Atkore Inc. (ATKR) Q1 2024 Earnings Call Transcript

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to Atkore's First Quarter Fiscal Year 2024 Earnings Conference Call. 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 the 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. And any reference to EPS or adjusted EPS means adjusted diluted earnings per share. Adjusted EBITDA and adjusted diluted earnings per share are non-GAAP measures. Reconciliations of non-GAAP measures in the 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, Atkore is off to a strong start for FY '24, and we are demonstrating the structural improvements and transformation that we made to our business over the past several years. I'm proud to share that volumes for the quarter were up 13%, driven by contributions across all key product areas. We're focused on executing our capital deployment model as evidenced by the $96 million in shares repurchased in the first quarter and the continued activity in January. In addition, I'm very pleased to announce that we've officially declared our first quarterly dividend, a very exciting achievement for our company. I also want to highlight the release of our fiscal year 2023 Sustainability Report, which was published last month. This report provides an update on the progress against our 2025 targets and covers additional important topics and initiatives. I'd like to take a moment to thank all of our employees for everything they do to support our key stakeholders. Overall, in fiscal 2024, we're off to a great start, and I continue to be excited for what's to come. With that, I'll now turn the call over to David to talk through the results from the first quarter and our outlook for the full year.

Thank you, Bill, and good morning, everyone. Moving to our consolidated results on Slide 4. In the first quarter, net sales were $798 million and adjusted EBITDA was $214 million. We are pleased with our margin performance in the quarter with adjusted EBITDA margins over 26%. Our tax rate in the quarter was favorable due to the vesting of previously granted stock compensation. This outsized benefit was unique and contributed to our strong EPS performance. Moving forward, we expect the rate to be closer to roughly 25% for the remaining quarters in the year. Turning to Slide 5 in our consolidated bridges. I'm pleased by our strong volume performance in the quarter with organic volumes up over 13%. These gains were offset by the continued pricing normalization, but this impact was within expectations and aligns with the pricing trends we have been discussing for the past several years. Moving to Slide 6. We're making good progress against the low double-digit volume expectation for the full year, with solid contributions across all key product areas. Our plastic pipe and conduit category was up high-single digits, led by solid growth in our PVC products. Across our electrical-related categories, volumes were slightly higher than anticipated in Q1 and several large customers met their calendar year-end rebate levels. Looking ahead, we expect Q2 to be softer than Q1 in terms of year-over-year volume percentage growth due to this timing of purchases at year-end and the recent severe weather conditions that have unfavorably impacted our January performance. Turning to Slide 7. Both segments had positive volume growth in the first quarter. Margins compressed in our Electrical segment with the previously mentioned pricing normalization that remained very strong at 34%. We also faced some year-over-year margin compression on the S&I side due to a cost comparison versus the prior year and the planned start-up costs in Indiana to support the volume ramp. Turning to Slide 8. We continue to execute our capital deployment model with cash generated from the business, and our balance sheet is in tremendous position with no maturity repayments required until 2028. Next on Slide 9, I am pleased to highlight a significant milestone for our company with the upcoming payment of our first regular quarterly dividend. Earlier this week, Atkore's Board of Directors approved the first quarterly dividend payment of $0.32 per share. This achievement was made possible by our sustained performance over a multiyear period and our confidence in the future. Now for our fiscal year 2024 outlook on Page 10. Our expectation of low double-digit percentage volume growth for the year remains on track. Also, with our strong EPS performance in Q1, we are increasing our full year estimate accordingly. As previously mentioned, our performance in January was impacted by several factors, including the adverse weather conditions in many parts of the U.S. This is affecting our estimates for Q2, but overall, we are maintaining our outlook for full year net sales and adjusted EBITDA. Also, as we've discussed before, we've always built in an expectation that the back half of the year will be stronger than the first half for two main reasons. First, as we are ramping up these new facilities, our volume from these sites will steadily increase throughout the year. And second, our overall business is always stronger in the spring and summer construction seasons versus the fall and winter. Therefore, we expect adjusted EBITDA to improve sequentially from Q2 to Q3 and then Q3 to Q4. With that, I'll turn it back to Bill.

