Q3 2023 Atkore Inc Earnings Call
Good morning, My name is Valerie and I will be your conference operator today at this time I would like to welcome everyone to the at Corp, third quarter fiscal year 2023 earnings Conference call.
All lines have been placed in a listen only mode. After the Speakers' remarks, there will.
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.
Like to withdraw your question again press the star one.
As a reminder, this conference is being recorded.
Thank you.
Now like to turn the conference over to your host John <unk>, Vice President of Treasury and Investor Relations.
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 and any reference to EPS, our adjusted EPS.
Adjusted diluted earnings per share adjusted EBITDA and adjusted diluted earnings per share are non-GAAP measures.
Conciliation 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 before we discuss the quarter I want to briefly address an incident that occurred at one of our H D. P type facilities.
Sunday, there was a fire in the exterior of our United Poly systems facility in Albuquerque, New Mexico, where finished goods or stored the health and safety of our employees and the local community is always our primary concern I want to publicly thank the incredible efforts of our local fire officials.
And our <unk> team on the ground. The fire has been contained and no. One was injured in terms of stakeholder impact at this time, we do not expect this incident to impact our 2023 financial outlook with seven hte facilities nationwide we are.
Confidence in our ability to meet the majority of our customer orders and redirect production as needed.
Now starting on slide three and our results for the third quarter.
We delivered better than expected earnings performance in Q3 volume in the quarter was up 2%, which is in line with our expectation for mid single digit volume growth for the full year as we anticipate volumes will ramp up higher in Q4 are accordingly results compare to the <unk>.
I am record highs of last year.
The pricing normalization, we planned for and have seen in 2023.
Year to date cash flow remains very strong, enabling us to execute our capital deployment strategy.
During the third quarter, we repurchased $147 million of shares, bringing our year to date I will share repurchases.
<unk> hundred $16 million.
In June we determined that we needed to change our accounting treatment of the solar credits related to the inflation reduction Act.
And David will cover details of the impact.
We are encouraged by the performance in the first three quarters of fiscal year and have increased our full year outlook for adjusted EPS.
Our results released today reflect not only the strength and stability of our underlying business model.
Combination of our team to execute and deliver on our strategic growth initiatives when I take a step back and compare our results from this quarter versus those that several years ago. We have structurally improve this business and we are demonstrating the sustainability of our earnings in the future.
With that I'll turn the call over to David Thank you Bill and good morning, everyone.
Slide four I want to address the change in accounting treatment of solar credits related to the inflation reduction Act that Bill mentioned.
Previously we had assumed we could use the government grant accounting model or <unk>.
Regarding the transferability or a majority of the solar credits to our customers.
However in June we determined that due to our September 30 year end, our fiscal year 2023.
We can no longer recognize these credits as a reduction of cost of sales.
Ted will recognize them as a benefit to our income tax provision.
For FY 'twenty, four and beyond we will be using the government grant accounting model to record the benefits from these credits as a reduction of cost of sales.
Under the <unk> method, we would have reported net sales and adjusted EBITDA in Q3 of $924 million and $291 million respectively. In addition, our tax rate would have been 24% and our adjusted diluted EPS would have been $5.
<unk> and 'twenty two.
Regardless of the accounting framework Q3 was a strong quarter that surpassed our expectations.
Moving to our consolidated results on slide five in.
In the third quarter net sales were $919 million and adjusted EBITDA was $270 million.
We're pleased with our margin performance in the quarter with adjusted EBITDA margins of 29%.
While this is down year over year versus previous record highs.
And still reflects the strength and resiliency of our business model.
As I've mentioned on the previous slide the change in our accounting treatment for the solar credits associated with the IRS.
We have a tax benefit in the third quarter that lowered our effective tax rate to less than 9%.
We recognized three quarters of the expected benefits in Q3.
This lower tax rate helped contribute 50.
To our higher than expected adjusted EPS of $5 and 72 sets.
Turning to slide six and our consolidated bridges volume was up 2% with F&I up over 7% year over year.
PVC volumes were down by mid single digits as expected when compared to our FY 'twenty to Q3 outperformance, resulting in unfavorable mix for the quarter.
Excluding the PTC impact.
At quarters volume would have been up approximately 7% with a 30 plus percent incremental benefit.
