Atkore Inc. Q2 2023 Earnings Call
Okay.
Good morning, My name is <unk> and I'll be your conference operator today.
Tom I would like to welcome everyone to Act Corp, second quarter fiscal year 2023 earnings conference call. All lines have been placed in a listen only mode. After the Speakers' remarks, there will be a question answer session. If you'd like to ask a question. During this time simply press the star key.
Followed by the number one on your telephone keypad.
We'd like to withdraw your question press the pound key as a reminder, this conference is being recorded.
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.
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. Adjusted EBITDA is a non-GAAP measure reconciliations of non-GAAP measures in our presentation of the most comparable GAAP measures are available in the appendix to today's presentation.
With that I'll turn it over to Bill.
Thanks, John and good morning, everyone, starting on slide three and our results in the second quarter I am pleased to share our earnings performance, which was slightly better than our expectations and reflects the strength of our business model.
At a high level volume in the quarter was up 4% in line with our expectations for mid single digit volume growth for the full year.
As expected pricing continued to normalize versus the record highs of last year, which drove the year over year change.
Net sales adjusted EBITDA and adjusted EPS, all increased sequentially from the first quarter overall the team delivered solid results.
Additionally, cash flow has been very strong in the first half of the year, allowing us to continue to execute our capital deployment strategy.
During the second quarter, we repurchased $119 million in shares and we continue to actively repurchase shares in Q3.
While also investing in our conduit to growth.
We are encouraged by the positive trends, we are seeing so far in 2023.
We've updated our outlook for adjusted EBITDA and adjusted EPS for the fiscal year.
I would like to thank all of our employees for everything they do to support our customers. It is because of their tireless efforts that <unk> is able to achieve the results and success that we continue to deliver their dedication reinforces my confidence in the future with that I'll turn the call over to David.
Can you talk through the results for the second quarter.
Thank you Bill and good morning, everyone moving to our consolidated results on slide four.
In the second quarter net sales were $896 million adjusted EBITDA was $276 million.
And adjusted EPS was $4 87.
We expect further normalization of our business in 2023 as compared to last year's outperformance and are pleased with our margin performance in the quarter with adjusted EBITDA margins of 31%.
While this is down year over year versus previous record highs is still a very strong and healthy level.
Turning to slide five and our consolidated bridges.
Overall, our quarter was in line with our expectations for revenue and slightly favorable for our expectations for earnings.
Volume was up 4% with <unk> more than 20%, mainly due to increased Mega project activity.
PBC volumes were down double digits in Q2, when compared to our strong FY 'twenty to Q2 outperformance, resulting in unfavorable mix for the quarter.
Excluding the PVC impact <unk> volume would have been up close to mid teens with a solid incremental benefit.
The year over year PVC volume reductions were mainly for utility projects on the West coast.
And the expected slowdown in residential activity.
Contrast, during the year over year reductions TBC volume was up versus pre COVID-19 levels.
And up 14% sequentially from Q1.
When we like to call out on this page is the introduction of an adjusted EPS Bridge, which demonstrates the progress we're making towards our goal of greater than $18 per share of adjusted EPS in 2025.
On this bridge, we've also isolated the impact of the solar credits related to the inflation reduction Act that began in calendar 2023.
As we've mentioned previously.
Majority of this credit related to the manufacturing of torque tubes will be pass through to our customers.
Moving to slide six and our segment results.
Margins compressed in our electrical segment with the previously mentioned pricing normalization and lower volumes in our PVC related products. However, we saw a solid margin growth on this F&I side.
Our <unk> business had 15% growth in adjusted EBITDA with adjusted EBITDA margins of over 15% in the quarter.
F&I volumes were up 20% in the quarter led by the increase in demand for our metal framing and solar related products.
Additionally, our metal framing cable management immune district construction businesses are well positioned to capture the growth in Mega projects, both in the U S and internationally.
Our product line diversification and the resiliency of our business model enables our ability to execute our strategic plan through various market cycles and macroeconomic conditions.
Our products are integral to the construction lifecycle across all verticals.
Whereby key Mega trends, we have deep customer relationships, all of which give us confidence in our value proposition as we move into the future.
Moving to slide seven we're pleased with the strength of our cash flow and balance sheet.
In the first six months of fiscal 2023, our cash flow from operating activities was 116% of our net income over the period and up 150% compared to the first half of fiscal 2022.
As Bill mentioned, we've been executing our capital deployment plan by investing in our business and repurchasing shares.
The strength of our cash flow and balance sheet provides a strong foundation for our company.
