Atkore Inc (ATKR) 2021 Q1 法說會逐字稿

Thank you for standing by, and welcome to the Atkore International First Quarter Fiscal 2021 Earnings Conference Call. (Operator Instructions) Please be advised is being recorded. Thank you.

I'd 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 risks 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, everybody. Starting on Slide 3. Thanks to our operational focus and culture of teamwork, Atkore continued to deliver strong financial performance across our businesses, resulting in another record quarter.

As just one example, adjusted EBITDA was $137 million in the quarter, up 76% from the prior year. We had strong performance across the business for metal conduit to solid execution and volume recovery in our international markets. In particular, we saw better-than-expected results in our PVC conduit business, driven by favorable pricing dynamics due to increased demand and industry supply constraints. This was a key enabler for us to achieve 27% adjusted EBITDA margins in the quarter.

It is important to remember that our PVC conduit story is not one that began in the past quarter or even in the past year. Rather, we recognized early on that this market had the potential to be a major growth category over the last decade through a combination of organic and inorganic investments we build out this product line and expanded our national footprint becoming the leader in the market. This positions us very well to support and supply the strong residential, data center and utility markets we are seeing.

In addition to delivering exceptional results across the business, we continue to prudently deploy capital in the quarter. Specifically, we repaid $40 million in debt and bought back $35 million in stock. You'll also recall that we completed our previously announced acquisition of Queen City Plastics in October.

Turning to Slide 4. We have a few other recent events and key business updates this year. You'll see in our earnings material, we're now reporting our 2 segments as Electrical and Safety & Infrastructure. We made this decision to rename and reorganize our 2 segments to better reflect each segment's value proposition and go-to-market approach.

We are also very pleased to announce that our Board recently approved a new 2-year $100 million stock repurchase authorization. This new authorization underscores our confidence in our ability to continue to grow earnings and generate strong cash flows and ultimately demonstrates the strength and sustainability of Atkore as a long term franchise.

In addition, I want to highlight the launch of our first sustainability report. In this report, which you can find on our website, we share all the activities that we are doing across the company in terms of health and safety, diversity, inclusion and energy management. This is an area that is very important to us, and we are glad to be showcasing our sustainability initiatives through this inaugural report.

Finally, as I said, the team delivered outstanding results in Q1, underpinned by the Atkore Business System and a customer-first mentality. Based on the strength of our business and our ability to deliver results, we are increasing our estimate for fiscal year 2021 adjusted EBITDA by $100 million.

With that, I'll turn the call over to David, who will walk us through the quarter in more detail.

Thank you, Bill, and good morning, everyone. As Bill mentioned, we are very pleased with the results in the first quarter.

Moving to our consolidated results on Slide 5. Net sales increased 14%, primarily due to higher average selling prices across many parts of our business. Adjusted EBITDA increased to $137 million, which drove our adjusted EBITDA margin to approximately 27% in the quarter, up 940 basis points from the prior year. Our adjusted EPS increased 100%, up to $1.88 as our strong profit growth and lower interest expense more than offset a higher tax rate in the quarter.

Turning to Slide 6. Net sales increased by $64 million due to higher selling prices, largely in our PVC and metal conduit products. Through outstanding operational and commercial execution, our team was able to fully overcome the impact on profitability from the decline in sales volume and higher input costs. We grew adjusted EBITDA by $59 million, driven by our ability to service our customers.

Shifting to segment results on Slide 7. The Electrical segment led our profit and margin improvement with adjusted EBITDA up $65 million and adjusted EBITDA margins above 34% due to the strong performance from our PVC and metal conduit products and international volume growth.

Turning to Safety & Infrastructure segment. Net sales increased 1%, but adjusted EBITDA declined by $4 million. Margins contracted versus a very difficult comparable in the prior year and the business is working to quickly absorb and pass-through our higher input costs. In addition, from a reporting standpoint, our prior period segment results have been restated to the new segment presentation. There were also no changes to our consolidated sales or operating income.

And now moving to our consolidated cash and liquidity on Slide 8. We ended the first quarter with $280 million in cash and generated $78 million in free cash flow in the quarter. We continue to take a multipronged approach to capital allocation as part of our commitment to drive value creation. To that end, we deployed over $80 million in the quarter by repaying $40 million in debt, repurchasing $35 million of stock and completing the acquisition of Queen City Plastics. We have made tremendous progress on our journey to strengthen our balance sheet over the past 2 years, and our net leverage ratio ended the quarter at 1.3x.

