Q2 2024 Earnings Summary
- Strong Growth in Large Project Opportunities: Atkore is experiencing increased orders and expects significant expansion in large project opportunities, particularly in the data centers and chip manufacturing sectors, starting from FY '25 and beyond. They are partnering with major companies (referred to as the "Magnificent 7"), dramatically increasing their team, and leveraging off-site manufacturing to meet demand.
- Expected EPS Growth Supported by Reversal of Temporary Challenges: The company anticipates adjusted EPS to increase from $16.50 in FY '24 to $18 in FY '25, supported by the expected reversal of an $80 million negative impact from HDPE and solar in FY '24, as well as contributions from large projects and productivity improvements. ,
- Outpacing Market Growth through Self-Help Initiatives: Atkore is growing faster than the market with a 6% year-to-date volume increase, driven by self-help initiatives such as expanding PVC products beyond core markets and capitalizing on global mega projects. This positions the company well to benefit from booming sectors like data centers, AI, and chip manufacturing. ,
- HDPE market challenges leading to reduced projections by $80 million for FY2024: Atkore's HDPE telecom-related products are facing demand challenges due to excess inventory and delays in government broadband funding. This has led to a decrease in near-term growth expectations and a reduction of $80 million in projections for FY2024.
- Slower ramp-up of solar torque tube production contributing to $80 million reduction in FY2024 expectations: Operational challenges at Atkore's Hobart, Indiana facility have resulted in production output trailing previous expectations. This slower ramp-up in solar torque tube production is impacting growth and is part of the $80 million reduction in expectations for HDPE and solar in FY2024.
- Potential pricing pressure if construction activity does not increase: Management indicated that if spring and summer construction activity does not pick up as anticipated, the pricing environment could be challenged in the second half of 2024, which could affect margins.
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EPS Growth Drivers
Q: What will drive EPS from $16.50 in '24 to $18 in '25?
A: The reversal of an $80 million negative impact from HDPE and solar this year will turn positive and grow beyond that. Continuation of our large project business and expected market help, along with productivity improvements and robust capital deployment, will bridge us from $16.50 to $18 plus EPS. -
HDPE Recovery Timing
Q: When will HDPE sales recover, and how big is HDPE?
A: HDPE markets are slower than expected; we didn't anticipate the business being worse year-over-year. We had not counted much on HDPE in our original guide, viewing it mostly as an FY'25 story. Slight improvement is expected in the back half, but not enough to offset the decline. -
Hobart Plant Ramp-up
Q: Can you update on Hobart plant's output versus expectations?
A: Though we can't disclose specific figures, Hobart is a large facility that will significantly increase our metal tons. Production hasn't met levels due to challenges like unplanned maintenance, but mechanical tube overall is up double digits year-over-year. Output increases are planned, likely impacting FY'25 more than FY'24. -
Pricing Strategy Amid Volume Shortfall
Q: Was there a bias to hold pricing instead of driving volume?
A: As market leaders, we're careful not to lower prices just to gain volume. We did well this quarter, achieving 6% volume growth year-to-date, higher than market growth. Our business plan is working, and we're still committed to $18 EPS despite two short-term issues. -
Solar Torque Manufacturing Challenges
Q: What's causing solar torque manufacturing issues?
A: The markets are strong, but we're fine-tuning equipment due to technical challenges like precise cutting at high speeds. End markets and customer relationships are solid. As we resolve these issues, we don't expect them to repeat in future quarters, boosting confidence in future performance. -
Impact of Destocking
Q: Is destocking still affecting you?
A: Year-to-date, HDPE experienced destocking, which was unexpected. Otherwise, inventory levels are stable across the market, with some customers slightly reducing inventories due to a lighter economy. -
Core PVC Market and Data Centers
Q: How are PVC products and data centers impacting growth?
A: Despite overall light markets, we're growing faster than the market due to initiatives like expanding PVC beyond electrical markets. Booming sectors like data centers and AI chip manufacturing are providing a good backlog, contributing positively to our earnings outlook. -
Spring and Summer Electrical Activity
Q: Any concerns about electrical market activity or pricing?
A: Things are unfolding as expected with no concerns. While activity pickup is a bit slower, indicators like non-residential construction employment up over 3% year-over-year and contractors' backlogs over 8 months are positive. We anticipate activity to pick up during the building season. -
Pricing Neutrality Timeline
Q: When will pricing be neutral year-over-year?
A: We expect pricing to be more neutral in Q1 or Q2 next year. Our guide implies that Q4 EBITDA will be fairly flat year-over-year, though pricing will still be down somewhat with volume up. -
Large Project Opportunities
Q: How will large projects progress, and key markets?
A: Expansion will mostly occur in FY'25 and beyond. We're partnering with major companies, including the "Magnificent 7", in chip manufacturing and data centers. We're increasing our team, engaging in off-site manufacturing, and extending operations internationally, including Europe. -
Conduit Imports Impact
Q: Are conduit imports significant, and has this changed?
A: Import levels vary by product from 0% to 3%, up to around 20% in some cases. This year may be slightly up, but trends vary. We're focused on our strengths, like quality and delivery, and initiatives such as getting Hobart running smoothly, mega projects, and share buybacks.