That I will turn it back to bill.
Thanks, David we are pleased with what we've accomplished in the first half of this year and we're excited about what lies ahead as we execute our three conduits are highlighted on slide eight.
Our M&A pipeline remains robust both in North America, and Europe , <unk> is well positioned as a buyer of choice given current market conditions and the strength of our party national profile.
Our category expansion initiatives related to solar and HD PE are progressing well and we've expanded our assembly and service capabilities to better support some of these larger projects both in the U S and around the world.
New product innovation as a percentage of net sales reached 9% in the second quarter and our innovative <unk> platform continues to be recognized well received in the marketplace.
These three platforms are pillars of our strategy to drive results in the back half of this year and into the future.
Moving to our outlook on slide nine given the strong performance we have delivered so far in 2023 and the positive trends. We are experiencing we are increasing and narrowing our expectations for adjusted EBITDA and adjusted EPS.
Credit really proud of the team strategy and processes, we have in place and I have full confidence in our ability to achieve our goals for the future 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.
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 Deane Dray from RBC. Your line is open.
Thank you and good morning, everyone.
Hey, good morning, <unk> morning.
Hey, I was hoping to get some more color and hopefully some specifics on the pricing dynamic. This quarter. This is all part of the normalization process and to be clear that seven down 17% essentially matched our estimates so no surprises at the headline level, but if you could.
Take us through the components and the inputs on the pricing dynamic here so I.
I always look at it in kind of three buckets. So how is market demand and then the second bucket. They are supply side capacity yet at core maybe some color on backlog and then thirdly.
What's going on on the input cost side.
The resins and steel and so forth. So if we could start there great question Deane, obviously, a couple of parts to that.
I'll start with as you mentioned and we did in our pre prepared remarks, we're basically right on track if anything slightly better I think because again, we exceeded anybody's expectations for the quarter were raising guidance so compliment to the team across the board.
Market demands are good and then if you look at it I think what David mentioned.
Even PVC sequentially up.
14%.
And as Tom just repeating David's comments, if you go back to pre Covid, where everybody was trying to buy as much as possible. During the Covid period. If you go back and look at it like art. Our fiscal Q2. This is there's higher demand what were selling for example in PVC than any quarter in <unk> history.
Backwards.
Yes, pre COVID-19, so overall things are going well.
I would say just in case anyone else ask.
Buyers are buying what they need almost to the copy out with your future questions.
Supply is coming in words and shower competitors by the way shipping pretty much on time and things like that so there is no need for somebody to do.
Spring buy and so forth that actually gives me optimism in other words, there is no extra supply in the channel because people are buying as they need it therefore.
The next quarter and so forth as we gave guidance this quarter should be good and I'm optimistic for future years.
<unk> market demand overall good nothing.
Z, but wholly solid supply is good both us and our suppliers and pipe costs are kind of all over the place and I say that from our standpoint.
If you look at things like steel costs from a year over year perspective, they're down 30%, but if you look like from the first quarter to the second quarter, it's up 20% and I'm starting to see now this is be projecting steel costs go down again, so it's all in what time period.
Same thing with copper down 10% year over year by up 12% quarter from Q1 to Q2, and then PVC highest dropped literally it's down almost the input cost is down almost 50% year over year and 25% just from Q1 to Q2.
I expect that again these are market forecasters continue to go down a little bit but.
So again.
No Dean and I think most of our shareholders now the biggest thing that controls. Our profit is just supply demand and the market second thing is <unk> ability, which I think we do really well shipping on time co loading all the value. We bring third thing is the <unk>.
Put cost in housekeeping, that's not as big a factor on how we market price and so forth. So hopefully I answered all your questions in that.
The only thing the only thing I would add.
Add to bills comments is on the F&I side. When you look at these big manufacturing plants Mega projects and whatever we've always said, we have really good content there U S metal framing wire.
Wire baskets on Salesforce, and you see that 20% up in volume in F&I.
<unk> so on solar we're starting to see the results of all of those projects.
That's really helpful.
And just a couple of clarification. So it sounds like lead times are now back to normal.
And that would also suggest that backlogs come in.
Kind of at normal level. So if you could just clarify those and then broadly just.
Question comes up a lot and it gets asked regularly but just how much of the price do you expect to hold onto because we hear PVC down 50% on the input costs, but certainly your pricing is much better than that so just.
The question about holding onto price. Thanks.
I'll start and then I think David May why now I would think of pricing in general Youre right. Her pricing is not down 50% its staff.
