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Atkore International Group Inc. (NYSE:ATKR)
Q2 2019 Earnings Call
May. 07, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the Atkore International second-quarter fiscal 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Keith Whisenand, vice president of investor relations for Atkore International. Thank you.

You may now begin.

Keith Whisenand -- Vice President of Investor Relations

Thank you and good morning, everyone. With me today are Bill Waltz, president and CEO, as well as David Johnson, chief financial officer. I'd like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or future financial performance of the company. Such statements involve risk and uncertainties such that actual results may differ materially.

Please refer to our 10-Q 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. With that, I'll turn it over to Bill.

Bill Waltz -- President and Chief Executive Officer

Thanks, Keith, and good morning, everyone. I am pleased to report that Atkore delivered strong financial results for the second quarter that exceeded our prior guidance with adjusted EBITDA of 18%. Looking at the highlights in the quarter, we delivered organic net sales growth of 5% due to improved average selling prices as well as focused sales effort in key electrical products that are specifiable and provide above-average margins. Volume was down overall with organic growth in the electrical raceway segment offset by the mechanical products and solutions segment, primarily due to project timing from our customers.

Despite the lower volumes in the MP&S segment, this business delivered strong pricing and mix improvements on a year-over-year basis. We saw accelerated benefits from our investments in productivity and we remain financially disciplined as we continue to improve our leverage ratio and do closer to our goal in the low two times range. Finally, Atkore maintained its momentum around innovation. Two products were recently named 2018 Products of the Year category winners in the Electrical Construction and Maintenance magazine.

Our super quick couple rain tight conduit and our bright rail conduit support systems. We also introduced six new products during the quarter, bringing the total to nine new products here today. Collectively, the external marketplace is recognizing the value we bring to the industry. With that, I'll turn the call over to David, who will walk us through our financials in more detail and provide insights into the quarter.

David Johnson -- Chief Financial Officer

Thanks, Bill, and good morning to everyone. Moving to our consolidated second-quarter results on Slide 3, net sales were $469 million, up 5% organically after normalizing for net acquisitions and foreign exchange. This increase is driven by higher average selling prices as well as focus effort on driving a favorable mix. Volume, including net acquisitions, was down 1.5%.

More than 100% of that decline was due to MP&S. The electrical raceway volume was up approximately 2% and volume for MP&S was down 10%, primarily from project timing year over year. To total Atkore, the net acquisition impact added just over 1% to the top line in the quarter. We incurred year-over-year input cost increases of $40 million.

Through initiatives, we successively increased our average selling prices $28 million, resulting in a net $40 million favorable EBITDA impact. We've broken out those items on the adjusted EBITDA bridge on Slide 3. Adjusted EBITDA was $77 million, up $12 million or 18% versus last year. Net acquisitions account for $1 million of the increase to adjusted EBITDA in the quarter, and accelerated productivity added $3 million.

These increases were partially offset by volume, inflation, variable compensation, and growth investments we've made in the business. Moving to Slide 4, operating income increased by 27%. However, our net income on a GAAP basis was $30 millio, down versus the second quarter of 2018 due to the prior-year gain on the [Inaudible] of $27 million. Adjusted EPS was $0.83, up 32% from the second-quarter 2018, reflecting the increase in adjusted earnings and favorable share count from our repurchases over the last year.

Moving to our segments on Slide 5 and 6, electrical raceway had another strong quarter with 2% volume growth coming from 15% growth in our focus products and then was 20% adjusted EBITDA growth. The mechanical products and solutions segment delivered additional pricing and mix improvements, which drove 4% reported EBITDA growth or 10% after adjusting for the prior-year [Inaudible]. The MP&S adjusted EBITDA margins, now back to 15%, up 110 basis points from Q2 2018 is up more than 500 basis points from Q4 2018. On Slide 7, year-to-date net cash flow from operating activities was $43 million, down approximately $10 million versus 2018.

