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Operator
Good morning. My name is Mandeep, and I will be your conference operator today. At this time, I would like to welcome everyone to AtCourt's second quarter fiscal year 2023 earnings conference call. All lines will be placed in a listen-only mode. After the speaker's remarks, there will be a question-answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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.
AtCourt
You may begin. Thank you, and good morning, everyone.
spk04
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. Adjusted EBITDA is a non-GAAP measure. Reconciliations of non-GAAP measures and a presentation of the most comparable GAAP measures are available in the appendix to today's presentation. With that, I'll turn it over to Bill.
Bill Waltz
Thanks, John, and good morning, everyone. Starting on slide three and our results in the second quarter, I'm pleased to share our earnings performance, which was slightly better than our expectations and reflects the strength of our business model. At a high level, Volume in the quarter was up 4% in line with our expectations for mid-single-digit volume growth for the full year. As expected, pricing continues to normalize versus the record highs of last year, which drove the year-over-year change. Net sales, adjusted EBITDA, and adjusted EPS all increased sequentially from the first quarter. Overall, the team delivered solid results. Additionally, cash flow has been very strong in the first half of the year, allowing us to continue to execute our capital deployment strategy. During the second quarter, we repurchased $119 million in shares, and we've continued to actively repurchase shares in Q3. While also investing in our conduits of growth, we are encouraged by the positive trends we are seeing so far in 2023 and we've updated our outlook for adjusted EBITDA and adjusted EPS for the fiscal year. I would like to thank all of our employees for everything they do to support our customers. It is because of their tireless efforts that Accor is able to achieve the results and success that we continue to deliver. Their dedication reinforces my confidence in the future. With that, I'll turn the call over to David to talk through the results from the second quarter.
AtCourt
Thank you, Bill, and good morning, everyone.
Bill
Moving to our consolidated results on slide four. In the second quarter, net sales were $896 million, adjusted EBITDA was $276 million, and adjusted EPS was $4.87. We expect further normalization of our business in 2023 as compared to last year's outperformance, but are pleased with our margin performance in the quarter with adjusted EBITDA margins of 31%. While this is down year-over-year versus previous record highs, it is still a very strong and healthy level. Turning to slide five in our consolidated bridges, the overall quarter was in line with our expectations for revenue and slightly favorable for our expectations for earnings. Volume was up 4% with S&I out more than 20%, mainly due to increased mega project activity. PVC volumes were down double digits in Q2 when compared to our strong FY22 Q2 outperformance, resulting in unfavorable mix for the quarter. Excluding the PVC impact, ACOR's volume would have been up close to mid-teens with a solid incremental benefit. The year-over-year PVC volume reductions were mainly for utility projects on the West Coast and the expected slowdown in residential activity. Contrasting the year-over-year reductions, PPC volume was up versus pre-COVID levels and up 14% sequentially from Q1. One new item to call out on this page is the introduction of an adjusted EPS bridge which demonstrates the progress we are making toward our goal of greater than $18 per share of adjusted EPS in 2025. On this bridge, we've also isolated the impact of the solar credits related to the Inflation Reduction Act that began in calendar 2023. As we've mentioned previously, the majority of this credit related to the manufacturing of torque tubes will be passed through to our customers. Moving to slide six in our segment results, margins compressed in our electrical segment with the previously mentioned pricing normalization and lower volumes in our PVC-related products. However, we saw a solid margin growth on this S&I side. Our S&I business had 15 percent growth in adjusted EBITDA with adjusted EBITDA margins of over 15 percent in the quarter. S&I volumes were up 20 percent in the quarter led by the increase in demand for our metal framing and solar-related products. Additionally, our metal framing, cable management, and unit construction businesses are well positioned to capture the growth in megaprojects both in the U.S. and internationally. Our product line diversification and the resiliency of our business model enables our ability to execute our strategic plan through various market cycles and macroeconomic conditions. Our products are integral to the construction lifecycle across all verticals. They're supported by key megatrends, and we have deep customer relationships, all of which give us confidence in our value proposition as we move into the future. Moving to slide seven, we're pleased with the strength of our cash flow and balance sheet. In the first six months of fiscal 2023, Our cash flow from operating activities was 116% of our net income over the period and up 150% compared to the first half of fiscal 2022. As Bill mentioned, we've been executing our capital deployment plan by investing in our business and repurchasing shares. The strength of our cash flow and balance sheet provides a strong foundation for our company.
