Atkore Inc.

Greetings. Welcome to Accor International Fourth Quarter 2019 Earnings Conference Call. At this time, all participants will be in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I will turn the conference over to John Deitzer, Vice President, Investor Relations. Mr. Deitzer, you may begin.

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 risk and uncertainties such that actual results may differ materially. Please refer to our SEC filings and 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.

Thanks, John, and good morning, everyone. I'm pleased to report that ACORD delivered excellent financial results for both the fourth quarter and the 2019 fiscal year. Let me begin with our highlights for the full year, and David will go over the fourth quarter in more detail. As I mentioned, 2019 was a very strong year for Accor. We increased the justity of a DAH by $53 million, or approximately 20%, compared to 2018, a remarkable achievement by everyone in our organization. and a credit to the results that can be achieved by following the ACWR business system. In addition to the growth in EBITDA, free cash flow increased 63% and we increased our adjusted EPS by 30% up to $3.62. We also made significant progress this year on improving our leverage position. We ended 2019 with a net debt to EBITDA ratio of 2.2 times, down considerably from where we were at this time last year. In summary, 2019 was a year of great financial performance and EBITDA growth driven by the Accor business system. We were able to convert those earnings to cash, which allowed us to both improve our leverage position and acquire four companies that will enhance our competitiveness in the marketplace. We plan to build upon that success from 2019 and continue to grow the company. For 2020 specifically, we expect to increase our adjusted EBITDA to between $335 million and $345 million and use the Accor business system to drive that growth even further in the future. With that, I want to thank all the employees in Accor for their tremendous efforts this year. I'll turn the call over to David, who will walk us through our financials for the fourth quarter in more detail.

Thanks, Bill, and good morning to everyone. As Bill mentioned, the fourth quarter was very strong. Moving to our consolidated results on slide four, net sales were $502 million, up $24 million versus prior year. As we anticipated and mentioned on our last call, volume was quite strong this quarter of $40 million, or 8.4%. Recent acquisitions also added $20 million in revenue, or just over 4%. These positive contributions were partially offset by declines in our average selling prices and unfavorable foreign exchange rates. Moving down to the adjusted EBITDA bridge, Our adjusted EBITDA for Q4 was $89 million of 25% or $18 million versus last year. The two largest drivers of adjusted EBITDA growth were the volume growth we experienced in both segments and the continued use of the Accra business system to drive margin expansion. Volume growth contributed $13 million in the quarter and price versus cost was a benefit of $12 million. This growth was partially offset by additional investments in the business, inflation, and the timing of certain expenses. Moving to slide five. On a GAAP basis, net income increased 41%. Adjusted EPS was $1.01, up 28% from the fourth quarter of 2018, reflecting the increase in adjusted earnings and favorable share count from our repurchases over the last year. Our adjusted EBITDA margin for the fourth quarter was 17.7%, up 280 basis points versus prior year. Moving to our segments on slide six and seven, Electrical Raceway had another strong quarter with approximately 6% volume growth, driven by solid expansion in our focused product categories. Adjusted EBITDA for electrical raceway increased 17% or $12 million based on our disciplined approach to margin expansion and higher volumes. Also, during the quarter, we acquired the assets of Rocky Mountain Colby Pipe Company, a leader in PVC conduit sold under the CoreTech brand name. This acquisition expands our product portfolio and improves our geographic coverage in the west coast of the United States for our plastic pipe and conduit business. Turning to the mechanical product and solution segment, the business delivered very strong EBITDA growth in Q4. EBITDA was up over $9 million, and the MP&S adjusted EBITDA margin climbed to 16.4%, up 680 basis points from Q4 2018. During the quarter, the business did a great job of increasing margins and profitability. This allowed us to deliver an adjusted EBITDA margin percentage that exceeded our expectations. On slide eight, year-to-date net cash flow from operating activities was $210 million, which generated a free cash flow of $175 million. This strong cash flow allowed us the flexibility during the quarter to make additional bolt-on acquisitions, as well as reduce our total deposition by roughly $40 million. With the reduction in our net debt and strong growth in earnings, our leverage ratio improved to 2.2 times. We continue to be very pleased with the progress in our leverage position, considering our ratio was at approximately three times at this point a year ago.

