Atkore Inc. (ATKR) Earnings Call Transcript & Summary

[Audio Gap] And cover multi-industry and engineering construction for Citigroup. And I'll also cover Atkore. And Atkore is -- sometimes I think about one of the best kept secrets of our coverage universe, and I think the secret's starting to get out. And we're very excited to have Bill Waltz, who is Atkore's President and Chief Executive Officer; and David Johnson, Chief Financial Officer. Bill joined Atkore in 2013, and David joined Atkore in August 2018. So I think the best way to do this, guys, is to just start, and there's going to be some people in this room who are not as familiar with at Atkore. So maybe if you could give a brief introduction to the company, focusing on its competitive advantages to end markets, your goals for long-term performance. We'll get started that way.

Yes. I'll start, then David, please complement here the information. So around $2 billion corporation, mostly focused on electrical products and also a little bit what we call mechanical products, which we can go into. Mostly like around 90% U.S.-based company with about 10% overseas. 50% of that is nonresidential construction, and then another 20% that's based on repair and maintenance within nonresidential construction. So from a standpoint of what I think is actually unique with Atkore really is our business system. So we focus on the people, process and strategy. And I think we've done that really well, and that's what's led to a very high teen digit, like 18%, 19% compounded EBITDA growth for the last 5, 7 years.

So I think when you think about the business has 2 segments: one, the electrical, think about the electrical infrastructure in a commercial building. So like a building like this or if you go to parking garage, you'll see the electrical infrastructure, condo with wires go through cable tray, so on and so forth. So think about the electrical infrastructure of any type of building, a data center, a hospital, anything like that. On the mechanical side, a little bit more diverse product sets that we support like the solar industry and different kind of niche end markets there.

Great. So maybe, Bill, we can follow-up on the comment around the Atkore business system. I mean, maybe talk about its roots. Because I think it has its roots in the Danaher Business System. And so what makes the Atkore Business System special? Why does it help you outperform?

Yes. Great question. Thank you, Andy. It's absolutely based, let's say, on the Danaher Business System. So very similar from that or Toyota on an operations side. One of the things that I want to make sure that is, I think, 2 ways unique with the Atkore Business System is it's more than just so a manufacturing, like literally this Friday, I'm taking 80 of our executives and tour in Toyota. And we do lean well and we drive good -- well, good productivity, but it's every facet of the business. So as I mentioned, people, process strategy, is how do we recruit people? How do we interview? How do the people to my left and right, the talent that we bring on board to grow the company in the future? All those type of things, the strategy and how we deploy it down. So it's just not an operating factory, it's every facet of the business. And the other thing, just being sincere, is I think a very high percentage of companies have, they'll say they have a business system, but is it truly used and ingrained every day? And I will tell you everything we do is based off our interview -- our business system. So as I mentioned, how we interview, it's standard. When that gemba walks occurs every morning at every facility at 9:00 o'clock to how we deploy our policy and how we have countermeasures and every facet truly is. So it's not just a slogan or something for investors or something that we put on walls. You have to follow the process in the continuous improvement. And that's what drives every process, I think, every year, continuous improvement.

And Bill, you've been with the company for 7 years, but CEO only for 1.5 years. And under the previous CEO, under John Williamson, the company was doing well, but it seems like it's actually stepped up a bit, under you over the last 1.5 years. So what has changed, if anything, under your leadership? What do you still want to do also going forward?

Yes. So yes, and I think it's a great question. I was here for -- as Andy mentioned, for almost 7 years now. So since we really formed the corporation, I've been here with John. It's a continuation. So it's not all suddenly a new CEO versus a continuation. So I think the things that I'm doing, which I'll address would be the same things that John and the previous management would do. But with that, the nuance have changed, it's just the right place in the evolution is. Now that we have the process, we have the structures engrained, everybody's engaged and aligned in exactly that same process is how we take it and focus it more externally. And that's the next thing to go as we get our EBITDA margins up into the high teens. How do we get organic growth growing more. We have our own house in -- your kind of house in shape. So now how do we drive above industry growths to that. And that's a long-term process, it's not going to happen overnight. But how we're driving new product, how we're spending more time investing in sales, how we're doing more pull-through sales, how we're doing things like digitization with them to drive organic growth. So I think that's the part of the thing, a more organic growth focus, more external focus, that's the new dimension -- our new dimension. But it's truly based on, you had to get your house in shape first. We've done that. Now how do we unleash it on our customers?

Do you have a way of thinking about that outgrowth, Bill? Like what is your target, if you may?

I thought -- a rough directional number is probably 100 basis points above market. Because one of the things, Andy, in your original question is like, hey, what makes Atkore? The products we have, we have high share. And we have 35%, 40% market share in a pretty structured environment. So for those type of products, we're looking to create more value for our customers, but also then continue to raise our pricing, quite frankly, as we deliver more value. And therefore, I'm not looking to dramatically grow those product lines versus new products, new acquisitions. There, we've shown with some of our products we call focused product categories that we've actually grown 10% and market's growing 2%. But that's a 10% of our business growing 10%, and that's how you kind of get the math of 100 basis points above market growth.

