Q2 2021 Atkore Inc Earnings Call
Yes.
Thank you for standing by and welcome to the <unk> second quarter fiscal 2021 earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and thank you I would now like to hand, the conference over to John Daycare, Vice President of Treasury and Investor Relations. Mr. <unk>. Please go ahead, thank you and good morning, everyone.
And 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.
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, and he referenced 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 three.
And the second quarter of 2021 at core again delivered outstanding performance across our businesses and what shaped up to be another record quarter Rev.
Revenue was $640 million and adjusted EBITDA was $193 million and the quarter, we had very strong results and both metal conduit and our focused product categories and in addition, we continue to see exceptional performance from our P. B C business driven by continued high demand.
In key end markets, such as residential and data centers.
Across our whole company volume has rebounded to pre COVID-19 levels. We ended Q2 up $1 million in terms of volume led by high single digit volume growth and our international business.
We are also very excited to announce that our new M. C. Glide armored cable products has recently been recognized by E. C. N M magazine as products of the year and the wire and cable category. We are committed to developing innovative products that help improve the experience.
For contractors on the job site and we're thrilled with this recognition.
These tremendous financial results and operational achievements were driven by the focus and dedication of our team the culture of teamwork across approximately 4000 employees is core to who we are as a company.
Our market remains robust and we continue to deliver results today and invest for the future. Therefore, we are increasing our FY 'twenty, one outlook and now expect to achieve adjusted EBITDA and a range of $700 million to $750 million.
I'll provide more detail on our outlook after David walk through this quarters financials, but before I pass it off I want to share an update regarding our recent acquisition of FRE composites on slide four.
This acquisition shows our proven bolt on M&A strategy at work, we continue to acquire high quality companies to expand our product portfolio and FRE composites does just that FRE is widely recognized as a market leader for their innovative and high quality fiberglass conduit systems.
And this acquisition is a perfect fit for our core with FRE as part of our portfolio. We gained increased exposure to large scale infrastructure transportation datacenter and utility projects all of which are poised for solid growth for the next few years. We're so pleased to welcome their great team.
<unk> core together will be focused on leveraging our collective strengths and growing this business with that I'll turn the call over to David to discuss the quarter.
Thank you Bill and good morning, everyone.
Moving to our consolidated results on slide five net sales increased 40% year over year, primarily due to higher average selling prices across many parts of our business.
Adjusted EBITDA increased to $193 million, which drove our adjusted EBITDA margin to 30% and the quarter up significantly from the prior year.
Our adjusted EPS of $2.79 increased 182% from the prior year.
Okay.
As you look at our year over year comparisons also recall that we had very minor negative impacts from temporary shutdowns related to the pandemic in Q2 fiscal 2020.
Turning to slide six and our consolidated bridges.
Net sales increased by $184 million due to higher selling prices largely in our PVC and metal conduit products and the impact from our recent acquisitions.
We also had double digit revenue growth and our focused product categories, which contain many apart fittings products.
Through outstanding operational and commercial execution, our team was able to fully overcome the impact from higher input cost inflation and we grew adjusted EBITDA by $106 million.
This profit growth was driven by our ability to service our customers and execute the our core business system. Despite the challenges associated with COVID-19, and raw material supply.
Shifting to our segment results on slide seven the electrical segment led our profit and margin improvement year over year with adjusted EBITDA of $111 million and adjusted EBITDA margins above 38% due to strong performance from our PVC and metal conduit products as well as our focus probably cash.
For your growth.
One other positive to call out is the volume growth that we had and our international business. This quarter, which was driven by the rollout of new products and solid demand recovery and key markets in Western Europe.
And our safety and infrastructure segment net sales increased nearly 15% from the prior year as the business was able to fully pass through the increases from rising steel input costs.
Just the EBITDA margins declined in the quarter, but on a constant and input cost we would have anticipated margins would be higher by 180 basis points at just over 12%.
We believe this segment is well positioned for growth and margin expansion as overall economic conditions continue to improve.
And now moving to Arkansas and cash flow review on slide eight.
We ended the second quarter with $304 million and cash and generated $55 million and free cash flow in the quarter or a $65 million increase versus Q2 of 2020.
