Atkore Inc. (NYSE:ATKR) Q4 2023 Earnings Call Transcript

Atkore Inc. (NYSE:ATKR) Q4 2023 Earnings Call Transcript November 17, 2023

Atkore Inc. beats earnings expectations. Reported EPS is $4.21, expectations were $4.19.

Operator: Good morning. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Atkore’s Fourth Quarter and Full Year 2023 Earnings Conference Call. All lines have been placed in a listen-only mode. After the speakers’ remarks, there’ll be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. Thank you. I would now like to turn the conference over to your host, John Deitzer, Vice President of Treasury and Investor Relations. Thank you. You may begin.

John Deitzer: Thank you, and good morning, everyone. I’m joined today by Bill Waltz, President and CEO, as well as David Johnson, Chief Financial Officer. We will take your questions after comments by Bill and David. I would like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or financial performance of the company. Such statements involve risks and uncertainties, but the actual results may differ materially. Please refer to our SEC filings in today’s press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. In addition, any reference in our discussion today to EBITDA means adjusted EBITDA.

And any reference to EPS or adjusted EPS means adjusted diluted earnings per share. Adjusted EBITDA and adjusted diluted earnings per share are non-GAAP measures. Reconciliations of non-GAAP measures and the presentation of the most comparable GAAP measures are available in the appendix to today’s presentation. With that, I’ll turn it over to Bill.

Bill Waltz: Thanks, John, and good morning, everyone. Starting on Slide 3, I’m pleased to report that Atkore again delivered strong operating results this year, and we remain confident in the future of our company. During our discussion today, we will discuss the quarterly and full year financials as we normally do, but we will also like to take this opportunity to review our strategic growth opportunities and provide some exciting updates regarding capital deployment. Let me start with a quick review of some of our highlights from the year. Turning to Slide 4. 2023 was a great year for Atkore. We delivered financial results well ahead of our expectations, and we made great progress on many of our strategic initiatives. We continue to be recognized as an employer of choice, and I believe that our talented team is a true [competitive] (ph) advantage for our company.

I’d like to take this moment to recognize them for the great work and everything they do to support our customers, thank you. David and I are confident in our business, and I’m pleased to report that we repurchased an additional $75 million in stock in the Q4. Over the past 24 months, we have now repurchased over $990 million of our stock. We are proud of our accomplishments, and we’ve worked diligently to evolve Atkore into an industry leader. Now, I’ll turn the call over to David to talk through the results from the Q4 and the full year.

David Johnson: Thank you, Bill, and good morning, everyone. Moving to our consolidated results on Slide 5. In the fourth quarter, net sales declined 15% year-over-year to $870 million, and our adjusted EPS decreased 24% to $4.21. For the full year, we achieved $3.5 billion in revenue, and our adjusted EPS was $19.40. Adjusted EBITDA for the full year was over $1 billion. [Turning] (ph) to Slide 6 and our consolidated bridges. Volumes were positive in the quarter and total profitability was stronger than expected. Looking at the full year, net sales decreased by $395 million due to lower average selling prices. As we have been discussing over the past several years, price normalization, primarily in our PVC business, started at the end of FY ’22, has continued through FY ’23.

However, our profitability on both the adjusted EBITDA and EPS basis was much stronger than originally anticipated. We’re extremely pleased with our overall financial performance. Moving to Slide 7 and our segment results. Margins compressed in our Electrical segment in the fourth quarter, driven by continued price normalization in our PVC-related products. Nonetheless, margins were better than expected, and we were encouraged to see volumes in our PVC-related products were flat on both a year-over-year and sequential basis. The year-over-year volume declines in the quarter were in our HDPE and cable products. Shifting over to our S&I segment, volumes increased 18%. Net sales for this part of business declined due to lower average selling prices resulting from the year-over-year declines in raw material input costs and the impact from solar credits offsetting the strong volume gains.