Bill, back to you for our outlook. Thanks, David. Moving to our initial outlook for 2020 on slide nine. Our view on the markets remains positive. and we expect electrical raceway volume to be up 1 to 2% in 2020. And with the trends that we've seen recently for MP&S, as well as their plans for growth, we anticipate MP&S volume to be up 1 to 3% for the year. Between our expected volume growth in both segments and the revenue from our recent bolt-on acquisitions, we expect to drive approximately 5% top-line growth for next year. We believe our strong financial performance from 2019 will continue in 2020, and we expect our adjusted EBITDA for the year to be between $335 and $345 million. For next year, we expect the benefits from the higher volumes and productivity to drive our EBITDA growth. These two factors combine for approximately $15 to $25 million in growth. In addition, we expect our three most recent acquisitions to provide $5 to $10 million in incremental EBITDA. Given the strong positive contributions that we've experienced in 2019 between selling prices and input costs, we are planning for an unfavorable impact of $10 to $15 million in 2020. Moving to the bottom line, we expect our adjusted EPS to be between $3.80 and $3.90, an increase of approximately 6.5% at the midpoint of the range, a solid increase above 2019 levels. Turning to the first quarter, for total ACOR, Our adjusted EBITDA range is between $72 and $77 million. Our adjusted EPS range is between 80 and 85 cents. In summary, Q4 and the full year 2019 were very strong, and we look to build upon that success in 2020. As we begin a new year, our employees remain focused on executing that core business system and positioning the company for long-term success. I want to recognize them for their efforts to make 2019 a very special year for Accor and their commitment to consistently driving value for our shareholders into the future. I also want to welcome all the employees from the recent acquisitions we completed this year. We are excited to have you as part of the Accor team. Operator, please now open the lines for questions.

Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from the line of Andrew Kaplowitz with Citi. Please receive your question.

Good morning, guys. Good morning, Andrew. Good morning, Andrew. Bill, can you talk about your volume growth, the 6.5% in Raceway in Q4? I think that's the highest volume growth we've seen from you since early 2018. I know you mentioned the five new products in the quarter that helped growth, but can you give us more color into your ability to outpace market growth going forward? Do you think new product-related growth could stay at these elevated levels for the next few quarters? And I know you've always had a big focus on new products, but what are you doing differently now?

A couple of things, Andrew. One, I do think, I'm just summarizing what you said, but then I'll add one other piece of color. We are driving the new focused product categories that are going up high single digits and new products, which, you know, low single digits, but it all adds together. The one thing, Andrew, that I just in full disclosure, we had an easier comp last year. in this specific quarter. So I think in our previous guidance, when we had called out, we would be above average growth. It's relative to last quarter. So I just want to put that back in framework. If you look at slide nine of the deck that we're expecting to grow, you know, with acquisitions around 5% next year, but I would not expect to see as strong as Q4 every quarter going forward. But it was a great quarter.

Yeah, that's helpful, Bill. In past calls, you've talked about having six to nine months of visibility given the backlog that your distributors and contractors have in Raceway, and that made you comfortable that you could forecast low single-digit market growth within non-res markets going forward. Obviously, we've continued to see some relatively weak starts data. Have you seen any deterioration in the backlog that gets you concerned? Well, that's an easy answer.

Yeah, no, it's good. It's very consistent with what we've always articulated, and the trend continues. It's low single digit, but in some ways the labor shortage out there is acting as a governor. So literally even just yesterday as we wrapped up our board meetings, and we're fortunate to have a lady that's the CFO of a large electrical contractor on the board. You know, that voice of customer of the contractors is consistent with me on the road, for the last several weeks with distributors and so forth and customers, contractors, that we expect it to continue and as far out as we can see, which, Andrew, as you said, it's at least six to nine months. So it's pretty good guidance for the rest of the fiscal year being we're two months in already.

And then one more for me. You had this year 19 almost 250 base points of margin contribution from price versus cost. Q4, the number was even bigger than that. When would you think about what is a more normal contribution for you when commodity prices aren't as volatile as they've been? And what level of price versus cost contribution is baked into FY20?

