Atkore Inc. (ATKR) Earnings Call Transcript & Summary

I'm very excited to have Atkore International with us. I think you're changing it to Atkore now, right? So very excited to have Atkore with us. We've got Bill Waltz, who's the President and CEO; and David Johnson, who is the CFO. I've gotten to know Atkore over the years and honestly, continue to surprise on the upside, great performance, really good growth during the pandemic. And it's a pleasure to have you guys join us.

So let me just start with sort of a softball, Bill, in the sense that I think some of our viewers may not know the business as well as they should given the performance. So maybe you could give just a brief introduction of the company, talk about competitive advantages and maybe some of the goals for long-term outperformance.

Okay. Thanks, Andy, and appreciate the great conference here. So Atkore in a snapshot, around $2 billion revenue company focused on 2 segments. Electrical products, so we make everything from cables and metal conduits and different things that deploy, isolates and protects electrical circuitry. And then we also have a smaller division that's Safety & Infrastructure. So everything from solar power, to security products, from bollards that protect Times Square, to signposts and a bunch of other products in those segments. Probably some of the key things that differentiates us is we do take a vertical market approach. So when we think of Electrical products we provide probably a dozen different products where some of our competitors while very confident are more focused on a product. So they may provide PVC conduit or metal conduit or cables or so forth, but we're the only one with the full breadth of product. And there are so many advantages to that from one order, one shipment, one invoice to the things we've invested with our electrical contractors and distributors with digitization, automation, just to make life simpler for them. So that's the kind of a real quick snapshot of the company, founded with an Atkore Business System, which I think questions to come. But everything is very structured process. And do that with the right team, and you see the results at least for the last 5 years where we do compounded growth of well over 15% or around 15% EBITDA growth a year.

And Bill, you've mentioned that sort of you have a lot of these products, but you've talked in the past about being #1 or #2 in most of your end markets. And so the question is, what's allowed you to get there? Is it just having this full suite of products? Is it the Atkore Business System? What are the strengths of the company would you say?

Yes. Well, it's a couple of things. I do think the strength is we have a great phenomenal team. Everybody's probably proud of their team, but our processes, interviewing people, engagement and alignment, the diversity and inclusion that we drive. And then, again, having a strategy and deploying that strategy down, including M&A. So from there, some of it, like I'll use PVC conduit, for example. We set up a vision 8 years ago to go, this is a fragmented industry. Back then, we had one company in Georgia. Since that time, including an acquisition just 2 or 3 months ago, we're now up to 9 different companies. And an industry that was very fragmented is now us and one other competitor making up over 80%. And I could do the same thing with our metal conduit businesses, our cable businesses. So everything from new product development, customer excellence from service and then a very robust bolt-on M&A process. Combine that together with the right talent and you see the results and earnings and quite frankly, stock price the last year or 2.

So Bill, interestingly, the Atkore I think is, I don't know, a grandchild of the Danaher Business System, maybe you tell me. So like maybe talk about what the Atkore Business System has brought to the company in terms of allowing you to perform the way you've performed?

Yes. It's similar if people know the Danaher Business System. It's very similar to DBS. So a lot of our previous Chairman, the CEO before me, all came from long lineage at Danaher. We have people on our Board from the Toyota system, the guy who ran the top operations in Lexington, Kentucky from Toyota. So between Toyota and Danaher, myself, I've been trained in it for decades. And the only thing is, so it's similar there. One of the things I think we do truly better, I'm going to say, I perceive, than anybody is applying that same discipline just not to the shop floor, but to the front end of the process. So that's literally everything from how we run business unit reviews, to how we interview people, to how we do funnel development for new product development, voice of customer. Everything, we believe, has a best practice that's continuously improved with standard work metrics. And again, you see it in the results. So that's where we drive differentiation with the disciplined approach, with the right team.

And Bill, I believe as part of your improvement, you really invested in a lot of things. You mentioned automation early in this conversation. So maybe talk about the efficiency gains you've made in plants. I mean, you've given us, the Street, this sort of, I guess, how do I say this, it's $15 million of productivity improvements that you think every year as sort of a benchmark. But there are not that many companies that sort of say, hey, we're going to do this productivity every year, no matter what. So tell us about sort of that strategy.

