Q2 2022 Atkore Inc Earnings Call
Good morning.
Name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to of course second quarter fiscal year 'twenty to 'twenty two earnings conference call.
All lines have been placed in a listen only mode.
After the Speakers' remarks, there will be a question and answer session.
You'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one.
A reminder, this conference is being recorded.
Thank you.
I would now like to turn the conference over to your host John <unk>, 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 three I am pleased to report that <unk> again delivered outstanding performance and strong results in the second quarter of 2022.
Despite continued challenges across the macro environment, we increased sales and profitability our businesses are performing well and we continue to execute our plans for capital deployment.
During the quarter, we repurchased $157 million in stock and continue to invest in our business for the future.
Given the outstanding performance and results in the first half of the year, we've increased the size of our share repurchase authorization from 400 million to $800 million and we are increasing our expectations for fiscal year 2022.
Turning to slide four we are increasing our outlook for full year adjusted EBITDA to a range of $1 billion to $5 billion to $1 3 billion.
This is up $375 million from our previous expectation as we continue to expect profitability levels in our PVC related products in other parts of the business to remain strong.
We are also now planning to repurchase at least $400 million in stock this year with our increased expectations for FY 'twenty. Two we also thought it would be helpful to provide some preliminary perspective on FY 'twenty three our initial expectations for adjusted EBITDA in FY 'twenty three are in there.
Range of $800 million to $900 million, there are many variables and market conditions that could cause this range to fluctuate, but we believe this is a good estimate for next year.
With that I'll turn the call over to David to discuss the quarter.
Thank you Bill and good morning, everyone.
<unk> to our consolidated results on slide five.
Net sales increased 54% year over year to $983 million.
Adjusted EBITDA increased to $346 million.
Which drove our adjusted EBITDA margin to 35% during the quarter, both up versus the prior year.
Our adjusted EPS increased to $5 39.
Turning to slide six and our consolidated bridges.
Net sales increased by $343 million, primarily due to higher selling prices and the contributions from recent acquisitions.
As we mentioned previously volumes have been impacted by several factors.
Thank you to our volumes for certain steel related products in the U S. In both the electrical and safety and infrastructure were down approximately 20% as many customers were holding off on purchases given the volatility we've seen recently with steel prices.
For example, the <unk>.
Average spot price for hot rolled steel was down over 30% in fiscal Q2 versus Q1.
However, the average prices still hasnt rebounded approximately 20% in April versus Q2, and with the increase the maintenance and the start of the building season, we expect volumes to increase for these products as we progressed through the year.
Volumes for the rest of our products were up over 12%.
In addition, our award winning <unk> products continued to gain traction in the market.
Our overall product vitality percentage reach high single digits as a percent of sales shifting to our segment results on slide seven the electrical segment increased adjusted EBITDA by $142 million and adjusted EBIT margins by 490 basis points.
And our safety and infrastructure segment net sales increased by 47% from the prior year and adjusted EBIT increased 79% and now a quick update on our capital deployment progress on slide eight.
We are now on track to exceed our plan to deploy over 1 billion in cash over the next two to three years that we announced in November and we deployed approximately $325 million in the first half of 2022.
Across our three pillars of capital expenditures M&A and share repurchases.
Very pleased with the performance of our two most recent acquisitions of SaaS go enforced our industry in both of these teams are off to a great start.
As Bill mentioned earlier, we've also increased the size of our current stock repurchase authorization ending in November 2023 four.
<unk> 400 million to $800 million.
One thing to remember in this current interest rate environment is that in 2021, we were able to successfully refinance and restructure our 100% floating debt portfolio at very competitive rates today.
Today, we have approximately 50% of our long term debt with a fixed interest rate for the next nine years.
As we wrap up the first half of 2022, we have extended our track record of outstanding operational performance over the past few years.
We have continued to successfully execute on our M&A program invest in our business for future growth and consistently return capital to our shareholders via stock repurchases.
Given our conviction in the future and our ability to execute we will continue to buy back shares.
Specifically and Opportunistically within our capital model with.
That will turn it to the operator to open the lines for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Jana.
And dray with RBC. Your line is open. Thank you good morning, everyone.
Good morning, Deane good morning, Hey, congrats on another outstanding quarter.
