Atkore Inc (ATKR) 2023 Q2 法說會逐字稿

Good morning. My name is Mandeep and I will be your conference operator today. At this time, I would like to welcome everyone to Atkore's Second Quarter Fiscal Year 2023 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. 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. Adjusted EBITDA is a non-GAAP measure. Reconciliations of non-GAAP measures and a presentation of the most comparable GAAP measures are available in the appendix to today's presentation.

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

Thanks, John, and good morning, everyone. Starting on Slide 3 and our results in the second quarter. I'm pleased to share our earnings performance, which was slightly better than our expectations and reflects the strength of our business model. At a high level, volume in the quarter was up 4%, in line with our expectations for mid-single-digit volume growth for the full year. As expected, pricing continues to normalize versus the record highs of last year, which drove the year-over-year change. Net sales, adjusted EBITDA and adjusted EPS all increased sequentially from the first quarter. Overall, the team delivered solid results.

Additionally, cash flow has been very strong in the first half of the year, allowing us to continue to execute our capital deployment strategy. During the second quarter, we repurchased $119 million in shares, and we've continued to actively repurchase shares in Q3 while also investing in our conduit to grow. We are encouraged by the positive trends we are seeing so far in 2023, and we've updated our outlook for adjusted EBITDA and adjusted EPS for the fiscal year.

I would like to thank all of our employees for everything they do to support our customers. It is because of their tireless efforts that Atkore is able to achieve the results and success that we continue to deliver through dedication, reinforces my confidence in the future.

With that, I'll turn the call over to David to talk through the results from the second quarter.

Thank you, Bill, and good morning, everyone. Moving to our consolidated results on Slide 4. In the second quarter, net sales were $896 million, adjusted EBITDA was $276 million and adjusted EPS was $4.87. We expect further normalization of our business in 2023 as compared to last year's outperformance and are pleased with our margin performance in the quarter with adjusted EBITDA margins of 31%. While this is down year-over-year versus previous record highs, it is still a very strong and healthy level.

Turning to Slide 5 and our consolidated bridges. The overall quarter was in line with our expectations for revenue and slightly favorable for our expectations for earnings. Volume was up 4% with S&I up more than 20% mainly due to increased mega project activity. PVC volumes were down double digits in Q2 when compared to our strong FY '22 Q2 outperformance, resulting in unfavorable mix for the quarter. Excluding the PVC impact, Atkore's volume would have been up close to mid-teens with a solid incremental benefit. The year-over-year PVC volume reductions were mainly for utility projects on the West Coast and the expected slowdown in residential activity.

Contrasting the year-over-year reductions, PVC volume was up versus pre-COVID levels and up 14% sequentially from Q1. When we line the call out on this page, it's the introduction of an adjusted EPS bridge, which demonstrates the progress we are making toward our goal of greater than $18 per share of adjusted EPS in 2025. On this bridge, we've also isolated the impact of the solar credits related to the Inflation Reduction Act that began in calendar 2023. As we've mentioned previously, the majority of this credit related to the manufacturing of torque tubes will be passed through to our customers.

Moving to Slide 6 and our segment results. Margins compressed in our Electrical segment with the previously mentioned pricing normalization and lower volumes in our PVC-related products. However, we saw a solid margin growth on the S&I side. Our S&I business had 15% growth in adjusted EBITDA, with adjusted EBITDA margins of over 15% in the quarter. S&I volumes were up 20% in the quarter, led by the increase in demand for our metal framing and solar-related products. Additionally, our metal framing, cable management and Unistrut Construction businesses are well positioned to capture the growth in mega projects, both in the U.S. and international.

Our product line diversification and the resiliency of our business model enables our ability to execute our strategic plan through various market cycles and macroeconomic condition. Our products are integral to the construction life cycle across all verticals. They're supported by key mega trends, and we have deep customer relationships, all of which give us confidence in our value proposition as we move into the future.

Moving to Slide 7. We're pleased with the strength of our cash flow and balance sheet. In the first 6 months of fiscal 2023, our cash flow from operating activities was 116% of our net income over the period and up 150% compared to the first half of fiscal 2022. As Bill mentioned, we've been executing our capital deployment plan by investing in our business and repurchasing shares. The strength of our cash flow and balance sheet provides a strong foundation for our company.

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

Thanks, David. We are pleased with what we've accomplished in the first half of this year, and we're excited about what lies ahead as we execute our 3 conduits of growth, highlighted on Slide 8. Our M&A pipeline remains robust, both in North America and Europe. Atkore is well positioned as a buyer of choice given current market conditions and the strength of our financial profile.