Yes. So to your point, we've done $10 million to $15 million, maybe some years more, better productivity. And we're very comfortable going forward with that. From the standpoint that even though I mentioned the strength of the business system, we're in the third inning of lean and productivity. And that's everything from just simple things like flow, visual management, just the basics, but you can never think you've arrived in any of those things, to capital deployment, where, and I'll just give you a couple of examples to go, hey, with our PVC facilities, we're the clear leader in like PVC kind of. We're twice the size of the next largest competitor. But how do we automate things like the blending of different resins and calcium carbonate. How do we take the product when it comes off and automatically bundle and strap it together and so forth. And there are so many examples across of just proper capital deployment that's driving productivity, driving safety and driving more volume through. And you've seen that even here during the last couple of months with demand up in PVC conduit, for example, and also our competitors struggling. It's hard to get workers in with COVID and contact tracing and so forth, so they faltered. Whereas with our ability to put throughput and automation have actually stepped up our game. So just so many examples I could walk through on capital but just the mindset of continuous improvement. We don't even advertise this. We have around 65 facilities across the globe. We probably close 1 to 2 rooftops conservatively every year, including doing this last year with COVID, seamless to our customers. And again, we have a list of other ones as we continue to deploy lean. So it's just in who we are. It's our DNA. There's a lot of great singles and doubles that we continuously do across every facet, including productivity.

And Bill, like I would not consider you a new CEO anymore, but at the same time, you did start in 2018, so not that long ago as CEO. And I think you and I have had this discussion before. I've noticed sort of material improvement in Atkore since you started as CEO. So maybe talk about what did you personally do differently than your predecessor, if anything? What has changed over the last couple of years just out of curiosity?

Yes. So one major inflection point. I don't want to give credit to myself or the team. We're just at the right place at the right time, but it was building off that framework because, Andy, I have been here for the last 8 years. But now that we have this internally well-run machine, Atkore Business System, flow, everything on productivity, how do we turn that externally? And that's probably the inflection point 3 years ago is how do we spend more time doing the same things we do well externally. So how do we get more growth, turn it into a growth machine, externally focused. We're close to 20% EBITDA margins. We'll exceed that this year. So it's like, yes, we can continue and we will, to your question, $10 million to $15 million a year internal productivity. But how do we drive new product development? How do we spend more time with our customers? How do we drive not just our customers being distributors, but pull-through? Let's go spend. We've hired like half a dozen people, engineers or sales to go meet with contractors and explain to them all the new labor-saving products that we're doing and have them pull through. We just released, for example, a whole new set of BIM three-dimensional models that is probably innovative in the industry, at least for ours, set it up with the contractor, set it up with the designer, have them pull it through where they want to use Atkore products with labor savings to the distributor, it just makes it flow. So that's the stuff. That's one inflection point that I think we're still in the first, second of opportunities here to really turn this into a growth machine, bringing value to every facet of the kind of supply channel, from distributors, to contractors and engineers.

So I know we've all asked you this before, but let's just get it out of the way now. So 70% of the company is U.S. construction. A majority of that is U.S. non-res. So you often get sort of put in that bucket of concerns about the Dodge Data and such, right? So maybe talk to us about why we shouldn't necessarily do that, why you've been outperforming the market, you expect to outperform the market in '21. How should we think about Atkore if we're a little worried still about U.S. non-res?

