Atkore Inc. (ATKR) Earnings Call Transcript & Summary

Good afternoon. And welcome to day 3 of the Morgan Stanley Laguna Conference. I am Josh Pokrzywinski, the firm's electrical equipment and multi-industry analyst. With me this afternoon, joining from Atkore is David Johnson, CEO (sic) [ CFO ]. Before we get started, I need to read a quick disclaimer, and then we'll jump into it. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to Morgan Stanley's sales representative. With that, we'll get started here. David, appreciate you joining us today. Sorry that we can't provide the sunshine and surf of Laguna. Hopefully, next year, we'll see you there. But I appreciate you making the time virtually all the same.

Yes, Josh, really appreciate it. And I appreciate the introduction. I am Dave Johnson, the CFO of Atkore International. For those of you who aren't familiar with us, we're a $2 billion company, mainly in the electrical business, I call it the electrical infrastructure. So think about the infrastructure of any kind of building or infrastructure so on and so forth that has any kind of electrical content.

Got it. So I guess just given that this has been kind of a dynamic year out there for a whole host of end markets, I'd imagine U.S. construction is pretty high on your list of focal points. If you wouldn't mind, just kind of taking the tour around some of the end markets you see and given folks the way of the land there since I would imagine the electrical markets or some of the electrical raceway that you do is you're kind of firmly midstream in that process, so you're pretty close to where the action is.

Yes. So we do sell-through distributions to electrical wholesalers, the nationals like Sonepar, WESCO and so on. But we do get a lot of end-market information. And for us, when you look at new construction, non-resi construction, where it's about 40% of our business, and when you look at the verticals there, the ones that are strong right now are -- data centers are strong. I don't think that's a big surprise to anybody. And for us, it's a good thing. So anytime you have more electrical content per, I would say, square foot of a building, we say that, that's -- it mixes us up versus the market. And so I'd say that's strong. Warehouses are strong right now. And before, I would say maybe 2 years ago, that would be a lower content building for us. But now warehousing is starting to get more automated, more lights out, that sort of thing in certain areas. And that just necessitates more of our type of products. So that's a positive for us. 12% of our business is in resi. I think everyone knows that residential has been really strong here of late and continues to be strong. I think the things that are not as strong are retail. But quite honestly, retail hasn't been strong for a while. So it's not a huge change. I would also say some of the other trends we're seeing is repurposing of buildings. So repair or remodel is about 15% of our building -- our business. So -- and if you're repurposing a mall into a warehouse or a data center or what have you, we would participate in that type of activity also. What else? We also have -- hospitality is going to be, I think, challenge for some time, hotels and what have you. And infrastructure seems to be okay. So in our OEM business, our MP&S segment, we support solar. Solar has been strong. And we also support specialty tubing for the ATV market, which given these times, people are buying ATVs and all kinds of different equipment, so that's been strong during this piece of time, too.

Got it. And then I guess maybe just across some of those verticals that you touched on there, some of which I think have some obviously differentiated elements, like a data center or a warehouse, but kind of in the classic commercial construction or institutional verticals, what's your sense for how much we've kind of worked off some of the pre-COVID backlog? Clearly, there are projects in flight, funding was secured, people had an idea in mind or even a hole in the ground. Is that the stuff that's being finished now? So we're still kind of living off of kind of the prior, or do you think some of what's in the market today is stuff where people have made an investment decision even knowing what we know about COVID?

Exactly. I would say that we look at a few things. So we -- our backlog ourselves is actually pretty small. We can have about 2 to 3 weeks of backlog. When we look at the backlog, we get some information on contractors and building contractors backlog. And the latest information that just came out, I think yesterday or day before was, on average, they have about 8 months' worth of backlog of activity at this point in time; if you go back a year ago, that was 8.5 months. So it hasn't changed remarkably at this point in time. I think the bigger concern is starts and what does this look like 12 months from now or even further. The starts information I just saw sequentially has gone up slightly. So I think it's more of a wait-and-see. We feel like when you look at all kinds of data, Dodge Data, Dodge starts, one thing you have to remember is these projects, they'll have different durations. So there's still work being done in LaGuardia, but that was a start years ago. So you have some long projects that are going to be activity for quite some time, and then you have some faster-moving projects. So when you look at that, the duration of projects on average, I know there are some questions, we're going to get some questions around this, is there an air pocket like a hole out there that's not going to be filled with activity? We don't believe in that because of the duration cycle of these projects. And the other advantage for Atkore is, we participate in nearly the entire construction cycle. So when a project is started, like the ground is being done, our PVC products go into that; then as the structure is being built, some of our metal framing products and then our electrical conduit -- metal conduit gets made; and then as the building gets built out, things like our prefab offerings, our armored cable gets deployed. So we really participate through that entire cycle. And again, this duration, I think, will average over time.