Yeah. So, Andrew, in my mind with that, I think if you look at the comments I just gave in our guidance, in other words, We had a phenomenal year with up almost 20% EBITDA, and it's off of a 2018 that was also up 19-plus percent. Some of that was on NICs and driving value, but that's one of the reasons kind of in caution that we don't hope to give back any price, but just in caution and guidance, we are guiding that there could be $10 million to $15 million of spread. So you can kind of work that in. you know, to the numbers we just presented and get a good feel for what we think the run rate for fiscal 2020 would be.

Thanks, Bill. Good quarter.

Awesome. Thank you, Andrew.

The next question is from the line of Deepa Raghavan with Wells Fargo. Pleasure to see you with your questions.

Hey, good morning, everyone. Good morning, Deepa. Hey. Tagging on that price question, how are you thinking about the first half, second half price conservation? I mean, within that 10 to 15 million, it looks like it would be more weighted first half, right, just given your comps, or are you thinking about it more linearly spread out?

All right. You know, as Bill mentioned, we had put in our guidance this little bit of headwind for price versus cost. Deepa, when you look at the way the quarters roll out in FY19, we expect the first half to be somewhat on par with FY19, and then really it's the second half where we had really strong price versus cost. That's probably where we have most of our at least potential headwind put into our current financial forecast.

Oh, sorry, was this price-cost or was this price on the top line? Price-cost. Oh, okay, got it. Oh, got it, got it. Sorry. So what would it be on the top line price? I mean, your revenue is low single digits. You probably have some acquisitions in there, too. But how does it, you know, what's the headwind from price pass-through? I mean, second half of fiscal 19, it was down mid-single digits, low to mid-single digits. Okay. what are you expecting for fiscal year?

Yeah, so we're expecting right now we, you know, guided on price versus cost being 10 to 15. I would, for planning purposes, assume that that's the same on sales. And the reason why I say that is commodities have somewhat flattened out at this point in time. And also, we're starting to see a little bit of an uptick in some commodity input costs, especially steel, where some of the steel companies have been pushing through various $40 a ton increases. So I think for planning purposes, Deepa, I would assume that's 100%.

Thanks for that. And my follow-up would be, your ADCOR business system looks like, you know, that's contributing pretty nicely to your margins. What was the margin improvement in fiscal 19 from this health health, you know, productivity, you know, ADCOR business systems versus volume leverage? And how much do you think it will be in fiscal 20? At least directionally, does it improve? Is your ad core business system going to add to more margin expansion potential in fiscal 20 versus fiscal 19? I mean, any color there with regards to... Yeah, sure.

A couple things I would mention. In FY19, productivity contributed approximately $15 million of improved adjusted EBITDA That was significantly more than the year before. And I would say the reason for that is one of our strategic deployment initiatives was around productivity. And I would say just in general, the business has a lot more rigor around the projects. We have a system that tracks, you know, all the kind of projects and where our funnel is and so on and so forth. So built into our FY20 guide would be a similar number to that, which again would be 3x more than what we did year, say, like FY18.

Got it. My final one, and I'll pass it on, is on capital deployment. Your share count assumption is higher than your exit rate in fiscal 19. I mean, this implies the delusion from options, but not much buybacks in there. So how do we think about the buyback potential? Are you saving it all up for acquisition spend? Just curious what your thoughts are on buybacks versus acquisition in fiscal 20. Thank you, and I'll pass it on.

Sure, absolutely. So, obviously, we have a little bit of dilution when it comes to stock comp, you know, annually every year. We don't put in our plan stock buybacks, even though we have the ability to buy back $50 million worth of shares. So, I think at this point in time right now, our priorities remain the same. You know, our Number one priority is our debt ratio and moving towards that two times goal that we have stated externally. Number two, tuck in M&A and when possible, buy back stock. And I just would remind everyone that we have bought back over a third of the company in the last couple of years. So we have had a substantial buy back program. Last year we bought back in the mid-20s, kind of million dollars worth of shares. And so we're not going to definitively tell you what a number would be, but we do have the opportunity to buy back $50 million if we decide that that's the best use of our cash.

Got it. Thanks much.

Great. Thanks, Deepa.

Thank you. As a reminder, if you'd like to ask a question today, you may press star 1 from your telephone keypad. We'll pause a moment to assemble the queue. Thank you. I have another question coming from the line of John Walsh with Credit Suisse. Please proceed with your question.