AtCourt
With that, I'll turn it back to Bill.
Bill Waltz
Thanks, David. We are pleased with what we've accomplished in the first half of this year, and we're excited about what lies ahead as we execute our three conduits of growth highlighted on slide eight. Our M&A pipeline remains robust both in North America and Europe. Accor is well positioned as a buyer's choice given current market conditions and the strength of our financial profile. Our category expansion initiatives related to solar and HDPE are progressing well, and we've expanded our assembly and service capabilities to better support some of these larger projects, both in the U.S. and around the world. New product innovation as a percent of net sales reached 9% in the second quarter, and our innovative MCGLI platform continues to be recognized and well received in the marketplace. These three platforms are pillars of our strategy to drive results in the back half of this year and into the future. Moving to our outlook on slide nine, given the strong performance we have delivered so far in 2023 and the positive trends we are experiencing, we are increasing and narrowing our expectations for adjusted EBITDA and adjusted EPS. I'm incredibly proud of the team, strategy, and processes we have in place, and I have full confidence in our ability to achieve our goals for the future. With that, we'll turn it over to the operator to open the line for questions.
Operator
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.
AtCourt
Your first question comes from the line of Dean Dre from RBC.
Operator
Your line is open.
Dean
Thank you. Good morning, everyone.
Bill Waltz
Hey, good morning, Dean. Good morning, Dave.
Dean
I was hoping to get some more color and hopefully some specifics on the pricing dynamic this quarter. This is all part of the normalization process. To be clear, that down 17% essentially matched our estimates, so no surprises at the headline level. If you could take us through the components and the inputs on the pricing dynamic here. I always look at it in kind of three buckets. So, how was market demand? And then the second bucket, the supply side capacity at ADCOR, maybe some color on backlog. And then thirdly, what's going on on the input cost side? You know, the resins and steel and so forth. So, if we could start there.
Bill Waltz
Great question, Dean. Obviously, a couple parts to that. I'll start with, as you mentioned, and we did in our pre-prepared remarks, we're basically right on track. If anything, slightly better, I think, because, again, we exceeded anybody's expectations for the quarter. We're raising guidance. So, compliment to the team across the board. Market demands are good. You know, and then, you know, like, if you look at, I think, what David mentioned, you know, like, even PBC, sequentially up 14%. And so I'm just repeating David's comments. If you go back to pre-COVID where everybody was trying to buy as much as possible during the COVID period, if you go back and look at, like, our fiscal Q2, there's higher demand, what we're selling, for example, in PVC, than any quarter in our course history going backwards, you know, yeah, pre-COVID. So, you know, overall, things are going well. I would say, just in case anyone else asks, You know, buyers are buying just what they need almost to the, you know, your future questions of, you know, supply is coming in, work, you know, and so are our competitors, by the way. Shipping pretty much on time and things like that. So there's no need for somebody to do a, you know, spring buy and so forth. That actually gives me optimism. In other words, there is no extra supply in the channel because people are buying as they need it. Therefore, you know, the next quarter and so forth, as we give guidance, this quarter should be good, and I'm optimistic for future years. So, market demand overall good. You know, nothing lazy, but tough to wholly solid. Supply is good, both us and our suppliers. Input costs are kind of all over the place, Dean, and I say that from a standpoint of if you look at things like steel costs, from a year-over-year, perspective, they're down 30 percent. But if you look, like, from the first quarter to the second quarter, it's up 20 percent. And I'm starting to see, now this is me projecting, steel costs go down again. So, it's all in what time period? Same thing with, like, copper, down 10 percent year over year, but up 12 percent quarter from Q1 to Q2. And then PVC has dropped. Literally, it's down almost the input cost to us. down almost 50% year-over-year and 25% just from Q1 to Q2. And I expect that, again, these are market forecasters continue to go down a little bit. But, you know, again, as you know, Dean, and I think most of our shareholders know, the biggest thing that controls our profit is just supply-demand in the market. Second thing is accordability, which I think we do really well, shipping on time, co-loading all the value we bring. Third thing is the input costs and us keeping up. That's not as big of a factor on how we deal market price and so forth. So hopefully, Dean, I answered all your questions in that.
