Atkore Inc. (ATKR) Earnings Call Transcript & Summary

Good morning. This is Chris Moore from CJS. Next company is Atkore Inc. With us today from management, David Johnson, Chief CFO; John Deitzer, Vice President of Treasury and Investor Relations. So same format, management will provide an overview of the company. I will then lead Q&A, and clients will have an opportunity to e-mail questions as well. So with that, David and John, why don't you get us going?

All right. Thank you very much, Chris. Thanks, everyone, for joining us today and having an opportunity to share a little bit about our company. If we go to Slide 3, just an overview of some of the things we'll touch on today is around our operational folks a little bit of detail around our Atkore Business System. Track record of success over the last few years of being public, 5 years in total. And then market leadership in a lot of our key product categories, we'll go through those categories in exactly what markets, end markets and so on. So moving on to the next slide, Slide 4. From 1959, you can see where -- we became public in 2016. Pretty much, if you look at our segments, most of it is electrical, so 72%. And then we also have a segment called safety and infrastructure. And in there, you will have certain safety products like engineered bollards that you might see in like Time Square, New York or what have you and some other products that find a way eventually into the end markets such as solar and what have you. Go by geography, mostly U.S.-based company, about 90% owned in total and then 11% international. The international footprint is mainly Western Europe and then also some business in China, New Zealand and Australia. If you look at the end markets -- and one thing about our business, especially if you look at the electrical business, it all goes through the electrical wholesale or electrical distributor channel. So we have many ways of getting to the estimates of our end markets, but please keep in mind that we do get through the channel. So it's not probably precise to a certain percent. But we feel like this is a fair representation of our end markets. Non-resi new construction, 33%. Repair and remodel about 20%. So about half kind of at non-resi, and then residential 14% and then OEM and so on. One other thing to mention here is that our products are felt, especially in the electrical side in every type of building. So when you look at non-res construction in any form, whether it's a data center warehouse, an office building, commercial structure of any type, our products are necessary to make sure that you have isolated and the electrical service to the facility. So as long as the facility has some sort of electrical content to it, our products are required. If we move on to Slide 5, we do have a foundation in the Atkore Business System, which is very similar to some other business systems that you might have heard from other companies. I think the thing that's a little bit different for us is we feel we use it for every aspect of our business. So when you step back and you look at standard work, lean methodology, continuous improvement and then applying that not only to our manufacturing environment, but also applying it to the front end of our business, the way we interview folks on and so forth, it is the way we run our business. And as we'll touch on a little bit later, we have added several acquisitions over the years. We have found by applying our Atkore Business System to those targets, we are able to generate additional value for the company. Moving on to Slide 6. Probably a little bit hard to read in some of these, but this gives you an idea of some of our products. If you go to the bottom, you'll see PVC electrical conduit. That would be the PVC conduit under the ground that leads the electrical supply into a building or neighborhood. And then you start working into the building itself. You'll get into things like cable tray in upper left and so on and so forth. I think the important thing about this slide is our products are pretty much all around you wherever you're at. If you go to a office building, they're going to be in the walls and the basement and so on and so forth. Same thing with the data centers, warehouses, et cetera. The other thing to keep in mind is these products are required, again, for all the buildings. And depending on what type of building you might have more of our electrical content. So when you look at something like a data center, I would say that and a hospital would be the highest density of our products. And then we start getting into things like retail, I would say that that's a little bit lighter in content. So we look at the mix of those end markets and what's growing and what the impact of our business will be. And by and large, the things that are growing fairly well, like data centers, warehouses, and what have you, would have a high content to be electrical content. If you move on to Slide 7, just a little bit of history of our track record of growth and the return on invested capital and what have you. When you look at our adjusted EBITDA, we've gone from roughly $164 million in 2015, up to $327 million in 2020. We're very pleased with the performance of the business during COVID. We were actually able to increase our EBITDA during that time. We were an essential business in, I would say, by and large, all of the states, all of our facilities, supporting the construction industry during that period of time, although we had challenges like everyone had challenges. But at the end of the day, we're very pleased with the fact that we were able to grow EBITDA during that period of time. You can see free cash flow. I would say, in general, FY '20 was very strong, a little bit of working capital liquidation in there, again, due to COVID. And then you see the return on capital. If you move on to Slide 8. This gives a little bit more detail into our brands, our customers. If you look at the overall, we're 1 or 2 in our market for some of our major product lines. So at the