Yes. So I think it brings up another question, which is with such high share, you think about your ability to price, right? And you guys, it seems like your dynamic pricing, whatever you want to call it, has gotten better over the last couple of years. So maybe talk about your ability to price. Because I feel like the bear case is that well, you're just the price taker. And as material costs go, you guys go. But it seems like you're outperforming pretty significantly.

Oh, yes, absolutely. And I'm going to tell you into original comment I made about the business system. We, 4 years ago, decided, hey, we think there's a discipline in pricing. I think most companies would say, hey, there is, and you can bring a Mackenzie or somebody in to read a book on pricing competitiveness and so forth. But we actually set the goal, here is one of our 3 priorities to become a price -- excellent pricing. Whole strategy around it, whole policy deployment, whole segmentation of products, how we do pricing, how we communicate it to the field, how David and I, ourselves, still to this day, every week, have over half hour with the different business leaders on what's happening? What other competitors? What's happening in the market? Who's leading price? Where commodity is going? It's that level of discipline that drives the results that take us. And I'm enjoying using directional numbers here now. But from 5 years ago, around $150 million EBITDA to around $350 million this year. I mean that's a huge change. It takes a lot of things. It's not the pricing, it's also productivity and so forth. But it's that type of discipline and that type of structure, that type of rigor. Every morning at 6 am, as an example, I get a whole set of metrics of every product line, by region, and what was the pricing, what's the exceptions on a scatter chart, who approved those. It's that type of strong, methodical process day-by-day that brings to results like we do.

Yes. And again, it brings up the question, you mentioned productivity, right? So you've got this $15 million that you said you can make, basically made it last year that you can make it again. How are you able to -- because it's a pretty big number when you think about the context of your company and productivity. Is it the Atkore Business System that's doing it? Is it some more specific focus that you've had or...

No, I would say, it's a great question, but it's absolutely the Atkore Business System. Reason I say that, about every year, we close one rooftop. But there's not one initiative, there's not one initiative in any part of our business. It's not pricing or one new product development or, to your example, here with productivity. It's literally every part of our business has a productivity funnel. If they have a goal, we make sure there's 150% to 200% of that goal in the hopper. Every business and every plant does a value stream map. Every business takes that value stream map, current state, future state, prioritizes the Kaizen events. Every business has an Atkore Business System kind of war room where they sit down and say, what are the metrics? They do a gemba walk, they do their Kaizens. So it's 30, 60, 90-day review. And I don't think there's a single initiative that probably drives more than 5% of that $10 million to $15 million. But it's that continuous improvement mindset. At times, Dave and I will approve capital, we go, hey, here's a new blending system that we want to put in one of our PVC facilities and so forth. But it's literally just work in the process.

We spend about $40 million on CapEx, a majority of that has some sort of productivity nature tied to it.

Got it. So last year you did 17% EBITDA margins, you talked about sort of high teens is kind of what you're doing. How do you think about the margin trajectory over the next few years in general? Taking into account all the things we just talked about, whether it's volume, pricing, productivity, how do you...

Yes. At least what we aspire to do, again, guidance is for this year, but it is to get closer to the 20%. And I think it's a combination, Andy, of everything we just mentioned. So in other words, productivity can add around 50 basis points a year to that. Pricing, we've done a really good job. We aspire to continue to drive it up. New product development, which we haven't talked about too much so far. But the products we're developing are typically innovative products that are driving higher margin, more value creation and then the fall through. And then as we do more acquisitions are typically things we bring a lot of synergies to, those acquisitions, we put them into our system, that all those things combined together should be able to drive over, let's say, a 5-year period to go from 17% to 20% EBITDA margin.

Yes. So look, you gave me the hint of talking about new products. So let me ask it to you in this way. Like, do you have a certain vitality index that you sort of drive to? And has that improved over the last couple of years?

Yes. So it has. And again, one of the things hopefully we do well is communicate transparently. So to the point of our current vitality rate is in low single digit, maybe getting closer to mid. So we still have lots of room for self improvement. But for a company that 5 years ago probably had focused nothing on new product development, we are releasing several dozen new products a year. Again, it's adding low single-digit increase. But in an industry that typically hasn't had anything, we are seeing the industry recognize that, for example -- and again, Andy, as you mentioned, we're a $2 billion revenue, $2 billion market cap. So an industry that's like $80 billion in the U.S. alone, there's a lot of bigger names out there. They're ABBs, the Eatons, the Schneiders and Legrands. But for our sized company, for the last 2 years in a row, the industry has awarded us 2 new product development awards out of around 12 to 15 awards. So there's few companies saying -- claim, they won a new product award, let alone 2. Let alone we're not the $40 billion behemoth in the industry, we are starting to create things that are pulling through, get Atkore's name recognized even better out there. And then, by the way, because these products bring a lot more value, you also need to take a profit profile gross margin from a 25%, 30% gross margin on average, a lot of times, up to 50% or 60% gross margin. So aspire, again, 5-plus years out, but how can we get that to 10%? It's not one thing that I would look for any investor to do. But if we continue to try productivity, continue to drive accretive M&A with bolt-on acquisitions and do the pull-through of organic growth and do new product, it can be a pretty compelling investment story.

