Atkore Inc. (ATKR) Earnings Call Transcript & Summary

Good morning, again, everyone. We're very delighted here to have Atkore with us on day 2 of the 8th Annual Credit Suisse Industrial Conference. With me today, I'm joined by Bill Waltz, Atkore's CEO; David Johnson, CFO; and John Deitzer of Investor Relations. I'd like to thank you guys all for being here with us. And then also, I think we're going to head right into Q&A.

So obviously, you just -- you're coming off of a very strong fiscal Q4 print. But one of the big topics of the earnings call was around nonresidential markets. So wanted to ask you to take an opportunity to kind of talk a little bit about, not necessarily what the macro forecast is for the end market, but kind of what you're hearing from your distributors, your agents, other people where you're getting a little bit more the pulse of what's happening in the market on a daily basis?

Yes. Absolutely, John. First off, by the way, thank you for a great conference. This year, we have a great lineup and every year. So really appreciate the support. It's moderating at a reasonable pace, just like we gave guidance to be up low revenue in the next year coming up that whether you talk to agents, you talk to distributors or you see in the press. Again, it's not gangbuster, but there's actually, since the pandemic, the most people working and construction going on right now. So things are decently active. Again, it's not huge, but that backlog is starting to grow in jobs right now that's already in the order pipeline. And you see things like the architectural billing index, where not the billing index of book jobs, but lease inquiries are going up. So -- and then I'd also remind people for Atkore specifically. Only 33% of our business is nonresidential in the U.S. And within there, there's obviously things like warehouses and data centers that are going really well. So you put all those things together and we're cranking along exactly to our game plan.

Great. And then maybe another way to come at that question, and you're absolutely right, really focused more on the new side with this line of question. When you think about your product portfolio, you have some products that go in early, I'm thinking more like the PVC products, some products that go in later in the life cycle of a building, probably some of your conduit stuff that's kind of finished there at the end. Is there anything that you can discern from what you're seeing in those different product category order rates on kind of where we are in the build cycle?

Yes. Firstly, it complements our business well. So we do get an early glimpse with the PVC because that's a product that's going underground. So even a lot of times before the hole is dug at the building just getting electrical to the building. And that business is going really well. The caveats I would bring are 2 things. So that business, PVC also is around 50% residential. And I said everybody knows residentials well. And it's hard for us to distinguish what is -- when we're selling to distribution, what's going to residential versus nonresidential. So I don't want to give over optimism because that fact. And the other thing I would bring up is a lot of times projects, you have a project that may take exactly 9 months after the start before we put product in, we get things like a LaGuardia airport and other airports that are literally 3- and 5-year job. So again, yes, PVC is an early indicator. PVC is going well, but there's so many other factors in there in addition to just PVC product that's going well.

Great. And then I guess you touched on it a little bit there when you talked about your agents. One of the things that we often get asked, and it's obviously a lot of times in some of these markets, there's multiple ways or multiple channels, right, to get to the end customer. It's not always the easiest to decipher. But can you just talk a little bit about how you go-to-market? I think you use kind of a rep model. But maybe just from a high level, help us understand how Atkore products actually ultimately make it to the end customer.

Yes. Great question, John. So we do sell-through, at least for our electrical products, we have a division of 25% mechanical, that's slightly different, that's OEM based. But for the vast majority of our business, we use electrical agents because of our well-known brand names and a whole suite of products. We firmly believe we have the best electrical agents in every region of the country that helps us drive. And with them, we sell to electrical distributors and the electrical distributor then sells to the contractor. One of the things that we found very successful, though, is we also have a set of sales force that we independently go direct to contractors, specifiers, engineers to show labor savings. Because if you actually want to take and spin the model around, we can sit there with our labor savings products, specifiable products, all this different value that we bring, for example, to a contractor and get them interested in the product. And then they go to a distributor and say, "Hey, I really want these Atkore products" and helps pull the products off. It gets our distributors that we're partnered with, stocking all of our products, and that's how we get the exponential leverage. And the results that you've seen with you and our investors have seen for the last 5 years with growth and return and capital and so forth there.

And then maybe that kind of segues into a pretty common question we get is around what are Atkore's moats, right? So when we think about what you're making, what are -- what prevents, say, an Asian entrant or somebody else coming into the market? Because you do have a good market share position, right? Number one. Number two, where your products are sold?