Thanks, David. We are very pleased with what we've accomplished this quarter and our outlook for this fiscal year, but we're even more excited about all the opportunities ahead. Moving to Slide 11. As we've said before, the electrical industry is a great place to be. It's difficult to find a building or infrastructure project that does not require Atkore's products. With over 90% of Atkore's product portfolio supporting electrical infrastructure, we are well-positioned to benefit from the strong electrical trends projected across numerous end market categories. On Slide 12, we've analyzed product volume data to determine estimated density across key end markets. With anticipated growth in data centers, manufacturing, lodging, health care, education and multifamily over the next five years and Atkore's ability to deliver a wide range of products that each of these buildings need. I am again reminded that Atkore in the electrical industry overall is a great place to be. Better yet, consensus agrees. Experts and peers across the industry also have a positive outlook on 2024 and beyond. In addition, with several other major public electrical contractors and electrical peers reporting record backlogs and projecting positive growth, it reinforces our confidence in the future for this industry. With that, we'll turn it back to the operator to open the line for questions.

Your first question comes from Andy Kaplowitz from Citigroup. Please go ahead.

Hi, good morning, guys.

Good morning.

Bill or David, I know you've projected strong volume growth for the year, but you experienced a notable increase in electrical volumes in Q1. You mentioned that some of the larger customers brought forward their volume. Could you quantify how much of that was a pull forward? Did you notice any changes in your HDPE markets? Additionally, can you estimate the impact of the weather on Q2 and how it might affect the results for that quarter?

Yes. I'll start, Andy, and then turn it over to David with what level of specificity here. But, first, HDPE, very much on track where we expected. But as David said in the past, it's more of a fiscal '25. You can see that with, I won't call it other public corporations, but even large fiberoptic companies have announced earnings recently. It's almost that their slide could have been interchanged with ours or what we've communicated there. And again, we can follow up with why we think that here in a moment. What we saw, and this is common for every year, is we said, and the industry said, it's not just us. Rebate levels go if you hit X number volume dollars, we'll give you whatever 2%, whatever the number rebate is back, and we try to stay firm to that. So some of our customers literally just said, Okay, we understand. Assuming when we saw a spike in December, it was to get to their goals. So a little soft there. And then not a surprise, I think, for anybody in January here that with the weather across the country, for example, us talking to our customers, for example, one large customer, I won't be overly specific here, but had over 50 of their locations down for at least two days or more dealing with the weather. So with those two things, January was light. But again, if you add up the strong organic growth in Q1 with what we're kind of forecasting per se without a precise number in Q2, it basically averages out and bridges exactly to what we have for the year. So again, to me, it's a good comfort thing that we're still on track and actually raised EPS. So hopefully, somewhere in that level, I answered your questions.

You did, Bill. But let me sort of step back. I think you talked about contractor backlogs. When you step back, obviously, the lead indicators are kind of all over the place, still may be stabilizing at lower levels. Are you seeing sort of any changes in primary markets? We already talked about HDPE, but clearly, things like data centers are ramping up. You've been working on undergrounding. So like are things sort of better than they were a few months ago as rates have come down worse? Like how do you sort of frame the market at this point?

Yes. I think either consistent, but definitely not worse. So let's put it that way. So, Andy, to your point, there are many metrics out there and which metrics are relevant or even over time, how metrics evolve on their importance. One of the ones that, at least I'll say I, but Atkore's gravitating to, that we don't talk about in the earnings deck, I don't think, but was Association Of Building Contractors. There's still a high 8-plus months, I forgot exactly 8.6, 8.8. But I do recall two things, for example. One, in December they actually increased the 10th of a month. So if their backlog is going up and then here in the last two days, the Association Of Building Contractors said about they have an even higher number of open jobs as they put jobs, literally, we could have written their script on the biggest constraint to Atkore. And it's a good thing, isn't in the market. So whether you read ABI or something like that, it's literally there is around nine months of backlog right now with contractors, ABI or ABC would talk to that. And to the point of as other skilled trades, whether it's a maintenance manager someplace else, may have slowing hiring, it's actually the economists for Association Of Building Contractors said how that's good for the industry, so they can hire more people. So Andy, at the end of the day, I'm pretty confident. We can talk about Q2 versus Q3 and when things ramp up and our own self-growth initiatives, but the backlogs are out there for us and everybody else.