This is really strong performance from a cash flow perspective, as many of you know that we have multiple factors that generally impacts free cash flow and the quarter such as dual tax payments two interest payments and the impact of annual rebate program and incentives.
In general we target free cash flow to be approximately 100% of net income on an annual basis for FY 'twenty, one, though we expect that cash flow will lag net income due to the recent large increases in both our average selling prices and input cost inflation.
All that being said, we've made tremendous progress on our journey to strengthen our balance sheet from the cash flow, we generate and we remain committed to our disciplined approach to capital allocation.
Consistent with this through the first half of 2021, we've had a very balanced approach to capital deployment with over 40% going to either organic or inorganic investments to grow our business for the future.
And now let me turn it back to Bill Thanks, David turning to our outlook on slide nine.
We are raising our outlook for net sales adjusted EBITDA and adjusted EPS for the fiscal year based upon the better than expected results, we experienced in Q2 as well as how we expect the back half of the year to unfold.
Our third quarter 2021 outlook is for net sales to be up approximately 80% to 100% and adjusted EBITDA to be and the range of $200 million to $220 million and.
In addition, we expect to grow our adjusted EPS up to $2.80 to $3.10.
For FY 'twenty, one we now expect our net sales to be up approximately 40% to 50% and adjusted EBITDA to be and the range of $700 million to $750 million, which is up $260 million to $290 million versus our prior estimate and edition, we expect our <unk>.
Adjusted EPS will be and the range of $10 to $10.70.
As evidenced by the results we delivered through a Q2, we are successfully navigating. This continued period of unusual supply demand dynamics as we've discussed previously by optimizing our supply chain, we're able to not only serve our customers reliably, but we're able to do so with shorter lead time.
And others.
That's a direct credit to the sustained efficiency the accor business system, there's high demand paired with constrained supply and P. B C and other categories is creating a very favorable pricing environment that is ultimately driving significant value and outperformance and our results.
That said and the long term, we do not expect this level of industry wide supply constraints to be the new normal to date and the third quarter, though we are continuing to see strong P. B C kind of demand and and elevated pricing and environment.
This is partially due to our ability to manage the market supply constraints that resulted from the Texas winter storms.
Moving to slide 10, I want to take a moment and reflect on the tremendous growth for the business over the past several years and frame our recent results and outperformance.
Youll recall last quarter, and addition to gave me and our guidance for FY 'twenty. One. We also provided some additional early perspective on FY 'twenty two.
While we caution that we would not be making a habit of providing long term guidance. We do want to communicate today. Our latest perspective has increased from what we outlined for you on our last call.
While we continue to expect more normal historical levels, and PVC demand and pricing as well as other parts of the business as we approach the late fall and winter months, we have adjusted our expectations for FY 'twenty. Two we are now providing a range for adjusted EBITDA of 400.
$450 million and.
And so you can see here and this chart over the FY 15 to FY 'twenty time period, we delivered a strong CAGR of approximately 15%.
Growth rate that we're really proud of especially as the market backdrop is varied across these years looking forward at our early perspective for adjusted EBITDA and FY 'twenty two.
While the level of EBITDA is down from the record, we expect to achieve and FY 'twenty, one and the growth rate is still in line with our historic double digit growth rate when compared to FY 'twenty.
Before we turn to Q&A I, just want to reiterate that we had a great first half of the year, but we're even more excited about what the future holds for this tremendous company with that we'll turn it to the operator to open the line for questions.
Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad to withdraw your question press the pound key.
Andrew Kaplowitz with Citi. Your line is open.
Hi, This is a time buchbinder on for Andy Good morning, Good morning.
But PVC markets remained strong and you previously described being able to focus production in order to provide competitive lead times and higher selling prices and so have you seen a big competitive response with regards to lead times and pricing given the strength and PVC markets.
I think were definitely leading the industry and our deliveries and with that customers are coming to us, but again, where I'm, making sure that we serve customers appropriately and not take any more orders than needed that we would actually get extended lead time. So hopefully that gives you a feel.
Thank you and you called out the impact and severe weather and Texas can you quantify how much of a tailwind that provided in the quarter and potentially for the full year.
