Q3 2020 Atkore International Group Inc Earnings Call
[music].
This call at this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will be each press star one on your telephone if you require any further assistance. Please press star Zero as a reminder, this conference is being recorded I would.
Now, let's turn the conference over to your host Jon Bates Vice President of 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.
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 <unk> I see filings in today's press release, which identify important factors that could cause actual results could differ materially from those contained in our projections or forward looking statements.
In addition, any reference in our discussion today to EBITDA and adjusted EBITDA with that I'll turn it over to Bill.
Thanks, John and good morning, everyone.
I'm pleased to report that I core delivered solid results from the third quarter. Despite the challenges associated with Covidien 19 pandemic.
I believe our strong operational focus and culture, a safety helps us as we navigate through these uncertain times.
As we start on page three in the third quarter, we do labored and adjusted EBITDA of $64 million as our margins performed better than our expectations given the strong cost control measures we implemented throughout the organization.
It is true the actions as so many of our employees that we were able to increase our cash balance by $100 million and end the quarter with a balance of 237 million.
I'm pleased to announce that shortly after the quarter ended we were able to come to agreement with the United Steelworkers Union to ratify it new agreement for Harvey, Illinois location.
I core we're focused on building a long term sustainable business and this agreement certainly helps.
Given the continued uncertainty and market volatility we estimate our F. why 2020 net sales adjusted EBITDA and adjusted Yeah, it'd be down approximately 10% versus prior year.
Now, let me take a moment to summarize my key takeaways regarding the quarter and recent event and then David will go into that results in more detail.
First the team delivered solid results in Q3, driven by our discipline you said the at core business system.
Second we're in a strong financial position with $237 million in cash at the end up with a third quarter.
Third as much as we focused on managing through these current conditions, we remain committed to building an even stronger at core for the future.
With that I'll turn the call over to David who will walk us through the quarter in more detail.
Thank you Bill and good morning, everyone.
As Bill mentioned, we are pleased he could result in the third quarter.
Moving to our consolidated results on slide four.
Net sales declined 22%, primarily due to the unfavorable market conditions caused by the pent up.
Adjusted EBITDA was $64 million and our adjusted EBITDA margin was approximately 17% in the quarter.
Our adjusted EPS of 67 cents as lower interest expense helped partially offset the lower earnings.
Turning to slide five.
Net sales declined $109 million due to lower volumes and lower selling prices.
Lower selling prices only which all from declines in key raw material inputs such that steel can resin.
Through outstanding operational commercial execution, our team was able to partially mitigate the impact on profitability from the decline in itself.
Moving to the adjusted EBITDA Bridge, and previously mentioned volume declines had the largest impact in the quarter was an unfavorable impact of $35 million.
However, but following the our core business with them and controlling costs, our team was able to drive $10 million in year over year productivity benefits.
Despite the significant market reduction or commercial team did an excellent job communicating the value of that core to our customers as our lower selling prices were in line with the changes in our input costs.
This resulted in a decremental adjusted EBITDA margin in the quarter of approximately 23%, which was better than our initial expectations.
Moving to are you electrical raceway results on slide six.
Segment had a solid quarter with an adjusted EBITDA margin of 20%.
Net sales declined 23% as we experienced lower volumes due to the pandemic.
However, our focus par the categories only declined in the low to mid teen percentages in the quarter.
Turning to the mechanical products and solutions segment on page seven.
That's helpful. Only declined 18% that's the man for large renewable energy projects and recreational equipment hope support the business during the quarter.
Adjusted EBITDA margins declined to 12% and are down 480 basis points versus a very strong prior year comparable.
Moving to page eight.
Let me take a moment to review our debt structure and liquidity.
We have $846 million total debt associated with our term loan facility.
This loan does not mature until December 2023.
We have no scheduled principal payments prior to maturity.
As Bill mentioned, we ended the quarter with $237 million in cash for a net debt position or $609 million or 1.9 times trailing 12 month adjusted EBITDA.
We are confident in our liquidity position.
Good luck, drawing on our asset base.
Turning to slide nine one to highlight that we're now down to 4% in our net debt to adjusted EBITDA ratio over the past 18 months.
As we discussed in our last call we expected the third quarter to be solidly cash flow positive. There were quite pleased with the 100 million dollar increase in our cash position.