bottom, you'll see PVC conduit #1. And that market is supplied by 2 or 3 competitors that make up roughly 75% to 80% of that market. Steel conduit, we're #2. There will be 2 other players. So about 3 players in those markets -- in that market that make up 92% of the market. And then when we get into like armored cable, we're #2. A couple of other competitors and the 3 of us make up probably high-80s, low-90s percent of that market. So really good competitors, good products. By and large, we do not have the influence of any type of imports into these markets. And that's by and large due to the fact that these products are heavy, they are hard to move and therefore, freight becomes an issue. And so most of our major markets are supplied in region, for the region. And then if you move over to the right, I mean, brands, I know you look at the products and they don't look overly complicated. And I would say that's probably true. But whenever you look at what's required from electrical code standards and so on, brands still are important. So we do have very strong brands, some of them around 90-plus years where electrical contractors who will buy through distribution our products, know the Allied Tube brand or the AFC Cable System brand. And with -- that comes with some expectations of quality, on-time delivery, so on. If you move over to the right, this would be our customer base. And when we think of customers, we actually do think of 2 sets of customers. So this would be our distributor customers, so those folks that we directly sell to. And then the customers who would buy from them would be electrical contractors. So we like to stay in contact with the electrical contractors, how they use our products so that we can innovate our products going forward and then obviously, servicing the distribution channel well. If you move on to Slide 9, there's a few aspects of organic growth. I guess one thing I would say overall is we believe the electrical industry is just a really good industry to be in. When you think of the electrification of everything you're seeing around us, I think the long-term growth prospects of the electrical industry in general are pretty strong. And then when you look at how can we help accelerate our growth, new product innovation, it's never been a strong point of the business, I would say, going back 3-plus years ago. Recently, we've invested quite a bit in voice of customers, some technical sales managers. And when -- if you look at the results so far, we've won Product of the Year this past year, we've won Product of the Year, 2 years ago. So innovation is becoming a little bit more core to what we do, and that's certainly allowing us to grow in those categories. When you look at global category expansion, we have had different areas where that voice of customers led us to expanding at a particular category. And then we've also invested a lot in digital capabilities. So when you think about how a building is designed something called a BIM module. All of our products are on BIM, makes it very easy for designers to design our products into a particular building, use our products, get used to our products. And again, that's looking a little bit forward beyond the distributor. But again, we've invested a lot in those capabilities. We've also invested a lot of digital capabilities with the distributor to make it just easier to do business, so that we're a supplier of choice when they have a need, obviously, for these construction projects. Moving on to Slide 10. You can see a little bit of a history of acquisitions and a couple of divestitures we made at the time. By and large, it's been electrical that we've expanded. We have looked at PVC acquisitions over this period of time. And fairly, everything is under, I would say, $100 million in purchase price. So not large M&A, basically, smaller typically family-run type businesses that we're able to acquire, add the Atkore Business System, add our channel expertise broadening our portfolio to serve that channel. And it's been a really good value creation for us over the last several years. You can see the more recent ones in 2021, Queen City Plastics, again, adding to our PVC franchise, really great acquisition. And then we did make another one of FRE Composites. This again would be an electrical conduit product category, but just happens to be fiberglass. And for some applications, fiberglass is preferred due to its weight and due to its properties around the fire and burning that sort of thing. And so the acquisition of FRE, although a fairly small acquisition, again, it's just one of these things where we're able to add it to our portfolio, serve the channel better and being part of the Atkore with our great agents and so on that we're able to add value to that target. Move on to the next slide. Looking at how we've managed debt over time and our capital structure. We have deleveraged pretty significantly over the last several years since the coming out of the PE environment. And this year, in particular, one of the things we did do, and we're very pleased with the outcome was refinancing our debt to where it's now 50% variable and 50% fixed. We thought that, that was a good time to do that. We were up until that point, 100% variable. And we also had 1 tower out there, which was getting closer to 2023. So we've moved our towers out to 2020, 2031. So as we sit here today, and we were able to do that and still lower our interest expense. So at the end of the day, we thought this was a really good time. Really happy with the outcome. And now we're set up with a strong financial footing going forward. Next slide, Slide 12. Focused on ESG. We're very proud of the fact that we had our first sustainability report last year. We continue to invest in certain technologies to reduce our waste. You can see some of the numbers to the right. And we continue to invest in people and community. And then if we go to Slide 13, that's about it. So Chris, hopefully, that's a good overview of our company. And if you have any questions so?