Yes. Again, good question. With the following thoughts. There's not one moat. But the good news is probably half a dozen, I'll go through some of them. First off, it is brands that have been around for 80 years, 100 years. We, with some of our brands like Unistrut, created the brand. Walt Disney himself was on a plane with the founder of Unistrut, made up the characters and the branding for that. And that's known. Same as a person out there that wants to be a Ford or Chevy. It's loyalty is something you're comfortable with. It’s reputation -- go, hey, if something does go bad, the PVC pipe gets a little gray or there's rust or something. Are we going to fix a product, return a product? Its's that level of confidence. There is, with the construction industry, a made in U.S.A. desire, all those things. And I just spoke, another value-add is our electrical agents. You want to be having the best sales organization out there, and they want to represent the best products. From there, it's the bundling of products. We're not just selling one product, even compared to our U.S. competitors, they may be selling just conduit or they may be selling just cable or they may be selling PVC conduit, but nobody brings the breadth of products that Atkore does to the industry. And that's more than just rebate programs and sales force and technical sales, that's the ability to put co-loads together so you don't have to buy as many products. And then thinking of co-loads. The other thing, even in the United States, if you look at our footprint, we have across the world because we always sell -- we produce locally and sell locally, we have 65 facilities. For example, on PVC pipe, we have 9 facilities strategically placed across the country. Our facility in Tampa, Florida or Thomasville, Georgia, could never effectively ship to the West Coast. So your question of, hey, what would happen if China would come in? I'm not even concerned about a person in the Carolinas trying to compete with me in California it’s just not effective. And it's more than PVC pipe, we strategically have cable facilities on both sides on New England and one in California. We have 2 trade product manufacturing locations. So across there, freight plays a large factor in it, and then it's all the other value-add that I just walked through.

And so you touched on another item that's been very topical this conference is freight. And I think we all can kind of see the pressure or the upward bias for freight cost into next year. Can you just talk about how you mitigate that? And if you see it as a headwind, is that something that gets offset with typical productivity? Are there other actions you take to offset freight? Maybe just isolating that specific item.

Freight cost, we do expect to go up. So probably very consistent with what you're hearing from other companies and so forth. But really, it's just not a factor for us. And what I mean, it is a factor from its mid-single-digit cost for Atkore. But either because it's productivity. Again, one of the things that you may want to touch on is with our capital deployment. But we're putting in a new transportation management system. So effectively to drive even just how much we can get on a truck. I mean the importance between having a 94% full truck and a 90% is significant and how do we do that and serve our customers better with automation. There's a lot of things like that we're doing. And then the biggest thing is we do really want is just our pricing. So to go, hey, what is the pricing? What's the value if we have inputs, whether it's cost, whether it's just supply and demand, commodity cost, freight cost. We factor that in and, I'd say because of the value proposition, we pass those things along. So stay on top of it. Every 2 weeks David Johnson and I host a meeting and we walk through all of our commodities, including freight cost. What's happening and are we getting in the price forward. But it's just not a major consideration because the team does it so well.

Got you. So that kind of -- there's 2 follow-on questions to that. I'm going to ask the one that I don't know the answer to first. So -- it seems really interesting. So in both those answers you talked about wanting to put more product in a truck, right? So whether you talked about putting PVC and metal right with that co-lo. You just talked here about actually packaging them more efficiently. Maybe just help us understand first how important that really is? The more you can put in a truck if there is any kind of numbers you can put around that? And then the follow-on to that would just be in you've talked a lot this, but maybe for people that aren't as familiar with the story is when you think about those steel costs or those kind of commodity costs, you do have a very rigorous kind of daily pricing model. So maybe if you want to take an opportunity just to remind people on that as well that just might not be as familiar with it.

