Q3 2022 Atkore Inc Earnings Call
Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the AD Corp, third quarter fiscal year 2022 earnings conference call. All lines have been placed on listen only mode. After the Speakers' remarks, there will be a question and answer session.
If 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.
As a reminder, this conference is being recorded thank you I would now like to turn the conference over to your host John Rasor, 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.
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 strong operating results in the third quarter of 2022, despite challenges in the overall global supply chains and labor availability I'm also.
I'd say just speak about many of the opportunities that lie ahead for us due in large part to actions we've taken to position <unk> as a leader in our markets.
We continue to execute against our operational plans as well as our capital deployment model. Currently we are well ahead of schedule on our plans to deploy over $1 billion over the next two to three years within this quarter alone we deployed over $400 million combined in.
The areas of capital expenditures M&A and share repurchases.
In regards to M&A, we are very pleased to welcome their employees from both Talon products, the United Poly systems in that core.
These are two great companies and we're excited about the opportunity to grow our businesses together.
In addition to these acquisitions during the quarter, we purchased a new property in the Dallas, Texas area that will be used to strategically grow our capacity for our <unk> products as wireless for by a strategic location for our new regional distribution center in the future.
Heading into the last quarter of our fiscal year, we are increasing our expectations and outlook for FY 'twenty two based on the strong performance we had in the first nine months.
Turning to slide four we are positive on the outlook for http products, given the expected growth in <unk> and broadband Internet access building on our recent acquisitions of four star industries, and United Poly systems, along with our existing portfolio of products.
We believe we have the opportunity to become a leading provider in this market over the next few years through additional organic and inorganic opportunities. It is for these reasons that we expect our HD p/e basis be a growth driver for accor.
Moving to slide five we are adding new HD p/e production equipment that we expect to receive in FY 'twenty three to be place in our new Dallas facility.
Purchasing this property, we will not only have additional space for production capacity, but equally as important we plan to build a new regional distribution center.
We believe the RTC will allow us to better service our customers in this region in the United States consistent with our strategy of one order one delivery one invoice.
This way of doing business, having the capacity and infrastructure to do Colo and same day pick ups is what continues to differentiate accor and supports our mission to be the customers' first choice.
With that I'm, especially thankful for each of our great employees and the work they do every day to support our customers.
Now I'll turn the call over to David to talk through the strong results of the third quarter.
Thank you Bill and good morning, everyone.
Moving to our consolidated results on slide six.
Net sales increased 24% year over year to $1 1 billion.
Adjusted EBITDA increased to $378 million, which drove our adjusted EBITDA margin to 36% in the quarter.
<unk> up versus the prior year.
Our adjusted EPS increased from $6.07.
Turning to slide seven and our consolidated bridges.
Net sales increased by $208 million due to higher selling prices and the contributions from recent acquisitions.
As we've previously mentioned volumes have been impacted by several factors.
In Q3, our volumes for metal related products in the U S were down and offset the gains we're seeing in other parts of the business.
These declines were driven by the steel price declines in volatility that we mentioned last quarter.
Even though this quarter wasn't as strong from a volume perspective were still positive over the long term given the strength of some of the key forward looking indicators, such as contractor backlog and 17 consecutive months of positive Abi.
However, total construction has been constrained by long lead times for non core electrical products and the availability of job site labor.
Moving across the bridge, we're very pleased with the performance and contribution from our two acquisitions completed in Q1 of this fiscal year SaaS go enforced our industries.
Turning to our segment results on slide eight the electrical.
Segment increased adjusted EBITDA by $84 million and adjusted EBIT margins by 230 basis points.
And our safety and infrastructure segment net sales increased by 25% from the prior year and adjusted EBITDA more than doubled.
And now a quick update on our capital deployment progress on slide nine.
As Bill mentioned, we are ahead of scheduled to deploy over 1 billion in cash over the next two years to three years that we announced in November and we've deployed over $730 million in the first nine months of 2022.
Our internal investments have increased with the addition of our new facility in Dallas, and we'll continue to find great companies to add into the portfolio.
