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spk05: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the AdCourse third quarter fiscal year 2022 earnings conference call. All lines have been placed on listen-only mode. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again press star one. As a reminder, this conference is being recorded. Thank you. I would now like to turn the conference over to your host, John Deisser, Vice President of Treasury and Investor Relations. Thank you. You may begin.
spk04: 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 that 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.
spk02: Thanks, John, and good morning, everyone. Starting on slide three, I'm pleased to report that ACOR again delivered strong operating results in the third quarter of 2022 despite challenges in the overall global supply chains and labor availability. I'm also excited to speak about many of the opportunities that lie ahead for us due in large part to actions we've taken to position at CORE as a leader in our markets. We continue to execute against our operational plans as well as our capital deployment model. Currently, we are well ahead of schedule on our plans to deploy over $1 billion over the next two to three years. Within this quarter alone, we deployed over $400 million combined in the areas of capital expenditures, M&A, and share repurchases. In regards to M&A, we are very pleased to welcome the employees from both Talon Products and United Poly Systems into ACOR. These are two great companies, and we're excited about the opportunity to grow our businesses together. In addition to these acquisitions, during the quarter, we purchased a new property in the Dallas, Texas area that will be used to strategically grow our capacity for our HDPE products, as well as provide a strategic location for our new regional distribution center in the future. Heading into the last quarter of our fiscal year, we are increasing our expectations and outlook for FY22 based on the strong performance we had in the first nine months. Turning to slide four, we are positive on the outlook for our HDP products given the expected growth in 5G and broadband internet access. Building on our recent acquisitions of Four Star Industries and United Poly Systems, Along with our existing portfolio products, we believe we have the opportunity to become a leading provider in this market over the next few years through additional organic and inorganic opportunities. It is for these reasons that we expect our HDPE business to be a growth driver for Accor. Moving to slide five, we are adding new HDPE production equipment that we expect to receive in FY23 to be placed in our new Dallas facility. By purchasing this property, we will not only have additional space for production capacity, but equally as important, we plan to build a new regional distribution center. We believe the RDC will allow us to better service our customers in this region of the United States, consistent with our strategy of one order, one delivery, one invoice. This way of doing business, having the capacity and infrastructure to do co-loads and same-day pickups is what continues to differentiate Accor and supports our mission to be the customer's first choice. With that, I'm especially thankful for each of our great employees and the work they do every day to support our customers. Now, I'll turn the call over to David to talk through the strong results of the third quarter.
spk08: Thank you, Bill, and good morning, everyone. Moving to our consolidated results on slide six, net sales increased 24% year-over-year to $1.1 billion. Adjusted EBITDA increased to $378 million, which drove our adjusted EBITDA margin to 36% in the quarter, both up versus the prior year. Our adjusted EPS increased to $6.07. Turning to slide seven and our consolidated bridges. Net sales increased by $208 million due to higher selling prices and the contributions from recent acquisitions. As we've previously mentioned, volumes have been impacted by several factors. Within Q3, our volumes for metal-related products in the U.S. were down and offset the gains we're seeing in other parts of the business. These declines were driven by the steel price declines and volatility that we mentioned last quarter. Even though this quarter wasn't as strong from a volume perspective, we're still positive over the long term given the strength of some of the key forward-looking indicators, such as contractor backlogs and 17 consecutive months of positive ADI. However, total construction has been constrained by long lead times for non-aqua-electrical products in the availability of job site labor. Moving across the bridge, we're very pleased with the performance and contributions from our two acquisitions completed in Q1 of this fiscal year, SASCO and Four Star Industries. According to our segment results in slide eight, the electrical segment increased adjusted EBITDA by $84 million and adjusted EBITDA margins by 230 basis points. In our safety and infrastructure segment, net sales increased by 25% from the prior year, and adjusted EBITDA more than doubled. And now a quick update on our capital deployment progress on slide nine. As Bill mentioned, we are ahead of schedule to deploy over one billion in cash over the next two to three years that we announced in November. And we've deployed over $730 million in the first nine months of 2022. Our internal investments have increased with the addition of our new facility in Dallas, and we continue to find great companies to add into the portfolio. In fact, looking back across all of our recent deals, each of these acquisitions are performing ahead of our original expectations. This is a testament to the Accor business system and our disciplined operational focus, starting from the diligence process all the way through to several years post-integration. In addition to our M&A activity, we've been active with share repurchases in both Q3 and in Q4. As we sit here today, we've already repurchased $500 million in stock this fiscal year. This is likely our total outlook for the fiscal year, but we still have $300 million in authorization ready to deploy as we enter our next fiscal year. With that, I'll turn the call back over to Bill to discuss the outlook.