Yes. So I'm going to take that one from at least 2 different directions. First, if any, the classic thing of any past performance is an indication of future performance. The markets have been growing slightly 2% to 3% over the last couple of years, but it's not like we have, been at 15% compounded growth in EBITDA and have done that off this massive market growth. So we performed, including this last year in the middle of COVID, and had a record number of profit. So I think from everything I just spoke about, new product development, bringing value to the customer, automation, digitization, there are so many things we're doing that even with a headwind, we can continue to perform well. And we've shown it last year. If a customer or an investor needs proof, just look at last year results. But then, Andy, to your specific question, if you peel back that 60%, give or take, of non-res, 25% of that is renovation. And we think that's actually strong, even just taking a retail center and turning it into a warehouse, changing office designs for COVID, whatever it is, moving around and so forth. So that's still strong. Then you break down that 35%, give or take, of new nonresidential construction. And of that 35%, there are a couple of places we would acknowledge for the next year, like offices and retail that are down, but there's many areas like data centers that are growing dramatically. And we're putting double the investment into those, whether it's new products I could speak about. We've hired a leader to attack that vertical market to go through. Warehousing, obviously, is going really strong. Health care is going strong. So even Dodge Momentum Index and stuff is looking to go from this low basis point or is projecting growth going forward, let alone all of our initiatives and so forth to add to that to pull through. And then by the way, Andy, the other parts besides that part of the market should grow. Our Safety & Infrastructure business, where we're investing in solar, we're invested in security and so forth, those markets are going to grow better than GDP. I don't think anybody would debate that. And nonresidential, 14% of our market, is going obviously gangbusters, give or take, around 10%. So I think even, and I'm sure one of your questions I would assume is, hey, how do we get to $400 million? I think as we do models, we're being conservative on what we're expecting the markets to grow over the next 2 years. So we control our own destiny on that.

Yes. No, totally, Bill. And I struggle a little bit with the notion of the goods versus the bads in non-res. You mentioned the data centers and warehousing. Is there any more color you could give us to help with that because obviously, the hospitality, retail, like there's some weaker markets there. But it does seem like, again, for most of my coverage actually, the goods are at least balancing the bads, if not maybe outweighing them.

Yes. So a couple of things. Without quoting exactly every metric and so forth, but again, you, your investors can go out and do 2 things. One, look at things like Dodge Momentum Index and so forth that a lot of things are projecting Dodge to go in 2022 to go with the market, again, from a lower jumping off point, but we're performing well. I don't think anybody is questioning our numbers or results so far. We'll start rebounding. So I think it's that. The other thing that's a phenomenon that I think all investors should understand is, there's what we're calling kind of the electrification density. So if someone looks at a square foot, like Dodge projects X square foot, the amount of electrical product used per square foot is going up, and that should be intuitive for anybody. Just to think of a warehouse of 10 years ago and go, hey, it was a bunch of shelving and fork trucks. Now you have sophisticated operations that are lights-out or half of it's lights-out. And even the unsophisticated operation still has things like RF scanning. I'm sitting here as I'm traveling, say, in a hotel room, and there's twice as many electrical outlets around me before. Think about things like you pull up to a factory or anything else and go, how many cars in 5 years are going to have electrical charging stations. That's going to drive it. So you take a square foot, extrapolate. Solar power is going to drive, but then you have duplication of electricity from the standpoint, you're going to get it from the utility and also from your microgrid. So there's so many different factors above and beyond from a secular trend that are also going to help us beyond. Data centers are going really well. We just walked through warehouses and some of the specific verticals.

Yes. No. That's really helpful. And I was just looking. So if I look at sort of raceway volume, right, in terms of, it's down a little bit as we speak. I mean, obviously, pricing is very strong, which we'll talk about. But how do you get visibility into sort of the overall growth for '21? Is it just based on sort of what you were talking about, Bill, that generally, you'd see investments in these higher-growth markets? You look at Dodge Momentum and you say that volume should pick up.

Yes. I think, well, it's a couple of things, Andy. It is that we probably have a dozen different services and triangulate. And it would be our confidence factors and doing our own regression analysis for our own company. But what we ourselves may only have a week, 2 weeks of backlog, I and the whole organization, as I talked earlier with that growth and external focus, are constantly in contact with all the customers. And not just our customers, could be distributors, contractors. We're fortunate, for example, even like the second-largest electrical contractor in the country, the CFO is on our Board of Directors. So we have that voice of customer. So we know what their backlog is, their projections are. And then also for, Andy, you or any investor, realize, as you talk about what is Atkore doing now at the beginning of the year, we are comping a year ago where there wasn't COVID to now where there is. When we get to second half of the year, we have, quite frankly, the tailwind of like March and April and May, where things were shut down. So this is not a stretch for Atkore to say, we should be up low to mid-single digits for the year in volume, let alone pricing power on top.