This gives us a lot of confidence in the strength of the entire business as we work our way through these normalization trends in our PVC related products.
Regarding our PVC products we.
We saw continued sequential growth in Q3, but up 11% quarter over quarter.
Moving to slide seven and our segment results margins compressed in our electrical segment, driven by continued pricing normalization and a year over year volume declines in our PVC related products.
Nonetheless margins were better than expected and we're very pleased with the market's recognition of our service and value offerings.
In addition, our steel conduit projects benefit from some recent one time supply chain challenges in the market that have now been resolved.
Net sales declined in our <unk> segment due to lower average selling prices, which largely reflects the year over year changes in our steel input costs.
Adjusted EBITDA and adjusted EBITDA margins compressed on the F&I side, primarily due to the recognition of the solar credit adjustment to cost of sales.
Under the G. T. A M method, we would have achieved a very strong 19% adjusted EBITDA margin in the quarter.
This is a robust performance, particularly given the business incurred several million dollars of onetime startup costs related to the new hope art facility.
Ramping up at a facility of this magnitude is never simple and we will still have some additional startup costs to incur.
We're very excited for the future of this plan.
F&I volumes were up 7% in the quarter. This was primarily due to 17% volume growth in the electrical infrastructure portion of our SME segment.
Moving to slide eight.
We continue to be pleased with the strength of our cash flow and balance sheet.
Year to date, our cash flow from operating activities was 103% of our net income over the period and up 52% compared to the same period of fiscal 2022.
As we continue to drive strong results against some record highs of last year the strength of our cash flow balance sheet provides an important foundation for our company's future.
We invested more than $120 million in capital expenditures this year with a large portion that investment going to our facility expansions and growth initiatives that we believe will drive positive results for many years to come.
With that I'll turn it back to bill.
Thanks, David.
We are pleased with how we progressed through the year and we're excited for what lies ahead as we prepare to close out fiscal 2023 and look towards the future moving to our outlook on slide nine sales of our solar products and associated tax credits that we discussed earlier.
Has caused some variation in our current year projections. Therefore, the midpoint of our current outlook for adjusted EBITDA in Q4 is $220 million.
Without this change in accounting.
Would it had been in a position to slightly increase our projections for the full year adjusted EBITDA versus the outlook provided back in May.
Turning to slide 10, we illustrate these changes by comparing against the outlook for both adjusted EBITDA and adjusted EPS under the previous methodology.
Taking a step back despite this variation between quarters and expectations. We are still raising the adjusted EPS for the year I'm incredibly proud of the team strategy and processes, we have in place with the strength of our balance sheet growth trajectory and leadership position in the market.
Im excited as we look into the future and remain focused on achieving our long term goals.
I will turn it over to the operator to open the line for questions.
Thank you 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.
Pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Chris Dankert of loop capital markets.
Your line is open.
Hey, good morning, guys.
Good morning, Chris Good morning, Chris.
So I guess first off and forgive me if I'm a little slow on the accounting, but can you just walk me through it seems like.
Okay.
The <unk> is.
Benefit into the fourth quarter.
But it was a hindrance in the third quarter in terms of EPS I think I'm just misunderstanding.
How that why that is if we're using the same accounting in both <unk> and <unk> can you just kind of like frame that up for me again.
Sure I'll I'll take this one Chris so basically when we switched the models we had to make a year to date adjustment. So therefore, we have three quarters worth of adjustment in Q3, and that's why you see the impact different in the actual Q3 numbers in the Q4 numbers I think our cup.
Just quick points on this because I'm sure that everyone's got some questions.
Basically the reason why we changed this was because of our fiscal year. If you read the bill and you realize that our fiscal year. Obviously ends in September the credits that are generated from the IR a during this period of time for us are not transferable there will be transferable in the future. They would have been the transfer.
We're both we would have the calendar year and we just have this unusual period of time here in our FY2023 due to our fiscal year, where theyre not so therefore, we had to go back and change the accounting and Youll see a negative impact overall for the full year to EBITDA, a slight improvement to adjusted <unk>.
I think going forward into next year, when we switched back to the other model because they will be transferable I think it will make it a lot more sense, because we will have a slight benefit in adjusted EBITDA and almost no impact in our effective tax rate.
That's extremely helpful. Thank you so much for the quick breakdown.