Our category expansion initiatives related to solar and HDPE are progressing well, and we've expanded our assembly and service capabilities to better support some of these larger projects, both in the U.S. and around the world. New product innovation as a percent of net sales reached 9% in the second quarter, and our innovative MC Glide platform continues to be recognized and well received in the marketplace. These 3 platforms are pillars of our strategy to drive results in the back half of this year and into the future.

Moving to our outlook on Slide 9. Given the strong performance we have delivered so far in 2023 and the positive trends we are experiencing, we are increasing and narrowing our expectations for adjusted EBITDA and adjusted EPS. I'm incredibly proud of the team, strategy and processes we have in place, and I have full confidence in our ability to achieve our goals for the future.

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 Deane Dray from RBC.

I was hoping to get some more color and hopefully some specifics on the pricing dynamic this quarter. This is all part of the normalization process. And to be clear, that down 17% essentially matched our estimates. So no surprises at the kind of headline level. But if you could take us through the components and the inputs on the pricing dynamic here. So I always look at it in kind of 3 buckets. So how was market demand. And then the second bucket, the supply side capacity at Atkore, maybe some color on backlog. And then thirdly, what's going on, on the input cost side, the resins and steel and so forth. So if we could start there.

Great question, Deane. Obviously, a couple of parts there. But I'll start with, as you mentioned, and we did in our prepared remarks, we're basically right on track, if anything, slightly better, I think. Because, again, we exceeded anybody's expectations for the quarter. We're raising guidance. So complement to the team across the board. Market demands are good. And then like if you look at, I think, what David mentioned, like even PVC sequentially up 14%. And so I'm just repeating David's comments, if you go back to pre-COVID, where everybody was trying to buy as much as possible during the COVID period, if you go back and look at like our fiscal Q2, this has -- there's higher demand, what we're selling, for example, in PVC than any quarter in Atkore's history going backwards...

Pre-COVID.

Yes, pre-COVID. So overall, things are going well. I would say, just in case anyone else asks, buyers are buying just what they need almost to the -- to your future questions of supply is coming in, we're -- and so are our competitors, by the way, shipping pretty much on time and things like that. So there's no need for somebody to do a spring buy and so forth. That actually gives me optimism. In other words, there is no extra supply in the channel because people are buying as they need it, therefore, the next quarter and so forth, as we give guidance this quarter, should be good, and I'm optimistic for future years. So market demand overall good, nothing lazy, but tough to wholly solid. Supply is good, both us and our suppliers.

Input costs are kind of all over the place, Deane. And I say that from a standpoint of if you look at things like steel costs, from a year-over-year perspective, they're down 30%. But if you look like from the first quarter to the second quarter, it's up 20%. And I'm starting to see -- now this is being projecting, steel costs go down again. So it's all what time period. Same thing with like copper, down 10% year-over-year, but up 12% order from Q1 to Q2. And then PVC has dropped. Literally, it's down almost the input cost down almost 50% year-over-year and 25% just from Q1 to Q2. And I expect that. Again, these are market forecast where it continue to go down a little bit.

But again, as you know, Deane, and I think most of our shareholders know, the biggest thing that controls our profit is just supply demand in the market. Second thing is Atkore's ability, which I think we do really well, shipping on time, co-loading, all the value we bring. Third thing is the input costs and us keeping up. That's not as big of a factor on how we market price and so forth. So hopefully, Deane, I answered all your questions in there.

The only thing I would add to Bill's comments is on the S&I side, when you look at these big manufacturing plants, mega projects and whatever, we've always said we have really good content there. You have metal framing, wire baskets, so on and so forth. And you see that 20% up in volume in S&I, add in some solar, we're starting to see the results of all those projects.

That's really helpful. And just a couple of clarifications. So it sounds like lead times are now back to normal, and that would also suggest that backlogs have come in and are kind of at normal levels. So if you could just clarify those. And then broadly, this question comes up a lot, and it gets asked regularly, but just how much of the price do you expect to hold on to? Because we hear PVC down 50% of the input cost, but certainly, your pricing is much better than that. So just the question about holding on to price.