Even during these challenging conditions.
Business has proven that it has a strong ability to convert earnings to cash.
Now, let me turn it back to bill for our outlook.
Thanks, David turning to slide 10.
With this solid performance that we saw in Q3, we now expect our full year net sales adjusted EBITDA and adjusted EPS to be only down approximately 10% versus prior year.
This is an improvement versus our 10% to 15% estimate in may.
However, this estimate is based on our assumption for our net sales in Q4 could be down approximately 15% versus prior year and our decremental EBITDA margins to be in the range of 30% as we anticipate certain expenses to slowly returned to the business.
As as we recognize other onetime events in the quarter.
In addition, we believe this approximate run rate for detrimental EBITDA margins will continue into fiscal year 2021, as we will have two very strong quarters to compare against in the first half of next year.
While we are proud of the cost controls that we've implemented in the face of this unprecedented situation there will be expense headwinds next year as we make continued investments that will help us to improve our capabilities and drive future growth.
One additional item to highlight on page 10 is that we're now increasing our estimate for F. Why 20 capital expenditures up to $28 million to $32 million due to the strong cash flow generation.
We want to continue to invest in projects that will deliver value for our customers and shareholders and the future.
Speaking of the future I would like to turn to slide 11 to introduce our new logo in tag line. This had been or project well over a year and then making and we wanted to share with you today, because we believe it's essential to who we are and at the core of what we do.
Our new tag line of building better together represents our belief that by working together with all of our stakeholders that the best is yet to come for Accor.
Operator, please now open the line for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby will become pilots you in a roster.
And our first question comes from the line of Andy Kaplowitz from Citigroup. Your line is open.
Hey, good morning, guys.
Good morning.
Bill So just thinking about the cadence as you went through the quarter yourselves are down about 20%, but you could you give us more color on the monthly cadence. What you saw on July did you see any improvement in your sales volume and it seems so in one part of the business I know you're guiding to 15% for Q4, which is what you did what you got to for.
And last quarter for for Q4, so any improvements that you're seeing though in the business.
Yes, Andy Great question, very linear improvement month to month. So it's I think we set the last call, where we were down a little less than 30% you can probably figure may was about the average for the quarter that 20% to 23% and in June was approaching that 15% that we're now.
And going into Q4 so.
In July was consistent with yeah in July I says, we're talking July was consistent with it.
A direction, we've given them for Q4.
Okay and then just following up on that Bill a you know you guided to 30% Detrimentals again for Q4, but as you said you did 23 and you know it's hard not to notice the 10 million and productivity that you had in the quarter I think you've guides about 15 million a year on average easily and I know you mentioned some temporary costs have to come back, but I think.
You know there, but the question from losses.
Conservatism is baked into the guidance here the potential to do better than 30% going forward.
Hey, Andy said, David I'll take that one so first of all in that 10 million, we estimate about half a little bit more than half is kind of onetime cobot related productivity improvements ever seen by just reducing costs. So you can imagine there right now and the piano you know very low things like medical expenses and what have you.
So in Q4, the 30% decremental, there's a couple of things going on there one who do have some onetime cost in the quarter. So as we announced we concluded our Harvey Union contract, which with they came some onetime costs. We also believe that some of the cost such as medical what have you as facility start to open up we will.
See some more those expenses in the quarter. The third point as you know, especially for Npls as we mentioned way back when we first the guidance. We Didnt know the Q4 was going to be a tough comp to begin with.
And we were talking about price versus cost and their initial guide was somewhere around the negative 10 million for the year. We're now probably slightly positive for the year, but Q4 is likely to be a little bit unfavorable again, mainly because of that very favorable comp from last year.
Very helpful guys and just one more follow from me I'm as you've had a few months to sort of watch the pandemics impact on your business. Obviously, some fundamental changes I think we talked last quarter about more focus on data centers in warehouses, maybe little less focus going forward on office and retail so how do you think.
About all that it should go into 21 can your business trend better and ultimately what nonresidential starts are going to date.
Andy I think so I'm I'm going to answer to question discount front of wine.
You know as you look at different forecast for next year for the market. It probably is going to be down in the low to mid single digits, we could get into depth with that for anyone but I do think as we continue to add more value new product development, you mentioned datacenters, there's a huge focus from us on how we grow in that market it faster.