spk02: Thanks, David. Turning to page 10, given the strong results that David just covered, we are increasing our 2022 expectations for net sales, adjusted EBITDA, and adjusted EPS. With the recent Dallas purchase, we've also increased our outlook for capital expenditures. Looking ahead, we continue to estimate that FY23 adjusted EBITDA will be between $800 to $900 million. We are confident in this estimate, but it is subject to market volatility and changes in assumptions. In November, we will provide our standard outlook for FY23. As we approach the end of this fiscal year, we are very pleased with what we've accomplished, and we are excited about the opportunities ahead. With that, we'll turn it over to the operator to open the line for questions.
spk05: 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. Your first question comes from the line of Chris Moore from CGS Securities. Your line is open.
spk03: Hey, good morning, guys. Thanks for taking a couple questions. Good morning, Chris. Good morning. I know dynamic pricing is kind of one of the key strengths of the company, and volume decisions are important. often impacted by pricing. I'm just trying to understand maybe a little bit better. As volume declines, how price is tied to that? Is it different for PVC than it is, you know, kind of in other areas?
spk02: I think, Chris, I think it's the next level in the question. It all depends on what the demand is out there, because obviously we want to maximize both price and volume, and then it's just a balancing act of what What the demand is, because obviously if you dropped your price in half, it's not like in a construction market people are going to buy twice as much and assume the competitors react. So I think the team did really well this quarter. And the only other insight I would give you to volume is with steel pricing over the last year, literally dropping from its high to where it is now, 60%. Anybody in the channel probably has worked through their volume, whether that's a distributor or a contractor, just because, you know, they can see publicly, you know, what the, you know, hot rolled steel price and cold rolled steel prices are. So beyond that, non-steel things, we actually grew in volume this quarter and pretty comfortable and bullish on both volume as we go into next year and pricing is playing out probably exactly like we perceive it should be at this stage.
spk03: Got it. Very helpful. Um, stay with that theme a little bit. When you look at PVC pricing today, where does it stand relative to 12 months ago?
spk02: It's down slightly, but exactly. Oh, absolutely. Oh, versus 12 months ago. You're right. Thank you, David. I apologize, Chris, because I'm thinking sequentially. It's actually up compared to a year ago, and that's what's helping to drive the margins down. It is down, not what's your question, slightly quarter over quarter, but we, quite frankly, anticipate that, and that's why you kind of see the... the guide for Q4, the 305 to 335. But everything's working out exactly as we anticipated, ironically, other than if anything, we had an even stronger Q3, you know, with pricing and every other initiative we're driving.
spk03: Got it. And the last one for me is just, are you seeing any meaningful changes on the PVC supply side? Any reason to think Mitsubishi is ramping production or any other players are entering the market at this stage?
spk02: No, I'm not aware of an electrical conduit market. Again, my competitors and I don't talk, but no, I'm not aware of anything. And the only thing I'd say is lead times for the industry have returned to basically normal, and I think we wanted to communicate that. But no, everything is moving along, and therefore the confidence in our mind that our shareholders should have that we established – kind of a focal point, I'll say, the $800 million to $900 million. And while we're giving specific guidance in November, in the middle of all the craziness out there from possible recession to wars to anything else, we're still very comfortable with our models and us being able to deliver on numbers that we set.
spk03: Got it. I'll leave it there. Thank you. Cool. Thanks, Chris.
spk05: Your next question comes from the line of Dean Dre from RBC Market. Your line is open.
spk06: Thank you. Good morning, everyone.
spk02: Hey, good morning, Dean. Good morning.
spk06: I just want to follow up on pricing. Just as you see the price percent sequentially coming down, you know, simplistically, I've always looked at your pricing power also based upon your backlog. So as long as you have outsized backlog, then you have pricing power. So, you know, the extent you can share some color around how backlog stands today, you know, even if you want to pick a product line, um, that helped give some context about pricing and then the go forward.