Got it. And then I guess, maybe just kind of to put the final piece on what you might be seeing in a near-term indicator, I think across a lot of different forms of distribution, you saw distributors get particularly cautious in the March-April time frame and really draw things down. I don't know if that necessarily happened for you guys. But where do you think your distributors stand on stocking levels right now? And is there a potential for perhaps a restock here as activity normalizes?

Right. A very good question. And it was a little bit unusual, I think, last quarter. One thing about Atkore's products, they tend to be large and bulky. So distributors don't like to store, they don't have the space, and they don't have months' supply of our products. So when we have a destock or restock, it's literally like a week out of 6 or a week out of 5 weeks. So it's not a huge plus or minus. We did see distributors -- some distributors, I would say, were more -- they were investing early because they were worried about supply. So some of the larger distributors were actually adding working capital because they want to be there to capture the activity and they were worried about supply at the time. I think within the quarter, that dynamic versus people working down their working capital, I would say, it averaged out last quarter. Going into this quarter, I would say that distributor levels are fairly normal; normal at a lower level, given kind of what they expect activity to be, but there's no -- they're at their week's supply of stock, if that makes sense.

Got it. And then I guess from a competitive perspective, I think some folks who are familiar with the industry could probably name a few competitors who play in bits and pieces, but maybe take a few minutes and just talk about the breadth of the offering and what you think helps win business, whether it's a distributor or on the job site because there are some fairly large companies that you might bump up against every now and again, but probably don't compete across the full spectrum.

Yes. So that's a very good question. If you look at some of our larger product lines, so we are -- in the metal conduit business, we have a couple of really good competitors there. By and large, they're not the large electrical players that you would typically think of, they are more in the steel industry or that sort of thing. We're in the PVC market. We're 1 of 2 large players in the PVC conduit. Again, our competitor, there is more in the plastics market. And then we are in the armored cable market, and there's 2 big suppliers there, one being a public cable company and one being a private. So when you look at our overall comparison with those type of products, I would say we have a very robust offering across all 3 product categories versus our single-line competitors. When you look at some of the bigger players in the space, where they might have cable tray and some of these sort of things like a Thomas & Betts or someone like that that's part of ABB, we do compete with them every day, just like anything else, but there more would have been engineered product offering. And it's a smaller piece of our business, but still an important piece of our business. So by and large, I think what we offer is, I guess, for a distributor, a couple of things: one, the breadth of our infrastructure products, we're able to ship partial trucks of different things, makes it easier for them to do business with one national player for those products; and then we have been investing quite a bit in new products. So things like fittings that make it labor easier on the job site because going into COVID, I think, Josh, that labor availability was a big issue. It was creating a lot of delays in new construction projects, so they were taking longer, longer and longer. But COVID, I think, coming back, labor is starting to come back. If you look at employment in the construction industry, it is starting to pick back up. But my anticipation is, productivity is still not quite there because of all the COVID protocols and these sort of things. So anything we can do to save labor on the job site is a value prop that's really resonating with contractors. And so we've recently won some really nice projects because they want to be able to save time and money on the site because they don't have the labor available. And that's, I would say, a value prop that's been very appropriate for our, say, distributors, but more contractors pulling through distribution.

Got it. And then I guess, at the distributor level, do you find that you do have a heads-up competitor that sits on the same shelf? Or will they just say, "Look, we don't need 4 suppliers of armored cable, we're going to go with Atkore, and that's going to be it." And I guess maybe related to that, when you get in the door with one product line to -- the rest of them tend to follow soon.

Yes. So a good question. And I'll -- a couple of different aspects to that. There are some distributors where we might be exclusive. But I would say, in general, that's an unusual situation. So they will carry maybe 2 different brands for different reasons, maybe a certain rebate program or something like that, that they want to work or availability or quality or what have you. So it's typically more than one. And then I would say that the bundling feature in the electrical industry is pretty prominent. So the more you can offer a distributor, the more kind of bundle rebate such sort of thing to make it more efficient for them to do business with you as 1 supplier versus 3, I think we do have a slight advantage there. And then I think the other thing that's important for Atkore is, we're geographically located across the U.S. So when you look at the PVC business, for instance, to ship PVC product long distances is just not financially attractive. So anything beyond the...

I know there's a lot of air.

Yes, it's all air. And you get between 400 and 500 miles away from a plant, it becomes a real problem from a financial standpoint. So given our footprint and where our PVC plants are, if a national player wants to go with more of a one supplier for that type of product, we're situated pretty well, given our geographic diversity.

Got it. And then I guess can you maybe mesh that up with the M&A strategy. Atkore has been active over time. I think the balance sheet is in good shape, so probably nothing preventing you from being active prospectively. What makes a good acquisition candidate for Atkore, whether it's a line of business, an end market, some manufacturing capability? I don't want to lead you down too far path trying to keep a broader for whatever your answer is. But maybe kind of talk through the M&A strategy and what you see as being kind of the ideal there.