Earnings Call: Q3 2021

Aug 3, 2021

Greetings, and welcome to the Atkore Third Quarter Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Deitzer, Vice President of Treasury and Investor Relations. 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. In the Q3, Atkore again delivered outstanding performance across are businesses in what shaped up to be another record quarter. Revenue was $854,000,000 and adjusted EBITDA was $274,000,000 This significant increase in earnings is are driven primarily by the exceptional performance in our PVC and metal conduit businesses. In the 3rd quarter, We had very strong results across multiple product categories, and our volumes were up 24% versus prior year. We generated strong cash flow and we continued our balanced approach to capital deployment by repurchasing $75,000,000 of stock. We are also pleased that we completed our debt refinancing process and extended our asset based loan credit facility. Looking forward, we are increasing our FY 'twenty one outlook and now expect to achieve have adjusted EBITDA in the range of $855,000,000 to $875,000,000 and we raised our perspective on FY 'twenty two are up to a range of $500,000,000 to $550,000,000 I'll provide more detail on the outlook After David walks us through this quarter's financials, but before I pass it off, I want to congratulate and recognize all of our employees for their tremendous are in support of our customers. With that, I'll turn the call over to David to discuss the quarter. Thank you, Bill, and good morning, everyone. Are participating. Moving to our consolidated results on Slide 4. Net sales increased 122% year over year, primarily due to are at higher average selling prices across many parts of our business. Adjusted EBITDA increased to $274,000,000 which drove our adjusted EBITDA margin to 32% in the quarter, both up significantly versus the prior year. Our adjusted EPS increased to $3.96 As you look at our year over year comparisons, Please recall that we had negative impacts from temporary shutdowns related to the pandemic in Q3 last year. Turning to Slide 5 and our consolidated bridges. Net sales increased by $469,000,000 due to higher selling prices are from higher input cost inflation and we grew adjusted EBITDA by $211,000,000 This profit growth was driven by our ability to service our customers despite the challenges associated with raw material supply as well as a very tight labor market. Shifting to our segment results on Slide 6. The Electrical segment led our profit and margin improvement year over year with adjusted EBITDA up $212,000,000 and adjusted EBITDA margins above 40% due to the strong performance we had across the segment. We experienced strong volume growth in both North America and International, which increased our sales by $64,000,000 in the quarter. In our Safety and Infrastructure segment, net sales increased by 71% from the prior year as the business was able to fully pass through higher input of our costs associated with raw materials, freight, labor and other items. Volume growth of 24% or 27,000,000 participants also drove part of the top line growth as we saw solid demand across multiple end markets. Adjusted EBITDA increased 58% to $22,000,000 and on a constant input cost basis, margins would have been up over 200 basis points versus the prior year. And now moving to our consolidated cash will review on Slide 7. We ended the 3rd quarter with $397,000,000 in cash and we generated $284,000,000 in free cash flow this year. Our priorities are organic investments in our business, strategic M and A and return capital to shareholders primarily through share repurchases, while also maintaining a strong balance sheet. During the Q3, we invested approximately $14,000,000 in organic investments, bringing our year to date total for CapEx to $34,000,000 In addition, as Bill mentioned, we repurchased $75,000,000 of stock in the quarter, bringing our total repurchases this year are subject to $110,000,000 Our healthy cash flow, strong balance sheet and overall financial strength provide us with the flexibility to execute on multiple fronts and driving value creation for our shareholders. Turning to Slide 8, I'd like to discuss the details of our recent debt refinancing. In late May, we completed the refinancing of our senior secured term loan expiring in are in the range of 2023 with 2 new instruments. As a result of this transaction, we lowered our overall effective interest expense, we separated and increased our maturity profile and we moved to a fifty-fifty split between fixed versus variable interest rate exposure. In conjunction with these two transactions, we received favorable updates from several of the rating agencies and we were able to extend our asset based loan facility into are in the range of 2026. With that, I'd like to turn it over to Bill to discuss our update outlook. Thanks, David. Are joining us. Turning to our outlook on Slide 9. We are raising our outlook for net sales, adjusted EBITDA and adjusted EPS for the fiscal year 2021. The guidance reflects a number of factors, our stronger than expected results year to date, participants are in our other businesses such as metal conduit. Our Q4 2021 outlook contemplates net sales are up approximately 70% and adjusted EBITDA to be in the range of $250,000,000 to $270,000,000 For fiscal 2021, we now expect our net sales to be up approximately 60% and adjusted EBITDA like to be in the range of $855,000,000 to $875,000,000 Just as we did in the first half of the year, Our entire team continue to effectively navigate what remains a very dynamic operating landscape through the Q3. We expect a combination of these dynamics and the macro trends to sustain the pricing tailwinds are in line with our increased fiscal 2021 guidance and our are clear understanding of the near term market, we are raising our perspective for fiscal 2022. We now expect adjusted EBITDA to be in the range between $500,000,000 $550,000,000 This considers the continued PVC conduit demands and our ability to meet them, while also factoring in macro grow uncertainty such as labor, supply constraints, pricing and customer behavior, particularly in the back half of fiscal 'twenty two. Before we turn to Q and A, I just wanted to reinforce how pleased we are with the team's execution and how excited we are for what the future holds for this a tremendous company. With that, we'll turn it over to the operator to open up the line for questions. Thank you. Your first question comes from Deane Grey from RBC Capital Markets. Your line is open. Thank you. Good morning, everyone. Hey, good morning, Deane. Good morning, Deane. Hey, just another outsized operating beat here and really do appreciate that you're giving some framework for fiscal 2022, some normalization, but still at very, very healthy levels. So would Like the first question, and Bill, you touched on this, talking about the sustainability of this are in the same position. The supply and demand dynamic on both sides of the equation, outsized demand and Supply constraints in the industry. So just can you expand more on your thoughts on the sustainability of both On the supply side, I know it's hard to get competition to it takes time to build new plants and so forth. So just your updated thoughts on the supply side. And then on demand, really interesting that you're seeing more on metal are in the range of $1,000,000,000 of non resi. But I know there's a number of embedded questions here, but if we could start there, please. Participants Yes. Great question, Dean. A lot to unpack. So I'll start with demand. We see demand low single digits going forward. So it's not that robust, but I think I can I'm are in the queue. But I think I can I'm generalizing, but I think I can speak for almost any product line, any competitor. The The challenge right now is not whether it's low single digit, high single digit or quite frankly flat almost. It's a question of Can you supply it? So that's what's causing more of the constraint, you're going to market up a couple of single digits. If we had more product, I think we of our participants are actually number 1 constraint. Last quarter, I think I would we would have said material. The participants are still a constraint, whether that steel that lead times used to be 3 weeks or now 12 weeks. The participants are in the supply and the material and so forth, which make forecasting more difficult and switching over more difficult. Of our customers have just come off force majeure, where 3 of the 4 were on force majeure for what seems like most of the fiscal year. But still, it's your hand to mouth getting additives and stuff like that. So it's a challenge with all those things. I think as time goes the participants are asking for you and the rest of the sell side and buy side. We want to be transparent and therefore, hey, do not expect, Let's just say $850,000,000 $875,000,000 wherever we end up this year, do not linearly expect that to reoccur next year just like lumber prices went up from $600 to $1800 and dropped back to $600, There will be some normalization. On the same thing, I think that Atkore's value prop will continue to hold forward into fiscal 2022 And also the supply demand dynamics you just asked about will carry forward with some variability and are challenged to predict, like anything in the world. And Dean, I'll just add. The demand in the market too, it's very hard to participants are in the same store. And The pandemic and obviously right now it's even more of a constraint. So I think the business is out there, things are being are designed and what have you, if you look at any of the future indicators. So I think that's a good indication for the future, but it is hard to really determine with This labor shortage exactly what volumes could be. Got it. And then just two follow ups here. Can you comment on the mix With PVC and metal conduit and you called out some increased demand on the metal side. Is that Typically, the non res doing better. And then is there is Any price elasticity, I know we've talked about this before, but it really just seems the market will take as much as you can deliver right now and is that still an end price is not a barrier. Just wanted to hear your thoughts there too. Yes. Go do it. Again, great set of questions, Dean. So We both residential is going strong and non residential. As we've always explained, since we sell to electrical distributors and then they sell to contractors, there's a little bit of difficulty in being overly precise. Quite frankly, even electrical distributor at times can be, hey, a contractor walked up to will call, picked up product. I didn't ask him where it was going. So, both seem to be moving along well. And also and again, I'm sure somebody will follow-up and going, hey, data centers are really strong. So there's a lot of great vertical markets in the non res and commercial construction realm that are carrying forward. We called out metal conduit and I I think if we didn't say in the prepared remarks and other products, just to make sure you and other investors, PVC is going really well, But it's not a one trick pony. So we kind of lay down and go, okay, what's the next product on next well? But our metal conduit business and of our businesses right now are doing well because as I mentioned at the very beginning, If you have the material, you have a good say do ratio, you're honest with your customers, they are, to your last part of the will need to pay more. Now Dean, there's always some price elasticity on how much But as you've seen in the results, we I think we're paying more. Some of it depend on the competitor, The market, the weak, it's kind of an average thing for this competitor feels like, say, whatever Atkore is charging, we'll charge 3% or 4% less. Of our participants are willing to pay that slight premium. And we are in many cases, I think, pulling