Atkore Inc. (NYSE:ATKR) Q1 2023 Results Conference Call February 1, 2023 8:00 AM ET

Company Participants

John Deitzer - VP, IR
Bill Waltz - President, CEO
David Johnson - CFO

Conference Call Participants

Andy Kaplowitz - Citi
Deane Dray - RBC
Alex Rygiel - B. Riley
Chris Dankert - Loop Capital
Chris Moore - CJS Securities

John Deitzer

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 in 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.

Adjusted EBITDA is a non-GAAP measure. 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.

Bill Waltz

Thanks, John, and good morning, everyone. Starting on Slide 3, Atkore is off to a solid start for 2023. Volumes for the quarter were up over 5%, and adjusted EPS increased 1% year-over-year in the quarter. We continue to execute our playbook for capital deployment and strategic growth. As previously discussed, we expanded our HDPE product operating with the acquisition of Elite Polymer Solutions in November. HDPE represents a significant growth opportunity for us, and I'm pleased with the progress and integration so far.

During the first quarter, we repurchase $150 million of shares, and in the second quarter, we've already repurchased over $100 million. Collectively, this brings our year-to-date total for repurchases above $250 million. With our solid start to the year, we are increasing our full year outlook for adjusted EBITDA and adjusted EPS. It is my pleasure to also announce the release of our 2022 sustainability report, which was published this morning and posted on the ES&G section of our website.

This report covers a broad range of topics, and I believe it demonstrates and articulates why Atkore is a great place to work and truly a special company. I would like to thank all of our employees for everything they do to support our customers and all of our stakeholders, is because of their tireless efforts that Atkore is able to achieve the results and successes that we have.

With that, I'll turn the call to David to talk through the results from the quarter and our outlook for the full year.

David Johnson

Thank you, Bill, and good morning, everyone. Moving to our consolidated results on Slide 4. In the first quarter, net sales were $834 million and adjusted EBITDA was $264 million. As we have mentioned several times, we expect our business to normalize in 2023 as compared to the past several years with our performance. That being said, we're nonetheless pleased with our margin performance in the quarter with adjusted EBITDA margins of 32%.

This was down year-over-year, but still a very strong and healthy level. Even with the decline in net sales and the adjusted EBITDA, we are pleased to see that our adjusted EPS increased in the quarter up to $4.61.

Turning to Slide 5 in our consolidated bridges. Volumes were up over 5% in the quarter, and our recent acquisitions contributed an additional 7% of growth. These gains were offset by the decline in our average selling prices. Our average selling prices have declined as we continue to see normalization of pricing and a continued downward trend for several of our key input costs.

During the quarter, we saw very strong pockets of performance related to data centers and several large chip fabrication projects globally. In addition, we are very pleased with the execution and integration performance from our recent acquisitions.

Moving to Slide 6. Those segments had positive volume growth. Margins compressed in our electrical segment with the previously mentioned normalization of pricing, however, we saw very strong margin growth on the S&I side. Our S&I business had 22% growth in the adjusted EBITDA.

Turning to our outlook for fiscal year 2023 on Page 7. We continue to expect volumes to be up mid-single digits for FY ‘23. We expect net sales to be down approximately 5% to 10% in 2023. As prices normalize and we see declines in several of our key input cost categories. However, with the strong performance in the quarter and the resiliency of our Atkore business system model, we are increasing our outlook for adjusted EBITDA and adjusted EPS.

For FY ‘23, we expect adjusted EBITDA of $1 billion at the midpoint with a range of plus or minus $50 million. This is an increase of $100 million versus our prior outlook. In addition, we are increasing our expectations for adjusted EPS up to a range of $15.85 to $17.75. As we mentioned last quarter, this outlook does not include any expected benefits from the tax credits associated with the Inflation Reduction Act, as we expect majority of these credits will flow through to our customers. With the strength of our cash flow and our commitment to returning cash to stockholders, we are also increasing our expectations for share repurchases in the fiscal year.