Yes. Andy, if you look at construction employment continues to go up, although the estimate from this week from the contractors association said that they estimate they need around 500,000 more new folks entering construction. And that's over and above the net normal. So there is a lot of work out there. I mean, when we talk about the contractor backlog and being around it, that's about the size it's going to be because people are going to take jobs two years from. So I think that's just a really healthy rate. This is around, again, getting folks who can actually execute some of these projects.

And one more for me. I know you said Safety & Infrastructure includes $7 million of start-up costs, but did you contemplate those costs when you were thinking about when you guided us to Q1? How are you factoring in any incremental start-up costs going forward? And was there anything else holding down Safety & Infrastructure margin?

Yes, I think we're on track. We exceeded our guidance for Q1, even if just slightly. Some of that is due to pulling ahead of volume. It's been a good quarter, and we remain optimistic about our full-year EBITDA, as well as the EPS outlook. I know David wants to add to this. It's important to remember that with a large complex factor, which some shareholders may overlook, every size presents its own challenges, whether it's an octagon or a circle. You cannot proceed until everything is operational and you have the necessary permits. All the machinery must be adjusted for each new size, which involves decisions like whether to use MIG or TIG welding. There are many complexities, and we anticipated that it would take the entire year to ramp up. As David mentioned earlier, you will see an increase in our guidance for the year as we continue to meet our volume targets. We have confidence in our end-of-year EBITDA projections and in our volume numbers as we progress through the year.

Got it. Thanks guys.

Yes. Thanks, Andy.

Your next question comes from the line of Deane Dray from RBC. Your line is open.

Thank you. Good morning, everyone.

Good morning, Deane.

It was great to see that volume come through this quarter, especially like Slide 6 that shows you that balance across the portfolio. So good to see that.

Thank you, Deane. From my perspective, it's not just about focusing on one product line; every product line performed well. The chart highlights that while PVC and HD are significant, making up 31% of our sales, we have many other excellent products that are also performing strongly in terms of pricing. Overall, it's a positive environment for Atkore.

Great. And that takes me to the heart of the question here is, take us through the pricing dynamics this quarter. And I know the recovery and the normalization is not going to be linear. But what were the specific dynamics this quarter, input costs, competitive positioning, where the demand was? I know geographically, that's a factor as well. But just take us through those dynamics, if you could.

I'll start, and then David can provide more details with the charts. Overall, we are on track. While some product lines are performing slightly lower, we encourage our general management and sales teams to continue their efforts. Referring back to Page 6, in at least two categories, if not more, others have raised their prices. This positions us as a price leader because of our efficient order and delivery system, which allows us to provide more value compared to many competitors in the industry. However, we are not the only company focused on delivering good returns to our shareholders. Overall, we are right on track.

Yes. Deane, if you look at Slide 5, when you consider the EBITDA bridge, the changes in price versus cost amount to about $90 million, and we had originally projected a midpoint of around $150 million for the year. This was always expected to be more front-end loaded compared to last year, since prices declined sequentially throughout the previous year. Therefore, in line with what Bill mentioned, we are definitely on track with our expectations for the year.

Got it. This leads me to my next question about the assumptions for the first and second halves of the year. I understand the seasonality aspect, as the construction season significantly impacts the second half. However, there is a notable difference in first half EBITDA, which is down 22% year-over-year, while the second half is expected to be nearly on par with last year. Is this the anticipated increase between the two halves? I understand the volume aspect, as we see that coming through and are confident in the end market demand. Is pricing the primary factor driving this?

So a couple of things. I would look at it more sequentially in the year of FY '24. Because when you compare it versus FY '23 of last year, we still had some really strong quarters at the beginning of the year as pricing went down through the year. So said another way, our comps will get easier at the back half of the year. So when you look at what we have in the second half of our fiscal year this year versus the first half, you will see a number that you'll need like in the $240 million, $250 million kind of EBITDA range versus the $210 million, $215 million or whatever average for Q1, maybe a little bit lower than for the first half. That is definitely, again, increases in Cobar, normal seasonality where you see the construction season picking up. And then pricing firming versus last year where pricing was still going down. So I think if you add that all together, I would say the seasonality is fairly atypical. Just a little bit more back-end loaded because of our growth initiatives hitting in the back half of the year.

