Atkore Inc. (ATKR) Q1 2021 Earnings Call Transcript

Thank you for standing by, and welcome to the Atkore International First Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised this conference is being recorded. Thank you. I would now like to hand the conference over to John Deitzer, Vice President of Treasury and Investor Relations. Mr. Deitzer, please go ahead.

Thank you, and good morning, everyone. I'm joined today by Bill Waltz, President and CEO; as well as David Johnson, Chief Financial Officer. We will take your questions after comments by Bill and David. I would like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or financial performance of the company. Such statements involve risks and uncertainties such that actual results may differ materially. Please refer to our SEC filings 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.

Thanks, John, and good morning, everybody. Starting on Slide 3, thanks to our operational focus and culture of teamwork, Atkore continues to deliver strong financial performance across our businesses, resulting in another record quarter. As just one example, adjusted EBITDA was $137 million in the quarter, up 76% from the prior year. We had strong performance across the business from metal conduit to solid execution and volume recovery in our international markets. In particular, we saw better-than-expected results in our PVC conduit business, driven by favorable pricing dynamics due to increased demand and industry supply constraints. This was a key enabler for us to achieve 27% adjusted EBITDA margins in the quarter. It is important to remember that our PVC conduit story is not one that began in the past quarter, or even in the past year. Rather, we recognized early on that this market has the potential to be a major growth category over the last decade through a combination of organic and inorganic investments. We built out this product line and expanded our national footprint, becoming the leader in the market. This position is very well to support and supply the strong residential, data center, and utility markets we are seeing. In addition to delivering exceptional results across the business, we continue to prudently deploy capital in the quarter. Specifically, we repaid $40 million in debt and bought back $35 million in stock. You'll also recall that we completed our previously announced acquisition of Queen City Plastics in October. Turning to Slide 4, we have a few other recent events and key business updates this year. You will see in our earnings material, we are now reporting our two segments as Electrical and Safety & Infrastructure. We made this decision to rename and reorganize our two segments to better reflect each segment’s value proposition and go-to-market approach. We are also very pleased to announce that our Board recently approved a new 2-year $100 million stock repurchase authorization. This new authorization underscores our confidence in our ability to continue to grow earnings and generate strong cash flows, and ultimately demonstrates the strength and sustainability of Atkore as a long-term franchise. In addition, I want to highlight the launch of our first sustainability report. In this report, which you can find on our website, we share all the activities that we are doing across the company in terms of health and safety, diversity, inclusion, and energy management. This is an area that is very important to us, and we're glad to be showcasing our sustainability initiatives through this inaugural report.

Thank you, Bill, and good morning, everyone. As Bill mentioned, we are very pleased with the results in the first quarter. Moving to our consolidated results on Slide 5. Net sales increased 14%, primarily due to higher average selling prices across many parts of our business. Adjusted EBITDA increased to $137 million, which drove our adjusted EBITDA margin to approximately 27% in the quarter, up 940 basis points from the prior year. Our adjusted EPS increased 100%, up to $1.88 as our strong profit growth and lower interest expense more than offset a higher tax rate in the quarter. Turning to Slide 6. Net sales increased by $64 million due to higher selling prices, largely in our PVC and metal conduit products. Through outstanding operational and commercial execution, our team was able to fully overcome the impact on profitability from the decline in sales volume and higher input costs. We grew adjusted EBIT by $59 million driven by our ability to service our customers. Shifting to segment results on Slide 7. The Electrical segment led our profit and margin improvement with adjusted EBITDA up $65 million and adjusted EBITDA margins above 34% due to the strong performance from our PVC and metal conduit products and international volume growth. Turning to the Safety & Infrastructure segment, net sales increased 1%, but adjusted EBITDA declined by $4 million. Margins contracted versus a very difficult comparable in the prior year, and the business is working to quickly absorb and pass through our higher input costs. In addition, from a reporting standpoint, our prior period segment results have been restated to the new segment presentation. There were also no changes to our consolidated sales or operating income. And now moving to our consolidated cash and liquidity on Slide 8. We ended the first quarter with $280 million in cash and generated $78 million in free cash flow in the quarter. We continue to take a multi-prong approach to capital allocation as part of our commitment to drive value creation. To that end, we deployed over $80 million in the quarter by repaying $40 million in debt, repurchasing $35 million of stock, and completing the acquisition of Queen City Plastics. We’ve made tremendous progress on our journey to strengthen our balance sheet over the past 2 years, and our net leverage ratio ended the quarter at 1.3x.