More than 100% of the difference is due to timing and magnitude of distributor rebates and annual incentive bonuses relating to 2018 paid in 2019. We expect this impact to normalize by year-end 2019. Finally, our leverage ratio, which we define as net debt to the trailing 12-month adjusted EBITDA was 2.8 times. As we've communicated in the past, our long-term goal is to move this metric back to the low two times range.

During the quarter, we paid $21 million of principal payments, including our normally scheduled payments and an excess cash payment we disclosed in our 2018 financials. Therefore, our next recorded debt payment is now March of 2020. Bill, back to you for our guidance update. Thanks, David.

Bill Waltz -- President and Chief Executive Officer

Moving to our 2019 guidance on Slide 8, our view on the construction markets has not changed for the year and we still expect electrical raceway to be up 2% to 4% in 2019. And because of the delayed project timing that impacted MP&S volumes, we now expect MP&S volume to be flat to up 2%. However, with our strong performance compared to our prior guidance, we are raising the midpoint of our full year. Our 2019 guidance is as follows: for the electrical raceway segment we expect the adjusted EBITDA range to be between $280 million to $290 million.

For our MP&S segment, we expect adjusted EBITDA to be between $57 million and $62 million. For total Atkore, we expect 2019 adjusted EBITDA to be between $300 million and $310 million. We estimate our adjusted EPS to be between $3.25 and $3.40. Interest expense will be approximately $52 million.

Our tax rate will be about 25% for the full year. Capex is expected to be between $35 million and $40 million for the year and our fully diluted share count will be around 48 million shares. Turning to the third-quarter guidance for total Atkore, our adjusted EBITDA range is between $79 million and $84 million, and our adjusted EPS range is between $0.88 and $0.95. In summary, while Q2 was another strong quarter, we also continue to see a strong second half of 2019 ahead of us.

Customer feedback points to an optimistic non-residential construction market with a strong pipeline of projects. We expect our strategic initiatives will continue to drive favorable results and long-term success. This cannot be done without our employees who are dedicated to and focused on taking care of our customers, making the business better each and every day and driving long-term value for our shareholders. Thank you for your commitment to Atkore.

Operator, please open the line for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Andrew Kaplowitz with Citi. Please proceed with your questions.

Eitan Buchbinder -- Citi -- Analyst

Good morning. This is a Eitan Buchbinder on for Andy.

Bill Waltz -- President and Chief Executive Officer

Good morning, Eitan.

Eitan Buchbinder -- Citi -- Analyst

Good morning. It looks like you had an inflection in the electrical raceway volume. Dodge non-res building construction starts began in calendar year down in January, February and recovered a bit in March. What are you currently seeing out of non-res end markets? And has the anticipation for a lower for longer interest rates been factored into your outlook for the back half of the year?

Bill Waltz -- President and Chief Executive Officer

Yes, we're still -- Bill here and again good morning, still predicting, as we just called out, the 2% to 4% growth as we go forward, which would be slightly higher than the beginning of the year because we're not there yet and -- but when we do it, it's everything you just quoted through to go what is dodge, what's architectural billing index. But the other thing that we have is just the voice of the customer. I just came back from three -- four days in San Francisco at a national electrical distributor event, where every customer was there. And they were so bullish and they have a good record backlog, so that's why we're guiding in the 2% to 4% range, which we think for the year is reasonable.

Eitan Buchbinder -- Citi -- Analyst

Thank you. And as a follow-up, price cost was favorable for $13 million last quarter and you no longer expected it to be a headwind. You did $40 million better price and cost in this quarter. What are your expectations for the second half of the fiscal year and do you expect price cost to be a tailwind for the full year?

Bill Waltz -- President and Chief Executive Officer

Yes, probably a slight -- I'll give and then if David wants to add. Probably a slight tailwind. And the reason for that, we're -- I think we're doing well with pricing and we'll continue to do well with pricing. Just value-added proposition, the products we're selling in general.

But as we did last year, we had the challenge not the challenge but the opportunity last year of year-over-year comparables. That was when President Trump had Tweeted the 232 and we just had amazing comparables that we're now going up against. So a little bit less price relative to the second half but still comfortable enough with our initiatives that we're guiding -- we just guided up here.