In fact looking back across all of our recent deals each of these acquisitions are performing ahead of our original expectations.
This is a testament to the <unk> business system, and our disciplined operational focus starting from the diligence process all the way through to several years post integration.
In addition to our M&A activity, we've been active with share repurchases in both Q3 and in Q4 as we sit here today, we've already repurchased $500 million in stock this fiscal year.
This is likely our total outlook for the fiscal year that we saw a 300 million in authorization ready to deploy as we enter our next fiscal year.
With that I'll turn the call back over to bill to discuss the outlook.
Thanks, David turning to page 10, given the strong results as David just covered we are increasing our 2022 expectations for net sales adjusted EBITDA and adjusted EPS.
With the recent Dallas purchase we've also increased our outlook for capital expenditures looking.
Looking ahead, we continue to estimate that FY 'twenty three adjusted EBITDA will be between $800 million to $900 million. We're confident in this estimate but it is subject to market volatility and changes in assumptions in November we will revise our standard outlet.
For FY 'twenty three.
As we approach the end of this fiscal year, we are very pleased with what we've accomplished and we are excited about the opportunities ahead with that we'll turn it over to the operator to open the line 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.
Your first question comes from the line of Chris Moore from CJS Securities. Your line is open.
Hey, good morning, guys. Thanks for taking a couple of questions.
Good morning, Chris Good morning, Chris Good morning, I know that dynamic pricing is kind of one of the key strengths of the company and volume decisions are.
Often impacted by pricing I'm, just trying to understand maybe a little bit better as volume declines how price is tied to that is is it different for PVC than it is kind of in other areas.
Chris I think it's the next level on the question. It all depends on what the demand is out there because obviously, we want to maximize both price and volume and then it's just a balancing act of what that what the demand is going to obviously be dropped your price in half it's not like in our construction market people are going to buy twice as much.
And assume the competitors react so.
The team did really well this quarter.
And the only other insight I would give you to volume is with steel pricing over the last year literally dropping from its high to where it is down 60% anybody in the channel probably has worked through their volume, but that is a distributor of contractor just because they can see publicly what.
Hot rolled steel price in cold rolled steel prices are so beyond that non steel things. We actually grew in volume this quarter I'm pretty comfortable and bullish on both volume as we go into next year and pricing is playing it out probably exactly right.
We receive it we should be at this stage.
Got it very helpful.
Yes.
Stay with that theme a little bit when you look at at PVC pricing today.
Does it stand relative to 12 months ago.
It's down slightly but exactly oh actually.
Oh versus 12 months ago Youre right. Thank you, David I apologize, Chris because I'm thinking sequentially, it's actually up compared to a year ago, and that's what's helping to drive the margins down. It is down that what was your question slightly quarter over quarter, but we quite frankly, we anticipated that and Thats why you kind of see you there.
The guide for Q4, the $305 to $3 35, but everything is working out exactly as we anticipated Ironically or then if anything we had even stronger Q3 with pricing and.
Every other initiatives we're driving.
Got it.
And the last one for me is just are you seeing any meaningful changes on the PVC supply side and any reason to think mitsubishi's ramping production or any other players are entering the market at this stage no.
Not aware of an electrical conduit market again, my competitors don't talk but no I'm not aware of anything and.
Only thing I would say is lead times for the industry have returned to basically normal and I think we wanted to communicate that but now it's everything is moving along and therefore the confidence in our mind that our shareholders should have that we established.
Kind of a focal point I'll say, the eight to 900 million and while we are.
Specific guidance in November in the middle of all the craziness out there from a possible recession two wars to anything else, we're still very comfortable with our models and us be able to.
Deliver all numbers that we set.
Got it and I leave it there thank you.
Quarters, Okay cool thanks, Chris.
Your next question comes from the line of Deane Dray from RBC.
Markets. Your line is open.
Good morning, everyone Hey, good morning, Good morning, I just wanted to follow up on pricing just as you see the price.
Percent sequentially coming down Simplistically I've always looked at your pricing power also based upon your backlog. So as long as you have outsized backlogs and you have pricing power. So yeah.