And now let me turn it back to Bill.

Thanks, David. Turning to Slide 9. I wanted to take a little deeper dive into our PVC conduit business. As I mentioned in my opening remarks, we've been building this business over the past decade. We started in 2013 with our acquisition of Heritage Plastics, and we continue today with our most recent acquisition of Queens City Plastics, which was completed in the fall.

Today, we have the largest network of manufacturing sites across the United States with a distribution range for this product optimized at approximately 500 miles or less from the original production location. This has proved beneficial for our business, especially this past quarter, as we saw higher-than-unusual demand outpace the supply chain capacity throughout the industry. Specifically, the rise in residential construction accelerated by the COVID-19 pandemic drove the majority of stronger-than-expected demand that we saw for the PVC conduit in the quarter.

In addition to these residential tailwinds, we saw increased PVC conduit demand as a result of increased construction for data centers. So far the demand for the PVC conduit is continuing in Q2, and this is higher than what we typically see in the winter season. As you may know, across many industries, supply is tight as manufacturers struggle to produce products with increased challenges everyone is facing today. We're continuing to work hard to meet this demand as best we can with a constrained supply chain for the industry.

During Q1, we addressed this imbalance by focusing on production of the products our customers needed the most, and we did so with very competitive lead times and at a higher selling price. Our ability to meet the recent growth in PVC conduit demand despite constricted supply is a direct reflection of the Atkore Business System at work.

Atkore will continue rising to the challenge going forward, providing competitive lead times and value in our tight supply industry and prioritizing customer service. This has been and will remain a differentiator for us.

Turning to Page 10 and our outlook for 2021. Based on these market dynamics and the tremendous execution from our entire team, we are increasing our outlook for net sales, adjusted EBITDA and adjusted EPS. We now expect our net sales to be up approximately 16% to 20%, and our adjusted EBITDA to be in the range of $440 million to $460 million, up $100 million versus our prior estimate. In addition, we expect to grow our adjusted EPS up to $5.65 to $5.95.

This updated outlook reflects our expectation that a significant portion of these price and value-added service benefits that we have experienced this quarter in our PVC conduit business will normalize as we move into the back half of the year.

In addition to updating our fiscal year 2021 guidance, we are also providing some initial perspective on our expectations for fiscal year 2022. As you know, it is not our typical practice to provide guidance 2 years out. But we believe that additional color is needed given the unusual supply and demand trends and exceptional performance that we are seeing in the current fiscal year.

Based on what we know today, we expect fiscal year 2022 adjusted EBITDA to be approximately $400 million. While this is down from what we anticipate achieving in fiscal year 2021, it is in line with our historic double digit growth rates when compared to fiscal year 2020. This perspective may vary in the future due to changes in assumptions or market conditions. And while we don't plan to make this a recurring update, we hope this insight is helpful context for the investment community as they update their financial models and analysis coming out of today's earnings call. We had a great first quarter, but we truly believe the best is yet to come for Atkore.

With that, we'll turn it back to the operator to open up the line for questions.

(Operator Instructions) John Walsh with Crédit Suisse.

Great performance in the quarter. Wanted to understand the industry supply constraints a little bit better. So part of your prepared remarks talk about just demand being higher than expected, but it seems like maybe was there something going on with channel inventory on the PV side? Did a competitor have any kind of production issues where you might have picked up incremental share? I guess I'm just trying to understand that a little bit better because you seem to think it kind of normalizes in the back half, and I just want to know what are the levers of that normalization.

Yes. John, phenomenal set of questions there. Bill, and I'll address, David can obviously add color. A couple of things. No one specific event. The PVC conduit, as we've explained in the past, is 50-plus percent tied to residential. So even within Atkore, that market, as everybody knows, up high single digits, maybe 10% growth, depends on what product and who is forecasting. So exceptionally strong markets. Two, it's just -- I don't think any of our competitors had inventory just from a perception of COVID and impacts and so forth. And then it just ties to the ability to produce, let's call it, high single digits to 10% growth and -- in the midst of COVID. So there's not like a facility went down. Quite frankly, the only facility went down was we had advertised our Pendleton facility was hit by a flood about a year ago, but we've overcome that even without the facility.

But honestly trying to get workers in, demand -- I'm speaking the industry workers to run 3 shifts, full staffed when unemployment benefits are reasonable. When you have COVID, when you have contract tracing going on, increased absenteeism, I think some of the industry struggled. Where Atkore focused, we ran our products, we ran 7/24 with high productivity. As I mentioned in our prepared remarks, we had a game plan that we only focused on A items. So just change over times, switch to another item, we reduced that. We were candid with our lead times and the industry from one coast to the other coast appreciated that.

