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spk02: Good morning. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to ATCOR's second quarter fiscal year 2022 earnings conference call. All lines have been placed in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you'd like to ask, telephone keypad. If you'd like to withdraw your question, again, press star 1. 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.
spk05: 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 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.
spk04: Thanks, John, and good morning, everyone. Starting on slide three, I'm pleased to announce that the Commission delivered outstanding performance and strong results in the second quarter of 2022. Despite continued challenges across the macro environment, we increased sales and profitability. Our businesses are performing well, and we continue to execute our plans for capital employment. During the quarter, we repurchased $157 million in stock and continue to invest in our business for the future. Given the outstanding performance and results in the first half of the year, we've increased the size of our share repurchase authorization from $400 million to $800 million, and we are increasing our expectations for fiscal year 2022. Turning to slide four, we are increasing our outlook for full-year adjusted EBITDA to a range of $1.25 billion to $1.3 billion. This is up $375 million from our previous expectation as we continue to expect profitability levels and our PVC-related products in other parts of the business to remain strong. We are also now planning to repurchase at least $400 million in stock this year. With our increased expectations for FY22, we also thought it would be helpful to provide some preliminary perspective on FY23. Our initial expectations for adjusted EBITDA in FY23 are in the range of $800 to $900 million. There are many variables and market conditions that could cause this range to fluctuate, but we believe this is a good estimate for next year. With that, I'll turn the call to David to discuss the quarter.
spk07: Thank you, Bill, and good morning, everyone. Moving to our consolidated results in slide 5, Net sales increased 54% year-over-year to $983 million. Adjusted EBITDA increased to $346 million, which drove our adjusted EBITDA margin to 35% in the quarter, both up versus the prior year. Our adjusted EPS increased to $5.39. Turning to slide six and our consolidated bridges. Net sales increased by $343 million, primarily due to higher selling prices and the contributions from recent acquisitions. As we've mentioned previously, volumes have been impacted by several factors. Within T2, our volumes for certain steel-related products in the U.S. in both electrical and safety infrastructure are down approximately 20%. as many customers were holding off on purchases given the volatility we've seen recently with steel prices. For example, the average fall price for hot-robed steel was down over 30% in fiscal Q2 versus Q1. However, the average price of steel has rebounded approximately 20% in April versus Q2, and with the increased demand from the start of the building season, we expect volumes to improve for these prices as we progress through the year. Bonus for the rest of our price were up over 12%. In addition, our award-winning NC Glide products continue to gain traction in the market. Our overall product fatality percentage reached high single digits as a percent of sales. Shifting to our segment results on slide 7, the electrical segment increased adjusted EBITDA by $142 million by 490 basis points. In our safety and infrastructure segment, net sales increased by 47% from the bar year, and adjusted EVA increased 79%. And now a quick update on our capital deployment progress on slide eight. We are now on track to exceed our plan to deploy over one billion in cash over the next two to three years that we announced in November. and we've deployed approximately $325 million in the first half of 2022 across our three pillars of capital expenditures, M&A, and share repurchases. We're very pleased with the performance of our two most recent acquisitions of Sasko and Four Star Industries, and both of these teams are off to a great start. As Bill mentioned earlier, we've also increased the size of our current stock repurchase authorization, ending in November 2023, from $400 million to $800 million. One thing to remember in this current interest rate environment is that in 2021, we were able to successfully refinance and restructure our 100% floating debt portfolio at very competitive rates. Today we have approximately 50% of our long-term debt with a fixed interest rate for the next nine years. As we wrap up the first half of 2022, we have extended our track record of outstanding operational performance over the past few years, during which we've continued to successfully execute on our M&A program, invest in our business for future growth, and consistently return capital to our shareholders via stock repurchases. Given our conviction in the future and our ability to execute, we will continue to buy back shares both consistently and opportunistically within our capital deployment model. With that, we'll turn it to the operator to open the line for questions.
spk02: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Gene Dre with RBC. Your line is open.
spk06: Thank you. Good morning, everyone.
spk04: Good morning, Dean. Good morning, Dean.
spk06: Hey, congrats on another outstanding quarter.
spk04: Thank you.
spk06: Thank you. What's your latest thinking? Because we get this question from investors about how much of the price will you keep? We had some volatility in steel. this quarter, and still you posted over a 50% price. So just to start it here, how much of the price do you expect to keep and any sort of visibility in terms of near-term demand? Thanks.