Eitan Buchbinder -- Citi -- Analyst

Thank you.

Operator

The next question is from the line of Deane Dray with RBC. Please you're here with your questions.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

Bill Waltz -- President and Chief Executive Officer

Good morning, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Hey, nice quarter. If you could just give some of the some of the puts and takes in, like, what did weather pose in terms of a potential headwind this quarter and any update on what's going on in freight?

Bill Waltz -- President and Chief Executive Officer

Yes, sure. I'll start on weather now overall, Dean, I don't think -- we didn't call out a major impact. We do feel like when you look at our separate product lines, the one product that gets impacted the most would be PVC, mainly because that is hitting the underground. And so we have heard from the field that there's some pent-up demand around PVC primarily because of whether.

On freight, really, it's been fairly stable for us. It's still an inflationary item. We've talked about year over year but we haven't seen any major change in freight either positive or negative, I would say, for the last two or three quarters. [Inaudible]

Deane Dray -- RBC Capital Markets -- Analyst

Yes, got it. And, Bill -- go ahead.

Bill Waltz -- President and Chief Executive Officer

Oh, no. I was -- nothing really to add, Deane. So yes, the second question, sir?

Deane Dray -- RBC Capital Markets -- Analyst

Oh, yes, Bill, could you expand on the comments about the non-res construction? End markets, the kind of visibility? I'd be most interested in hearing about individual end markets and construction activity there and maybe some comments about the size of the projects and what that means to you about where we are in the cycle.

Bill Waltz -- President and Chief Executive Officer

Yes. So to the markets that we're seeing probably, Deane, the most growth in or opportunities around offices and hotels, obviously, things like education continue to go well. And then within offices, we're seeing a lot of data center projects. So that's probably the specificity.

I do think there is a high correlation with where we're seeing it and obviously where Dodge is also reporting now. I will admit though that remember we do sell through distributors, so our visibility there may not be as strong as somebody that's selling direct or if you were talking to, lets say, a Wesco or something.

Deane Dray -- RBC Capital Markets -- Analyst

Just last question for me on the point about distributors. Any factors in destocking, kind of sell and sell through color there? And any update on the rebate picture at this point?

Bill Waltz -- President and Chief Executive Officer

No -- it's a following things. I don't think so. The material commodities, we can all track. Copper bounces around, steel is when going down slightly over the last couple of months but not enough that if anyone was to make a big move like last year, where hey steel prices were shooting up, people were trying to buy ahead and therefore we had tougher comparables.

I think it's steady state at this point and I think there's enough optimism in the markets. And to your earlier question on whether that David answer is PVC, we didn't call out volume impacts because of weather but there was some. So I think with that backlog, distributors are not looking to destock versus, hey, we're going into the busy part of the season. Things are going exactly quite frankly as least we here at Atkore plant.

Deane Dray -- RBC Capital Markets -- Analyst

That's very helpful. Thank you.

Bill Waltz -- President and Chief Executive Officer

Thanks, Deane.

Operator

The next question is from the line of John Walsh with Credit Suisse. Please proceed with your questions.

John Walsh -- Credit Suisse -- Analyst

Hi. Good morning.

Bill Waltz -- President and Chief Executive Officer

Good morning, John.

David Johnson -- Chief Financial Officer

Good morning, John.

John Walsh -- Credit Suisse -- Analyst

Hi. So I know one of your initiatives has really been to drive kind of new product introduction. You highlighted it in the prepared remarks. Just wondering if you give us some color either around where the New Product Vitality Index stands today or kind of what the growth rate is of some of these newer products that have been introduced relative to the fleet average, kind of how much faster are they growing? Any color on there would be helpful.

Bill Waltz -- President and Chief Executive Officer

Yes. I'll send you a check later for that question. We're -- we'll give you both sides. We're still in the low single digit for vitality and we see lots of opportunity to go forward.

