Atkore Inc (ATKR) 2020 Q4 法說會逐字稿

Greetings, and welcome to the Atkore International Fourth Quarter 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, John Deitzer, Vice President of Treasury and Investor Relations. Thank you. You may begin.

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 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. 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. I'm pleased to report that Atkore delivered record earnings in the fourth quarter and for the full fiscal year 2020. I believe our strong operational focus and culture of teamwork and safety helps us deliver upon our commitments as we navigate through these challenging times.

As we start on Page 3, in the fourth quarter, we delivered double-digit year-over-year improvements for our net income and our adjusted EBITDA and our adjusted EPS. Each of these hit a new quarterly record. This growth in profitability is quite remarkable given revenues were down 5% during the quarter. As I take a moment to pause and reflect upon the great results of this past quarter, it was a tremendous effort by the entire team and a testament to the breakthrough results that can be achieved by effectively utilizing the Atkore Business System.

Turning to the full year results on Page 4. Atkore was able to increase full year net income and adjusted EBITDA in spite of the 8% decline in sales associated with the COVID-19 pandemic. Separate from the financial results, one of the items that I'm most proud of this year is our improvement in our overall safety record. This was a challenging year in so many ways, and our employees rose to occasion to help support our customers and most importantly, each other as we collectively improve our global safety incident rating by more than 20%.

Turning to fiscal year 2021, a couple of items to highlight and mention post the close of the fiscal year. In October, we acquired the assets of Queen City Plastics to expand and grow our PVC business. We truly believe in the value of Atkore as a great place to work and as a great investment, and we're excited to welcome the employees of Queen City onto our team and help us write the next chapter in our growth story. Additionally, we deployed $15 million in share repurchases, and we're excited to announce the official launch of our innovative new MC Glide aluminum cable product, which we believe will significantly help improve the experience of our customers on the job site.

Now let me take a moment to summarize my key takeaways regarding the quarter and the full year, and then David will go over the quarterly results in more detail. First, the team delivered record results in Q4. Second, we're in a strong financial position with $284 million in cash at the end of the year. Third, as much as we focus on managing through these current conditions, we remain committed to building an even stronger Atkore for the future. And we estimate that we will grow our net sales, adjusted EBITDA and adjusted EPS in fiscal year 2021.

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 fourth quarter.

Moving to our consolidated results on Slide 5. Net sales declined 5% primarily due to the unfavorable market conditions caused by the pandemic. Adjusted EBITDA increased to $98 million, which drove our adjusted EBITDA margin to approximately 21% in the quarter, up 290 basis points versus prior year. Our adjusted EPS increased by 17%, up to $1.18 as our strong profit growth and lower interest expense more than offset a slightly higher tax rate in the quarter.

Turning to Slide 6. Net sales declined $24 million due to lower volumes, partially offset by higher selling prices specifically in our PVC 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 we grew adjusted EBITDA by $9 million.

Moving to the adjusted EBITDA bridge. The previously mentioned volume declines were more than offset as we were able to drive $13 million in profit improvement from our approach to value selling. This is primarily due to our PVC price which support the strong residential market. In addition, we had a solid benefit from year-over-year productivity improvements in the quarter, but that benefit does include certain onetime items such as lower T&E and other expenses.

Moving to our segment results on Slide 7. The Electrical Raceway segment led our profit and margin improvement with adjusted EBITDA up $13 million and adjusted EBITDA margins above 25%. Net sales declined almost 3% as we experienced lower volumes. However, our focused product categories in the U.S. were up mid-single digits.

Turning to the Mechanical Products & Solutions segment. Net sales declined more than 11% primarily due to lower volumes. However, we were pleased with the overall profitability of the business. Adjusted EBITDA declined this quarter, but that was versus a very difficult comparable from 2019.

Moving to Page 8. Let me take a moment to review our cash and liquidity. We ended FY '20 with $284 million in cash, up $161 million versus prior year and up $47 million sequentially. In the quarter, we repaid $40 million of debt and ended with a net leverage ratio of 1.6x. We are securing our cash and liquidity position, and we look forward to deploying cash to drive value creation opportunities for our customers and shareholders.

And now let me turn it back to Bill.

Thanks, David. Turning to Slide 9. I wanted to highlight our outstanding track record of growth. As David just mentioned, we generated very strong cash flow. In fact, over the past 5 years, we delivered double-digit average compounded annual growth rates for adjusted EBITDA and free cash flow. And in terms of return on capital, we ended 2020 at our highest level ever at 18%. We believe these results set us apart and clearly demonstrate our ability to execute. In addition, the future of Atkore is very bright, and we are looking forward to building upon this outstanding track record of growth.