spk04: Yeah, so I'll do them in reverse order, Dean. Near-term demand looks strong, and obviously we're factored by labor. And I'm saying labor out, you know, contractors, other products, challenges out in the market. But things like Architectural Billing Index, Dodge Momentum Index, and so forth are all exceptionally positive. So we're still optimistic for the future. Pricing is a challenging one. We're probably, you know, We're still seeing some growth in some areas, some other products probably have hit peak and so forth. And that's why, while it's hard to predict, and I wish I had a crystal ball that could tell us exactly three years out, we are at least comfortable enough that we're raising earnings for this year pretty dramatically. and then also giving that guidance of next year of $800 million to $900 million. I don't know if we move off the $600 million long-term, even though we've kind of said in the past we hope to always, with organic growth M&A, exceed that number. So hopefully that helps that we see pricing lasting into at least 2024, if not beyond, you know, as we start to give some type of estimate for 2023.
spk06: That's real helpful. And yeah, I really appreciate the fact you're giving this forward guidance into fiscal 23. And you know, we're expecting normalization to be something above, if not well above 600. But what you're thinking about normalization, when and how does that base 600 become meaningfully increased? And what are the factors there?
spk04: Well, I think it's a factor for a couple of things. Again, if anyone goes back as you've been with the stock since it's been a stock, you know, we've compounded our EBITDA 10% a year pre-COVID. So, like, we're doing the right stuff with our aqua business system, organic investments, new product development, and an M&A. So as you keep adding that up, faced off against the headwind of, you know, we will have margin compression, or maybe we won't, but I would think it would be very prudent to assume From an investor standpoint, it would be margin compression. Is that out a couple years? You know, just as those two intersect in exactly what number that, you know, we've margin compression normalizes.
spk09: And then everything we do is upside.
spk04: It's just hard to say, Dean. I would at least plan 2024, just as we've given numbers here this morning.
spk08: But, Dean, as you know, there's just so many variables. And right now, with the world with interest rates and everything, there's just
spk09: normal market dynamics, we're doing what we can.
spk08: We obviously every day work to make sure that there isn't a normalization impact.
spk06: Great. Just last question for me, and then, Bill, from a historical context, I actually covered AdCorp in its prior life when it was part of the Tyco portfolio. I go way back, and that's the degree of confidence historically that you've always been able to pass through higher raw material costs 100% to customers. So that's been proven. It's just some context in color around what was going on in the steel products. It was really interesting that you say that some of the customers were holding off in in that period of declining price. But what are the lessons learned? It seems to have rebounded in April, and any color there would be helpful.
spk04: Yeah, so again, I'll kind of do reverse. It has rebounded, at least that it's, again, without being too specific for April, that we're just wrapping up and getting into May as we close the books. It's more in the flat versus down. I think David mentioned 20% in the last quarter. These are rough numbers. I think it depends on what type of steel and so forth. But steel prices went, for example, hot rolled directionally around $1,800 a ton to less than $1,000 all here in the last couple of months and then bounced back up $1,200, $1,300. I haven't tracked in the last week or so. And, you know, our buyers are efficient. They need to buy. These are a lot of must-stock products. But if you're on the industrial side, for example, with a solar farm or something else, and you can hold off a month or two, it obviously, you know, they get the forecast to make economic sense. And then on the electrical side, it's more of a must-stock product, for example, with metal conduit. But again, a distributor that probably was trying to buy ahead just to make sure they could keep stock in this precarious supply environment, all of a sudden go, hey, let's hold off for two weeks. Just one week of inventory in a 13-week quarter is 7%, 8%. So you see where all of a sudden... hey, let's cut a little bit, it's enough to swing that number and that all is, you know, between our safety and infrastructure business and electrical is a large portion of our business still. So, but as David mentioned in prepared remarks, you know, I think the steel costs from what our forecast, they are kind of moderating at this level. And as we go into, you know, kind of spring buy and stuff like that, we're starting to see the demand pick back up. And the last statement I think David wants to add, again, the other parts of the market were just amazing. I mean, we were up 12%, as David mentioned. So I think well above what anybody would say is typical market at this point.
spk08: Dean, the other thing I would add is that was the cost of steel that's making that fluctuation, not necessarily the price and the market of our products, because obviously there's other inflationary factors from freight and labor and energy and you name it. So it's not like there was a correlation in pricing. It's just more of a delay if people can reduce stock and so on and so forth in this quarter.
