Atkore Inc. (ATKR) Earnings Call Transcript & Summary

All right. Good morning again, and thanks, everyone, for joining us at the 9th Annual Credit Suisse Industrials Conference. My name is John Walsh, and I am the multi-industrial analyst here. Today is Day 2 of our conference, and we're very excited to have Atkore here with us. We have Bill Waltz, Atkore's CEO. And I think we're going to be going straight into Q&A.

So I do plan on focusing on some more strategic questions going forward, but the obligatory supply chain question is how we've been starting. Obviously, it hasn't been that long since you've reported the quarter, but the supply chains are very dynamic. Just curious, any update if you're seeing any changes that you would highlight here, given that we're now December for the quarter?

Yes. No, great question, John, and looking forward to the other questions you and investors may have. But, no, it's still elongated supply chain. In other words, whether we manufacture almost entirely in the United States for our local markets, but whether there's challenges with ports, whether there's challenges with other product lines getting to a job site, it's the same as we reported a couple of weeks ago. So nothing's really changed there. I think Atkore is doing a great job with our SIOP process. So we're managing through it well and delivering great value. And we're very optimistic, assuming questions to come on what the future is going to be like, but as we also explained because of these challenges short term, volumes are probably down this quarter, mid to high single digits. But again, that's no reflection on anything we've given for our forecast for the quarter.

Got you. Makes sense. So one of the questions we've been getting, and I myself have had this question, you've announced this enhanced capital allocation plan on the quarter, the $1 billion. Maybe you can just remind us kind of how you have it earmarked? And then the real question is, how you came up with that number, right? Because if we look at your balance sheet and we look at your ability to generate cash flow, I would argue that number could actually be higher. So we'd love to get a little bit of the thought process behind it and kind of how you're earmarking that $1 billion that you've announced at the quarter.

Okay. So the $1 billion, again, it's a general assumption over the next 2 to 3 years. It could be more, as to your point, if we generate more EBITDA than we expected, and we're a great company at generating free cash flow. So it just came down to a directional number in order to communicate to the shareholders that we do have that opportunity as you look at our value, our EBITDA and do some multiple, that people we don't think are taking in, the ability for ours to buy back stock, to truly drive M&A, and then to spend this year an increased amount on CapEx in that $80 million to $90 million. So the good news in my mind for Atkore is, I think, anything, all 3 of those buckets, whether it's CapEx, whether it's M&A or stock buyback, is good and accretive for our shareholders. So -- and who knows, hopefully, we actually exceed EBITDA and generate more free cash flow, and it's over $1 billion in the next couple of years, kind of alluding to your point of becomes greener. And then it's just the automation. We have a very low amount of employees, if someone is to look at us, with 4,000 employees for $3 billion of revenue, probably half the size of what a typical electrical manufacturer. But there's a lot of opportunities for us to continue to automate processes and save labor and make it more efficient. So that's probably the 3 big areas to CapEx, being productivity, digital and new product development.

Great. And then maybe just starting with the last of those buckets. On your own automation, often a question we get is around your ability to get productivity every year. It's something you guys talk about with the Atkore business system. Can you just remind us kind of maybe what inning you're in on that and your productivity journey?

Yes. And again, good question. I would still probably say the second, third inning, especially in the shop floor and productivity. We're -- I'm proud of Atkore and our business system. We talk about it. I don't think we get the credit we deserve, because we do it from everything from how we interview people to simulate, onboard people, to how we run meetings. Well, on the shop floor, we do a good job, but I don't think the ability to truly to get to root causes and truly drive the gemba walks and retransform the operations, there's lots of opportunities there. So our ability to drive productivity in the past, there's still lots to do in the future, which is a nice thing.

Yes. Great. And maybe before we get to digitization, and it might be one and the same, but can we talk about electrification? Big -- a lot of dollars being spent on electrification. The world is moving towards electrification of hydrocarbon fuels. How does Atkore fit into that equation?

Yes, it's huge. And by the way, there's probably a dozen secular trends from digitization to electrification to security, just green in general, and safety that we could talk about. But electrification -- let me just giving you a fact, then tie in Atkore. I read a great Wall Street Journal article over the summer, where they were projecting that like 20% of the U.S. energy right now is from electrical, but to getting to 50% by 2050. So again, huge opportunity for the U.S. to become more green. And let's face it, nothing happens without Atkore's products. I mean, we are the company that literally and figuratively is the connector, the conduit for everything from electrical vehicle to if you did have some type of solar array on your rooftop or out in a large massive field solar array, you need our cables, our conduits, our cable trays, our fittings to connect all those things together. So when anybody projects things like a dodge and square foot, then you add that multiplier effect of how much more electrical lines are going to be run, hardening the grid and everything else that goes along with it, it's a great secular trend for our space to be in, and then Atkore specifically.