In the market itself and put more effort there.
And just our co loans all the value prop, we should be able to do better than the markets.
No there's got to guide in November but.
Appreciate it thanks.
Thanks, Andy.
Our next question comes from the line of Deane Dray from RBC capital. Your line is open.
Thank you good morning, everyone.
Good morning.
Maybe we could just pick up where we left off with Andy's last question I've just to clarify when you say low to mid single digit is that for Nonresi overall value in place what I'm asking just clarify exactly yeah, Dean I think I'm going again. This is the most unprecedented time and try to do a for cash.
And we're not guiding for 2021, yet, but I would think most indicators for put in place next year would have 2021 downloaded mid single digits. There's a great side I'm getting very specific here AI a.
That dotcom that gives forecasts everywhere from Dodge the movies to.
You know different other for cask organizations and they would have 2021 down around 4.8% to be overly precise with a lot of variance in there and that's the same thing we're seeing whether it's talking to.
Distributors contractors A.B. I deal with having record low numbers here for the last couple of months there will be some headwind next fiscal year, but again, we're talking you lease at this stage the low single digits and then to Andy's question, we help to outperform that as we happen to pass.
And the Washington that Jim just mentioned that is a kind of calendar look and of course for fiscal year. You know, it's going to be a little bit interesting for us and we'll give our outlook next quarter, because we will be comping against two non cosy corridors. So for us it's going be a little bit more about you know a tale of two different.
In house for a flight 21.
That's real helpful. And then qualitatively the way some people are looking at the Nonresi market is as states reopened any construction projects that had been started got the green light to continue and so the worry or the issue. The concern here is what is the pipe what does that.
Pipeline look like after this these current projects are completed are we going to hit an air pocket and this depends on kind of CEO confidence. So you've got your ear to the ground. There what are you seeing in terms of the high flying the funnel. After these current projects are completed yeah.
I'll end with the answer then give me some more specific I think that ties dean to our earlier answer that low single digits down for next year to your point I'm not aware of any project of significance that somebody's dug into the ground. That's been stopped there has been projects without meeting specific ones, but.
You can imagine in Orlando just as example, whether it's an airport or entertainment complex if that was on the books, but they haven't started the chabal they have postponed in some cases.
A b. I has been low and therefore go out nine months from now you know that starts will be a little bit slower. The only question I would have or pushes where you say hey, you know is her pocket theres just jobs that are three month long to do there's other things that take three years. This schedule that I think the statistical averages.
And I go back therefore to go next year put in place should be down low single digits theres not like a hiccup to say Oh, I'm really concerned about too much Jess.
But we'll continue do well we've done well I mean back to plug is this your thinking this as much as were down in this last quarter and we've had yo neutral basically spreads and a year ago to David's point, we said the second half of this year was going to be tough because as a historically high spreads.
We'll manage through new product development continue to work on coal loads a lot of other customer focused seen things, including Digitization I'm, an optimist, but I'm also setting the ground for you know, it's it's not like all side in a vaccinations going come here at the ended the year and there was going to be a V shape recovery.
Non res.
Would be unrealistic for anybody to after that.
All right. That's all real helpful. Let's switch gears here and talk about your distributors and there had been thought last quarter or that there was still some de stocking to happen yet that may be an additional week, how does that actually play out yet played out the following things I think inventories back and why.
And probably as we said most distributors have five to eight weeks if I actually gave you blow by blow I think in mid March most distributors for thinking manufacturers would shut down there would have a koby case. So they stocked up by time, we had or earnings call. They were de stocking because manufacturers are up in jobs.
Sites are down and then I think over the months. So like May and June maybe even to July people have noticed that we're into new normal as much as this can be a new normal and there are back to their five to eight weeks of inventory and they're doing well and obviously, we're going well and being that obviously plays out.
The differently by geographic locations like the Boston area was really heavily impacted the now it's starting to come back. So there's different parts of the country, where it wasn't as impacted and now its opening up and so and so forth, but overall.
Issues I think inventories in line yes.
Good to hear just last one from me on Capex the increase.
You described just kind of generically that you're looking to create value, but can you be anymore specific as to either a project or type of project and then maybe Dave David can share with us the internal rates of return ranges that you see what kind of returns you're actually getting.