spk06: That was really helpful. Thank you.
spk09: Thanks, Dean Kaplowitz with Citigroup. Your line is open. Good morning, Andy. Good morning, Andy. So maybe I can follow up on Dean's question around price. You just raised guidance again by 40%.
spk00: Maybe you give us a little more perspective on your price-cost spread. It doesn't seem to be going down still despite.
spk09: I think last quarter you mentioned that competition. We're starting to discount more.
spk00: Maybe you can talk about lead times, you know, the overall competitive environment you're seeing.
spk04: Yeah, so I think, Andy, to your point, overall, you're correct. Margins have not gone down. I think we built that in not knowing what would happen. And, obviously, by the way, in some cases, you know, margins on some products are still going up. So from there, I think lead times have continued to get a little bit better. And, again, I'm giving directional numbers. five, three to four. So I think slowly the market is getting back to normal. And that's why both the balance of we don't think next year would be as strong. Obviously, we hope and wish and will drive to be in another, you know, almost one point three billion. But I don't think that's proven from an investment. And just knowing where we are now, it's not like margins or pricing across every product with every competitor in every region is going to collapse in the next six months. Or we feel comfortable enough to give a preliminary estimate of $800 million to $900 million for next year.
spk00: That, you know, forward estimate. But let me maybe ask you a follow-up there. What are your sort of assumptions at this point into that $800 million to $900 million? What does the market look like? What does price of extra color you could give us would be helpful?
spk04: Yeah, good question. So I will share that we actually did a bottoms-up, but you've got to watch for a lot of false precision here. In other words, to your point, Andy, doing all those estimates. So I think normal market, 2%, 3%, 4%, low to mid-single-digit organic growth, Seems to me very logical when I look at how strong Dodge is and ABI and all the other indicators, like everything's positive from that standpoint. And then it's an assumption by each product line, but some compression of margin. In other words, hey, assuming it's going down versus up, that leads to that number. And then to say precisely how much price, Sandy, it's by product line.
spk00: Then just maybe one more quick one. You obviously upped your sharing purchases. Maybe just talk about sort of the M&A market that you're seeing now. Obviously a lot more volatility in valuations these days. You still think you can sort of get your normal bulk on strategy this year moving forward?
spk04: Yeah, without never – the challenge – and then I'm going to say a definitive strong yes. The challenge is it's binary. In other words, we can get down to the deal and all of a sudden have a disagreement on working capital pay or something. And it's just at the point of it doesn't make sense if we're going to not have deal fever and keep to our values and our business system that you can never absolutely know in a deal. But I would reemphasize again – There's a lot of deals out there. We've doubled down on the size of our team. We have the balance sheet to make this happen, the cash flow, and therefore the bolt-on acquisitions and maybe even slightly larger ones than we've done in the past that are still strategic, synergistic, debt-responsible with our management bandwidth, I'm relatively comfortable with that we will achieve.
spk00: Appreciate it.
spk02: Thanks, Andy. Next question comes from the line of Chris Moore with CJS Securities. Your line is open.
spk03: Good morning, guys. Hey, good morning, Chris. Good morning. Good morning. Thanks for taking the time. Maybe I'll just beat this pricing question to death. But when PVC pricing really increased sharply in calendar 21, it seemed like the conversation with end users was, was much more about guaranteeing on-time delivery than pricing. Has that dynamic changed at all?
spk04: add some in other words there was no discussion of just of price say say no but it was just can we deliver what confidence do you have you know in a customer that we will our say-do ratio because it was all over this place i think chris the earlier questions where you know i'm saying it's two to three three to four weeks again on delivery um prices are more of a consideration there but it's still the value package of confidence and delivery and then the other things that core really does well with the one order one delivery one invoice um you know our reputation and so forth that's helping keep the market strong at the moment but not as much on pure supply demand and i would say one thing chris you know that
spk08: product line, the PVC HEP product lines would be in that 12% growth we saw in this quarter. I would say the demand side is probably even stronger than what we thought of maybe six months ago, given utility spend on putting their electric lines underground, all the continued residential construction, data center construction, what have you. The end market volume there is still really strong. So there's strong demand to Bill's point. I think that it's still an important aspect of getting the items on time.
