Earnings Call Transcript - ATKR Q3 2025

Operator, Operator

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 Third Quarter Fiscal Year 2025 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, Matt Kline, Vice President of Treasury and Investor Relations. Thank you. You may begin.

Matthew D. Kline, Vice President, Treasury and Investor Relations

Thank you, and good morning, everyone. I'm joined today by Bill Waltz, President and CEO; John Deitzer, Chief Financial Officer; and John Pregenzer, Chief Operating Officer and President of Electrical. We will take questions at the conclusion of the call. 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 releases, 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 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.

William E. Waltz, President and CEO

Thanks, Matt, and good morning to everyone. Thank you for joining us today for our fiscal 2025 Third Quarter Earnings Call. Before I address our third quarter results, I want to discuss the announcement made earlier today. I've informed the board of my decision to retire from Atkore. After much reflection, I know that now is the time to start a new phase of my life with my family. I've had the privilege of spending 12 years with Atkore, including 7 as CEO as part of a 40-year career. I'm proud of all the accomplishments that the team has achieved. Although the work is never fully complete, it is time for the Board to engage their succession planning process. The Board supports me in this decision. I am focused on a seamless transition and plan to lead Atkore in my current role until a successor is appointed. Our strength as a company has always come from our strategy, process, and most importantly, our people, and that will not change. Our Atkore business system is about the team, and I have the utmost confidence in what our teams can achieve going forward. While we are making this announcement today, I am committed as ever to our strategy, our nearly 5,600 employees, and our shareholders until the next CEO is appointed. With that, I'll turn to our third quarter results, starting on Slide 3. We delivered strong performance in the quarter, achieving net sales, adjusted EBITDA, and adjusted EPS toward the top end of the ranges we presented in May. Our net sales of $735 million included 2% organic volume growth. Beyond our volume growth, results were supported by continued productivity gains, particularly in our S&I segment. Year-over-year declines in average selling prices were in line with our expectations, and we are pleased to see a second consecutive quarter of sequential pricing improvement in our steel conduit products. As we started our third quarter this past April, we were just beginning to operate in the new tariff environment. Over the last 90 days, the environment has continued to evolve with multiple modifications to initial tariffs and the introduction of new ones. Notably imported steel conduit and PVC conduit volumes have both declined year-over-year in the third quarter compared to the prior year. As we started the third quarter, the Dodge Momentum Index indicated a slowdown in planning activity across several nonresidential categories. Since then, construction sentiment has been mixed; we've observed pockets of strength in certain verticals, while other key sectors have been more subdued. Tariffs are influencing not just input costs but also market pricing dynamics and broader demand patterns. Taking all this into account, we are maintaining our full-year adjusted EBITDA midpoint of $400 million and are raising the midpoint of our adjusted EPS to $6.50, reflecting improved visibility and stronger earnings leverage. Looking ahead to FY '26, we continue to refine our estimates. We anticipate several headwinds, some of which have been previously communicated, such as the expected year-over-year impact from lower selling prices. Others, like the broader tariff effects, which have both direct and indirect elements have emerged more recently and introduced greater complexity. We expect these pressures to persist into next year, and we are actively evaluating various levers to help mitigate their impact. In closing, I want to thank our teams across the organization for their continued execution and discipline. Their dedication to the Atkore business system remains central to how we deliver value to our customers and shareholders. With that, I'll turn the call over to John Deitzer to talk through the results from the quarter and our full year outlook.

