Atkore Inc (ATKR) 2022 Q3 法說會逐字稿

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Atkore's Third Quarter Fiscal Year 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. Thank you.

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. Starting on Slide 3, I'm pleased to report that Atkore again delivered strong operating results in the third quarter of 2022 despite challenges in the overall global supply chains and labor availability. I'm also excited to speak about many of the opportunities that lie ahead for us due in large part to actions we've taken to position Atkore as a leader in our markets. We continue to execute against our operational plans as well as our capital deployment model.

Currently, we are well ahead of schedule on our plans to deploy over $1 billion over the next 2 to 3 years. Within this quarter alone, we deployed over $400 million combined in the areas of capital expenditures, M&A and share repurchases. In regards to M&A, we are very pleased to welcome the employees from both Talon products, the United Poly Systems into Atkore. These are 2 great companies, and we are excited about the opportunity to grow our businesses together.

In addition to these acquisitions, during the quarter, we purchased a new property in the Dallas, Texas, area that will be used to strategically grow our capacity for our HDPE products as well as provide a strategic location for our new regional distribution center in the future. Heading into the last quarter of our fiscal year, we are increasing our expectations and outlook for FY '22 based on the strong performance we had in the first 9 months.

Turning to Slide 4. We are positive on the outlook for HDPE products, given the expected growth in 5G and broadband Internet access. Building on our recent acquisitions of Four Star Industries and United Poly Systems along with our existing portfolio of products, we believe we have the opportunity to become a leading provider in this market over the next few years through additional organic and inorganic opportunities. It is for these reasons that we expect our HDPE business to be a growth driver for Atkore.

Moving to Slide 5. We are adding new HDPE production equipment that we expect to receive in FY '23 to be placed in our new Dallas facility. By purchasing this property, we will not only have additional space for production capacity, but equally as important, we plan to build a new regional distribution center. We believe the RDC will allow us to better service our customers in this reach in the southern United States, consistent with our strategy of 1 order, 1 delivery, 1 invoice.

This way of doing business, having the capacity and infrastructure to do co-loads and same-day pickups is what continues to differentiate Atkore and supports our mission to be the customer's first choice.

With that, I'm especially thankful for each of our great employees and the work they do every day to support our customers.

Now I'll turn the call over to David to talk through the strong results of the third quarter.

Thank you, Bill, and good morning, everyone. Moving to our consolidated results on Slide 6. Net sales increased 24% year-over-year to $1.1 billion. Adjusted EBITDA increased to $378 million, which drove our adjusted EBITDA margin to 36% in the quarter, both up versus the prior year. Our adjusted EPS increased to $6.07.

Turning to Slide 7 and our consolidated bridges. Net sales increased by $208 million due to higher selling prices and the contributions from recent acquisitions. As we previously mentioned, volumes have been impacted by several factors. Within Q3, our volumes for metal-related products in the U.S. were down and offset the gains we're seeing in other parts of the business. These declines were driven by the steel price declines and volatility that we mentioned last quarter.

EBITDA this quarter wasn't as strong from a volume perspective. We're still positive on the long term, given the strength of some of the key forward-looking indicators, such as contractor backlog and 17 consecutive months of positive ADI. However, total construction has been constrained by long lead times for non-Atkore electrical products and the availability of job site labor.

Moving across the bridge, we're very pleased with the performance and contributions from our 2 acquisitions completed in Q1 of this fiscal year, Sasco and Four Star Industries.

Turning to our segment results on Slide 8. The Electrical segment increased adjusted EBITDA by $84 million and adjusted EBITDA margin by 230 basis points. In our Safety & Infrastructure segment, net sales increased by 25% from the prior year and adjusted EBITDA more than doubled.

And now a quick update on our capital deployment of progress on Slide 9. As Bill mentioned, we are ahead of schedule to deploy over $1 billion in cash over the next 2 to 3 years that we announced in November, and we've deployed over $730 million in the first 9 months of 2022. Our internal investments have increased with the addition of our new facility in Dallas, and we continue to find great companies to add into the portfolio.

