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Atkore International Group Inc. (NYSE:ATKR)
Q4 2019 Earnings Call
Nov 22, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings. Welcome to Atkore International fourth-quarter 2019 earnings conference call. [Operator instructions] Please note that this conference is being recorded. At this time, I will turn the conference over to John Deitzer, vice president, investor relations.

Mr. Deitzer, you may begin.

John Deitzer -- Vice President, 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 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 and today's press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. In addition, any reference in our discussion today to EBITDA means adjusted EBITDA. With that, I'll turn it over to Bill.

Bill Waltz -- President and Chief Executive Officer

Thanks, John, and good morning, everyone. I am pleased to report that Atkore delivered excellent financial results for both the fourth quarter and the 2019 fiscal year. Let me begin with our highlights for the full year, and David will go over the fourth quarter in more detail. As I mentioned, 2019 was a very strong year for Atkore.

We increased adjusted EBITDA by $53 million or approximately 20% compared to 2018, a remarkable achievement by everyone in our organization and a credit to the results that can be achieved by following the Atkore business system. In addition to the growth in EBITDA, free cash flow increased 63%, and we increased our adjusted EPS by 30%, up to $3.62. We also made significant progress this year on improving our leverage position. We ended 2019 with a net debt-to-EBITDA ratio of 2.2 times, down considerably from where we were at this time last year.

In summary, 2019 was a year of great financial performance and EBITDA growth driven by the Atkore business system. We were able to convert those earnings to cash, which allowed us to both improve our leverage position and acquire four companies that will enhance our competitiveness in the marketplace. We plan to build upon that success from 2019 and continue to grow the company. For 2020, specifically, we expect to increase our adjusted EBITDA to between 335 million and $345 million and use the Atkore business system to drive that growth even further in the future.

With that, I want to thank all the employees in Atkore for their tremendous efforts this year. I'll turn the call over to David, who will walk us through our financials for the fourth quarter in more detail.

David Johnson -- Chief Financial Officer

Thanks, Bill, and good morning to everyone. As Bill mentioned, the fourth quarter was very strong. Moving to our consolidated results on Slide 4, net sales were $502 million, up $24 million versus prior year. As we anticipated and mentioned on our last call, volume was quite strong this quarter, up $20 million or 8.4%.

Recent acquisitions also added $20 million in revenue or just over 4%. These positive contributions were partially offset by declines in our average selling prices and unfavorable foreign exchange rates. Moving down to the adjusted EBITDA bridge, our adjusted EBITDA for Q4 was 89 million, up 25% or $18 million versus last year. The two largest drivers of adjusted EBITDA growth were the volume growth we experienced in both segments and the continuing use of the Atkore business system to drive margin expansion.

Volume growth contributed 13 million in the quarter, and price versus cost was a benefit of $12 million. This growth was partially offset by additional investments in the business, inflation and the timing of certain expenses. Moving to Slide 5. On a GAAP basis, net income increased 41%.

Adjusted EPS was $1.01, up 28% from the fourth-quarter 2018, reflecting the increase in adjusted earnings and favorable share count from our repurchases over the last year. Our adjusted EBITDA margin for the fourth quarter was 17.7%, up 280 basis points versus prior year. Moving to our segments on Slide 6 and 7, electrical raceway had another strong quarter, with approximately 6% volume growth, driven by solid expansion in our focused product categories. Adjusted EBITDA for electrical raceway increased 17% or $12 million based on our disciplined approach to margin expansion and higher volumes.

Also, during the quarter, we acquired the assets of Rocky Mountain Colby Pipe Company, a leader in PVC conduit sold under the Cor-Tek brand name. This acquisition expands our product portfolio and improves our geographic coverage in the West Coast of United States for our plastic pipe and conduit business. Turning to the mechanical products & solutions segment, the business delivered very strong EBITDA growth in Q4. EBITDA was up over $9 million, and the MP&S adjusted EBITDA margin climbed of 16.4%, up 680 basis points from Q4 2018.

During the quarter, the business did a great job of increasing margins and profitability. This allowed us to deliver an adjusted EBITDA margin percentage that exceeded our expectations. On Slide 8, year to date net cash flow from operating activities was $210 million, which generated a free cash flow of $175 million. This strong cash flow allowed us the flexibility during the quarter to make a good earnings.