It’s important to acknowledge that the declines in adjusted EBITDA and adjusted EBITDA margins include the recognition of the solar credit adjustment to cost of sales. Under the GGAM method, earnings and margins would have been much stronger and closer to 14%. As you may recall from our comments last quarter, we will be using this methodology in FY ’24. Turning now to Page 8, we wanted to review some of the volume trends for FY ’23 and our outlook for FY ’24. In FY ’23, we achieved 3% volume growth, which was slightly below our expectations of mid-single-digit percentage growth for the year. During the Q4, there was a clear slowdown in demand coming from the telecom industry as the market and channel is working through elevated inventory levels and timing related to some of the government’s stimulus funding.

This slowdown caused an unanticipated impact of volume to our HDPE-related products. In addition, the ramp in production of our new facility in Indiana was behind our expectations, which led to slightly lower levels of shipment than we had anticipated. This being said, we are working through this production challenges, and we expect sales for solar-related products to double in FY ’24. This projected growth in our solar-related products is a key driver in our low double-digit growth expectation for the total enterprise in FY ’24. This will be a large step-up, and we expect the capital investments that we’ve been making in Indiana and other parts of our organization to deliver for our business in FY ’24. In addition, our metal framing, cable management, and construction services businesses are very well positioned to support the continued growth of global mega projects.

This part of our business grew double-digits in FY ’23, and we expect continued high-single digit growth this year. This team has done a tremendous job growing Atkore’s presence with some of the most recognized companies in the world. Turning now to our outlook on Page 9. We anticipate net sales to grow in FY ’24, led by the low double-digit volume gains. Partially offsetting this growth will be continued pricing normalization, which will lead to lower levels of adjusted EBITDA and adjusted EPS. In FY ’24, we will use the GGAM method of accounting related to the solar credit, which will bring our tax rate back toward our historical range in the mid-20%. We continue to see upside potential in our company, and we’re committed to returning at least $200 million in cash to shareholders through repurchases.

Moving to Slide 10. We recognize there are a lot of moving parts between our performance in FY ’23 and our outlook for FY ’24. Therefore, we’ve outlined some of the critical components that impacts both net sales and adjusted EBITDA. For example, we expect price versus cost to be a headwind of approximately $225 million to $275 million on an adjusted EBITDA basis. Of that amount, we would estimate that nearly $175 million has already occurred when you look at lower margin levels exiting FY ’23 versus the start of the year. At the midpoint, this would be approximately $500 million of the $585 million that we outlined last year as total price outperformance. Turning to Slide 11. Despite these anticipated declines in FY ’24, we’re extremely pleased with the structural transformation and improvements that we’ve achieved in the business since our IPO.

Last year at this time, we shared a historical bridge which broke down the different components in our sales and earnings since 2017. One year later, the sustainable pricing improvements that we discussed are still holding, and our estimates regarding pricing outperformance are in-line with our expectations. The diversity and strength of our product portfolio is a true competitive advantage, and we expect our long-term adjusted EBITDA margins will land in the range of 25%. Even at these lower levels versus our performance in the past three years, these margins would be equal or slightly better than best-in-class companies in the electrical industry. With that, I’ll hand it back to Bill to give an update on our growth opportunity.

Bill Waltz: Thanks, David. Starting on Slide 13, Atkore is a differentiated company and a great investment opportunity. The financial and portfolio-related achievements we’ve made since IPO as well as the strong secular tailwinds and growth opportunities we have ahead of us have positioned Atkore well for continued success. Turning to Slide 14, we have provided a view of our strong financial profile. Our balance sheet and cash flow give us a rock solid foundation from which to grow. In addition, on Slide 15, our products are genuinely all around you, and these are truly essential items for the electrical infrastructure needed in all types of construction. In fact, when you look at our segment sales on Slide 16, we estimate that over 90% of our sales are related to electrical infrastructure.