Thanks, David. Turning to Slide 9, I wanted to take a deeper dive into our PVC conduit business. As I mentioned in my opening remarks, we've been building this business over the past decade. We started in 2013 with our acquisition of Heritage Plastics, and we continue today with our most recent acquisition of Queen City Plastics, which was completed in the fall. Today, we have the largest network of manufacturing sites across the United States with a distribution range for this product optimized at approximately 500 miles or less from the original production location. This has proved beneficial for our business, especially this past quarter as we saw higher than usual demand outpace the supply chain capacity throughout the industry. Specifically, the rise in residential construction accelerated by the COVID-19 pandemic drove the majority of stronger-than-expected demand that we saw for the PVC conduit in the quarter. In addition to these residential tailwinds, we saw increased PVC conduit demand as a result of increased construction for data centers. So far, the demand for PVC conduit is continuing in Q2, and this is higher than what we typically see in the winter season. As you may know, across many industries, supply is tight as manufacturers struggle to produce products with increased challenges everyone is facing today. We're continuing to work hard to meet this demand as best we can with a constrained supply chain for the industry. During Q1, we addressed this imbalance by focusing on the production of the products our customers needed the most. And we did so with very competitive lead times and at a higher selling price. Our ability to meet the recent growth in PVC conduit demand despite constricted supply is a direct reflection of the Atkore Business System at work. Atkore will continue rising to the challenge going forward, providing competitive lead times and value in our tight supply industry and prioritizing customer service. This has been and will remain a differentiator for us. Turning to Page 10 and our outlook for 2021. Based on these market dynamics and the tremendous execution from our entire team, we are increasing our outlook for net sales, adjusted EBITDA, and adjusted EPS. We now expect our net sales to be up approximately 16% to 20%. And our adjusted EBITDA to be in the range of $440 million to $460 million, up $100 million versus our prior estimate. In addition, we expect to grow our adjusted EPS up to $5.65 to $5.95. This updated outlook reflects our expectation that a significant portion of these price and value-added service benefits that we've experienced this quarter in our PVC conduit business will normalize as we move into the back half of the year.

John Walsh with Credit Suisse. Your line is open.

Hi. Good morning, everyone.

Good morning, John.

Good morning, John.

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

Yes. John, phenomenal set of questions there. Bill and I will address. David can obviously add color. A couple of things. No one specific event that PVC conduit has, as we've explained in the past, is 50% plus tied to residential. So even within Atkore that market, as everybody knows, is up high single digits, maybe 10% growth depending on what product and who's forecasting. So exceptionally strong markets. Two, I don't think any of our competitors had inventory just from a perception of COVID and impacts and so forth. And then it just ties to the ability to produce what’s called high single digits to 10% growth amid COVID.

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

Yes, everything is going well. I mentioned earlier that we highlighted metal conduit. While PVC has been outstanding, we would still see good results even without it because the other parts of our business are performing well. Our Mechanical and Safety & Infrastructure segments, which I mistakenly referred to earlier, typically have a slight delay due to contracts or quarterly indexing. We anticipate regaining strength there, especially considering we had strong comparisons from last year. Overall, everything is progressing according to plan or even exceeding expectations.

Great. We'll pass the baton. Thanks again for all the color.

Yes, thank you, John.

Deane Dray with RBC Capital Markets. Your line is open.

Thanks. Good morning, everyone. I'll add my congrats on a strong quarter.

Thank you.

Thanks, Deane.

Did you have any instances where you had to turn down business due to supply constraints? Was there any unmet demand during the quarter?

I would handle it differently. I'm not sure if we turned down any supply, but we engaged in honest discussions. Our values at Atkore allowed us to maintain lead times of about a week. If a customer wants to place an order, we will ensure we can meet that commitment. Did we use pricing to our advantage? Yes, if a customer desires our backlog and the benefit of quick order fulfillment, they can expect a high say/do ratio from us, unlike others who might accept an order and then fail to deliver three weeks later, which can be quite frustrating. This inconsistency is why customers choose to work with us, even if it means canceling existing orders. Perhaps Deane implied that for a certain price or quantity, we could guarantee delivery in a week, as we are committed to outperforming everyone else. I'm confident some customers turned to our competitors.

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

That's real helpful. Was there anything on the raw material cost side? Let's say, resin …

No.

… in the quarter, you didn't mention it so.