Terrific. Yes, that's a great start. Thank you, John (sic) [ David ]. Yes, we're beginning with a couple of kind of broad themes for all the companies today and then we'll get into specifics. So I mean the first one is just impact of labor availability. So obviously, a growing topic for many companies. Just trying to get your thoughts at this point in time, what you're seeing at this stage? And do you believe it's an issue moving forward?

Yes. I think everything that you've read about different constraints and difficulties for manufacturing, I don't think we're any different than anyone else where there are labor constraints. There are commodity constraints. There's the availability of steel. There's, for us, availability of PVC resin. I think those are all challenges. I mean one of the things I will mention that even before COVID though, labor was a shortage. I mean it was a shortage in our electrical contractors. So it was creating construction times that were elevated compared to historic norms. I mean I think we're still seeing that. And then on top of that, yes, it is definitely a constraint. But I will say for our business in total, we're not an assembler. We're not a high labor content business. So I think for us, the top of the mind is more around the availability of those input commodities like steel, copper, PVC resin, et cetera.

Got you. We'll jump to that in a little bit. And just in terms of -- from a labor standpoint, obviously, work-from-home has been a big theme for many companies. Just talk in terms of what percentage of your employees work from home now? And are most back in the office at this stage? Or how are you looking at that moving forward?

That's a good question. I think it's probably evolving over time. And as we sit here, most people are back in the office. When you look at our manufacturing footprint, a lot of people have been in the manufacturing environment ever since COVID, since we were deemed an essential business. So when you look at headquarters or the more office locations, we did go through a period of time where we were all remote. I will say that having the basis of the Atkore Business System where we had standard work and documentation, it made it think about as seamless as it could be. Obviously, we had to make sure everyone's computers and the network and all that sort of things up and running. But I thought that it went really well. But now as we're going forward, we're probably a little bit more on the business as usual side of getting people into the office. We do think there's a value of being physically together. That being said, we've always had an opportunity to be a little bit flexible for people. So if folks had a reason why they need to be away on a certain day, we've always supported that. And I think we're going to continue to support that in the future.

Got it. Dynamic pricing, it's obviously a critical component of your business model. Can you talk a little bit about how pricing works at Atkore? Can Atkore benefit from inflation over -- at times? Maybe just dig into that a little bit.

Yes, I'm very happy to do that. If you look at the electrical of our business, again, almost all that goes through electrical distribution. And most of those products are priced on a daily basis. So when you look at steel conduit, PVC conduit, armored cable, those products, in particular, are our priced on a daily basis. And what we do at Atkore, and I believe a lot of the industry does in our product categories, we do a lot of work around what exactly is going on with commodities, what is also happening in freight and labor and all these sort of things. So we tend to look at it as more of an input cost. And then we have pricing managers that look at what's going on with demand in a very regional way. And the reason why that's important, as I had mentioned before, freight is a high cost to us because our products are either heavy like in steel conduit or what have you or they cube out before they weigh out like PVC conduit. And so taking all those into consideration, what's the price of the week or the day, what's going on in the market, what type of projects are out there, we price very dynamically. We have a weekly meeting with myself, the CEO and kind of the major sales leaders and business leaders talking about pricing strategy and what we're seeing in the marketplace. And that's how we basically go and input our pricing strategy. When you look at the results over the last several years, I think what you take away in it, I would say we're very transparent when you look at our bridges. And when you look at our bridges over the last several years, you'll notice somewhat despite commodities going up or down, we tend to add some EBITDA improvement quarter-over-quarter, almost every quarter since we've been public. And so I would say it's important to understand that even when commodities come down and pricing might come down at some point in time. Now the lag effect of that, we tend to benefit. And then I do feel like we do a really good job of getting ahead of commodity increases where I'll give you an example, steel mill might announce a $40 a tonne increase they might announce it. We're already implementing that into our pricing. We might not see that $40 a tonne or we might see it 2 weeks or 3 weeks or 4 weeks from now. And so it's very dynamic. And with that, I would say that one of the things we don't do, we get some questions around do you hedge commodities and all that. Well, given our pricing environment, how dynamic and how well we think we do, there's really no need to hedge commodities. We kind of deal with it as we go, and you can see it in our results. Now that's the electrical side of the business. I would say on the S&I side of the business, a little bit different. Those contracts, we have some OEM contracts and what have you, where you might have a quarter lag on pricing. So what you'll see in that segment is as commodities go up, you'll see the EBITDA dollars stay the same or go up a little bit, but the percentage EBITDA to sales will come down. And then when you start seeing steel in particular, because that's a major input of S&I, start to come down, you'll start seeing that the percentage is actually rebound back to their typical levels.