John M. Deitzer, Chief Financial Officer

Thank you, Bill, and good morning, everyone. Moving to our consolidated results on Slide 4. In the third quarter, we achieved net sales of $735 million and adjusted EBITDA of $100 million. Adjusted EPS was $1.63. Turning to Slide 5 and our consolidated bridges. Organic volumes increased 2% compared to the third quarter of fiscal 2024. Average selling prices declined 12% year-over-year driven primarily by our PVC conduit and steel conduit products. These year-over-year price declines for both product categories were expected. And as Bill mentioned, we are pleased to report the second consecutive quarter of sequential pricing improvement in our steel conduit products. We also saw sequential pricing improvement across the enterprise, including for electrical cable and flexible conduit, mechanical and metal framing products. However, pricing has not kept pace with raw material cost increases. This has been particularly true with respect to copper, which has seen cost volatility for most of the quarter. Moving to Slide 6. Year-to-date, our volume is now up slightly, having been flat for the first 6 months compared to the prior year. Our year-to-date volume reflects growth across 3 product areas. Our metal framing, cable management, and construction services has grown low single-digit year-to-date, driven by our ongoing focus on construction services as well as cable management. Year-to-date, our plastic-pipe, conduit, and fittings category is now flat year-over-year, having overcome a mid-single-digit decline in the first half of fiscal '25. Growth in the third quarter came from our PVC and fiberglass conduit products. Our metal electrical conduit and fittings product area has grown low single digits year-to-date, having overcome flat volume performance in the first half. We estimate that demand for domestically-made steel conduit has increased due to enacted tariffs on imported steel. Our electrical cable and flexible conduit category also continues to grow, up low single digits year-to-date, which we believe is in part due to the success of our differentiated products. Turning to Slide 7. Adjusted EBITDA margins compressed year-over-year in our Electrical segment primarily due to pricing declines related to our PVC and steel conduit products. Adjusted EBITDA margins improved in our S&I segment year-over-year, driven by volume growth and overall better productivity. The productivity gains were primarily due to better cost management in our North American operations. Turning to Slide 8. Year-to-date, our business has generated $192 million in cash flow from operations, and we've received $14 million in proceeds this year from the previously announced divestiture of the Northwest Polymers business and the sale of some excess equipment. We remain committed to executing a balanced capital deployment model with an emphasis on returning cash to shareholders. Our balance sheet is in a strong position with no maturity repayments required until 2028, and our recently refinanced asset-based lending agreement remains undrawn, contributing to a net leverage ratio of approximately 1x. Next, on Slide 9. We are maintaining the full-year outlook midpoint for adjusted EBITDA. However, with better line of sight to the fourth quarter, we've narrowed the range and expect full-year adjusted EBITDA between $390 million to $410 million. We are also pleased to be increasing the midpoint of our full-year outlook for adjusted EPS and now expect to achieve adjusted EPS within the range of $6.25 and $6.75. With this, we expect our fourth quarter adjusted EBITDA to be in the range of $75 million to $95 million. Our adjusted EPS is expected to be in the range of $1.05 and $1.35. We are also adjusting our outlook for our full-year tax rate. As a reminder, the impairment recorded in the second quarter will reduce our full-year tax rate, which we now expect to be in the range of 19% to 21%. This means we'd expect our tax rate in the fourth quarter to be within a range of 20% to 23%. As we mentioned earlier, the forward-looking sentiment on construction activity appears mixed depending on the end market. Through our first 9 months, we have grown just under 1%. For the full year, we would expect our volume to be flat to slightly positive. With that, I'll turn it over to John Pregenzer.