Yes. So I'll start from, I'll say, small to big on the points from an investor standpoint. And I don't know so I'm looking at, rhetorically, John Deitzer on what we share on freight cost. But figure mid-single digits. So therefore, if you assume 5% of $2 billion. It's a $100 million cost for us, directionally. So the difference between having a truck that's 90% full and 100% full is huge, if you just walk through that math. On the same hand, what we're all focused on is being the customer's first choice and supplying the customer. Therefore, you just can't wait to get a full truck. You have to go -- well, the guy in Wisconsin who wants a truck, oh, I'm going to wait 2 weeks till I get one more order in Minnesota. So that balance, that automation to do that is material. But again, with our whole suite of products, the amount of sales we get, our agent network and so forth, we have a better ability to satisfy the customer, ship immediately and fill trucks than probably anybody. And that's a competitive sustainable advantage. From there, really important for our customers is the co-load capability. I'm going to give you a hypothetical, imagine if you were in Downtown Chicago or New York City and you had electrical distributor, it's a small location. This is not like a big home depot out in the middle of Kansas or something where you have lots of space. They can't afford to have a whole truckload of PVC conduit, a whole truckload of metal conduit, a whole truckload of trade products, a whole truckload of electrical products, they don't even have the space for it. So Atkore being able to send one truck in very efficiently and give them a quarter truckload hits their needs both from space, managing their inventory levels, they are a business that needs to manage [ GMROIs ] and everything else, like all the -- we do. So having that capability, again, ties naturally to Atkore, and that literally is a competitive, sustainable advantage that I think we bring to customers, and they appreciate. And then from your pricing standpoint, one of the nice advantages we have is our products we price, well, I'm going to say dynamically, but it's literally real-time every moment. So looking at just what the feedback we're getting from our agents, what our hit rate is, how much, compared to forecast, what we're hearing, what we see in inflation, going or what we even predict. A lot of times, inflation is our friend. So price is going up or down. If we see steel costs being announced, for example, even if that's not going to hit us for 4 to 6 or 8 weeks. We're getting out in front of that and getting that price put into the market most of the time since before it ever hits us. And again, we effectively communicate that. So our customers and even their customers understand that. So there is science to every step of this process. And it's why, for the last 3 years, we've had more price than our costs going up. And why even this year, and the middle is slower, pandemic and everything else, we're forecasting to have again a positive price to cost that will help drive our EBITDA and our net income up as we go forward.

Great. And I guess, sticking with this theme of providing more to your customers, I remember for a couple of quarters, we were talking about opportunities around fittings. And I think that was kind of a smaller product line for you. But you looked at kind of where your market share entitlement could be and it seemed like it should have been higher. That I think was just one example you used. I mean, are there more kind of niche products like that, that we should think about you have an opportunity to actually grow market share?

Yes. Absolutely. And you asked one of the things, John, to your very first question on, hey, what's the market's happening? And yes, you have some headwinds in nonresidential, but there's enough self-help for Atkore. And I'll use fittings as an example and then give you other examples. If we in the investor deck that we have published in their earnings call, you'll see that a lot of our products were #1 or #2. But there's other products like fittings, where we're probably #10, #15 in the market. In other words, there's a lot of people larger than us. So think of the irony for Atkore, where for the metal conduit, the plastic conduit, the cable that goes in it, we have over 30% market share in every one of those product lines. And then we have, like, let's say, 2% or 3% in fittings. The thing that connects the 2 together, it naturally goes together on the truck. So there's huge white space opportunity to grow. And that's, again, where we can leverage everything from new product designs I could walk through that are really labor savings to the ability to put them on the same order, the same shipment, the same invoice, to bundle the rebate programs together. That doing things like that collectively, we're growing mid- to high single digits, even in the last year with things like our PVC and metal fittings, and that's again in the middle of a pandemic. So we aspire -- now again, trying to be objective here. If we only have 2% or 3% market share, if we're growing 2 to 3x faster than the market, it's still these products are 10% of our business. So -- but these things add up, and that's why you see the double-digit compounded growth in EBITDA, the 1,500 basis point return on invested capital improvement over the last 5 years. And yes, there is more than fittings. There's products like trade products that we have a good market share in, but we could do better. It's specifiable products, higher margin. So it's all how do we leverage Atkore as a whole as we go forward.

Great. And then, I guess, keeping with that kind of self-help theme. Productivity, right, has been kind of something you talk about on a year-over-year, every year entitlement. Could you maybe unpackage that a little bit? What are the investments you're making to drive that productivity that you target every year? It sounded like you talked a little bit about some CapEx spending around some of these digital solutions you might be using internally. But how do you help -- or I guess, help us understand and unpackage how you drive that productivity year after year? And what inning, I guess, I would ask, do you think you are in productivity?