I'm smiling because with all these questions are good questions were point, you back and forth fighting for who gets the answer and I want on this one other then I'll pass it to him on their return on investment it's across the board is we're optimistic I'm not just talking for fiscal 2021, but literally for the next test decade, we did events like a shark tank.
Bad Challenge our employees for new product development ideas came up with 30 different submissions funded seven so you're starting to see a little bit of that we're working on digitization efforts. So there's a little bit more funding for that theres larger capital projects for some of our facilities Theres some environmental things were.
Working on and so it's across the board where does it my mind the organization compliment all 3600 of 4000 employees for driving that working capital on cash flow going guys. We know what we're dealing with as much as anybody does with coded and we're moving ahead, so we're making investments including cash.
Backs, because there's lots of projects with real good returns for our shareholders our customers and society. So that's the high level being but there's not just one project and I'm excited to invest because I know they are going to be good returns for in these returns or you know were between two and three year type of return.
Dean and if you're right. When we first gave our outlook at the beginning of this year, we're probably in this capital range again, so we had reduced as last quarter, not really just being prudent regarding capital ill.
Going into Cove, and not really understand exactly how the markets. We're going to go now we feel a little bit more comfortable we generated $100 million of cash increase we feel comfortable that we can go and.
Releases investment in Q4.
Thank you and if I can add to I think with your very first question, where you made some comment around or statement like hey, with Andy on CEO confidence.
Next year again, the markets from what everybody predicts is slightly down but for our core and the leadership and employees. We're bullish on the future just like the last page I wrapped up on page 11, it's about how we rebranded back or how we invest so yes. It will there be some headwinds in the market. Yes, do we have a phenomenal team that's focused on bring.
In value to our customers absolutely and therefore, we're moving ahead and every facet of the comp.
Company in our initiatives.
Great. That's all helpful and I really like the shark tank event concept I'll talk more about that offline, but great job. Thank you.
Sounds great. Thank you. Thank you.
Our next question comes from the line a deep a regular van from Wells Fargo. Your line is open.
Hi, good morning, everyone. Good money deep learning beep up.
Hello. My first question is on the commodity deflation in the price pass throughs.
Are you now tracking hundred person price has given the commodity deflation or are you still slightly positive.
Hey can you also talk about how we should think about commodity deflation, which is priced faster in the next couple of quarters and entering 2021.
Yeah.
David do you want and other instead.
Going back to our core bridges on slide five you can see that but.
Impact on commodities on the sales line was 10 million and on the EBITDA line was around $1 million. So I would say that we pass through or we were able to.
Adjust accordingly, our prices with a commodity costs.
Some quarters will be plus one minus one and year to date were actually positive and remember where you did a positive versus a couple of years of record increases year over year, so going into the year. We've said that the full year would be a negative 10 now even with co that we will be favorable to that.
And Q4 will be a little bit unfavorable but thats a lot more to do with the comparable of last year than it is any kind of sequential situation.
Okay got it that's fair.
Can you remind as bill what are the new construction worsening ventilation mix is.
In down cycles.
Al Gore, specifically and also can you talk about how Atcor is working to places so favorably to us devaluation side of Quinn's near term.
Okay.
Up a little bit innovation versus Oh renovation on par I apologize thanks, David.
Renovation, probably in that 15% to 20% of the market, obviously, I think that will be a headwind or tailwind for us has had wrong sorry.
Purely from the standpoint of you think about office buildings and I don't think people are going to be building as many office buildings, but the whole renovation open work spaces in the offices joke structured walls and so forth. So I think we will have some pickup it's always just a little tougher for us selling through distributors to get.
Sys numbers on how it is or how much it's growing but that should be good and then again I just think the more we work with our products are labor savings with contractors and pool products through our distributors and any these growth initiatives, we will do better than the markets.
And I think people if you remember we've talked about investing in technical sales managers.
In the last say year time period, those folks are a lot more on the ground kind of even ahead of the distributor wind projects come up so I think having those resources out there will certainly help us capture any those opportunities.
Lease our share of yes. Please.
Got it.
Just switching gears to capital deployment, how are you thinking about M&A continuity in the current environment.
That's my final question. Thanks.
Yeah. So.
We're are starting to look I mean, we never really stopped but we obviously pause just a little hard with over there last couple of months you into flight a couple locations but.