You can share some color around how backlog stands today.
Even if you want to pick a product line.
To help give some context about pricing and then the go forward like in between the way I would think about is our typical lead times pre COVID-19 were four days and we aspire with are already sees to get our lead times down to one day, so theres going to be some real fun things, we will be able to do to deliver value as we go forward with that corporate customers.
But if we're shipping in four days in places Lee our backlog is four days and I think as lead times across all of our products from our metal conduit PVC conduit and so forth. There is a couple of product lines that are still.
Backlog by mines, but overall for <unk> core and the industries that are not now if you look out at what contractors have that still is where your question may have been gone very robust at eight or nine months in may deviate up and down literally like a 0.1% of a month in their backlog, but thats why from.
Indicators like that to the architectural billing index as David mentioned in his prepared remarks 17 months of positive Abi.
We're still we're optimistic for the future than I am for this year on volume our capabilities to deliver new products to grow on.
Great. That's helpful and then for David on what we'd seen everywhere across the sector free cash flow being below.
The quarterly averages and we're seeing that here today.
How much.
My guess is it's working capital build given the demand there may be some rebates in there, but just give us some context about the free cash flow conversion.
If you look at the operating cash flow number it's actually a record for us. So we actually had a very strong.
Operating cash flow month.
Embedded in that you are right, we still do have a working capital build because we still have elevated pricing. So our receivables are a little bit higher.
A little bit higher in inventories and then we also had higher capex this quarter, mainly because of the <unk>.
Investment in Dallas and investment in a couple of our other growth initiatives. So when you take that into consideration again very strong cash flow quarter. It just wasn't to the same level as we typically would expect in the third quarter as a percent of net income and then David if I can add without the financials I think our aspiration is it typical.
Year, not this year, but it is to generate a 100% free cash flow net income just as you know Deane for last year and a half there has been a working capital build when you look at the days themselves. We just looked at this interestingly enough are days or I missed exactly where they were three years ago. So it's not like the days have elevated its really the Dol.
Got it and then if I could just a last one on the Dallas facility really interesting that it's both going to be manufacturing.
As well as a distribution center, how long will it take to.
Bring the manufacturing capacity up.
And are you looking at still other opportunities to add capacity by buying plants as opposed to what sounds to be more like a greenfield.
Yes, so <unk> to your first part of the question, we will start to see the positive impact of volume from that facility in fiscal year 2023. So both good news for our customers in a very.
A market that is supposed to grow double over the next seven plus years with the different infrastructure builds and five <unk> networks and broadband so good news for our customers.
Good news for our shareholders and as we go forward I think anything's on the table. Both you know we've been obviously the most active year.
With M&A with the dollars, we spend and both most active year with organic investments. So I would exceed both of those things continuing and to our future and that's why again when shareholders asked us questions about the ability to deliver our few.
Future.
Earnings. It's all these things that we've mapped out and she is at what point do we communicate out because obviously there is competitors and so forth there, but this drives exactly why we have comfort in our eight to 900 million and never seen $600 million.
As we go forward.
I appreciate the very last point, there because you save me from asking a question about the.
Fiscal 'twenty three guide so thank you all good stuff. Thanks Dean.
Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open.
Good morning, everyone I will ask about the fiscal 'twenty guide.
Yeah.
So you didn't change your 'twenty three outlook, but you continue to put in your release that you expect PVC and other metals pricing and a return to more normal levels. I think many of US are just trying to figure out what's your new normal is you said the business is trending mostly in line with your expectations now, but as we get closer to 23 can you give us some more color on what the new normal might be for.
PVC pricing or frequent electrical margins in 'twenty three and beyond.
Really anything more color and what's embedded in that 800 to 900 million of EBITA, yeah. So Andy I'll start, but as you can expect we will give a lot more clarity in November .
I think it is an unusual thing for accor, where most companies don't give numbers out future years, Besides kind of shareholder meetings of very high level, but we wanted to ground everybody into that packed more details will come in November .
