '22. We are now providing a range for adjusted EBITDA of $400 million to $450 million. As you can see here in this chart, over the FY '15 to FY '20 time period, we delivered a strong CAGR of approximately 15%, a growth rate that we're really proud of, especially as the market backdrop has varied across these years. Looking forward at our early perspective for adjusted EBITDA and FY '22, while the level of EBITDA is down from the record we expect to achieve in FY '21, the growth rate is still in line with our historic double-digit growth rate when compared to FY '20.

Before we turn to Q&A, I just want to reiterate that we had a great first half of the year, but we're even more excited about what the future holds for this tremendous company. With that, we'll turn it to the operator to open the line for questions.

(Operator Instructions) Andrew Kaplowitz with Citi.

This is Eitan Buchbinder on for Andy. The PVC markets remained strong, and you previously described being able to focus production in order to provide competitive lead times at higher selling prices. So have you seen a big competitive response with regard to lead times and pricing, given the strength in PVC markets?

I think we're definitely leading the industry in our deliveries; and with that, customers are coming to us. But again, we're making sure that we serve customers appropriately and not take any more orders than needed that we would actually get extended lead times. So hopefully, that gives you a feel.

And you called out the impact of severe weather in Texas. Can you quantify how much of a tailwind that provided in the quarter and potentially for the full year?

It's hard to quantify from a standpoint of exactly how much, but it was absolutely a catalyst that helped drive our results, especially in PVC. Now, the only thing I would add to that is, while PVC is a standout, we're doing well, as we called out, from metal conduit, our cable businesses, international businesses. So it's not a one-trick pony, but it definitely helped.

And if I could just squeeze one more in. Can you give some color about how to think about margins within the safety and infrastructure business? There's a lag in terms of prices settling in. So do you expect margins to be able to return to that mid-teens level in the third quarter or as we wrap up the year?

This is David. I would say it depends. It depends on whether steel prices continue to rise or come down. And the reason for that is, if you look at this quarter in particular, S&I actually did raise prices to offset 100% of the increase in input costs. So they did a really good job; netted to 0, which, as you know, does affect the overall percentages. Now, they were down a little bit in volume and what have you in the quarter.

So going forward, I would expect that same attributes to happen, where price does offset cost, but it will have a decremental effect on the actual percentage. So I would say it'd get a little bit better from here, but until steel prices actually peak and maybe even start going down slightly, you won't see a tremendous upswing in that actual percentage.

Deane Dray with RBC Capital Markets.

So we're still trying to absorb some of these big price increases, just the magnitude of them. And that's always been the story historically with Atkore, is the ability to pass through instantly higher raw material costs. If there's ever been a quarter, this is it, that kind of shows you that's your model.

So can I start with, if the context of the 35.6 percentage points in price increase, what's the input cost increase that we saw in the quarter? Can we start there? Just if you aggregate steel, if you aggregate, resin, how much was higher input costs?

Yes, Deane. I'm going to reference our Page 6. And on the bottom where the EBITDA bridge is, you can see that input cost changes were an increase of $64 million in the quarter; offset, obviously, by the $163 million in increased prices. So I would say the increased price as an element certainly is the pass-through of input cost changes, but also probably even a major element of it is, again, just delivery and being able to service our customers and being able to get the price for the value that we're offering to market at this point in time.

And just directionally, out of that $64 million, how much of it was PVC versus steel...

It's probably a mix, Deane, because you get into steel costs. Hot-rolled steel in the last 7, 8 months have tripled in price. And then, it's a question of we probably sell more steel products than PVC.

It's all of S&I Steel, for instance. So yes, I would say a little bit more on the steel side.

So the question then becomes for us is the process of normalization. And maybe let's just start on the supply side of new capacity. Do you have plans for new capacity to come on? And might your competition start to bring in new capacity?

It's obviously hard. I'm not here today to announce anything that we're doing, but don't read into that either, Deane. We did bring our facility for PVC, for example, that was knocked out by a flood back online, so that's helped some.

From there, Deane, it's hard to speculate. Any type of add in infrastructure is at least a year long to put something in, whether it's us or competition, then you get into “is this an anomaly” for a year, do you have space in your facility. And then, you do have growing markets. So I'm always watching. We're watching, but there's nothing that I can predict or that overly concerned about at the moment.

That's for Atkore, but how about competition?