With that, I'll turn it back to Bill.

Bill Waltz

Thanks, David. We are very pleased with what we've accomplished in this quarter and our outlook for this fiscal year, but we're even more excited about all the opportunities ahead.

Moving to Slide 8, as we've said before, we believe that sustainability is central to the strength, safety, and longevity of Atkore. This morning, we released our third sustainability report and seeing all the great work that our team has accomplished truly inspires me. This report details our initiatives involving our products, customers, and employees, and I would encourage everyone to read it.

Inside the report and highlighted here is the progress we've made against our four external sustainability targets. As you may recall, we introduced these four targets last year and set very smart goals that we believe will help guide and focus our efforts to enable sustainable value creation. We are making good strides for our targets for each of these goals, and we are confident in our ability to meet or even potentially exceed some of these items by 2025.

Turning to Slide 9. We sincerely appreciate the external recognition that we've recently received from several leading independent organizations. We believe these acknowledgements demonstrate that we have a company culture and employees who are able to truly make Atkore a great place to work and a compelling investment opportunity. I'm confident in the team, strategy and processes we've put in place to continue Atkore strong trajectory, and I firmly believe that best is yet to come for our company.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Andy Kaplowitz with Citigroup.

Andy Kaplowitz

So, Bill, you recorded good volume growth, as you said you would, based on data center chip fabrication demand, is what you highlighted. But could you talk about the resilience of those end markets? Obviously, we've seen a bit of a slowdown in the tech sector. But we know non-restarts have been very strong over the last year. So is that helping? And what is the duration of customer backlogs and how much confidence do they give you in extended volume visibility for Atkore?

Bill Waltz

Yes, we're still optimistic or consistent on volume going forward in the -- let's call it, the mid-single digits for the rest of the year. When I'm out talking with our customers -- I just flew back from a convention here late last night. 6 months, 9 months, a year of backlog with our distributor partners. So I would continue to see others. As you mentioned, there's going to be a delayed job here or there, either because of somebody getting equipment in or someone reconsidering things, yes. But there's enough volume there. There's enough Atkore capabilities to drive our fair share of growth beyond the market that I would estimate mid single digits. So nothing has really changed, Andy, which is kind of nice.

Andy Kaplowitz

And then, you recorded just over the high end of your guidance for the quarter, I think at $264 million in EBITDA, but you raised your '23 guidance by $100 million without adjusting volume as we just talked about. So what is it about the price versus cost equation that has changed to allow you to adjust your guidance pretty early in the year, pretty significantly? Are you retaining more price so far than that waterfall chart that you gave us last quarter? And does that potentially change the trajectory of the $600 million or so in price giveback you gave us in that waterfall?

Bill Waltz

Yes. I would say for this year, we are seeing more price that we're holding on to, and/or just commodity costs drop them faster, different things like that and our value equations, that we are able to raise, as you mentioned, our whole year forecast for EBITDA of around $100 million. To sit here and project out further, I think -- we're not giving comments on '24. We're still comfortable as we can be on the $18 plus for the long term. But for this year, Andy, there's enough comfort in the year to raise the guidance by the $100 million.

David Johnson

Yes. And Andy, as you know, the second half is usually a little bit stronger as construction season starts in full force. So when you look at the first half after first quarter actuals and our second quarter guide, we felt comfortable in raising that full year guide.

Andy Kaplowitz

And then, just one more question for me. You mentioned the rebound in metal electrical conduit volumes that you're seeing. Is that because demand is improving? Or was that more of a supply constraint issue that's now being relieved? And then just asking the same question on PVC markets. Pricing there still looks like maybe it's been dropping a little but stabilizing, but how do you define demand in PVC as non-resin demand outweighing resi weakness?

Bill Waltz

Yes. So I'll do in reverse order there. I think there is enough opportunity -- well, let me back up. There is residential weakness. That should not be a surprise already, right. But that's single-family home. Multifamily homes, we're telling -- so going really strong. And then there's enough other markets, all those electrification trends, [Car G], the grid in the varying lines and 5G networks, that for all of our products.