All right. That was really helpful, David. I appreciate the precision, especially the reminder about the dynamics second half and those of last year and the comps. So that was really helpful. And just last one for me. You referenced the Indiana plant. Can you give us an update, the start-up? Where does it stand in terms of productivity, efficiencies and so forth?

Yes. To answer your question about the Indiana plant, it is on track. This means that, as David noted with the $7 million, it is not yet generating the long-term profits we anticipate, but that is expected. The complexity of each product SKU makes it different from launching something simpler, like a light bulb factory or a ketchup production line, where there's only one SKU. Each customer and product involves running the machines, taking them offline for a couple of days, and ramping up production in phases. However, we have an excellent leadership team in place, and things are progressing well. In the short term, we do expect profits as the plant begins operations. Overall, we have reaffirmed our forecast for the rest of the year, and everything is moving as expected at this point.

All good to hear. Thank you.

Thanks, Deane.

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

Hi, good morning, guys. Thanks for taking a couple of questions. Maybe just on PVC pricing for January, was there a much change?

No, we anticipated volume. Many of our products, particularly those suited for underground use like PVC and HDPE, are affected by weather conditions across the country. I made an error earlier by mentioning smaller lines and fiber used under bridges. Pricing is generally on track, and we have implemented a couple of price increases. However, it becomes challenging to achieve realization when demand is low. Nonetheless, we remain optimistic about our efforts to raise prices in the industry going forward.

Yes, Chris, as you remember, our backlog is less than a couple of weeks. We review volumes every week. As Bill mentioned, January was slow due to several factors. The beginning of this week has been much stronger, so we'll see how it plays out for the rest of the quarter compared to our expectations for Q2.

Got it. Appreciate that. Maybe just one more on Indiana. So obviously, you talked quite a bit about the driver from The Inflation Reduction Act. You guys are getting up and getting going. How would you characterize kind of demand for torque tubes overall? And how would you view that kind of against the current domestic capacity to meet that demand? Is it enough beyond where you guys are at? What are you seeing overall?

Yes, Chris, from what I can gather, there appears to be more demand than available capacity in the industry moving forward. As we've noted in our prepared remarks and responses to questions over the years, others, including public customers, might also have insights on this. The Inflation Reduction Act should shift a significant amount of volume to the U.S., which is beneficial for the economy. Even if the solar market remains stagnant, this situation effectively doubles the demand for torque tubes, and currently, I don't believe that capacity is available with any company. As we work on enhancing our capacity and ramping up production, I believe our competitors are likely doing the same. The combination of expanding the domestic torque tube market and potential significant growth in the solar market indicates a robust and promising landscape for both Atkore and the country as we strive for a carbon-free future.

I appreciate that. Maybe just one last one here. Obviously, you sell most of your products through distributors. However, you have mentioned marketing efforts that extend beyond this distribution channel, focusing on building relationships with major players in markets such as array makers and fab owners, with the intention of becoming a partner. I was wondering if you could provide any update on that and share your thoughts on how you are approaching this longer-term process.

It's a multiyear process, but I'm proud to share that NECA, which is the National Electrical Contractors Association representing all union and equivalent nonunion electric construction contractors, named us one of their premier partners. There are about 13 premier partners, including a mix of companies from freight carriers to energy generators. In the categories of PVC products, steel conduit products, and metal framing products, we are the only premier partner across all our offerings. While there are other manufacturers in certain areas, this recognition highlights the relationships that Atkore is building, complementing our organization, products, and the value of our partnerships. It's an exciting development.

Got it. I appreciate that. I will leave it there.

Thanks, Chris.

Your next question comes from the line of Alex Rygiel from B. Riley. Your line is open.

Thank you. Good morning, gentlemen. A very nice quarter.

Thank you, Alex.

A couple of quick questions here. First, as we think about the second quarter guidance versus the first quarter, directionally, what does your guidance imply for price and volume? And I guess what I'm getting at here is, have we seen the correction in raw materials sort of fully reflected in either the first quarter or the second quarter guide?

In the second quarter guidance, we anticipate that our year-over-year volume will be lower than it was in the first quarter while still showing modest growth year-over-year. When considering pricing, the fluctuations in steel prices can impact our numbers quickly, as we can adjust our pricing on a daily basis. However, any changes may not be immediate due to the time it takes to manage our inventory. Overall, the process is quite dynamic with little meaningful lag, except in the S&I segment, which tends to follow a more quarterly pattern. This can result in some delays when steel prices rise and some headwinds when they fall, but these effects usually balance out over a few quarters.