Thank you.
Is your latest thinking as we get this question from investors about how much of the price will you keep we had some volatility in steel.
This quarter and still you've posted over 50% price.
So just started here how much of the price do you expect to keep.
And any sort of visibility in terms of near term demand. Thanks.
Yes, so I'll do them in reverse order Deane near term demand looks strong obviously were factored by labor and I'm, taking labor out contractors other products challenges out in the market, but things like architectural billing index Dodge momentum index and so forth are all exceptionally pause.
So we're still optimistic for the future pricing, it's a challenging one we're probably.
We're still seeing some growth in some areas. Some other products probably have hit peak and so forth and that's why while it's hard to predict D and I wish I had a crystal ball that can tell us exactly three years out.
Or at least comfortable enough that we're raising our earnings for this share pretty dramatically and then also giving that guidance of next year of 8% to $900 million I don't know if we move off the $600 million long term, even though we've kind of said in the past, we hope to always which are gaining growth M&A exceed that number so.
Hopefully that helps that we see pricing last seen into at least 2024, if not beyond.
We started to give us some type of estimate for 2023, that's real helpful and I really appreciate the fact, you're giving this forward guidance into fiscal 'twenty three.
And we're expecting normalization to be something.
Above if.
If not well above 600, but what's your thinking about normalization when and how does that base 600 plus com.
Meaningfully increased and what are the factors there well I think it's it's a factor of a couple of things again, if anyone goes back as you've been with the stock presents its been a stock.
We've compounded our EBITDA, 10% a year pre COVID-19. So like we're doing the right. So if they are at core businesses.
Organic investments new product development, and then M&A. So as you keep adding that up based off against the headwind.
We will have margin compression or maybe we won't but I would think it would be very prudent to assume from an investor standpoint, there would be margin compression is that out a couple of years just as those two intersect and exactly what number that we saw margin compression normalizes and in everything we do is upside it's just hard to say.
And I would at least planned 2024, just as we've given numbers here. This morning, but Deane as you know there is so many variables right now, but the world with interest rates and everything there is just so many different unknowns and we're already given perspective, a year and a half out at this point in time, so I think beyond that.
I think in a normal market dynamics, we're doing what we can we we were obviously everyday work to make sure that there isn't a normalization impact great and just last question for me and then Bill has from a historical context I actually covered at core in its prior life. When it was part of the Tyco portfolio.
I go way back and that's the degree of confidence and historically that you've always been able to pass through higher raw material costs are 100% to customers. So that's been proven it.
Just some context and color around what was going on in the steel products.
It was really interesting that you say that some of the customers were holding off.
And in that period of declining price, but what are the lessons learned it seems to have rebounded in April and any color. There would be helpful. Yeah. So again I'll just kind of you reverse it has rebounded at least that it's again without getting too specific for April that were just wrapping up and getting into may as we close the books is more in the flat.
<unk> versus down and I think David mentioned, 20% in the last quarter.
These are rough numbers I think you know.
It depends on what type of steel and so forth, but steel prices. When for example high road directionally around $800 a ton to less than 1000, Oh here in the last couple of months and bounce back up 200, $3500 I haven't tracked in the last week or so.
And our buyers are efficient they need to buy these are a lot of my stock products particular on the industrial side for example, with a solar farm or something else and you can hold off a month or two it obviously they get the forecast to make economic sense and then on the electrical side, it's more of a must stop product for example with metal.
Conduit, but again a distributor that probably was trying to buy ahead just to make sure they could keep stock in this precarious supply environment.
Hey, let's hold off for two weeks, just one week of inventory and a 13 week quarter is 7% to 8%. So you see where all of a sudden hey, let's cut a little bit it's enough to swing that number and metal is between our safety and infrastructure business in electrical is a large portion of our business. So.
But as David mentioned in the prepared remarks.
I think the steel costs from what our forecast say youre kind of moderating at this level and as we go one dose kind of spring buy and stuff like that we're starting to see the demand pick back up and last statement I think David wants to add again, the other parts of the market. We're just amazing I mean, we were up 12% as David mentioned.
So I think well above what they are antibody, which he is typical market at this point.
Dan the only thing I would add is that was the cost of steel, that's making that fluctuation not necessarily the price in the market of our products, because obviously theres other inflationary factors from freight and labor and energy and you name. It. So it's not like there was a.