We're back moving ahead again, so I think it will do still always be with the at core business system that discipline, we've talked about in the past in other words for key things is strategic is does it have synergies will we keep and continued to be debt responsible I'll make a plug again for the 1.9 leverage ratio and do we had the management.
Bandwidth in the answers as absolutely so with that said the others give or take 100 acquisitions in the pipeline there as ones were working today will be prudent throughout the process and we will spend more lease we will and our capital appointment bank or generically around 50, maybe 100 million you know it depends if there is.
Right deal for next year as we continue to spend money on internal Capex and Dom you know shareholder buyback in the 15 million and so forth.
Okay. So your pipeline so continue to be a full and you're looking I guess, that's the message nothing this call would hasn't really pushed up.
All of these targets to the right our Oh, no not really no I wouldn't say.
Questions, including from employees, both ways like Hayes is a buying spree I don't know if I'd say that on the same had I don't think we push things off we had for a couple of months, but we're back in the process. We have a regular routine monthly call I met with one of our finance leaders yesterday, just some of the status. So couple of specific details.
It's.
We have a drumbeat with the at core business system and were continued executed.
Really for all for our investors out there the way I'm looking at there is the challenge of coated.
Other than that challenge.
The at core business system, our employees our initiatives really have not changed we're moving forward drumbeat by drumbeat on every facet of the organization from talent to investments internally the M&A to the new branding with extra focus on things that are glad to growing like data.
Centers so.
It's at core and we'll continue to be accor.
Thank you very much I'll pass it on.
Great Thank feedback.
Our next question comes from the line of John Walsh from Credit Suisse. Your line is open.
Hi, good morning.
Good morning, John.
So a lot of questions already you know on the forward look of the market.
Tough to call but.
One thing we've heard consistently is data center, where house, so theres going to be different verticals, leading next year versus probably what we've seen last year. Even before can you talk about how that change in leadership impacts your mix.
And if there's any big discernible changes in mix, if it's a hotel versus a warehouse versus an office for your products yeah.
The following answers.
Slightly positive to neutral in other words, if you think about the things that you just mentioned datacenters great for us.
Healthcare that should also be up you know going into next year, great for us and just think of all the electrical thing. So the mix there very positive on the other hand warehouses, yeah, a lot of square footage some electrics, but not as much. So overall, it's going to be helpful. But I also John.
Model in a massive increase because of it and then it's just up to our teams, which I'm very confident and to how we get in our unfair share of those vertical markets and a lot of discussion a lot of effort and that's again datacenters growing is not a new phenomenon. So we've been focused on.
Good for a couple years now and I think as we go forward, you'll see more effort.
Great and then you know just a couple of question so far around the cost avoidance is there a way to put these items as we think about next year into a structural bucket.
You know variable, where you're potentially going to maintain very tight control on whether that's teeny et cetera, and then kind of the stuff that's truly variable with volume such as like compensation for employees is there a way to to use that construct to help us think about someone.
The moving parts as we think about next year.
Yeah, I think we give our outlook for next year and next quarter will definitely provide more color around those individual items and you're right, there's going to be part that.
Goes.
That's going to come back into the piano like medical Aveed, there's others that are going to be controllable by us such as peony and then there's our normal productivity, which we don't want to lose sight of the fact that we still have hill productivity projects investment in cap or whatever so when we give our outlook.
The next quarter, we will.
Monetize all those pluses and minuses year over year.
As of right now we felt it was appropriate to at least give some guidance for what we were thinking about going into next year, knowing that we were going to get a lot of questions around what we see the market and what have you and so thats why we.
We've been talking about the ground low mid single digits for the market next year.
Great well, we'll look forward to that discussion next quarter appreciate the color. Thank you.
Thanks, John Thank you.
We have no further questions in queue today, I'll turn the call back to build waltz for closing remarks, great. Thank you.
Before we conclude let me summarize three key takeaways from today's discussion first the solid results. We delivered in the third quarter are the result of our strong operational focus from our teams and that commitment to the at core business system second we're in great financial position with a cast.
Cash position of $237 million and third we're taking the necessary steps to keep our employees safe while managing through the current conditions and also truly growing the business, we want for the future to make it even stronger with that thank you for your support and interest in Accor.
And we look forward to speaking with you during our next quarterly call. This concludes the call for today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].