In fact, looking back across all of our recent deals, each of these acquisitions are performing ahead of our original expectations. This is a testament to the Atkore Business System and our disciplined operational focus starting from the diligence process, all the way through to several years post integration.

In addition to our M&A activity, we've been active with share repurchases in both Q3 and in Q4. As we sit here today, we've already repurchased $500 million in stock this fiscal year. This is likely our total outlook for the fiscal year, but we saw a $300 million authorization ready to deploy as we enter our next fiscal year.

With that, I'll turn the call back over to Bill to discuss the outlook.

Thanks, David. Turning to Page 10. Given the strong results that David just covered, we are increasing our 2022 expectations for net sales, adjusted EBITDA and adjusted EPS. With the recent Dallas purchase, we've also increased our outlook for capital expenditures.

Looking ahead, we continue to estimate that FY '23 adjusted EBITDA will be between $800 million to $900 million. We are confident in this estimate, but it is subject to market volatility and changes in assumptions. In November, we will provide our standard outlook for FY '23. As we approach the end of this fiscal year, we are very pleased with what we have accomplished, and we are excited about the opportunities ahead.

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

(Operator Instructions) Your first question comes from the line of Chris Moore from CJS Securities.

I know dynamic pricing is kind of one of the, obviously, key strengths of the company and volume decisions are often impacted by pricing. Just trying to understand maybe a little bit better, as volume declines, how price is tied to that? Is it different for PVC than it is kind of in other areas?

Chris, I think it's the next level on the question. It all depends on what the demand is out there because, obviously, we want to maximize both price and volume. And then it's just a balancing act of what the demand is because obviously, if you dropped your price in half, it's not like in a construction market people are going to buy twice as much and assume the competitors react. So I think the team did really well this quarter.

And the only other insight I would give you to volume is with steel pricing over the last year literally dropping from its high to where it is now, 60%, anybody in the channel probably has worked through their volume, and that's a distributor, a contractor, just because they can see publicly what hot-rolled steel price and cold rolled steel sale prices are.

So beyond that, non-steel things, we actually grew in volume this quarter and pretty comfortable and bullish on both volume as we go into next year and pricing is playing out probably exactly like we perceive it should be at this stage.

Got it. Very helpful. Stay with that theme a little bit. When you look at PVC pricing today, where does it stand relative to 12 months ago?

It's down slightly, but exactly -- oh, actually versus 12 months ago, you're right. Thank you, David. I apologize, Chris, because I'm thinking sequentially. It's actually up compared to a year ago, and that's what's helping to drive the margins. Now it is down, that was your question, slightly quarter-over-quarter, but we quite frankly anticipated that, and that's why you kind of see the guide for Q4, the $305 million to $335 million. But everything is working out exactly as we anticipated ironically other than, if anything, we had even stronger Q3 with pricing and every other initiative we're driving.

Got it. And the last one for me is just, are you seeing any meaningful changes on the PVC supply side? Any reason to think Mitsubishi is ramping production or any other players are entering the market at this stage?

No, I'm not aware of in the electrical conduit market, again, my competitors and I don't talk. But, no, I'm not aware of anything. And the only thing I'd say is lead times for the industry have returned to basically normal, and I think we wanted to communicate that. But no, it's -- everything is moving along and, therefore, the confidence in our mind that our shareholders should have that we established kind of a focal point, I'll say, the $800 million to $900 million. And while we're giving specific guidance in November, in the middle of all the craziness out there from a possible recession to wars to anything else, we're still very comfortable with our models and us be able to deliver on numbers that we set.

Your next question comes from the line of Deane Dray from RBC Capital Markets.

I just want to follow up on pricing. Just as you see the price percent sequentially coming down, simplistically, I've always looked at your pricing power also based upon your backlog. So as long as you have outsized backlog, then you have pricing power. So to the extent you can share some color around how backlog stands today, even if you want to pick a product line, that kind of helps give some context about pricing and then the go forward like in the fourth quarter?

