Atkore - Earnings Call - Q1 2020
February 4, 2020
Transcript
Speaker 0
Greetings. Welcome to Atkore International First Quarter Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Deitzer, Vice President of Investor Relations. Thank you, sir.
You may now begin.
Speaker 1
Thank you, and good morning, everyone. With me today are Bill Waltz, President and CEO as well as David Johnson, Chief Financial Officer. 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 such that 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. With that, I'll turn it over to Bill.
Speaker 2
Thanks, John, and good morning, everyone. I'm pleased to report that Atkore is off to a great start for the year. For the first quarter, we are continuing to build upon the momentum and strong operational performance that we drove in 2019. Let me begin with a few highlights, and David will go over the quarter and segment results in more detail. In the first quarter, we increased adjusted EBITDA by 11%, driven by solid volume growth in both segments.
We grew adjusted EPS by 27% and drove our net debt to EBITDA position down to 2.1 times. The solid financial results in the quarter are an output from the hard work and dedication of all our Atkore employees. Our team continues to focus on taking care of our customers and delivering value for our stockholders. As a result of this focus and consistent execution from the team, we're excited to increase our outlook for the year for adjusted EBITDA and adjusted EPS. We anticipate full year 2020 adjusted EBITDA to be between $340,000,000 to $350,000,000 and adjusted EPS to be between $3.95 and $4.05 With that, I'll turn the call over to David, who will walk us through our financials for the first quarter in more detail.
Speaker 1
Thank you, Bill, and good morning, everyone. As Bill mentioned, the first quarter was a very good start to the year. Moving to our consolidated results on Slide three. Net sales were $447,000,000 down 1% versus the prior year. Adjusted EBITDA increased 11% and our adjusted EBITDA margin increased 190 basis points up to 17.4%.
Adjusted EPS increased 27% as the solid operational performance and a favorable tax rate related to the benefit recognized from stock based compensation drove the significant year over year improvement. We generated free cash flow of $42,000,000 which was 27 percent increase versus the same period last year. Turning to Slide four. Volume growth was solid this quarter, up $14,000,000 or 3%. Recent acquisitions also added $12,000,000 in revenue.
We've seen declines in market prices for several of our major input costs versus Q1 twenty nineteen. Therefore, the positive contributions from volume and M and A were offset by declines in our average selling prices, which reduced our sales by $30,000,000 in the quarter. Moving to the adjusted EBITDA bridge. Our adjusted EBITDA was $78,000,000 up 11% or $8,000,000 versus last year. This increase was driven by profitable volume growth and productivity improvements in both segments.
These results are a good example of the Atkore Business System network. Moving to our segment results on Slides five and six. Electrical Raceway had a good quarter with approximately 2% volume growth driven by our PVC products and near double digit growth in our focused product categories. We did experience some volume weakness in our international business this quarter, but this was more than offset by our domestic volume, which was up 3% for the quarter. Adjusted EBITDA for Electrical Raceway increased $2,000,000 driven by the volume gains we previously mentioned and continued operational improvements.
Adjusted EBITDA margins increased 70 basis points to 20.6%. Turning to the Mechanical Products and Solutions segment. The business continued its recent trend of delivering significant year over year EBITDA growth and margin expansion. We anticipate this to moderate next quarter and in the back half of the year as the business will have very strong prior year comparables. Adjusted EBITDA in the quarter was up approximately $6,000,000 and the MP and S adjusted EBITDA margin was 15.6% this quarter, up five sixty basis points from Q1 twenty nineteen.
During the quarter, the business increased margins by selling additional value added solutions to customers and managing the overall profitability of the product portfolio. On the top line, the strong volume gains from the continued ramp up of several large renewable projects were completely offset by declines in average selling prices. Turning to Page seven. We ended the first quarter with a cash balance of $164,000,000 Net cash flow from operating activities was $52,000,000 which generated free cash flow of $42,000,000 in the quarter. Our net debt position declined with the rise in our cash balance, and when coupled with our growth in earnings, our leverage ratio improved to 2.1x.
Bill, back to you for our outlook.
Speaker 2
Thanks, David. Moving to our outlook for the second quarter and full year 2020 on Slide eight. For the second quarter, we anticipate our adjusted EBITDA range to be between 80,000,000 and $85,000,000 and our adjusted EPS range to be between $0.90 and $0.95 Turning for the full year outlook. We remain positive in our view of the markets, and we continue to expect low single digit volume growth for both segments. We are increasing our outlook for adjusted EBITDA up by $5,000,000 to a range of $340,000,000 to $350,000,000 for the year.