And then Alex, to expand on your question a bit, while David is better suited to provide the details, I want to share how we view our profit and pricing, particularly for our shareholders. The first consideration is general industry volume. With tight capacity, like any product, we can command higher prices because we have several options and customers interested. Second, our capability sets us apart as the industry leader, and we are significantly investing in our approach of one order, one delivery, one invoice, which creates a competitive and sustainable advantage that I believe no one else can replicate in the next decade. Regarding your question on steel prices, as David noted, we utilize real-time pricing, but this does not heavily impact our EBITDA.

And then secondly, can you give us an update on the expansion of your distribution centers?

Yes, that's a great question. We're on track with several projects that are up and running well. We're currently working on one facility in Dallas and another in Atlanta. We've purchased and leased the facilities, and we're installing racking and starting to bring in products. As David mentioned earlier in response to other questions, regarding this fiscal year and addressing Deane Dray's question, we're looking at bridging the average from $210 million to $250 million in the second half of the year. The regional service centers are expected to significantly benefit us in fiscal year '26 once we fully operationalize them and realize their value proposition. We're already seeing some benefits now, but the potential leverage moving forward is what gives us confidence in the $18-plus EPS that we projected a couple of years ago.

Very helpful. Thank you very much.

Thank you, Alex.

Your final question comes from the line of Chris Dankert from Loop Capital. Your line is open.

Hi, morning guys, thanks for taking the question.

Thanks, Chris.

I would like to know if you believe distribution inventories are still in a good position as we approach the second quarter, considering that there may have been some rebate buying to reach those break points at the end of the year. Any comments on the inventory situation at the distribution level would be appreciated.

Yes, I think we're back to normal pre-COVID levels. There is inventory available, and it's at an appropriate amount for this time of year. It's difficult to predict exactly when we'll see changes, but customers may start to stock up as they anticipate a stronger spring and summer season. Currently, we are right on track, and inventory levels are neither low nor high, which is as it should be. Commodity prices are relatively stable, with some fluctuations in materials like steel and PVC. While we always aim to increase pricing, there are no significant swings or supplier shortages. Overall, business has returned to normal.

Glad to hear that. And then maybe just to zoom out to the 30,000 feet for a second. Obviously, competitive dynamics don't swing too much quarter-to-quarter. But certainly, we're getting a lot of questions on just are there any changes in the competitive landscape? I mean pricing would suggest there's nothing dramatic going on at the moment. But maybe just a quick comment on how you see the competitive landscape and what's going on and what might be changing a little bit incrementally here?

Nothing of significance. There's always minor players that try to enter noise level things, so somebody importing a product because of things. But literally, there's as much opportunity without me getting specific on things the U.S. government may do. Or he saw flashes this morning if Trump was elected, he would stop imports and all the different things. At the end of the day, it's the earlier questions of, there's the demand out there, almost nine months of contractor backlog. It's our self-help things of growing with the solar industry, growing with HDPE and so forth, that those are really the drivers of the business.

Yes. And Chris, just remember, I mean, I think we've talked about this many times. You still have to have agents, you have to have distribution, you have to have a brand that people know. I mean, so there are a lot of reasons why like we do well and that the competitive landscape is fairly stable year-over-year.

Makes sense. Well, thanks so much guys and congrats on a nice start to the year here.

Thank you.

Thank you, Chris.

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

Thank you. Let me take a moment to summarize my key three takeaways from today's discussion. First, Q1 was a solid start to the year with organic volumes up 13%. Second, the declaration of our first quarterly dividend is another recognition of our structural improvements in transformation over the past several years. Third, with a great team, product portfolio and strategy, supported by strong secular tailwinds, we believe the best is yet to come at Atkore. Before we conclude today's call, I would like to mention a planned rotation of key talent that demonstrates the Atkore business system at work. John Deitzer will be transitioning into the role of VP of Electrical Finance; and Matt Kline, who is currently our VP of Electrical Finance as well as the General Manager of our Fiberglass Conduit business unit will be moving into the Treasury and IR role. We wish them both continued success in their new positions. With that, thank you for your support and interest in our company. 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 disconnect.