Almost Andy, to your first question, we're still cautiously optimistic for growth, both for the industry and for Atkore going forward. And then from there, with steel conduit, yes, I think it was a good quarter, but I won't overplay any one market for a short time period.

David Johnson

Yes. I mean, to me, the -- only 2 things may be there, Andy, is the fact that we feel very strongly destocking and for steel conduits over. And so, what we're seeing right now is the real demand in the market. And then also, you're starting to see steel costs rise in the future and expectations rise. So folks are getting ahead maybe a little bit and getting their orders in and probably a more typical way than they were in the last 3, 6 months.

Operator

Our next question comes from Deane Dray with RBC.

Deane Dray

I appreciate all that color through Andy's questions because that really does strike at the storyline here. And certainly, we like what we've seen for the first start of the year. And maybe we can just drill down a bit because -- on what normalization is and whether we have a clear read? And I know it's still early in the year, but here's kind of the way I think investors have been looking at it, versus fiscal '22 and your prior guide on EBITDA. It was looking at a 33% decline. And there was this worry it would be falling off a cliff in January. And obviously, that's not happening. You've boosted. It's now a 25% decline using the mid-point. But it's also $1 billion, which I think is interesting in terms of that mid-point you and I talked about, how that's an important milestone. So look, it's still early in the year. Where does that normalization trend line go from here in -- for fiscal '23 on an EBITDA basis?

Bill Waltz

Deane, it's like, if you want to follow up, we're comfortable with the mid-point of the guide. I think there will be some pressure continuing on some of our pricing. But I think there's enough other things that we're doing well, i.e., the volume growth, new product development or new products that typically have higher margin, our value equation for customers that are driving -- in some places we're getting margin, even more as we go forward, that we're comfortable raising our guide for the year, but -- and also very comfortable still on the FY '25 guide.

Now, could some product lines continue to have some drop in margin quarter-over-quarter and so forth? Yes. But overall, I would tell you almost where you started, we're comfortable enough 3 months in to say, you know what, pricing is holding better. Your whole -- the beginning of 33% drop and 25% drop, that $1 billion like you mentioned, sounds good to me and it was good how we would offer that in the $18 EPS and then we'll talk about how we continue to drive it forward from there. So hopefully, I answered, but it's hard to say product by product being with that much crystal ball.

Deane Dray

And for David, it came up a couple of times about the decline in input costs and it looks as though that is bigger than what the decline we've seen in pricing. So just kind of take us through that dynamic, the key input costs, how much they've gone down and how that factors into your pricing?

David Johnson

Sure, Deane. So if you look at Slide 5 of our deck and you look at the bottom in the EBITDA bridge, you'll see that cost changes year-over-year for Q1 were down $70 million. Now obviously, pricing was down more than that, and that has a lot to do with the normalization we've been talking about, that you have seen from where we were a year ago, especially in things like steel, tremendously lower now than they were a year ago.

Now, sequentially, you're starting to see steel, like I mentioned earlier, come up a little bit. And so, there's different dynamics in S&I as to when price changes in some of our other pipelines of how long we hold on the price versus the commodities coming down and what have you -- But in general, I would say that, that $70 million is a pretty significant reduction year-over-year.

Bill Waltz

Sorry, Deane. I don't know if it was part of your question, but I know there's -- especially on the buy-side questions out there, on the whole dynamic of cost versus our price. Just as a reminder, I know you understand this Deane, but that -- the things that drive our ability to price are supply-demand competition. So what are your competitors doing compared to how much demand is in the industry, and then Atkore's value prop, which I think is bar-none the best in the industry with our ability to co-load in one order, one delivery, one invoice or electronics, our customer service, those types of things.

So as sometimes buy side looks at commodity costs, yes, that's a factor, because maybe one of our competitors is out there thinking, well, if my cost went down, I can lower my price and still make a margin, and we have to react. But that's just not a major contributor to how we price in the market for any of our product cost.