Hi, good morning. Good morning, John. So I think at the midpoint, you know, productivity is adding about, a solid mid-single-digit improvement in adjusted EBITDA year-on-year. I think you've commented before in the past you're relatively early innings in productivity. Is that a good placeholder to think about what you kind of have in the pocket as we model out the years going forward from productivity?

Yeah, John, I think so. I paraphrase slightly differently. I think we're average in productivity versus beginning. Now, we did make a comment here, at least I think David did, of we started this as an SDP, Strategic Deployment Process, two years ago and really enhanced our funnel. Very humbly, we have a lot to go, but I think that $15 million number, that feels like a good number for every year.

Gotcha. And then, you know, thinking about the free cash flow conversion, obviously, very strong this year on a full year basis, also in the fourth quarter. You know, what's kind of the sustainability or, you know, how are you guys viewing that free cash flow conversion on, you know, call it your adjusted net income going forward?

Yeah, so we typically talk about our free cash flow on net income and our goal to be above 100%. This year, obviously, was a very strong year. Last year, John, if you recall, we were a little bit below that. And by and large, the factor that determines whether we're above or below is working capital. And to some extent, the impact of commodities on our inventory and so on and so forth. So this year, I would say, is a very strong year. Our go-forward goal would be to be above that 100%.

And then I guess, you know, obviously the renewable projects hit nicely in the quarter. I mean, was that a benefit to cash? You just kind of talked about your working capital there being one of those swing factors.

Yeah, I think it is, but we obviously had a strong end of the year in volume. But I would say, you know, net-net, the solar business, when you add in it from a free cash flow basis, is pretty much on par with our other businesses.

All right, thank you for taking the questions.

Thank you.

Our next question is from the line of Dean Dre with RBC Capital Markets. Please proceed with your questions.

Good morning. This is Jeff Vaughn for Dean. Maybe touching on the electrical raceway volume guidance of 1% to 2% for next year, can you maybe just discuss which verticals you're seeing the most and maybe least growth, and does that have any mix on your margins?

Great question. Probably the areas where we see the largest growth is around health care and hotels as we go into next year, areas with a little less growth are warehouses. is exceptionally small or mixed. There's some things like within healthcare, we have some more sophisticated products like luminary cable and so forth, but not enough to change our internal forecast. We're always driving. We usually saw how well we've done with driving the mix, the margin, selling more value added products, but I wouldn't go as far as say, because one vertical is up or one is down, that it's going to significantly change our, our forecast.

Got it. And, uh, So your leverage now, I mean, you're pretty much approaching that two times target. Is there either a number that you target for M&A deployment annually or a percentage of capital deployed? And then also maybe just touch on your pipeline. What are the multiples you're seeing, et cetera?

Yeah, I'll handle that question. You know, this past year we deployed $100 million in truck and M&A across four acquisitions. I think if you think about going forward, that somewhat level of M&A activity would be appropriate, we think, with our capital deployment and keeping our debt ratio in check. Maybe a little bit north of that if the opportunities are there. I would say right now our pipeline is about the same as it's been, so it's pretty robust. Again, our acquisition targets tend to be smaller, tuck in around our core requirements, around the electrical raceway at this point in time. And we're still seeing, you know, when you look at our last two or three, the valuations are still in that kind of mid-single-digit range.

Great. Thanks.

Thank you. Thank you.

Thank you. We've reached the end of our question-and-answer session, and I'll turn the call back over to Bill Waltz for his closing comments.

Great. Thank you. Before we conclude, let me summarize three key takeaways. First, across multiple financial metrics, 2019 was an astounding year. Second, we significantly improved our leverage position, while at the same time acquiring four companies that will enhance and support our plans for growth. Third, we expect our strong financial performance to continue. For 2020 specifically, we expect to increase our adjusted EBITDA to between $335 and $345 million. Collectively, our team, our culture, and the ATCOR business system enable us to maintain focus and deliver upon our commitments to our customers and shareholders. With that, I want to thank you for your support and interest in ATCOR. I look forward to speaking with you during our next quarterly call. This concludes the call for today.

Thank you. Today's conference has concluded and you may now disconnect your lines at this time. Thank you for your participation.