Bill
The only thing I would add to Bill's comments is on the S&I side, when you look at these big manufacturing plants, megaprojects, and whatever, we've always said we have really good content there. You have metal framing. We have wire baskets, so on and so forth. And you see that, you know, 20% up in volume in SNI, you know, add in some solar, we're starting to see the results of all those projects.
Dean
That's really helpful. And just a couple of clarifications. So it sounds like lead times are now back to normal. And that would also suggest that backlogs have come in and are kind of at normal level. So if you just clarify those. And then broadly, this question comes up a lot and it gets asked regularly, but just how much of the price do you expect to hold on to? Because, you know, we hear PVC down 50% of the input cost, but certainly your pricing is much better than that. So just, you know, the question about holding on to price. Thanks.
Bill Waltz
You know, I'll start, and then I think David may want to. Now, I would think of pricing in general. You're right. Our pricing is not down 50%. It's down, but we are doing better than expected. I would refer everybody, and our best guess still is what we put in the November earnings deck to go what pricing we think we give back and how that bridges to the future, how that bridges to $18 plus EPS. And I would say we're two quarters in to a three-year plan, but we're as comfortable today as we were in November when we put the plan together. So everything's really, I'm quite frankly, very proud of the team. Oh, it's just trying to look into a very murky crystal ball and call it shot by shot. And we are on track, which is the Accor business team and an amazing set of leaders.
Bill
And on the backlog question, Dean, you probably have two different sets. So the flow products are major product categories that we have. Our backlog's back to, I would say, somewhat normal. And remember, that's like two weeks. It's like two to three weeks. It's not much backlog. And then when you look at more on the project side, where we talked about some of these major projects and whatever, and international, backlogs are up as you would expect that they would be.
Dean
Great. And just a last question over on the cash flow side, which is exceptionally strong. David, just take us through the dynamics there. What's been the difference maker? And I appreciate that bridge that you gave us as well. But just the conversion on operating cash to free cash flow is much stronger than what you've done seasonally. So just help us with some insight there, please.
Bill
Yes, Dean. It's actually fairly simple and straightforward. Last year, we were building working capital throughout the year. And basically now, as your pricing comes down, some receivables will come down. I think our inventories are in really good shape. So at the end of the day, the major delta is in the fact that we've taken out some working capital versus investing in working capital.
AtCourt
Great to hear. Thank you. Thanks, Dean.
Operator
Your next question comes from the line of Chris Dankert from Loop Capital. Your line is open.
AtCourt
Hey, morning, guys. Thanks for taking the question. Good morning, Chris.
Chris
Yeah, I guess if we could dig into S&I a little bit. You cited the megaprojects. Maybe you could give us a little more context, just exactly where some of the wins are coming from. And maybe just to kind of expand further, how are DAWs and other stimulus is also kind of rolling through the P&L or kind of what you expect for the rest of the year there?
Bill Waltz
Yeah. So, Chris, I'll try to give you as much color without saying specific customers and or it's hard to say the city because then it kind of goes back to the global project there. But as should come no surprise to anyone, a lot of investment projects, not just in the United States, as David called out in the pre-remarks, but across the globe, the Middle East, Europe, in the States, whether it's data centers, chip manufacturing, startup of EV battery places, and so forth, and the list goes on. And what we found complements to our international team, complements to our, I say our domestic team, but here in the States, is the value add of us going in and be able to work directly with the manufacturer. We're still working through distribution. We sell it. But the partnership of things like Unistrut, the brand that's been around now for 100 years, well-known, consistent across the globe, we're doing things like kitting and so forth, where we're bringing it all in, setting up a job site. And we're winning a lot of jobs there, a lot overseas. So again, Middle East, Europe, and so forth. that are growing, quite frankly, rapidly. We're putting a full team together in areas like that.