John W. Pregenzer, Chief Operating Officer and President of Electrical

Thank you, John. Moving to Slide 10. As Bill touched on in the beginning of the call, the topic of tariffs remains fluid with no definitive certainty on their duration or size. As we manage the business, we recognize that tariffs have both a direct and indirect impact on our company. A central theme supporting tariffs is an increase in onshoring of manufacturing across the U.S. There have been positive indicators that onshoring investment momentum is starting to pick up. However, these efforts take time with various factors impacting the rate of change. A potential direct benefit from tariffs for Atkore primarily centers on our ability to recapture lost market share from imports for certain product categories over time. This is especially true for our steel conduit products. We believe this will occur over time as market demand shifts back towards more domestically-sourced products. Since last quarter, the administration announced several changes to existing tariffs and new tariffs. The most relevant change for Atkore was the increase to the original steel and aluminum tariffs on Mexico and Canada from 25% to 50%. The recently announced 50% tariff on imported copper that became effective on August 1 is not expected to negatively impact Atkore due to our domestic supply partners. As we look beyond FY '25 to FY '26, we are estimating various factors that are likely to impact us. As we have previously communicated, due to the rate of change in our average selling prices for our PVC conduit products in FY '25, we expect to experience a year-over-year headwind into FY '26. We expect that unfavorable impact to occur throughout the duration of the year, starting with our exit rate in FY '25 but having a lesser impact as the year progresses. The recently expanded aluminum tariffs from 25% to 50% creates a new cost challenge for the market, which could also slow demand activity for our products. The combination of these factors suggest there are approximately $50 million of unmitigated headwinds in FY '26. Although we have not finalized our full-year guidance for FY '26, we are actively working to offset the effects of these anticipated headwinds. Now turning to Slide 11. As we've often said, the electrical industry is a great place to be. Our strategy addresses items that we are focused on today while also looking toward the future. We remain committed to maintaining a strong balance sheet and financial profile that enables us to return capital to shareholders while also pursuing strategic actions that enhance our portfolio of domestically-manufactured electrical products. Our teams continue to drive operational excellence through the Atkore business system, our disciplined data-driven approach to managing growth, productivity, and customer value. Despite near-term challenges, our positioning in key electrical end markets gives us confidence in our ability to grow volume over the mid- to long term. Today and in the future, Atkore is providing comprehensive solutions to deploy, isolate, and protect critical electrical infrastructure over the long term, while on a mission to be the customer's first choice by providing unmatched quality, delivery, and value to help our customers achieve their goals. With that, we sincerely thank you for joining our call and for your interest in our company. Now we'll turn it to the operator to open the line for questions.

Operator, Operator

Your first question today comes from the line of Andy Kaplowitz from Citi.

Unidentified Analyst, Analyst

This is Piyush on behalf of Andy. Congrats on the retirement announcement. Well deserved.

William E. Waltz, President and CEO

Well, thank you, Piyush, and I look forward to still talking with you for a while here, but enjoy.

Unidentified Analyst, Analyst

Absolutely. So I just wanted to touch on volume growth. It seems that forecasting volumes has been a little bit challenging, and I understand it's been a dynamic macro environment. But based on your conversations with your customers and the mega projects and the mega trends that you have talked about, do you have enough visibility on demand trends to provide some insights on your volume expectations for '26?

William E. Waltz, President and CEO

John, let me share my thoughts on this. The end markets, particularly data centers, are experiencing significant growth, which is promising for us. However, there's a distinction between fiscal Q2 and Q3 regarding the global mega projects we undertake with specific customers, as the timing for these jobs has been slower compared to last year. Still, after conversations with prominent data center companies, we remain optimistic about future prospects. The solar sector reflects a similar sentiment, and our customers are expressing confidence in their outlook as well. Aside from the residential market, we anticipate reasonable growth in the coming months. As for next year's estimates, we are not providing specific numbers at this time, but we expect to see positive growth moving forward.

John M. Deitzer, Chief Financial Officer

I completely agree with Bill. We've experienced some fluctuations in our international business due to the completion of some major projects and the start of new ones as we look ahead. Overall, we feel positive about this. In the North American business, performance has met our expectations, although there have been some inconsistencies in timing over the months. Looking forward, a low single-digit growth environment seems quite plausible.

Unidentified Analyst, Analyst

Got it. Helpful. And just like touching on your water end market, I think you have talked about increasing focus on water, but it seems that the water end markets are a bit mixed here. Maybe expand on the demand trends that you are seeing across the end market, and is water still a vertical where you're planning on investing?