spk03: Got it. Very helpful. Just one more on PVC. A little bit longer term, what are the puts and takes for PVC pricing never giving back too much from current levels?
spk04: well our our job both i say for our customers and for our shareholders is to provide a value equation that price isn't the largest thing just like if anyone orders online you know it's the simplicity of dealing with you know clicking a button and getting your product the next day and so forth so I would aspire that we never give it back, but we do have competitors out there, and it's, you know, a competitive market, and how they react, you know, there is that consideration that we'll have to factor in. So I think, Kristen, it feels weird to the CEO to say this, but I think factoring in some is just prudent. Now it's a question of, I think, being asked of, you know, when does that occur, and how much comes back, and that's just tough to say so at this moment. But at least we're comfortable enough that, again, besides raising this year substantially, putting a first pin in next year that's above the $600 million that we had before.
spk03: Got it. I know it's a long lead time in terms of people being able to ramp up on PVC manufacturing. Are you seeing anything on that front in terms of any new – supply capabilities coming into the market?
spk04: No, I, you know, again, I put the asterisk there that my competition does not call me and tell me about what they're doing internally, but we have not seen anything in the PVC. And again, I can't speak for somebody has that plan or they plan on adding a line or something, but it's challenging. In other words, even somebody in the industry, would have to have space in one of their factories, would have to have the silo space, would have to have the rail car space, would have to have the blender capacity. So even there to say, well, I'm just going to add one more line and have seven lines versus six is not a simple task even for somebody already in the industry. So that's why back to our confidence in raising next year's estimate more in the 800 to 900 range than the 600 is we don't see supply-demand changing dramatically next year. Got it. I'll leave it there. I appreciate it, guys.
spk02: Thank you, Chris. Your next question comes from the line of Victor Kong with Credit Suisse. Your line is open.
spk01: Good morning, everyone. Thank you for taking the question. John Walsh. So my first question is, can you talk a little bit about non-region-ready demand trends for steel versus PVC product in the quarter and in the outlook?
spk04: Yeah, I think, Victor, if I understood your question, I would say almost everything void of PVC is non-resi. So that's kind of simple. Therefore, steel is all non-resi. I'm simplifying, but basically 90 plus, 95 plus percent. For PVC, because we put the, not we, but the PVC content is used for like underground lines going into a sub-development. and or from the sub-development into the house, that market is probably 30%, 40% residential, and then the other 60% is non-residential. But PVC is probably the only residential product. And our major contributor to utility.
spk08: Yes. That would be the third sub-part of there.
spk01: Thank you. And a follow-up question. Are you seeing any change in competitive dynamics around pricing from smaller suppliers specifically?
spk04: No, I don't think so. You know, I think everybody has their own value equation and what they're trying to do to go to market and so forth. But, no, nothing jumps out.
spk08: I would say that everyone is really struggling with higher input costs, whether it's, You know, the stuff that makes up the product itself or transportation or labor, you name it.
spk09: I think a lot of people are starting with a high input cost.
spk08: So I think that the mindset of a lot of industries right now is, you know, around pricing and making sure that they're holding or maybe able to expand the margin slightly.
spk04: Yeah, I'll just double down on David's comment that I think – We've done a good job being the leadership team and the management at Accor, but communicating that even in the past to go, well, what's steel cost or what's PVC? As each of you investors understand from tracking other companies, there's so much. Freight costs up over 40% and labor and what's the cost of lumber for a crate? that we've done a pretty effective job of accurately communicating to our customers that there's a lot more cost input than just what's copper, steel, and PVC at the moment. But I think our competition also understands that and has to adapt to that to keep in the business.
spk01: Okay. Thank you for the question. I'll pass it along. Cool. Thanks, Victor. Thank you, Victor.
spk02: This concludes the question and answer session. I would now like to turn the call back over to Bill Walsh for closing remarks.
spk04: Before we conclude, let me summarize my three key takeaways from today's discussion. First, Q2 was a great quarter, and we have a strong outlook for 2022. Second, we are executing our capital deployment model with $325 million deployed in the first half of this year. Third, we have a bright future ahead, and we're committed to growing and building Accor as a strong, long-term franchise. With that, thank you for your support and interest in Accor, and we look forward to speaking with you during our next quarterly call. This concludes the call for today.
spk02: Ladies and gentlemen, thank you for your participation. This concludes today's conference call.
spk04: You may now disconnect.
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