Deane Dray

Yes. Bill, you and I had this exact discussion last quarter, first question, and you gave a, what I thought a comprehensive tutorial on the dynamics and how you have to look well beyond just the input costs. And so, I’ve been referring people to that transcript and sending it, and thank you for the reminder.

And just last question for me. Talk about the pipeline of M&A? And are you seeing any other competition coming in? Because, obviously, this is a really attractive niche and the surprise for some investors to say, how come you haven’t seen anyone else trying to elbow their way in?

Bill Waltz

Yes. So, to that great question, Deane, and for whoever also thinking of those questions. But no, we haven’t -- let’s put it this way. There is no increased trend that we’ve seen as people bought other companies that we’ve passed by, yes. But again, I think Atkore is unique that most companies we buy are privately owned family enterprises, small enough on the radar that a large private equity firm wouldn’t have the management structure to put in place with them, are large electrical peers to have different niches than we do in this set of, call it, Raceway products, that I think we are uniquely in a position to acquire most of these companies as they come up to market.

So they never say never or something hasn’t been sold to somebody else, of course, but no increased trend and the market is still active. We’re actively pursuing things. We’ve actually increased the size of our M&A team here in the last month, just to continue to expand, whether different products in the States look more aggressively into Canada, look more aggressively into Europe. So we are deploying our capital well between M&A, internal investments, and obviously, stock buyback. So it’s a good time to be with that corp.

Operator

Our next question comes from Chris Dankert with Loop Capital.

Chris Dankert

I guess, first off, in safety and infrastructure, in particular, volume was up nice, and obviously, the comp was a bit easier. But anything in particular you'd call out on the demand side kind of fueling that volume in S&I?

Bill Waltz

Yes. So whenever we reference a little bit about data centers and fab plants, a lot of that, when you start thinking about the metal framing, our wire basket products -- even in a different part of their business, security was pretty strong this quarter. So pretty broadly speaking, they've had solid growth across all their product lines this quarter.

Chris Dankert

And then, maybe to follow up. Obviously, there's a lot of different governmental actions going on right now. You've got the IRA, infrastructure jobs, RDOF, et cetera. I guess, first off, what impact is baked into that kind of mid single digit volume guide from those at? I know it's hard to -- break it hard that way, but if you can kind of give any sense for, is that more of a 2024 dynamic, I assume, for the majority of it, but any sense on is some of that showing up? What's based in the guide? And any comments on just kind of that environment.

Bill Waltz

Yes. I think, Chris, I'll just paraphrase back what we said. I think it will be more impactful in 2024, just because a lot of these things like the Inflation Reduction act with credits and so forth, just literally kicked in, in January. But there's probably a little bit in there, but nothing major, but we are definitely knowing that these things are coming along, positioning ourselves, and that's again where I say Atkore is a company to invest in and grow with as we go forward.

David Johnson

And like the fiber investments and all that dynamics, how these -- I think the deadline is pretty soon and they can sign up for the money and see what their need is. So we're still a little ways before that actually gets to action. So to this point, a little bit, but not the majority of our volume growth this year.

Chris Dankert

I guess if nothing else, it certainly gives you confidence at that 2025 target number on $18.

Operator

Our next question comes from Chris Moore with CJS Securities.

Chris Moore

Most of it is covered. I was hoping maybe you could just give some updated thoughts on the HDPE market opportunity. You talked about it a little bit, but obviously, lots of acquisitions there and a lot's going on that front. Maybe just any updated thoughts you have there?

Bill Waltz

Yes, Chris, really excited for that market. Every facet of it, first, almost -- the other Chris had just asked the question. I think the best is yet to come here with funding for and getting things ready for fiber optic and so forth. And without mentioning specific customers, we have a great general manager that was just talking to some of the largest electrical distributors in the nation yesterday. And while they're optimistic for '23, they're even more optimistic for 2024, and we are well positioned, and we have a kick ass team that very much reminds me as a complement to Atkore, the PBC division of a decade ago where you take 5, 6 of the best run companies and you bring together those management teams. They get to compare now best practices, manufacturing, how we have a national footprint, how we can, therefore, work with national customers that a lot of other people can't, just because they're regional. And this is why, almost back to the previous analyst questions, we have high comfort at this stage with our 2025, $18 plus EPS. So economy is going in the right direction, secular trends going in the right direction, and Atkore is getting well positioned. So long-winded answer and say we're excited for HDPE.