spk02: Yeah. But Dean, the way I would think about it is our typical lead times pre COVID were four days and we aspire with our RDCs to get our lead times down to one day. Um, so there's going to be some real fun things we'll be able to do to deliver value as we go forward with that core for our customers. But if we're shipping in four days, implicitly our backlog is four days. And I think as lead times across all of our products from a metal conduit to PVC conduit and so forth, there's a couple of product lines that are still backlogged by months. But overall for Accor in the industries, they're not. Now, if you look out at what contractors have, that's still where your question may have been going very robust at eight or nine months. And may deviate up and down literally like a 0.1% of a month in their backlog. But that's why from indicators like that to the architectural building index that David mentioned in his prepared remarks, 17 months of positive ABI, we're optimistic for the future than I am for this year on volume, our capabilities to deliver new products to grow on.
spk06: Great. That's helpful. And then for David, look, we've seen everywhere across the sector free cash flow being below the quarterly averages, and we're seeing that here today. My guess is it's working capital build given the demand. There may be some rebates in there, but just give us some context about the free cash flow conversion.
spk07: Yeah, if you look at the operating cash flow number, it's actually a record for us. So we actually had a very strong operating cash flow month. But embedded in that, you're right, we still do have a working capital build because we still have elevated pricing, so our receivables are a little bit higher in inventories. And then we also had higher CapEx this quarter, mainly because of the investment in Dallas. and investment in a couple of our other growth initiatives. So when you take that into consideration, you know, again, very strong cash flow quarter. It just wasn't to the same level as we typically would expect in the third quarter as a percent of net income.
spk02: And then, David, if I can add without the financials, I think our aspiration is a typical year, not this year, but is to generate 100% free cash flow net income.
spk07: Just as you know, Dean, for the last year and a half, there's been a working capital build. When you look at the days themselves, we just looked at this interestingly enough. Our days are almost exactly where they were three years ago. So it's not like the days have elevated. It's really the dollars.
spk06: Got it. And then if I just last one on the Dallas facility, really interesting that it's both going to be manufacturing as well as a distribution center. How long will it take to bring the manufacturing capacity up? And are you looking at still other opportunities to add capacity by buying plants as opposed to what sounds to be more like a greenfield?
spk02: Yeah, so Dean, to your first part of the question, we'll start to see the positive impact of volume from that facility in fiscal year 2023. So both good news for our customers and a very, a market that's supposed to grow double over the next seven plus years with, you know, the different infrastructure bills and 5G networks and broadband. So good news for our customers, good news for our shareholders. and as we go forward i think anything's on the table both you know we've been obviously the most active year um with m a with the dollars we've spent and both most active year with organic investment so i would exceed both of those things continuing into our future and that's why again when you know shareholders ask us questions about the ability to deliver our future It's all these things that we've mapped out. It's just at what point do we communicate out because obviously there's competitors and so forth there. But this drives exactly why we have comfort in our $800 million to $900 million and never seen $600 million as we go forward.
spk06: I appreciate the very last point there because you saved me from asking a question about the fiscal 23 guide. So thank you.
spk08: Yep. All good stuff. Thanks, Dean. Thanks, Dean.
spk05: Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open.
spk00: Good morning, everyone. I will ask about the fiscal 23 guide. So you didn't change your 23 outlook, but you continue to put in your release that you expect PVC and other metals pricing to return to more normal levels. I think many of us are just trying to figure out what your new normal is. You said the business is trending mostly in line with your expectations now, but as we get closer to 23, can you give us more color? on what the new normal might be for PVC pricing or for, you know, electrical margins in 23 and beyond and really anything more color and what's embedded in that 800 to 900 million of EBITDA.
spk02: Yeah. So Andy, I'll start, but as you can expect, we'll give a lot more clarity in November and, I think it's an unusual thing for Adcore where most companies don't give numbers out future years besides, you know, kind of shareholder meetings of very high level. But we wanted to ground everybody. And to that fact, more details will come in November. We are seeing a slight, as I mentioned to an earlier question, I think from Chris, you know, slowdown in pricing, you know, is starting to subside slightly, but nothing significant. I would expect a slight drag over the next year to two years. But again, what we're doing internally is all these growth initiatives, some of which we've communicated. I think there's other agenda items that we already have lined up to talk about that will be a great growth initiative in November. So as we formalize those plans a little bit more, I can tell you more to come. But pricing continued to subside slightly. and then having enough growth initiatives, even with a flat market, that will control our destiny. I'm pretty comfortable with solid organic growth next year, even in a flat market, just because of the things that we have lined up in other areas.