Yes. But, Deane the way I would think about it is our typical lead times pre-COVID were 4 days and we aspire with our RDCs to get our lead times down to 1 day. So there's going to be some real fun things we'll be able to do to deliver value as we go forward with Atkore for our customers. But if we're shipping in 4 days, implicitly our backlog is 4 days, and I think as lead times across all of our products from a metal conduit to PVC conduit and so forth. There's a couple of product lines that are still backlog by month. But overall, for Atkore and the industry is they're not now.

If you look out at what contractors have, that still is where your question may be going very robust at 8 or 9 months and may deviate up and down literally like 0.1% -- of a month in their backlog. But that's why from indicators like that to the Architectural Billings Index that David mentioned in his prepared remarks, 17 months of positive ABI, we're still more optimistic for the future than I am for this year on volume, our capabilities to deliver new products to grow on.

Great. That's helpful. And then for David, on -- look, we've seen everywhere across the sector free cash flow being below the quarterly averages, and we're seeing that here today. How much -- my guess is it's working capital build, given the demand. There may be some rebates in there, but just give us some context about the free cash flow conversion.

Yes. If you look at the operating cash flow number, it's actually a record for us. So we actually had a very strong operating cash flow month. But embedded in that, you're right, we still do have a working capital build because we still have elevated pricing, so our receivables are a little bit higher, a little bit higher in inventories. And then we also had higher CapEx this quarter, mainly because of the investment in Dallas, and investment in a couple of our other growth initiatives.

And when you take that into consideration, again, very strong cash flow quarter. It just wasn't to the same level as we typically would expect in the third quarter as a percent of net income.

And then, David, if I can add without the financials, I think our aspiration is a typical year, not this year, but is to generate 100% free cash flow to net income.

It's just as you know, Deane, for the last 1.5 years, there's been a working capital build. When you look at the days themselves -- we just looked at this interestingly enough. Our days are most exactly where they were 3 years ago. So it's not like the days have elevated, it's really the dollars.

Got it. And then if I could just last one on the Dallas facility. Really interesting that it's both, going to be manufacturing as well as a distribution center. How long will it take to bring the manufacturing capacity up? And are you looking at still other opportunities to add capacity by buying plants as opposed to what sounds to be more like a greenfield?

Yes. So Deane, to your first part of the question, we'll start to see the positive impact of volume from that facility in fiscal year 2023. So both good news for our customers in a very -- a market that's supposed to grow double over the next 7-plus years with the different infrastructure bills and 5G networks and broadband.

So good news for our customers, good news for our shareholders. And as we go forward, I think anything is on the table, both we've been -- obviously, the most active year with M&A with the dollars we've spent and both most active year with organic investments. So I would see both of those things continuing into our future.

And that's why, again, when shareholders ask us questions about the ability to deliver our future earnings, it's all these things that we've mapped out. It's just at what point do we communicate out because, obviously, there's competitors and so forth there. But this drives exactly why we have comfort in our $800 million to $900 million and never seen $600 million as we go forward.

I appreciate the very last point there because you saved me from asking a question about the fiscal '23 guide.

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

I will ask about the fiscal '23 guide. So you didn't change your '23 outlook, but you continue to put in your release that you expect PVC and other metals pricing to return to more normal levels. I think many of us are just trying to figure out what your new normal is. You said the business is trending mostly in line with your expectations now. But as we get closer to '23, can you give us some more color on what the new normal might be for PVC pricing or for electrical margins in '23 and beyond? And really anything more color on what's embedded in that $800 million to $900 million of EBITDA?

Yes. So Andy, I'll start. But as you can expect, we'll give a lot more clarity in November. It's -- I think it's an unusual thing for Atkore where most companies don't give numbers out future years besides kind of shareholder meetings of very high level, but we want to ground everybody. And to that pact, more details will come in November.

We are seeing a slight, as I mentioned to an earlier question, I think, from Chris, slowdown in pricing, starting to subside slightly, but nothing significant. I would expect a slight drag over the next year to 2 years. But again, what we're doing internally is all these growth initiatives, some of which we've communicated, I think there's other agenda items that we already have lined up to talk about, there will be a great growth initiative in November.