It's hard to quantify for most standpoint of exactly how much but it was absolutely a catalyst that helped drive our resolve especially and P. B C and now the only thing I would add to that is while P. B C. As a stand out we're doing well as we called out for metal conduit to our cable businesses international businesses.
So it's not a one trick pony, but it definitely helped.
And if I could just squeeze one more and.
Color about about how to think about margins within the safety and the.
Safety and infrastructure business.
You know, there's a lag in terms of prices settle again, so do you expect margins to be able to return to that mid teens level, you know and the third quarter or as we wrap up the year.
And this is David I would say it depends it depends on whether it's steel prices continuing to rise or or come down and the reason for that is if you look at this quarter in particular.
They were able S and I actually did raise prices to offset 100% of the increase in input costs. So they did a really good job netted to zero, which as you know it does affect the overall percentages and they were down a little bit and volume and what have you and a quarter. So going forward I would expect that same.
No.
Attributes that happen, where price does offset cost, but it will have a detrimental effect on the actual percentage. So I would say get a little bit better from here, but until steel or steel price is actually peak and maybe even start going down slightly you won't see a tremendous upswing and the actual percentage.
Thank you that's very helpful I'll pass it along.
Great. Thank you.
Deane Dray with RBC capital markets. Your line is open.
Thanks, Good morning, everyone, Hey, good morning, again and so.
And we're still trying to absorb some of these big price increases just the magnitude of that.
And that's always been the story historically with it with at core has the ability to pass through instantly.
Higher raw material costs, and if there's ever been a quarter. This is it kind of shows you that your model so.
Can I start with if the context of the 35.6.
Percentage points and price increase what's the.
The input cost increase that we saw in the quarter can we start there just if you aggregate steel if you aggregate raise and how much was higher input costs. Yeah. Deane, if you right I'm going to reference our page six and on the bottom where the EBITDA bridge as you can see that input costs.
And as Ware, and increase of $64 million and the quarter.
<unk> said, obviously by the $163 million and increased price and so I would say the increased prices and element certainly is you know the pass throughs and input cost changes, but also.
Probably even a major element of it is again, just delivery and being able to service, our customers and being able to get the price for the value that we're offering the market at this point and time got it and just directionally out of that $64 million how much of it was a P D C versus steel.
A simple.
It's probably a mix Deane because you get into like steel cost hot rolled steel and the last seven eight months have tripled and price and then it's a question of you know, we probably sell more steel products and P. B C. So as all of us and I as steel for gas and so yeah, I would say a little bit more on the steel side.
<unk>.
Alright, So the question and then becomes for Us is.
The process of normalization.
So will there be a and maybe let's just start on the supply side of new capacity is there do you have plans for new capacity come on and might your competition start to.
And new capacity it it's obviously hard not here today to announce anything that we're doing but don't read into that either Dean yeah. We did bring our facility for P. B and C. For example that was knocked out by a flood back on line. So that's helped some from there Deane, it's hard to speculate any type of.
And of AD and infrastructure is at least a year long to put something and whether it's us for competition and then you get into is this an anomaly for a year do you have space and your facility and then you do have growing market. So I'm always watching we're watching but theres nothing.
And I can predict or that overly concerned about at the moment that's for at core, but how about competition Oh no. But it is the same day any other words to go deep and do they have space and their facility or they city and they're taking their money and private company and to their shareholders are they concerned two years from now price he may normalize and by the way if somebody was that a law.
Little bit of capacity.
You know the markets are growing across the board, so and I would expect that to continue for the next several years. So I was making more of a holistic statement that I'm not that concerned good and then just so we're level set on the rule of thumb is.
Conduit and cannot be shipped more than 500 miles economically so Pete that's true yes.
Yeah, Matt negates any chance that you'll start seeing Chinese imports imports Oh, yeah Chinese share at least for P. B C and that's of all my concerns and life. That's not one of them just want to make sure that's still.
Yeah.
And about.
Alright.
The ramp down and normalizing is you think is a 2021 so the back half things can normalize because if you look at the guidance, which we really appreciate you pointing to for 'twenty two it does ramp down and so.
What's the kind of is it is it linear in terms of the selling price is supply demand begins to normalize and yeah. I think it is linear probably dean with the other assumption is probably a little bit more directly and the winter months because again there is seasonality to our business you can see that.