And just as a follow up here can you comment maybe on what Youre seeing in the channel in terms of inventory and stocking levels. I mean, I think you were mentioning in the past is we're looking pretty healthy to even lean in some cases is it still the case out there.
Yeah, Chris Bill here.
I would say it's healthy.
Healthy it's lean in other words, I don't expect anyone to buy.
By ahead, so that should be a good thing even really as we get into the spring of next fiscal year because at this stage I think quite frankly, our competitors, they're shipping basically on time for our type of product line. So therefore, there is no need in the channel, but any type of inventory adjustments I think are behind us.
We're shipping well and as we mentioned during the call we.
We expect mid single digits for the full year and that means a really healthy volume in Q4 coming up here.
Thank you. Your next question comes from the line of Deane Dray of RBC. Your line is open. Thank you.
Good morning, everyone, Hey, good morning Deane.
Really appreciate all the bridges that you've provided to kind of keep it on an apples to apples basis, especially page nine kind of giving us what the midpoint would've been for <unk> and for the year. So I appreciate that just in the spirit of transparency can you I know you're not in.
Ready to give 24 guidance, but any color on Cogs into 24 because of the <unk> model.
It would be helpful for us as start.
Having a framework for that.
That accounting change for next year as well.
Yes, so basically what I would suggest is if you look at our year to date through the first two quarters we had.
Little bit of solar tax impact into Cogs, so going into next year it will be slightly.
Favorable to that because we will have one.
More credits because we have the new plant online so on and so forth and then we will be switching back to the <unk>, which will be a little bit more consistent with what it would have been if you were at Q1 and Q2 together.
<unk>, probably offsetting some of that will be some pricing and all these sort of things that we will give more clarity on in November .
And then Dean I know not.
Deferred financial questions, but throughout all of this at the end of the day, we're raising EPS for the year and we're still comfortable with 2025 and the $18 plus EPS. So we are running ahead throughout this changing in accounting methods through fire that's already been contained in <unk>.
We're going to be up in that facility. We anticipate in a couple of days so the <unk> business system and the leadership there moving straight ahead no matter what.
Alright, I appreciate all that so then we can set aside the accounting noise and talk about some of the fundamentals in the quarter. If we could I'm really interested in hearing more specifics around pricing normalization, because that's probably been the biggest area of inbound calls that we get so bill.
Just frame for us end market demand in the quarter.
Any changes on the competition side, including geographic and how this Eddie.
But costs and how those factored into pricing, which ended up being better than what we thought it would but we had estimated thanks, yes. So Dan I think to your last part of your question statement. It was better than we anticipated we're still going to face some headwinds as we go forward, but it's better than anticipated I think David covered in your prepared remarks, if you pull.
Our PVC even in this quarter, we were up 7%, so I want to emphasize.
Complement David the management team here, we predicted and exactly how this is going to play out for the last year or two we're on track.
Still probably some price normalization with products like PVC over the next year, but well within everything we've anticipated a we're doing better than we anticipated do you see that again I'm talking before all of this accounting yourself I'm talking directional here, so anybody correct for Mark, but where we guided to 50 and we delivered 290 before.
The accounting changes so we had a really strong quarter up 7% when you pull out the PVC.
Pricing is doing better than anticipated and even with all those things we're going to have a really strong Q4 volume now that I think is more attributable to us the markets are good but it is everything from the solar mill coming up in the quarter to other initiatives playing out. So we are definitely doing ourselves.
In addition to a reasonable market. So I am excited as I've ever been dean for the future.
Thank you. Your next question comes from the line of Andy Kaplowitz of Citigroup. Your line is open hey, good.
Everyone. Good.
Good morning and evening.
So you mentioned you haven't seen Destocking button, there, let's call. It loose peers have so maybe if you could remind us sort of what's differentiating you in the marketplace and how would you characterize a RASM versus nonresidential volumes and then I do think you modestly lowered your outlook for 'twenty three sales.
<unk> 10 down from five to 10.
What is that I know, there's a small impact from <unk> in there.
Yes, so great question Andy.
With regards to others you have to then part of it like look at their volume in regards to their products in other words Sandy. We if you went back a year ago or something or nine months ago I provide precise time would it talked about destocking, but I think again, that's behind us and our product lines.