Our leverage ratio improved to 2.2 times. We continue to be very pleased with the progress in our leverage position considering our ratio was at approximately three times at this point a year ago. Bill, back to you for our outlook.

Bill Waltz -- President and Chief Executive Officer

Thanks, David. Moving to our initial outlook for 2020 on Slide 9, our view on the markets remained positive, and we expect electrical raceway volume to be up 1 to 2% in 2020. And with the trends that we've seen recently for MP&S, as well as their plans for growth, we anticipate MP&S volume to be up 1 to 3% for the year. Between our expected volume growth in both segments and the revenue from our recent bolt-on acquisitions, we expect to drive approximately 5% top line growth for next year.

We believe our strong financial performance from 2019 will continue in 2020, and we expect our adjusted EBITDA for the year to be between 335 million and $345 million. For next year, we expect the benefits from the higher volumes and productivity to drive our EBITDA growth. These two factors combined for approximately 15 million to $25 million in growth. In addition, we expect our three most recent acquisitions to provide 5 to $10 million in incremental EBITDA.

Given the strong positive contributions that we've experienced in 2019 between selling prices and input costs, we are planning for an unfavorable impact of 10 to $15 million in 2020. Moving to the bottom line, we expect our adjusted EPS to be between $3.80 and $3.90, an increase of approximately 6.5% at the midpoint of the range, a solid increase above 2019 levels. Turning to the first quarter for total Atkore, our adjusted EBITDA range is between 72 and $77 million. Our adjusted EPS range is between $0.80 and $0.85.

In summary, Q4 and the full-year 2019 were very strong, and we look to build upon that success in 2020. As we begin the new year, our employees remain focused on executing the Atkore business system and positioning the company for long-term success. I want to recognize them for their efforts to make 2019 a very special year for Atkore and their commitment to consistently driving value for our shareholders into the future. I also want to welcome all the employees from the recent acquisitions we completed this year.

We are excited to have you as part of the Atkore team. Operator, please now open the lines for questions.

Questions & Answers:


Operator

[Operator instructions] Thank you. Our first question is from the line of Andrew Kaplowitz of Citi. Please proceed with your question. Please proceed with your question.

Andrew Kaplowitz -- Citi -- Analyst

Good morning guys.

Bill Waltz -- President and Chief Executive Officer

Good morning, Andrew.

David Johnson -- Chief Financial Officer

Good morning, Andrew.

Andrew Kaplowitz -- Citi -- Analyst

Guys, can you talk about your volume growth to 6.5% in Raceway in Q4. I think that's the highest volume growth we've seen from you since early '18. I know you mentioned the five new products in the quarter that helped growth. But can you give us some more color into your ability to outpace market growth going forward? Do you think new product-related growth could stay at these elevated levels over the next few quarters? And I know you've always had a big focus on new products, but what are you doing differently now?

Bill Waltz -- President and Chief Executive Officer

A couple of things, Andrew. One, I do think this -- I'm just summarizing what you said, but then I'll add one other piece of color. We are driving the new -- focused product categories are going up high single digits, and new products, which, low single digits, but it all adds together. The one thing, Andrew, is that I -- just simple disclosure, we had an easier comp last year in this specific quarter.

So I think in our previous guidance, when we had called out, we would be above-average growth, it's relative to last quarter. So I just want to put that back in framework. If you'd look at Slide 9 of the deck that we're expecting to grow with acquisitions around 5% next year, but I would not expect to see as strong as Q4 every quarter going forward. But it was a great quarter.

Andrew Kaplowitz -- Citi -- Analyst

Yes, that's helpful, Bill. And then in past calls, you've talked about having six to nine months of visibility, given the backlog that your distributors and contractors have in Raceway, and that made you comfortable that you could forecast low single-digit market growth within nonres markets going forward. Obviously, we've continued to see some relatively weak starts data, have you seen any deterioration in the backlog that gets you concerned? Or you just --

Bill Waltz -- President and Chief Executive Officer

No.

Andrew Kaplowitz -- Citi -- Analyst

Well, that's an easy answer.

Bill Waltz -- President and Chief Executive Officer

Yes, yes. No, it's good. It's very consistent to what we've always articulated, and the trend continues. It's low single-digit, but in some ways, the labor shortage out there is acting as a governor.