Yes. So John, as you know, we have the Atkore Business System very much designed off the Danaher Business System, Toyota Production System. And for us, it's much more than like a slogan, much more than what we talk to investors. It's literally what we do every day and every facet from strategy deployment down to lean daily management. So whether it's simple things just like GEMBA walks and hour by hour and how to do a Kaizen in a cell, that's happening all the time. Some bigger ideas -- I talked about already the transportation management system. I'll give you another example is we're the market leader, I'm going to say by far, in our PVC conduit. Again, we have 9 facilities, our biggest competitor has 4, just to give you an order of magnitude and the size and the breadth of our reach there with PVC, and we run it really well. But we also have the science down that we've spent capital to invest in automatic blending. And again, for an investor sitting there and go, oh you make PVC pipe. The complexity of even making a PVC conduit, the sophistication of how much of different blends you need, how much you can use recycled or reground material? What does that do to your calcium carbonate need in that? Well, what happens if you can't get that amount of product? What happens if the humidity is up or down? What happens if it's 6-inch size PVC conduit versus 2 inch? We put in sophisticated blending systems that automate all those things that we have exact formulas. It's not somebody -- good old Henry Bob that knows the industry for 38 years with a pound of -- a 5-gallon bucket trying to guess on it. And that drives productivity, quality, we bring these things down to a science, upper and lower control limits. So that's another example where we're getting more throughput, better quality product, more efficient. And that's just one example. We're investing across the board. One other example tying in the digital aspect to it is what's called RPAs, robotic process automation. So a lot of things, even, for example, if an employee was to leave a company, most companies would sit there and have a process, a checklist to go, okay, did IT turn them off? Did we turn them off from payroll? We've automated processes like that. We actually have robots, a bot that automates a process. So therefore, we're saving labor. Our employees are focused on more value-added things than that. Our compliance rate has gone up. These are the fun things with Atkore because we have hit and exceeded our numbers for the last several years. You see the results, and it gives people like David and John and the rest of our management team the opportunity to truly focus on things that are going to make 2024 as successful, we would hope, as what 2020 has been.

Great. And we talked mostly on the new front earlier. But when I think about renovation, that's a lot more difficult market to kind of get insight into. There's not as many external indicators for that. But if I just conceptually think about somebody remodeling an office or something to bring people back to work safely. There's going to be things moved around, electrical outlets, maybe temporary walls, et cetera. Can you talk a little bit about what you're seeing in renovation markets? And kind of what gives you confidence that, that's going to be a source of growth?

Yes. So very much like you said, we see it as a source of growth. I forgot the precise number, it's in our deck. I think it's -- we're estimating around 20%. To your point, it is tough for us to get exact handle on numbers because we're out talking to distributors. We're talking to contractors. I try to spend most of my time being external, so does our leadership team. But it's not an exact science when you're shipping the truck on where exactly the product is being used. But everything you said to go, hey, if you're remodeling, you're ripping out walls, putting new walls in. Even if you're moving out from the city to a vacant facility in the suburbs or even if Amazon is taking over a retail facility and remodeling, all that work that doesn't show up, for example, in architectural billing index is growing. We see it growing. I don't have a precise number, so I won't quote, but it's absolutely a tailwind helping the industry as 20% of our business. And the other thing there that's hitting at all of us as a positive trend is just the whole electrification to go, hey, before, did you just have -- you go to an old hotel, you just have one set of outlets versus now with all the different plugs, the sophistication, whether it is a warehouse or whether it's an office building, the amount of electrical content typically in a building is increasing. And therefore, it's more work and usage per square foot for Atkore products. So, again, another tailwind. Each of these things are small, 50, 100 basis points, but they all compound up to give us a very optimistic picture for the future.

Great. And then maybe a question for David or for you, Bill. But as you think about the free cash flow profile of the business, obviously, it's been improving. What do you think or -- I'm trying to remember if you put out an endpoint on either a free cash flow margin. If you think about it as a percentage of sales, if you think about it on conversion ratio, kind of what do you think your entitlement is? And how are you going to drive to get there?