Turning to Page 10 and our outlook for 2021. We expect to grow our net sales, adjusted EBITDA and adjusted EPS versus fiscal year 2020. We expect our net sales to be up approximately 2% to 6% and adjusted EBITDA to be in the range of $340 million to $360 million. In addition, we expect to grow our adjusted EPS up to $3.95 to $4.25. However, just as we saw a bit of roller coaster activity in fiscal year '20, we expect this year to be uneven in terms of year-over-year performance quarter-by-quarter. For Q1, we expect a modest increase in our net sales and a very strong increase in adjusted EBITDA.

We are excited about the future, and we are confident in our team and our business model. Therefore, we expect to invest approximately $50 million to $55 million in CapEx as we increase investments in our digital and customer enhancement projects. We believe that the best is yet to come for Atkore.

And with that, we'll turn it back over to the operator to open up the lines for questions.

(Operator Instructions) Your first question comes from the line of Deane Dray from RBC Capital Markets.

Nice way to finish your fiscal year here.

Thank you.

And we really like seeing you reinstate the EPS guidance because that does speak to your confidence and visibility. And just on that topic, maybe can you share with us some of your key assumptions on what would take you to the low end versus the high end of the range for the fiscal year as you see it today and very specifically, comments on nonres project activity funnel and so forth?

Yes. Deane, I'll start on the markets. And then from there, some of the rest of the bridge and so forth, I may pass over to David. So we see slight increase in markets going forward. Obviously, next year is harder to predict than most. But if you look at different markets that are growing really strong, residential, that's gone well, data centers that are going well, warehousing going well, that we see it as enough of an offset to some of the markets, obviously like hotels and so forth, that are going slower.

And then again, what people forget, and I think we have it attached in the appendix of this, is there's a lot of renovation markets that are going strong. And then put on top of that, that we have, and I truly mean this, the Atkore Business System where, as I think David mentioned here in the prepared remarks, we have categories even in the last quarter like focused product categories that are growing well, good single-digit growth even when challenging times. So between that increase in electrification in markets where there's more electrical content per square foot, we think slow single-digit growth is reasonable for this year. And then for some of the rest of the bridge...

Yes, Deane. And then basically, we have a slightly favorable price versus cost, we feel, going into next year. And then we'll get a little bit of an uplift, small uplift, from M&A. We'll have our typical productivity uplift we see year-over-year, and that pretty much rounds out where we came up with the midpoint of our guidance.

That's helpful. How about -- since you talked about into the next year, any comments on how October went? And any color so far in November?

Yes. So as we predicted, for the full quarter, it's slowly improved. So every month-over-month from August, September and so forth, we're better than the previous month. And October, basically flat give or take. So it ties exactly with what we're expecting kind of slow sequential improvement going forward.

The other thing -- sorry, Deane, to remember is we mentioned that each quarter could be a little lumpy. But for half of next year, we will be comping COVID quarters. So if we're doing this when we're comping good quarters, there is some hope here when we get to our fiscal Q3 of doing really well. So...

That's great to hear, and I'm glad you pointed that out. Any comment on inventory in the channel, where distributors stand in terms of potential restocking?

Yes. So complement to them, they've run -- I'm generalizing the whole industry with 1,000 distributors, but they've run well-managed businesses. So as a whole, whatever they've targeted, let's assume something like 6 weeks of inventory, as it went down, they cut back. As it's growing, it will continue to grow but kind of targeting that 6 weeks. So there -- or I'm saying 6 weeks, but constant days on hand. So therefore, as the markets slowly grow, you could expect a slight increase and then stocking. Again, one nice product -- or thing with our products, they're large, they're bulky. So one -- no one's going to overstock, but you can't really destock that much either.

That's great. And just one last nuance question for me on pricing. The idea that Raceway is up, and you did call out PVC and that's mostly resi, but mechanical being down, is it -- is that just tough comps? Is it strange to see them move in opposite directions?

Yes. So it is tough comps. I think -- with our transparency, I think if you went back a year ago, we would have said that we had such high EBITDA margin not to maintain that MPS. We had a couple really high-margin products. So we've been saying that for a year. And then on the flip side, in the residential market, we just hit it out the park, and I can get into more details there.

Yes. Deane, if you remember, at the end of last year in MP&S, they're running at the 17% and 16% EBITDA percentage type, and we said typically it should be around 13%, 14%. So that's pretty much where they were.