So literally, even just yesterday, as we wrapped up our board meetings, and we're fortunate to have a lady that's the CFO of a large electrical contractor in the board. Voice of customer, the contractors is consistent with me on the road for the last several weeks with distributors and so forth, and customers, contractors, that we expect to continue and -- as far as we can see, which, Andrew, as you say, it's at least six to nine months. So it's pretty good guidance for the rest of the fiscal year being we're two months in already.

Andrew Kaplowitz -- Citi -- Analyst

And then one more for me. You had this year, '19, almost 250 basis points of margin contribution from price versus cost. Q4, the number was even -- the total was bigger than that. Is there any way to think about what is a more normal contribution for you when commodity prices aren't as volatile as they've been? And what level of price versus cost contribution is baked into FY '20?

Bill Waltz -- President and Chief Executive Officer

Yes. So Andrew, in my mind, with that, I think if you look at the comments I just gave in our guidance. In other words, we had a phenomenal year with up almost 20% EBITDA. And then it's off of a 2018 that was also up 19-plus percent.

Some of that was on mix and driving value. But that's one of the reasons, kind of, in caution that we don't hope to give back any price, but just in caution of guidance, we are guiding that there could be 10 to $15 million of spread. So you can kind of work that in to the numbers we just presented and get a good feel for what we think the run rate for fiscal 2020 would be.

Andrew Kaplowitz -- Citi -- Analyst

Thanks, guys, that's clear.

Bill Waltz -- President and Chief Executive Officer

Awesome. Thank you, Andrew.

Operator

The next question is from the line of Deepa Raghavan with Wells Fargo. Please proceed with your question.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Good morning everyone.

Bill Waltz -- President and Chief Executive Officer

Good morning, Deepa.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Tagging on that price question. How are you thinking about the first half, second-half price contribution, I mean, within that 10 to $15 million? It looks like it would be more weighted first half, right, just given your comps? Or are you thinking about it more linearly spread out?

David Johnson -- Chief Financial Officer

All right. Yes, as Bill mentioned, we had put in our guidance this little bit of a headwind for price versus cost. Deepa, when you look at the way the quarters roll out in FY '19. We expect the first half to be somewhat on par with FY '19 and then moving to the second half, where we had really strong price versus cost, that's probably where we have most of our at least potential headwind put into our current financial forecast.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Sorry, was this price cost or what is price on the top line, unfavorable?

David Johnson -- Chief Financial Officer

Price cost.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

OK. Got it, sorry. So what would it be on the top line price? Even your revenue is low single digits, you probably have some acquisitions in there, too, but how does it -- what's the -- what's the headwind from price pass-through. I mean, second half of fiscal '19, it was down mid-single digits, low to mid-single digits.

So what are you expecting for second-half '20?

David Johnson -- Chief Financial Officer

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

So I think for planning purposes, we probably would assume that's 100%

Deepa Raghavan -- Wells Fargo Securities -- Analyst

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

David Johnson -- Chief Financial Officer

Yes. sure. A couple of things I would mention. In FY '19, productivity contributed approximately $15 million of improved adjusted EBITDA.

That was significantly more than the year before. And I would say the reason for that is one of our strategic deployment initiatives was around productivity. And I would say just in general, the business has a lot more rigor around the projects. We have a system that tracks all the kind of projects and where our funnel is and so on so forth.

So built into our FY '20 guide would be a similar number to that, which, again, would be 3x more than what we did the year of, say, like FY '18.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Got it. My final one, and then I'll pass it on. It's -- on capital deployment, your share count assumption is higher than your exit rate in fiscal '19. I mean this implies the dilution from options but not much buyback from there.

So how do we think about your buyback potential? Are you saving it all up for acquisition spend? Just curious what your thoughts are on buybacks versus acquisition in fiscal '20.

David Johnson -- Chief Financial Officer

Sure, absolutely. So obviously, we have a little bit of dilution when it comes to stock comp annually every year. We don't put in our planned stock buybacks, even though we have the ability to buy back $50 million worth of shares. So I think at this point in time, right now, our priorities remain the same.

Our No. 1 priority is our debt ratio and moving toward that two times goal that we have stated externally; No. 2, tuck-in M&A and when possible, buy back stock. And I just would remind everyone that we have bought back over a third of the company in the last couple of years, so we have had a substantial buyback program.

Last year, we bought back in the mid-$20s kind of million worth of shares. And so we're not going to just simply tell you what our number would be, but we do have the opportunity to buy back 50 million if we decide that that's the best use of our cash.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

All right, thanks so much.