We are also increasing our full year outlook for adjusted EPS up to a range of $3.95 to $4.05 In summary, the first quarter was a great start to the year from a volume, operational performance and financial perspective, and we look to continue that success for the remainder of the year. Operator, please now open the line for questions.
Speaker 0
Thank you. We'll now be conducting the question and answer session. Our first question is coming from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.
Speaker 3
Thank you. Good morning, everyone.
Speaker 2
Good morning, Deane.
Speaker 3
Hey, nice execution this quarter. And maybe we can start with the dynamics on price cost. So within price, I think we've all been used to this in steady environment of rising raw material costs and the quick pass through. Just remind us when that trend turns and you got falling raw materials, just the dynamics on the pricing and how that plays out and how that's reflected this quarter?
Speaker 2
Yes. So great question, Deane, and thank you for the compliments at the beginning. With the Raceway segment, it's pretty real time. So again, for both these commodities or both our segments, we like it when prices go up or down, and you continue to see that volatility. And then a little bit to your point or maybe we're at a point with the mechanical business, where there's a little bit more index pricing and contracts, we're able to hold on to it a little bit longer.
And therefore, some of the reason, not all of the reason, but some of the reason we saw just such a great quarter for the mechanical business as commodity prices like steel dropped some in Q4 or Q1, excuse me.
Speaker 3
That's helpful. And then what's your sense on non res playing out? I mean, there's so much uncertainty right now in terms of the macro and non res is always such a reflection on CEO confidence. Are you seeing at the margin any changes, any push outs, green light on projects? Just any color there would be really helpful here.
Speaker 2
Yes. Great. Tom, as much as we know, it's literally steady, no change, low single digit. But I'd tell you, Dean, I even have more confidence in that now than I did probably three months ago, purely from some of the factors like Architectural Billing Index for the last three months have all been positive. Even went back for the full year for ABI, it would be slightly up.
If you look at calendar Q4, it's up even more. And then we just wrapped up meetings with distributors about two or three weeks ago. We had our largest sales agent conference in the country last week, and everybody continues to forecast at low single digit growth. And the shortage of labor acts as a modifier governor out there to keep that pretty consistent. So obviously, the farther we get into our fiscal year, the more confidence we have in that low single digit, but I see no changes.
Speaker 3
Got it. And just last one from me. What are you baking in assumptions for new product introductions this year? Is there anything that you would highlight?
Speaker 2
Not really. It's a low single digit. It's built into our number. It's slightly higher margin. It's obviously a long term growth emphasis that we're putting a lot of focus on.
But Dean, it's a low single digit number. So therefore, if we grew 20% or 3%, it gets into the rounding of whether we're up 1%, 2% or 3% overall.
Speaker 3
That's real helpful. Thank you.
Speaker 2
Thanks, Deane.
Speaker 0
Our next question is from the line of Andrew Kaplowitz with Citi. Please proceed with your question.
Speaker 4
Hey, good morning,
Speaker 2
Good morning, Andy.
Speaker 4
So following up on Deane's question, just around the pipeline of opportunity in non res, your volume was good in the quarter. You mentioned ABI, Dodge Momentum also looks better. Any sort of actually improvement in the pipeline that you're seeing? It seems like you might be hinting that you are seeing a little bit of improvement in the pipeline, but I don't want to put words directly in your mouth.
Speaker 2
Yes. That may be slightly more because, again, I think the low single digit. I would have said more confidence. In other words, if I would have went back to last quarter, I would have said low single digit. That's been kind of consistent for literally a year.
But there were a couple of things a quarter ago that would have said, hey, ABI was going below 50, therefore, out nine months. At the end of this fiscal year, going into 2021, where there may be being some concern and so forth. Whereas now, it's not like all of sudden it swung super positive, but the indicators seem to be aligned with what our voice of customer has continuously told us, so long single digits. So I just think the risk has reduced as much as we can see.
Speaker 1
Yes. I would say, Andy, there were some macro indicators that might have turned slightly negative a few months ago, but what's been really consistent for quite some time is the feedback from contractors, agents and distributors. So that gives us confidence in that low single digit number.
Speaker 4
Got it. And you did mention a little bit of international weakness impacting Raceway. So maybe you can give us a little more color on that. We know it's not a large portion of the business, but does it have the ability to hold you back? Just maybe a little more color there.
