Atkore Inc (ATKR) 2022 Q2 法說會逐字稿

Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to Atkore's Second Quarter Fiscal Year 2020 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 outstanding performance and strong results in the second quarter of 2022. Despite continued challenges across the macroenvironment, we increased sales and profitability. Our businesses are performing well, and we continue to execute our plans for capital deployment.

During the quarter, we repurchased $157 million in stock and continue to invest in our business for the future. Given the outstanding performance and results in the first half of the year, we've increased the size of our share repurchase authorization from $400 million to $800 million, and we are increasing our expectations for fiscal year 2022.

Turning to Slide 4. We are increasing our outlook for full year adjusted EBITDA to a range of $1.25 billion to $1.3 billion. This is up $375 million from our previous expectations as we continue to expect profitability levels in our PVC-related products and other parts of the business to remain strong.

We are also now planning to repurchase at least $400 million in stock this year. With our increased expectations for FY '22, we also thought it would be helpful to provide some preliminary perspective on FY '23. Our initial expectations for adjusted EBITDA in FY '23 are in the range of $800 million to $900 million. There are many variables and market conditions that could cause this range to fluctuate, but we believe this is a good estimate for next year.

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

Thank you, Bill, and good morning, everyone.

Moving to our consolidated results on Slide 5. Net sales increased 54% year-over-year to $983 million. Adjusted EBITDA increased to $346 million, which drove our adjusted EBITDA margin to 35% in the quarter, both up versus the prior year. Our adjusted EPS increased to $5.39.

Turning to Slide 6 and our consolidated bridges. Net sales increased by $343 million primarily due to higher selling prices and the contributions from recent acquisitions. As we've mentioned previously, volumes have been impacted by several factors.

Within Q2, our volumes for certain steel-related products in the U.S. in both Electrical and Safety & Infrastructure are down approximately 20% as many customers were holding off on purchases given the volatility we've seen recently with steel prices.

For example, the average spot price for hot-rolled steel was down over 30% in fiscal Q2 versus Q1. However, the average price of steel has rebounded approximately 20% in April versus Q2. And with the increased demand from the start of the building season, we expect volumes to improve for these price as we progress through the year.

Volumes for the rest of our prices were up over 12%. In addition, our award-winning MC Glide products continue to gain traction in the market. Our overall product vitality percentage reached high single digits as a percent of sales.

Shifting to our segment results on Slide 7. The Electrical segment increased adjusted EBITDA by $142 million and adjusted EBITDA margins by 490 basis points. In our Safety & Infrastructure segment, net sales increased by 47% from the prior year and adjusted EBITDA increased 79%.

And now a quick update on our capital deployment progress on Slide 8. We are now on track to exceed our plan to deploy over $1 billion in cash over the next 2 to 3 years that we announced in November, and we've deployed approximately $325 million in the first half of 2022 across our 3 pillars of capital expenditures, M&A and share repurchases.

We're very pleased with the performance of our 2 most recent acquisitions of Sasco and 4 Star Industries, and both of these teams are off to a great start. As Bill mentioned earlier, we've also increased the size of our current stock repurchase authorization ending in November 2023, down $400 million to $800 million.

One thing to remember in this current interest rate environment is that in 2021, we were able to successfully refinance and restructure our 100% floating debt portfolio at very competitive rates. Today, we have approximately 50% of our long-term debt with a fixed interest rate for the next 9 years.

As we wrap up the first half of 2022, we have extended our track record of outstanding operational performance over the past few years, during which we've continued to successfully execute on our M&A program, invest in our business for future growth and consistently return capital to our shareholders via stock repurchases. Given our conviction in the future and our ability to execute, we will continue to buy back shares, both consistently and opportunistically within our capital deployment model.

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

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

Congrats on another outstanding quarter. What's your latest thinking, because we get this question from investors about how much of the price will you keep? We had some volatility in steel this quarter and still you posted over 50% price. So just starting here, how much of the price do you expect to keep? And any sort of visibility in terms of near-term demand?