And with previous years, and revenue and earnings and it's a logical thing and now the words think about P. B C. Specifically, but even other building products. It's hard to put P. V C underground when half for the United States is frozen for five bonds, but I would suspect that my competition and myself will be built.
And inventory catching up during the winter months and therefore, when spring comes next year, they'll probably be more of a normalized supply demand and therefore, our guidance, which most people don't give her estimates are for 100 or $450 million seems both prudent but by the way and up and increase from.
You know quite frankly, just three months ago. So it's a good time to be here at core shareholder.
Agreed and just last one for me is a bit more of a technical question. So when I look at the F. R E acquisition, and that's fiberglass so I'm pretty familiar with the the building codes for steel.
Purses building codes of P V C. How does fiber glass get get.
And within the equation of building codes as a substitute for P V C.
And what it could be but dean and Theres a couple of places here, where it's really unique and so that's why we're so excited to add this to the line. So for example on page for.
With bridges and things like that fiberglass is the lightest evolved and materials, we provide and again, we have the full suite of conduits. So if you do have an aging and bridge and you're concerned about hey, you want to replace things, but you don't want to add.
With tons and tons of weight to it fiberglass is a perfect alternative to redo the kind do it on a bridge for example, and then to your point about getting Turkey fiberglass is perfect and fire retardant applications for example, steel won't Mel but it would transfer the who.
Heat inside to the wire. So you don't want a steel conduit for example, going into your fire system, but you know so the cables burn before the fire pumps go on so and that type of case FRE is spot on for those applications. So tunnels that kind of thing all of those kind of applications exactly so it's.
And we acquired it for the long long term like anything we do but obviously with the new administration and investments and infrastructure. It was like the perfect time for us to get this as part of our Corporation and.
That's really helpful explanation and yes, it's highly topical, especially and bridge and tunnel and all the infrastructure spending that is supposed to be happening and so congrats.
Congrats.
Thank you Yep. Thank you Deane.
John Walsh with credit Suisse. Your line is open.
Hi, good morning.
Good morning, John.
Wanted to circle back here to price.
And if I remember correctly I think your previous view on 2020, two kind of assumed that the benefit of price related to COVID-19.
You know normalizes I guess to use the.
Dean's word there.
I'm trying to understand why that might be the case.
Your product requires a very regional manufacturing structure.
It's a pretty concentrated market I guess I'm curious why all of a sudden price would kind of normalize and at least not just plateau at these rates. It's also pretty small part of the input costs of the project. So maybe just help us understand that a little bit yeah, great question John.
First obviously for myself for employees and our shareholders I would love. It if it was to plateau I, just don't think and by the way we will strive to continue to bride value to our customers and get a fair price for providing that value I just think it's not realistic John from the following reason.
Demand when our competitors do catch up are they willing to say hey, I can provide the same services that core they can't today I'm generalizing, there's great competitors out there across all of our product lines.
But as they catch up and build supply and get it out and the field and all of a side and start, saying, Hey, I'll provide 5% less.
Price for that same service I think we'll start to see more normalized now John to your point when we gave the original guidance. It still had if anyone did a model and just said you know volume up several percent productivity. There was still two years of price built in and now as we raised that guidance for <unk>.
Dimension to the 400 for 50 range, we are assuming along with the FRE acquisition that we will continue to hold some more of that price going forward, but I. Just don't think it's a prudent thing for our investors and we want to be as transparent as possible I E. The reason, we're probably one of the very few.
Companies, that's giving you some type of estimate into 2020 two.
And one just one other thing on that I do think you know as time goes on we'll definitely have a little bit more clarity and to that as we add more clarity and FY 'twenty. One you know a quarter ago, we obviously thought for.
For 50 for EBITDA and now we're significantly above that as you know these challenges have increased a little bit and the quarter due to the winter storm and what have you, but we also see this imbalance between supply and demand continuing at least through this year. So you know as the year unfolds and we get more information.
And we'll re look like we normally do in November and provide updated guidance for FY 'twenty and the other thing I'd like to emphasize and sorry, John back to you then or is <unk>.
P B C. We've called out because its our most.
Example of that supply demand characteristics, but I don't want to ignore whether it's our cable business, our metal conduit business and I'm not quite lists each one of our international business that this isn't just one product, but most of those other products and our businesses also.