Your next question comes from the line of Deepa Raghavan from Wells Fargo.

So if we look at your fiscal Q1 guide across EBITDA or EPS, assumptions are fairly strong, growth assumptions. But the same potential is not carried into rest of the year. It appears you're guiding to flattish EBITDA or -- I mean, close -- I mean -- and slight growth in EPS for rest of the year even with easy Q3 comps. Can you walk us through how you're thinking through the cadence of rest of the year?

So yes, you are correct, Deepa. So in Q1, we expect to be very strong. Again, residential is going to be strong. Our PVC business is really strong. And we do have a slight improvement in the last 3 quarters of the year, and it's just basically because of the uncertainty where we looked at the ABI and where it would be 6 to 9 months out and what have you, the end part of the year.

We know that Q3 will be [burned than] Q3 last year because of COVID. This Q4 that we just put up now versus what we could see in Q4 next year, we just have some uncertainty. So at least now for our guide, we're saying strong Q1 because we see it right now and flat for the following 3 quarters, but it will be different quarter-by-quarter.

Okay. So you'll probably guide as you see fit every quarter.

Yes. I think it's just prudent at this time with so much uncertainty to kind of look at it 6 months kind of out, and so we made an estimation of what we think the back half of the year is, and we'll wait to see what materializes.

Okay. Got it. How are you thinking through that? I did notice the chart at the back, the 14 -- Slide 14, that's helpful. But how are you thinking about new construction which is nonresi construction, 33% of your revenues, versus 20% which is your nonresi renovation mix, playing out next year? Is growth that you're assuming driven entirely by renovation? Or do you also have any new construction recovery baked into your guide?

I think very low single digit, but we do expect also growth in the new construction. Again, [EPU] and many others keep really good track of what Dodge and [AII] is saying and so forth, but just like Dodge coming out and calling information very similar to what we see talking to our distributors. So there are some -- and we purposely put in these categories the kind of weighted average from top to bottom. But there are some strong markets out there from, again, the data centers and the warehouses and so forth, so a lot of bills that were passed in this last election for K through 12 schools with renovations.

So as David mentioned, we're being cautious. To Deane's point, we're one of the few companies already putting out EPS guidance. It's guidance, but we expect to hit and maybe there's some additional upside as we go forward. But for now, low single-digit growth there, and then the rest of the market is obviously pretty strong.

Yes, sorry, low single-digit in overall nonres or just renovation nonres and not new...

Overall numbers, and then the lowest of those would be the new construction.

And Deepa, [when you think] like in MP&S, we would expect growth in solar. So there's other pieces of the business that we would expect growth next year.

That's fair. Moving on to your decision to reduce debt even further. I mean even before you did that, 1.9x net debt-to-EBITDA is not particularly high. So curious why you felt the need to reduce debt voluntarily versus, say, deploying more towards share buybacks?

Well, I think one of the things that's [good] to look at are our net debt ratio, which we have worked down. I think what's missing a little bit is we still do have $800 million of gross debt. So we do feel like it's prudent to get that gross debt number down slightly, especially when we'll be looking to refinance that in -- while it's due in 3 years, probably somewhere between now and then. So we feel it's a good use of cash to reduce some of that overall gross debt.

Your next question comes from the line of Andy Kaplowitz from Citigroup.

So I just want to go into maybe Deane's question, a little more detail about the margin. I think last quarter you told us something like 30% decrementals for Q4. I know MP&S had that kind of performance, and you talked about this value-based pricing in Raceway.

Maybe how sustainable is it? And it was obviously a lot better than you thought. So could you talk about that? I think I saw you had modest positive price versus cost in '21, but Q4 was more than modest as you kind of talked about. So what are you doing differently, and how sustainable is it going forward?

Yes. Great question. Lots of questions within that, a lot of information. But the basic thing that really drove the results were residential was up more than, I'm going to say, forecast for the industry and specifically, our competitors and ourselves. And the -- and we sell a lot of PVC product into subdivisions, think of all the electrical lines running underground to a subdivision or house. With that, we have the largest set of electrical PVC conduit facilities spread out across the country.

So as demand started to exceed supply, we were able to commit to customers, supply customers, provide our Atkore Business System a better value proposition than quite frankly, I think, the competition. And therefore, we were able to get more price than what our cost increase value selling. I think you see some of that here in the first quarter. And then from there, we'll see where it goes as we go forward. But I don't want to diminish the rest of the businesses. Back to other charts we've produced over the last 3 years, we've continued to get more price than our cost base because of our ability to do numerous things with value proposition to our customers.