Yes. So I'll do them in reverse order, Deane. Near-term demand looks strong. Obviously, we're factored by labor. And I'm saying labor out contractors, other products, challenges out in the market, but things like Architectural Billing Index, Dodge Momentum Index and so forth, are all exceptionally positive. So we're still optimistic for the future.

Pricing is a challenging one. We're probably have -- we're still seeing some growth in some areas, some other products probably have hit peak and so forth. And that's why while it's hard to predict, and I wish I had a crystal ball that could tell us exactly 2 years out. We are at least comfortable enough that we're raising earnings for this year pretty dramatically and then also giving that guidance of next year of $800 million to $900 million.

I don't know if we move off the $600 million long-term, even though we've kind of said in the past, we hoped that always with our organic growth, M&A exceed that number. So hopefully, that helps that we see pricing lasting into at least 2024, if not beyond, as we start to give some type of estimate for 2023.

That's really helpful. And I really appreciate the fact that you're giving this forward guidance into fiscal '23. And we're expecting normalization to be something above, if not well above $600 million. What's your thinking about normalization, when and how does that base $600 million become meaningfully increased? And what are the factors there?

Well, I think it's -- Deane, in fact there were couple of things. Again, if anyone goes back as you've been with the stock since it's been a stock, we've compounded our EBITDA 10% a year pre-COVID. So like we're doing the right, so there is Atkore Business System, organic investments, new product development and in M&A.

So as you keep adding that up based off against the headwind, we will have margin compression or maybe we won't, but I would think it would be very prudent to assume from an investor standpoint, there would be margin compression.

Is that out a couple of years? Just as those 2 intersect and exactly what number that we -- margin compression normalizes and then everything we do is upside, it's just hard to say, Deane. I've release Plan 2024 just as we've given numbers here this morning but…

Deane, this is so many variables and right now, with the world with interest rates and everything, there's just so many different unknowns, and we're already giving perspective 1.5 years out at this point in time. So I think beyond that, I think the normal market dynamics, we're doing what we can. We obviously, every day work to make sure that there isn't a normalization impact.

Just last question from me. And then Bill, from a historical context, I actually covered Atkore when in its prior life when it was part of the Tyco portfolio, so if I go way back and that's the degree of confidence and historically that you've always been able to pass through higher raw material costs 100% to customers? So that's been proven.

And just some context and color around what was going on in the steel products. It was really interesting to say that some of the customers were holding off in that period of declining price. But what are the lessons learned? It seems you have rebounded in April and any color there would be helpful?

Yes so again, I'll kind of reverse it. It has rebounded and we said it's again -- without being too specific for April -- that we're just wrapping up and getting into May as we closed the books, is more in the flat versus down I think David mentioned 20% in the last quarter.

These are rough numbers I think -- it depends on what type of steel and so forth. But steel prices when for example, high rolled directionally around $1,800 a ton to less than $1,000 and all here in the last couple of months and bounced back up $1,200, $1,300. I haven't tracked in the last week or so. And our buyers are efficient. They need to buy. These are a lot of must-stock products.

But if you're on the industrial side, for example, with a solar farm or something else and you can hold off a month or 2, it obviously -- they get the forecast to make economic sense. And then on the electrical side, it's more of a must-stock product, for example, with metal conduit. But again, distributor that probably was trying to buy ahead just to make sure they could keep stock in this precarious supply environment, all said and go, hey let's hold off for 2 weeks. Just 1 week of inventory in a 13-week quarter is 7%, 8%.

So you see where all of a sudden hey, let's cut a little bit. It's enough to swing that number and metal is between our Safety & Infrastructure business and Electrical is a large portion of our business. So but as David mentioned in the prepared remarks, I think the steel cost from what our forecast say or kind of moderating at this level.