Speaker 1
Yes, sure. So basically, international is 10% of our overall sales number. The business tends to be a little bit more project oriented. So you will have a quarter where you're either going up against a tough comp or a quarter where the projects are just lining up more or less for Q2 versus Q1 so on and so forth. So this quarter in particular, we just had some timing on projects.
The backlog is still looking pretty good, serve where we expect it to be at this point in time. So I don't see it being a drag in the next three quarters. But we just want to highlight the fact that The U. S. Market up 3% in Q1 was, we think, a very strong start to the year.
Speaker 4
Got it. And then just focusing on MP and S for a second. Your adjusted EBITDA margin there has stayed above your historical levels for the last several quarters. Another good report here at 15.6%. We know price versus cost is helping a bit, but does the combination of improved pricing, productivity you've talked about in the past, the improved mix help you now maintain higher margin than we used to be able to achieve in that segment?
Does that continue moving forward?
Speaker 1
Yes. We like we've said before, when we had some 17% kind of numbers that we feel that the longer term position for the business would be 13% to 15%. We're slightly above that. The team has done a really good job, not only I think on price cost and productivity, but also more value add to our customers, secondary operations, different value that we're bringing to the customers. I'm thinking that 13,000,000 to $15,000,000 is more a long term outlook for that business given if commodities were stable over some point in time.
Speaker 4
And then $15,000,000 is still a good productivity number for the year for both segments, as you said in the past?
Speaker 1
Yes. We actually had a very good start to the year in productivity, and our funnel continues to be strong.
Speaker 2
Andy, if you want one
Speaker 5
of the
Speaker 2
things I just want to call out on Page four of the deck, but literally when we gave strong numbers here, it's all volume and productivity. This is actually a quarter where our price cost, not that we don't want to drive it positive, was actually a headwind for us. And really the team with the Atkore business is what drove these strong results. Really proud of the team for what they made happen this quarter.
Speaker 0
Our next question is from the line of John Walsh with Credit Suisse. Please proceed with your question.
Speaker 6
Hi, good morning.
Speaker 2
Good morning, John.
Speaker 6
Hi. And I'll echo a good solid quarter here to start the year. You. Wanted to have a quick discussion around kind of capital allocation priorities. Just thinking about the balance sheet is in really good shape.
You kind of reiterated your CapEx number. Shares are a little bit better. Just wanted to understand the priorities of deployment for repurchases and if there's any kind of small bolt on M and A or something larger in the pipeline that you're looking at?
Speaker 1
Sure, John. I think it's pretty consistent. When we look at our debt ratio, we are comfortable going below two if you compare us against our electrical peers. Now in general, they're between one to two, say 1.5 is somewhat average for our electrical peers. We'll also be looking at tuck in M and A.
And just like we were able to deploy almost $100,000,000 last year in tuck in M and A, we still feel that there's quite a few opportunities in our pipeline. They're priced appropriately. And so for us, it's pay down debt CapEx and then take advantage of our tuck in M and A.
Speaker 6
Got you. Okay. That's helpful. And then I guess following in on Andy's question on MP and S. I mean the EBITDA came in better than we thought.
And I think also your guide for this quarter, we're maintaining the full year from an absolute dollar basis. I know you were talking margin before, but just wondering, was there any timing with renewables or is there anything you're assuming? You obviously talked a little bit about price cost, but it would seem that you kind of overdrive the quarter and maintain the year. Yes.
Speaker 2
I think that's, John, probably a good characterization. I don't think there's anything notable to call out. Obviously, they did a job shift in December that could have shipped in January and therefore the 7% growth. And we just have tough comps in the second half of the year. We had some large projects.
We had a great mix. So again, trying to give you everybody accurate guidance, I wouldn't assume that that would continue at that type of year over year increase in growth rate for the rest of the year. No reflection or anything bad to come, just it's what's compared to the end of last year.
Speaker 6
Great. Thank you.
Speaker 2
Thanks, John. Our
Speaker 0
next question is from the line of Deepa Raghavan with Wells Fargo Securities. Please proceed with your question.
Speaker 5
Hey, good morning all. Morning, Just to Kihei, a few clarification questions. On the guide, last quarter, I think you guys guided you guys when you guys guided Q1 last quarter, you beat that by $0.11 right, I mean versus your midpoint. And you raised your full year guidance by about $0.15 for the full year. You raised it by more than what you I think you expected, right?