All right. And then maybe just a follow-up. Can you talk a little bit about the pricing you're seeing across maybe different parts of the product portfolio? I mean, a lot of emphasis on the PVC side, but how about on the the metal conduit and maybe some of the other products as well?

All good. I mean, that's why I think even in my very beginning of my prepared remarks, we did call out, for example, metal conduit, you just referenced. So this -- well, PVC was extraordinary. This isn't a story, we would still have good results even without PVC because the rest of the businesses continue to perform well. Mechanical, our safety and infrastructure, excuse me for Freudian slip, that has, as we've always explained, a little bit more time lag where you have a contract in place or a quarter index. So there, we expect to regain the strength, and we had strong comps from a year ago. But everything is running basically to plan or, I could say, better than planned.

Deane Dray with RBC Capital Markets.

I'll add my congrats on a strong quarter.

Thank you.

Thanks, Deane.

Just to broaden out some of the questions on the supply/demand spike here. Did you have anything that in terms of -- did you pass on any business that you just couldn't supply? Was there unmet demand in the quarter?

Deane, I'll do it differently. I don't know if we passed on supply, but what we did was frank candid conversations, our values with Atkore is we kept our lead times to, let's say, a week. So in other words, if somebody wants an order, we're not going to take the order and then not hit a commitment. So did we or did we leverage the price to go? If you want our backlog, and you want this precious commodity of getting orders in a week high say/do ratio, whereas others may have sure, take the order and 3 weeks later, they're not delivering. And we've all been through those frustrations. That's not Atkore. That's why customers switch to us even canceling orders.

But maybe Deane implicit in that to go, here's our price or if you want this quantity, here's what it would take to get it in the week because we're going to continue to deliver better than anybody. I'm sure competitors went -- or customers went to competitors.

But Deane, as you can imagine, the timing, a 2- or 3-week delay on a construction project waiting for PVC conduit, it just -- obviously, timing and being able to count on a 1-week delivery is much more important in general to most customers as they're building out their construction sites.

That's real helpful. Was there anything on the raw material cost side, let's say, resin that -- in the quarter? You didn't mention it, so.

No. Yes, no, we -- and I think in past quarters, like way back, and I'm going to forget when, August when the hurricanes hit the Gulf Coast, our resin suppliers went through force majeure. We personally managed through it because like of the 4 suppliers, our 2 primary ones were the 2 on force majeure. I forget how much detail we brought up in previous calls. But honestly, we work through that ourselves and we continue to perform well whereas the rest of the industry probably didn't even have that headwind.

So it's a long-winded answer to no. Just Deane to the question from John earlier, when markets are growing high single digits, maybe double digits, and the industry starts saying, "Hey, I'll take any order, look at this pricing." We continue to lead pricing. We continue to service well. You get 4 or 5 weeks of backlog and a competitor, that's not actually good for the industry without having candor of your lead times. And we reengineered our products, focused on our A items and the team just stepped up like I knew they could and should and always do.

Good. And then if we look in the second half, comps get tougher and you've been clear that you're expecting to see a normalized demand. Can you frame for us what that ramp down to a normalized level looks like?

Yes, I'll start and then David wants to add color on numbers. Again, just a thought where -- I mean, how many companies are making $350 million for target, raise in their first quarter $100 million. So putting in framework, we're still going to have a great year. And next year, where we want to give some level of estimate, whatever word I should use, of $400 million, Deane, I'm wrapping into your question, I still think it's phenomenal because that's well above yours or anybody's guidance, 10%-plus compounded growth from $327 million, it's just we are performing exceptionally well.

Now to all those things where this quarter and the quarter we're going into, Q2, we think it's like beyond a grand slam to go some of the supply imbalance, demand imbalance will normalize. And therefore, we're giving the estimate of the $440 million to $460 million. To get into how much and what numbers for the second half, David, I don't know if there's any color there?

Yes, really, Deane, even if you look at the back half and you kind of look at our full year minus our first quarter actual and our Q2 guide, we're still up almost 10% EBITDA for the second half of the year. So it's still a solid performance. But again, we're forecasting at this point in time what we see directly in front of us. And I'm sure we'll have more information as the year unfolds.

Yes. And then, Deane, even to the point you brought up in the last quarter, where, again, as everybody recalls, in Q4, we hit it out of the park then. So to your comment a minute ago, these are on good comps of a year ago. So it's a team of around 3,800 employees, they're are just working in unison to be the customer's first choice.