And as we go into kind of spring buy and stuff like that, we're starting to see the demand pick back up. And the last statement I think David wants to add, again the other parts of the market were just amazing. I mean we were up 12%, as David mentioned. So I think well above what they are -- anybody would say is typical market at this point.

And Deane, the other thing I would add is that was the cost of steel that's making that fluctuation, not necessarily the price in the market of our products because, obviously, there's other inflationary factors from freight and labor and energy and you name it. So it's not like there was a correlation in pricing. It's just more of a delay if people can reduce stock and so on and so forth in this quarter.

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

Bill, so maybe I can follow-up on Deane's question around pricing. Obviously, you just raised guidance again by 40%. Maybe you give us a little more perspective on your price cost spread. It doesn't seem to be going down still despite -- I think last quarter, you mentioned that competitors were starting to discount more. So maybe you can talk about lead times in the overall competitive environment you're seeing?

Yes, so I think Andy, to your point overall, you're correct, margins have not gone down. I think we built that in, not knowing what would happen and obviously -- and by the way, in some cases, margins on some products are still going up. So from there, I think lead-times have continued to get a little bit better. And again, I'm giving directional numbers it all depends on what competitor, what product, what region in the country.

But if it was, let's say, 4 to 5 weeks and last quarter estimate is it now instead of 4% to 5%, 3% to 4%. So I think slowly the market is getting back to normal, and that's why both the balance of we don't think next year would be as strong. Obviously, we hope and wish and will drive to be in another almost $1.3 billion. But I don't think that's prudent from an investor standpoint. On the same hand, just knowing where we are now.

It's not like margins or pricing across every product with every competitor in every region is going to collapse in the next 6 months. And therefore, we feel comfortable enough to give yes preliminary estimate of $800 million to $900 million for next year.

And Bill, kudos to you for continuing to give that forward estimate, but let me maybe ask you a follow-up there. Like what are, your sort of assumptions at this point into that $800 million to $900 million? What does the market look like? What does price cost look like any sort of extra color you could give us would be helpful?

Yes good question, so -- I will share that we actually did a bottoms up, but you got to watch for a lot of false precision here. In other words, to your point Andy, doing all those estimates. So I think normal market, 2%, 3%, 4%, low to mid-single-digit organic growth, which seems to me very logical when I look at how strong Dodge is and ABI and all the other indicators like, everything is positive from that standpoint.

And then it's an assumption by each product line, but some compression in margin. In other words hey, assuming it's going down versus up, that feeds that number. And then to say precisely how much price Andy it's by product line.

Got it, and then just maybe one more quick one. You obviously upped your share repurchases. Maybe just talk about sort of the M&A market that you're seeing now obviously, a lot more volatility in valuations these days. You still think you can sort of get your normal bolt-on strategy this year moving forward?

Yes without -- never -- the challenge -- and that I'm going to say a definitive strong, yes. The challenge is it's binary. In other words, we can get down to the deal and all of a sudden have a disagreement on working capital paid or something. And it's just at the point of it doesn't make sense if we're going to not have the deal fever and keep to our values and our business system that you can never absolutely know in the deal.

But I would reemphasize again, there's a lot of deals out there. We doubled down on the size of our team. We have the balance sheet to make this happen, the cash flow and therefore, the bolt-on acquisitions and maybe even slightly larger ones than we've done in the past, that are still strategic, synergistic debt responsible within our management bandwidth, I'm relatively comfortable that we will achieve.

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

Maybe I'll just beat this pricing question to death. But when PVC pricing really increased sharply in calendar '21, it seemed like the conversation with end users was much more about guaranteeing on-time delivery than pricing. Has that dynamic changed at all?

I think it's had some. In other words, there was no discussion of just either of price, if they know, but it was just can we deliver, what confidence do you have, and our customer that we will our say-do ratio because it was all over the spot price. I think, Chris the earlier questions where I'm saying it's 2 to 3, 3 to 4 weeks, again, on delivery, prices are more of a consideration there, but it's still the value package of confidence in delivery.