William E. Waltz, President and CEO

Yes. Well, I'd say at this stage, the majority, there's always a couple of things to finish, but the investments were in May. Now it's just growing with end customers. And that seems to be going on pace. Again, as we called out in previous quarters, we, whatever word you want to use, may have fired too strong a word, but specific customers that were resellers were retail-oriented and plumbing and things like that tied to residential is down. But where we're focused, the municipal is picking up or filling that void year-over-year. And I think it should be a reasonable market for us going forward.

Unidentified Analyst, Analyst

Got you. Helpful. One last one on HDPE. I think last quarter, you mentioned potential for increased competition from satellites. How has that dynamic evolved so far? And how is the current inventory in the channel? And if you have started to see these companies making their way into the projects?

William E. Waltz, President and CEO

Yes. So I'll start but anybody jump in here. Again, I should probably turn it over to our COO that's closer to these things. So to the last quarter, I don't think with the One Big Beautiful Bill and everything else that is still the option to use satellites, somebody can give me more details on the specific parts of what laws, but the states are required to do the most effective thing out there. So that hasn't changed one way or the other. I'm not aware, but maybe it's my knowledge of specific jobs we won with the BEAD Act. But I do think you can triangulate this with, again, other people in the industry that overall fiber is starting to go up because of the data center growth and things like that. So long-winded answer, Piyush, that nothing's really changed from our last quarter guidance other than we are starting to see the business volumes pick up as we go forward, again, another should be a good thing over the longer term.

Operator, Operator

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

Deane Michael Dray, Analyst

Bill, I'll also add my congrats on the announcement. I know you're still in the seat, but I appreciate everything you've done here and congrats.

William E. Waltz, President and CEO

Deane, thank you. And yes, I'm still in the seat and nothing changes. But yes, working with you, obviously, through Atkore and previous careers, it's been a great relationship.

Deane Michael Dray, Analyst

Absolutely. Can you provide more details on the impact of the tariffs, specifically regarding the imports of steel conduit from Mexico? How has that changed since the tariffs were implemented? Has it halted the flow of Mexican steel conduit? Additionally, can you address the situation with PVC imports from Latin America? Has that also come to a stop, or can you provide some insights on that?

William E. Waltz, President and CEO

Certainly. I'll address both questions. Overall, for the fiscal year through October, we've seen performance that is mostly flat, with increases up to 2%. However, in the last fiscal quarter, both metrics experienced a significant drop, likely exceeding 20% and possibly approaching 30%. It's important to note that while tariffs seem to be having an effect, there's also the possibility that pre-buying occurred after President Trump’s election, which could have influenced inventory levels. Specifically, tariffs appear to have impacted steel conduit, which has seen an increase of 50%, while PVC has risen by 10% for most countries. It's worth considering that reported import values can be subjective, and this may contribute to an estimated overall impact of about 5% from tariffs. In conclusion, both categories are experiencing declines, particularly in areas affected by tariffs, especially steel.

Deane Michael Dray, Analyst

Got it. And then second question, can you take us through and update us on your demand visibility as it stands today, at one time, there was a meaningful backlog that has all been burned off. I would presume. So are you down to like a 2-week visibility? Just kind of give us a sense there because I know that shortened time frame as more volatility, and you have to gauge what's going on in the construction markets, but just frame for us the earnings visibility and any dimension that you could.

William E. Waltz, President and CEO

Yes, I will do my best, and the team can jump in if necessary. Our current backlog is about two weeks, give or take, as we aim to ship in four days. There are some make-to-order products, but that aspect hasn’t changed significantly. Conversations with our customer base reveal that distributor inventories are average to slightly lower, and there are various reasons for this. One reason is that, as mentioned in our prepared remarks, PVC pricing has fallen. Distributors operating on thinner margins are reluctant to buy products at high prices with lower margins to pass them on, which makes sense. Recently, the copper market has been quite volatile, especially after President Trump announced proposed tariffs around July 7 or 8. Copper prices spiked from the mid-$4 range to nearly $6 per pound. As a result, prudent contractors and distributors likely decided to hold off on purchasing, especially with the announcement of copper tariffs on August 1. This could explain why they are maintaining lighter inventories. According to some customers, the demand in the utility market appears to be solid, with contractors actively installing; however, some distributors are still working through their existing inventory. Overall, there is a bit more optimism for us in the utility market moving forward, although the situation at the manufacturer or distributor level might be somewhat less favorable.