Chris Moore

Last one for me, just kind of cash flow related. So cash flow from operations, I think just under $200 million for the quarter. Inventory was down a little bit, but $11.5 million. What are kind of your thoughts in terms of inventory levels for the balance of the year?

David Johnson

I mean, I think from a days standpoint, we're kind of where we want to be, but you will see a little bit here -- as we talked about in the back half of the year, we expect a lot more solar volume coming up with our new facilities. So we will have a little bit of an inventory build there. So when you look at it on, say, a day's level, it's going to be fairly level between now and end of the year, but that does mean a little bit of a dollar increase for the next, I'd say, quarter or two.

Operator

Our last question comes from Alex Rygiel with B. Riley.

Alex Rygiel

To follow up on that last question, can you comment on sort of the trend in solar demand in the near term as well as telecom conduit demand in the near term, appreciating the very positive long-term outlook?

Bill Waltz

Yes. Both short term and long term, really optimistic. It almost ties back to some of the other questions with what are we seeing. Again, some of the background that David talked about in our prepared remarks, is, solar credits are out there. They just started with Inflation Reduction Act. So I think it is something that -- the people that make the solar arrays, the people that buy them for the solar farms are aware of, and that is a great stimulus, and well, I'll kick on here on January 1. But we're for Atkore well positioned. I think we've talked in previous conference calls where we actually -- some intelligence, quite frankly, some done lot, but we had started up a whole facility dedicated to making the solar torque tubes, and that's coming online for us here kind of in the beginning of Q3. So another quarter out, but that will both help with organic growth, help with our EPS, and the demand is absolutely out there, both just people wanting to be green. And these tax credits are probably shipped on a lot of business that used to be made offshore to U.S. manufacturing. So good for the economy, good for the U.S., good for green and good for Atkore.

David Johnson

Yes. So, Alex, one way to think about it is, like the solar industry itself could stay flat year-over-year. The volume for domestic torque tubes is still going to be up substantially because it just doesn't make any financial sense to import torque tubes anymore compared to buying someone domestically.

Alex Rygiel

And then, is it time for you to update your 2025 target or comment -- confidence towards achieving it?

Bill Waltz

I'll just say -- I don't know what to say. And if you -- for the thought process on the optimism, when we get to the 10 multiple on that, then we'll talk about where we go as we continue to drive forward. I will say, because we have great management teams literally across the board -- like, you look at what David spoke about with S&I, just an amazing quarter that for David, myself and the executive staff, we're having an all-day media on Thursday, and it's all about 2025 and 2028. That's the focus, how do you keep this fly wheel spinning faster and faster. So who knows. I don't think we're going to do -- re-up our numbers for a while, Alex, but it's definitely a thing of how we continue to grow and take it to the next level.

David Johnson

Yes. We pretty formally will update it again at the --

Bill Waltz

November.

David Johnson

November like we normally would. But I just would remind you that we did put a greater than signed in front of the '18. So we were thinking about that as we were putting that together.

Operator

There are no further questions at this time. I'll now turn the call over back to Bill Waltz.

Bill Waltz

Before we conclude, let me summarize my 3 key takeaways from today's discussion. First, Q1 was a solid start to the year, with volumes up over 5%. Second, we are increasing our expectations for the full year earnings and share repurchases. Third, we're excited about the progress we've made in regards to sustainability and ESG, and we're very excited about what lies ahead in this area for our products, customers and employees.

With that, thank you for your support and interest in our company, and we look forward to speaking with you during our next quarterly call. This concludes the call for today.