Oh, no. But it is the same, Deane. In other words, Deane, do they have space in their facility, or are they sitting there taking their money, a private company, to their shareholders, or are they concerned 2 years from now pricing may normalize. And by the way, if somebody was to add a little bit of capacity, the markets are growing across the board. And I would expect that to continue for the next several years. So I was making more of a holistic statement that I'm not that concerned.

And then, just so we're level set on the rule of thumb, is conduit cannot be shipped more than 500 miles economically.

Yes, PVC.

Yes. That negates any chance that you'll start seeing Chinese imports on that.

Oh, yes, Chinese. At least for PVC, that's all my concerns in life, that's not one of them.

Just want to make sure that's still that's not something that we're concerned about. So the ramp down and normalizing you think is a 2021; so the back half, things can normalize, because if you look at the guidance, which we really appreciate you pointing to for '22, it does ramp down. So is it linear in terms of the selling price as supply-demand begins to normalize?

Yes. I think it is linear, probably, Deane, with the other assumption is probably a little bit more directly in the winter months; because, again, there is seasonality to our business. You can see that with previous years in revenue and earnings, and it's a logical thing. In other words, think about PVC specifically, but even other building products. It's hard to put PVC underground when half of the United States is frozen for 5 months.

But I would suspect that my competition and myself will be building inventory, catching up during the winter months. And therefore, when spring comes next year, there'll probably be more of a normalized supply-demand. And therefore, our guidance, which most people don't give or estimates, are of $400 million to $450 million seems both prudent. But by the way, an increase from, quite frankly, just 3 months ago. So it's a good time to be an Atkore shareholder.

And just last one for me, a bit more of a technical question. So when I look at the FRE acquisition and that's fiberglass, so I'm pretty familiar with the building codes for steel versus building codes of PVC. How does fiberglass get within the equation of building codes? Is it a substitute for PVC, or is it...

Well, it could be. But Deane, there's a couple places here where it's really unique, and so that's why we're so excited to add this to the line.

So for example, on Page 4, with bridges and things like that, fiberglass is the lightest of all the materials we provide. And again, we have a full suite of conduits. So if you do have an aging bridge and you're concerned about, hey, you want to replace things but you don't want to add tons and tons of weight to it, fiberglass is a perfect alternative to redo the conduit on a bridge, for example.

And then, to your point about getting techy, fiberglass is perfect in fire-retardant applications. For example, steel won't melt, but it would transfer the heat inside to the wire. So you don't want a steel conduit, for example, going into your fire system so the cable is burned before the fire pumps go on. So in that type of case, FRE is spot-on for those applications.

Tunnels, that kind of thing, all those kind of applications.

Exactly. So we acquired it for the long long-term, like anything we do. But obviously, with the new administration and investments in infrastructure, it was like the perfect time for us to get this as part of our corporation.

That's really helpful explanation. And yes, it's highly topical, especially bridge and tunnel and all the infrastructure spending that is supposed to be happening.

John Walsh with Credit Suisse.

Wanted to circle back here to price. If I remember correctly, I think your previous view on 2022 kind of assumed that the benefit of price related to COVID normalizes, I guess, to use Deane's word there. But I'm trying to understand why that might be the case. Your product requires a very regional manufacturing structure. It's a pretty concentrated market. I guess I'm curious why, all of a sudden, price would kind of normalize and at least not just plateau at these rates. It's also pretty small part of the input costs of a project. So maybe just help us understand that a little bit.

Yes. Great question, John. First, obviously, for myself, the employees and our shareholders, I would love it if it was to plateau. And by the way, we will strive to continue to provide value to our customers and get a fair price for providing that value. I just think it's not realistic, John, for the following reason - supply-demand. When our competitors do catch up, are they willing to say, “Hey, I can provide the same service as Atkore.” They can't today, I'm generalizing. There's great competitors out there across all of our product lines. But as they catch up and build supply and get it out in the field, and all of a sudden start saying, “Hey, I'll provide 5% less price for that same service”, I think we'll start to see more normalized.

Now, John, to your point, when we gave the original guidance, if anyone did a model and just said volume up several percent, productivity, there was still 2 years of price built in. And now, as we raise that guidance, or estimates to the $400 million to $450 million range, we are assuming, along with the FRE acquisition, that we will continue to hold some more of that price, going forward. But I just don't think it's a prudent thing for investors, and we want to be as transparent as possible, i.e. the reason we're probably one of the very few companies that's giving some type of estimate into 2022.