We are seeing a slight as I mentioned to an earlier question I think from Chris.
You know.
Slowdown and pricing is starting to subside slightly but nothing significant I would expect a slight drag over the next year to two years, but again, what we're doing internally is all of these growth initiatives some of which we've communicated I think there is other agenda items that we already have lined up to talk about that would be great.
Growth initiative in November so as we formalize those plans are a little bit more I would you tell you more to come but pricing continue to subside slightly and then having enough growth initiatives, even with a flat market that will control our destiny I'm pretty calm.
Trouble with solid organic growth next year, just even in a flat market just because of the things that we have lined up in other areas.
That's helpful. And then maybe David gave some color regarding the volume declines in the quarter. It still seems like you're positive on the volume outlook going forward and the headwinds youre seeing are mostly supply chain labor related or maybe that reaction to steel price declines, but are you seeing any signs of weakness in the overall end market demand and how do you think about volume growth.
I think you've talked about it just now bill a little yeah.
<unk> a follow up just to give some clarity there so yes.
So long term short term long term Charlotte so long term, we're comfortable when you look at everything as I think I mentioned, it already or David that the Abi is up for 17 straight months now.
Check this but it's probably a history of how many months of positive results and Dodge momentum index and the backlog out there with contractors and as I mentioned the.
Infrastructure, Bill really hasn't hit yet and a lot of those things arent going to show up on a square footage report if it's adding a new electrical lines underground in new fiber optic lines underground. So theres things if somebody looks at conventional metrics. They will not see that will help grow the business and I am not talking arent, just our business, but the industry I mean, there's so much here with.
The electrification EV charging hardening of our electrical infrastructure that exceptionally positive go short term for a second it's playing out basically as we expected again <unk> is in a great position right now, but at the end of the day. There's products. For example that we don't provide like switch gear that theres four or five.
Other people in the electrical industry that they've gone from seven to eight week delivery times per year, that's slowing up job sites literal loan.
<unk>, so tight trying to get trades people out of job site, especially when they have logistical issues with other suppliers. So if anything it's Andy into strange way, if we have to get all the inventory out of the channel right now where we're doing such a great year to position us for next year I am very comfortable with it in that area.
Point short term as I did mentioned.
We're still price down 60% over the last year, you are going to have everybody in the channel you cant totally destock here, but if you did have an extra week of inventory out of contract site proud.
Probably using that steel before you buy new steel if you had and this is beyond conduit. This the same with our safety and infrastructure business.
With those customers and the same with the distributors. So I think everybody is trying to destock as much as possible to me that gives me optimism on next year, just because there won't be any type of inventory in the channel and then Andrew If I go back to long term you have everything we talked about it's great for the industry.
From a positive tailwind and then we add on top of that everything at core is positioned to do as we just mentioned today for example, the startup of the new H D. P. A facility.
<unk> power for example, it's a phenomenal company with great leadership, but I think even there we can help invest and expand their customer base and grow with them later alone our previous acquisitions like FRE and fiberglass with the infrastructure Bill and like I said more things to come here in November so.
Well as I can be at this stage I'm only other thing I'd add on the short term Andy is if you look at the jobs numbers non res construction continues to add jobs in June it was almost 17000 jobs. So.
There is work out there the backlogs there. It's just gained the people and the products actually execute on the construction, which is probably a little bit of the headwind short term now I'm getting Oh, sorry, Andy one other thing.
One could make the case that even if there's a slowdown in residential markets.
<unk> recession, and consumer things that we need workers out on job site. So I could make a case that there's a slight recession and those markets and it opens up more people to work in the construction industry, where we're going to have a higher fall through rate of our electrical products. It could actually help back course, so again I think we're in a unique position with.
U S made products not only with overseas issues lots of great growth initiatives to be really well positioned for the future.
Leather points on that Andy when you look at residential construction you know you see multifamily a little bit of strength, there certainly benefits our core more than single family does so I think that's a positive and you're also seeing some urban centers at least anecdotally, where some office buildings being turned into residential.
Selling units, which again any of that refurbishment activity certainly helps our business also.