Bill
So, Chris, like our value proposition with our construction, our international teams, where you can do more of the fabrication or so on and so forth with sub-assemblies off-site so that you don't hold up the site itself. I think that value prop is resonating quite a bit with the end users, so.
Chris
No, that's great color. Thank you so much for that. And maybe we could just dig in a little bit. You know, obviously, the M&A has been pretty impressive here. Can you just kind of update us on the status, the integration there and kind of, you know, if everything's on track with what you've been expecting from Talon, Poly, and Elite?
Bill Waltz
Yeah, so overall for our HDP acquisitions, which are the ones you mentioned, everything's on track. The team's doing a really good job there of integrating. And when I'm saying integrating, bringing them into our culture, ERP systems over the next year and so forth, but also sharing facilities. In other words, it doesn't make sense to ship if we had a facility in Texas and we had a facility in a different state, you know, to have one in Texas ship past the other one versus let's move the production around. Really great team coming together, sharing best practices, very optimistic for the future that we will hit or exceed our numbers for our integration models. And as I assume either you know or David's explained in previous quarters, you know, obviously they're pretty synergistic, well above our weighted average cost of capital. So everything's looking along just as planned again.
AtCourt
Good to hear. Well, thanks again and congrats on the quarter. Thank you, Chris.
Operator
Your next question comes from the line of Andy Kaplowitz from Citigroup. Please, your line is open.
Andy Kaplowitz
Good morning, everyone.
Operator
Hey, good morning, Andy.
Andy Kaplowitz
Miller, David, can you give more color into your volume assumptions for the rest of the year? Is the deceleration in year-over-year sales in Q3 that you're guiding to versus Q2 all price? Are you still thinking mid-single-digit volumes for the year overall? And have you seen any new incremental signs of destock? As I know you're aware, one of your competitors talked about a little bit of distributor destocking that hit their order profile late in their calendar Q1.
Bill Waltz
Yeah, Andy, I'll start, and then obviously David may want to add. Our assumptions are to continue to have mid-single-digit growth and volume. Now, pricing, as we've called, for example, on some products will still go down. Revenue, I would look at the last page of the prepared remarks on what that means for Q2 or Q3, excuse me, down 10 to 15%. But that's because of the pricing and a question Dean asked where like, hey, steel costs are down dramatically, PVC costs are down dramatically. We're still making good, think of it as gross margin, but the revenue line down some. Volume continued to go up. And I would claim we do not have any destocking. And I would reference that to go 14% up sequentially, quarter over quarter in PVC. And I'm using PVC as an example, you know, up to pre-COVID levels. Now, what I do see, you know, whatever, is no one's stocking up. There's no one driving to put pre-buy in just because, you know, even customers are listening to this call. The revenue is going, you know, the pricing is going down a little bit. So there's no, there's no incentive when, you know, some manufacturer like us can deliver a 1 time to put an extra 2 or 3 weeks of inventory in. But that's actually good news. If you look at the way I am glass at full. the future. We're going to hit our numbers, we're going to grow low single digits to mid single digits in volume, and there's no artificial buy-up of distributors now as we go into, say, fiscal year 24. Hopefully that answers the question or if there's follow-up, Andy.
Bill
Yeah, Andy, I mean, we are at So when you look at PVC, for instance, I mean, inventory levels would be lower than they were last year because last year we had talked about Q2 and Q3 where people had bought, I would say, in addition to what they were seeing because they had multiple orders out there, so on and so forth. But we're looking at this more sequentially and seeing what distributors are doing. And like Bill had mentioned, you know, that's a positive trend.
Bill Waltz
And Andy, one other thing. When we're making statements like this, there's lots of additional backup material that's And I forgot the precise number that's out there with the association of building contractors, but within, like, point, 2 months, the contractors backlog is as strong as it's ever been. I think it's like, I said, down. From, like, 9 months to, like, maybe 8.8, give or take, but basically, you know, there's a lot of indications. Oh, and to a question asked earlier that probably did an address to something from Chris. is a lot of the stimulus, still the states are trying to figure out how to fund it. So again, you look out into future years and say, hey, when this stimulus actually hits, that people can spend it, i.e. the states, there should be additional pickup in volume and so forth. So we're optimistic, and that's why the infamous $18 plus EPS is definitely in our targets. We're delivering that plus now, so.