Art and unique situations steel supply went from a three weeks for us to get steel and to literally like 13 weeks and go on for measuring weeks to months and that has caused unique where competitors have stocked out or product or haven't been able to forecast accurately 13 weeks in advance so.
But those things over time should normalize, but I'm projecting John just like for you or I would ask me what the cost of lumber is going to be two years from now.
Yeah.
Yeah, no that makes sense I was just going to say you know we definitely appreciate you providing a look into into 2022.
Because you are one of the few.
If we could talk actually maybe a little bit about international obviously, it's a smaller part of your business, but maybe you could talk about the end markets that you are seeing driving that international growth and kind of I know you're in.
You know kind of a smaller subset of countries, but and.
Any other color you can provide there yeah couple, it's probably across the board with their growth and to the point, we provided and other things it's around 10% of the business give or take but two things I would claim there there, especially one growing share there just have a great organization that is really aligned with and cost.
<unk> and providing value and then specifically data centers I have a.
Call every couple of weeks with our president of International and his eyes light up when you talk and I won't mention specific large data corporations, but his work with them both in Europe, and the middle East and so forth as they grow he and his team are doing a great job and that area. So.
Great and then maybe ill just one more here when you think about the volume recovery.
You know for the back half of this year and into next year. Obviously, we are looking at Abi right Dodge contract backlog et cetera, but any more color you'd provide around kind of that slope between kind of new construction projects renovation retrofit and then.
Maybe you know a little bit of thoughts around infrastructure.
As well, yeah, So I think and general expect for the whole year to be low single digits, which means stronger than that and the second half of the year with the fairness of this quarter will be probably even high single digits, but we are comping the infamous yo shut down corn.
And teen quarter last year.
But again, John Digressing, a little for and question and I'm really proud David called it out that we were actually up slightly and volume this quarter and the metal still things being slower and COVID-19 compared to the full robustness a year ago. So the teams that are on well, we're serving customers and just going forward. Thank mid to low single digit grow.
<unk>.
As a driver.
Great. Thank you for all the color yeah. Thank you John.
Alright take care.
Chris Moore with CJS Securities. Your line is open.
Hey, good morning, Yeah, most of my and been asked here, but maybe in your prepared remarks, you talked to you know still about still heavily investing in organic growth.
Net products geography et cetera can.
Can you maybe talk to that a little bit further.
Yeah. So we are Chris without naming products, we haven't released yet one of our key focuses is on both new products, but also services, so but I'll go with new products. We have for example, and I called it out.
One and award for our cable business, where we're just the outside edging on a piece of cable, whereas this metal banding as a lot smoother. So it's a lot easier to pull through like the choices and the walls and so forth. That's literally was just recognized by electrical construction magazine as their products of the year for.
The cable business and there are several other products I know, we've released for and the last month and we'll be talking through with our employees and then it services just how can we leverage.
Pull through investments, we're making with contractors software tools that help our truckers pickup orders and know exactly when to arrive and what bay to tools for Bim modeling and so forth. So we're making investments literally across the board as one would appreciate when we're delivering results like this.
We're also really focused on making sure we're making investments. So that you know 2023 will be as successful as what this fiscal year is turning out to be.
Got it.
Helpful and I'll leave it there I appreciate it guys.
Thank you, Chris and welcome to Atcor Yeah. Thank you. Thank you very much.
I would now like to turn the call back over to Bill Waltz for closing remarks, great. So hey, before we conclude let me summarize my three key takeaways from this discussion. This morning first the outstanding performance, we delivered and the second quarter is a result of the strong operational focus and the entire team.
<unk> and our ability to prioritize our customers and provide the products they need most.
Second we continue to deploy capital effectively to grow our business and we're really excited about the recent acquisition of FRE composites third and in closing we continue to be enthusiastic about what the future holds for this tremendous company and team over the remainder of the year and then beyond.
And that so with that thank you for all your support and interest and Accor and we look forward to speaking with you during our next quarterly call. So thank you that concludes the call for the day.
This concludes the <unk> second quarter fiscal 2020, One earnings conference call and we thank you for your participation you may now disconnect.
Yeah.