Three-quarters of our sales are in our Electrical segment, but a significant portion of our Safety & Infrastructure products are also directly related to electrical infrastructure. This is especially true when you think about our prefabrication devices and our solar products. Turning to Slide 17, there are strong secular trends related to electrical infrastructure that we trust will support our market for years to come. Underlying many of these trends are also a large government stimulus program, and with some of them have a spending profile through the end of the decade. David has said this many times before, and even to several of you, and I could not agree more with him, “The electrical industry is a great place to be.” Moving to Slide 18, we remain focused on executing the conduits of growth that we’ve discussed at this time last year, which emphasized M&A, category expansion initiatives, and product innovation.

Today, we wanted to provide an update on our key category expansion initiatives, which are an important aspect of executing our conduits of growth for years to come. In FY ’24, we anticipate the investments that we made in Indiana will start to demonstrate considerable financial benefits. We expect growth and benefits from our investments in our regional service centers and HDPE will start to materialize in FY ’25 and beyond. On Slide 19, we wanted to highlight our new facility in Hobart, Indiana. This is really a great achievement for all of us and I could not be more pleased with the team. On Slide 20, as mentioned before, we’re expanding our service and distribution capabilities in Texas, and we are now planning to add in additional service capabilities outside of the Greater Atlanta region.

Moving to Slide 21, we’re pleased with the integration and investments we’ve made in our HDPE-related acquisitions. This business is now operating cohesively as one unit, and we continue to drive the adoption of the Atkore business system throughout the network. Yes, there are challenges as you’ve heard about the industry and inventory, timing of stimulus funding and so on. However, I’m confident in our team and the long-term value this business will drive for our company. We estimate that we’re number two in the power and telecom part of the market, which is probably less than 20% of the overall HDPE market when you think about other applications like oil and gas and water. Atkore is an outstanding company and a compelling investment opportunity.

With our exceptionally strong balance sheet and diverse product portfolio, we are well-positioned to deliver long-term value for all of our stakeholders. With that, I’ll turn it over to David to give some exciting updates about our capital deployment plan.

David Johnson: Thanks, Bill. Yes, I’m excited to announce, on Slide 23, that our Board has added plans for a regular quarterly dividend in our capital deployment model. The introduction of this dividend is supported by our strong performance over the past several years and our confidence in the future. Turning to Slide 24, our updated capital deployment plans reflect our intention to invest and grow our business while consistently returning cash to shareholders. We’re being quite selective in our approach to M&A as we continue to have a high level of confidence in our current business as demonstrated through the nearly $1 billion we’ve deployed to share repurchases over the past 24 months. Moving to Slide 25, we anticipate elevated levels of capital expenses in FY ’24, similar to FY ’23, as we build out our RSC network that Bill mentioned and continue to invest in our digital tools and capabilities.

Next, on Slide 26, looking back on the version of the slide we presented a year ago, some things have changed for the positive and negative. Despite these changes, we believe our growth investments and our capital deployment model support our ability to deliver [more than] (ph) $18 per share of adjusted EPS in FY ’25. With that, I’ll turn it back to Bill for Slide 27.

Bill Waltz: Thanks, David. And we are very pleased with what we’ve achieved over the past several years, and we’re even more excited about the opportunities ahead. With our outstanding financial profile and differentiated product portfolios supported by strong secular trends, we are a compelling investment opportunity for anyone looking for a company with strong growth initiatives and a commitment to returning cash to shareholders. I’m confident in the team, the strategy, and processes we put in place to continue Atkore’s strong trajectory. With that, we’ll turn it over to the operator to open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Alex Rygiel from B. Riley. Please go ahead. Your line is open.

Alex Rygiel: Thank you. Good morning, gentlemen, and — for a nice quarter and lots of — some really helpful slides here. So, thank you very much for that.

Bill Waltz: Thanks, Alex.

David Johnson: Yeah. Good morning.

Alex Rygiel: My first question here is, kind of your visibility as it relates to both the solar market and the HDPE market or the telecom market. How confident are you that you feel like you’ve got pretty good visibility as it relates to either existing inventory and how that’s getting worked through the channel and then customer demand over the next, call it, 12 to 18 months?