David Johnson -- Chief Financial Officer

Thanks, Deepa.

Operator

Thank you. [Operator instructions] I have another question coming from the line of John Walsh with Credit Suisse. Please proceed with your question.

John Walsh -- Credit Suisse -- Analyst

Good morning.

David Johnson -- Chief Financial Officer

Good morning, John.

John Walsh -- Credit Suisse -- Analyst

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

Bill Waltz -- President and Chief Executive Officer

Yes. John, I think so. I'd paraphrase slightly differently. I think we're average in productivity versus beginning.

Now we did make a comment here, at least I think David did. We started this as an SDP, strategic deployment process, two years ago and really enhanced our funnel very humbly, we have a lot to go. But I think that $15 million number, net-net, feels like a good number for every year.

John Walsh -- Credit Suisse -- Analyst

Got you. And then thinking about the free cash flow conversion. Obviously, very strong this year on a full-year basis also in the fourth quarter. What's kind of the sustainability? Or how are you guys viewing that free cash flow conversion on, call it, your adjusted net income going forward?

David Johnson -- Chief Financial Officer

Yes. So we typically talk about our free cash flow on net income and our goal to be above 100%. This year, obviously, was a very strong year. Last year, John, as you recall, we were a little bit below that.

And by and large, the factor that determines whether we're above or below is working capital, and to some extent, the impact of commodities on our inventory and so on and so forth. So this year, I would say, it was a very strong year. Our go-forward goal would be to be above that 100%.

John Walsh -- Credit Suisse -- Analyst

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

David Johnson -- Chief Financial Officer

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

John Walsh -- Credit Suisse -- Analyst

All right. Thank you for taking the questions.

David Johnson -- Chief Financial Officer

Thanks, John.

Bill Waltz -- President and Chief Executive Officer

Thank you,

Operator

Next question is from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.

Jeff Reive -- RBC Capital Markets -- Analyst

Good morning, this is Jeff on for Deane. Maybe touching on the electrical raceway volume guidance of 1 to 2% for next year. Can you maybe just discuss which verticals you're seeing the most in maybe lease growth? And does that have any mix on your margins?

Bill Waltz -- President and Chief Executive Officer

Great question. Probably the areas where we see the largest growth is in -- around healthcare and hotels as we go into next year, areas with a little less growth are warehouses. It's really -- it's exceptionally small on mix. There are some things like within healthcare, we have some more sophisticated products like luminary cable and so forth but not enough to change our internal forecast.

We're always driving, which as you saw how well we've done with driving the mix, the margin, selling more value-added products. But it won't go as far as say because one vertical is up or one is down, that it's going to significantly change our forecast.

Jeff Reive -- RBC Capital Markets -- Analyst

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

David Johnson -- Chief Financial Officer

Yes, I'll handle that question. This past year, we deployed $100 million in tuck-in M&A across four acquisitions. I think if you think about going forward, that somewhat level of M&A activity would be appropriate, we think, with our capital deployment and keeping our debt ratio in check, maybe a little bit north of that if the opportunities are there. I would say right now, our pipeline is about the same as it's been.

So it's pretty robust. Again, our acquisition targets tend to be smaller tuck-in around our core value around electrical raceway at this point in time. And we're still seeing, when you look at our last two or three, the valuations are still in that kind of mid- single-digit range.

Jeff Reive -- RBC Capital Markets -- Analyst

Great. Thanks.

Operator

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

Bill Waltz -- President and Chief Executive Officer

Great. Thank you. Before we conclude, let me summarize three key takeaways. First, across multiple financial metrics, 2019 was an astounding year.

Second, we significantly improved our leverage position, while at the same time, acquiring four companies that will enhance and support our plans for growth. Third, we expect our strong financial performance to continue. For 2020, specifically, we expect to increase our adjusted EBITDA to between 335 and $345 million. Collectively, our team, our culture in the Atkore business system enable us to maintain focus and deliver upon our commitments to our customers and shareholders.

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

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

John Deitzer -- Vice President, Investor Relations

Bill Waltz -- President and Chief Executive Officer

David Johnson -- Chief Financial Officer

Andrew Kaplowitz -- Citi -- Analyst

Deepa Raghavan -- Wells Fargo Securities -- Analyst

John Walsh -- Credit Suisse -- Analyst

Jeff Reive -- RBC Capital Markets -- Analyst

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