But from there, as we called it out, two new products that won kind of magazine articles customer -- product of the year, we've introduced -- we're almost up to 10-plus products, not quite there this year alone. Then the really interesting thing or fun thing is while we're still on low single digits, those products are growing 50%, rough number there. So we are seeing the traction and, therefore, our investment in everything from salespeople that will focus on an additional voice-of-customer to extra sales people were investing in this year to help pull the products through our distribution to our engineering customers and contractors, it's clicking along exact -- actually, we said stretch objectives and we're ahead of those stretch objectives, so --

David Johnson -- Chief Financial Officer

Yes, John, and this David. It's also critically important because it gives our reps something else -- distribution this also gives our sales people you know more to talk about Atkore and the advantage we have with our product basket. And so those products are critically important for us moving forward.

John Walsh -- Credit Suisse -- Analyst

Great. And then just thinking about the free cash flow generation here, as we think about the back half, obviously Q2 is seasonally one of your weaker quarters. Just kind of any way to help us with the cadence here in the back half.

Bill Waltz -- President and Chief Executive Officer

As part of that --yes, the second quarter is always our weakest by far quarter of the year. When you look at the -- what happened in the first half of this year, we are slightly down versus the first half of last year. The main reason for that is if you can imagine, at the end of last year, we had build up some pretty significant rebate reserves. and incentive reserves and all those sort of things because we had a fantastic year last year.

Some of those have paid out the first half of this year. We do expect that to normalize here over the second half of the year as those reserves get built up again because we are having a really good year. And therefore, the target we set of around 100% of net income, plus or minus, five points here and there, given on the year working capital and what have you to pay on commodity, we still feel strongly that that's where we anticipate this year to be.

John Walsh -- Credit Suisse -- Analyst

Great appreciate the color. Thank you.

Bill Waltz -- President and Chief Executive Officer

Thanks, John.

Operator

[Operator instructions] The next question is from the line of Deepa Raghavan with Wells Fargo. Please proceed with your questions.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Good morning. So I have a few questions. First one, your strategy to exit lower-margin businesses is paying off. Margins are obviously higher now but can you talk about how sustainable the margin list is and how much more runway there is once prices all caught up maybe by second half of this year?

Bill Waltz -- President and Chief Executive Officer

I'll start. I think, Deepa, we're -- good morning, by the way, Deepa.

David Johnson -- Chief Financial Officer

Good morning, Deepa.

Bill Waltz -- President and Chief Executive Officer

I think where we are when you look at back to our forecast, overall, the margins are in the area. Obviously internally we're still pushing. There maybe a little bit more on the MP&S side, a little bit less on the raceway from a comparable but I think we're in the range now. I mean, we had again a phenomenal quarter here, so --

David Johnson -- Chief Financial Officer

Yes, when you look at EBITDA margins of 15 for MP&S and net 19 -- 20 of raceway, we feel pretty comfortable there. And, Deepa, as you know with this business, if commodities do trend down, those percentages could bump up a little bit just because the nature of the pass through. And then if commodities go up, they could go down slightly. So I feel that where we are right now, it's a pretty good range.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Got it. OK. Second question on overall demand moderation, it's more specific to MP&S. I mean, volumes seems to be impacted by project delays.

You mentioned this quarter or last quarter two volumes are a little late. But given given all these volume impacts that you're seeing, my question is how much visibility is there as you exit this year and going into fiscal '19. I mean, pricing obviously we know you have a handle, how do you price, and how we should model for your price. But can you talk about volume visibility exiting second half? And I have one more later.

Bill Waltz -- President and Chief Executive Officer

Yes, Deepa, I'll start. I don't think with a lot of rate transparency. In other words, we -- everybody has the same data on the economy. That seems to be going along.

Our different indicators seem to be good and we do have some backlog but we're not a business that overall has deep backlogs of six or nine months of visibility. Again, the economy itself, and I'll speak for MP&S here but it's doing well. It's literally, I think, with the shortage of labor -- I was out with customers recently and it was more than just the shortage of the contractor. One of the delays is because even architects are taking orders that they haven't fully like designed, kind of winging the -- estimating the project costs and then finishing the design.