Great. And I know we've asked this question before, I'll ask it again for the benefit of the audience. But how should we think about how Atkore's dollar content per structure, right, changes in this electrified world, or maybe some examples?

Yes. So a couple of things. First off, the good news is it's a relatively small part of a building. We estimate like less than 1%. And I'm bringing that up first, John, that when someone says, hey, your prices are up, it's going to slow down things, maybe other products, steel, concrete, whatever well, but at the end of the day, our products are mission critical. You don't install a building or anything without our products, and service delivery is more important. Now that said, while it's a small part of an overall building, it is absolutely going up in content. And no matter where you look at an example, whether it's an automated warehouse, where you think about 10 years ago and say, hey, it was probably just fork trucks driving around, now it's RFID [indiscernible] just lays out automated warehouse, all the amount of digitization there. You look into a hospital room today compared to 10 years ago, we just talked about electrification. And think of the redundancy of the grid that if you are getting power from your local energy supplier, but you also have a solar array, you literally have twice the amount of electrical lines and backups, electrical vehicles being connected in. And then you start getting into things like the grid itself and hardening that to go, okay, even where you had electrical lines, now you want to put them underground in California, so you don't create a fire; now you want to put those electrical lines underground in the southern state, so when a hurricane hits, you don't have down power lines for weeks or time. So all these things, the amount of electrical content, is going up several percent, I would say, increase at least per square foot, and then there's all the other trends at outside of the building, as I just mentioned. So that's again where I think we're optimistic for this year when you look at our forecast, but I'm really optimistic for years to come. And we're making -- we're investing now to make these things reality.

Great. And so then that brings up the question kind of the competitive moat, right? And I know you always get asked this question, but there's a big opportunity here opening up with electrification. Does that bring more competitors into the market? And then maybe just remind us how Atkore set up and why you wouldn't have an import land, right, to sell these products?

Yes. So there's -- you can never say never to anything, and obviously, I'm not talking to my competition. But there are so many moats, using your word, first off, and let's take PVC for example. You can't effectively ship, even us, we're the leader by far in electrical conduit with 9 facilities. Our biggest competitor has 4, but you need to be in the market. You can't effectively ship from our facilities in Georgia and Florida, for example, to Illinois. So just to have that, you're not going to have a start-up and have a national threat. Then you get into all the things of, is it an established brands, do you have -- we sell-through electrical agents, having relationships with distributors, those things, even if you came up with the product are not quick things, assuming you can get certified through all the different codes. And then where Atkore is unique is not just that we have one product, but we truly are the one-stop shop across all these products. That's the value, and that's one of the reasons we've been able to drive price and profits is for providing so much more value than one product, that we are one order, one delivery, one invoice. And then even in -- so you take out the chance of a product coming in, a PVC product coming from China, I just don't see it is feasible when we can't ship probably to 700 miles and make it effective. It's our innovation, new product development, there's just so many things. And then by the way, even if you're making PVC pipe for municipal, you have enough to do right now. I mean the whole industry is back up. So they're just trying to keep up in their own markets and so forth, let alone -- even there, I'm trying to like drill in on something, it's different compounds, different certifications, therefore, you need more silos to hold calcium carbonate, I don't want to get too much into weeds, but there's just a dozen different things from brands and reputations to compounds to geographical plays to the full suite of products to agents, it's not something that would be easy.

Yes. Well -- and so that brings up another question we often get asked is spec product versus non-spec product. And when we look at your portfolio, I believe more of it is non-specified product, but you just alluded to you have codes, you have compounds, there's material science. I mean, how easy is it to -- or how difficult is it to truly go from, hey, I'm a -- I supply PVC for plumbing to then come into electrical markets, right?

Yes, it's a great question. Soto your point earlier, I don't have a specific number on actual spec to say it's Atkore. But there's first customer preference for, is it Atkore, one of our brands, and then to go, even without that, there is absolutely, to what you just alluded, you have to be able to meet these specifications. And first these specifications, giving pass and UL, NSF, all the different specifications, CSA in Canada, are not simple certifications and things. And there are unique parts. So that plumbing manufacturer, just using the closest thing to go -- his ingredient or that company's ingredient list is going to be totally different. They're not putting calcium carbon in. They are not using redrive. So even if they decide to go into our market, unless they totally revamped their facility, they wouldn't be cost competitive. To give a perfect example, even within PVC, let alone if we get into other product lines, we have 9 facilities, I think 3 are actually set up, and this is a long-term thing to be able to manufacture non-conduit products. So it's both ways. The expertise, let alone, then you just get the channel and everything else we talked about, so could somebody in PVC municipal pipe decide they want to enter the market? Yes. Would they be effective? Would they have to make significant investments? And would it take years to make that happen? That's why there's people focus on specific products, like somebody making snow skis, probably isn't making snowshoes just because, well, it's all in the same genre. It's a lot more complex.