Yes, Andy, to add to that. We also look at construction backlog in non-res. So there's some data points there. And by and large before the pandemic, that was in the high 8-month range. And right now, it's in the low 7s. They did tick up, believe it or not, in December. So I think that's a good indication. And if you look at non-res construction jobs or employment, that kind of bottomed out a few months ago. You're actually starting to see that tick up a little bit, too. So those tend to be a little bit precursors and sort of let us know what the near-term future is going to look like.

I think it reminds me to ask you guys because like to that point of employment, there's obviously lots of potential for infrastructure spend out there. And so do you see any sort of evidence of customers maybe thinking about more projects going forward? Do we just have to sort of wait to see what happens with funding before we sort of get incremental tailwind around that?

I think the way I would at least answer probably for David is, the numbers we gave for this year and the numbers we've projected for next year, the $400 million, does not have an infrastructure spend though. We're prepared for it. There's products we're developing that we just think are natural for different areas like that, that we'll be able to talk about more in the future, but that would actually be upside to anything we're discussing today.

Great. And then, Bill, you were one of the few new brave souls, maybe the only one, who actually put out '22 guidance. So maybe talk about that. I mean, again, part of the reason why you did that is because you don't want us to get too excited, which is interesting in that sense. So maybe talk about the visibility, why you put it out, why you think the business is going to normalize from the really high levels that it is in the first half of '21.

Yes. I think, Andy, appreciate, Andy, how you asked the question because the first thing is why do it. Because, again, there's probably some companies out there that are not giving guidance still for a quarter, let alone a year, let alone for 2 years out. So the premise there is, as we released our numbers, we had guided around $350 million. And within 1 quarter, we've jumped to $450 million. And David and I, the full Atkore team with the high performance, high humility, absolutely believe in transparency. So the last thing we want, an investor would think we're a great story, more to come. We didn't want somebody with irrational exuberance taking $450 million, not knowing the Atkore story, and all of a sudden projecting $500 million next year and then disappointing when we don't hit some number than in our own mind. So we're literally trying to safeguard investors. Now from there, how do we get to $400 million without every specific detail? We literally had our presidents, our general managers, obviously, it's assumptions, but just do bottoms-up. What is the assumptions on market, which we're assuming low single-digit growth. What are we thinking to grow above the market, which is not anything unusual, 100, 200 basis points market growth of new product development that we have, that $10 million to $15 million of productivity. And also, if you look back over our bridges for the last 5 years, we've always had some pricing power. So again, a continuation of that, and we do come into $400 million. That's how we came to the number. Now I will tell you, by coincidence, by triangulation, it's a pretty impressive number to go last year in the middle of COVID, we hit a record profit of $327 million. You go $327 million to $400 million, it's slightly over 20%. Specifically, it's 10.2% compounded EBITDA growth. And again, for the last 5 years, we've delivered around 15%. So it's not out of the norm for us to do that. Quite frankly, it's right in almost the slope of what we've done. And then that's where I would tell you for an investor that does any type of modeling, how many of your clients out there, your customers, your shareholders have those type of numbers and keep that track record going. Now we have to deliver it and then do it in the middle of pandemic. So that's why we did it. We wanted to stop somebody from modeling too high. God forbid somebody would actually do that. But also it's a pretty impressive number when hopefully now we're telling you...

You got to keep us crazy sell-siders down though.

Good point. We tried, Andy. Yes, the other thing we didn't contemplate is M&A. And obviously, it's going to be a big part of our go-forward capital deployment strategy, Andy. So that would be something we didn't contemplate in that number. And we did also recognize that, that number was above kind of what everyone thought we would already be in FY '22.

And a kind of similar question because if I look at your Q2 guide, you're guiding to sort of mid-20% EBITDA margins. And then you've got the margin sort of trailing off back to more normalized levels in the mid to high teens in the second half implied in the guide. I mean, obviously, it's probably time to talk about that residential business and the sort of demand driver there versus the supply constraints that your peers have. Because it seemed like there is some conservatism in the sense that, sure, this will normalize over time, but maybe it doesn't normalize within a quarter or even 2 quarters. So any comments you want to give around that?