So literally from the architect on how, projects are getting delayed. And then one thing we didn't call out a lot of specificity during our kind of prepared remarks is specifically for MP&S. There were a couple of large projects last year at this time. Like in our security business that just -- we didn't repeat.

But again the team overall look at the results look at the profit and that's what gives us confidence to actually be raising our earnings.

David Johnson -- Chief Financial Officer

Yes, remember, Deepa, last -- in Q1, MP&S was around 10%. Now they're at 15%. We answered a lot of questions around when did we think we could get above that -- to that 12%, 13%. So now given the volume, the mix of products, kind of where we are with projects, we think MP&S had a very solid Q2.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

OK. So it looks like you're not implying the demand moderation was driven by higher prices. Am I reading that [Inaudible]?

David Johnson -- Chief Financial Officer

No, no.

Bill Waltz -- President and Chief Executive Officer

No, I think we're doing a great job. I have to compliment the teams. We're doing a very solid job of picking what things we focus on, where do we want to grow? One of I think our prepared remarks was how we're estimating to grow in that 2% to 4%, for example, on Raceway. But for products we're picking, specifically what we call focused products, we're up in a very solid double-digit number and that's been things like specialty cable, our wire basket and cable tray, our prefab.

And I can name a couple others where we've specifically said with our agents, with our customers, with our employees, these are higher-margin products. These are specifiable products and we're targeting and we're growing, and we're not as focused on some of the lower-margin commodity products. So, are we selecting where we go? Yes you're -- you, the shareholders, are seeing those results and quite frankly our customers are seeing the value  add that we're bringing in also.

David Johnson -- Chief Financial Officer

And, Deepa, just one additional thing -- remember in our electrical raceway, our three big product categories are still conduit, PVC, and cable. We have third-party ways of verifying what our market share is on a regular basis. So we monitor that very closely to make sure we're not just sitting here telling you that prices are [Inaudible], volume are -- we know because we're able to have that third-party verification of where our shares are.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Got it. That's very helpful color. Appreciate that. My final question is inventory in the channel.

Can you comment on if that's right size or a little out of balance at this time?

Bill Waltz -- President and Chief Executive Officer

I think as much as -- yes, great question, Deepa. I think as much as I can tell, I would say it's balanced. So I don't think -- I don't -- definitely don't believe there's an overstock in the industry by any stretch of the imagination. And if anything being that we are, there is some seasonality to construction seasons.

I think it's probably appropriate.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Thanks. I'll pass it on.

Bill Waltz -- President and Chief Executive Officer

Thanks, Deepa.

David Johnson -- Chief Financial Officer

Thanks, Deepa.

Operator

The next question is from the line of Peter Lennox-King with UBS. Please proceed with your questions. 

Peter Lennox-King -- UBS -- Analyst

Good morning, everyone.

Bill Waltz -- President and Chief Executive Officer

Good morning. Peter.

David Johnson -- Chief Financial Officer

Good morning.

Peter Lennox-King -- UBS -- Analyst

I was hoping maybe we could start just talking about on the margin. You mentioned a productivity increase. And I'm wondering what it was that drove out that a higher penetration of automation or was there something else behind that? And should we expect more to come in the rest of the year?

Bill Waltz -- President and Chief Executive Officer

Hey, Peter. I apologize. You broke up for one word at the very beginning. I got the price increase.

I just missed the beginning premise of the question. I'm sorry, sir.

Peter Lennox-King -- UBS -- Analyst

I apologize. I was asking about productivity.

Bill Waltz -- President and Chief Executive Officer

Oh, productivity. OK. 

Peter Lennox-King -- UBS -- Analyst

What drove the productivity gains on the quarter and should we see more?

Bill Waltz -- President and Chief Executive Officer

Yes, the productivity and we're aspiring to keep delivering and more as we go forward both in the second half and into 2020 just the focus. So there's not one thing there's not one automation. We -- a year ago, we did close one facility. We typically don't call out specific facility closures but we are always looking at rooftop closures as we drive lean and consolidate production.