I'll start, and then I think David may add. Now I would think of pricing in general, you're right. Our pricing is not down 50%. It's down, but we are doing better than expected. I would refer everybody -- our best guess still is what we put in the November earnings stack to go what pricing we think we'd get back and how that bridges to the future, how that bridges to $18-plus EPS. And I would say we're 2 quarters into a 3-year plan, but we're as comfortable today as we were in November when we put the plan together. So everything is really -- I'm quite frankly very proud of the team. Only just trying to look into a very murky crystal ball and call it shot by shot, and we are on track, which is the Atkore business team and an amazing set of leaders.

And on the backlog question, Deane, you probably have 2 different sets. So the flow products, our major product categories that we have. Our backlog's back to, I would say, somewhat normal. And remember, that's like 2 weeks. It's like 2 to 3 weeks. It's not much backlog. And then when you look at it more on the project side where we talked about some of those mega projects and what have you and international, backlogs are up, as you would expect that they would be.

Great. And just a last question over on the cash flow side, which is exceptionally strong. David, could you just take us through the dynamics there? What's been the difference maker? And I appreciate that bridge that you gave us as well, but just the conversion on operating cash to free cash flow is much stronger than what you've done seasonally. So just help us with some insight there, please?

Yes, Deane. It's actually fairly simple and straightforward. Last year, we were building working capital throughout the year. And basically now, as your pricing comes down, some of the receivables will come down. I think our inventories are in really good shape. So at the end of the day, the major delta is in the fact that we've taken out some working capital versus investing in working capital.

Your next question comes from the line of Chris Dankert from Loop Capital.

I guess if we could dig into S&I a little bit. You cited the mega projects. Maybe you could give us a little more context just exactly where some of the wins are coming? And maybe just kind of expand further how RDOF as well the stimulus is also kind of rolling through the P&L or kind of what you expect for the rest of the year there.

Yes. So Chris, I'll try to give you as much color without saying specific customers and/or it's hard to say the city because then it kind of goes back to it's a global project there. But as it should come to no surprise to anyone, a lot of investment, not just in the United States, as David called out in the pre-remarks, but across the globe, the Middle East, Europe, in the States, whether it's data centers, chip manufacturing, start-up of EV battery places and so forth and the list goes on. And what we found complements our international team, complements our -- or I should say our domestic team, but here in the States is the value add of us going in and being able to work directly with the manufacturer.

We're still working through distribution we sell, but the partnership of things like Unistrut, the brand that's been around now for 100 years, well known, consistent across the globe. We're doing things like kitting and so forth, where we're bringing all in, setting up a job site, and we're winning a lot of jobs there, a lot overseas. So again, Middle East, Europe and so forth that are growing, quite frankly, rapidly, we're putting a full team together in areas like that.

So Chris, like our value proposition with our use of our construction or your national teams where you can do more of the fabrication or so on and so forth, with some of these off site that you don't hold up the site itself. I think that value prop is resonating quite a bit with the end users.

No, that's great color. And maybe if we could just dig in a little bit. Obviously, the M&A has been pretty impressive here. Can you just kind of update us on the status of the integration there and kind of if everything is on track and what you've been expecting from Talon, Poly and [NLE]?

Yes. So overall, for our HDPE acquisitions, which are the ones you mentioned, everything is on track. The team is doing a really good job there of integrating. And when I'm saying integrate, bringing them into our culture, ERP systems over the next year and so forth, but also sharing facilities. In other words, it doesn't make sense to ship if we had a facility in Texas and we had a facility in a different state to have to -- wind up in Texas, shipped past the other one versus let's move the production around.

So a really great team coming together, sharing best practices, very optimistic for the future that we will hit or exceed our numbers for our integration models. And as I assume either you know or David's explained in previous quarters, obviously, they're pretty synergistic, well above our weighted average cost of capital. So everything's working along just as planned, again.

Good to hear. And congrats on the quarter.

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

Bill or David, can you give more color into your volume assumptions for the rest of the year? Is the deceleration in year-over-year sales in Q3 that you're guiding to versus Q2 all price? Are you still thinking mid-single-digit volumes for the year overall? And have you seen any new incremental signs of destock? As I know you're aware, one of your competitors talked about a little bit of distributor destocking to hit their order profile late in their calendar Q1.

Yes. Andy, I'll start and then, obviously, David may want to add. Our assumptions are to continue to have mid-single-digit growth in volume. Now pricing, as we call, for example, in some products will still go down. So revenue, I would look at the last page of the prepared remarks on what that means for Q2 -- or Q3, excuse me, down 10% to 15%. But that's because of the pricing. And a question Deane asked, we're like, hey, steel costs are down dramatically, PVC costs are down dramatically. We're still making good, think of it as gross margin, but the revenue lined down some. Volume continues to go up.