Correlation and pricing is just more of a delay if people can reduce stock and so on so forth and this quarter that was really helpful. Thank you.
Thanks team.
Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.
Hey, good morning, guys.
Good morning, Andy Andy.
So maybe I can follow up on <unk> question around pricing.
You just raised guidance again by 40%, maybe you could give us a little more perspective on your price cost spread it doesn't seem to be going down still despite I think last quarter, you mentioned that competitors and we're starting to discount more. So maybe you can talk about lead times and the overall competitive environment you are seeing.
So I think Andy to your point overall Youre correct margins have not gone down I think we built that and not knowing what would happen and obviously and by the way in some cases margins on some products are still going up.
So from there I think lead times have continued to get a little bit better and again I'm, giving directional numbers. It all depends on what competitor what products what region of the country, but if it was let's say four to five weeks in last quarter estimate as it now instead of four to five three to four so he thinks.
Slowly the market is getting back to normal and that's why it's both through the balance of we don't think next year would be as strong obviously, we hope and wish and will drive to another almost $1 3 billion, but I don't think thats prudent from an investor standpoint on the same hand.
Knowing where we are now it's not like margins or pricing across every product with every competitor in every region is going to collapse in the next six months and therefore, we felt comfortable enough to give a plan, yes preliminary estimate of eight to 900 million for next year.
And kudos to you for continuing to give that forward estimate, but let me maybe ask you a follow up there like what are your sort of assumptions at this point into that $800 million to $900 million. What does the market look like what does price cost look like any sort of.
Extra color you can give us would be helpful. Yeah. Good question. So it will share that we actually did a bottoms up but you've got to watch for a lot of false precision here or in other words to your point Andy doing all of those estimates. So I think normal market to three 4% you know low to mid single digit organic growth, which seems to me there.
Illogical when I look at how strong <unk> in Abi and all the other indicators like everything's positive from that standpoint, and then it's our assumption by each product line, but some compression of margin in other words, hey, assuming its going down versus up that leads to that number and then they say precise.
How much price sandy it's by product line.
Got it and then just maybe one more quick one you obviously upped your share repurchases, maybe just talk about sort of the M&A market that you've seen now obviously a lot more volatility in valuations. These days you still think you can sort of get you.
Normal bolt on strategy this year moving forward.
Yeah without never the challenge here, and then I'm going to say a definitive strong yes. The challenge is it's buying area in other words, we can get down to the deal at all of a sudden have a disagreement on working capital paid or something and it just at the point of it doesn't make sense, if we're going to not have deal fever, and keep to our values and our business.
System that you can never absolutely known a deal, but I would reemphasize again.
There's a lot of deals out there we doubled down on the size of our team.
We have the <unk>.
Balance sheet to make this happen to cash flow and therefore, the bolt on acquisitions and maybe even slightly larger ones than we've done in the past there is still a strategic synergistic that responsible and with our management bandwidth.
Im.
Relatively comfortable with that we will achieve.
Appreciate it.
Thanks Sandy.
Yes.
Next question comes from the line of Chris Moore with CJS Securities. Your line is open.
Good morning, guys, Hey, good morning, Greg good.
Good morning, Thanks for taking it.
Maybe I'll just beat this pricing question to death, but when when PVC pricing really increased sharply in calendar 'twenty. One it seemed like the conversation with end users was much more about guaranteeing on time delivery than than than pricing.
Has that dynamic changed at all.
I think <unk>.
Ed.
Other words, there was no discussion of just of price say say no. But he was just can we deliver what confidence do you have.
A customer that we will our <unk> ratio because it was all over the place I think Chris to earlier questions were.
I'm, saying, it's two to three three to four weeks again on delivery.
This is a more of a consideration there, but its still the value package of confidence in delivery and then the other things <unk> really does well with one order one delivery one invoice.
Our reputation and so forth, it's helping keep it the market is strong at the moment, but not as much on pure supply demand and I would say one thing Chris that product line. The PVC ACP product lines would be in that 12% growth. We saw in this in this quarter I would say the demand side is probably even stronger than what we thought.
The maybe six months ago, given the utility spend on putting their electric lines underground all the continued residential construction data center construction and what have you.