Good there residential is weaker than the other markets the infrastructure and so forth has obviously gone really well manufacturing is going well and I think the best is yet to come as we go forward. So again, all within what we expected or anticipated with our own self help there and then regards to revenue.
I'll kind of turn it over to David.
And the temporary.
Volume in.
In line with exactly what we've been saying is this if you see a little top line difference that's going to be just the commodity impact of what we had expected versus kind of where it's ending up so to me focusing on that volume number is really important and it's right in line, what we have been predicting and.
That's helpful guys and maybe to that end can you give us a little more color until electrical our adjusted EBITDA margin performance.
You talked about a little bit guys, but you know your margins flat sequentially, just hasnt degraded really at all.
The last couple of quarters, despite increasing pricing pressure. So is it simply costs are dropping just SaaS for AD core and how much is increased productivity, helping so that may be sustained margins here willing to <unk> moving forward.
I think Andy we maybe we're conservative there, but everything you said is yes, we are driving productivity in different ways, obviously were hitting and you're having an inflation in our facilities with the operators and so forth, but the team's doing good there commodity costs have dropped to and not as much as pricing. So that's still.
Well I think the mid Thirty's is probably too high as you go into next year, but we really haven't set guidance, yet, but I would say is through all of that Tim earlier statements I think I made when dean was asking a question.
It's going to be a good year here, we just raised our guidance for the year and we're still comfortable with the 2025 outlook and we really do look forward to November talking about but I'm not going to foreshadow next fiscal year at this moment, so hopefully or follow up Andy but we're in a good spot now helpful. Bill and then one more for me.
Just color in safety and infrastructure volume moving forward volume was still good volume growth is still good maybe decelerated a little bit.
And I thought your solar capacity starting to ramp and in Q3, So you know.
What do you see moving forward in that segment, yes that will be the stronger of the two divisions because of the self help we have other things happening in the electrical innovation from a growth perspective that Jess will probably hit more in fiscal year 'twenty four but solar mill literally just started making shipments here like in the last month and as you could.
Factors, both a ramp up from one shift to two shifts to three shifts and things like that but that will help drive win hopefully you guys get a sense that I and the management team are bullish on volume in Q4, some of that will be our self help including solar very.
Very helpful guys.
Thank you I appreciate it.
Thank you. Your next question comes from the line of Chris Moore of CJS.
Yes Securities Your line is open.
Hey, good morning, guys. Thanks for taking my questions.
Right.
Could you just we're hearing from some people.
That <unk> capex spending slowing a little bit of carriers I'm, just curious if you're seeing that and maybe how would you characterize the advancements in HCP over the last 12 months to 18 months any kind of negatives or positives surprises there.
Very optimistic for the future right now a little bit slower.
How much when I feel one of the big things is we have and I go back every number at least high here seems to be different but directionally part of inflation reduction Act was $65 billion. So someone's <unk> 62 versus 65 with what's called the bead.
Broadband access and so forth.
Unlike other infrastructure, where the government and the states already have a way to allocate that money. This is the first time the U S government's had to deal with allocating out funds in regards to how do you do fiber optic to the home so that money hitting the states is a little bit delayed than what.
Do you expect the infamous shovel ready we've all experienced over the last decade. The good news to that in my mind, Chris is again, I keep going back and saying, we just raised guidance and to your point H D. P isn't as strong as we had anticipated at this stage, but it's still coming so it's just a question of halfway through next fiscal.
Year, you add what we perform this year you add that on top of it and that starts to get where the management team's confidence and where we look out to fiscal year 'twenty. Five. So again, we're cranking full cylinders were investing great cash flow and you are right short term http.
We would have expected a year ago to be slightly stronger.
Got it very helpful.
And my next one I know you're not giving guidance here, we'll do that in November I believe.
Maybe just big picture, if you look at calendar 'twenty four versus 'twenty three.
Are there things that that might concern you a little more in 'twenty, four or things that actually might be better and 24 versus 23 alright.
Think slightly more optimistic for 2004 for two reasons.
One reason is a lot of the markets like residential are supposed to at least coordinated Dodge bounce back I'm looking at Dodge forecast that had the market's down 10% for this year and start gaining single 6%.
Level of false precision here and up to like 10%, 25%. So we get those markets starting to come back as interest rates dropped those type of things now you can debate those and then the biggest thing Frac core I keep going back to is our own I'll use the word self help but we have deployed if you go back over the last two years a lot of capital into.