David Johnson: So, Alex, this is David. I’ll take the solar question, and I just want to remind you, as part of the Inflation Reduction Act, with the incentives made for domestic manufacturing of torque tubes, that market essentially beginning last year doubled domestically even if the amount of solar being deployed was the same. So, I think for that one we’re very comfortable. We have really good relationships with some of the large tracker OEMs, that volume is going to — is there and continues to be there. Now our challenge is probably more on just production on that side of the business.

Bill Waltz: Yeah. So, just one other thought on David’s, because of the IRA, just moving volume from China to the U.S. doubles the size of the market. So, the market is exceptionally healthy. It’s all about us and just getting factories up. And then, for HDPE, that’s a little bit more triangulation, but I think everybody from fiber optic [public] (ph) corporations, I won’t call out individuals, but that are out there that have already announced their earnings and their estimates on when the funding will get deployed to our competitors that are public that have announced to things like the fiber optic BEAD Association and so forth, have all estimated their second half of next year. So from that to talking to customers, we’re pretty optimistic.

Again, it’s $65 billion of what’s called BEAD part of the IIJA. So, it’s a huge amount of funding. It’s just a question of getting that “shovel ready” taking longer than expected. But we’re ready and it’s really what’s going to help carry us full-year ’25 and beyond.

Alex Rygiel: Very helpful. And as some of maybe your smaller competitors figure out ways to digest the weaker pricing environment that you’ve worked through very, very well, do you see even more attractive M&A targets developing from a pricing standpoint and whatnot from those private entities that are having trouble accessing capital?

Bill Waltz: Yeah. So two things, Alex. I’m going to answer your specific question and then go a little bit broader on M&A. Absolutely, yes. And we just had our Board meeting and they had the same exact thought as you. Classically, this is a perfect time to potentially acquire and so forth. So, we are out, we are working deals. To the one chart that David did with capital deployment, the good news also with Atkore is we give our estimates for this year and reaffirm the $18-plus for next year is there’s so many organic opportunities where we’re spending $200 million plus on capital that even without M&A, you’re comfortable with the $18 EPS for next year. And our management is so focused on that, that we’re not going to opportunistically just grab acquisitions for the sake of acquisitions.

But I think we’ve always been disciplined and we’ll continue to be disciplined as we quite frankly absorb all the stuff of startup of factories, deploying capital for technology, the regional service centers and so forth.

Alex Rygiel: Thank you very much. Nice quarter, nice year.

Bill Waltz: Thank you, Alex.

David Johnson: Thanks, Alex.

Operator: Your next question comes from the line of Deane Dray from RBC. Please go ahead. Your line is open.

Deane Dray: Thank you. Good morning, everyone.

Bill Waltz: Hey, good morning, Deane.

David Johnson: Good morning, Deane.

Deane Dray: Hey, can we go through pricing dynamics in the quarter and then the implications on the path to normalization that you talked about in the prepared remarks? So, for the quarter, pricing ended up being not down as much as we thought it would be, so better on pricing. And just that, how does that factor in lead times? What you’re seeing in terms of competition, input costs and so forth?

Bill Waltz: Yeah. So, Deane, I just think Q4 was slightly better as we expected, and the whole year was slightly better. If you go back, and David, perhaps correct me, or you, Deane, we started the year with around $850 million EBITDA. So again, this was a strong year that beat our expectations and guide, analyst expectations and guide, this quarter’s that we just wrapped up, analyst guide for EPS and EBITDA and so forth. And pricing still remains good, better than what we forecasted, but I also want — as David walked through in the prepared remarks, we continue to see PVC slowly go down. So that’s the part of the estimate as we go forward. But really the stuff that we presented in November a year ago is playing out other than slightly better than exactly to go, “Hey, over a two-year period, here’s what we think we’re going to keep because of our service, our regional service centers, the ability for one order, one delivery, one invoice.