We are doing better than expected I would refer everybody and our best guess still is what we put into November .
Ernie stack to go what pricing, we think we'd get back and how that bridges to the future how that bridges $18, plus EPS and I would say, we're two quarters into a three year plan, but we're as comfortable today as we were in November when we put the plan together. So everything is really quite frankly very proud of.
The team is trying to look into a very murky crystal ball and call. It shot by shot and we're on track, which is the <unk> business team and an amazing set of leaders and on the backlog question Dean you probably have two different set so the flow products, our major product categories that we have our backlogs back.
Two I would say somewhat normal remember that's two weeks that's like two to three weeks, it's not much backlog and then when you look at it more on the project side, where we've talked about some of these major projects with whatever and international backlogs are up as you would expect that they would be.
Great and just a last question over on the cash flow side, which is exceptionally strong.
David you just take us through the dynamics there what's been the difference maker and I appreciate that bridge that you gave us as well, but just the conversion.
On operating cash to free cash flow is.
Much stronger than what you've done in seasonally so just help us with some insight there. Please.
Yes, thats actually fairly simple and straightforward year last year, we were building working capital throughout the year and basically now it was your pricing comes down some receivables will come down I think our inventories are in really good shape. So at the end of the day. The major Delta is in the fact that at least take it.
Also working capital versus investing in working capital.
Great to hear thank you.
Thanks Dean.
Okay.
Your next question comes from the line of Chris Dankert from Loop capital. Your line is open.
Hey, good morning, guys. Thanks for taking the question.
Good morning, Chris I guess.
Yeah, I guess, if we could dig into F&I a little bit.
You say that the Mega projects, maybe you could give us a little more context.
Exactly where some of the wins are coming in.
And maybe just kind of expand further how are the office about the stimulus is also kind of rolling through the P&L or kind of what you expect for the rest of the year there.
Yes, so Chris I'll try to give you as much color without saying specific customers and are it's hard to say the city. Because then it kind of goes back to who is the global project there but.
And it should come as no surprise to anyone.
Lot of investment not just in the United States as David called out in the pre remarks, but across the globe.
Middle East you're in.
At this stage, whether it's data centers chip manufacturing startup of EV battery places and so forth and the list goes on and what we found compliments to our international team complements our I'd say, our domestic team, but here in the states is the value add of us going in.
And beyond will work directly with the manufacturer, we're still working through distribution, we sell it but the partnership of things like <unk>.
The brand has been around now for 100 years, well now consistent across the globe, we're doing things like kitting, and so forth, where we're bringing all in setting up a job site and we're winning a lot of jobs. There are lot overseas, So again middle east.
Europe , and so forth that are growing quite frankly rapidly we're putting a full team together in areas like that so.
So Chris like our value proposition with our.
Construction of our international teams, where you can do more of the fabrication or so on and so forth with sub assemblies off site that you do.
Don't hold up the site itself I think that value prop is resonating quite a bit with that.
And users so.
No that's great color. Thank you so much for that.
And maybe you could just digging a little bit obviously, the M&A has been pretty impressive here can you just kind of update us on the status of the integration there and kind of if everything is on track with what you've been expecting from talent Pollyanna and elite.
Yes, so overall for our HCP acquisitions, which are the ones you mentioned everything's on track the teams doing a really good job there are integrated and what I'm, saying integrating bringing them into our culture ERP systems over the next year and so forth, but also sharing facilities in other words, it doesn't make sense the shape.
If we add a facility in Texas, we added facility in a different state.
Why not in Texas should pass the other one versus let's move the production around so really great team coming together sharing best practices very optimistic for the future that we will hit or exceed our numbers for our integration models and as I assume either you have nowhere David's explained in previous quarters.
Basically they are pretty synergistic well above our weighted average cost of capital. So everything's clicking along just as planned again.
Good to hear thanks, again, and congrats on the quarter.
Thank you Chris.
Your next question comes from the line of Andy Kaplowitz from Citigroup. Please your line is open.
Good morning, everyone.
Hey, good morning, Andy.
Bill or David can you give more color into your volume assumptions for the rest of the year is the deceleration in year over year sales in Q3 that youre guiding to versus Q2, all price. So you're still thinking mid single digit volumes for the year overall and have you seen any new incremental signs of destock as I know youre aware one of your competitors talked.
About a little bit of district distributor Destocking to hit their order profile late in the calendar Q1.
Yes, and Andy I'll start and then obviously, David may want to add or.