I mean, what you did in Q1. So just curious, what's driving that momentum? Which segment or which part on the which of the line items in the income statement is driving that?
Speaker 1
Yes. It's just I would say, Deepa, a little bit better on the volume number and the mix number and productivity. So when we gave that guide out for the full year, I would say just a little bit better there, and particularly in Electrical Raceway. And you can see that's why we changed the full year guide for Electrical Raceway. And then we did roll through the favorable benefit in Q1 from our, I'd say, discrete tax benefit that we recognized in Q1.
And that's how you get from the 11,000,000 to about $15,000,000 I think as the quarter went on, we just felt we did have a strong quarter and things are firming up with the way we felt that the guidance typically after Q1 wouldn't guide up in the full year, but we felt like we're in a position to be able to move the guidance up.
Speaker 5
Got it. Just a clarification on that price pass throughs. So John, did I hear you right that electrical rates where you are passing through 100% of this commodity deflation even as we speak in MP and S you're able to hold. Is that a fair characterization? And that's how you're thinking for the rest of the year also?
I think the question is more how much are you able to hold on to? But looks like you're telling me nothing in ER and very little in MP and S. Is that right?
Speaker 1
Typically, don't break out the price cost between dollars between the two segments. We do say overall, when you look at the bridge this quarter, Deepa, we're down $30,000,000 in sales in total. And I would say we're flat on EBITDA. We're actually down slightly in EBITDA. So in that case, we were passing through lower commodity costs in our pricing, but holding our margin levels.
As we guided for the full year, we did say there's going to be we anticipate a headwind for the full year and mainly because the second half of last year, especially in MP and S, we really had robust pricing and spreads in that case. So we were guiding that in the second half of the year, would be negative. First half of the year, first quarter, we were flat.
Speaker 5
Got it. Your Electrical Raceway, again, my last question and just a clarification point. I mean, trends low single digits, I mean, you're still kind of keeping it, but I'm sensing there's some underpacing in some verticals versus the expectation. Can you talk through how that works, not just I'm not just talking non res low single digits, but with the non res low single digits, can you talk through verticals? And also overall perspective, you talk about industrial versus non res versus resi trends versus how you guided ninety days ago?
Thank you. And that will be it.
Speaker 2
Okay. Thanks, Deepa. Yes, a couple of thoughts, Deepa. The way I would characterize it from the high level, then I'll get down to verticals for you, is the market, the voice of customer has been consistent all along. So nothing's changing.
It's always been the low single digits. What I try to affirm and Deepa is thinking some of the publications you've done with Wells Fargo is that third party information now seems to be aligning more with what we hear from our customer base of low single digits. So the confidence factor is up. Not necessarily changing anything, it's just the low single digit everybody seems to triangulate around that across every indicator, voice of customer, distributor, contractor, sales agent, whether group think or not, consistent information. As for some of the verticals, offices, hotel, data center seem to be strong.
I always put the caution out there that we sell exclusively through distribution. So we don't have a scientific level of precision there, but those seem to be the verticals going up. We don't sell as much into industrial, but same thing as I'm assuming you and everybody else saw, ISM came out with a pretty good number yesterday for the industrial side. So maybe that's going to see a bounce back for the economy as we go forward.
Speaker 5
Thank you. Great quarter.
Speaker 2
Thank you again, Deepa. So I think we're
Speaker 0
I'm sorry. Please go ahead,
Speaker 2
Mr. No. Operator, to you if there's any more questions.
Speaker 0
At this time, there are no additional questions. I hand the floor back to you, Mr. Walls, closing remarks.
Speaker 2
Okay. Cool. Thank you. So before we conclude, let me summarize my key three takeaways for the quarter. First, we're off to a great start for 2020, and Q1 was very strong across multiple metrics.
Second, we continue to remain positive on the nonresidential construction markets and expect the low single digit growth to continue for the remainder of the year. And third, we expect our strong financial performance from Q1 to continue, and we raised our full year outlook on adjusted EBITDA to be between $340,000,000 and $350,000,000 Collectively, it's our team, it's our culture, it's the Atkore business system that enable us to maintain and deliver upon our commitments to our customers and our shareholders. With that, we want to thank you for your support and interest in Atkore, and we look forward to speaking with you again during our next quarterly call. So thank you. This concludes the call for today.
Speaker 0
Thank you. You may now disconnect your lines at this time.
Speaker 2
We
Speaker 0
thank you for your participation.