And I would claim we do not have any destocking. And I would reference that to go 14% up sequentially quarter-over-quarter in PVC. I'm using PVC as an example, up to pre-COVID levels. Now what I do see and, whatever, is no one's stocking up. There's no one driving to put prebuy just because even customers listening to this call, the revenue is going -- the pricing has gone down a little bit. So there's no incentive when you know some of the manufacturer like us can deliver on time to put an extra 2 or 3 weeks of inventory in.

But that's actually good news, if you look at -- the way I am, glass half full, the future, we're going to hit our numbers, we're going to grow low single digits to mid-single digits in volume and there's no artificial buy-up at distributors now as we go into, let's say, even into fiscal year '24. Hopefully, that answers the question. Or if there's a follow-up, Andy?

Andy, I mean, we are -- when you look at PVC, for instance, I mean inventory levels would be lower than they were last year because last year, we had talked about Q3 -- or Q2 and Q3 where people had bought, I would say, in addition to what they were seeing because they had more orders out there, so on and so forth. But we're looking at this more sequentially and seeing what distributors are doing and like Bill had mentioned, that's a positive trend.

Yes. And Andy, one other thing just there -- when we're making statements like this, there's lots of additional backup material. And I forgot the precise number that's out there with the association ability and contractors. But within like 0.2 months, the contractor's backlog is as strong as it's ever been. I think it's, like I said, down for like 9 months to like maybe 8.8, give or take. But basically, there's a lot of indications.

And to a question asked earlier that I probably didn't address is something from Chris is a lot of the stimulus. Still the states are trying to figure out how to fund it. So again, you look out into the future years and say, hey, when this stimulus actually hits, that people can spend it, i.e., the states, there should be additional pickup in volume and so forth. So we're optimistic, and that's why the infamous $18-plus EPS is definitely in our targets. We're delivering that plus now.

Yes. No, that's -- for sure. Like that's very helpful. And maybe just a follow-up to that. Like obviously, you guys follow Dodge Momentum, ABI, things like that. You see DMI, it's come down a little bit sequentially, but still up 11% in April year-over-year. So maybe if you can just sort of parse out for us the markets overall. I think last quarter, you cited data center, chip fabrication facilities driving your results. Are you still seeing that? Are you seeing any areas that maybe you're a little bit more worried about on the nonres side? Or just as you said, contractor backlogs are strong so across the board, things are still okay.

Yes. I'll start with the key takeaway. Contractor backlogs are strong, and we're still optimistic for the future.

And I'd say one other thing to remember, too. Other manufacturers' backlog that we will eventually hook into is at record levels, too.

Yes. One more, and then I'll get to the parse and the specifics. Andy, the other thing I hope every shareholder understands is the amount of self-help. Like in other words, to go those 3 conduits of growth and go on our expansion in HDPE, our expansion into global mega projects. There's other things like we've talked about, the RDCs and literally becoming the one-stop shop instantaneous. Those things and other things we're working on, we're just not ready to pre-announce, give us huge confidence even in down markets that we will drive forward and to continue to be successful like we have been for the last half decade and plus.

Now Andy, to your specific thing, I say obviously, but residential markets are down. Nonresidential -- almost all commercial things we're expecting for this year to be down. Industrial is probably like a push. Health care continues to be up with investments. And then as you mentioned, Andy, the things that don't get caught once in a while like in a Dodge square foot and so forth is utilities and all this infrastructure build. As I mentioned to an earlier question, whether it's chip manufacturers across the globe, whether it's EV charging stations and battery charging stations and data centers, we're finding those markets. And I would think other people in our space are really strong right now. So that's carrying the business forward here.

And then one last thing. Whenever you look at like Dodge starts, whenever you have a predominance of these mega projects, the starts are still important, of course, but then you might have a start that these projects go on for multiple years. So you do see business for a much longer duration than you would, say, a start on an office building or something like that.

Helpful. And then last question. You mentioned strong growth in solar-related products in Q2. Maybe give us a little more color how solar is contributing to your performance? And we know you have the torque tube facility coming online in Q3. Is it possible to quantify how much incremental growth your solar business can have in the second half of your fiscal year, maybe versus last year or the first half of this year?

David, do you -- like I know the numbers. I'm just hesitant. I was saying it gives us strong comp and it's -- well, look at S&I, for example. Now global mega projects hit it, but literally, S&I, shout out to that organization, they're up 20% year-over-year. Solar will be a good portion of that in global mega projects. Those 2 things are what's driving above market revenue.