the industry forward with price increases. And Deane, in that 24% volume increased year over year, broadly speaking, was across all the product lines. So I think we did see strength across the entire portfolio. That's really helpful. Thanks for all the color and congrats. Thanks, Dean. Your next question comes from John Walsh from Credit Suisse. Your line is open. Hi, this is Jing Zhang on for John. Good morning. Good morning. Hi. So it looks like you added automation when you reopened your Pendleton facility. So how much longer do you think you can continue to get productivity in the $10,000,000 to $15,000,000 range. Yes, I would think that would go on. I want to say forever, but there's no shortage of opportunities. I know a lot of astute investors will ask about the ability to the participants continue to drive productivity. I'm really proud of our Atkore business system and what it does and the fundamentals that we drive with it. But there is not a shortage of productivity opportunities across safety, quality, delivery and productivity. So You could probably model that type of number out for the next several years at least. Got you. That's helpful. Participants. And if I could follow-up, any color around your M and A funnel? And if you can please help us understand your Yes. So again, great questions here. The funnel remains robust. We are actively working it, again with this great financial year, and I'm sure questions to come at some point during the day with investors on our capital deployment and buying back stock is we're generating a lot of cash. So we're doubling down on even our resources to make sure we're connected to all deals and without having deal fever, I mean Atkore's pride itself on is it strategic, is it synergistic, Is it Deb responsible and do we have the management bandwidth and that's kind of in the four rules since Atkore was formed and we continue to drive those the participants are still in the same store. But there are enough deals out there to keep moving forward with and yes, we are expanding into safety and infrastructure very much like the of our four rules, we have to make sure if it's our strategy, I do think in the safety and infrastructure, There are some vertical markets that are going to grow much faster than GDP. And I also think that there participants can be good synergies. So now it's just what is the appropriate deal for us with management bandwidth, right vertical channels and so are actively working deals in both segments. That's helpful. Appreciate the questions. Thank queue. Great. Thank you. Your next question comes from Chris Moore from CJS Securities. Your line is open. Hey, good morning guys. Hi Chris. Good morning Chris. Good morning. Obviously, Pricing has been the biggest driver of 'twenty one results at this point. Recognizing that your fiscal 'twenty two estimated EBITDA range lacks at this point lacks the clarity and detail of your 2021 guide. Can you maybe just talk a little bit more about what's in there? For example, How do you look at volume growth in fiscal 2022 versus 2021 or 2020? Yes. We haven't given a lot of details, which we will obviously, Chris, in one quarter's time when we give our official guidance for next year. But broadly speaking, I would say that kind of are in the mid single digit volume number and then normalization of pricing and then some continuation of the participants are in the same store. M and A from the deals that we already have in this year that we've already announced that will lap a little bit into next year and then our typical productivity improvements. So I would say that in general, those would be the buckets that would be built into that outlook. Got it. Obviously, much of the focus is on the areas where you're generating the exceptional results, PVC, on the metal side and trying to predict when some of that will normalize. What about the flip side? End markets that have been soft throughout COVID, some of the non res like office and retail hotels, Do you see those as being potential tailwinds in 2022? Yes. I think so, Chris. But there are tailwinds to go if you look at some of these segments, there's 3% of our sales, 6%. I'm not being prescriptive to say which one's which that there's enough other things the participants that are going well. Obviously, data centers, I think I just mentioned a couple of minutes ago when I was addressing Dean's question, warehousing continues to be strong, and I'm saying strong with some of these things. Dodge is looking at double digits. And then also as we get into this latter half of twenty twenty two and into 2023, Dodge even predicts things like hotels and stores and restaurants have bounced back. Now it's off of this year's low, but That's the reason relative to how we're performing this year is that I think David answered it well and I did when we said the participants are seeing low to mid single digit growth for next year. So, if anyone travels, travel, so you will realize that airports are totally back participants and other things, we're pretty optimistic for the future here with growth. Got it. I'll jump back in line. I appreciate it, guys. Thank you, Chris. Your next question comes from Andy Kaplowitz from Citigroup. Your line is open. Hey, good morning, guys. Participants are ready. Good morning, Andy. Hope everyone is well. You're predicting a slightly down Q4 versus Q3 in terms of EBITDA. There doesn't appear to be that much historical seasonality between the 2 quarters. So could you give us more color on what in your businesses is sequentially declining? You've talked about PVC a lot. Has that tailwind peaked at this point? Or are you predicting a decline in commodity prices? Or is volume expected to be slightly off? Any color would be helpful. Yes. So we're arguing, Andy, because both of us want to answer here. But Yes. So how I think about it, to your point, we last quarter, what the quarter we just delivered was $274,000,000 And we're