<unk> are to continue to as mid single digit growth in volume now as pricing as we call. For example in some products will still go down so revenue I would look at the last page of the prepared remarks on what that means for Q2, our Q3, excuse me down 10% to 15%, but that's because of that.
Pricing in our question Deane asked we're like Hey, steel costs are down dramatically PVC costs are down dramatically, we're still making good think of it as gross margin, but the revenue line down some volume continued to go up and I would claim we do not have any destocking.
And I would reference that to go 14% up sequentially quarter over quarter in PVC and muesli PPC as example.
Up to pre Covid levels, now where I do see whatever is no. One stock you know theres no one driving to put pre buy it just because.
Even customers listening to this call. The revenue was going the pricing has gone down a little bit. So theres no theres no incentives when you know a manufacturer like us can deliver on time.
An extra two or three weeks of inventory in but that's actually good news. If you look at the way I am glass half full the future we're going to hit our numbers, we're going to grow low single digits to mid single digits in volume and there is no artificial buy up of distributors now as we go into fiscal year 'twenty four.
Hopefully that answers the question or if there is follow up Andy Andy I mean, we are at that so when you look at PBC for instance, I mean inventory levels would be lower than they were last year because last year. We had talked about Q3, Q2, and Q3, where people had bought I would say in addition to what they were seeing because they are portable.
Orders out there so and so forth, but we are looking at this more sequentially and seeing what distributors are doing and like Bill had mentioned, that's a positive trend and.
And Andy one of the things.
When we're making statements like this there's lots of additional backup material and I forgot the precise number that's out there with the association of builders and contractors, but within like <unk>. Two binds the contractors backlog is as strong as it's ever been and I think it's like I said down from them.
Nine months like maybe eight eight give or take but basically theres a lot of indications all into a question asked earlier that probably didn't address as something that from Chris is a lot of the stimulus still the states are trying to figure out how to.
Funded so again, you look out into future years, and say hey, this stimulus actually it's that people can spend it I E. The state there should be additional pick up in volume and so forth. So we're optimistic and that's why the infamous $80 plus EPS is definitely in our targets.
So literally every hour.
Yes.
For sure that's very helpful and maybe just a follow up to that like obviously, you guys saw Dodge momentum Abi or things like that you see DNI.
<unk> come down a little bit sequentially, but still up 11% in April year over year. So maybe if you could just sort of pushed out for us the market. So overall I think last quarter, you said that data center chip fabrication facilities driving your results are you still seeing that or are you seeing any areas that maybe you're a little bit more worried about on the non res.
Side or just as you said contractor backlogs are strong so across the board things are still okay.
Yes, I'll start with the key takeaway contractor backlogs are strong and we're still optimistic for the future and I'd say one other thing to remember to other manufacturers backlog that we believe eventually hook into is at record levels to Oh and.
One more and then I'll get to the specifics Andy they're saying I hope every shareholder understand is the amount of self help like in other words to go over those three conduits of growth and go on our expansion in HCP, our expansion into global Mega projects. There's other things like we've talked about the art.
He sees and literally becoming the one stop shopping centre eds, those things and other things. We're working on we're just not ready to re earn outs gave us huge confidence even if down markets that we will drive forward to continue to be successful like we have been for the last half decade, plus now Andy to your specific thing.
Avi I say, obviously that residential markets are down.
Non residential almost all commercial things, we're expecting for this year to be down industrials, probably like a push healthcare continues to be up with investments and then as you mentioned and the things that don't get caught once in a while like in a Dodge square foot and so forth is utilities and <unk>.
All of this infrastructure build.
As I mentioned to an earlier question, whether it's chip manufacturers across the globe, whether its EV charging stations and battery charging stations and data centers.
Finding those markets and we're seeing other people in our space are really strong right now so that's carrying the business forward here.
One last thing whenever you look at like Dodge starts whenever you have a predominance of these mega projects.
They're still important of course, but then you might have a start but these projects go on for multiple years. So you do see that business for a much longer duration than you would say a start on an office building or something like that.
Helpful. And then last question you mentioned strong growth in solar related products in Q2, and then you can give us a little more color how solar is contributing to your performance and we know you have the tortilla facility coming online in Q3 is it possible to quantify how much incremental growth. Your solar business can have in the second half of your fiscal year, maybe versus last year. The first half of this year.
David you like I know the numbers I am just I would say it gives us strong confidence when I look at <unk>. For example, now global Mega projects hit it, but literally F&I shout out to that organization.
When they are up 20% year over year.
Solar will be a good portion of that in global makeup projects that was two things are what's driving above market and I think it's probably a more of a story of FY 'twenty, Florida in FY2023 as Youre looking at the.