Yes, in previous quarters, particularly around the time the hurricanes impacted the Gulf Coast, our resin suppliers faced a force majeure situation. We managed that situation well because two of our main suppliers were affected. I can't recall the details we shared in past calls, but we navigated it successfully while others in the industry struggled. To answer Deane's earlier question, when the market experiences growth rates in the high single digits or even double digits, companies often accept any orders available due to pricing dynamics. We have been able to maintain our pricing leadership and continue to serve effectively. A backlog of four to five weeks for a competitor is not beneficial for the industry, especially if there’s lack of transparency regarding lead times. We have reengineered our products with a focus on our key items, and our team has performed exceptionally well, just as I expected they would.

Good. If we look at the second half, comparisons will become more challenging, and you’ve indicated that you’re anticipating a return to normalized demand. Can you explain what that transition to a normalized level looks like?

Yes, I'll start, and then David wants to add color on numbers. Again, just a thought where I mean, how many companies make $350 million per target raise in the first quarter, $100 million? So putting in framework, we're still going to have a great year and next year where we wanted to get some level of estimate, whatever word I should use, a $400 million, Deane, I’m wrapping into your question, I still think it's phenomenal because that's well above yours, or anybody's guidance. 10% plus compounded growth from $327 million, it's just we're performing exceptionally well. Now to all those things where this quarter and the quarter we're going into Q2, we think it's like behind a grand slam to go. Some of the supply and balance, demand and balance will normalize, and therefore we're giving the estimate of $440 million to $460 million. To get into how much and what numbers for the second half, David, I don't know if there's any color.

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

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

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

Exactly. So if you look at our cash flow statement, we had a pretty significant working capital increase. There's two elements to that, Deane. Obviously, commodities are up, things like steel and what have you, so you will see that in your inventory. But obviously, our receivable days are flat, but they're up quite a bit in dollars, again, because of the pricing flowing through our balance sheet. So we are a little bit late this quarter. Q2 is always a soft cash flow quarter for us because of certain elements around our tax payments and our rebate payments and what have you. But when you look at the full year in total, that 100% or slightly above net income, we feel really strong with that typical guidance that we give.

That's really helpful. Thank you.

Thanks, Deane.

Andy Kaplowitz with Citigroup. Your line is open.

Hey, good morning guys.

Good morning, Andy.

Good morning.

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

I think it's probably, Andy, around markets. So we are expecting to be up low single digits for the fiscal year. So for the quarter itself, I think it's just some of the lag. We're expecting some pickup in these numbers, both volume and also growth. We are being selective in orders. I mean, we charge a premium. So some of our products like our focus categories that we've put in place for these, the name says focus on growth above the markets. They were up low to mid single digits, so we're taking share as we expected with those products. The other thing, I'm getting into the weeds here, but there were two less days in the calendar. So you work that out over our remaining days in a typical quarter of 60 days or something. So there's a couple nuances, but markets down low single digits. I think the markets themselves will improve to low single-digit growth in the second half. And residential data centers and things like that are continuing to be strong.

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

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

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

Yes, great question, Andy. I want to repeat some of my earlier points. There's nothing significant to add regarding COVID or acquisitions. We're simply focused on Atkore running our business going forward without delving into too many specifics. We provided this number because we believe we've performed exceptionally well. Not many companies have achieved over 10% compounded growth in EBITDA, moving from $327 million to nearly $400 million during the pandemic. We aim to maintain that trend. We wanted to avoid anyone, whether from the sell-side, buy-side, or as shareholders, misinterpreting and expecting a $450 million figure. In line with our values and commitment to transparency, we believe this is a unique situation. Some companies aren't even providing guidance for the quarter, while we're offering an estimate for the market looking a year ahead, acknowledging the risks involved. You mentioned the assumptions behind this, but there's nothing detailed beyond providing a foundation for everyone.

Appreciate it, guys.

Thank you, Andy.

Thank you.

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

Thank you. Hey, before we conclude, let me summarize three key takeaways from today's discussion. First, the outstanding results were delivered in this quarter as a result of our strong operational focus by everybody on this team across the globe, and our ability to prioritize our customers and get them the products they need most. As I described in our mission statement, it's all about being our customers' first choice. Second, we continue to deploy capital effectively to grow our business, strengthen our balance sheet, and return cash to our stockholders. And third, in closing, probably the most important thing we're excited about the future of Atkore, and our expectations for growth. So with that, thank you for your support and interest in Atkore, and we look forward to speaking with you during our next quarterly call. This concludes the call for today. Thanks, everyone.

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