predicting $250,000,000 to $270,000,000 So the top end of the range at $270,000,000 is almost the same as the $274,000,000 And if we strive and we hit everything, I think we could get there. But so there's nothing dramatic. I think pricing probably spreads, profit margins have probably peaked across different things. And the only thing I would put in perspective is with this 2.74, I make the analogy that literally you drove through a major city and you got every green light. Literally, as Dave and I, we called out metal condo, we called out PBC. I, in these unprepared remarks, mentioned cable, metal framing, every product line contributed very well And that even in the best of times just doesn't occur. So I don't think there's anything systemic as much as just participants are being prudent on the range versus we're going to hit it out of the park exactly like we did in Q3 of this year. Participants But by the way, as David will remind our teams and I would like to remind investors, in the best of years, Atkore would have $100,000,000 in a quarter. Participants here, it's a really great question to go, hey, why are you only predicting $250,000,000 to $270,000,000 These are pretty impressive numbers here. You've definitely come pretty far. So Bill, maybe I could follow-up. Could you update us in terms of where you think PVC inventories are? How the participants. Yes, I think it's great questions that I will give you estimates on, but that's why the variance and even the words we used on the participants for next year, anybody's forecast, and most companies can predict 2 weeks, let alone a year out. Right now, Andy, I would say that Lead times within PVC conduit, which is what we sell most of is probably 4 to 8 weeks out, where it's typically, let's say, 2 to 3 weeks, there's a little bit of offset with that where distributors understanding that are now placing orders for 8 weeks are out just because they need to get their product on time. I think some of the other markets, while we don't serve them and their competitors don't come in to serve us like municipal and plumbing are even out further. I read a report from an industry person on Friday that was quite frankly predicting some of the plumbing and municipal stuff would not get delivered until January if you placed an order now. So even much longer lead times in some product lines. I think over time getting into the winter months, it does normalize because there is seasonality in the business. The participants are in the same store. And therefore, some of the reason why I think we have the appropriate numbers, the $500,000,000 to $550,000,000 In other words, we will continue to do much participants Yes, that's a massive step up. On the same hand, as inventories come back and things normalize, to earlier questions, we won't be able quite the price premium. So as much as we can look into our crystal ball, balance all those type of things, we thought the very appropriate and raised by $100,000,000 forecast for next year of $500,000,000 to $550,000,000 seem to hit all those factors. Very helpful. And then maybe I just want to understand what you're saying about volume, Bill, in the sense that it was up 24%, obviously, easy comps. You're talking about labor shortages and low single digit volume, I guess, and non res expected over time. But If you look at underlying volume growth, you've talked in the past about having good probability of pacing above that. The participants, given your own new product cycle, there's obviously the specter of increased electrification out there. We kind of alluded to it a little bit in participants are in the same position. But then also, the infrastructure bill is out there now. I'm sure you've seen some of the details. So like when you put that all together, what's probability that Adcor's rate growth rate is decently higher than that low single digit level. I would aspire and hope, Andy, I just think like the infrastructure bill to say yes, it's out there in draft form, what end up coming around, what turns out to be shovel ready. So there's nothing there's no uptick that we've put into the numbers. But I think David also appropriately framed just the number to go to an earlier question, Hey, what's the size? We have general guides, but could this number be $50,000,000 more or less than the numbers we have? There's still a lot of variance out there. So and then specifically to the growth, the 24 While Amazing realizes a comparison to last year when some of the things were shut down. So as we go are looking forward off of a reasonably good year this year. It could be mid single digits because Andy, to all your points, we don't have new M and A in there. We don't of our cold pricing in markets and then try to grow 100 basis points above. We will talk a lot over the coming quarters on investments and new products and things we're just not ready to publicly announce on products and patents and so forth there. But we are driving that can add 100 basis points to 200 basis points and if everything clicks, could you walk into mid single digits? Yes, there's a path to get there. At this stage, quite frankly, talking over a year out, I would still say the low to mid single digits, but your logic has merit. Appreciate it, Bill. Thank you, Andy. Thank you, Andy. There is no further question at this time. I would now like to turn the call over back to Bill. Before we conclude, let me summarize my 3 key takeaways from today's discussion. First, The outstanding results we delivered in the Q3 are a credit to the great efforts by everyone in our organization. 2nd, We believe in the long term strength of our company, and we will continue to deploy capital effectively to drive value for our stockholders As evidenced by the $75,000,000 in stock we repurchased during the quarter. 3rd and in closing, We are very excited about the opportunities ahead of us for our business. 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.