And then the other thing, Atkore really does well with the one order, one delivery, one invoice, our reputation and so forth. It's helping keep it the market strong at the moment, but not as much on pure supply demand.

And I would say one thing, Chris, that product line, the PVC ACP product lines would be in that 12% growth we saw in this quarter. I would say the demand side is probably even stronger than what we thought of maybe 6 months ago, given utility spend on putting their electric lines on the ground, all the continued residential construction, data center construction, what have you. The end market volume there to Bill's point, I think that it's still an important aspect of getting the items on time.

Got it, very helpful. Just one more PVC, a little bit longer term, what are the puts and takes for PVC pricing never giving back too much from current levels?

Well our job, both for I'd say for our customers and for our shareholders is to provide a value equation that price isn't the largest thing, just like if anyone orders online. It's the simplicity of dealing with clicking the button and getting your product the next day and so forth. So I would aspire that we never give it back, but we do have competitors out there and it's a competitive market and how they react, there is that consideration that we'll have to factor in.

So I think Chris, it feels weird to the CEO to say this, but I think factoring is when does that occur? And how much comes back, and that's just tough to say so at this moment. But at least we're comfortable enough that again, besides raising this year substantially, putting a first pin and next year that's above the $600 million that we had before.

Got it. I know it's a long lead-time in terms of people being able to ramp up on PVC manufacturing. Are you seeing anything on that front in terms of any new supply capabilities coming into the market?

No again, I put the asterisk there that my competition does not call me and tell me about what they're doing internally, but we have not seen anything in the PVC. And again, I can't speak for somebody has and/or if they plan on adding a line or something, but it's challenging.

In other words, even somebody in the industry would have to have space in one of the factories would have to have the silo space, would have to have the railcar space, would have to have a blender capacity. So even there to say, well, I'm just going to add one more line. And we have 7 lines versus 6 is not a simple task even for somebody already in the industry.

So that's why back to our confidence in raising next year's estimate or an $800 million to $900 million range than the $600 million is we don't see supply demand changing dramatically next year.

Got it.

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

This is John Walsh. So my first question is, can you talk a little bit about non-resi/resi demand trends for steel versus PVC products in the quarter and in the outlook?

Yes, I think Victor, if I understood your question, I would say almost everything void of PVC is non-resi so that's kind of simple, therefore, steels on resi. I'm simplifying, but basically, plus 95-plus percent. For PVC, because we put and that we, but the PVC conduit is used for like underground lines going into a sub-development and/or from the sub-development into the house, that market is probably 30%, 40% residential -- is non-residential. But PVC is probably the only residential product.

Again a major contributor in the utility.

Yes.

These are the 1/3 -- so part of that.

And a follow-up question, are you seeing any change in competitive dynamics around pricing from smaller suppliers specifically?

No, I don't think so. I think everybody is -- everybody has their own value equation and what they're trying to do to go-to-market and so forth. But no, nothing jumps out.

I would say that everyone is really struggling with higher input costs, whether it's the stuff that makes the product itself or transportation or labor, you name it. I think a lot of people are starting with high input costs. So I think the mindset of a lot of industries right now is around pricing and making sure that they're holding and may be able to expand the margins slightly.

Yes I'll just double down on David's comment that I think we've done a good job in the leadership team and the management at Atkore, but communicating that even in the past, what steel costs or what's PVC, as you -- each of you, investors understand from tracking other companies freight costs up over 40% in labor.

And what's the cost of lumber for a crate that we've done a pretty effective job of this accurately communicating to our customers that there's a lot more cost input than just what's copper, steel and PVC at the moment. But I think our competition also understands and has to adapt to that -- to keep in the business.

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, Q2 was a great quarter, and we have a strong outlook for 2022.

Second, we are executing our capital deployment model with $325 million deployed in the first half of this year. Third, we have a bright future ahead, and we're committed to growing and building Atkore as a strong long-term franchise.

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.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.