It's kind of the DNA of our organization with the Atkore business system. A lot of us have come from what I consider world-class companies whether that's automotive companies, Danaher, [Inaudible] background company. So it's just driving the day to day, making value stream maps from their driving what Kaizens you want to go and then making sure they're sustainable improvements. I was on a call right before I left for the sales convention out on the West Coast with our best-practice lead vice president of operations, where we had literally every operations person on the call, saying how do we even continue to step up the game more.

So it's step-by-step substantial results. But David and I is -- we're also encourage organization. If they have larger projects that have good returns back to our capital deployment, it's probably the quickest turnaround a lot of times on investment. So, we're going both.

David?

David Johnson -- Chief Financial Officer

Yes, a lot of  that $40 million dollars of capex we spent, we certainly target you know a third of that if not more toward productivity projects, Peter. And to give you an idea, like in our PVC business when you can invest in automated mixing versus manual mixing, not only does that reduce labor but it increases your efficiency of products that you're able to use and the input cost is improved.  So you know uptime other mills all these sort of things you can imagine is what's the the basis for that productivity gain.

Peter Lennox-King -- UBS -- Analyst

That's great. Thank you. And then maybe since you touched on capital deployment, with leverage moving back down toward but still some ways above the two-time target, how are you thinking about M&A capacity and your pipeline from here? And when deals do present themselves are you leaning more toward one sector for the other, how are you thinking about that from here?

Bill Waltz -- President and Chief Executive Officer

Right. So I'll answer the second question first. We've publicly said that our focus will mainly be on the electrical Raceway. That doesn't mean we don't look at other opportunities but our focus will be to leverage our opportunity with our channel kind of our core business in the electrical Raceway.

Our pipeline is still solid. I think we've talked before a lot of times our targets are smaller, privately held companies. We are very disciplined when it comes to pricing probably even more so now kind of where we are in the perceived cycle, whichever way you want to think, whether it's mid psych or what have you. We're being very disciplined there.

And we also want to make sure that we have solid strategies, not just like sales synergies, which we somewhat discount the hard-cost synergies or we can add value. So, that pipeline, I would say, generally speaking, is still solid, tends to be more, I think, right now singles rather than smaller kind of opportunities. But we are going to focus on reducing our debt unless we have those couple of targets where we really want to add to our basket. And I would say that in general we're pretty much balanced where we expected to be at this point in time.

And one thing I will say is that 2.8, we would like to move that down to two and a half or lower toward the two times range. And like we talked about before, the second half of the year is usually more of a cash generator for us. So we will have more operating cash flow in the second half of this year to deploy.

Peter Lennox-King -- UBS -- Analyst

That's helpful. Thanks very much, guys.

Bill Waltz -- President and Chief Executive Officer

Sure.

Operator

Thank you. [Operator instructions] Thank you.. At this time, I'll turn the floor back to Mr. Waltz for his closing remarks.

Bill Waltz -- President and Chief Executive Officer

OK. Thank you. Before we conclude, let me summarize the four key takeaways. First, we deliver good organic revenue growth driven by strategic focus on the right product mix.

Second, adjusted EBITDA and adjusted EPS are up again double digits year over year and exceeded our guidance for the quarter. Third, our strategic initiatives, including focus on innovation, continued to deliver great results. And fourth, Atkore has increased our full-year guidance. Collectively, our team culture in the Atkore business system enables us to maintain focus on key objectives and deliver upon our commitments to our customers, our shareholders, and achieve the goals that we had set out for the remainder 2019.

With that, I want to thank you for the support and interest in Atkore. I look forward to speaking with you during our next quarterly call, and this concludes the call for today. Thank you.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Keith Whisenand -- Vice President of Investor Relations

Bill Waltz -- President and Chief Executive Officer

David Johnson -- Chief Financial Officer

Eitan Buchbinder -- Citi -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

John Walsh -- Credit Suisse -- Analyst

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Peter Lennox-King -- UBS -- Analyst

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