And I think, again, it's probably more of a story of FY '24 than FY '23 as you're looking at the factories coming online. Obviously, that takes some time, get it started up and so on and so forth. So I really feel like we'll be talking about this in our fourth quarter when we give guidance for FY '24, be a much bigger part of the story.

Your next question comes from the line of Chris Moore from CJS Securities.

Yes. Maybe we can just talk a little bit more about HDPE. I know you said the integration is going well. But could you maybe talk a little bit more about the market dynamics specifically there? And what your expectations are versus -- I know it's an area where potentially lots of growth, just kind of maybe get an update there from a market perspective.

Yes. So Chris, I'll start with short term. Like some other markets, I hate to even get into the infamous weather, but there are obviously storms on the West Coast and things like that, where these are products that you put underground. So average for this quarter, it wasn't like, oh my god, gangbusters, but all good, totally on plan as we go forward for the year. If not, I think there's slight upside through our business models and so forth.

And then talking to our team and talking to customers, very optimistic for the future. Because this ties back to, and I'm quoting a number, I think I'm right at all, but the bead, which has an acronym to it, but for putting it in fiber optics. That was like $65 billion allocated. So that's where, like David mentioned just a moment ago with solar, it's really a story I think you're going to see play out in next fiscal year. Not that there's any issue now. We're hitting numbers, integration going well, just great people. I mean, half the thing I love with teams is what's the talent we've brought into the family. So everything on track.

And I would also tell you, like as I'm traveling out with customers, unsolicited -- again, I can't get too specific. I'd be with a customer just going, hey, how is it going and they're saying, we're on plan. And then they'll make a comment. As the weather breaks, if they're in north, we're really excited about this future growth in HDPE. So like unsolicited, you're hearing comments there from customers to meet on the upside opportunity. So long-winded story to say everything is totally on track and optimistic for the future.

Got it. Very helpful. And maybe just my second one. Recognizing that all things being even, distributors like higher prices. Commissions as a percentage of revenue is what they look for. How much conversation are they having with customers regarding the margin that Atkore makes on its products, especially PVC conduits? Do you even hear much on that front?

No, I don't, Chris, with the following things. It's fair to say I haven't really asked the question. But what I would tell you that we've quantified in the past is if you add up all the products at core sales and you add up all of our competitors and look at a cost of ability, it is low single digits. So at the end of the day, whether the price of just PVC conduit, the [O conduit], armor cable is 2x for 1x. It's not going to change the overall cost of ability just by the math alone.

It's more about, do they -- still labor is the biggest challenge, the biggest kind of governor of growth in the industry, not the backlog, not the future incentives and therefore, obviously, making sure our product comes on time as quality is important. And then where we're winning across numerous things is our new innovations that save labor, time, and that's why you're also seeing Atkore at its highest levels, 9% new product vitality.

Who wouldn't have thought for an industry like this that you would have this level of new product vitality? And that's a compliment to our team, working with our customers to come up with new things as save labor and our save for an install. So long-winded answer, Chris, I don't think there's any concern there.

Yes. And Chris, I would also say that our co-load strategy through our distribution, whenever you're able to put multiple products on a truck and deliver on time at the right time, that service, that ability for our construction site to utilize that labor on construction as efficiently as possible is much more important than whatever the piece price of whatever part of our products would be.

Your final question comes from the line of Alex Rygiel from B. Riley.

I think you said that the PVC volume was down for utility products in the West Coast. Was this more a trend? Or was it weather? Or was it just timing of projects?

Great final question. Purely weather. Maybe timing behind the scenes that I don't know about, but no, we're really optimistic. There's projects cutting loose. And for example, where I will mention a customer because it's just public, things like PG&E, the California utility that's committed, I think it's 10,000 miles to put above-ground electrical lines of below ground. And that's over the next 5, 7 years. And each year, they're ramping up to kind of triple their current run rate. So all public information. That gives you a feel, Alex, again, of all these secular trends that are adding up to make us optimistic as we go forward.

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

Before we conclude, let me summarize my 3 key takeaways from today's discussion. First, we continue to expect mid-single-digit volume growth for the full year. Second, we are increasing our expectations for full year earnings based on the strong business momentum so far in 2023 and the robust dynamics supporting our business. Third, we're pleased with the strength of our cash flow and balance sheet. Our solid financial position is the foundation of our future growth, and I firmly believe the best is yet to come for our company.

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.