So as we formalize those plans a little bit more, I'd tell you more to come. But pricing continue to subside slightly, and then having enough growth initiatives even with a flat market that will control our destiny, I'm pretty comfortable with solid organic growth next year, just even in a flat market just because of the things that we have lined out in other areas.

Bill, that's helpful. And then maybe, David, give some color regarding the volume declines in the quarter. It still seems like you're positive on the volume outlook going forward and the headwinds you're seeing are mostly supply chain, labor related or maybe that reaction to steel price declines. But are you seeing any signs of weakness in overall end market demand? And how do you think about volume growth moving forward? I think you talked about it just now, Bill, a little bit.

Yes. I appreciate the follow-up just to give some clarity there. So yes, I'll go long term, short term, long term, we call it. So long term, we're comfortable. When you look at everything, as I think I mentioned already or David, that the ABI is up for 17 straight months. I haven't checked this, but it's probably a history of how many months of positive results in Dodge Momentum Index and the backlog out there of contractors.

And as I mentioned, the infrastructure bill really hasn't hit yet. And a lot of those things aren't going to show up in a square footage report, if it's adding new electrical lines underground and new fiberoptic lines underground. So there's things -- if somebody looks at conventional metrics, they will not see that will help grow the business. And I'm not talking just our business, but the industry. I mean there's so much here with the electrification, EV charging, hardening of our electrical infrastructure, that's exceptionally positive.

Go short term for a second, it's playing out basically as we expected. Again, Atkore is in a great position right now. But at the end of the day, there's products, for example, that we don't provide, like switchgear, there's 4 or 5 other people in the electrical industry that they've gone from 7-, 8-week delivery times to 1 year, that's slowing up job sites let alone employment is still tight, trying to get trades, people out at job sites, especially when they have logistical issues with other suppliers.

So if anything, Andy, it's a strange way, if we have to get all the inventory out of the channel right now where we're doing such a great year to position us for next year, I'm very comfortable with it.

And then the other point short term, as I did mention, with steel price down 60% over the last year. You are going to have everybody in the channel, you can't totally destock here. But if you did have an extra week of inventory at a contract site, probably using that steel before you buy new steel, if you had -- and this is beyond conduit. This is the same with our Safety & Infrastructure business with those customers and the same with the distributor. So I think everybody is trying to destock as much as possible. To me, that gives me optimism on next year just because there won't be any type of inventory in the channel.

And then, Andy, if I go back to long term, you have everything we talked about that's great for the industry, from a positive tailwind. And then we add on top of that, everything Atkore's positioned to do as we just mentioned today, for example, the start-up of a new HDPE facility, United Poly, for example, it's a phenomenal company with great leadership. But I think even there, we can help invest and expand our customer base and grow with them, let alone our previous acquisitions like FRE and fiberglass with the infrastructure bill. And like I said, more things to come here in November. So all issues I can be at this stage.

The only other thing I'd add on the short term, Andy, is if you look at the jobs numbers, nonres construction continues to add jobs. So in June, it was almost 17,000 jobs. So there is work out there, the backlog is there. It's just getting the people and the products to actually execute on the construction, which is probably a little bit of the headwind short term.

Yes. Now I'm getting -- sorry, Andy, one other thing. One could make the case that even if there's a slowdown in residential markets, and/or recession in consumer things that we need workers out on job sites. So I could make a case if there's a slight recession in those markets and it opens up more people to work in the construction industry, where we're going to have a higher fall-through rate of our electrical products, it could actually help Atkore.

So again, I think we're in a unique position with U.S.-made products, not dealing with overseas issues, lots of great growth initiatives to be really well positioned for the future.

And one other point on that, Andy, when you look at residential construction, you see multifamily, a little bit of strength there, certainly benefits Atkore more than single-family does. So I think that's a positive. And you also see in some urban centers, at least anecdotally, where some office buildings being turned into residential dwelling units, which, again, any of that refurbishment activity certainly helps our business also.