Growth initiatives are one order one delivery one an invoice we have a lot of key customers that love that service model. So as we go forward both from our ability to charge a higher premium for that service or delivery other initiatives like solar and more things to come.
We are optimistic for everything we're doing here and I think that's what gives us confidence for the future.
Very helpful. I will leave it there thanks guys. Thanks, Chris.
Thank you.
We have another follow up question from the line of Deane Dray of RBC. Your line is open.
Great. Thank you a question for David just to kind of take us through cash flow for the quarter.
Some of the dynamics I know Capex is higher.
Is there anything else and working capital you'd want to call out it was seasonally lower conversion than what we typically see but the capex can certainly swing that.
Yeah, I would say that the Capex and I would also say that we had some buildup of inventory as you can imagine doing going into the start up of our new solar plant. So we had several weeks of inventory ahead of that startup and you really haven't seen.
The increase in volume yet.
So that was probably the the <unk>.
Two things I would point to Q3.
Got it and then for Bill some commentary if you could about July .
As well as the.
What's what are the indicators on kind of tracking to mid single digit volume growth.
And if you could highlight what verticals are driving that thanks, yes, so without getting too specific into this quarter.
Average deemed good quarter or a good month without any more specific but enough as we're sitting here on August wherever the data is that.
Are unprepared remarks are that we're still very comfortable with the overall AD core mid single digit and if you did the weighted math on that through three quarters that means a pretty strong Q4 here. So two earlier questions. I think inventory has been worked through in the <unk>.
Quarters, before us and distributors and contractors are buying as needed. So things are good there and then the verticals that are really strong I think I mentioned earlier, but anything regarding infrastructure. So therefore, even manufacturing companies and again, we don't have I'll be very transparent as always with everybody we sell to distribute.
So the manufacturers. So we have a good feel but some of it I just rely like you would on di and looking on manufacturing is up 12% lease according to Dodge here in this.
Or the calendar year, so things like that institutional spend still from the stimulus monies are strong.
Obviously things around utilities, and so forth are really strong and then there was a lot of things I think we will talk about more in the future as we work with what we call kind of global Mega projects, but just imagine chip manufacturers and things like that across the globe. We have a really good relationship with some of those customers. So.
The other thing I would add is in this market right now it does seem like week to week theres more variability than typical.
I don't know why that is it just I don't know if it's the labor constraint or the supply chain issues in our piece of the electrical market, but July was as Bill mentioned, good and we expect a strong Q4.
Got it and just last one for me.
On capital allocation like seeing the buybacks you still have plenty of authorization left.
Where and how might M&A fit into the equation over the next couple of quarters.
Yes. The pipeline is good if I was to rank because there is not having a great capital allocation I had a great board discussion on that here just last week.
It's a mixture of four or five things Deane. So obviously internal investment where we're still looking at 200 million give or take on <unk>.
Capex for new organic growth and productivity, we have a pipeline.
It's very active I will say, we have deals that are leased I won't get too specific here, but numerous deals under confidentiality agreements.
We have an active group mining other things here that are all strategic without in any way, having any type of deal fever, because again, where our performance as we've shown last November it's been phenomenal on deals and then we will continue to as you mentioned stock buyback, so and we will get into a much more in depth conversation in November around capital.
Allocation.
Great. Thank you.
Thanks again Dean.
This concludes the question and answer session I would now like to turn the call back over to Bill Waltz for closing remarks.
As we conclude let me summarize my key takeaways from today's discussion.
We still expect mid single digit volume growth for the full year as we are expecting a ramp up in volume in Q4.
And we are increasing our expectations for full year adjusted EPS.
Third we're pleased with the strength of our cash flow and balance sheet, which are enabling us to continue to invest in our business, our solid financial position and capital deployment plan are the foundation of our future growth and we remain confident in our long term outlook.
Before we end the call. There is one final item that I'd like to share last month I celebrated my 10 year anniversary with the company and David will be celebrating his five year anniversary with <unk> next week as a management team we are truly humbled by the hard work and dedication of all of our.
Toys entering all of their accomplishments, it's because of their commitment to our values that we believe that that suggested com for accor.
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.
This concludes today's conference call you may now all disconnect.
Please wait the conference will begin shortly.
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