Yes. And then also around the pricing, because we get asked this question all the time. You look at a PVC input or a steel price, but I know we always -- you always talk about that price cost equation. So maybe can you just talk a little bit about how you manage that price cost equation as a business, whether commodity prices are rising or, at some point, maybe they become deflationary?

Yes. So I think this is obviously a best practice of Atkore, where we -- back to our ABS system have these things called strategic initiative -- strategic -- and we do a strategic deployment process. This was a 3- or 4-year initiative that we put in that now we consider -- and again, without throwing a lot of buzzwords, Lean Daily Management, where we manage it literally daily and hourly. But literally, my executive staff and I sit through a meeting every Friday for 45 minutes to an hour, product by product, segment by segment, what's happening in the market, what's kind of the price volume elasticity, where are we seeing, where are we going, and different things like that. And we have proven over time that almost every year, if you look back over the last like, let's say, 5-plus years, we've got more price and cost. We've done this whether commodity costs are going up or down. I know in previous investor decks we've shown correlations of steel, copper, PVC, and whether it's going up or down, we've been successful. So probably there's an issue when we went public 6 years ago. I don't -- most investors, I think, now accept the fact that we've proven this capability. But again, it's about providing value. It's -- there's things of being able to do that one order, one delivery, one invoice, one-stop shop, strong relationships, strong brands, shipping on time, digitization, at the end of the day, it's you or I, at least I'll speak for myself, I'll order on Amazon, I'm not price chart, checking the local retail store, it's just so convenient. So yes, do we have to be competitive? Absolutely. Every product has to be competitive, but it's not about price as much as all the rest of the value that we're bringing. And to your first question or second question, that $90 million in CapEx is to bring more value to our customers that will even make it a simpler choice for them to buy from Atkore.

Great. And that kind of segues into the next question. I'm really trying to understand what digitization means for Atkore? I mean you started talking about having the ability to tie into Revit and BIM models, et cetera. Maybe help us understand what you're doing as a company on that digitization front? Because it's obviously different than maybe what some others are doing. So we'd love to get a little bit more color there.

Yes. Almost a simple answer would be everything, but I'll try to give you specifics from there. And this is a place where I don't know if investors appreciate enough. The electrical industry that how -- in my opinion, we're probably 30 years behind consumer industry, but that's a huge opportunity. So therefore, you mentioned specifically Revit and BIM, how we're accelerating with an aspiration that like every contractor is set up using a Revit tool with our BIM models. So just naturally, when they go to a distributor, hey, here's Atkore, it already works, everything ties together, design, weights and so forth. And I'll tell you, a lot of times, we have smaller, like the mom-and-pop competitor, they're not making that investment. And if they were, I don't want to say it's irrelevant, but there's -- if a contractor want to have 6 different sets of models from 6 different companies, so this is where Atkore, the one-stop shop, that can provide every type of condo, it can provide cable, it can provide fittings, it can provide cable trays, and I keep mentioning product after product, metal framing, et cetera, et cetera, to go, hey, I will hook into the Atkore BIN Revit tools, and it's covering everything, and it's consistently designed. So that's just one example. We're developing apps. Again, nothing different than if you were to pull into a retail store or Starbucks and go to like Lane 3 and your food will be delivered to you. Same thing, just to make our customers' lives easier, instead of where do I pull in, when do I get delivered, especially in these days of logistical challenges, hey, I have an app. I know it's 10:30. I pull into Bay 3. The load is waiting for me as soon as they pull in. We're doing things just to even track. Again, things that consumer would see with an order that when we ship -- now we haven't installed this yet, but we're looking to provide a service that you can actually track your orders that's going across from our facility to the customers' locations. It's those type of things. We're doing things behind the scenes with ERP. We're upgrading our product information models as the world becomes more sophisticated online, that they have all of our designs and our weights and all that information for our customers with what's called API, so they can get it real time. So it's literally -- and I'm probably forgetting a whole section, but we have had for the last 5 years, like a 7, 8-year road map and just walk through like every facet of what we're doing, including we just had a deep dive in the last 2 days, a true massive enhancement to our atkore.com website that will probably be rolled out October, November of next year. And So John, hopefully, I gave you a feel that it's literally everything, but how we just make it easier across every facet of our business. Internally, back to productivity, what's called RPA, or Robotic Process Automation, we have 2 or 3 programmers just dedicated to taking simple tasks of internally our people's hands and stuff like that. So it's the wave of the future. All investors know it, just not -- has not -- the electrical industry and our competitors are probably behind the scenes, and we're looking to be a first mover in this area.