That's helpful. And then, Bill, maybe how are you thinking about your businesses in terms of what the new administration might do? Obviously, there's still uncertainty in Washington in the Senate. But Biden has talked about making buildings more efficient, significant renewables focus, which we know you have. So any early thoughts on how you could benefit from the new administration and what it might do?

Yes. Great question. Again, before I answer, I'm going to remind, we have the Atkore Business System. There's so much opportunity in front of us that we're driving ahead no matter what. But where Biden administration could help us is if there's more increase in infrastructure and more support for solar. Solar is an industry that's already projected to grow 10-plus percent compounded growth for the next 10 years. And obviously, if there's more focus on that, it helps our mechanical business even more.

Great. And then just one more follow-up for me. Bill -- for Bill or David, maybe if you put all this sort of [include] good markets that Atkore is exposed to now versus the challenged markets, you've talked about warehousing, data centers, obviously, residential renovation, would you be able to quantify how much is sort of, percentage of the business, the weaker markets now? Obviously, in the previous question, you talked about the 30% that's nonres new construction. But any sort of more color around sort of good versus bad would be helpful.

Yes. I think when we look at it, Andy, we look at it as a weighted average of all this. But I think we've talked before, too, about the density. So when we take into consideration the density of our product lines by types of building and we do that math, it comes out to low single digits this year. So you could assume that those ones that are lower, I would say, given the fact that there also happen to be some of the lower density, so we probably have a little bit of favorable mix in there. But when you add all that together, it's low single digits.

Your next question comes from the line of John Walsh from Crédit Suisse.

Solid performance.

Thanks, John.

Maybe just a clarification or a cleanup question first. I apologize if I missed it, but did you actually say what your productivity number in your 2021 bridge is?

No, we didn't, John. But we did say -- what I did comment on that is, relatively speaking, in line with what we've done in the past.

Yes. So I guess the follow-on question to that is I think you've historically talked about leveraging 20% to 25% on your volume and then adding productivity on top of that to the tune of $15 million. If you just run through that basic math, if that's correct, it looks like you're not giving yourself that full productivity benefit. Is there something offsetting that? I think you talked about investments or...

(inaudible) yes, John, you basically answered the question for me. It is basically investments. We are going to continue to invest in our digital platforms this year. We do expect some new products. We just introduced a really exciting new product recently, and we still have some other new products behind those. So we do have investments that, by and large, are for growth a little bit in this year, but probably more for the future.

Okay. Great. No, I just wanted to make sure I understood the mechanics behind that. And maybe...

And one other point to remember, too, there probably will be some higher medical and some of those things in the P&L this year versus FY '20 as people go and have more elective procedures and that kind of stuff.

Got you. Okay. No, that's helpful. And then obviously, a lot of time spent on the different end markets, and your sales mix is -- once again, we all appreciate the disclosure there. But if I just go back to some previous conversations on that new construction piece, it does seem to kind of relatively track the Dodge starts on a lag, and it does seem like what you're implying would kind of break from that. And you talked about the density of the product on some of the parts that are growing. I mean is that the real answer to the question on why you think that traditional relationship kind of breaks?

Yes. I think there's 2 things. One, again, the mix and the density of the things that are growing, probably weighted a little bit favorably. But I also think that, I mean, this is my personal opinion, the prime lag of how long it takes to make a building is probably a little longer now than it's been in the past only because of lower productivity and what have you. So I do think that there's some pent-up demand out there for finishing these projects that are out there.

There are no further questions at this time. Mr. Waltz, I turn the call back over to you.

Great. Thank you. Hey, before we conclude, let me summarize my key takeaways from today's discussion. First, the solid results we delivered in the fourth quarter are a result of our strong operational focus and every one of our team's commitment to the Atkore Business System. I can't emphasize it enough. You put the right team together, you focus with the business system, you get solid results. And we are taking the necessary actions to keep our employees safe and to grow our business despite these challenging times.

Next, we're in a very strong financial position. And over the next 6 to 9 months, we -- or over the past 6 to 9 months, we've answered many of the questions that each of you have had over the past years. Since -- and here today, we believe that our strong balance sheet, our demonstrated ability to execute through a downturn and our projections to grow make Atkore a truly compelling investment opportunity.

And in closing, we're not done. We're focused on building better together with our employees. We serve our customers better than anyone that will help our shareholders and our communities in order to create an even stronger business for the future.

So with that, thank you for your support and interest, and we look forward to talking to you with our next call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may's now disconnect.