Deane Michael Dray, Analyst

Okay. That's helpful. And just last one. A lot of good detail as always on pricing. And could you just step back and give us a perspective of any surprises in the quarter on how pricing played out? It was actually both for PVC and steel, a little bit better than what we had been estimating, and now you got 2 quarters of better steel pricing. But just from your perspective, what has surprised you, if anything, about how pricing is playing out from here?

William E. Waltz, President and CEO

Yes, I'll begin with Deane and expand on your comments. Since our January earnings call, the price guide versus cost has matched our estimates, resulting in no surprises. It aligns with our numbers, and we are reaffirming our guidance while also raising EPS. Metal conduit has performed slightly better than expected, and PVC has also shown some improvement. However, as John Pregenzer mentioned earlier, the 50% tariff on aluminum imports from Canada has impacted us. Due to this tariff, we have not been able to recover the aluminum costs so far. There has been considerable volatility in both copper and aluminum, but we are unable to measure any significant deviation from market trends at this point.

Operator, Operator

Your next question comes from the line of David Tarantino from KeyBanc Capital Markets.

David Edmund Tarantino, Analyst

Bill, congrats on the upcoming retirement. Maybe to put a finer point on the fiscal 2026 comments. Could you walk us through generally how you're thinking about the underlying assumptions within the $50 million headwind? Maybe walk through PVC, steel, and what looks to be bubbling up aluminum headwinds and what do you think the mitigating actions would look like? I think you mentioned that this was unmitigated?

William E. Waltz, President and CEO

Yes, great question, David. I'll begin, and John Deitzer can add if needed. We wanted to provide some insight for next year now instead of waiting until November as we engage with different shareholders. However, we are not giving specific guidance at this moment. As we mentioned in last year’s November guide and our January updates, we expect year-over-year challenges related to items like PVC due to pricing declines this year, which has resulted in a lower starting point. Even if PVC prices remain steady throughout next year, we anticipate around $70 million in year-over-year changes based on the current pricing scenario. While I won't detail each commodity, it's noteworthy that PVC has dropped and steel conduit prices are also down currently. We're projecting sequential improvements in the upcoming quarters, which may lead to some positive shifts as we head into next year. Regarding future estimates, John Pregenzer mentioned about $50 million, presuming standard productivity levels and an expected 2% to 3% volume growth for next year. We're diligently working on enhancing productivity, increasing volume, and identifying cost control measures. We have recently sold off one or two smaller businesses and are considering additional actions to enhance shareholder value. At this point, David, that’s as much detail as we can provide. It’s a challenging environment with fluctuating tariffs, making it tough to be more precise.

John M. Deitzer, Chief Financial Officer

Yes, I'm totally aligned here with Bill, David. There's a lot of volatility on certain items whether we've seen that even just play out here in the month recently with copper where it spiked close to $6 a pound and dropped pretty significantly. So the net headwinds we're expecting are right around $50 million, but that includes some level of our normal productivity improvement and volume expectation to get us back to that net $50 million. We probably, to Bill's point, have a variety of headwinds in excess of that. And so there are normal measures here to kind of get us back to the net $50 million is the expectation into next year. So we wanted to try to get ahead of that communication, if we could.

David Edmund Tarantino, Analyst

Okay. Great. That's helpful. And then maybe just to dig in this field just a little bit more. It sounds like the import pressures are beginning to relax and pricing is improving sequentially. So what gives you the confidence that pricing trends are bottoming out and heading to a more sustainable improvement?