Got it. That's helpful. Maybe just talk a little bit more about the PVC market, kind of the unique characteristics of the PVC conduit market and why it has been such a big driver of excess margin over the last few quarters?

Yes. I set up a little bit talking about the fact that PVC conduit goes in the ground. One of the interesting thing about that is it tends to be one of the first things that happens at a construction site. And the other thing that's important to note about that is you really can't do a lot of other construction on the site until you get the PVC in the ground. So unlike maybe later in construction cycle where you're starting to put up walls, you can move some materials around or move trays around or what have you, PVC pretty much has to be there when you start a project. So that's a general overview of how it's used. And then as you can imagine, if you're building a new, say, residential neighborhood, delays in that are really a problem because you're literally delaying the entire project. So on-time performance and kind of commitment to being able to deliver at a specific time, is extremely important in the PVC business. And then on the -- so demand has been strong. Demand has been strong because of data centers, warehouses, residential and so on. So the demand side has been strong. It's a needed product. So then you look at the input side, and there has been constraints on resin and there's been constraints on resin and chlorine and some of these other inputs into resin due to floods and different particular issues at certain suppliers around hurricanes and then close down storing COVID and bringing them back up, a myriad of reasons. So what we did when we first saw this constraint was we felt it was more important to keep our lead times similar to our normal lead times, keep them on the business pretty stable, reduce the amount of SKUs that we're supplying because we didn't want to waste capacity on SKUs that weren't going to be the most critical for people moving forward. So this strategy around holding our on-time performance, our lead time led to some very substantial price increases, which we're still seeing today. And by and large, our customers are very happy that the fact that they're able to get the product, get it on time, they can get their project moving and they're not I would say, wasting weeks and weeks and weeks at a construction site. So those are the overall dynamics that are going on in the PVC business right now.

Got it. That's helpful. I mean, Atkore obviously has multiple moats that protect positioning brand recognition, breadth of products, electrical agent network. Maybe talk a little on the electrical agent kind of how critical that is to what you're doing and how well established it is.

That's a great question. I would say that having relationships with distributors. And when you look at the electrical business in the United States, you're probably looking at $110 billion market that basically goes through electrical distributors. Agents are basically our sales organization with -- who deal with distributors. So we deal directly with distributors, talk to heads of them because we have the breadth of products that allows us to do that. Because of our breadth of products and the attractiveness of our brands, we feel we get probably some of the better reps, agents in a particular region. And again, I think that's a little bit of advantageous for us because they can represent Atkore in a very broad sense to these electrical distributors. So again, I think it just plays on itself that the more products you can bring to a good agent, you're going to get the better agent. The more you really invest in the relationship with the agents, which we've invested quite a bit again with these digital tools and having agent portals and really getting connected to them, and then their relationships with distributors really helpful for our business. And again, building those relationships, building that rapport with distribution is definitely a moat in the electrical industry that's very, very difficult to replicate. It takes many, many, many years. And that's why you see others and other product categories having to buy U.S. companies to get that access, even though they might be a big European company or something.

Got it. And just in terms of the stock itself, 2 objections that I sometimes hear people are learning the story are commodity products and very cyclical end markets. So maybe we can start with the commodity products. Is that a fair description of your product portfolio?

I would -- of course, I'm going to say no, but I would say there is a commodity aspect because, obviously, our pricing is dynamic, and so it does take a little bit longer to learn the fact that, yes, margins are going to go up and down a little bit with commodities going up or down. But unlike some other commodity products, I would say, given our pricing, our ability, our relationships with distributors that kind of I would say, the structure of the markets going into the fact that we don't have foreign competition due to things like freight and that sort of thing. I think there are a lot of moats around the business. And then you just look at the earnings of the business over the last 5 years. I would suggest that if you put those up against any kind of pure commodity type businesses that we would stack up very well when you look at our results. So I think that would definitely be my response back to the commodity questions.

And how about on the kind of cyclicality of the end markets? Maybe you can walk us through the -- your key end markets. Are there significant peaks and troughs in your business because of the cyclicality of the markets?