Should be.

So I want to shift over to markets in a second, but let me ask you one follow-up to what we just talked about. Like, David talked about the CapEx. So have you increased investment, whether it's R&D or CapEx in new product development because you see the good returns there?

Oh, yes. Sorry, I was going to give David the capital point, but absolutely.

He gets all the easy.

Yes. So absolutely. And one of the challenges we even have. The team, again, we -- like M&A or anything else, we want to make sure it's a good investment. We appreciate our shareholders' capital and making sure we use it wisely. But we are challenging the team to go, guys, if there is a good thing with a couple of year return, bring it to us. So a lot of focus there. That CapEx is going up in R&D, and we're spending a lot already in the last 2 to 3 years on more R&D, bringing in young engineers to organization. Last year, we invested more, for example, even it's a little off the capital side but just training, professionally training all of our employees on really how to do voice a customer well. So you may be sitting here and go, all these things are basic but you'd be surprised how many companies just don't do this stuff well. And it's the difference between good and great that slowly adds value to our customers and, therefore, our shareholders.

And Andy, I'd just add a little bit on the investment side. We've invested in the technical sales out in the field. So one thing we haven't talked about too much is our products go through electrical wholesalers, so distribution. Rexel, Sonepar, Rex sells to the world. Then they typically get sold to an electrical contractor. So for us, it's very important for us to get the voice of the customer to the contractor, the actual user of the products. And that's where a lot of our new products have come from is labor savings on site, given that labor constraints right now is a major issue on construction sites. So those are the types of investments. And then we pull those products through the channel, if that makes sense.

Does. And so if I remember correctly, you guys are 60% to 65% levered to U.S. non-res.

Yes.

And so stepping back, we always get the question, like you're 10 years into the cycle, aren't you long in the 2 with what's going on? And I've asked you guys on earnings calls, like it seems like you've got some pretty good visibility into low single-digit growth. So maybe you want to talk about where...

You think Dodge will talk multiyear out. We just had their Chief Economist with our staff here last week, as you look out 3 to 5 years, and they're still calling for growth. And we can talk short-term if -- Andy, if you're -- other people in the room would like to. For the next year, you have to remember the time between a start of a project, somebody commissioning a project. And by the time you actually build a building, it's probably 6 to 9 months to a year. And then some of these mega projects, an airport and so forth. If anyone's flying through LaGuardia or O'Hare, there are three 5-year projects. So therefore, when somebody asked like, well, what confidence you have? I was like, well, just to this morning, ABI came out with probably the most positive number in the last 9 months. I forgot the exact...

52.

52. And it's like the last 6 months of ABI have all been positive numbers. So to sit here and then I'll go with some specific points of customers here, what confidence you have? I was like, well, if ABI, for 5 months or 6 months is same positive numbers, that's an indication very strong for the next 9 months, it should at least be positive. Again low single digit. I'm not here, nor hopefully anybody telling you it's going to be double-digit growth, but we performed well and consistent low single-digit growth as we've shown for the last 5-plus years to do that. And then what I can add beyond the metrics that anybody in the room can do is sum out all the time with our customers, including this last week, and I was with one of our electrical agents. But whether it's an agent, a distributor, a contractor, and everybody is talking record backlog. Now putting that in context, some of the reason for the record backlog is, as David mentioned, there is a labor shortage. So contractors can't keep up with the work. But for at least the next 6 to 9 months, I definitely think the product -- the projects are there, they're already in the funnel to be worked through. So that gives us confidence, at least as we give guidance for our fiscal year.

And Andy, that feedback has been very consistent for the last 3 years from the field. And sometimes the macro indicators go positive or negative quarter-to-quarter to quarter, whatever. It seems like the indicators are more triangulating around that right now. I think this gives us more confidence in the near-term future.

Right. And then within non-res is new construction and renovation. Does it really matter for somebody on the outside looking at you guys? Like how would you...

No. The funneling things. The overall answer is no, it doesn't matter. Two, one thing that matters, but we -- again, we're talking 10s and 50s of basis points is what type of construction is being done. In other words to go, if a hospital goes up, if a data center goes up, if an education center goes up, there's probably, by definition, more electrical equipment. Just think about a hospital room with all of its redundancy, all of its electrical outlets, all the electronics in a hospital room per square foot. If a hospital goes up, there's probably 3, 5x the amount of electronics that's in a warehouse, retail building. So even within Dodge, some of the trends, i.e., more health care spending, are actually helping us because even if you just look at square footage, you get the loss of quite frankly, I don't sell, we don't sell as much into a retail building as we do a hospital. So -- but overall, it doesn't matter if it's renovation, hospital building versus a hotel. We serve all the different market segments.

Right. I want to open it up to the audience in a second, but just following up on that. It does seem like though institutional in general has been doing reasonably well. Has that been a benefit to your business in general? Are there any other verticals that have really been driving your business in 2019?