spk00: Bill, that's helpful. And then maybe David gave some color regarding the volume declines in the quarter. It still seems like you're positive on the volume outlook going forward. And the headwinds you're seeing are mostly supply chain, labor-related, or maybe that reaction to steel price declines. But are you seeing any signs of weakness in overall end market demand? And how do you think about volume growth moving forward? I think you talked about it just now, Bill, a little bit.
spk02: Yeah, I appreciate the follow-up just to give some clarity there. So, yeah, I'll go long-term, short-term, long-term if you follow this. So long-term, We're comfortable when you look at everything, as I think I mentioned already, or David, that, you know, the ABI is up for 17 straight months. I haven't checked this, but it's probably a history of how many months of positive results and Dodge Momentum Index and the backlog out there with contractors. And as I mentioned, you know, the infrastructure bill really hasn't hit yet. And a lot of those things aren't going to show up in a square footage report if it's adding new electrical lines underground and new fiber optic lines underground so you know there's things if somebody looks at conventional metrics they will not see that will help grow the business and i'm not talking art just our business but the industry i mean there's so much here with the electrification ev charging hardening of our electrical infrastructure that exceptionally positive go short term for a second It's playing out basically as we expected. Again, Accor is in a great position right now, but at the end of the day, there's products, for example, that we don't provide like switch gear that, you know, there's four or five other people in the electrical industry that they've gone from seven, eight week delivery times to a year. That's slowing up job sites, let alone, you know, employment still tight, trying to get trades people out at job sites, especially when they have logistical issues with other suppliers. So If anything, it's Andy, it's a strange way. If we have to get all the inventory out of the channel right now, where we're doing such a great year to position us for next year, I'm very comfortable with it. And the other point short term, as I did mention, um, you know, we're still priced down 60% over the last year. You are going to have everybody in the channel. You can't totally D stock here, but if you did have an extra week of inventory at a contract site, probably using that steel before you buy new steel if you had and this is beyond conduit this is the same with our safety and infrastructure business with those you know customers and the same with a distributor so i think everybody's trying to destock as much as possible to me that gives me optimism on next year just because there won't be any type of inventory in the channel and then and if i go back to long term you have everything we talked about that's great for the industry you know from a positive tailwind and then we add on top of that everything at core's position to do as we just mentioned today for example the startup of the new hdpa facility united poly for example is a phenomenal company with great leadership but i think even there we can help invest and expand their customer base and grow with them let alone our previous acquisitions like fre and fiberglass with the infrastructure bill and like i said more things to come here in november so I'm bullish as I can be at this stage.
spk07: The only other thing I'd add on the short-term, Andy, is if you look at the jobs numbers, you know, non-res construction continues to add jobs. So in June, it was almost 17,000 jobs. So there is work out there. The backlog's there. It's just getting the people and the products to actually execute on the construction, which is probably a little bit of the headwind, you know, short-term.
spk02: Yeah, and now I'm getting – oh, sorry, Andy, one other thing. One could make the case that even if there's a slowdown in residential markets and or recession and consumer things that we need workers out on job sites. So I could make a case that if there's a slight recession, And those markets and it opens up more people to work in the construction industry where we're going to have a higher fall through rate of our electrical products. It could actually help back or so again, I think we're in a unique position with us made products, not dealing with overseas issues. lots of great growth initiatives to be really well positioned for the future.
spk07: And a couple other points on that, Andy. When you look at residential construction, you know, you see multifamily, a little bit of strength there. Certainly benefits Accor more than single family does, so I think that's a positive. And you also see in some urban centers, at least anecdotally, where some office buildings being turned into residential dwelling units, which, again, any of that refurbishment activity certainly helps our business also.