Yes. So this is an interesting question. I get it, too, because when we talk about non-res construction. Going through COVID, I would think would be a good example of how cyclical are these markets. I mean, I'm very glad I'm not in the airline industry, the cruise industry and what have you. And when you look at how well the business held up during COVID and you look at how broad-based the non-res construction market is, so yes, you could always point to a subsegment that's probably challenged. And I would say that, in general, retail had been challenged for quite some time. You could sit there and say, what's your viewpoint of offices going forward. Are they going to be more in demand, more space because you need spacing? Or are they going to be more outside the city center? You can go into all these sort of things. But can also sit there and say, data centers are going to be very strong. It's very -- it's a segment that's really good for us because of the amount of electrical content. You look at warehouses are being -- a warehouse itself, several years ago was a big empty building. So the electrical content of that building, I would say probably was on the lower level. And now it's moved up quite a bit because of automation, more automation in these warehouses. Some of these warehouses are already adding in like electrical vehicle chargers to try to get ahead of the fact that their fleet is probably going to electrify over some period of time. All that kind of trend around the content of a warehouse is positive for us. So I do think the electrification or whatever you want to call it, overall trend for -- the mega trend over the next several years, plus the fact that the subsegments of non-res construction are a lot broader than what I think some people give it credit to. I mean, I can point to all the bonds that have been approved for construction of either new universities are new, I would say, K though 12 schools in the South, Southwest and what have you, and then all the renewals of schools in the Northeast and those sort of construction projects. I mean I think that the business itself, non-res construction for me is not a bad place to be.

Got it. That's helpful. Before I jump back to my question, I got a question from an investor. Just is there a simple explanation as to why expectations for fiscal '22 are down sharply? Again, not talking about you providing any estimates or anything like that at this point in time. Just for someone who's learning the story in terms of kind of what's different in '22 and what was perhaps outsized in fiscal '21?

Right. I do appreciate that question. We've -- going into this year and looking at what was going on in the PVC market, we knew we were going to have a substantial year, and we've been showing that in our outlook. We thought it was prudent to get ahead of next year and provide some sort of an outlook, just tempering the fact that at some point in time, pricing could go back to its somewhat previous norm. And if that was the case, then you would see EBITDA more in the range of what we showed the outlook. Over time, we'll provide updates to that outlook as to where we think we are in there. But we just didn't want people to get euphoric around how greater numbers are this year and just build off of that. We think the numbers we put out for next year are actually above what a lot of people had expected FY '22 to be. And again, as things have unfolded and there's probably a little bit less uncertainty, we will be giving updates here in probably 3 weeks' time with our quarterly -- our Q3 quarterly results.

Got it. That's helpful. And then...

I think one thing is if people start to understand Atkore, look, we do try to be very transparent on what's going on in the business. And so that was just another one of those things we felt the need to make sure our investors understood what was really going on.

No, no, I think it may make great sense. So obviously, pricing is wildcard from year to year. From a volume standpoint, I mean, how do you kind of look at growth? Is it kind of GDP, in that area? This second quarter with growth of 40%, most of that was pricing. So how do you kind of view volume?

Yes. So I'll answer that a couple of ways. One, our Q2 volume was flat to our Q2 volume in FY '20, which we felt was really good because our FY '20 was -- Q2 was really strong, going right into kind of COVID. So we thought that was a nice result. Obviously, Q3, if you look at our outlook, we expected volume to be up given that we're going to be comparing against by and large, our biggest COVID quarter. But if you look at the macroeconomics in the U.S., I would say that the electrical market in total historically was like a GDP-type market. I would say 2 things for us and maybe one thing for the market, I think it's GDP plus some sort of factor around this whole globalization of electrification. And you can see it in any of the big electrical players that are public, you can see it in their numbers. So I do think the market is going to be GDP plus, you pick a number, 200 basis points or something like that going forward. I think it's going to be better than it was in the historic past just because so much stuff is moving to electrical. And then when you get us, I did articulate a little bit some of our organic growth opportunities around new products, a little bit of M&A, those sort of things. I think we are able to outgrow a little bit in our markets above that GDP plus.

Got it. Good timing. I think we're right up against the window here. I don't know if you had any final thoughts for investors at this point in time before we wrap this up.

No. Like I said, I really appreciate the interest. And Chris, thank you for all your questions. And I would invite everyone to join us, join in what, 3 weeks' time, and we'll be giving you details on our results for Q3.

Terrific. John, David, thanks for your time. Appreciate it, and have a great rest of the day. Thanks, guys.

Thank you.