Andy Kaplowitz
Yeah, for sure. That's very helpful. And maybe just to follow up to that, obviously you guys follow Dodge Momentum, ABI, things like that. You see DMI, it's coming down a little bit sequentially, but still up 11% in April year over year. So maybe if you just sort of parse out for us the markets overall. I think last quarter you cited data center, chip fabrication facilities driving your results. Are you still seeing that? Are you seeing any areas that, you know, maybe you're a little bit more worried about on the non-res side, or just as you said, contractor backlogs are strong, so across the board, things are still okay?
Bill Waltz
I'll start with the key takeaway. Contractor backlogs are strong, and we're still optimistic for the future.
Bill
And I say one other thing, too. Remember, too, other manufacturers' backlog that we will eventually hook into is at record levels, too.
Bill Waltz
Oh, and one more, and then I'll get to the parts and the specifics. Andy, the other thing I hope every shareholder understands is the amount of self-help. You know, like, in other words, to go with those three conduits of growth and go on our expansion in HDPE, our expansion into global megaprojects. There's other things, like we've talked about, the RDCs and literally becoming the one-stop shop instantaneous. Those things and other things we're working on, we're just not ready to pre-announce, give us huge confidence, even if down markets, that we will drive forward and continue to be successful like we have been for the last half decade and plus. Now, Andy, to your specific thing, obviously, I say obviously, but residential markets are down. Non-residential, almost all commercial things we're expecting for this year to be down. Industrial is probably like a push. Healthcare continues to be up with investments. And then, as you mentioned, Andy, the things that don't get caught once in a while, like in a Dodge square foot and so forth, is, you know, utilities and all this infrastructure build. You know, as I mentioned in an earlier question, whether it's chip manufacturers across the globe, whether it's EV charging stations and battery charging stations and data centers. We're finding those markets, and I would assume other people in our space are really strong right now. So that's carrying, you know, the business forward here.
Bill
And then one last thing, whenever you look at, like, Dodge starts, whenever you have a predominance of these mega projects, the starts are still important, of course, but then you might have a start, but these projects go on for multiple years. So you do see business for a much longer duration than you would, say, a start on, an office building or something like that.
Andy Kaplowitz
Helpful. And then last question. You mentioned strong growth in solar-related products in Q2. Can you give us a little more color how solar is contributing to your performance? And we know you have a Tortube facility coming online in Q3. Is it possible to quantify how much incremental growth your solar business can have in the second half of your fiscal year maybe versus last year or the first half of this year?
Bill Waltz
David, I know the numbers. I'm just hesitant. I would say it gives us strong confidence. Well, look at S&I, for example. Now, global makeup projects hit it, but literally S&I, shout out to that organization, when they're up 20% year over year, solar will be a good portion of that in global makeup projects. Those two things are what's driving above market rate.
Bill
And I think it's probably more of a story of FY24 than FY23, as you're looking at The factory's coming online. Obviously, that takes some time to get it started up and so on and so forth. So I really feel like we'll be talking about this in our fourth quarter when we give guidance for FY24 and be a much bigger part of the story.
AtCourt
Appreciate all the color, guys. Thanks, Andy. Thank you.
Operator
Your next question comes from the line of Chris Moore from CJS Securities. Your line is open.
Chris Moore
Hey, good morning, guys. Yeah, maybe we just talk a little bit more about HDP. I know you said the integration is going well, but could you maybe talk a little bit more about the market dynamics specifically there and, you know, what your expectations are versus, you know, I know it's an area where potentially lots of growth, just kind of maybe get an update there from a market perspective.