Very helpful guys and then maybe just wanted to follow up on the ADP condo a business you obviously highlight highlighted it putting it together over the last year or two could you give us more color on how big it could get and what kind of growth you do expect in the business I know, it's probably a smaller part of the business still but it does seem like youre emphasizing it yes.
Yes, so real rough the H D P industry overall coming from outside consultants and so forth is supposed to double over the next five seven years.
Thats try tied exactly to all of the things, including the $1 two trillion in infrastructure. So for us without giving you specific numbers I think it can be a reasonable portion of our business.
Dot here to say today is going to be the largest are exactly in the middle but it's going to grow I think with our investments and acquisitions and organically and it's going to be strong markets to go you know all of the fiber optic lines that having broadband access for everyone in the country.
The infrastructure Bill would help subsidize that and then there's a lot of times, where a customer could use either PVC conduit or H D. P. I could get into the details of why there is different preferences, but as we look to put electrical lines underground so theyre not knocked out with storms and so forth.
This will play well for both H D P and PVC markets for us.
Got it guys.
Thanks, Andy Thank you Andy.
Your next question comes from the line of Victor Kang from Credit Suisse. Your line is open.
Good morning, good morning Victor.
So could it can I follow up on us a little bit more about the SDP offering I was just wondering how how much of a leverage it is today.
Infrastructure build for example, if you could give a little bit more color around that.
Dolby screen.
Yeah, It's definitely a great question Victor is the infrastructure Bill is going to absolutely help I forgot the exact number but I want to say there is 50 $60 billion of the 1.2 earmarked exactly to putting in fiber optic lines and across the country. So as I mentioned earlier, we've had outside consultants.
Look it is an estimate of the current capacity the industry and how much should be needed over the next five years to seven years to meet the demands just of the infrastructure Bill itself and it's very promising.
Awesome awesome. Thank you could I could also get some thoughts around.
The potential of the dividend.
David do you want to address alright.
Right now when you look at our capital deployment strategy, we put in place at the end of last year, we focused primarily on.
Our organic opportunities through through Capex, which I think we've done a really good job there are M&A opportunities because we feel like theres still significant opportunities to add these companies and we've had added four yet this year. So I think it's been a strong M&A here and then.
On having excess cash sitting on the balance sheet. We decided you know we think the most effective way at least right now from where we are is stock buybacks. When we bought back as we sit here today $500 million in the fiscal year. So really we look at our business is more of a growth opportunity with all the mega trends that are our business.
Support so we feel like at this point in time dividends, probably not the way we want to go with capital deployment, but it's something we think about it on a regular basis.
Not saying in the future we won't do that it's just right now we feel like there's a lot of growth opportunities, we wouldn't take advantage of those right now.
Then David to add taken up in a way or no foreshadowing here, but obviously in November when we gave the fiscal year guidance, we'll also give capital deployment, including future expectations for stock buyback and everything else. So again, it's nice to earlier questions. We're generating a lot of cash and I think we're investing it wisely on behalf of our shoulder shareholders.
Including returning it with stock buyback.
Got it got it and my last question is what is the expectation around price costs into.
Fiscal quarter four and.
Next year.
Yeah. So in quarter four like Bill has said a little bit of price softening going in the Q4 versus Q3 sequentially, you'll see it in our adjusted EBITDA numbers slightly down guide from where Q3 was and then Q4 will give you more details.
When we give our official guidance.
In November .
Thank you.
Thank you Victor and thanks Victor.
And this concludes the question and answer session I would now like to turn the call back over to Bill Waltz for some closing remarks before we conclude let me summarize my three key takeaways from today's discussion first Q3 was a great quarter and we are increasing our expectations for FY 'twenty two.
Second we are executing our capital deployment model ahead of schedule with over $730 million deployed in the first nine months of this year.
Third we have a bright future ahead, and we're committed to growing and building our core with our recent acquisitions and growth opportunities in HD P/e and our Rd fees, we really do believe that the best is yet to come for accor.
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.
This concludes today's conference call you may now disconnect.
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