And just one other thing on that. I do think as time goes on, we'll definitely have a little bit more clarity to that as we have more clarity in FY '21. A quarter ago, we obviously thought $450 million for EBITDA, and now we're significantly above that as these challenges have increased a little bit in the quarter due to the winter storm and what have you. But we also see this imbalance between supply and demand continuing at least through this year. So as the year unfolds and we get more information, then we'll re-look like we normally do in November, provide updated guidance for FY '20.

Yes. And the other thing I'd like to emphasize, and sorry, John, back to you then, sir, is PVC we've called out because it's our most example of that supply-demand characteristic. But I don't want to ignore whether it's our cable business, our metal conduit business. I'm not going to list each 1, or international business, that this isn't just one product. But most of those other products and/or businesses also are in a unique situation. Steel supply went from 3 weeks for us to get steel in to literally, like, 13 weeks. We've gone to measuring weeks to months. And that has caused unique, where competitors have stocked out a product or haven't been able to forecast accurately 13 weeks in advance.

But those things, over time, should normalize. But I'm projecting, John, just like for you or I to estimate what the cost of lumber is going to be 2 years from now.

That makes sense. I was just going to say we definitely appreciate you providing a look into 2022 because you are one of the few.

If we could talk actually maybe a little bit about international; obviously, it's a smaller part of your business, but maybe you could talk about the end markets that you're seeing driving that international growth. And I know you're in kind of a smaller subset of countries, but any other color you can provide there?

Yes, a couple. It's probably across the board with their growth. And to the point we provide in other things, it's around 10% of the business, give or take. But 2 things I would claim there. There's especially one growing share. They just have a great organization that is really aligned with end customers and providing value; and then specifically data centers. I have a call every couple weeks with our President of International, and his eyes light up when he's talking. I won't mention specific large data corporations, but his work with them, both in Europe and the Middle East and so forth as they grow, he and his team are doing a great job in that area.

And just one more here. When you think about the volume recovery for the back half of this year and into next year, obviously we are looking at [ABI, right, Dodge], contractor backlog, et cetera. But any more color you'd provide around kind of that slope between new construction projects, renovation, retrofit, and then maybe a little bit of thoughts around infrastructure, as well?

Yes. So I think, in general, expect for the whole year to be low single digits, which means stronger than that in the second half of the year. With the fairness of this quarter, we'll be probably even high single digits, but we are comping the infamous shutdown quarantine quarter last year.

But again, I'm, John, digressing a little from the question. I'm really proud. David called it out that we were actually up slightly in volume this quarter in the middle of still things being slower in COVID compared to the full robustness a year ago.

So the teams are doing well. We're serving customers. And just going forward, think mid- to low single-digit growth as a driver.

Chris Moore with CJS Securities.

Yes, most of mine have been answered, but maybe in your prepared remarks, you talked about still heavily investing in organic growth, be that products, geography, et cetera. Can you maybe talk to that a little bit further?

Yes. So we are, Chris, without naming products we haven't released yet, one of our key focuses is on both new products but also services. But I'll go with new products.

We, for example, and I called it out, won an award for our cable business, where just the outside edging on a piece of cable, whereas this metal banding is a lot smoother. So it's a lot easier to pull through like the [joists] and the walls and so forth, that literally was just recognized by Electrical Construction Magazine as their Product of the Year for the cable business.

And there's several other products. I know we've released 4 in the last month that we'll be talking through with our employees. And then, in services, just how can we leverage pull-through investments we're making with contractors, software tools that help our truckers pick up orders and know exactly when to arrive, and to tools for BIM modeling and so forth. So we're making investments really across the board.

As one would appreciate, when we're delivering results like this, we're also really focused on making sure we're making investments so that 2023 will be as successful as what this fiscal year is turning out to be.

I would now like to turn the call back over to Bill Waltz for closing remarks.

Great. So before we conclude, let me summarize my 3 key takeaways from this discussion this morning. First, the outstanding performance we delivered in the second quarter is a result of the strong operational focus of the entire team and our ability to prioritize our customers and provide the products they need most. Second, we continue to deploy capital effectively to grow our business, and we're really excited about the recent acquisition of FRE Composites. Third, and in closing, we continue to be enthusiastic about what the future holds for this tremendous company and team over the remainder of the year and then beyond that.

So with that, thank you for all your support and interest in Atkore, and we look forward to speaking with you during our next quarterly call. So thank you. It concludes the call for this day.

This concludes the Atkore Second quarter Fiscal 2021 Earnings Conference call. We thank you for your participation. You may now disconnect.