End market volume.
Volume there is still really strong so theres strong demand.
Bill's point.
I think that it's still an important aspect of getting the the items on time.
Got it very helpful.
And just one more on PVC.
A little bit longer term what are the puts and takes for PVC pricing never.
Never giving back too much from current levels.
Well art.
Our job both for assay for our customers and for our shareholders is to provide a value equation that price isn't the largest thing just like if anyone orders online.
The simplicity of dealing with clicking a button and getting your product. The next day and so forth. So I would aspire that we never give it back but we do have competitors out there and it's a competitive market and how they react to you know there is that consideration that we'll have to factor in so I think Chris it feels weird as the CEO to say.
But I think factoring in some it's just prudent now it's a question of active I think Deane asked of <unk>.
When does that occur.
How much comes back and that's just tough to say so at this moment, but at least we're comfortable in the outfit.
Besides racing this year substantially putting into first pin in next year, that's above the $600 million that we had before.
Got it I know, it's a long lead time in terms of people being able to ramp up.
On PVC manufacturing are you seeing anything on that front in terms of of any new.
Supply capabilities coming into the market.
No again I'd put to the Astro there that my competition does not call me and tell me about what Theyre doing internally, but we have not seen anything in the PVC and again.
I can't speak for somebody has.
That plan or if they plan on adding a line or something but it's challenging in other words, even somebody in the industry would have to have space in one of their factories would have to have the silo space would have to either railcar space would have to add to the blender of capacity. So even there to say well I'm just going to add one more line and have seven lines versus six.
<unk> is not as simple task even for somebody already in the industry. So that's why back to our confidence in raising next year's estimate.
We're in the eight to 900 range than the 600 is we don't see supply demand changing dramatically next year.
Got it I'll leave it there I appreciate it guys.
Yeah. Thank you Chris.
Your next question comes from the line of Victor Kang with Credit Suisse. Your line is open.
Good morning, everyone and thank you for taking the question.
Hang on.
John Walsh.
So my first question is can you talk a little bit about nonresident ready demand trends for SKU versus PVC products in the quarter and outlook.
Yes, I think Victor if I understood. Your question I would say almost everything void of PVC is non res E. So that's kind of simple therefore steals all non res, yes, I'm simplifying but basically.
90, plus 95 plus percent.
For PVC, because we put the not we but the PVC conduit is used for like underground lines going into sub development and ore from the sub development into the house that market is probably 30%, 40% residential and then the other 60% is nonresidential but.
<unk> probably be only.
Or is it actual product within our major contributor to utility, yes would be the third.
So part is there.
Thank you and the follow up question.
Are you seeing any change in competitive dynamics around pricing from smaller suppliers specifically.
No I don't think so.
Thank everybody.
Has your own value equation, and what they're trying to do to go to market and so forth, but no nothing jumps out.
No I would say that everyone is really struggling with higher input costs, whether it's.
The stuff that makes them proud of itself or transportation or labor you name. It I think a lot of people are starting with a high input costs. So I think the mindset of a lot of the industries right now is.
Pricing and making sure that they're holding may be able to expand our margins slightly yes, I'll just double down on David's comment that I think.
We've done a good job in the leadership team and the management at core, but communicating that even in the past ago, what steel cost or what's PVC as you. Each of you investors understand from this tracking other companies. There is so much freight costs up over 40% in labor and what's the cost of.
Lumber for a crate that we've done a pretty effective job of accurately communicated to our customers that there is a lot more cost input than just what's copper steel and PVC at the moment, but I think our competition I'll also understands and has to adapt to that to keep in the business.
Okay. Thank you for the question.
Pass it along.
Cool, Thanks Vic character.
This concludes our question and answer session I would now like to turn the call back over to Bill Waltz for closing remarks.
Before we conclude let me summarize my three key takeaways from today's discussion first Q2 was a great quarter and we have a strong outlook for 2022.
Second we are executing our capital deployment model with $325 million deployed in the first half of this year.
Third we have a bright future ahead, and we're committed to growing and building <unk> as a strong long term franchise with that thank you for your support and interest in <unk> and we look forward to speaking with you during our next quarterly call. This concludes the call for today.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now.
Please wait the conference will begin shortly.
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