No, that's very interesting. And then maybe cycling back to something you said earlier in the conversation, safety, right. So if I look at kind of your market shares, right, and you look at some of those security products, they're top 10 versus everything else is #1, #2. So kind of what are the aspirations in security? And how should investors think about what you want to do in security when you bring it up?

Yes. So it's obviously a secular trend, like we talked about electrification, and grid hardening, and solar and so forth, just the safety of -- when you do see -- even myself, unfortunately, my -- I'll say my main home, but where I live on the weekend is in Waukesha, Wisconsin, where we had a individual just 2 weeks ago drive through a Christmas parade. So we'll be able to have barriers like we make bollard and razor wire. We have a bunch of products that are great for security, and we are making investments both organically, but we're also looking back to your $1 billion-plus of cash flow to deploy some into M&A there. I think our safety and infrastructure team has deserved the right. They've done a great job managing this business, and we're looking to grow and invest it, maybe not at the same pace with all the opportunities in electrical, but I would not be surprised as an investor if we find the right opportunities to do more acquisitions around the safety side of the business.

Great. And then maybe just pivoting, we hear it from a lot of different companies, but you've already touched a little bit on this. What is Atkore doing on the ESG front? Clearly, you have a play here in investments in solar, renewables, electrification, but maybe let's broaden that out to what Atkore is doing as an organization.

Yes. So I'll just reiterate the first part, then I'll answer at a go. One of the things -- first, I want to make sure investors understand, and we're going to try to communicate more effectively, is to play as participating in the ESG fund. In other words, think about our products, it's entirely on being greener. It's all about electrification and reducing carbon and/or if it's not that with electrification and solar, it's around safety and so forth. So it's good for the morale of our employees and society, the products we provide and the services. Internally focused, it's something we've done since I've been here going on 9 years, probably plus, is focus on ESG. And I'll just give you a couple of examples, and we do have a sustainability report, our second one coming out within, I'd say, a month, give or take, from now. But you just look at environmental, we have well over 20 facilities, part of what's EPA calls their ENERGY STAR Achiever status, where you commit to within 5 years or less, creating a 10% reduction in internal electrical and energy use. We've had a plant like Phoenix. We have 3 plants already achieve this status. The most recent one, probably our third largest facility, in Phoenix. We saved -- I want to say it was like 19% energy, 19.6%, within 2 or 3 years. So we're doing a lot internally. We were just even talking here before we got on camera about how we can even drive it faster to make energy savings. And I think you'll see some commitments in our next sustainability report about what we're going to do to reduce our energy footprint and become better for society as a whole. Now, that's energy. And I'm just picking one thing, you move on to society, safety is something we've committed to. We've relaunched -- we've always had a good safety record, but relaunched our whole, Let's Make It Home campaign, did truly drive it to the heart. So like I can talk about things called incident rates and so forth, in our employees, and they get it. But I'd rather make it personal about they need to come home safely to their families and how we can make it home. So we've invested in that to truly hit the hearts and minds of our employees. Diversity is huge. One thing, a little plug for Atkore here on the diversity side, I've read other people's sustainability reports. A lot will set a goal to be gender pay neutral within 3 years, 5 years. Atkore has been that, I think, forever. But I know at least in the last couple of years since we've done it, we actually, overall, have a higher pay for female employees across Atkore than we do our male employees. So where companies strive to make things happen, we're already there with gender pay. And then from a governance, we do a good job there. We have a declassified Board. I don't want to over fixate on rankings like ISS and Glass Lewis, but I think if you were to put us -- and we do, we look at our proxy peers, we're in the top quartile of their rankings for us for ESG. So I think we're doing a great job externally with what we do for our society. Internally, we're doing a great job. And quite frankly, back to investments, we're accelerating all these things. So again, it's a great time to be an Atkore person, an employee, customer, and I think, shareholder.

Great. And I think on that, we'll leave it there, just given the time. But once again, Bill, really appreciate you and the Atkore team being here, and we hope that everyone stays well and safe. And once again, appreciate everyone for tuning in.

Yes. Thank you, John, and thanks to investors. Bye now.

Bye.