Got it. And then just last question for me. For David, on free cash flow conversion came up light versus what we typically see in the first quarter. Is -- but given the kind of demand and inventory build, I would imagine there were some working capital pressures. But just take us through that, please.

Exactly. So if you look at our cash flow statement, we had a pretty significant working capital increase. There's 2 elements to that, Deane. Obviously, commodities are up, things like steel and what have you. So you will see that in your inventory. But obviously, our receivable days are flat, but they're up quite a bit in dollars. Again, because of the pricing flowing through our balance sheet.

So we're a little bit light this quarter. Q2 is always a soft cash flow quarter for us because of certain elements around our tax payments and our rebate payments and what have you. But when you look at the full year in total, that 100% or slightly above net income, we feel really strong with that typical guidance that we give.

Andy Kaplowitz with Citigroup.

So obviously, strong pricing in the quarter. Your electrical business have volume declines despite the strong pricing, which I know we've talked about. So maybe if you can give color regarding what you're seeing in the core non-res markets at this point. How much of your volume decline in the quarter might have been kind of what you've been talking about that you're just more selective with your selling decisions.

I think it's probably, Andy, around markets. So we are expecting to be up low single digits for the fiscal year. So for the quarter itself, I think it's just some of the lag. It is -- we're expecting some pickup in these numbers, both volume and also growth. We are being selective in orders. I mean, we charge a premium. So our -- some of our products, like our focus categories that we've in place for these, the name says, focus on growth above the markets. They were up low to mid-single digits. So we're taking share as we expected with those products.

The other thing I'm getting into the weeds here, but there were 2 less days in the calendar. So you work that out over, however, many days in a typical quarter of 60 days or something. So there's a couple of nuances. But market is down low single digits. I think the markets themselves will improve to low single-digit growth in the second half. And residential, data centers and things like that continue to be strong.

Helpful. And then can you give us some more color to how to think about margins within your Safety & Infrastructure business moving forward? Obviously, you mentioned a lag of reflecting higher steel cost and pricing, but would you expect to catch up to steel, let's say, in the second half of the year? And could you, at that point, see a more normalized EBITDA margin, let's say, in the mid-teens?

Yes. I think you said it well, Andy. Q2 is probably going to be somewhere around flat, Q1, the second half, we would expect to pick up the pricing when all the indexes kick in what have you. And we expect the back half of the year to be more typical in that 13% to 14% type of a range.

Got it. And you did, in answering some previous questions, talk about the fiscal '22 guide. It's a little unusual, as you guys know, to come out now and talk about it. So any other assumptions that you're thinking about, whether it's markets, acquisitions, anything like that, that you give us perspective on at this point?

Yes. No, great question, Andy. And I'll reiterate some of my earlier statements here in a moment. But no, there's nothing to go. COVID cured, COVID not cured, acquisitions. And this is kind of straight vanilla Atkore running our business, going forward, really not diving into any details beyond that. The reason we gave this number is just, again, as I think we've performed so well. Again, how many companies out there have had 10% plus compounded growth in EBITDA for 5, 7 years now. And again, through a pandemic, to go from $327 million to around $400 million, we continue that trend.

What we didn't want to do in the middle of that was have anybody whether sell side, buy side, any shareholder out there, grabbing hold of a $450 million and then applying on top. So just in our values, our transparency, we thought this is a pretty unusual situation. There are some companies out there that literally aren't even guiding for the quarter. And here, we're giving you an estimate the market for literally a year out knowing there's lots of risk and, Andy you just mentioned what assumptions are in there. But there's nothing specific other than something to ground everybody with.

I'll now turn the call back over to Bill Waltz for closing comments.

Cool. Thank you. Before we conclude, let me summarize 3 key takeaways from today's discussion. First, the outstanding results were delivered in this quarter as a result of our strong operational focus by everybody on this team across the globe and our ability to prioritize our customers and get them the products they need most. As I described in our mission statement, it's all about being our customers' first choice.

Second, we continue to deploy capital effectively to grow our business, strengthen our balance sheet and return cash to our stockholders. And third in closing, probably the most important thing, we're excited about the future of Atkore, and it's -- our expectations for growth.

So with that, thank you for your support and interest in Atkore, and we look forward to speaking with you during our next quarterly call. This concludes the call for today. Thanks, everyone.

This concludes today's call. We thank you for your participation. You may now disconnect.