William E. Waltz, President and CEO

You're right about steel conduit, David. As I noted in response to Deane's question, PVC imports seem to be decreasing, but it's difficult to pinpoint the exact factors behind this trend. However, given domestic competition, PVC pricing is projected to decline further at least until the end of this year and likely into next year as well. We aren’t at that level yet, so I wanted to clarify. Regarding our products, while steel prices aren't rapidly increasing, we did see two consecutive quarters of margin growth with steel conduit, and we anticipate margins will improve again based on what we've observed in July. I hope this answers your question, David.

David Edmund Tarantino, Analyst

Yes. Yes, that's helpful. And then maybe if I could sneak one more in. Could you just refresh us on how should we be thinking about capital allocation, just particularly around the share buyback pause this quarter, both near and long term?

William E. Waltz, President and CEO

Yes, regarding our guidance of $150 million, nothing has really changed. We have spent $100 million. There could be a debate on whether we should have allocated $25 million last quarter, $25 million next quarter, or spent it all to reach the $150 million, or even more. However, there is no commitment to anything specific, but our guidance remains that we will spend $150 million this year. Additionally, we have not yet met with the Board regarding future plans. I believe stock buybacks will always be an important aspect for us, but we have not finalized our capital allocation for next year to provide any range at this time.

John M. Deitzer, Chief Financial Officer

Yes, in alignment with that, I believe we've discussed this for some time. Capital expenditures play a crucial role in our capital allocation strategy, which includes dividends, share repurchases, and mergers and acquisitions. These have consistently been the four foundational elements of our capital allocation model. As we approach November and beyond, we will provide an update on our expectations for 2026, but these have been the primary components of our capital allocation framework.

Operator, Operator

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

Christopher M. Dankert, Analyst

I just echo the congratulations again here, Bill. I guess the first question here, as far as the impact of the lost IRA tax credit on kind of next 12-month earnings, I know it's fairly small, but is that included in the $50 million headwind?

John M. Deitzer, Chief Financial Officer

You were breaking up there for a second. Chris, can you mention that again?

Christopher M. Dankert, Analyst

Yes. Apologies. Just on the IRA tax credit, that's going away, I believe, here. Is that headwind included in that $50 million you called out as headwinds for '26?

John M. Deitzer, Chief Financial Officer

Yes, I'll take a step back. I think we addressed this on one of the slides. From our perspective regarding the relevant parts of the Inflation Reduction Act, we anticipate that the situation will remain stable at least in the near to midterm. There may be some long-term changes projected towards the late 2020s or 2030s. However, in the near to midterm, our current assumption is that the tax credits for solar torque tubes will mostly remain intact. We have experienced some modest headwinds this year, and the dynamics of our volume in that market have been slightly affected by solar credits, which we highlighted in one of the volume overviews this year. Overall, our operating plan remains largely unchanged.

William E. Waltz, President and CEO

Yes, I understand your question was focused on the torque tube tax credit. However, as I mentioned in previous responses, the market tends to fluctuate from job to job. While I cannot speak on behalf of our customers, I can say that feedback from them regarding solar remains positive, even in the absence of tax credits. They are currently experiencing strong backlogs and have data indicating they can launch new energy sources faster than any other energy form. It's clear that the demand for energy, particularly for data centers and similar needs, is increasing significantly in the U.S. From my discussions with customers, I believe solar, like nearly all energy sources, will experience growth well above GDP in the future.

Operator, Operator

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

William E. Waltz, President and CEO

Thank you. Let me take a moment to summarize my 3 key takeaways from today's discussion. First, Atkore had a solid third quarter of financial performance. Second, we are maintaining our full year 2025 outlook midpoint for adjusted EBITDA and raising our outlook for adjusted EPS. Finally, it has been and continues to be my honor to serve in this role, and I look forward to supporting Atkore during this time of transition over the upcoming months. With that, thank you for your support and interest in our company. This concludes the call for today.

Operator, Operator

This concludes today's conference call. Thank you for joining. You may now disconnect.