The factories coming on online obviously that takes some time getting it started up and so on and so forth. So I really feel like we'll be talking about this in our fourth quarter, when we give guidance for FY 'twenty four.
Much bigger part of the story.
Appreciate all the color guys.
Thanks, Andrew.
Your next question comes from the line of Chris Moore from CJS Securities. Your line is open.
Hey, good morning, guys, Yeah, maybe we just talk a little bit more about HCP I know you said the integration is going well, but could you maybe talk a little bit more about the market dynamics, specifically, there and you know what your expectations are versus.
I know, it's a scenario where potentially lots of growth just kind of maybe get an update there from from market perspective.
Yes, so Chris I'll start with short term.
Some other markets I hate to even get into the infamous weather, but theyre, obviously storms on the west coast and things like that where these are products that you can put underground so.
Average for this quarter it wasn't like Oh, My God Gangbusters, but all good totally on plan as we go forward for the year, if not I think there is slight upside work through our business models.
And so forth and then talking to our team and talking to customers very optimistic for the future because this ties back to that I'm quoting the number I think I'm right on the bead, which as an acronym to it but for putting in fiber optics that was like $65 billion allocated so that's that's where like David mentioned just.
A moment ago with solar it's really a story I think youre going to see play out in next fiscal year. That's there's any issue now we're hitting the numbers integration gone well just great people. I mean, you have the thing I love with teams is whats the talent we've brought into the family. So everything on track and I would also tell you that like us.
I am traveling out with customers on solicited again can't get too specific I'd be with a customer just going hey, how's it going and they are saying we're on plan and then they'll make a comment as the weather breaks if theyre north we're really excited about this future growth in HCP unsolicited youre hearing comments there from custom.
<unk> to me.
The upside opportunity so long winded story to say everything is totally on track and optimistic for the future.
Got it very helpful and maybe just my second one recognizing that you know all things being even distributors like higher prices commissions percentage of revenue is what they look for how much conversation are they having with customers regarding the margin at <unk> and its products, especially.
PVC conduit.
Do you even hear much on that front.
Don't Chris with the filing thinks it's fair to say I haven't really asked the question, but what I would tell you that we've quantified in the past is if you add up all the products at core cells and you add up all of our competitors and look at our cost of ability. It is low single digits. So at the end of the day whether.
There is a price of just PVC conduit steel conduit armored cable is two extra one X, it's not going to change the overall cost of bill.
Alrighty, just by the math alone it's more about do they still labor is the biggest challenge the biggest kind of governor of growth in the industry not the backlog not the future incentives and therefore, obviously, making sure our product comes on time as quality is important and then where we're winning across.
Numerous things is our new innovations at save Labor time, and Thats why Youre also seen <unk> at its highest level of 9%.
New product vitality, who would've thought for an industry like this that you had had this level of new product vitality and thats a complement to our team working with our customers to come up with new things that save labor and are safer to install so long waited answer Chris I don't think Theres any concern there, yes, Chris I would also say that our <unk> strategy.
<unk> through our distribution whenever youre able to put multiple products on the truck and deliver on time at the right time that service the ability for our construction site to utilize that labor on construction as efficiently as possible is much more important than whatever the piece price of whatever part of our products with it.
Perfect I'll leave it there. Thank you guys. Thanks, Chris Chris.
Your final question comes from the line of Alex Rygiel from B Riley Your line is open.
Good morning, I think you said that the PVC volume was down for utility projects on the West Coast was this more of a trend or was it weather or was it just timing of projects.
Great.
Clarifying question purely weather, maybe timing behind the scenes that I don't know about but now we're really optimistic theres projects Khani loose and for example.
Where I will mention in a customer because this is public things like piccinini, the California utility that's committed I think it's 10000 miles.
Above ground electrical lines up below ground.
Over the next five seven years and each year, they are ramping up to kind of a triple their current run rate. So all public information that gives you a feel Alex again of all these secular trends that are adding up to make us optimistic as we go forward.
Thank you very much.
Thanks, Alex.
This concludes the 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 by three key takeaways from today's discussion first we continue to expect mid single digit volume growth for the full year.
Second we are increasing our expectations for full year earnings based on the strong business momentum so far in 2023, and a robust dynamic supporting our business.
Third we're pleased with the strength of our cash flow and balance sheet, our solid financial position is the foundation of our future growth and I firmly believe the best is yet to come for our company.
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.
Please wait the conference will begin shortly.
Sure.