So I think basically, John, we said publicly we targeted free cash flow to be over 100% net income. And we saw this past year, we definitely did better than that. We did have some working capital that came out of the business as part of the pandemic. And we do expect to put some of that working capital back into the business here in FY '21. But generally speaking, north of that 100% net income is where we target.

Great. And when you think about it, I mean, obviously, you have a pretty CapEx like business model. But as working capital the primary driver, as you view it, that's really what's going to be that can move the needle? And then, I guess, net income growth as well.

Right. Net income growth, which I think we've demonstrated, has been pretty positive over the last several years. And then just order efficiency and working capital days. And just like Bill said about the Atkore business system, not only does that efficiency come out in our cost, it also comes out in working capital and how we look at our days of inventory, how we look at our accounts receivable and making sure that the terms are out there are deserved. And we look at that on a pareto basis on a regular basis. So it's all those kind of little actions that end up being -- that come into working capital -- they said that will generate more free cash flow.

You're on mute, John.

Maybe a question going back to that electrification comment you made. We've heard from other manufacturers. I'll use Eaton as an example, they've been very public with a number. When you think about a data center, how much more electrical content and opportunity there is to sell into versus, say, a shopping mall or something? You've talked about this warehouses, data center, hospitals as being more electrical intensive. But I don't know if we've ever been able to get a number around it for you. So can you help us understand what that mix impact is to Atkore as we think about what verticals are growing faster or slower in the nonresidential space?

Yes. It did. So I don't know -- we'll follow-up if we've ever given a precise number. But I will tell you, we do a whole science there, we call density weighting. So we take literally every one of our products, say, hey, how much goes to residential versus how much goes to a data center versus, how much goes to a warehouse. And we also per square foot then set and put an estimate on electrical content. And as one could imagine, without giving a precise number that if you just were to walk into a hospital or data center per square foot, it's several times more than what a retail center is going to be. So the tailwinds are actually helping us. Because you think about things that are growing, data centers are obviously growing. You can look at the Dodge report. There's massive jobs still going on from Google to even I saw one who -- a large job with Tesla going on right now. They’re just tremendous sized jobs with lots of electrical content. And again, John, to an earlier question, these are not 6-month type of projects, these are projects that will take multiple years to supply all the content that locations like that are looking for. The other factor that I don't know if others are talking about, but would apply even say to an Eaton Corporation, but obviously applies to us, is just the amount of electrical content holistically. Look at a warehouse. Envision if you were to walk through a warehouse 10 years ago, and it would probably have been a bunch of steel posts going up supporting the ceiling and empty space with racks and Ford trucks driving around. Today, if you imagine an automated warehouse where maybe 2 or 3 floors and 2 or 3 of those floors may be lights out, literally just automated scanners going on, picking equipment, picking up, dropping down, being bundled together. And even where there are physical workers, they're still using RF guns and all the amount of electrical equipment just to get the things going there. Per square foot, the amount of electrical content is up significantly in a warehouse, but it's more than just a warehouse. Think of the factory, the office building that now has the electrical car parking. They go before just a parking lot. Now you have electrical outlets out there. So -- or solar arrays with the Biden administration besides a growing trend. Now all of a sudden, you just don't have a -- one set of generation for electrical power running into community, you're going to have 2. You're going to have the hydro power coming in. You're going to have the wind mill coming in, the solar power coming in. So the amount of electrical lines, the amount of Atkore equipment per square foot is obviously going up. And again, so trends in what's growing specifically, things like data centers and hospitals are helping us. And then across every facet, the amount of electrical content is going up. So those 2 things, again, give us even the middle of the nonresidential headwinds and things like hotels and amusement parks. The optimism to give a forecast here for this quarter is around $100 million in profit. I mean, think in our slow quarter, what we're doing let alone having a record last year and having an upbeat forecast for this year.

Great. Well, I'm just looking at the clock, and unfortunately, we have run out of the 30-minute time slot, but really appreciate the conversation, very interesting. We didn't get a chance to talk about ESG, but I kind of heard clean energy transition electrification there at the end. So maybe that's something we can follow-up with. But definitely, I want to thank you for your time and appreciate you guys being here at the conference and hope that everyone stays safe.

Thanks, John. Great conference as always, and appreciate the time with you.

Excellent. Take care. Bye.

Thanks for that.