Bill Waltz
Yeah, so first I'll start with short-term growth. Like some other markets, I hate to even get into the infamous weather, but there were obviously storms on the West Coast and things like that where these are products being put underground. So, you know, average for this quarter. It wasn't like, oh, my God gangbusters, but all good. Totally on plan as we go forward for the year. If not, I think there's slight upside work to our business models. And so forth, and then talking to our team and talking to customers. Very optimistic for the future because this ties back to and I'm quoting a number. I think I'm right on, but the bead, which has an acronym to it, but for putting in fiber optics, you know, that was like. 65Billion dollars allocated so that's that's where, like, David mentioned just a moment ago with solar. It's really a story I think you're going to see play out in next fiscal year. Not that there's any issue now. We're hitting numbers, integration going well, just great people. I mean, half the thing I love with teams is what's the talent we've brought into the family. So everything on track. And I would also tell you, like, as I'm traveling, out with customers unsolicited. Again, can't get too specific. I'd be with a customer just going, hey, how's it going? And they're saying, we're on plan. And then they'll make a comment, you know, as the weather breaks, if they're in north, we're really excited about this future growth in HDP. So like unsolicited, you're hearing comments there from customers to me on the, you know, the upside opportunity. So long-winded story to say everything's totally on track and optimistic for the future.
Chris Moore
Got it. Very helpful. And maybe just my second one. Recognizing that, you know, all things being even, distributors like higher prices. You know, commissions, percentage of revenue is what they live for. How much conversation are they having with customers regarding the margin that Atcor makes on its products, especially, you know, PVC conduits? Do you even hear much on that front?
Bill Waltz
No, I don't, Chris, with the following things. In fairness, I haven't really asked the question yet. But what I would tell you that we've quantified in the past is if you add up all the products at CoreSells and you add up all of our competitors and look at a cost of ability, it is low single digits. So at the end of the day, whether the price of just PVC conduit, steel conduit, armored cable is 2X or 1X, it's not going to change. the overall cost of ability just by the math alone. It's more about do they still labor is the biggest challenge, the biggest kind of governor of growth in the industry, not the backlog, not the future incentives. And therefore, obviously making sure a product comes on time as quality is important. And then where we're winning across numerous things is our new innovations that save labor time. And that's why you're also seeing Accor at its highest levels, 9% new product vitality. Who would have thought for an industry like this that you would have this level of new product vitality? And that's a compliment to our team working with our customers to come up with new things that save labor and are safer to install. So long-winded answer, Chris. I don't think there's any concern there.
Bill
Yeah, and Chris, I would also say that our co-load strategy through our distribution, whenever you're able to put multiple products on the truck and deliver on time at the right time, that service, the ability for our construction site to utilize that labor on construction as efficiently as possible is much more important than whatever the piece price of whatever part of our products would be.
Chris Moore
Perfect. I'll leave it there. Thank you, guys.
AtCourt
Thanks, Chris.
Operator
Your final question comes from the line of Alex Regal from B. Riley. Your line is open.
Alex Regal
Good morning. I think you said that the PVC volume was down for utility projects on the West Coast. Was this more a trend or was it weather or was it just timing of projects?
Bill Waltz
Great clarifying question. Purely weather. Maybe timing behind the scenes that I don't know about, but no, we're really optimistic. There's projects cutting loose. And for example, Where I will mention a customer, because this is public, things like PG&E, the California utility that's committed, I think it's 10,000 miles to put above ground electrical lines of low ground. And that's, you know, over the next five, seven years. And each year they're ramping up to kind of triple their current run rate. So all public information. That gives you a feel, Alex, again, of all these secular trends that are adding up to make us optimistic as we go forward.
Alex Regal
Thank you very much.
AtCourt
Thanks, Alex.
Operator
This concludes the question and answer session. I would now like to turn the call back over to Bill Waltz for closing remarks.
Bill Waltz
Before we conclude, let me summarize my three key takeaways from today's discussion. First, we continue to expect mid-single-digit volume growth for the full year. We are increasing our expectations for full-year earnings based on the strong business momentum so far in 2023 and the robust dynamic supporting our business. Third, we're pleased with the strength of our cash flow and balance sheet. Our solid financial position is the foundation of our future growth, and I firmly believe the best is yet to come for our company. With that, thank you for your support and interest in our company. and we look forward to speaking with you during our next quarterly call.
AtCourt
This concludes the call for today. This concludes today's conference call. You may now disconnect.
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