Very helpful, guys. And then maybe just want to follow-up on the HDPE conduit business. You obviously highlighted it, even putting it together over the last year or 2. Can you give us some more color on how big it could get? And what kind of growth you do expect, because I know it's probably a smaller part of your business still, but it does seem like you're emphasizing it.

Yes. So real rough, the HDPE industry overall coming from outside consultants and so forth is supposed to double over the next 5, 7 years. And that's tied exactly to all the things, including the $1.2 trillion infrastructure. So for us, without giving specific numbers, I think it can be a reasonable portion of our business. I got here to say today is going to be the largest or exactly in the middle. But it's going to grow, I think, with our investments and acquisitions inorganically, and it's going to be strong markets to go.

All the fiberoptic lines, that having broadband access for everyone in the country, the infrastructure bill to help subsidize that. And then there's a lot of times where a customer could use either PVC conduit or HDPE. I could get into the details of why there's different preferences. But as we look to put electrical alliance underground, so they're not knocked out with storms and so forth, this will play well for both HDPE and PVC markets for us.

Your next question comes from the line of Victor Khong from Credit Suisse.

So could I follow up and ask a little bit more about the HDPE offering. I was just wondering how much of a leverage it is to the infrastructure bill, for example? If you could give a little bit more color around that, that would be great.

Yes. It's definitely a great question, Victor. The infrastructure bill is going to absolutely help. I forgot the exact number, but I want to say there's $50 billion, $60 billion of the $1.2 trillion earmarked exactly to putting fiberoptic lines in across the country. So as I mentioned earlier, we've had outside consultants look at it and estimate the current capacity of the industry and how much would be needed over the next 5 to 7 years to meet demands just of the infrastructure bill itself, and it's very promising.

Awesome. Awesome. Could I also get some thoughts around the potential of the dividend?

David, do you want to address that?

Yes. So right now, when we look at our capital deployment strategy we put in place at the end of last year, we focused primarily on our organic opportunities through CapEx, which I think we've done a really good job there. Our M&A opportunities, because we feel like there's still significant opportunities, to add these companies, and we've added 4 yet this year. So I think it's been a strong M&A year.

And then not having excess cash sitting on the balance sheet, we decided we think the most effective way, at least right now from where we are, is stock buybacks, and we bought back, as of we sit here today, $500 million in the fiscal year. So really, we look at our business as more of a growth opportunity with all the mega trends that our business helps support.

So we feel like, at this point in time, dividend is probably not the way we want to go with capital deployment. But it's something we think about on a regular basis. And I'm not saying in the future, we won't do that, it's just right now we feel like there's a lot of growth opportunities we want to take advantage of those right now.

Yes. And then David, to add, take nothing away or no foreshadowing here, but obviously, in November when we give the fiscal year guidance, we'll also give capital deployment, including future expectations for stock buyback and everything else. So again, it's nice. To earlier questions, we're generating a lot of cash, and I think we're investing it wisely on behalf of our shareholders, including returning with stock buyback.

Got it. Got it. And my last question is, what is the expectation around price cost into fiscal quarter 4 and next year?

Yes. So on quarter 4, like Bill had said, a little bit of price softening going into Q4 versus Q3. So sequentially, you see it in our adjusted EBITDA number, slightly down guide from where Q3 was. And then Q4, we'll give you more details when we give our official guidance in November.

And this concludes the question-and-answer session. I would now like to turn the call back over to Bill Waltz for some closing remarks.

Before we conclude, let me summarize my 3 key takeaways from today's discussion. First, Q3 was a great quarter, and we are increasing our expectations for FY '22. Second, we are executing our capital deployment model ahead of schedule with over $730 million deployed in the first 9 months of this year. Third, we have a bright future ahead, and we're committed to growing and building Atkore. With our recent acquisitions and growth opportunities in HDPE and our RDCs, we really do believe that the best is yet to come for Atkore.

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

This concludes today's conference call. You may now disconnect.