spk00: Very helpful, guys. And then maybe just wanted to follow up on the HDP condo business. You obviously highlighted it. You've been putting it together over the last year or two. Can you give us more color into how big it could get and what kind of growth you do expect in the business? I know it's probably a smaller part of your business still, but it does seem like you're emphasizing it.
spk02: Yeah, so real rough, the HDP industry overall, coming from outside consultants and so forth, is supposed to double over the next five, seven years. And that's tied exactly to all the things, including the $1.2 trillion infrastructure. So for us, without giving specific numbers, I think it can be a reasonable portion of our business. I'm not here to say today is going to be the largest or exactly in the middle, but It's going to grow, I think, with our investments and acquisitions and organically, and it's going to be strong markets to go. You know, all the fiber optic lines that, you know, having broadband access for everyone in the country, the infrastructure bill to help subsidize that. And then there's a lot of times where a customer could use either PVC conduit or HDPE. I could get into the details of that. why there's different preferences. But as we look to put electrical lines underground so they're not knocked out with storms and so forth, this will play well for both HDPE and PVC markets for us. Thanks, Andy.
spk05: Your next question comes from the line of Victor Kong from Credit Suisse. Your line is open.
spk01: Good morning. Good morning, Victor. So could I follow up and ask a little bit more about the HDP offering? I was just wondering how much of a leverage it is to the infrastructure bill, for example, if you could give a little bit more color around that, that would be great.
spk02: Yeah, it's definitely a great question, Victor. The infrastructure bill is going to absolutely help. I forgot the exact number, but I want to say there's $50, $60 billion of the 1.2 earmarked exactly to putting fiber optic lines in across the country. Yeah. As I mentioned earlier, we've had outside consultants look at it and estimate the current capacity of the industry and how much would be needed over the next five to seven years to meet the demands just of the infrastructure bill itself, and it's very promising.
spk01: Awesome. Awesome. Thank you. Could I also get some thoughts around the potential of a dividend?
spk02: David, do you want to address that?
spk07: So right now, when you look at our capital deployment strategy we put in place at the end of last year, we focused primarily on organic opportunities through CapEx, which I think we've done a really good job there. Our M&A opportunities, because we feel like there's still significant opportunities to add these companies. And we've added four yet this year, so I think it's been a strong M&A year. And then you know, not having excess cash sitting on the balance sheet, we decided, you know, we think the most effective way, at least right now, from where we are is stock buybacks. And we bought back, as of we sit here today, $500 million in the fiscal year. So really, we look at our business as more of a growth opportunity with all the, you know, mega trends that our business helps support. So we feel like at this point in time, dividends are probably not the way we want to go with capital deployment, but it's something we think about on a regular basis, and I'm not saying in the future we won't do that. It's just right now we feel like there's a lot of growth opportunities, and we want to take advantage of those right now.
spk02: Yeah, and then, David, to add, take nothing away or no foreshadowing here, but obviously in November when we give the fiscal year guidance, we'll also give capital deployment, including dividends. future expectations for stock buyback and everything else. So, again, it's nice to earlier questions. We're generating a lot of cash, and I think we're investing it wisely on behalf of our shareholders, including returning it with stock buyback.
spk01: Got it, got it. And my last question is, what is the expectation around price costs into fiscal quarter four and next year?
spk07: Yeah, so in quarter four, you know, like Bill had said, a little bit of price softening going in the Q4 versus Q3. So sequentially, you see it in our adjusted EBITDA numbers slightly down guide from where Q3 was. And in Q4, we'll give you more details, you know, when we give our official guidance in November.
spk01: Thank you.
spk07: Thank you, Victor. Thanks, Victor.
spk05: And this concludes the question and answer session. I would now like to turn the call back over to Bill Waltz for some closing remarks.
spk02: Before we conclude, let me summarize my three key takeaways from today's discussion. First, Q3 was a great quarter and we are increasing our expectations for FY22. Second, We are executing our capital deployment model ahead of schedule with over $730 million deployed in the first nine months of this year. Third, we have a bright future ahead and we're committed to growing and building Accor. With our recent acquisitions and growth opportunities in HDPE and our RDCs, we really do believe that the best is yet to come for Accor. With that, thank you for your support and interest in our company. We look forward to speaking with you during our next quarterly call. This concludes the call for today.
spk05: This concludes today's conference call. You may now disconnect.
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